1811 E. Northrop Blvd, Chandler, AZ 85286
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
1. Nature of Business
2. Summary of Significant Accounting Policies
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany transactions have been eliminated in consolidation.
The condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete annual financial statements and should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, which was filed with the Securities and Exchange Commission (“SEC”) on February 20, 2020.24, 2021. In the opinion of management, the condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary to present a fair statement of the Company’s condensed consolidated financial position, results of operations and cash flows as of and for the periods presented.
Operating results for any interim period are not necessarily indicative of the results that may be expected for the full year. The year-end condensed consolidated balance sheet data was derived from audited consolidated financial statements but does not include all disclosures required by GAAP for complete annual consolidated financial statements.
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements. Actual results could differ from those estimates.
Revenues are recognized when control of the promised goods or services are transferred, to the Company’s customers in an amount that reflects the consideration the Company expects to be entitled in exchange for those goods or services. Determining whether a valid customer contract exists includes an assessment of whether amounts due under the contract are collectible. The Company performs this assessment at the beginning of every contract and subsequently thereafter if new information indicates there has been a significant change in facts and circumstances.
Deferred revenue consists of cash payments that are received or due in advance of the Company’s performance as well as deferrals associated with certain contracts that include a material right.performance.
The difference between the opening and closing balances of deferred revenue primarily results from the timing difference between the Company’s performance and the customer’s payment. For the six months ended June 30, 2021, the Company recognized $6.1 million of revenue that was included in the deferred revenue balance as of January 1, 2021. For the six months ended June 30, 2020, the Company recognized $22.6 million of revenue that was included in the deferred revenue balance as of
January 1, 2020. For the six months ended June 30, 2019, the Company recognized $21.3 million of revenue that was included in the deferred revenue balance as of January 1, 2019. Amounts reported in the closing balance of deferred revenue are expected to be recognized as revenue within the next 12 months.
5. Restructuring and Impairment Expense
The restructuring liability amounts are recorded within either the (i) accounts payable and accrued liabilities account or (ii) lease liability account or (iii) other long-term liabilities account on the condensed consolidated balance sheets.
The mutual funds in the tables above, represent the deferred compensation asset balances, which are considered to be trading securities. The Company’s deferred compensation asset balances are recorded in the investments line item on the Company’s condensed consolidated balance sheets, and are classified as Level 1 securities. There were no transfers between any level categories for investments during the periods presented.
There were no differences between amortized cost and fair value of investments as of June 30, 20202021 or December 31, 2019,2020, and 0 reclassifications out of accumulated other comprehensive income during either the six months ended June 30, 20202021 or 2019.
7. Accounts Receivable, Net
8. Other Significant Balance Sheet Accounts
9. Credit Facilities
10. Lease Obligations
The Company has agreements to sublease certain portions of its office facilities, with 23 active subleases as of June 30, 2020.2021. The Company’s subleases do not include any options to extend or for early termination and do not contain any residual value guarantees or restrictive covenants. All of the subleases were classified as operating leases for the period ended June 30, 2020.2021. The Company is subleasing approximately 37,000 square feet of office space in Denver, Colorado with a remaining commitment to lease of 142 months and net lease payments of $1.1$0.2 million. The Company is subleasing additional office space of approximately 21,000 square feet in Denver, Colorado with a remaining commitment to lease of 3220 months and net lease payments of $1.6$1.0 million. The Company is also subleasing approximately 24,000 square feet of office space in San Diego, California with a remaining commitment to lease of 6 months and net lease payments of $0.5 million. Sublease income for the six months ended June 30, 2021 and 2020 and 2019 was $1.0$1.3 million and $1.6$1.0 million, respectively.
11. Income (Loss) Per Share
Basic income (loss) per share is calculated by dividing net income (loss) available to common stockholders for the period by the weighted average number of common shares outstanding for the period.
Diluted income (loss) per share is calculated by dividing net income (loss) available to common stockholders for the period by the sum of (i) the weighted average number of common shares outstanding for the period, plus (ii) potentially dilutive securities outstanding during the period, if the effect is dilutive. Potentially dilutive securities for the periods presented include stock options, unvested restricted stock units (“RSUs”) and unvested performance stock units (“PSUs”).
12. Stock-Based Compensation
13. Income Taxes
The Company uses the asset-liability method to account for taxes. Under this method, deferred income tax assets and liabilities result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the condensed consolidated financial statements that will result in income and deductions in future years.
The Company recognizes deferred tax assets if realization of such assets is more-likely-than-not. In order to make this determination, the Company evaluates a number of factors including the ability to generate future taxable income from reversing taxable temporary differences, forecasts of financial and taxable income or loss, and the ability to carryback certain operating losses to refund taxes paid in prior years. The cumulative loss incurred over the three-year period ended June 30, 20202021 constituted significant negative objective evidence against the Company’s ability to realize a benefit from its federal deferred tax assets. Such objective evidence limited the ability of the Company to consider in its evaluation certain subjective evidence such as the Company’s projections for future growth. On the basis of its evaluation, the Company determined that its deferred tax assets were not more-likely-than-not to be realized and that a valuation allowance against its deferred tax assets should continue to be maintained as of June 30, 2020.2021.
The Company’s current effective income tax rate that has been applied to normal, recurring operations for the six months ended June 30, 20202021 was (2.7)(1.0)%. The Company’s actual effective income tax rate for the six months ended June 30, 2020,2021, after discrete items, was 234.9%1.0%. The income tax benefit for the six months ended June 30, 2020 was attributable to certain changes in income tax law related to net operating loss carryback as a result of the Coronavirus Aid, Relief and Economic Security Act
The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The tax years 2001 through 2019 are open to examination by major taxing jurisdictions to which the Company is subject.
ZOVIO INC
Notes to the conclusions reached by the IRS. The final notice of proposed adjustments from the IRS examination had no adverse material impact on the Company’s overall financial results as at June 30, 2020.Condensed Consolidated Financial Statements (Unaudited)
The Company’s income tax returns for the tax years ended December 31, 2013 through 2015 are under examination by the California Franchise Tax Board.
14. Regulatory
The Company is subject to extensive regulation by federal and state governmental agencies and accrediting bodies. In particular, the Higher Education Act of 1965, as amended (“Higher Education Act”), and the regulations promulgated thereunder by the U.S. Department of Education (“Department”) subject the Company and its university partners to significant regulatory scrutiny on the basis of numerous standards that institutions of higher education must satisfy in order to participate in the various federal student financial aid programs under Title IV of the Higher Education Act (“Title IV programs”). Ashford is regionally accredited by Western Association of Schools and Colleges Senior College and University Commission (“WSCUC”).
Department of Education OpenOn-Site Program Review of former Ashford University
In July 2016, Ashford was notified by the Department that an off-site program review had been scheduled to assess Ashford’s administration of the Title IV programs in which it participates. The off-site program review commenced in July 2016 and covered students identified in the 2009-2012 calendar year data previously provided by Ashford to the Department in response to a request for information received from the Multi-Regional and Foreign School Participation Division of the Department’s Office of Federal Student Aid (“FSA”) in December 2015 but may be expanded if the Department deems such expansion appropriate.
In December 2016, the Department informed Ashfordthe University that it intended to continue the program review on-site at Ashford. The on-site program review, which commenced in January 2017 and initially covered the 2015-2016 and 2016-2017 award years, but may be expanded if the Department deems such expansion appropriate. To date, the Company has not received a draft report from the Department.
Department of Education Program Participation Agreement for Ashford University
On April 23, 2018, Ashford received an updated Program Participation Agreement from the Department. Based on the updated Program Participation Agreement, Ashford is provisionally certified to participate in Federal Student Financial Aid Programs until March 31, 2021. Ashford is required to submit its reapplication for continued certification by December 31, 2020.
ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
Department of Education Close Out Audit of University of the Rockies
The Company previously recorded an expense of $1.5 million forduring the fiscal year ended December 31, 2018, in relation to the close out audit of University of the Rockies resulting from its merger with Ashfordthe University in October 2018. The expense was recorded in relation to borrower defense to repayment regulations. On September 26, 2019, the Department of Education sent Ashfordthe University a Final Audit Determination letter for the University of the Rockies. This letter confirmed that with the exception of the borrower defense to repayment regulations, none of the other audit findings resulted in financial liability. The Department also stated that additional liabilities could accrue in the future. On December 19, 2019, the Company filed an administrative appeal with the Department appealing the alleged liability on the basis that the University of Rockies did not close but rather merged with Ashford.the University. The briefing on the appeal is complete and the Company is awaiting a decision by the administrative law judge.
WSCUC Accreditation of former Ashford University
Global Campus is regionally accredited by WASC Senior College and University Commission (“WSCUC”). In July 2013, WSCUC granted Initial Accreditation to Ashfordthe University for five years, until July 15, 2018. In December 2013, Ashfordthe University effected its transition to WSCUC accreditation and designated its San Diego, California facilities as its main campus and its Clinton, Iowa campus as an additional location. As part of its institutional review process, WSCUC commenced its comprehensive review of Ashfordthe University with an off-site review in March 2018. As part of the WSCUC Institutional Review Process a Reaffirmation of Accreditation Visit was conducted by an evaluation team in April 3-5, 2019. At its meeting in June 26-28, 2019, the Commission acted to reaffirm Ashford’s accreditation through Spring 2025.
WSCUC also visited Ashford on May 1, 2019 to conduct its federally mandated, six-month post-implementation review, due to the merger of University of the Rockies and into Ashford which was finalized on October 31, 2018. WSCUC has verified that Ashford has met all post-implementation requirements related to the merger of the two entities.
Ashford submitted a change of control and legal status application (the “Change of Control Application”) to convert to a nonprofit California public benefit corporation, and separate from the Company (the “Conversion Transaction”). On July 12, 2019, WSCUC notified Ashford that it had approved the Change of Control Application for the Conversion Transaction. The approval is subject to certain conditions which must be met prior to the close of the Conversion Transaction, including divestiture of financial and ownership interest in the Company by all Ashford officers and related parties and submission of a revised services agreement with respect to the Conversion Transaction, including the incorporation of key performance indicators into that agreement. WSCUC is also requiring a post-implementation site visit of Ashford within six months of the close of the Conversion Transaction.
On July 1, 2020, and inIn connection with the transaction recently announced, AshfordPurchase Agreement by and among the Company and the University of Arizona, the Company submitted to WSCUC, on July 1, 2020, a substantive change application for a change in ownership from the University to Global Campus which requiresrequired review and approval by the Substantive Change Committee and the Structural Change Committee of the Commission. The name
On November 12, 2020, WSCUC notified the Company that it had approved the change of control application filed to complete the Sale Transaction, subject to certain conditions. These conditions included (i) ensuring that Global Campus is differentiated effectively from Ashford University tothe University of Arizona and its affiliates in marketing materials; (ii) providing a report to WSCUC within 90 days of the close of the transaction outlining the actionable steps it will take to address student success including in the form of retention and graduation; (iii) those officers, administrators and related parties who become Global Campus will not occur untilofficers or administrators divest themselves of their financial and ownership interest in the changeCompany; and (iv) Global Campus and the Company submit a revised strategic services agreement which incorporates any applicable key performance indicators into that agreement. Additionally, WSCUC notified Global Campus that the provisions of ownership receives approval from WSCUC. For further information regarding subsequent events, referthe Notice of Concern issued as part of the reaffirmation of the University in July 2019 remain in effect.
ZOVIO INC
Notes to Note 16, “Subsequent Events” to the condensed consolidated financial statements.Condensed Consolidated Financial Statements (Unaudited)
Department of Education Abbreviated Preacquisition Review LetterRegulation
On October 7, 2019,December 1, 2020, the Company announced that in connection with the Conversion Transaction, the Department has provided a response (the “Abbreviated Preacquisition Review Letter”)parties to the request for review made on July 15, 2019. The request for an abbreviated preacquisition review was made in accordance with Department proceduresPurchase Agreement entered into Amendment No. 1 to the Purchase Agreement (“Amendment”) pursuant to which, among other things, the University of Arizona and Global Campus waived the closing condition regarding issuance of a pre-acquisition review notice by the Department provides information about conditions it intends to impose in connection withof Education. Under 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 daysterms of the Conversion TransactionPurchase Agreement, as amended, the Closing was subject to customary closing conditions for approximately $103 million letter of credit (“LOC”), representing the Department’s determination of 25% of the Title IV fundingtransactions in fiscal year 2018 (the “25% LOC”).this sector. The Department is expected to conduct a post-closing review of AshfordGlobal Campus following the change of control resulting from the ConversionSale Transaction consistent with the Department’s procedures during which the Department makes a determination on the institution’s request for recertification from the Department following the
ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
change of control, including whether to impose an increase in the letter of credit requirement or place other conditions or restrictionsrestrictions.
To be eligible to participate in Title IV programs, an institution must comply with the Higher Education Act and the regulations thereunder that are administered by the Department. The provisions of the Higher Education Act also include being in compliance with the following:
•The 90/10 Rule - A proprietary institution loses eligibility to participate in Title IV programs if the institution derives more than 90% of its revenues from Title IV program funds for two consecutive fiscal years, as calculated in accordance with Department regulations. Any institution that violates the 90/10 rule for two consecutive fiscal years becomes ineligible to participate in Title IV programs for at least two fiscal years. In addition, an institution whose rate exceeds 90% for any single fiscal year is placed on Ashford.provisional certification and may be subject to other enforcement measures.
On July 7, 2020,•Cohort Default Rate -For each federal fiscal year, the Department indicated it would no longer requirecalculates 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 eligibility to participate in the 25% LOC dueFederal Direct Loan Program and the Federal Pell Grant Program if, for each of the three most recent federal fiscal years, 30% or more of its students who became subject to a proposed new transaction structure. Pursuant torepayment obligation in that federal fiscal year defaulted on such obligation by the new structure, Ashford University LLC,end of 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.following federal fiscal year.
•Financial Responsibility
- The Department calculates an institution'sinstitution’s composite score for financial responsibility based on its (i) equity ratio, which measures the institution'sinstitution’s capital resources, ability to borrow and financial viability; (ii) primary reserve ratio, which measures the institution'sinstitution’s ability to support current operations from expendable resources; and (iii) net income ratio, which measures the institution'sinstitution’s ability to operate at a profit. An institution that does not meet the Department'sDepartment’s minimum composite score of 1.5 may demonstrate its financial responsibility by posting a letter of credit in favor of the Department and possibly accepting other conditions on its participation in the Title IV programs.
For Following the fiscal year ended December 31, 2018,Sale Transaction, the consolidated composite score calculated was 2.2, satisfying the composite score requirement of the Department's financial responsibility test, which institutions must satisfy to participate in Title IV programs. The Company expects the consolidated composite score for the year ended December 31, 2019 to be 0.7 and below the composite score requirement as a result of non-recurring restructuring and acquisition related charges. The Department has historically calculated Ashford’s composite score based on Zovio’s consolidated audited financial statements rather than Ashford’s stand alone audited financial statements. The deadline to submit audited financial statements was postponedUniversity is no longer owned by the Department from June 30, 2020 until up through December 31, 2020.
If the Conversion Transaction takes place, Ashford will no longer be owned by Zovio,Company, and therefore AshfordGlobal Campus will submit its stand-alone audited financial statements to the Department for the purpose of calculating the institution’s composite score. The Company expects Ashford’s composite score, based on its standalone audited financial statements for the year ended December 31, 2019, to be at least 1.6 and above the Department’s requirement for a composite score of 1.5 or greater.
On August 3, 2020, the Company announced the signing of a definitive agreement with the Arizona Board of Regents, a body corporate, for and on behalf of the University of Arizona and the University of Arizona Global Campus to acquire the assets of Ashford University. For further information regarding subsequent events, refer to Note 16, “Subsequent Events” to the condensed consolidated financial statements.
If the Department calculates Ashford’s composite score based on Zovio’s consolidated financial statements, the institution’s composite score for the period ended December 31, 2019 would be below the required composite score of at least 1.5. In such event, to continue participation in Title IV programs, Ashford would either need to: (1) submit a letter of credit equal to at least 50% or more of the Title IV Program funds received by the institution during its most recently completed fiscal year; or (2) at the discretion of the Department, submit a letter of credit equal to at least 10% or more of the Title IV Program funds received by the institution during its most recently completed fiscal year and accept additional conditions (including, but not limited to, a provisional certification, compliance with monitoring requirements, remain current on debt payments, meet certain financial obligations, agree to receive Title IV Program funds under an arrangement other than the Department’s standard advance funding arrangement, and agree to pay Title IV credit balances due to students before submitting a request for funds to the Department).
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Notes to Condensed Consolidated Financial Statements (Unaudited)
GI Bill Benefits
On September 6, 2019, the U.S. Department of Veterans Affairs (“VA”) announced that effective October 1, 2019, the VA would be assuming the functions of the State Approving Agency (“SAA”) for California (“CSAAVE”), based on its negative assessment of CSAAVE’s performance during the preceding three years. On October 14, 2019, Ashford submitted the application for approval in California with the VA. On February 14, 2020, Ashford received notice from the VA, serving as the SAA for the State of California, that Ashford meets the criteria for approval for veterans education under the provisions of Title 38, United States Code, Section 3675, and that the VA, acting as the California SAA, had approved substantially all of Ashford’s programs that students and potential students could pursue using their GI Bill benefits, retroactive to July 1, 2019. This notice substantially resolved the GI Bill Benefits issue that emerged in May 2016, when the Iowa Department of Education (“Iowa DOE”), which is the Iowa SAA, informed the Company that, as a result of the planned closure of the Clinton Campus, the Iowa DOE would no longer continue to approve Ashford’s programs for GI Bill benefits after June 30, 2016, and recommended Ashford seek approval through the SAA for any location that met what the Iowa DOE determined to be the definition of a “main campus” or “branch campus.”
On June 25, 2020, the California Department of Veterans Affairs signed an agreement with the US Department of Veterans Affairs that returned the CSAAVE to its role as the SAA for the State of California. CSAAVE’s transition back into their role as the SAA became effective on July 1, 2020.
Defense to Repayment
On October 28, 2016, the Department published borrower defense to repayment regulations to change processes that assist students in gaining relief under certain provisions of the Direct Loan Program regulations.
On June 14, 2017, the Department announced a postponement of the 2016 defense to repayment regulations and its intention to resubmit the regulations through the negotiated rulemaking process. The Department announced an additional postponement on October 24, 2017. On February 14, 2018, the Department announced that it was postponing the effective date of this rule until July 1, 2019, so that it could complete the negotiated rulemaking process and develop the new regulations. Because the negotiated rulemaking committee did not reach consensus, the Department published a proposed regulation through a notice of proposed rulemaking (“NPRM”), took public comment, and planned to issue final regulations by November 1, 2018, effective July 1, 2019. This did not occur.
In September and October of 2018, the U.S. District Court for the District of Columbia issued a series of orders and opinions holding these procedural delays by the Department to be improper. The Court reinstated the 2016 repayment regulations as of October 16, 2018.
The 2016 These defense to repayment regulations allow a borrower to assert a defense to repayment on the basis of a substantial misrepresentation, any other misrepresentation in cases where certain other factors are present, a breach of contract or a favorable nondefault contested judgment against a school for its act or omission relating to the making of the borrower’s loan or the provision of educational services for which the loan was provided. In addition, the financial responsibility standards contained in the new regulations establish the conditions or events that trigger the requirement for an institution to provide the Department with financial protection in the form of a letter of credit or other security against potential institutional liabilities. Triggering conditions or events include, among others, certain state, federal or accrediting agency actions or investigations, and in the case of publicly traded companies, receipt of certain warnings from the SEC or the applicable stock exchange, or the failure to timely file a required annual or quarterly report with the SEC. The new regulations also prohibit schools from requiring that students agree to settle future disputes through arbitration.
On March 15, 2019, the Department issued guidance for the implementation of parts of the regulations. The guidance covers an institution'sinstitution’s responsibility in regard to reporting mandatory and discretionary triggers as part of the financial
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Notes to Condensed Consolidated Financial Statements (Unaudited)
responsibility standards, class action bans and pre-dispute arbitration agreements, submission of arbitral and judicial records, and repayment rates.
On August 30, 2019, the Department finalized the regulations derived from the 2017-2018 negotiated rulemaking process and subsequent public comments. This version of the borrower defense regulations applies to all federal student loans made on
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Notes to Condensed Consolidated Financial Statements (Unaudited)
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'sstudent’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'sinstitution’s financial responsibility composite score that differ from those in the 2016 regulations.
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 administrationadministration’s borrower defense to repayment rule. On June 26, 2020, the House of Representatives failed to override President Trump’s veto of a bill that would have undone the Trump administration’s borrower-defense rule.veto. The rewritten borrower defense to repayment rule went into effect on July 1, 2020 and will apply to any federal student loans made on that date or after.
On March 18, 2021 the Department announced it would adopt a streamlined approach for granting full debt relief to borrowers reversing the methodology first announced in December 2019 that allowed for partial student loan cancellation for borrowers. The Department recentlydetermined that the previous methodology did not result in an appropriate relief determination.
In July 2020, the Department notified Ashfordthe Company that they would be initiating a preliminary review of borrower defense applications from borrowers who made claims regarding Ashford.the University. 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 begunCompany received and timely responded to receive thesethe submitted claims and is reviewingcannot predict the outcome of the Department's review. The Company has responded to everything received and compilingcannot predict the individual factsoutcome of each case to submit to the Department for their review.this review at this time.
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. Other than the specific liabilities assumed by Global Campus, the Company and AU LLC will generally remain responsible for liabilities of the University relating to periods prior to the closing of the Sale Transaction. Below is a list of material legal proceedings to which the Company or its subsidiaries is a party.
California Attorney General Investigation of For-Profit Educational Institutions
In January 2013, the Company received from the Attorney General of the State of California (“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 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
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Notes to Condensed Consolidated Financial Statements (Unaudited)
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 each such date.
Representatives from the Company met with representatives from the CA Attorney General’s office on several occasions to discuss the status of the investigation, additional information requests, and specific concerns related to possible unfair business practices in connection with the Company’s recruitment of students and debt collection practices.
The parties also discussed a potential resolution involving injunctive relief, other non-monetary remedies and a payment to the CA Attorney General and in the third quarter of 2016, the Company recorded an expense of $8.0 million related to the cost of resolving this matter.
The parties did not reach a resolution and on November 29, 2017, the CA Attorney General filed suit against Ashford and the Company. The Company intends to vigorously defend this case and emphatically denies the allegations made by the CA
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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,A trial is scheduled for October 2021. We cannot predict the outcome of this legal proceeding is uncertain at this point because of the many questions of fact and law that may arise. At present, thetime. 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 received from the Attorney General of the State of Massachusetts (“MA Attorney General”) a Civil Investigative Demand (“MA CID”) relating to the MA Attorney General’s investigation of for-profit educational institutions and whether the university’sUniversity’s business practices complied with Massachusetts consumer protection laws. Pursuant to the MA CID, the MA Attorney General has requested from the Company and AshfordGlobal Campus documents and information for the time period January 1, 2006 to present.
While the Company denies the allegations made by the MA Attorney General, the parties have reached a resolution. The resolution does not include an admission or finding of wrongdoing by the Company or any non-compliance with any state or federal law, rule or regulation. The Company is cooperating withwill pay $0.3 million to the investigationMA Attorney General and cannot predictwill also cease to collect previously written off balances owed to Ashford University by students who enrolled in Ashford and were Massachusetts residents between 2011 to 2014.
16. Segment Information
Prior to December 1, 2020, the eventual scope, duration or outcomeCompany operated in one segment for reporting purposes. Following the Sale Transaction, the Company now operates in 2 reportable segments: The University Partners Segment and the Zovio Growth Segment. These segments were recast based upon the Company’s respective offerings.
On December 1, 2020, the Company consummated the Sale Transaction. For additional information see Note 1, “Nature of the investigation at this time.Business.” 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. Inreports segment information based upon 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 captioned In re Bridgepoint, Inc. Shareholder Derivative Action. A consolidated complaint was filed on December 18, 2012management approach, and the defendants filedSale Transaction resulted in a motion to staychange in how the case whilechief operating decision maker viewed the underlying securities class action is pending. The motion was granted byoperations moving forward. This change included the Court on April 11, 2013. The stay was lifted following the settlementcreation of the underlying securities class actionthree operating segments: Fullstack, TutorMe, 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 demandZovio, 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.
Obrochta v. Clark, et al.
On 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 currenttwo reportable segments: University Partners and former officers and directors. The complaint is captioned Obrochta 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. 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 Stein securities class action.Zovio Growth.
ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
Stein Securities Class ActionThe Company’s operating segments are determined based on (i) financial information reviewed by the chief operating decision maker, (ii) internal management and related reporting structure, and (iii) the basis upon which the chief operating decision maker makes resource allocation decisions. During the quarter ended March 31, 2021, in conjunction with the departure of the Company's chief executive officer, the chief operating decision maker transitioned to the Office of the CEO, which is comprised of three executives. The Fullstack and TutorMe operating segments are aggregated into a single reportable segment, the Zovio Growth Segment. The aggregation of the Fullstack and TutorMe operating segments is based on their uniform customer bases and methods of services provided, as well as evaluation of quantitative thresholds as required by ASC 280-10-50-12. Based on these same quantitative tests, the Zovio operating segment is a separate reportable segment, the University Partners Segment. This change in segment reporting did not have any impact on the determination of reporting units used to assess impairment under ASC 350, Intangibles - Goodwill and Other.
On March 8, 2019, a securities class action complaint (the “Stein Complaint”) was filed inThe Company’s University Partners Segment includes the U.S. District Courttechnology and services provided to colleges and universities to enable the online delivery of degree programs and related goods and services. The Company’s University Partners Segment also includes the tuition revenue related to the University prior to the Sale Transaction on December 1, 2020.
Segment Performance
The following table summarizes financial information regarding each reportable segment’s results of operations for the Southern District of California by Shiva Stein namingperiods presented (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Revenue by segment | | | | | | | |
University Partners | $ | 62,254 | | $ | 98,962 | | $ | 131,933 | | $ | 192,828 |
Zovio Growth | 6,932 | | 4,978 | | 14,112 | | 8,984 |
Total revenue and other revenue | $ | 69,186 | | $ | 103,940 | | $ | 146,045 | | $ | 201,812 |
| | | | | | | |
Segment profitability | | | | | | | |
University Partners | $ | (654) | | $ | 8,655 | | $ | (6,091) | | $ | 5,073 |
Zovio Growth | (1,858) | | (465) | | (3,473) | | (4,400) |
Total segment profitability(1) | $ | (2,512) | | $ | 8,190 | | $ | (9,564) | | $ | 673 |
(1) Segment profitability represents EBITDA.
The following table reconciles total loss before income taxes to total segment profitability (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Income (loss) before income taxes | $ | (4,257) | | | $ | 5,446 | | | $ | (13,667) | | | $ | (5,311) | |
Adjustments: | | | | | | | |
Other expense, net | (232) | | | (161) | | | (159) | | | 101 | |
Depreciation and amortization expense | 1,977 | | | 2,905 | | | 4,262 | | | 5,883 | |
| | | | | | | |
Total segment profitability | $ | (2,512) | | | $ | 8,190 | | | $ | (9,564) | | | $ | 673 | |
During both the Company, Andrew Clark, Kevin Royal,six months ended June 30, 2021 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 regardingJune 30, 2020, Global Campus accounted for 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)entire amount of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.University Partners segment revenue, respectively.
On October 1, 2019,During both the plaintiff filed a substantially similar amended complaint. On November 27, 2019, all defendants filed a motion to dismiss,six months ended June 30, 2021 or 2020, there were no customers or individual university clients which was granted by the Court on June 15, 2020. The outcome of this legal proceeding is uncertain at this point becauseaccounted for 10% or more of the many questions of fact and law that may arise. The Company has not accrued any liability associated with this action.Zovio Growth segment revenue.
ZOVIO INC
16. Subsequent EventsNotes to Condensed Consolidated Financial Statements (Unaudited)
Zovio Inc, a Delaware corporation (the “Company”), through its wholly owned subsidiary, Ashford University, LLC, a California limited liability company (“AU LLC”), ownsThe Company’s total assets by segment are as follows (in thousands): | | | | | | | | | | | |
| As of June 30, 2021 | | As of December 31, 2020 |
University Partners | $ | 91,587 | | | $ | 111,830 | |
Zovio Growth | 62,308 | | | 49,476 | |
Total assets | $ | 153,895 | | | $ | 161,306 | |
The Company’s accounts receivable and operates Ashford University, a regionally-accredited, online university (the “University”). On August 1,deferred revenue in each segment are as follows (in thousands): | | | | | | | | | | | |
| As of June 30, 2021 | | As of December 31, 2020 |
University Partners accounts receivable | $ | 2 | | | $ | 45 | |
Zovio Growth accounts receivable | 7,920 | | | 7,159 | |
Total accounts receivable | $ | 7,922 | | | $ | 7,204 | |
| | | |
University Partners deferred revenue | $ | 0 | | | $ | 10 | |
Zovio Growth deferred revenue | 10,582 | | | 8,080 | |
Total deferred revenue | $ | 10,582 | | | $ | 8,090 | |
As of each June 30, 2021 and December 31, 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,there were no individual partners or customers which accounted for and on behalf10% or more of the University Partners segment net accounts receivable balance. Additionally, as of Arizona (the “University of Arizona”),each June 30, 2021 and the University of Arizona Global Campus, a newly formed Arizona nonprofit corporation (“University of Arizona Global Campus”). Upon the closingDecember 31, 2020, there were no individual partners or customers which accounted for 10% or more of the transaction contemplated by the Purchase Agreement (the “Sale”), UniversityZovio Growth segment net accounts receivable balance, as customers are individual students or third parties paying on their behalf, rather than university clients.
The Company’s goodwill amounts as of Arizona Global Campus will ownJune 30, 2021 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 subjectDecember 31, 2020, respectively, are fully attributable to the conditions set forth therein.Zovio Growth Segment. For additional information on goodwill, see Note 8, “Other Significant Balance Sheet Accounts - Goodwill and intangibles, net.”
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.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, 20192020 (“Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on February 20, 2020,24, 2021, 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 “Zovio,” “the Company,” “we,” “us” and “our” refer to Zovio Inc, a Delaware corporation, and its wholly owned and indirect subsidiaries.
Forward-Looking Statements
This Quarterly Report on Form 10-Q (the “Form(“Form 10-Q”) contains “forward-looking statements”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 (“Exchange Act”). All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements may include, among others, statements regarding future events, future financial and operating results, strategies, expectations, the competitive environment, regulation and the availability of financial resources, including, without limitation, statements regarding:
•our ability to either (i) successfully convert Ashford University® (“Ashford”) to a 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 potential 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 University of Arizona and the Universityability of Arizona Global Campusregarding Ashford University;
•our abilitycurrent or any future university partners to comply with the extensive and continually evolving regulatory framework, applicable to us and Ashford,such partners, including but not limited to Title IV of the Higher Education Act of 1965, as amended (“Higher Education Act”), and its implementing regulations, the gainful employment regulations, defense to repayment regulations, state authorization regulations, state laws and regulatory requirements, and accrediting agency requirements;
•our ability to meet any conditions of the U.S. Department of Education (the “Department”) with respect to the Asset Purchase and Sale Agreement (the “Purchase Agreement”) with the Arizona Board of Regents, for and on behalf of the University of Arizona (“University of Arizona”) and the University of Arizona Global Campus, a newly formed Arizona nonprofit corporation (“Global Campus”);
•projections, predictions and expectations regarding our business, financial position, results of operations, liquidity and capital resources and enrollment trends at Ashford;
•our anticipated seasonal fluctuations in enrollment and operating results;
•our ability to obtain continued approval of Ashford’s programs for GI Bill benefits through the Iowa State Approving Agency (“ISAA”) or the California State Approving Agency for Veteran's Education (“CSAAVE”), and to prevent any disruption of educational benefits to Ashford’s veteran students;trends;
•the ability of Ashfordour current or any future university partners to continue participating in the U.S. Departmentobtain continued approval of Defense Tuition Assistance Programprograms for educational benefits to active duty military personnel andstudents or to prevent any disruption of educational benefits to Ashford’s active duty militaryveteran 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;
•expectations regarding the adequacy of our cash and cash equivalents and other sources of liquidity for ongoing operations, planned capital expenditures and working capital requirements;
•expectations regarding capital expenditures;
•the impact of accounting standards on our financial statements;
•the reasonableness and acceptance of our tax accruals;
•management'smanagement’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 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
Zovio Inc is an education technology services company that partners with higher education institutions and employers to deliver a suite of innovative, personalized solutions and learning experiences to help learners and leaders achieve their aspirations. Our wholly-owned subsidiary, Ashford isaspirations and help institutions grow. Zovio’s expertise across academic disciplines, credential levels, learning experiences, and modalities has powered student and partner success through a regionally accredited academic institution, which delivers programs primarily online. Ashford offers associate’s, bachelor’s, master’stailored, customer-focused approach bolstered by data analytics. The Company provides student recruitment and doctoral programs primarily online. As of June 30, 2020, Ashford offered approximately 1,100 coursesenrollment systems, retention strategies, educational tools and approximately 65 degree programs.curriculums.
In April 2019, the Company acquired both Fullstack Academy, Inc (“Fullstack”) and TutorMe.com, Inc. (“TutorMe”), each of 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 both contributors to theZovio's strategy of Zovio becoming a best-in-class education technology services company.
Key operating data
In evaluating our operating performance,
our management focuses in large part on our
(i) revenue
(ii)and operating income (loss)
and (iii) period-end enrollment at Ashford.. The following table, which should be read in conjunction with our condensed consolidated financial statements included
elsewhere in
Part I, Item 1 of this report, presents our key operating data for each of the periods presented (in
thousands, except for enrollment data)thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
Consolidated Statement of Income Data: | 2021 | | 2020 | | 2021 | | 2020 |
Revenue and other revenue | $ | 69,186 | | | $ | 103,940 | | | $ | 146,045 | | | $ | 201,812 | |
Operating income (loss) | $ | (4,489) | | | $ | 5,285 | | | $ | (13,826) | | | $ | (5,210) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
Revenue and other revenue(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.
Key enrollment trends
Enrollment at Ashford decreased 9.3% to 34,395 students at June 30, 2020 as compared to 37,910 students at June 30, 2019. Enrollment decreased by 0.9% since the end of the preceding fiscal year, from 34,722 students atOn December 31, 2019 to 34,395 students at June 30, 2020.
We believe the decline in enrollment is partially attributable to a general weakening in the overall education industry due in large part to increased regulatory scrutiny.
We continue to make investments in the workflow along the student lifecycle to better support our incoming and current students. One area in which we continue to experience positive enrollment trends is within the Education Partnerships programs with various employers. Some of these programs provide companies with the opportunity to offer their employees a way to pursue and complete a college degree without incurring any student debt. Enrollments in the Education Partnerships programs account for approximately 35% of our total enrollment as 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 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 Salethe Services 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 Arizonawith 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 whichwhereby the Company will provide recruiting, financial aid, counseling, institutional support, informationcertain educational technology and academic support services, to University of Arizona Global Campus. The Strategic Services Agreementwhich has an initial term of fifteen (15) years, subject to renewal options although University of Arizona Global Campus hasand certain early termination provisions. The amounts earned from 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 toare denoted as revenue on 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 expense
We implemented various restructuring plans to better align our resources with our business strategy and the related charges are recorded in the restructuring and impairment expense line item on our condensed consolidated statements of income (loss). ChangesOn December 1, 2020, the Company also entered into a transition services agreement with Global Campus whereby the Company will provide certain temporary transition services (the “Transition Services Agreement”), which has a term of three years. The amounts earned from the Transition Services Agreement are denoted as other revenue on the condensed consolidated statements of income (loss). Subsequent to December 1, 2020, revenue is primarily derived from service revenue from our university partners.
Prior to December 1, 2020, the majority of the amounts earned by the Company were from tuition, technology fees, and digital materials related to students whose primary funding source is governmental funding. The amounts earned from these estimates couldstreams is denoted as university-related revenue on the condensed consolidated statements of income (loss). Factors affecting this revenue include (i) the number of students who enroll and remain enrolled in courses, (ii) degree and program mix, (iii) changes in tuition rates and (iv) the amount of scholarships offered. Enrollments are a function of the number of continuing students at the beginning of each period and new enrollments during the period, offset by students who either graduated or withdrew during the period.
Costs and expenses
Technology and academic services costs consist primarily of costs related to ongoing maintenance of educational infrastructure, including online course delivery and management, student records, assessment, customer relations management and other internal administrative systems. This also includes costs to provide support for curriculum and new program development, support for faculty training and development and technical support. This expense category includes salaries, benefits and share-based compensation, information technology costs, curriculum and new program development costs (which are expensed as incurred) and other costs associated with these support services. This category also includes an allocation of depreciation, amortization, rent, and occupancy costs attributable to the provision of these services.
Counseling services and support costs consist primarily of costs including team-based counseling and other support to prospective and current students as well as financial aid processing. This expense category includes salaries, benefits and share-based compensation, and other costs such as dues, fees and subscriptions and travel costs. This category also includes an allocation of depreciation, amortization, rent, and occupancy costs attributable to the provision of these services.
Marketing and communication costs consist primarily of lead acquisition, digital communication strategies, brand identity advertising, media planning and strategy, video, data science and analysis, marketing to potential students and other promotional and communication services. This category was primarily from our historical captions of advertising and marketing and promotional. This expense category includes salaries, benefits and share-based compensation for marketing and communication personnel, brand advertising, marketing leads and other promotional and communication expenses. This category also includes an allocation of depreciation, amortization, rent, and occupancy costs attributable to the provision of these services. Advertising costs are expensed as incurred.
General and administrative costs consist primarily of compensation and benefit costs (including related stock-based compensation) for employees engaged in corporate management, finance, human resources, compliance, and other corporate functions. This category also includes an allocation of depreciation, amortization, rent, and occupancy costs attributable to the provision of these services.
University-related expenses represent those costs that were transferred to Global Campus in the Sale Transaction and that are no longer incurred by the Company. These costs were previously primarily components of instructional costs and services, with some costs from admissions advisory and marketing and some general and administrative.
Restructuring and impairment expenses have historically been primarily comprised of (i) charges related to the write off and impairment of certain assets, (ii) severance costs related to headcount reductions made in connection with restructuring plans and (iii) estimated lease losses related to facilities vacated or consolidated under restructuring plans.
Factors Affecting Comparability
We believe the following factors have had, or can be expected to have, a material impactsignificant effect on the Company’s condensed consolidated financial statements. For informationcomparability of recent or future results of operations:
Sale transaction
The results of operations prior to December 1, 2020 are not comparable to those following that date. On December 1, 2020, the Company entered into the Services Agreement with Global Campus whereby the Company will provide certain educational technology and support services. On December 1, 2020, the Company also entered into the Transition Services Agreement with Global Campus whereby the Company will provide certain temporary transition services. Subsequent to December 1, 2020, revenue is primarily derived from service revenue from our university partners.
Cost reductions
We recently took actions to reduce our cost structure to more appropriately align it with both our revenue expectations and the nature of our business following the Sale Transaction. As we moved through the second quarter of 2021, our enrollment began to stabilize at levels slightly lower than anticipated, causing us to further reduce our planned spending. Our total year-to-date cost reduction efforts will yield approximately $40.0 million of savings in calendar 2021, and approximately $60 million in annualized savings going forward, compared to planned spending levels.
Seasonality
Our operations are generally subject to seasonal trends. Our university partners 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 our university partners enroll students throughout the year, fourth quarter revenue is generally lower than other quarters due to the holiday break in December, with an increase in the first quarter of each year.
Trends and uncertainties regarding the restructuring and impairment expense recorded, refer to Note 5, “Restructuring and Impairment Expense” to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.continuing operations
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. The cumulative loss incurred over the three-year period ended June 30, 20202021 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 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 June 30, 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 suggested additional topics for consideration for action by the Rulemaking Committee.
The Rulemaking Committee met from January through March of 2019 on topics related to accreditation, competency-based education, state approval of online programs, and distance learning. The Rulemaking Committee reached consensus on all topics and the Department 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 April 2, 2020, the Department released proposed 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 a short comment period which ended on May 4, 2020.
Gainful Employment
In October 2014, the Department published gainful employment regulations impacting programs required to prepare graduates for gainful employment in a recognized occupation. The gainful employment regulations became effective July 1, 2015, with certain institutional disclosure requirements which became effective early 2017.
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 affecting programs under Title IV be published in final form by November 1, prior to the start of the award year (July 1) to which they become effective. This section also permits the Secretary to designate any regulation as one that an entity subject to the regulations 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 gainful employment rule are not required to report gainful employment data to the National Student Loan Data System. Additionally, those institutions that have early implemented are not required to include the disclosure template, or a link thereto, in their gainful employment program promotional materials and directly distribute the disclosure template to prospective students. Institutions that have early implemented are no longer
required to post the gainful employment disclosure template and may remove the template and any other gainful employment disclosures from 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 any federal fiscal years, 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 for the 2016, 2015 and 2014 federal fiscal years were 13.7%, 13.5% and 14.9%, respectively. The draft three-year cohort default rate for Ashford University for the 2017 federal fiscal 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.2021.
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 six months ended June 30, 2020.2021.
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 June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Costs and expenses: | | | | | | | |
Instructional costs and services | 43.2 | | | 51.3 | | | 45.2 | | | 49.3 | |
Admissions advisory and marketing | 37.3 | | | 41.7 | | | 39.9 | | | 43.2 | |
General and administrative | 13.9 | | | 21.0 | | | 15.8 | | | 17.7 | |
| | | | | | | |
Restructuring and impairment expense | 0.5 | | | 5.0 | | | 1.6 | | | 2.5 | |
Total costs and expenses | 94.9 | | | 119.0 | | | 102.5 | | | 112.7 | |
Operating income (loss) | 5.1 | | | (19.0) | | | (2.5) | | | (12.7) | |
Other income (expense), net | 0.2 | | | 0.3 | | | (0.1) | | | 0.4 | |
Income (loss) before income taxes | 5.3 | | | (18.7) | | | (2.6) | | | (12.3) | |
Income tax expense (benefit) | 0.3 | | | (2.3) | | | (6.2) | | | (1.1) | |
Net income (loss) | 5.0 | % | | (16.4) | % | | 3.6 | % | | (11.2) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Revenue and other revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Costs and expenses: | | | | | | | |
Technology and academic services | 26.1 | | | 16.6 | | | 25.5 | | | 17.7 | |
Counseling services and support | 33.5 | | | 22.6 | | | 33.2 | | | 23.2 | |
Marketing and communication | 31.4 | | | 20.9 | | | 32.6 | | | 23.2 | |
General and administrative | 12.2 | | | 11.1 | | | 16.6 | | | 12.4 | |
University-related expenses | — | | | 23.2 | | | — | | | 24.4 | |
| | | | | | | |
Restructuring and impairment expense | 3.4 | | | 0.5 | | | 1.6 | | | 1.6 | |
| | | | | | | |
Total costs and expenses | 106.6 | | | 94.9 | | | 109.5 | | | 102.5 | |
Operating income (loss) | (6.6) | | | 5.1 | | | (9.5) | | | (2.5) | |
Other income (loss), net | 0.3 | | | 0.2 | | | 0.1 | | | (0.1) | |
Income (loss) before income taxes | (6.3) | | | 5.3 | | | (9.4) | | | (2.6) | |
Income tax expense (benefit) | (0.3) | | | 0.3 | | | (0.1) | | | (6.2) | |
Net income (loss) | (5.8) | % | | 5.0 | % | | (9.3) | % | | 3.6 | % |
Three Months Ended June 30, 20202021 Compared to Three Months Ended June 30, 20192020
Revenue.Total revenue and other revenue. OurTotal revenue and other revenue for the three months ended June 30, 2021 and 2020, and 2019, was $103.9$69.2 million and $107.5$103.9 million, respectively, a decrease of $3.6$34.7 million, or 3.3%33.4%. For the three months ended June 30, 2021 and 2020, University Partners segment revenue was $62.3 million and $99.0 million, respectively, representing a decrease of 37.1%, and the Zovio Growth segment revenue was $6.9 million and $5.0 million, respectively, representing an increase of 39.3%.
The decrease in revenue in the University Partners segment of $36.7 million between periods was primarily due to the change in business model in December 2020, and the related decrease in university-related revenue as compared to the prior year. This decrease was also due to a decrease of 8.8% in average weekly enrollment from 38,304 students for the three month period ended June 30, 20192021, as compared to 34,952 students for the three month period ended June 30, 2020. As a result ofPartially offsetting the decrease in enrollments, tuitionthe University Partners segment was the new service revenue decreased by $3.4 million, netfrom the Services Agreement entered into in December 2020, as well as other revenue generated from course digital materials decreased by $0.5 million, and technology feethe Transition Services Agreement of approximately $2.5 million.
The increase in revenue decreased by $0.4 million. The decrease in revenuethe Zovio Growth segment between periods was alsoprimarily due to higher scholarships for the period, an increase of $1.4 million. The overall revenue decrease was partially offset by net revenue fromgrowth in new customer contracts within the related subsidiaries, of $4.9 million, as well as a tuitionFullstack Academy and fees increase, effective January 2020.TutorMe.com.
Instructional costsTechnology and academic services. Our instructional costsTechnology and academic services for the three months ended June 30, 2021 and 2020, and 2019, were $44.9$18.1 million and $55.1$17.2 million, respectively, a decreasean increase of $10.2$0.9 million, or 18.5%4.9%. Specific decreasesincreases between periods primarily include direct compensation of $4.1 million, corporate supportother technology and academic services of $1.3$2.3 million other subsidiary costs of $1.3 million, facilities costs of $1.0 million, bad debt expense of $0.9 million, professionaland license fees of $0.6$0.7 million, business related travelpartially offset by decreases in consulting and outside services of $1.2 million, employee costs of $0.5 million, and instructor feesamortization of $0.4$0.3 million. Instructional costsTechnology and academic services, as a percentage of revenue, for the three months ended June 30, 2021 and 2020, were 26.1% and 2019, were 43.2% and 51.3%16.6%, respectively, a decreasean increase of 8.1%9.5%. This decreaseincrease primarily included decreasesincreases in direct compensationemployee costs of 3.3%3.6%, other subsidiary costs of 1.2%, corporate supporttechnology and academic services of 1.0%3.4%, facilities costslicense fees of 0.9%1.8%, bad debt expenseand instructional supplies of 0.7%, professional feespartially offset by a decrease in consulting and other outside services of 0.5%0.4%.
Counseling services and business related travel of 0.5%. As a percentage of revenue, bad debt expense was 2.9%support. Counseling services and support for the three months ended June 30, 2021 and 2020, compared to 3.6% for three months ended June 30, 2019.
Admissions advisory and marketing. Our admissions advisory and marketing expenses for the three months ended June 30, 2020 and 2019, were $38.8$23.2 million and $44.8$23.5 million, respectively, a decrease of $6.0$0.3 million, or 13.4%1.6%. Specific factors contributing to the overall decrease between periods were decreasesa decrease in advertising costsother counseling services and support expenses of $2.0 million, compensation of $1.8 million, professional fees of $0.8 million, facilities costs of $0.8 million,$0.2 million. Counseling services and other subsidiary costs of $0.5 million. Admissions advisory and marketing,support, as a percentage of revenue, for the three months ended June 30, 2021 and 2020, were 33.5% and 2019, were 37.3% and 41.7%22.6%,
respectively, a decreasean increase of 4.4%10.9%. This decreaseincrease primarily included decreasesincreases in advertisingemployee costs of 1.4%9.2%, compensationdepreciation of 1.2%0.6%, professional fees of 0.7%,and facilities costs of 0.7%0.5%.
Marketing and other subsidiarycommunication. Marketing and communication for the three months ended June 30, 2021 and 2020, were both $21.7 million, respectively. Specific factors contributing to the overall increase between periods were increases in employee costs of 0.5%$0.5 million, partially offset by a decrease in advertising of $0.4 million. Marketing and communication, as a percentage of revenue, for the three months ended June 30, 2021 and 2020, were 31.4% and 20.9%, respectively, an increase of 10.5%. This increase primarily included increases in advertising of 7.6%, employee costs of 2.1%, and consulting and outside services of 0.7%.
General and administrative. Our generalGeneral and administrative expenses for the three months ended June 30, 2021 and 2020, and 2019, were $14.5$8.4 million and $22.5$11.6 million, respectively, a decrease of $8.0$3.2 million, or 35.7%27.7%. The decrease between periods was
primarily due to decreases in acquisitionemployee costs of $7.3$1.7 million, professional fees of $1.2 million and other general and administrative compensationexpenses of $3.4$0.9 million, partially offset by an increaseincreases in other subsidiaryhuman resources costs of $1.9$0.5 million and transaction costsinsurance of $0.8$0.3 million. General and administrative expenses, as a percentage of revenue, for the three months ended June 30, 2021 and 2020, were 12.2% and 2019, were 13.9% and 21.0%11.1%, respectively, a decreasean increase of 7.1%1.1%. This decreaseincrease was primarily due to decreasesincreases in acquisitioninsurance of 0.7%, consulting and outside services of 0.5%, legal fees of 0.4%, and employee costs of 6.8% and administrative compensation of 2.9%0.3%, partially offset by increasesdecreases in professional fees of 0.8% and other subsidiary costsgeneral and administrative expenses of 1.7% and transaction costs of 0.9%0.5%.
University-related expenses. We did not record any charges to university-related expenses for the three months ended June 30, 2021. Charges incurred for the three months ended June 30, 2020 related to the legacy University.
Restructuring and impairment expense. WeFor the three months ended June 30, 2021, we recorded $2.3 million of restructuring and impairment expense. For the three months ended June 30, 2020, 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,expense. These charges were comprised primarily of a reduction in force and revised estimates of lease charges.
Other (expense) income,expense, net. Our otherOther expense, net, was $0.2 million for the three months ended June 30, 2021 and $0.2 million for the three months ended June 30, 2020, respectively. The amounts recognized during the three months ended June 30, 2021 relate primarily to interest expense.
Income tax expense (benefit). We recognized an income tax benefit of $0.2 million and otheran income net, wastax expense of $0.3 million for the three months ended June 30, 2019.2021 and June 30, 2020, respectively, at effective tax rates of 5.3% and 5.5%, respectively. The decrease between periods was primarily due to a loss on deferred compensation investmentsincome tax benefit for the three months ended June 30, 2020.2021 was mainly attributable to the tax refunds received from the federal and FTB audit examinations.
Income tax expense (benefit)Net income (loss). We recognized income tax expense of $0.3 million, and an income tax benefit of $2.4Net loss was $4.0 million for the three months ended June 30, 2020 and June 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 attributable2021, compared to tax refund true-ups related to the CARES Act and IRS audit examination.
Net income (loss). Our net income wasof $5.1 million for the three months ended June 30, 2020, compared to net loss of $17.6a $9.1 million for the three months ended June 30, 2019, a $22.7 million increase in net incomedecrease as a result of the factors discussed above.
Six Months Ended June 30, 20202021 Compared to Six Months Ended June 30, 20192020
Revenue.Total revenue and other revenue. OurTotal revenue and other revenue for the six months ended June 30, 2021 and 2020, and 2019, was $201.8$146.0 million and $217.3$201.8 million, respectively, a decrease of $15.5$55.8 million, or 7.1%27.6%. For the six months ended June 30, 2021 and 2020, University Partners segment revenue was $131.9 million and $192.8 million, respectively, representing a decrease of 31.6%, and the Zovio Growth segment revenue was $14.1 million and $9.0 million, respectively, representing an increase of 57.1%.
The decrease in revenue in the University Partners segment of $60.9 million between periods was primarily due to the decrease in university-related revenue as compared to the prior year. The decrease between periods was primarily due to a decrease of 8.5% in average weekly enrollment from 38,396 students for the six month period ended June 30, 20192020 to 35,126 students for the six month period ended June 30, 2020. As a result of2021. Partially offsetting the decrease in enrollments, tuitionthe University Partners segment was an increase of service revenue decreased by $13.5 million, technology fee revenue decreased by $1.2 million and netdue to the Services Agreement entered into in December 2020, as well as an increase in other revenue generated from course digital materials decreased by $1.0the Transition Services Agreement of approximately $5.3 million.
The decreaseincrease in revenue in the Zovio Growth segment between periods was alsoprimarily due to higher scholarships for the period, an increase of $5.4 million. The overall revenue decrease was partially offset by net revenue fromgrowth in customer contracts experienced this year within the related subsidiaries, of $8.9 million, as well as a tuitionFullstack Academy and fees increase, effective January 2020.TutorMe.com.
Instructional costsTechnology and academic services. Our instructional costsTechnology and academic services for the six months ended June 30, 2021 and 2020, and 2019, were $91.3$37.2 million and $107.0$35.7 million, respectively, a decreasean increase of $15.7$1.5 million, or 14.7%4.1%. In addition to the decline in enrollment, specific decreasesSpecific increases between periods include direct compensation costsother technology and academic services expenses of $7.6$2.8 million, corporate support serviceslicense fees of $4.6$1.4 million, bad debt expense of $1.1 million, business related travel of $0.7 million, license fees of $0.7$0.6 million, and information technologyinstructional supplies of $0.5 million, partially offset by decreases in consulting and outside services of $2.1 million, employee costs of $0.6 million, facilities costs of $0.6 million, and professional fees of $0.4 million. Instructional costsTechnology and academic services, as a percentage of revenue, for the six months ended June 30, 2021 and 2020, were 25.5% and 2019, were 45.2% and 49.3%17.7%, respectively, a decreasean increase of 4.1%7.8%. This decreaseincrease primarily included decreasesincreases in direct compensationemployee costs of 2.4%3.0%, corporate supportother technology and academic services expenses of 1.7%2.2%, license fees of 1.6%, instructional supplies of 0.8%, and bad debt expense of 0.3% and license fees of 0.3%0.5%, partially offset by an increasea decrease in instructor feesconsulting and outside services of 0.5%0.4%. As a percentage of revenue, bad debt expense was 3.2%
Counseling services and support. Counseling services and support for the six months ended June 30, 2021 and 2020, compared to 3.5% for the six months ended June 30, 2019.
Admissions advisory and marketing. Our admissions advisory and marketing expenses for the six months ended June 30, 2020 and 2019, were $80.5$48.5 million and $93.9$46.9 million, respectively, a decreasean increase of $13.4$1.6 million, or 14.2%3.5%. As a result of our change in marketing strategy and the shift in advertising mix, specificSpecific factors contributing to the overall decreaseincrease between periods include increases in employee costs of $3.6 million and human resources costs of $0.3 million, partially offset by decreases in advertisingfacilities costs of $6.1 million, compensation of $6.0 million, professional fees of $0.9$1.6 million and business related travelother counseling services and support expenses of $0.8 million. Our admissions advisoryCounseling services and marketing expenses,support, as a percentage of revenue, for the six months ended June 30, 2021 and 2020, were 33.2% and 2019, were 39.9% and 43.2%23.2%, respectively, a decreasean increase of 3.3%10.0%. This decreaseincrease primarily included decreasesincreases in compensation of 1.8%, advertisingemployee costs of 1.5%, professional fees9.5% and human resources costs of 0.3% and business related travel of 0.3%0.5%, partially offset by a decrease in facilities costs of 0.3%.
Marketing and communication. Marketing and communication for the three months ended June 30, 2021 and 2020, were $47.6 million and $46.7 million, respectively, an increase of $0.9 million, or 1.7%. Specific factors contributing to the overall increase between periods were increases in other subsidiaryemployee costs of 0.6%$1.3 million and consulting and outside services of $0.6 million, partially offset by decreases in license fees of $0.7 million and other marketing and communication expenses of $0.5 million. Marketing and communication, as a percentage of revenue, for the six months ended June 30, 2021 and 2020, were 32.6% and 23.2%, respectively, an increase of 9.4%. This increase primarily included increases in advertising of 7.0%, employee costs of 1.9%, and consulting and outside services of 0.8%.
General and administrative. Our generalGeneral and administrative expenses for the six months ended June 30, 2021 and 2020, and 2019, were $32.0$24.3 million and $38.5$25.0 million, respectively, a decrease of $6.5$0.7 million, or 16.8%2.8%. The decrease between periods was
primarily due to decreases in acquisitionemployee costs of $8.2$1.6 million, non-recurring stock compensation of $1.5 million, professional fees of $1.2$1.4 million and other subsidiary costslegal fees of $0.9$0.7 million, partially offset by increases in corporate support servicesexecutive severance of $2.4 million, amortization of intangible assets of $0.8$3.6 million and transaction costsinsurance of $0.5 million. Our general and administrative expenses, as a percentage of revenue, for the six months ended June 30, 2021 and 2020, were 16.6% and 2019, were 15.8% and 17.7%12.4%, respectively, a decreasean increase of 1.9%4.2%. This decreaseincrease was primarily due to decreasesincreases in acquisitionexecutive severance of 2.5%, employee costs of 3.8%1.2%, and other subsidiary costsinsurance of 0.5%0.6%, partially offset by increasesdecreases in corporate support services of 0.7%, administrativenon-recurring stock compensation of 0.7%, other administrative costs of 0.5%,0.6% and transaction costsprofessional fees of 0.4%.
Restructuring and impairment expense.University-related expenses. We recognized $3.2 million of restructuring and impairment expensedid not record any charges to university-related expenses for the six months ended June 30, 2021. Charges incurred for the six months ended June 30, 2020 comprised primarily of revised estimates of lease charges, as well as severance costs resulting from a reduction in force.related to the legacy University.
Restructuring and impairment expense. For the six months ended June 30, 2019,2021, we recorded $2.3 million of restructuring and impairment expense. For the six months ended June 30, 2020, there were $5.4$3.2 million of similar restructuring and impairment expenses.
Other (expense) income, net. Our otherOther expense, net was $0.2 million for the six months ended June 30, 2021, as compared to other income, net of $0.1 million for the six months ended June 30, 2020, as compared to other income, netan increase of $0.9 million for$0.3 million. The amounts recognized during the six months ended June 30, 2019, a decrease of $1.0 million. The decrease between periods was2021 relate primarily due to decreased interest income on average cash balances and a loss on deferred compensation investments.expense.
Income tax benefit. We recognized an income tax benefit of $12.5$0.1 million and $2.4$12.5 million for the six months ended June 30, 20202021 and 2019,2020, respectively, at effective tax rates of 234.9%1.0% and 9.0%234.9%, respectively. The income tax benefit for the six months ended June 30, 20202021 was mainly attributable to the $12.7 million refund claimstax refunds received from the net operating loss carryback provisions of the CARES Act.federal and FTB audit examinations.
Net income (loss). Our net loss was $13.5 million for the six months ended June 30, 2021 compared to net income wasof $7.2 million for the six months ended June 30, 2020, compared to net loss of $24.2 million for the six months ended June 30, 2019, a $31.4$20.7 million increase in net incomeloss 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. At June 30, 20202021 and December 31, 2019,2020, our cash and cash equivalents were $75.1$24.0 million and $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$35.5 million, respectively. At June 30, 2021 and December 31, 2020, total restricted cash was $13.3 million and $20.0 million, respectively, and investments were $1.5 million and $1.5 million, respectively. At June 30, 2021, 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, 20202021 as compared to December 31, 2019.2020. 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 Additionally, our income tax receivable increaseddecreased from December 31, 20192020 to June 30, 20202021 primarily due to $1.9 million tax refunds received from 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 millionfederal and received $6.2 million in June 2020. We anticipate receiving the remaining refund by the end of the third quarter ending September 30, 2020.FTB audit examinations.
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” in this Form 10-Q.
Title IVOperating activities
Net cash used in operating activities was $16.3 million for the six months ended June 30, 2021, compared to net cash provided by operating activities of $6.7 million for the six months ended June 30, 2020, an overall decrease between periods in net cash provided by operating activities of $23.0 million. The decrease in cash provided by operating activities is primarily attributable to the increase in net loss of $20.7 million between periods, including the minimum residual payment of $12.2 million to Global Campus during the period, as well as the decreases in non-cash expenses, partially offset by the net increases in the working capital accounts due to changes in the business model since the prior year.
Investing activities
Net cash used in investing activities was $0.9 million for the six months ended June 30, 2021, compared to net cash used in investing activities of $0.6 million for the six months ended June 30, 2020. Capital expenditures for the six months ended June 30, 2021 were $0.7 million, compared to $1.6 million for the six months ended June 30, 2020. During the six months ended June 30, 2021 and other governmental funding2020, we capitalized costs for intangibles of $0.3 million and $0.1 million, respectively. We expect our capital expenditures to be approximately $3.0 million for the year ending December 31, 2021.
AshfordFinancing activities
Net cash used in financing activities was $1.1 million for the six months ended June 30, 2021, compared to net cash provided by financing activities of $2.3 million for the six months ended June 30, 2020. During each of the six months ended June 30, 2021 and 2020, net cash used included tax withholdings related to the issuance of restricted stock units vesting. For the six months ended June 30, 2020, we received $2.7 million of cash which was for long-term debt to be repaid as a function of generating future revenue.
Agreements with Global Campus
Our largest university partner, Global Campus, derives the majority of its respective cash revenues from students who enroll and are eligible for various federal student financial assistance programs authorized under Title IV of the Higher Education Act. AshfordAn institution 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 AshfordGlobal Campus is from government tuition assistance programs for
military personnel, including veterans, payments made in cash by individuals, reimbursement from corporate affiliatespartnerships and private loans.loans from third parties.
If we wereThe majority of our cash comes from our Services Agreement with Global Campus. The service fees in the Services Agreement are subject to become ineligiblecertain minimum residual liability adjustments, including performance-based adjustments, minimum profit level adjustments, and excess direct cost adjustments. These adjustments are all variable in nature in that they depend
upon the Company’s performance during each service period. In June 2021, the Company made a minimum residual payment of $12.2 million 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 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, togetherGlobal Campus. In connection with the timing at which 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 inServices Agreement, 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,minimum residual payment will be madepaid annually in June. If the Company's restructuring efforts and enrollment initiatives do not occur as market and business conditions warrant. The timing and extent of any repurchasesplanned, then the Company will depend upon market conditions, the trading price of our shares and other factors, and subjectneed to the restrictions relatingfind alternative sources 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 provided by operating activities was $6.7 million for the six months ended June 30, 2020, compared to net cash used in operating activities of $22.1 million for the six months ended June 30, 2019, an overall increase between periods in net cash provided by operating activities of $28.8 million. The increase in cash provided by operating activities is primarily attributable to the $31.4 million increase in net income between periods, 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 investing activities was $0.6 million for the six months ended June 30, 2020, compared to net cash used in investing activities of $37.4 million for the six months ended June 30, 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 six months ended June 30, 2019, we used $19.3 million of cash paid for acquisition. During the six months ended June 30, 2020 and 2019, we capitalized costs for intangibles of $0.1 million and $0.3 million, respectively. We expect our capital expenditures to be approximately $4.6 million for the year ending December 31, 2020.
Financing activities
Net cash provided by financing activities was $2.3 million for the six months ended June 30, 2020, compared to net cash used in financing activities of $0.7 million for the six months ended June 30, 2019. For the six months ended June 30, 2020, $2.7 million of 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 six months ended June 30, 2020 and 2019, net cash used included tax withholdings related to the issuance of restricted stock units vesting.fund operations.
Based on our current level of operations, and based upon recent cost reductions throughout the organization, we believe that our future cash flows from operating activities and our existing cash and cash equivalents will provide adequate funds for ongoing operations, minimum residual payments, 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
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 June 30, 2020, the surety had issued $8.6 million of bonds on our behalf under this facility.
Significant Contractual Obligations
The following table sets forth, as of June 30, 2020,2021, certain significant cash and contractual obligations that willmay affect our future liquidity:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period | | | | | | | | | | | | |
(In thousands) | Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter |
Operating lease obligations | $ | 45,771 | | | $ | 4,147 | | | $ | 8,914 | | | $ | 5,299 | | | $ | 3,805 | | | $ | 3,538 | | | $ | 20,068 | |
Other contractual obligations | 51,663 | | | 10,502 | | | 13,530 | | | 10,470 | | | 8,132 | | | 4,925 | | | 4,104 | |
Uncertain tax positions | 104 | | | — | | | — | | | 104 | | | — | | | — | | | — | |
Total | $ | 97,538 | | | $ | 14,649 | | | $ | 22,444 | | | $ | 15,873 | | | $ | 11,937 | | | $ | 8,463 | | | $ | 24,172 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
(In thousands) | Total | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter |
Operating lease obligations | $ | 57,643 | | | $ | 4,039 | | | $ | 7,009 | | | $ | 5,316 | | | $ | 5,022 | | | $ | 4,759 | | | $ | 31,498 | |
Other contractual obligations | 15,393 | | | 4,735 | | | 6,314 | | | 4,322 | | | 22 | | | — | | | — | |
Uncertain tax positions | 28 | | | — | | | 28 | | | — | | | — | | | — | | | — | |
Total | $ | 73,064 | | | $ | 8,774 | | | $ | 13,351 | | | $ | 9,638 | | | $ | 5,044 | | | $ | 4,759 | | | $ | 31,498 | |
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Note 2, “Summary of Significant Accounting Policies” to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.Risk
Market and Credit Risk
Pursuant to our cash investment policy, we attempt to mitigate the exposure of our cash and investments to market and credit risk by (i) diversifying concentration to ensure we are not overly concentrated in a limited number of financial institutions, (ii) monitoring and managing the risks associated with the national banking and credit markets, (iii) investing in U.S. dollar-denominated assets and instruments only, (iv) diversifying account structures so that we maintain a decentralized account portfolio with numerous stable, highly rated and liquid financial institutions and (v) ensuring that our investment procedures maintain a defined and specific scope such that we will not invest in higher-risk investment accounts, including financial swaps or derivative and corporate equities. Accordingly, pursuant to the guidelines established by our cash investment policy, we invest our excess cash exclusively in high-quality, U.S. dollar-denominated financial instruments.
Despite the investment risk mitigation strategies we employ, we may incur investment losses as a result of unusual and unpredictable market developments, and we may experience reduced investment earnings if the yields on investments that are deemed to be low risk remain low or decline further in this time of economic uncertainty. Unusual and unpredictable market developments may also create liquidity challenges for certain of the assets in our investment portfolio.
We have no derivative financial instruments or derivative commodity instruments.
Interest Rate Risk
To the extent we borrow funds, we would be subject to fluctuations in interest rates. As of June 30, 2020,2021, we had approximately $2.8 million in long-term notes payable.
Our future investment income may fall short of expectations due to changes in interest rates. At June 30, 2020,2021, a hypothetical 10% increase or decrease in interest rates would not have a material impact on our future earnings, fair value or cash flows related to interest earned on our cash, cash equivalents or investments.
Item 4. Controls and Procedures.Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act, that are designed to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officerPrincipal Executive Officer and principal financial officerPrincipal Financial Officer or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Principal Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(b) and Rule 15d-15(b) of the Exchange Act. Based on that evaluation, our Chief Executive Officer and our Principal Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2020.2021.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting, during the three months ended June 30, 20202021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.Proceedings
For information regarding our legal proceedings, refer to Note 15, “Commitments and Contingencies” to our condensed consolidated financial statements included in Part I, Item 1 of this report, which note is incorporated by reference into this Part II, Item 1.
Item 1A. Risk Factors.Factors
Investing in our common stock involves risk. Before making an investment in our common stock, you should carefully consider the risk factors discussed in Part I, Item 1A, “Risk Factors” of the Form 10-K. The risks described in the Form 10-K are those which we believe are the material risks we face, and such risks could materially adversely affect our business, prospects, financial condition, cash flows and results of operations. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may impact us. Except as set forth below, there have been no material changes in our risk factors from those previously disclosed in the Form 10-K.
Risks RelatedChanges to the Proposed Ashford Transactions and Proposed Change90/10 rule or related Title IV regulation could adversely impact our university partners, which in turn could adversely affect our revenues or our ability to grow.
In March 2021, President Biden signed the American Rescue Plan Act (“ARPA”) of 2021. The ARPA includes a major change in the Structure of Our Operations
Failure90/10 revenue test that provides for-profit institutions and their students access to complete the asset purchase agreement withFSA programs. Under the Arizona Board of Regents, for andARPA, the Higher Education Act would be modified to change the formula from counting only Title IV program funds on the '90 side' to instead include all “federal funds that are disbursed or delivered to or on behalf of the University of Arizona and the University of Arizona Global Campus, which is subjecta student to conditions and also may not close duebe used to uncertainties, may prevent us from executing on our strategic plans, and could materially and adversely impact us.
attend such institution” or collectively “federal education assistance funds.” The asset purchase agreement with the Arizona Board of Regents, a body corporate, for and on behalf of the University of Arizona and the University of Arizona Global Campus is subject to certain conditions, some of which are out of our control. There can be no assurance when or whether these conditions will be satisfied or, to the extent waivable, waived or the occurrence of any effect, event, development or change will not transpire. If these conditions are not satisfied or waived, if permitted, the asset purchase agreement may be terminated and would not be completed.
There can be no assurance with respect to the timing of the completion of the asset purchase agreement or whether it will be completed on its current terms, or at all. If it is not completed for any reason, we may not be able to fully implement our strategic plans, or such plans would be delayed, which could have a material adverse impact on our future expected financial performance.
The Conversion Transaction is subject to the receipt of regulatory approvals that if not obtained, could delay or prevent its consummation, and an excessive delay in finalizing the Conversion Transaction could disrupt our business during its pendency.
The Conversion Transaction remains subject to various regulatory approvals following the conversion. There can be no assurances that these regulatory approvals will be obtained on the currently contemplated timeline or at all. In addition, as a condition to granting these regulatory approvals, a regulatory authority may require changes to the structure of the Conversion Transaction, and these changes may negatively impact our financial condition and results of operations. A material delay in obtaining such approvals may create uncertainty or otherwise have negative consequences, including adverse changes in our relationships with Ashford’s students, vendors and faculty; adverse impacts on employee recruiting and retention efforts; and diversion of management’s attention and internal resources from ongoing business, any of which may materially and adversely affect our financial condition and results of operations. We cannot predict with certainty whether and when any of the required regulatory approvals will be granted. Whether or not the Conversion Transaction is consummated, while it is pending, we will continue to incur costs, fees, expenses and charges related to the Conversion Transaction.
If the Conversion Transaction is consummated, we90/10 provision will be subject to various risksnegotiated rulemaking after October 2021, with an earliest effective date on or after January 1, 2023. Additionally, in June 2021, the Department held virtual public hearings to receive stakeholder feedback on potential issues for the upcoming negotiated rulemaking sessions. These issues include borrower defense to repayment for students, gainful employment requirements, and uncertainties arising out of the changes in the structure of our operations, any of which could materially and adversely affect our business and operations, and our stock price.
Having obtained most regulatory approvals and agreed upon the general structure and major terms and conditions regarding the Conversion Transaction, if it is ultimately consummated, then various aspects of our operations would change in important ways. These changes include, but are not limited to, the following:
•Following the Conversion Transaction, we would no longer ownownership and operate a regulated institution of higher education, but we would instead be an education technology service provider to AU NFP and possibly other third-party education providers. While the services we would provide are services that we provide as part of our business today, we have no experience operating solely as an education technology service provider to third parties.
•Initially, all of our revenue would be derived pursuant to the services agreement with AU NFP. Accordingly, AU NFP’s ability to increase its enrollment and tuition and fee revenue, and our ability to continue to perform the services necessary to enable AU NFP to achieve such goals, would be critical to the success of our services business.
If the Conversion Transaction is consummated, but we are unable to successfully re-focus our business to providing education technology services to third-party education providers, or if the contemplated services agreement with AU NFP fails to achieve the anticipated levels of performance, then our business, financial condition and results of operations, as well as our stock price, could be materially and adversely affected.
If the Department does not approve the change of control related to the Conversion Transaction and recertify Ashford to continue participating in the Title IV programs, its students would lose their access to Title IV program funds, or there are significant limitations as a condition of Ashford’s continued participation in the Title IV programs, as a service provider to Ashford, our business, financial condition and results of operations, as well as our stock price, could be materially and adversely affected.
Institutions are required to seek recertification from the Department on a regular basis in order to continue their participation in Title IV programs. An institution must also apply for recertification by the Department if it undergoes a change in control, as defined by the Department regulations, and may be subject to similar review if it expands its operations or educational programs in certain ways. Ashford’s conversion to nonprofit status as a part of the Conversion Transaction, if consummated, would constitute a change in control of Ashford. The Department conducted an abbreviated preacquisition reviewinstitutions of the change of control and is expectedhigher education among other topics. If these changes were to conduct a post-closing review of Ashford following the change of control resulting from the Conversion Transaction, if consummated. See “Regulation – U.S. Department of Education Abbreviated Preacquisition Review Letter” in Item 1, “Business.” There can be no assurance that the Department will recertify Ashford or that the Department will not impose conditions or other restrictions on Ashford as a condition of granting Ashford a provisional certification following the proposed change in control. If the Department does not renew, or withdraws, the certification of Ashford to participate in the Title IV programs at any time, Ashford’s students would no longer be able to receive Title IV program funds. Similarly, the Departmentgo into effect, it could renew Ashford’s certification, but restrict or delay Ashford’s students’ receipt of Title IV funds, limit the students to whom Ashford could disburse funds, decline to approve Ashford as a nonprofit institution for Title IV purposes, or place other restrictions on Ashford.
Any of these outcomes would have a material adverse effect on us. If the Conversion Transaction is consummated, we would no longer own or operate Ashford, and we would no longer participate in the Title IV programs as an institution. However, we would face the risks discussed above in connection with providing services to Ashford as a third-party education technology services provider, including adverse effects on our business and operations from a reduction or loss in our revenues under the contemplated services agreement if Ashford loses or has limits placed on its Title IV eligibility.
The separation of Ashford via the Conversion Transaction, may not be completed on the terms or timeline currently contemplated and failure to complete, or any delay of, the separation of Ashford from Zovio Inc may negativelyadversely impact our planned business, financial condition or results of operations.
The Conversion Transaction,university partners, which may be subject to a number of conditions including, among other things, regulatory approval. There can be no assurance that the conditions to the completion of the Conversion Transaction will be satisfied, or that the separation will be completed on the terms or timeline currently contemplated, if at all. Other unanticipated developments could further delay, prevent or otherwise adversely affect the separation of the university, including disruptions in the capital and other financial markets, among other things. If the separation of the university is not completed or is delayed, we will be subject to several risks, including but not limited to:
•a failure to complete the separation and transition or a delay in such events could result in a negative perception by the market of the Company generally and a resulting decline in the market price of our common stock;
•the Company and Ashford may experience negative reactions from its employees and business partners; and
•there may be substantial disruption to our business and a distraction of our management team and employees from day-to-day operations, because matters related to the separation and transition have required substantial commitments of time and financial and other resources, which could otherwise have been devoted to other opportunities that might have been beneficial.
Risks Related to the Extensive Regulation of Our Business
The failure of Ashford to demonstrate financial responsibility may result in a loss of eligibility to participate in Title IV programs or require the posting of a letter of credit in order to maintain eligibility to participate in Title IV programs.
To participate in Title IV programs, an eligible institution must satisfy specific measures of financial responsibility prescribed by the Department. For additional information, see “Regulation — Department Regulation of Title IV Programs — Financial responsibility” in Item 1, “Business.” One measure of financial responsibility is an institution's composite score, a number between negative 1.0 and positive 3.0. An institution's composite score must be at least 1.5 for the institution to be deemed financially responsible without the need for further Department oversight. If Ashford is found not to have satisfied the Department's financial responsibility requirements, they could be limited in their access to or lose Title IV program funding, or they may be required to post a letter of credit in favor of the Department and possibly accept other conditions to their participation in Title IV programs, which would have a material adverse effect on enrollments and our revenues, financial condition, cash flows and results of operations.
The Department historically has calculated Ashford’s composite score based on our consolidated audited financial statements, rather than the institution’s stand-alone audited financial statements. For the fiscal year ended December 31, 2018, our consolidated composite score calculated was 2.2, satisfying the composite score requirement of the Department's financial responsibility test. We expect our consolidated composite score for the fiscal year ended December 31, 2019 to be 0.7 and below the composite score requirement as a result of non-recurring restructuring and acquisition related charges unrelated to Ashford. To continue participation in Title IV programs, Ashford could be required to submit a letter of credit and agree to other conditions or restrictions on its Title IV participation. We also are subject to additional financial responsibility standards contained in the 2016 defense to repayment regulations and in the amended regulations that take effect on July 1, 2020. See “Regulation – Defense to repayment.”
If the institution is unable to submit a required letter of credit or to comply with any other applicable conditions or restrictions on its Title IV, the institution could lose its eligibility for Title IV program funding and be subject to other sanctions. The requirement that the institution submit a letter of credit and be subject to other conditions or restrictions on the institution’s Title IV participation, or any limitation or loss of the institution’s Title IV eligibility, would have a material adverse effect on enrollments and our revenues, financial condition, cash flows and results of operations.
Risks Related to Our Business
We may require additional financing in the future and if such financing is not available on terms acceptable to us, itturn could adversely affect our revenues or our ability to grow.
We believe that cash flow from operations will be adequate to fund our current operating plans for the foreseeable future. However, we may need additional financing to finance our plans, particularly if we pursue any acquisitions. The amount, timing and terms of such additional financing will vary principally depending on the timing and size of new program offerings, the timing and size of acquisitions we may seek to consummate and the amount of cash flows from our operations. To the extent that we require additional financing in the future, such financing may not be available on terms acceptable to us or at all and, consequently, we may not be able to fully implement our plans.
We may be susceptible to a number of political, economic, and geographic risks that could harm our business. Significant disruptions in the global economic environment, as a result of a pandemic such as COVID-19, may cause a decrease in our enrollment and adversely affect our business and financial results.
The occurrence of certain political, economic or geographic events (for example, natural disasters or a pandemic, such as the recent outbreak of Coronavirus (“COVID-19”) could result in a significant decline in our revenue. We are dependent on students and other customers that are geographically diverse and could be negatively impacted if economic conditions in the US and globally were negatively impacted. Such an occurrence could cause a decrease in enrollment, including a decrease in
student enrollment in our Corporate Partnership programs, through a slowing down of FTG, a decrease in military student enrollment, or including a decline in student retention.
The recent coronavirus outbreak has been declared a pandemic by the World Health Organization, has spread to the United States and many other parts of the world and will adversely affect our business operations, financial results, and employee availability, and may cause a decrease in our enrollment and a drop in student retention.
The outbreak of the COVID-19 continues to grow both in the United States and globally, and related government and private sector responsive actions have and will continue to adversely affect our business operations. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the COVID-19 and the actions taken to contain it or treat its impact. We have asked our corporate employees whose jobs allow them to work remotely to do so for the foreseeable future. Such precautionary measures could create operational challenges as we adjust to a remote workforce, which could adversely impact our business. We are also dependent on customers that are geographically diverse and would be negatively impacted if economic conditions in the US and globally continue to be negatively impacted and cause a decrease in our enrollment.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.Proceeds
The following table sets forth information regarding repurchases of our common stock on a monthly basis for the three months ended June 30, 2020:
ISSUER PURCHASES OF EQUITY SECURITIES
| | | | | | | | | | | | | | | | | | | | | | | |
Period | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that may yet be Purchased Under the Plans or Programs |
April 1, 2020 through April 30, 2020 | 68,825 | | | $ | 1.56 | | | — | | | $ | — | |
May 1, 2020 through May 31, 2020 | — | | | $ | — | | | — | | | $ | — | |
June 1, 2020 through June 30, 2020 | — | | | $ | — | | | — | | | $ | — | |
Total | 68,825 | | | $ | 1.56 | | | — | | | $ | — | |
(1)On April 15, 2020, the Company repurchased shares in relation to the retention payout in connection with the Fullstack acquisition from April 1, 2019.None.
Item 3. Defaults Upon Senior Securities.Securities
None.
Item 4. Mine Safety Disclosures.Disclosures
None.
Item 5. Other Information.Information
None.
Item 6. Exhibits.
Exhibits | | | | | | | | |
Exhibit | | Description |
10.1 | | | |
31.1 | | | |
31.2 | | | |
32.1 | | | |
101 | | | The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020,2021, filed with the SEC on August 3, 2020,July 28, 2021, formatted in Extensible Business Reporting Language (“XBRL”): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Income (Loss); (iii) the Condensed Consolidated Statements of Stockholders’ Equity; (iv) the Condensed Consolidated Statements of Cash Flows; and (v) the Notes to Condensed Consolidated Financial Statements. |
104 | | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | |
| ZOVIO INC |
| |
August 3, 2020July 28, 2021 | /s/ KEVIN ROYAL |
| Kevin Royal Chief Financial Officer (Principal financial officer and duly authorized to sign on behalf of the registrant) |