UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q


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

For the quarterly period ended September 30, ~~2021~~2022


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

For the transition period from________________to________________

Commission File Number: 001-34272

ZOVIO INC

(Exact name of registrant as specified in its charter)


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

1811 E. Northrop Blvd, Chandler, AZ 85286

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

(858) 668-2586

(Registrant’s telephone number, including area code)

None

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

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

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

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

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☐

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

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

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


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

The total number of shares of common stock outstanding as of ~~October 21, 2021,~~November 15, 2022, was ~~33,459,695.~~34,221,081.

ZOVIO INC

FORM 10-Q

INDEX



PART I—FINANCIAL INFORMATION		43
Item 1. Financial Statements		43
	Condensed Consolidated Balance Sheets (Unaudited)	43
	Condensed Consolidated Statements of Income (Loss) (Unaudited)	54

	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)	65
	Condensed Consolidated Statements of Cash Flows (Unaudited)	87
	Notes to Condensed Consolidated Financial Statements (Unaudited)	98
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		2824
Item 3. Quantitative and Qualitative Disclosures About Market Risk		3633
Item 4. Controls and Procedures		3734

PART II—OTHER INFORMATION		3835
Item 1. Legal Proceedings		3835
Item 1A. Risk Factors		3835
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		3839
Item 3. Defaults Upon Senior Securities		3839
Item 4. Mine Safety Disclosures		3839
Item 5. Other Information		3839
Item 6. Exhibits		3940
SIGNATURES		4041

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

ZOVIO INC

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except par value)


		As of September 30, 2021		As of December 31, 2020			As of September 30, 2022		As of December 31, 2021
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	31,608	$	35,462	Cash and cash equivalents	$	3,092	$	28,265
Restricted cash	Restricted cash	9,808		20,035		Restricted cash	2,935		9,288
Investments	Investments	1,322		1,515		Investments	216		974
Accounts receivable, net of allowance for credit losses of $1.8 million and $1.2 million at September 30, 2021 and December 31, 2020, respectively		8,539		7,204
Accounts receivable, net of allowance for credit losses of $1.4 million and $0.9 million at September 30, 2022 and December 31, 2021, respectively						Accounts receivable, net of allowance for credit losses of $1.4 million and $0.9 million at September 30, 2022 and December 31, 2021, respectively	5,360		9,631

Prepaid expenses and other current assets	Prepaid expenses and other current assets	15,564		12,617		Prepaid expenses and other current assets	3,303		13,423

Total current assets	Total current assets	66,841		76,833		Total current assets	14,906		61,581
Property and equipment, net	Property and equipment, net	27,711		30,575		Property and equipment, net	1,042		26,382
Operating lease assets	Operating lease assets	29,909		20,114		Operating lease assets	17,091		28,881

Goodwill and intangibles, net	Goodwill and intangibles, net	29,998		31,785		Goodwill and intangibles, net	23,461		29,499

Other long-term assets	Other long-term assets	3,316		1,999		Other long-term assets	2,056		2,691
Total assets	Total assets	$	157,775	$	161,306	Total assets	$	58,556	$	149,034
LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY					LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable and accrued liabilities	Accounts payable and accrued liabilities	$	57,878	$	62,693	Accounts payable and accrued liabilities	$	26,516	$	74,769
Deferred revenue and student deposits	Deferred revenue and student deposits	13,083		8,090		Deferred revenue and student deposits	8,039		14,939

Total current liabilities	Total current liabilities	70,961		70,783		Total current liabilities	34,555		89,708
Rent liability	Rent liability	35,373		24,125		Rent liability	18,081		34,205

Other long-term liabilities	Other long-term liabilities	8,577		7,181		Other long-term liabilities	2,910		5,115
Total liabilities	Total liabilities	114,911		102,089		Total liabilities	55,546		129,028
Commitments and contingencies (see Note 15)		0		0
Commitments and contingencies (see Note 14)						Commitments and contingencies (see Note 14)
Stockholders' equity:	Stockholders' equity:					Stockholders' equity:
Preferred stock, $0.01 par value:	Preferred stock, $0.01 par value:					Preferred stock, $0.01 par value:
20,000 shares authorized; zero shares issued and outstanding at both September 30, 2021, and December 31, 2020		—		—
20,000 shares authorized; zero shares issued and outstanding at both September 30, 2022, and December 31, 2021						20,000 shares authorized; zero shares issued and outstanding at both September 30, 2022, and December 31, 2021	—		—
Common stock, $0.01 par value:	Common stock, $0.01 par value:					Common stock, $0.01 par value:
300,000 shares authorized; 67,155 and 66,454 issued, and 33,446 and 32,267 outstanding, at September 30, 2021 and December 31, 2020, respectively		675		668
300,000 shares authorized; 67,930 and 67,255 issued, and 34,221 and 33,546 outstanding, at September 30, 2022 and December 31, 2021, respectively						300,000 shares authorized; 67,930 and 67,255 issued, and 34,221 and 33,546 outstanding, at September 30, 2022 and December 31, 2021, respectively	682		676
Additional paid-in capital	Additional paid-in capital	171,315		179,489		Additional paid-in capital	170,623		172,060
Retained earnings	Retained earnings	307,574		326,319		Retained earnings	268,405		283,970

Treasury stock, 33,709 and 34,187 shares at cost at September 30, 2021, and December 31, 2020, respectively		(436,700)		(447,259)
Treasury stock, 33,709 shares at cost at both September 30, 2022, and December 31, 2021, respectively						Treasury stock, 33,709 shares at cost at both September 30, 2022, and December 31, 2021, respectively	(436,700)		(436,700)
Total stockholders' equity	Total stockholders' equity	42,864		59,217		Total stockholders' equity	3,010		20,006
Total liabilities and stockholders' equity	Total liabilities and stockholders' equity	$	157,775	$	161,306	Total liabilities and stockholders' equity	$	58,556	$	149,034

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

ZOVIO INC

Condensed Consolidated Statements of Income (Loss)

(Unaudited)

(In thousands, except per share amounts)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Revenue	Revenue	$	59,808	$	5,131	$	200,585	$	14,258	Revenue	$	22,038	$	59,808	$	131,320	$	200,585
University-related revenue		—		97,035		—		289,720

Other revenue	Other revenue	2,418		—		7,686		—		Other revenue	507		2,418		4,238		7,686
Revenue and other revenue	Revenue and other revenue	$	62,226	$	102,166	$	208,271	$	303,978	Revenue and other revenue	$	22,545	$	62,226	$	135,558	$	208,271
Costs and expenses:	Costs and expenses:									Costs and expenses:
Technology and academic services	Technology and academic services	$	16,498	$	19,084	$	53,698	$	54,821	Technology and academic services	$	10,077	$	16,498	$	45,865	$	53,698
Counseling services and support	Counseling services and support	20,438		24,670		68,936		71,529		Counseling services and support	6,481		20,438		45,517		68,936
Marketing and communication	Marketing and communication	21,068		23,274		68,628		70,017		Marketing and communication	7,771		21,068		47,957		68,628
General and administrative	General and administrative	9,013		11,437		33,285		36,405		General and administrative	5,535		9,013		20,493		33,285
University-related expenses		—		22,863		—		72,332

Legal expense										Legal expense	—		—		920		—
Restructuring and impairment expense	Restructuring and impairment expense	300		184		2,641		3,430		Restructuring and impairment expense	—		300		35,887		2,641
Gain on transactions, net										Gain on transactions, net	(3,599)		—		(49,288)		—
Total costs and expenses										Total costs and expenses	26,265		67,317		147,351		227,188
Operating loss										Operating loss	(3,720)		(5,091)		(11,793)		(18,917)

Total costs and expenses		67,317		101,512		227,188		308,534
Operating income (loss)		(5,091)		654		(18,917)		(4,556)
Other income (expense), net										Other income (expense), net	295		(69)		(3,656)		90

Other income (loss), net		(69)		39		90		(62)

Income (loss) before income taxes		(5,160)		693		(18,827)		(4,618)
Loss before income taxes										Loss before income taxes	(3,425)		(5,160)		(15,449)		(18,827)
Income tax expense (benefit)	Income tax expense (benefit)	59		(428)		(82)		(12,906)		Income tax expense (benefit)	30		59		116		(82)
Net income (loss)		$	(5,219)	$	1,121	$	(18,745)	$	8,288
Income (loss) per share:
Net loss										Net loss	$	(3,455)	$	(5,219)	$	(15,565)	$	(18,745)
Loss per share:										Loss per share:
Basic	Basic	$	(0.16)	$	0.03	$	(0.56)	$	0.26	Basic	$	(0.10)	$	(0.16)	$	(0.46)	$	(0.56)
Diluted	Diluted	$	(0.16)	$	0.03	$	(0.56)	$	0.26	Diluted	$	(0.10)	$	(0.16)	$	(0.46)	$	(0.56)
Weighted average number of common shares outstanding used in computing income (loss) per share:
Weighted average number of common shares outstanding used in computing loss per share:										Weighted average number of common shares outstanding used in computing loss per share:
Basic	Basic	33,427		32,646		33,182		31,711		Basic	34,211		33,427		33,968		33,182
Diluted	Diluted	33,427		34,015		33,182		32,342		Diluted	34,211		33,427		33,968		33,182

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

ZOVIO INC

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(In thousands)


		Common Stock			Additional Paid-in Capital		Retained Earnings				Treasury Stock					Common Stock			Additional Paid-in Capital				Retained Earnings						Treasury Stock
		Shares	Par Value						Total	Treasury Stock			Shares			Par Value	Additional Paid-in Capital
Balance at December 31, 2019		65,695	$	660	$	192,413	$	375,180			$	(469,315)	$	98,938
Adoption of accounting standard (ASU 2016-13)		—	—		—		91				—		91
Balance at December 31, 2020															Balance at December 31, 2020	66,454					$	668			$	179,489	$	326,319					$	(447,259)	$	59,217

Stock-based compensation	Stock-based compensation	—	—		4,138		—				—		4,138		Stock-based compensation	—	—		2,382				—						—		2,382

Stock issued under stock incentive plan, net of shares held for taxes	Stock issued under stock incentive plan, net of shares held for taxes	338	3		(205)		—				—		(202)		Stock issued under stock incentive plan, net of shares held for taxes	563	5		(1,083)				—						—		(1,078)

Net income		—	—		—		2,020				—		2,020
Contingent consideration															Contingent consideration	—	—		(122)				—						—		(122)
Stock issued for acquisition															Stock issued for acquisition	—	—		(10,559)				—						10,559		—
Net loss															Net loss	—	—		—				(9,493)						—		(9,493)

Balance at March 31, 2020		66,033	$	663	$	196,346	$	377,291			$	(469,315)	$	104,985
Balance at March 31, 2021															Balance at March 31, 2021	67,017	$	673	$	170,107			$	316,826					$	(436,700)	$	50,906
Stock-based compensation	Stock-based compensation	—	—		802		—				—		802		Stock-based compensation	—	—		247				—						—		247
Stock issued under employee stock purchase plan	Stock issued under employee stock purchase plan	57	1		111		—				—		112		Stock issued under employee stock purchase plan	31	—		76				—						—		76
Stock issued under stock incentive plan, net of shares held for taxes	Stock issued under stock incentive plan, net of shares held for taxes	236	2		(182)		—				—		(180)		Stock issued under stock incentive plan, net of shares held for taxes	79	1		(89)				—						—		(88)
Contingent consideration		—	—		1,245		—				—		1,245
Stock issued for acquisition		—	—		(22,162)		—				22,162		—
Repurchase of common stock		—	—		—		—				(106)		(106)
Net income		—	—		—		5,147				—		5,147
Balance at June 30, 2020		66,326	$	666	$	176,160	$	382,438			$	(447,259)	$	112,005

Net loss															Net loss	—	—		—				(4,033)						—		(4,033)
Balance at June 30, 2021															Balance at June 30, 2021	67,127	$	674	$	170,341			$	312,793					$	(436,700)	$	47,108
Stock-based compensation	Stock-based compensation	—	—		1,146		—				—		1,146		Stock-based compensation	—	—		990				—						—		990

Stock issued under stock incentive plan, net of shares held for taxes	Stock issued under stock incentive plan, net of shares held for taxes	23	1		(19)		—				—		(18)		Stock issued under stock incentive plan, net of shares held for taxes	28	1		(16)				—						—		(15)

Net income		—	—		—		1,121				—		1,121
Balance at September 30, 2020		66,349	$	667	$	177,287	$	383,559			$	(447,259)	$	114,254
Net loss															Net loss	—	—		—				(5,219)						—		(5,219)
Balance at September 30, 2021															Balance at September 30, 2021	67,155	$	675	$	171,315			$	307,574					$	(436,700)	$	42,864

~~ZOVIO INC~~

~~Condensed Consolidated Statements of Stockholders’ Equity (continued)~~

~~(Unaudited)~~

~~(In thousands)~~


		Common Stock			Additional Paid-in Capital		Retained Earnings			Treasury Stock					Common Stock			Additional Paid-in Capital		Retained Earnings			Treasury Stock
		Shares	Par Value						Total			Shares			Par Value	Additional Paid-in Capital						Treasury Stock
Balance at December 31, 2020		66,454	$	668	$	179,489	$	326,319		$	(447,259)	$	59,217
Balance at December 31, 2021														Balance at December 31, 2021	67,255			$	676	$	172,060		$	283,970			$	(436,700)	$	20,006

Stock-based compensation	Stock-based compensation	—	—		2,382		—			—		2,382		Stock-based compensation	—	—		(1,169)		—			—		(1,169)

Stock issued under stock incentive plan, net of shares held for taxes	Stock issued under stock incentive plan, net of shares held for taxes	563	5		(1,083)		—			—		(1,078)		Stock issued under stock incentive plan, net of shares held for taxes	509	5		(138)		—			—		(133)
Contingent consideration		—	—		(122)		—			—		(122)
Issuance of shares for acquisition		—	—		(10,559)		—			10,559		—

Net loss	Net loss	—	—		—		(9,493)			—		(9,493)		Net loss	—	—		—		(7,437)			—		(7,437)

Balance at March 31, 2021		67,017	$	673	$	170,107	$	316,826		$	(436,700)	$	50,906
Balance at March 31, 2022														Balance at March 31, 2022	67,764	$	681	$	170,753	$	276,533		$	(436,700)	$	11,267
Stock-based compensation	Stock-based compensation	—	—		247		—			—		247		Stock-based compensation	—	—		(13)		—			—		(13)

Stock issued under employee stock purchase plan	Stock issued under employee stock purchase plan	31	—		76		—			—		76		Stock issued under employee stock purchase plan	38	—		35		—			—		35
Stock issued under stock incentive plan, net of shares held for taxes	Stock issued under stock incentive plan, net of shares held for taxes	79	1		(89)		—			—		(88)		Stock issued under stock incentive plan, net of shares held for taxes	113	1		(12)		—			—		(11)

Net loss	Net loss	—	—		—		(4,033)			—		(4,033)		Net loss	—	—		—		(4,673)			—		(4,673)
Balance at June 30, 2021		67,127	$	674	$	170,341	$	312,793		$	(436,700)	$	47,108
Balance at June 30, 2022														Balance at June 30, 2022	67,915	$	682	$	170,763	$	271,860		$	(436,700)	$	6,605
Stock-based compensation	Stock-based compensation	—	—		990		—			—		990		Stock-based compensation	—	—		(139)		—			—		(139)

Stock issued under stock incentive plan, net of shares held for taxes	Stock issued under stock incentive plan, net of shares held for taxes	28	1		(16)		—			—		(15)		Stock issued under stock incentive plan, net of shares held for taxes	15	—		(1)		—			—		(1)
Net loss	Net loss	—	—		—		(5,219)			—		(5,219)		Net loss	—	—		—		(3,455)			—		(3,455)
Balance at September 30, 2021		67,155	$	675	$	171,315	$	307,574		$	(436,700)	$	42,864
Balance at September 30, 2022														Balance at September 30, 2022	67,930	$	682	$	170,623	$	268,405		$	(436,700)	$	3,010

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

ZOVIO INC

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)
Nine Months Ended
September 30,
2021 2020
Cash flows from operating activities:
Net income (loss) $ (18,745) $ 8,288
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision for bad debts 1,002 9,845
Depreciation and amortization 6,297 8,749
Deferred income taxes — 6
Stock-based compensation 3,619 6,086
Noncash lease expense 6,539 8,546
Net loss (gain) on marketable securities (144) 47
Loss (gain) on disposal or impairment of fixed assets 71 38
Changes in operating assets and liabilities:
Accounts receivable (2,335) (14,513)
Prepaid expenses and other current assets (2,948) 219
Other long-term assets (1,318) (821)
Accounts payable and accrued liabilities (2,369) (12)
Deferred revenue and student deposits 4,992 4,269
Operating lease liabilities (7,527) (8,173)
Other liabilities 1,275 (2,468)
   Net cash provided by (used in) operating activities (11,591) 20,106
Cash flows from investing activities:
Capital expenditures (1,155) (2,587)
Purchases of investments (740) (702)
Capitalized costs for intangible assets (565) (199)
Sale of investments 1,076 1,818
   Net cash used in investing activities (1,384) (1,670)
Cash flows from financing activities:
Proceeds from the issuance of stock under employee stock purchase plan 76 112
Borrowings from long-term liabilities — 2,682
Tax withholdings on issuance of stock awards (1,182) (400)
Repurchase of common stock — (106)
   Net cash provided by (used in) financing activities (1,106) 2,288
Net increase (decrease) in cash, cash equivalents and restricted cash (14,081) 20,724
Cash, cash equivalents and restricted cash at beginning of period 55,497 92,537
Cash, cash equivalents and restricted cash at end of period $ 41,416 $ 113,261
Reconciliation of cash, cash equivalents, and restricted cash:
Cash and cash equivalents $ 31,608 $ 86,628
Restricted cash 9,808 26,633
Total cash, cash equivalents and restricted cash $ 41,416 $ 113,261

Supplemental disclosure of non-cash transactions:
Purchase of equipment included in accounts payable and accrued liabilities $ 65 $ 36
Issuance of common stock for vested restricted stock units $ 3,861 $ 1,388
Debt extinguishment $ 3,095 $ —
Issuance of notes payable $ 2,809 $ —


	Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities:
Net loss	$	(15,565)	$	(18,745)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for bad debts	513		1,002
Depreciation and amortization	4,458		6,297


Stock-based compensation	(1,321)		3,619
Noncash lease expense	3,383		6,539

Net loss (gain) on marketable securities	151		(144)

Loss on disposal or impairment of fixed assets	35,887		71
Gain on transactions, net	(49,289)		—
Changes in operating assets and liabilities:
Accounts receivable	2,443		(2,335)
Prepaid expenses and other current assets	(2,981)		(2,948)
Other long-term assets	(1,309)		(1,318)
Accounts payable and accrued liabilities	(46,346)		(2,369)
Deferred revenue and student deposits	832		4,992
Operating lease liabilities	(4,517)		(7,527)
Other liabilities	964		1,275

Net cash used in operating activities	(72,697)		(11,591)
Cash flows from investing activities:
Capital expenditures	(24)		(1,155)
Purchases of investments	(47)		(740)
Capitalized costs for intangible assets	(530)		(565)
Net proceeds from sale of assets	43,921		—
Sale of investments	654		1,076

Net cash provided by (used in) investing activities	43,974		(1,384)
Cash flows from financing activities:



Proceeds from the issuance of stock under employee stock purchase plan	35		76
Payment of debt revolver fees	(320)		—
Proceeds from long-term borrowings, net of fees	29,627		—
Tax withholdings on issuance of stock awards	(144)		(1,182)
Repayments on long-term borrowing	(32,001)		—

Net cash used in financing activities	(2,803)		(1,106)
Net decrease in cash, cash equivalents and restricted cash	(31,526)		(14,081)

Cash, cash equivalents and restricted cash at beginning of period	37,553		55,497
Cash, cash equivalents and restricted cash at end of period	$	6,027	$	41,416

Reconciliation of cash, cash equivalents, and restricted cash:
Cash and cash equivalents	$	3,092	$	31,608
Restricted cash	2,935		9,808

Total cash, cash equivalents and restricted cash	$	6,027	$	41,416




Supplemental disclosure of non-cash transactions:
Purchase of equipment included in accounts payable and accrued liabilities	$	—	$	65
Issuance of common stock for vested restricted stock units	$	659	$	3,861
Debt extinguishment	$	—	$	3,095
Issuance of notes payable	$	—	$	2,809

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

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Nature of Business

Zovio Inc (the “Company”) is a Delaware corporation, and is an education technology services company that partners with higher education institutions and employers to deliver innovative, personalized solutions to help learners and leaders achieve their aspirations. In April 2019, the Company acquired both Fullstack Academy, Inc. (“Fullstack”) and TutorMe.com, Inc. (“TutorMe”), each of which became wholly-owned subsidiaries of the Company at that time. 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.

On ~~December 1, 2020,~~May 23, 2022, the Company ~~and AU LLC finalized a definitive~~completed the sale of TutorMe through an Asset Purchase ~~and Sale~~ Agreement (the “Purchase Agreement”)~~, by and among~~. Pursuant to the Purchase Agreement, the Company ~~AU LLC, the Arizona Board of Regents, a body corporate, for~~ and ~~on behalf~~TutorMe sold substantially all of the assets of TutorMe’s business in consideration of $55.0 million in cash and the assumption of certain liabilities of TutorMe’s business. The gain on sale of TutorMe is comprised as follows:


TutorMe sale consideration	$	55,000
Less: Disposed net assets:
Accounts receivable, net	1,314
Prepaid and other assets	619
Goodwill	3,472
Intangibles	376
Deferred revenue	(7,732)
Other liabilities	(631)
Less: Transaction fees and adjustments	6,079
Gain on sale of TutorMe	$	51,503

On July 31, 2022, the Company entered into a new asset purchase agreement (the “New Asset Purchase Agreement”), pursuant to which Zovio sold to University of Arizona, ~~(the “University of Arizona”),~~ and the University of Arizona Global Campus ~~a newly formed Arizona nonprofit corporation~~ (“Global Campus” or “UAGC”) all of the remaining assets of Zovio related to the UAGC Services Business (the “Transaction”). ~~Upon~~In connection with the Transaction, the parties terminated the previous agreements. In addition, UAGC (a) paid to Zovio cash in the amount of $1.00, (b) assumed all obligations under Zovio’s business contracts associated with the UAGC Services Businesses, including the lease for the facilities located in Chandler, Arizona, which has a remaining term of eight years and approximately $20.0 million in rent obligations, (c) released Zovio from all remaining obligations under the UAGC/Zovio Agreements, including from all indemnification obligations under the Original Asset Purchase Agreement and all minimum payment guarantees under the UAGC Services Agreement, and (d) granted Zovio a general release of all claims. In addition, UAGC hired substantially all of the UAGC Services Business employees. In turn, Zovio (i) paid to UAGC cash in the amount of $5.5 million, reflecting the allocated minimum payment owed by Zovio to UAGC for the month of July 2022, (ii) paid to UAGC cash in the amount of $5.0 million, and assigned to UAGC the right to a security deposit in the amount of $2.7 million, for assuming Zovio’s obligations under the Chandler lease, (iii) granted UAGC the right to any refund achieved by Zovio after the closing of the ~~Purchase Agreement (the “Sale Transaction”),~~Transaction from the State of California as a result of its appeal of that certain judgment set forth in the Statement of Decision issued by the Superior Court of the State of California, County of San Diego on March 3, 2022, (iv) released UAGC from all remaining obligations under the UAGC/Zovio Agreements, and (v) granted UAGC and University of Arizona a general release of all claims.

The Company ~~and Ashford University (the “University”) transferred to~~recorded a $5.8 million loss on transaction for the net asset adjustment from Global Campus in connection with the ~~tangible and intangible academic and related operations and assets comprising~~Transaction on July 31, 2022, which partially offset the ~~University to Global Campus.~~gain on the sale of TutorMe noted above.

Following the ~~closing~~consummation of the ~~Sale~~ Transaction, ~~Global Campus owns~~Zovio and UAGC have no contractual or other relationship with one another, other than an agreement to reasonably cooperate to effect the Transaction. As of the date hereof, UAGC operates the University ~~in affiliation with~~as an integrated, online university. Zovio will continue to support the ~~University~~continued growth and expansion of ~~Arizona~~its Fullstack subsidiary and ~~with a focus on expanding access~~simultaneously explore strategic alternatives for that business.

ZOVIO INC

Notes to ~~education for non-traditional adult learners, and~~Condensed Consolidated Financial Statements (Unaudited)

Prior to the ~~Company provides services to Global Campus under a long-term Strategic Services Agreement (the “Services Agreement”). The services that~~Transaction, the Company provides to Global Campus under the Services Agreement include recruiting, admissions, marketing, student finance, financial aid processing, and financial aid advising, program advising, student retention advising, support services for academics, information technology and institutional support.

~~The~~ majority of the Company's cash ~~comes~~came from the Services Agreement with Global Campus. The service fees in the Services Agreement ~~are~~were subject to certain minimum residual liability adjustments, including performance-based adjustments, minimum profit level adjustments, and excess direct cost adjustments. These adjustments ~~are~~were all variable in nature in that they depend upon the Company’s performance during each service period, and to a certain extent the performance and forecast of Global Campus.

2. Summary of Significant Accounting Policies

Principles of Consolidation

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

Unaudited Interim Financial Information

The condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete annual financial statements and should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, which was filed with the Securities and Exchange Commission (“SEC”) on ~~February 24, 2021.~~April 15, 2022. 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.

Going Concern and Liquidity

As of September 30, 2022, the Company had combined cash and cash equivalents of $3.1 million, compared with combined cash and cash equivalents of $28.3 million as of December 31, 2021. On May 23, 2022, the Company sold TutorMe for $55.0 million as described in Note 1, “Nature of Business,” and used the proceeds to pay down its debt of $31.5 million as described in Note 8, “Credit Facilities,” and pay the $22.4 million in statutory penalties for the California Attorney General matter as described in Note 14, “Commitments and Contingencies.” The Company had negative cash flows from operations of $15.4 million for the fiscal year 2021, and negative cash flows from operations of $72.7 million for the nine months ended September 30, 2022.

The Company’s Services Agreement with Global Campus was subject to certain adjustments that impacted the amount and timing of cash flows. Further, Global Campus incurred higher costs in their fourth quarter (the Company's second quarter) than the Company previously budgeted. On or about June 15, 2022, Global Campus advised the Company that Global Campus received a notice from the Department of Defense that they were placed on probation which would preclude them from enrolling new military students, pending completion of a comprehensive review. Additionally, there were communications from the Department of Defense to current Global Campus students cautioning them to consider leaving the University. We were advised by Global Campus that this matter should be resolved in a timely manner, however, it became apparent over the following weeks that these prolonged actions were having a negative impact on the University's revenue and therefore a negative impact on the Company's financial outlook. As a result, the Company entered into a new agreement with Global Campus, effective on July 31, 2022, which allowed Global Campus to acquire the business previously used to provide services to Global Campus. For additional information, see Note 1, “Nature of Business.”

The Company will continue to support the continued growth and expansion of its Fullstack subsidiary and simultaneously explore strategic alternatives for that business. The ability of the Company to continue as a going concern is dependent on the Company generating cash from its operations and availability to other funding sources. Due to the Company’s negative cash

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

flows from operations and projected future negative cash flows from operations, substantial doubt exists about the Company’s ability to continue as a going concern for the twelve months following the issuance of these condensed consolidated financial statements. Management plans to cover any shortfall from operations by selling its Fullstack subsidiary or obtaining debt financing. However, there can be no assurance the Company will be successful in its efforts to sell Fullstack or obtain adequate debt financing.

The condensed consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustment that might be necessary if the Company is unable to continue as a going concern.

Impairment of Long-Lived Assets

The Company assesses potential impairment to its long-lived assets under ASC 360, Property and Equipment. The Company makes this assessment when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recorded if the carrying amount of the long-lived asset is not recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Any required impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds fair value and is recorded as a reduction in the carrying value of the related asset and an expense to operating results. Due to the Transaction with Global Campus on July 31, 2022, the Company’s qualitative assessment indicated that an impairment in the Company’s long-lived assets occurred as of September 30, 2022. For additional information, see Note 1, “Nature of Business.”

The Company recorded an impairment of its long-lived assets during the nine months ended September 30, 2022 in the consolidated statements of income (loss) of $35.9 million as follows:


Property and equipment, net	$	22,596
Operating lease assets	10,370
Intangibles, net	976
Other long-term assets	1,945
Impairment of long-lived assets	$	35,887

Use of Estimates

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

~~Notes Payable~~

~~The fair value~~ As noted above, these condensed consolidated financial statements have been prepared on a going concern basis which contemplates the realization of the Company’s outstanding notes payable was estimated using the net present value of the payments, discounted at an interest rate consistent with market interest rates. The Company, through Fullstack, had previously entered into a contract whereby its counterparty advanced funds to the Company for certain program development costs, which the Company was obligated to repay out of future revenues from the developed program. The Company originally recognized these advances as a debt obligation.

~~During the first half of 2021, the notes payable contract was amended~~assets and the ~~amount was revalued. As such, included within the other income (loss), net, on the condensed consolidated statements~~settlement of ~~income (loss) for the nine months ended September 30, 2021, is an offset of interest expense~~liabilities in the ~~amount~~normal course of ~~$3.1 million, as well as a loss on extinguishment of debt of $2.8 million, the net impact of which is immaterial.~~

~~Revenue and Other Revenue~~

Revenues are recognized when control of the promised goods or services are transferred, 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.

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, which has an initial term of just over fifteen years, subject to renewal options and certain early termination provisions. The amounts earned from the Services Agreement are within the scope of ASC 606, ~~Revenue from Contracts with Customers~~ (“ASC 606”), and are denoted as revenue on the condensed consolidated statements of income (loss). On 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).

The Services Agreement has a single performance obligation, as the promises to provide the identified services are not distinct within the context of these agreements. The single performance obligation constitutes a series of distinct services as the customer benefits as services are provided. Service revenue is recognized over time using the input method. The input method provides a faithful depiction of the performance toward complete satisfaction of the performance obligation and can be tied to the direct cost incurred. The service fees received over the term of the agreement are variable in nature in that they are dependent upon the number of students attending the university and revenues generated from those students during the service period. The service fees are subject to certain 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. Such adjustments are presented as minimum residual liability within accounts payable and accrued liabilities. For additional information, see Note 8, “Other Significant Balance Sheet Accounts - Accounts Payable and Accrued Liabilities.” The Company allocates variable consideration to the distinct increments of service to which it relates, as the variability is directly related to the Company’s effort to satisfy the distinct increments of service provided. This is consistent with the allocation objective in ASC 606. The Company meets the criteria in the standard and exercises the practical expedient to not disclose the aggregate amount of the transaction price allocated to the single performance obligation that is unsatisfied as of the end of the reporting period. The Company does not disclose the value of unsatisfied performance obligations because the variable consideration is allocated entirely to a wholly unsatisfied promise to transfer a service that forms part of a single performance obligation.

~~ZOVIO INC~~

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

The Company, through Fullstack, offers both full-time and part-time technology bootcamps. The tuition fees for these programs are recognized as revenue as the services are provided to the student, which occurs over the applicable period of instruction. For most Fullstack programs, tuition is collected prior to the start of the cohort; however, for certain programs students can defer payment until completion of the program and for these students an accounts receivable balance is recorded.

The Company, through TutorMe, provides online on-demand tutoring services through hourly and access license contracts. Revenue for these contracts are recognized based on hours used or ratably over the contract period depending on the type of contract. For most TutorMe contracts, cash is collected at or near the onset of the contract. The collected cash is recognized as deferred revenue until recognized into revenue.

~~Technology and Academic Services~~

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. These costs were previously components of instructional costs and services, as well as general and administrative. 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, human resources, rent, and occupancy costs attributable to the provision of these services.

~~Counseling Services and Support~~

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. These costs were previously components of instructional costs and services, admissions advisory and marketing, as well as general and administrative. 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, human resources, rent, and occupancy costs attributable to the provision of these services.

~~Marketing and Communication~~

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. These costs were previously components of admissions advisory and marketing, as well as some general and administrative. 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, human resources, rent, and occupancy costs attributable to the provision of these services. Advertising costs are expensed as incurred.

~~General and Administrative~~

General and administrative costs consist primarily of compensation and benefit costs, including related stock-based compensation, for employees engaged in corporate management, finance, compliance, and other corporate functions. This category also includes an allocation of depreciation, amortization, human resources, rent, and occupancy costs attributable to the provision of these services.

~~University-Related Expenses~~

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, including instructor fees and other employee costs, student related bad debt expense, license fees for licenses transferred to Global Campus and other costs.

~~ZOVIO INC~~

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

business.

Comprehensive ~~Income (Loss)~~Loss

The Company has no components of other comprehensive income (loss), and therefore, comprehensive ~~income (loss)~~loss equals net ~~income (loss).~~loss.

Recent Accounting Pronouncements

~~In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes~~ (“ASU 2019-12”), which removes certain exceptions to the general principles in Topic 740. The amendments in this update also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this standard are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company applied the new standard, including all applicable updates, effective January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s condensed consolidated financial statements.

~~3. Financial Statement Reclassification~~

On December 1, 2020, the Company consummated the Sale Transaction. For additional information on the Sale Transaction, see Note 1, “Nature of Business” above. The Company now provides services to Global Campus, which include recruiting, financial aid, counseling, institutional support, information technology, and academic support services. The Company made changes in its presentation of revenue line items and operating expenses and reclassified prior periods to conform to the current presentation. The Company determined that these changes would provide more meaningful informationNone noted as this new presentation provides transparency for costs that will be incurred as a service provider and costs that will not reoccur in the future as they are related to university costs that were transferred to Global Campus in the Sale Transaction.

We have reclassified our operating expenses for prior period to conform to the above disaggregation and revisions to our presentation. There were no changes to total operating expenses or operating income as a result of these reclassifications.

The following table presents our operating expenses as previously reported and as reclassified on our condensed consolidated statements of income (loss) for each of the three and nine-months period ended September 30, 2020 (in thousands):
Three Months Ended
September 30, 2020 Nine Months Ended
September 30, 2020
Costs and expenses: As Reported As Reclassified As Reported As Reclassified
Technology and academic services $ — $ 19,084 $ — $ 54,821
Counseling services and support — 24,670 — 71,529
Marketing and communication — 23,274�� — 70,017
Instructional costs and services 44,929 — 136,184 —
Admissions advisory and marketing 41,620 — 122,155 —
General and administrative 14,779 11,437 46,765 36,405
University-related expenses — 22,863 — 72,332
Restructuring and impairment expense 184 184 3,430 3,430
Total costs and expenses $ 101,512 $ 101,512 $ 308,534 $ 308,534
applicable.

1110

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

4.3. Revenue, Other Revenue and Deferred Revenue

The following table presents the Company’s net revenue disaggregated based on the revenue source (in thousands):


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Strategic services revenue	Strategic services revenue	$	52,702	$	—	$	179,318	$	—	Strategic services revenue	$	13,151	$	52,702	$	104,462	$	179,318
Transition services income	Transition services income	2,418		—		7,685		—		Transition services income	507		2,418		4,238		7,685
Tuition revenue, net	Tuition revenue, net	7,012		93,183		20,967		277,533		Tuition revenue, net	8,873		7,012		26,695		20,967
Digital materials revenue, net		—		5,809		—		17,415
Technology fee revenue, net		—		2,628		—		7,628
Other revenue, net (1)	Other revenue, net (1)	94		546		301		1,402		Other revenue, net (1)	14		94		163		301
Total revenue, net	Total revenue, net	$	62,226	$	102,166	$	208,271	$	303,978	Total revenue, net	$	22,545	$	62,226	$	135,558	$	208,271

(1) ~~Primarily consists of revenues~~Represents revenue generated from various services and other miscellaneous fees.

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Over time, over period of instruction	Over time, over period of instruction	$	62,159	$	82,659	$	208,062	$	244,872	Over time, over period of instruction	$	22,531	$	62,159	$	135,464	$	208,062
Over time, full tuition grant (1)		—		13,948		—		42,792

Point in time ~~(2)~~(1)	Point in time ~~(2)~~(1)	67		5,559		209		16,314		Point in time ~~(2)~~(1)	14		67		94		209
Total revenue, net	Total revenue, net	$	62,226	$	102,166	$	208,271	$	303,978	Total revenue, net	$	22,545	$	62,226	$	135,558	$	208,271

(1)~~Represents revenue generated from the FTG program.~~

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

The Company operates under 2two reportable segments and has no significant foreign operations or assets located outside of the United States. For additional information on segmentation, see Note ~~16,~~15, “Segment Information.”

~~ZOVIO INC~~

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

Deferred Revenue and Student Deposits

Current deferred revenue and student deposits consisted of the following (in thousands):


		As of September 30, 2021		As of December 31, 2020			As of September 30, 2022		As of December 31, 2021
Deferred revenue, current	Deferred revenue, current	$	12,126	$	7,477	Deferred revenue, current	$	7,909	$	14,469
Student deposits	Student deposits	957		613		Student deposits	130		470
Total current deferred revenue and student deposits	Total current deferred revenue and student deposits	$	13,083	$	8,090	Total current deferred revenue and student deposits	$	8,039	$	14,939

Below are the opening and closing balances of current deferred revenue from the Company’s contracts with customers (in thousands):


		2021		2020			September 30, 2022		September 30, 2021
Current deferred revenue opening balance, January 1	Current deferred revenue opening balance, January 1	$	7,477	$	23,356	Current deferred revenue opening balance, January 1	$	14,469	$	7,477
Current deferred revenue closing balance, September 30	Current deferred revenue closing balance, September 30	12,126		29,413		Current deferred revenue closing balance, September 30	7,909		12,126
Increase (decrease)	Increase (decrease)	$	4,649	$	6,057	Increase (decrease)	$	(6,560)	$	4,649

For further information on receivables, refer to Note 7,6, “Accounts Receivable, Net” within the condensed consolidated financial statements.

Deferred revenue consists of cash payments that are received or due in advance of the Company’s performance. As of September 30, ~~2021~~2022 the deferred revenue balance relates entirely to the Zovio Growth segment. For the majority of the

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

Company’s customers, payment for services is due prior to services being provided and is included in current deferred revenue. However, there ~~are~~were previously contracts which ~~include~~included deferred revenue that iswas deemed to be long-term. For additional information, refer to Note 8,7, “Other Significant Balance Sheet Accounts - Other Long-Term Liabilities” within the condensed consolidated financial statements.

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 nine months ended September 30, 2022, the Company recognized $8.2 million of revenue that was included in the deferred revenue balance as of January 1, 2022. For the nine months ended September 30, 2021, the Company recognized $6.4 million of revenue that was included in the deferred revenue balance as of January 1, 2021. ~~For the nine months ended September 30, 2020, the Company recognized $23.3 million of revenue that was included in the deferred revenue balance as of January 1, 2020.~~ Amounts reported in the closing balance of deferred revenue are expected to be recognized as revenue within the next 12 months.

5.4. Restructuring and Impairment Expense

During the nine months ended September 30, 2022, the Company recognized $35.9 million of asset impairment charges in the restructuring and impairment expense line item on the Company’s condensed consolidated statements of income (loss). There were no such charges in the three months ended September 30, 2021 and 2020, the Company recognized $0.3 million and $0.2 million, respectively, of restructuring and impairment expense. During the nine months ended September 30, 2021 and 2020, the Company recognized $2.6 million and $3.4 million, respectively, of restructuring and impairment expense. The components of these expenses are further described below.2022.

The Company had previously vacated or consolidated properties and subsequently reassessed its non-cancelable leases obligation. Additionally, the Company had previously relocated its headquarters from California to Arizona. As a result, duringDuring the three and nine months ended September 30, 2020, the Company recognized relocation and lease reassessment expenses of $0.3 million and $0.5 million, respectively. NaN such expense was recorded for either the three or nine months ended September 30, 2021, respectively.

~~In May and July 2021, the Company implemented restructuring plans to reduce operating expenses, implement cost reductions and conserve cash resources. During the three months ended September 30,~~ 2021, the Company recognized $0.3 million and $2.6 million, respectively, of severance costs ~~of $0.3 million, all of which related to~~in the University Partners segment. These restructuring charges consist of one-time termination benefits for employee severance, benefits and related costs, all of which are expected to result in cash expenditures and substantially all of which will be paid out over the next 12 months. For the three months ended September 30, 2020, the Company reversed $0.1 million of restructuring and impairment expense ~~relating to severance costs for wages and~~

~~ZOVIO INC~~

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

~~benefits for a prior restructuring plan. During~~line item on the ~~nine months ended September 30, 2021 and 2020, the Company recognized severance costs~~Company’s condensed consolidated statements of ~~$2.6 million and $2.9 million, respectively.~~income (loss).

The following table summarizes the amounts recorded in the restructuring and impairment expense line item on the Company’s condensed consolidated statements of income (loss) for each of the periods presented (in thousands):


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021

Asset impairment										Asset impairment	$	—	$	—	$	35,887	$	—

Severance costs	Severance costs	$	300	$	(70)	$	2,641	$	2,902	Severance costs	$	—	$	300	$	—	$	2,641
Lease exit and other costs		—		254		—		528

Total restructuring and impairment expense	Total restructuring and impairment expense	$	300	$	184	$	2,641	$	3,430	Total restructuring and impairment expense	$	—	$	300	$	35,887	$	2,641

The Company previously vacated or consolidated properties and subsequently reassessed its non-cancelable leases. Additionally, the Company previously implemented restructuring plans to reduce operating expenses, implement cost reductions and conserve cash resources. The severance costs and lease costs are expected to substantially all be paid out over the next 12 months.

The following table summarizes the changes in the Company's restructuring and impairment liability by type during the nine months ended September 30, ~~2021~~2022 (in thousands):


		Student Transfer Costs		Severance Costs		Lease Exit and Other Costs		Total			Asset Impairment		Student Transfer Costs		Severance Costs		Lease Exit and Other Costs		Total
Balance at December 31, 2020		$	1,282	$	742	$	1,974	$	3,998
Balance at December 31, 2021										Balance at December 31, 2021	$	—	$	1,282	$	520	$	398	$	2,200
Restructuring and impairment expense	Restructuring and impairment expense	—		2,641		—		2,641		Restructuring and impairment expense	35,887		—		—		—		35,887
Payments and adjustments	Payments and adjustments	—		(2,493)		(1,115)		(3,608)		Payments and adjustments	—		—		(520)		(219)		(739)

Balance at September 30, 2021		$	1,282	$	890	$	859	$	3,031
Non-cash transaction										Non-cash transaction	(35,887)		—		—		—		(35,887)
Balance at September 30, 2022										Balance at September 30, 2022	$	—	$	1,282	$	—	$	179	$	1,461

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

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

5. Fair Value Measurements

The following tables summarize ~~the~~ fair value information as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively (in thousands):
As of September 30, 2021
Level 1 Level 2 Level 3 Total
Mutual funds $ 1,322 $ — $ — $ 1,322


	As of September 30, 2022
	Level 1		Level 2		Level 3		Total
Mutual funds	$	216	$	—	$	—	$	216

As of December 31, 2020
Level 1 Level 2 Level 3 Total
Mutual funds $ 1,515 $ — $ — $ 1,515


	As of December 31, 2021
	Level 1		Level 2		Level 3		Total
Mutual funds	$	974	$	—	$	—	$	974

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 September 30, ~~2021~~2022 or December 31, ~~2020,~~2021, and no reclassifications out of accumulated other comprehensive income during ~~either~~ the nine months ended September 30, ~~2021~~2022 or ~~2020.~~

2021.

~~ZOVIO INC~~

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

7.6. Accounts Receivable, Net

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


		As of September 30, 2021		As of December 31, 2020			As of September 30, 2022		As of December 31, 2021
Accounts receivable	Accounts receivable	$	10,372	$	8,420	Accounts receivable	$	6,761	$	10,562
Less allowance for credit losses	Less allowance for credit losses	1,833		1,216		Less allowance for credit losses	1,401		931
Accounts receivable, net	Accounts receivable, net	$	8,539	$	7,204	Accounts receivable, net	$	5,360	$	9,631

The following table presents the changes in the allowance for credit losses for the nine months ended September 30, 2022 (in thousands):


Beginning Balance		Charged to Expense		Write-offs		Recoveries of amounts		Ending Balance


$	931	$	513	$	(60)	$	17	$	1,401

The following table presents the changes in the allowance for credit losses for the nine months ended September 30, 2021 (in thousands):
Beginning
Balance Charged to
Expense Write-offs Recoveries of amounts Ending
Balance
Non-FTG related allowance $ 1,216 $ 1,002 $ (385) $ — $ 1,833
Total allowance for credit losses $ 1,216 $ 1,002 $ (385) $ — $ 1,833

~~The following table presents the changes in the allowance for credit losses for the nine months ended September 30, 2020 (in thousands):~~
Beginning
Balance Charged to
Expense Write-offs Recoveries of amounts Ending
Balance
FTG-related allowance $ 1,749 $ 1,524 $ (1,872) $ 337 $ 1,738
Non-FTG related allowance 11,963 8,321 (14,124) 4,518 10,678
Total allowance for credit losses $ 13,712 $ 9,845 $ (15,996) $ 4,855 $ 12,416


Beginning Balance		Charged to Expense		Write-offs		Recoveries of amounts		Ending Balance


$	1,216	$	1,002	$	(385)	$	—	$	1,833

1513

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

8.7. Other Significant Balance Sheet Accounts

Prepaid Expenses and Other Current Assets

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


		As of September 30, 2021		As of December 31, 2020			As of September 30, 2022		As of December 31, 2021
Prepaid expenses	Prepaid expenses	$	3,106	$	3,027	Prepaid expenses	$	746	$	2,664
Prepaid licenses	Prepaid licenses	2,257		1,371		Prepaid licenses	62		1,233
Prepaid income taxes		—		48
Income tax receivable		—		1,644

Prepaid insurance	Prepaid insurance	3,044		1,127		Prepaid insurance	1,859		2,254

Insurance recoverable	Insurance recoverable	476		404		Insurance recoverable	346		496
Other current assets (1)	Other current assets (1)	6,681		4,996		Other current assets (1)	290		6,776
Total prepaid expenses and other current assets	Total prepaid expenses and other current assets	$	15,564	$	12,617	Total prepaid expenses and other current assets	$	3,303	$	13,423

(1) ~~Other current assets includes a~~Decrease in balances is primarily due to the $5.8 million loss on transaction recognized for the net asset adjustment ~~due~~ from Global Campus ~~related to~~in connection with the ~~Sale~~ Transaction ~~which is currently in mediation.~~on July 31, 2022. See Note 1, “Nature of Business.”

Property and Equipment, Net

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


		As of September 30, 2021		As of December 31, 2020			As of September 30, 2022		As of December 31, 2021

Furniture and office equipment	Furniture and office equipment	$	23,974	$	36,146	Furniture and office equipment	$	1,383	$	22,032
Software	Software	5,502		7,512		Software	—		4,493
Leasehold improvements	Leasehold improvements	15,901		16,325		Leasehold improvements	—		15,921
Vehicles	Vehicles	22		22		Vehicles	—		22

Total property and equipment(1)	Total property and equipment(1)	45,399		60,005		Total property and equipment(1)	1,383		42,468
Less accumulated depreciation and amortization	Less accumulated depreciation and amortization	(17,688)		(29,430)		Less accumulated depreciation and amortization	(341)		(16,086)
Total property and equipment, net	Total property and equipment, net	$	27,711	$	30,575	Total property and equipment, net	$	1,042	$	26,382

(1)Decrease in balances are partially due to the asset impairment recognized in connection with the Transaction with Global Campus. See Note 1, “Nature of Business.”

For the three months ended September 30, ~~2021~~2022 and ~~2020,~~2021, depreciation and amortization expense related to property and equipment was ~~$1.4~~$0.1 million and ~~$1.5~~$1.4 million, respectively. For the nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, depreciation and amortization expense related to property and equipment was ~~$3.9~~$2.7 million and ~~$4.7~~$3.9 million, respectively.

1614

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

Goodwill and Intangibles, Net

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


		September 30, 2021							September 30, 2022
Definite-lived intangible assets:	Definite-lived intangible assets:	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Definite-lived intangible assets:	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Capitalized curriculum costs		$	13,932	$	(12,760)	$	1,172
Capitalized curriculum costs (1)								Capitalized curriculum costs (1)	$	604	$	(137)	$	467
Purchased intangible assets	Purchased intangible assets	14,185		(8,535)		5,650		Purchased intangible assets	11,605		(8,315)		3,290
Total definite-lived intangible assets	Total definite-lived intangible assets	$	28,117	$	(21,295)	$	6,822	Total definite-lived intangible assets	$	12,209	$	(8,452)	$	3,757
Goodwill	Goodwill					23,176		Goodwill					19,704
Total goodwill and intangibles, net	Total goodwill and intangibles, net					$	29,998	Total goodwill and intangibles, net					$	23,461

		December 31, 2020							December 31, 2021
Definite-lived intangible assets:	Definite-lived intangible assets:	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Definite-lived intangible assets:	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Capitalized curriculum costs	Capitalized curriculum costs	$	13,745	$	(12,644)	$	1,101	Capitalized curriculum costs	$	13,982	$	(12,796)	$	1,186
Purchased intangible assets	Purchased intangible assets	14,185		(6,677)		7,508		Purchased intangible assets	14,185		(9,048)		5,137
Total definite-lived intangible assets	Total definite-lived intangible assets	$	27,930	$	(19,321)	$	8,609	Total definite-lived intangible assets	$	28,167	$	(21,844)	$	6,323
Goodwill	Goodwill					23,176		Goodwill					23,176
Total goodwill and intangibles, net	Total goodwill and intangibles, net					$	31,785	Total goodwill and intangibles, net					$	29,499

(1)Decrease in balances are partially due to the asset impairment recognized in connection with the Transaction with Global Campus. See Note 1, “Nature of Business.”

For the three months ended September 30, ~~2021~~2022 and ~~2020,~~2021, amortization expense was ~~$0.7~~$0.5 million and ~~$1.3~~$0.7 million, respectively. For the nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, amortization expense was ~~$2.4~~$1.7 million and ~~$4.0~~$2.4 million, respectively.

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


Year Ended December 31,	Year Ended December 31,			Year Ended December 31,
Remainder of 2021		$	658
2022		2,533
Remainder of 2022				Remainder of 2022	$	497
2023	2023	2,380		2023	1,987
2024	2024	791		2024	636
2025	2025	122		2025	166
2026				2026	158
Thereafter	Thereafter	338		Thereafter	313
Total future amortization expense	Total future amortization expense	$	6,822	Total future amortization expense	$	3,757

1715

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

Accounts Payable and Accrued Liabilities

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


		As of September 30, 2021		As of December 31, 2020			As of September 30, 2022		As of December 31, 2021
Accounts payable	Accounts payable	$	9,129	$	11,246	Accounts payable	$	14,683	$	5,967
Accrued salaries and wages	Accrued salaries and wages	7,305		6,149		Accrued salaries and wages	3,749		5,434
Accrued bonus	Accrued bonus	2,521		11,428		Accrued bonus	1,005		3,625
Accrued vacation	Accrued vacation	3,084		3,369		Accrued vacation	120		3,037
Accrued litigation and fees	Accrued litigation and fees	8,041		8,341		Accrued litigation and fees	—		22,376
Minimum residual liability	Minimum residual liability	7,422		1,216		Minimum residual liability	—		14,987
Accrued expenses	Accrued expenses	14,494		12,473		Accrued expenses	3,709		13,400

Current leases payable	Current leases payable	4,405		6,934		Current leases payable	2,422		4,492
Accrued insurance liability	Accrued insurance liability	1,424		1,537		Accrued insurance liability	798		1,404
Accrued income taxes payable	Accrued income taxes payable	53		—		Accrued income taxes payable	30		47
Total accounts payable and accrued liabilities	Total accounts payable and accrued liabilities	$	57,878	$	62,693	Total accounts payable and accrued liabilities	$	26,516	$	74,769

Other Long-Term Liabilities

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


		As of September 30, 2021		As of December 31, 2020			As of September 30, 2022		As of December 31, 2021
Uncertain tax positions		$	28	$	28

Notes payable	Notes payable	2,885		2,981		Notes payable	$	2,835	$	2,723
Deferred revenue	Deferred revenue	942		—		Deferred revenue	—		807
Other long-term liabilities	Other long-term liabilities	4,722		4,172		Other long-term liabilities	75		1,585
Total other long-term liabilities	Total other long-term liabilities	$	8,577	$	7,181	Total other long-term liabilities	$	2,910	$	5,115

9.8. Credit Facilities

The Company has issued letters of credit that are collateralized with cash, in the aggregate amount of ~~$9.8~~$2.9 million as of September 30, ~~2021.~~2022. The letters of credit relate primarily to the Company's leased facilities and insurance requirements. The collateralized cash is held in restricted cash on the Company's condensed consolidated balance sheets.

~~The Company is required to provide surety bonds in certain states in which it does business. As a result,~~On April 14, 2022, the Company ~~had previously~~ entered into a ~~surety bond facility~~Financing Agreement (the “Credit Facility”) among the Company, as borrower, each of its wholly-owned subsidiaries as subsidiary guarantors (the “Guarantors”), the lenders party thereto from time to time (the “Lenders”) and Blue Torch Finance LLC, as administrative agent and collateral agent for the Lenders (the “Agent”). The Credit Facility provided for a term loan in the aggregate principal amount of $31.5 million (the “Term Loan”). Subject to the terms of Credit Facility, the Term Loan had an interest rate per annum equal to LIBOR plus 9.0%, payable monthly, with a maturity date of April 14, 2025.

Concurrent with the sale of TutorMe on May 23, 2022, the Company repaid in full all outstanding obligations of the Company owed to Blue Torch Finance, LLC and the Lenders pursuant to the Credit Facility. In connection with the Company’s repayment of the outstanding obligations under the Credit Facility, Blue Torch terminated the Credit Facility and released all of its security interests in and liens on all of the assets of the Company and its subsidiaries.

There was an ~~insurance~~extinguishment of debt and an early termination of the loan during the period ended September 30, 2022. All fees associated with the term loan, including a termination fee of $0.5 million, and the write-off of the unamortized financing fees of $3.0 million. These along with normal interest expense of $0.3 million and amortization of issuance costs of $0.1 million, were included as part of “Other income (expense), net” in the condensed consolidated statements of income (loss).

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

On September 16, 2022, the Company, entered into a Loan and Security Agreement (the “Loan Agreement”) among the Company and its wholly owned subsidiary Fullstack Academy, LLC, a Delaware limited liability company (“Fullstack”), as borrowers, and Calla Lily Holdings LLC, a Delaware limited liability company, as the lender (the “Lender”). The Loan Agreement provides for a revolving line of credit in the aggregate principal amount of $5.0 million (the “Revolving Line”), maturing on January 14, 2023, for which the Company to ~~provide such bonds when required. Although there are no remaining bonds~~borrow against from time to time as needed to fund operations. No amounts were borrowed on the ~~Company’s behalf under this facility~~Loan Agreement as of September 30, ~~2021,~~2022.

Subject to the terms of Loan Agreement, the Revolving Line has an interest rate per annum equal to 14.5%, payable monthly. Any amounts outstanding on the Revolving Line are due at maturity. At maturity, the Company ~~still holds certain liability associated with any required collateral.~~will also pay a fee equal to 5.0% per annum of the average unused portion of the Revolving Line. The Loan Agreement contains customary representations, warranties, affirmative and negative covenants (including financial covenants), and indemnification provisions in favor of the Lender as well as customary events of default, including payment defaults, breach of representations and warranties, and covenant defaults. The obligations of the Company and Fullstack as borrowers under the Loan agreement are secured by a first priority security interest in substantially all tangible and intangible personal property of each of the Company and Fullstack.

~~10.~~9. Lease Obligations

Operating Leases

The Company leases various office and classroom facilities with terms that expire at various dates through 2033. These facilities are used for academic operations, corporate functions, enrollment services and student support services. The Company does not have any leases other than its office facilities and classrooms. All of the leases were classified as operating leases for the period ended September 30, ~~2021,~~2022, and the Company does not have any finance leases. All of the leases, other than those that may qualify for the short-term scope exception of 12 months or less, are recorded on the Company’s condensed consolidated balance sheets.

~~ZOVIO INC~~

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

The Company, ~~obtained additional~~through Fullstack, has a lease in New York for classrooms and office space and recorded a right-of-use ~~assets~~asset of ~~$14.6~~$13.4 million as of September 30, 2022 in exchange for lease ~~obligations related to new classroom and office leases during the period ended September 30, 2021.~~

obligations. The Company ~~has agreements~~had previously begun to ~~sublease certain portions~~market this space for sublease. Subsequent to quarter end, effective November 10, 2022, the Company entered into a lease termination agreement with the landlord of ~~its office facilities, with 2 active subleases~~this facility for a termination fee of $0.6 million. There is an additional payment of $0.7 million, which is payable upon the sale of Fullstack. There is no impairment indicator as of September 30, ~~2021.~~2022.

The Company's one active sublease as of September 30, 2022 relates to office space of approximately 21,000 square feet in Denver, Colorado with a remaining commitment to lease of 5 months and net lease payments of $0.2 million. Sublease income for the nine months ended September 30, 2022 and 2021 was $0.4 million and $1.9 million, respectively. The Company’s ~~subleases do~~sublease does 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~~The sublease was classified as an operating ~~leases~~lease for the period ended September 30, 2021. The Company is subleasing office space of approximately 21,000 square feet in Denver, Colorado with a remaining commitment to lease of 17 months and net lease payments of $0.9 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 3 months and net lease payments of $0.3 million. Sublease income for the nine months ended September 30, 2021 and 2020 was $1.9 million and $1.4 million, respectively.2022.

~~11. Income (Loss)~~10. Loss Per Share

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

Diluted ~~income (loss)~~loss per share is calculated by dividing net ~~income (loss)~~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”).

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Numerator:	Numerator:									Numerator:
Net income (loss)		$	(5,219)	$	1,121	$	(18,745)	$	8,288
Net loss										Net loss	$	(3,455)	$	(5,219)	$	(15,565)	$	(18,745)
Denominator:	Denominator:									Denominator:
Weighted average number of common shares outstanding	Weighted average number of common shares outstanding	33,427		32,646		33,182		31,711		Weighted average number of common shares outstanding	34,211		33,427		33,968		33,182
Effect of dilutive options and stock units	Effect of dilutive options and stock units	—		1,369		—		631		Effect of dilutive options and stock units	—		—		—		—

Diluted weighted average number of common shares outstanding	Diluted weighted average number of common shares outstanding	33,427		34,015		33,182		32,342		Diluted weighted average number of common shares outstanding	34,211		33,427		33,968		33,182
Income (loss) per share:
Loss per share:										Loss per share:
Basic	Basic	$	(0.16)	$	0.03	$	(0.56)	$	0.26	Basic	$	(0.10)	$	(0.16)	$	(0.46)	$	(0.56)
Diluted	Diluted	$	(0.16)	$	0.03	$	(0.56)	$	0.26	Diluted	$	(0.10)	$	(0.16)	$	(0.46)	$	(0.56)

The following table sets forth the number of stock options and stock units excluded from the computation of diluted ~~income (loss)~~loss per share for the periods indicated below because their effect was anti-dilutive (in thousands):
Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
Stock options 1,279 1,525 1,391 1,654
Stock units 972 — 1,170 577


	Three Months Ended September 30,		Nine Months Ended September 30,
	2022	2021	2022	2021
Stock options	693	1,279	869	1,391
Stock units	3,244	972	3,068	1,170

~~ZOVIO INC~~

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

~~12.~~11. Stock-Based Compensation

The Company recorded ~~$1.0 million~~a reversal of $139 thousand of stock-based compensation expense for the three months ended September 30, 2022, primarily relating to the forfeitures of RSU's and ~~$1.1~~also certain performance-based PSUs not meeting their targets. The Company recorded $1.0 million of stock-based compensation expense for the three months ended September 30, ~~2021~~2021. The related income tax expense was $36 thousand for the three months ended September 30, 2022, and ~~2020, respectively. The~~the related income tax benefit was $0.2 ~~million and $0.3~~ million for the three months ended September 30, ~~2021 and 2020, respectively.~~2021.

The Company recorded ~~$3.6~~a reversal of $1.3 million for the nine months ended September 30, 2022, primarily relating to the forfeitures of RSU's and ~~$6.1~~also certain performance-based PSUs not meeting their targets. The Company recorded an expense of $3.6 million of stock-based compensation expense for the nine months ended September 30, ~~2021 and 2020, respectively.~~2021. The related income tax ~~benefit~~expense was ~~$0.9 million and $1.5~~$0.3 million for the nine months ended September 30, ~~2021~~2022, and ~~2020, respectively.~~the related income tax benefit was $0.9 million for the nine months ended September 30, 2021.

During the nine months ended September 30, 2022, the Company granted 1.0 million RSUs at a weighted average grant date fair value of $0.84 and 0.6 million RSUs vested. During the nine months ended September 30, 2021, the Company granted 1.1 million RSUs at a weighted average grant date fair value of $3.31, and 1.0 million RSUs vested.

During the nine months ended September 30, ~~2020,~~2022, the Company granted ~~1.4~~0.4 million ~~RSUs~~performance-based PSUs at a weighted average grant date fair value of ~~$2.22,~~$0.90, and ~~0.8~~0.2 million ~~RSUs~~performance-based or market-based PSUs vested.

During the nine months ended September 30, 2021, the Company granted 0.9 million performance-based PSUs at a weighted average grant date fair value of 2.72, and no performance-based or market-based PSUs vested. ~~During the nine months ended September 30, 2020, 1.1 million market-based PSUs were granted at a weighted average grant date fair value of 2.18 and no performance-based or market-based PSUs vested.~~

During each of the nine months ended September 30, ~~2021,~~2022, and ~~September 30, 2020,~~2021, the Company did not grant any stock options and no stock options were exercised.

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

As of September 30, ~~2021,~~2022, unrecognized compensation cost was ~~$5.4~~$3.1 million related to unvested stock options, RSUs and PSUs.

~~13.~~12. Income Taxes

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

The Company recognizes deferred tax assets if realization of such assets is more-likely-than-not. In order to make this determination, the Company evaluates a number of factors including the ability to generate future taxable income from reversing taxable temporary differences, forecasts of financial and taxable income or loss, and the ability to carryback certain operating losses to refund taxes paid in prior years. The cumulative loss incurred over the three-year period ended September 30, ~~2021~~2022 constituted significant negative objective evidence against the Company’s ability to realize a benefit from its federal deferred tax assets. Such objective evidence limited the ability of the Company to consider in its evaluation certain subjective evidence such as the Company’s projections for future growth. On the basis of its evaluation, the Company determined that its deferred tax assets were not more-likely-than-not to be realized and that a valuation allowance against its deferred tax assets should continue to be maintained as of September 30, ~~2021.~~2022.

The Company’s current effective income tax rate that has been applied to normal, recurring operations for the nine months ended September 30, ~~2021 was (1.0)%. The Company’s actual effective income tax rate for the nine months ended September 30, 2021,~~2022, after discrete items, was ~~0.4%~~(0.8)%.

As of both September 30, ~~2021,~~2022, and December 31, ~~2020,~~2021, the Company ~~had $19 thousand, respectively, of~~did not have any gross unrecognized tax ~~benefits, of which $15 thousand, respectively, would impact the effective income tax rate if recognized.~~benefits. Although the Company believes the tax accruals provided are reasonable, the final determination of tax returns under review or returns that may be reviewed in the future and any related litigation could result in tax liabilities that materially differ from the Company’s historical income tax provisions and accruals.

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 2017 tax ~~years 2001 through 2020~~year and forward are open to examination ~~by major taxing jurisdictions~~for federal income tax purposes, and the 2015 tax year and forward are open to ~~which the Company is subject.~~

examination for state income tax purposes.

~~ZOVIO INC~~

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

~~14.~~13. Regulatory

The Company is subject to ~~extensive~~ regulation by federal and state governmental agencies and accrediting bodies. In particular, the Higher Education Act of 1965, as amended (“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”).

Following the July 31, 2022 Transaction with Global Campus, the Company was released from all remaining obligations under the UAGC/Zovio Agreements, including from all indemnification obligations under the Original Asset Purchase Agreement. For additional information, see Note 1, “Nature of Business.”

U.S. Department of Education

~~In December 2016,~~the Purchase Agreement, as amended, the Closing was subject to customary closing conditions for transactions in this sector. The Department was expected to conduct a post-closing review of Global Campus, consistent with the Department’s procedures during which the Department ~~informed~~makes a determination on the ~~University that it intended to continue 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~~institution’s request for recertification from the Department ~~deems such expansion appropriate.~~following the change of control, including whether to impose or place other conditions or restrictions. To ~~date,~~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.

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

On July 1, 2022, the Department notified the Company ~~has not received~~that as a ~~draft report~~result of the Statement of Decisions issued in the California Attorney General matter as described below in Note 14, “Commitments and Contingencies,” the Department was conducting a preliminary review of the Company’s participation in Title IV Higher Education Act programs and requested various documents and information from the Company. The Company is evaluating the request and cooperating with the Department.

Department of Education Close Out Audit of University of the Rockies

~~The~~During the fiscal year 2018, the Company ~~previously~~ recorded an expense of $1.5 million, ~~during the fiscal year 2018,~~ in relation to the close out audit of University of the Rockies resulting from its merger with the University in October 2018. The expense was recorded in relation to borrower defense to repayment regulations. On September 26, 2019, the Department sent the 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 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”). As part of the WSCUC Institutional Review Process, a Reaffirmation of Accreditation Visit was conducted by an evaluation team in April 2019. At its meeting in June 2019, the Commission acted to reaffirm accreditation through Spring 2025.

In connection with the Purchase 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 required review and approval by the Substantive Change Committee and the Structural Change Committee of the Commission.

On November 12, 2020, WSCUC 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 the 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 officers or administrators divest themselves of their financial and ownership interest in the Company; 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 the Notice of Concern issued as part of the reaffirmation of the University in July 2019 remain in effect.

~~Department of Education Regulation~~

On December 1, 2020, the parties to the Purchase 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 of Education. Under the terms of the Purchase Agreement, as amended, the Closing was subject to customary closing conditions for transactions in this sector. The Department is expected to conduct a post-closing review of Global Campus following the Sale 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 change of control, including whether to impose or place other conditions or restrictions.

~~ZOVIO INC~~

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

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 provisional certification and may be subject to other enforcement measures.~~

•~~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 eligibility to participate in the Federal Direct Loan Program and the Federal Pell Grant Program if, for each of the three most recent federal fiscal years, 30% or more of its students who became subject to a repayment obligation in that federal fiscal year defaulted on such obligation by the end of the following federal fiscal year.

•~~Financial Responsibility~~ - The Department calculates an institution’s composite score for financial responsibility based on its (i) equity ratio, which measures the institution’s capital resources, ability to borrow and financial viability; (ii) primary reserve ratio, which measures the institution’s ability to support current operations from expendable resources; and (iii) net income ratio, which measures the institution’s ability to operate at a profit. An institution that does not meet the Department’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.

~~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. 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’s responsibility in regard to reporting mandatory and discretionary triggers as part of the financial responsibility standards, class action bans and pre-dispute arbitration agreements, submission of arbitral and judicial records, and repayment 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 or after July 1, 2020, and, among other things: grants borrowers the right to assert borrower defense to repayment claims against institutions, regardless of whether the loan is in default or in collection proceedings; allows borrowers to file defense to repayment claims three years from either the student’s date of graduation or withdrawal from the institution; and gives students the ability to allege a specific amount of financial harm and to obtain relief in an amount determined by the Department, which may be greater or lesser than their original claim amount. It also includes financial triggers and other factors for recalculating an institution’s financial responsibility composite score that differ from those in the 2016 regulations.

~~ZOVIO INC~~

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

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 determined that the previous methodology did not result in an appropriate relief determination.

In July 2020, the Department notified the Company that they would be initiating a preliminary review of borrower defense applications from borrowers who made claims regarding 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. In 2020, the Company received and timely responded to the submitted claims. The Company has responded to everything received and cannot predict the outcome of this the Department's review at this time.

~~15.~~14. Commitments and Contingencies

Litigation

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

Education Dynamics Lawsuit

On September 15, 2022, the Company was served with a Complaint filed by Education Dynamics (a former vendor). In the Complaint, Education Dynamics asserts claims against the Company for breach of contract and unjust enrichment, alleging that the Company has failed to pay Education Dynamics for services previously rendered in the amount of $0.8 million. The Company has not filed its response to the Complaint.

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 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~~and from the CA Attorney General’s office met 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.

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

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~~defended this case and ~~emphatically denies~~denied the allegations made by the CA Attorney General that it ever deliberately misled its students, falsely advertised its programs, or in any way ~~was~~were not fully accurate in its statements to investors. A ~~bench~~ trial took place in the fourth quarter of 2021.

On March 7, 2022, the Superior Court of the State of California, County of San Diego (the “Court”), issued a Statement of Decision regarding the Lawsuit in favor of the CA Attorney General. In the Statement of Decision, the Court ordered the Company to pay $22.4 million in statutory penalties. As a result, the Company accrued an additional $14.3 million in the fourth quarter of 2021, for ~~this matter is scheduled to begin in November~~a total of $22.4 million accrued as of December 31, 2021. ~~We cannot predict~~The Court denied the ~~outcome of this matter at this time.~~CA Attorney General’s demands for restitution and injunctive relief finding no evidence postdating 2017 that would necessitate an injunction. The Company ~~cannot reasonably estimate any updated range~~is disappointed by the Court’s decision and believes that its practices were at all times in compliance with California law. On June 10, 2022, the Company filed a notice of ~~loss for this action based on currently available information and as such, the prior accrual of $8.0 million remains and is recorded~~appeal on the ~~accounts payable~~Statement of Decision. During the second quarter of 2022, the Company paid $23.3 million, which included the full amount of the judgment as well as applicable costs and accrued ~~liabilities line item~~interest. This payment did not waive the Company’s right to appeal the judgment.

In connection with the Transaction closed on ~~the condensed consolidated balance sheets.~~

~~ZOVIO INC~~

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

~~16. Segment Information~~

~~Prior to December 1, 2020,~~July 31, 2022, the Company ~~operated in one segment for reporting purposes. Following~~granted UAGC the ~~Sale Transaction,~~right to any refund achieved from the ~~Company now operates in 2 reportable segments: University Partners and Zovio Growth. These segments were recast based upon~~State of California as a result of the ~~Company’s respective offerings.~~

~~On December 1, 2020, the Company consummated the Sale Transaction.~~appeal. For additional information, see Note 1, “Nature of Business.”

15. Segment Information

The Company operates in two reportable segments: University Partners and Zovio Growth. The Company reports segment information based upon the management approach, and ~~the Sale Transaction resulted in a change in~~ how the chief operating decision maker ~~viewed~~views the ~~operations moving forward. This change included~~operations.

Until the ~~creation~~sale of TutorMe, the Company had three operating segments: Fullstack, TutorMe, and Zovio, and two reportable segments: University Partners and Zovio Growth. On May 23, 2022, the Company completed the sale of TutorMe by which the Company sold substantially all of the assets of TutorMe’s business in consideration of cash and the assumption of certain liabilities of TutorMe’s business. For additional information, see Note 1, “Nature of Business.”

The Company’s operating segments are determined based on (i) financial information reviewed by the CEO, who is 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. In conjunction with the departure of the Company's previous chief executive officer in March 2021, the chief operating decision maker transitioned to the Office of the CEO, which is comprised of three executives. The

Fullstack and TutorMe, ~~operating segments~~through sale date, are aggregated into a single reportable segment, ~~the~~called Zovio ~~Growth segment.~~Growth. The aggregation of the Fullstack and TutorMe operating segments iswas 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~~called University ~~Partners Segment. This change in~~Partners. The segment reporting did not have any impact on the determination of reporting units used to assess impairment under ASC 350, Intangibles - Goodwill and Other.

The ~~Company’s~~ University Partners segment includes the technology and services provided to colleges and universities to enable the online delivery of degree programs and related goods and services. ~~University Partners also includes~~On July 31, 2022, the ~~tuition revenue~~Company entered into the New Asset Purchase Agreement, pursuant to which Zovio sold to Global Campus all of the remaining assets related to the ~~University prior to the Sale Transaction on December~~UAGC Services Business. For additional information, see Note 1, ~~2020.~~“Nature of Business.”

2421

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

Segment Performance

The following table summarizes financial information regarding each reportable segment’s results of operations for the periods presented (in thousands):


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Revenue by segment	Revenue by segment									Revenue by segment
University Partners	University Partners	$	55,185	$	95,991	$	187,118	$	288,819	University Partners	$	13,675	$	55,185	$	108,792	$	187,118
Zovio Growth	Zovio Growth	7,041		6,175		21,153		15,159		Zovio Growth	8,870		7,041		26,766		21,153
Total revenue and other revenue	Total revenue and other revenue	$	62,226	$	102,166	$	208,271	$	303,978	Total revenue and other revenue	$	22,545	$	62,226	$	135,558	$	208,271

Segment profitability	Segment profitability									Segment profitability
University Partners	University Partners	$	(408)	$	6,036	$	(6,499)	$	11,109	University Partners	$	(2,806)	$	(408)	$	(2,393)	$	(6,499)
Zovio Growth	Zovio Growth	(2,648)		(2,517)		(6,121)		(6,916)		Zovio Growth	(367)		(2,648)		(4,942)		(6,121)
Total segment profitability(1)	Total segment profitability(1)	$	(3,056)	$	3,519	$	(12,620)	$	4,193	Total segment profitability(1)	$	(3,173)	$	(3,056)	$	(7,335)	$	(12,620)

(1) Segment profitability represents EBITDA.

The following table reconciles total loss before income taxes to total segment profitability (in thousands):


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Income (loss) before income taxes		$	(5,160)	$	693	$	(18,827)	$	(4,618)
Loss before income taxes										Loss before income taxes	$	(3,425)	$	(5,160)	$	(15,449)	$	(18,827)
Adjustments:	Adjustments:									Adjustments:
Other expense, net	Other expense, net	69		(39)		(90)		62		Other expense, net	(295)		69		3,656		(90)
Depreciation and amortization expense	Depreciation and amortization expense	2,035		2,865		6,297		8,749		Depreciation and amortization expense	547		2,035		4,458		6,297

Total segment profitability	Total segment profitability	$	(3,056)	$	3,519	$	(12,620)	$	4,193	Total segment profitability	$	(3,173)	$	(3,056)	$	(7,335)	$	(12,620)

During both the three months ended and nine months ended September 30, ~~2021~~2022 and September 30, ~~2020,~~2021, Global Campus accounted for the entire amount of the University Partners segment revenue, respectively. As noted above, the contract with Global Campus was terminated on July 31, 2022.

During both the three months ended and nine months ended September 30, ~~2021~~2022 or ~~2020,~~2021, there were no customers or individual university clients which accounted for 10% or more of the Zovio Growth segment revenue.

The Company’s total assets by segment are as follows (in thousands):
As of
September 30, 2021 As of
December 31, 2020
University Partners $ 95,903 $ 111,830
Zovio Growth 61,872 49,476
Total assets $ 157,775 $ 161,306


	As of September 30, 2022		As of December 31, 2021
University Partners	$	9,325	$	86,628
Zovio Growth	49,231		62,406
Total assets	$	58,556	$	149,034

2522

ZOVIO INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

The Company’s accounts receivable ~~and deferred revenue~~ in each segment are as follows (in thousands):
As of
September 30, 2021 As of
December 31, 2020
University Partners accounts receivable $ 49 $ 45
Zovio Growth accounts receivable 8,490 7,159
Total accounts receivable $ 8,539 $ 7,204
University Partners deferred revenue $ — $ 10
Zovio Growth deferred revenue 14,025 8,080
Total deferred revenue $ 14,025 $ 8,090


	As of September 30, 2022		As of December 31, 2021
University Partners	$	236	$	78
Zovio Growth	5,124		9,553
Total accounts receivable	$	5,360	$	9,631

As of each September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the University Partners accounts receivable balance was immaterial. As of each September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, there were no individual partners or customers which accounted for 10% or more of the Zovio Growth accounts receivable balance, as customers are individual students or third parties paying on their behalf, rather than university clients.

The Company’s deferred revenue and student deposit amounts as of September 30, 2022 and December 31, 2021, respectively, are fully attributable to the Zovio Growth segment. For additional information on deferred revenue and student deposits, see Note 3, “Revenue, Other Revenue and Deferred Revenue.”

The Company’s goodwill amounts as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, are fully attributable to the Zovio Growth segment. For additional information on goodwill, see Note 8,7, “Other Significant Balance Sheet Accounts - Goodwill and intangibles, net.”

16. Subsequent Events

The Company performed an evaluation of events occurring between the end of our most recent quarter end and the date of filing these condensed consolidated financial statements.

On October 13, 2022, the Company entered into a non-binding letter of intent (“LOI”) with a third party for the proposed sale of Fullstack (“Proposed Transaction”). The Proposed Transaction is to be structured as a sale of membership interest and the consideration will be paid out in cash.

On October 25, 2022, the Company held a Special Meeting of Stockholders (the “Special Meeting”). Of the shares of our common stock, par value $0.01 per share (“Common Stock”) outstanding as of September 22, 2022, holders of approximately 53% shares of Common Stock were represented, either by attending the Special Meeting or by proxy, and constituted a quorum under the Company’s bylaws. At the Special Meeting the votes were cast to approve the voluntary liquidation and dissolution of the Company (the “Dissolution Proposal”) pursuant to the Plan of Dissolution (the “Plan of Dissolution”) which authorizes the Company to liquidate and dissolve the Company in accordance with the Plan of Dissolution.

On November 1, 2022, the Company received an expected written notification (the “Notice”) from the Listing Qualifications Department of the NASDAQ Stock Market LLC (“Nasdaq”) notifying the Company that the closing bid price for its common stock had been below $1.00 for 30 consecutive business days and that the Company therefore is not in compliance with the minimum bid price requirement for continued inclusion on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2). In light of the Company's pending dissolution as authorized by the Company's stockholders on October 25, 2022, the Company has elected not to appeal the delisting of its common stock. Pursuant to the Notice, the Company's common stock will therefore ceased to trade on The Nasdaq Capital Market following the close of business on November 10, 2022. At that time, the Company has further instructed its transfer agent to close the Company's stock transfer records and discontinue recording transfers of the Company's securities.

On November 10, 2022, the Company entered into a lease termination agreement with the landlord of the Company's facility in New York. For additional information on the lease termination, see Note 9, “Lease Obligations.”

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

The following Management’s Discussions and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto included in Part I, Item 1 of this report. For additional information regarding our financial condition and results of operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 (“Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on ~~February 24, 2021,~~April 15, 2022, 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 (“Form 10-Q”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (“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 liquidate and dissolve the ~~ability~~Company in accordance with the Plan of Dissolution;

•our ~~current or any future university partners~~ability to comply with the extensive and continually evolving regulatory framework, applicable to 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;

•the ability of our ~~current or any future~~ university partners to obtain continued approval of programs for educational benefits to active duty military students or to veteran students;

•the outcome of various lawsuits, claims and legal proceedings;

•the ~~impact of COVID-19 on the economy, and the~~ demand for our services and the ~~collectibility~~collectability 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;

•the growth of our growth segment;

•management’s goals and objectives; and

•other similar matters that are not historical facts.

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

Forward-looking statements should not be interpreted as a guarantee of future performance or results and will not necessarily be accurate indications of the times at or by which such performance or results will be achieved, if at all. ~~Forward-looking~~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~~aspirations.

On July 31, 2022, the Company entered into an asset purchase agreement (the “New Asset Purchase Agreement”), pursuant to which Zovio sold to Global Campus all of the remaining assets of Zovio related to the UAGC Services Business (the “Transaction”). In connection with the Transaction, the parties terminated the previous agreements. In addition, UAGC (a) paid to Zovio cash in the amount of $1.00, (b) assumed all obligations under Zovio’s business contracts associated with the UAGC Services Businesses, including the lease for the facilities located in Chandler, Arizona, which has a remaining term of eight years and ~~help institutions grow.~~approximately $20.0 million in rent obligations, (c) released Zovio from all remaining obligations under the UAGC/Zovio Agreements, including from all indemnification obligations under the Original Asset Purchase Agreement and all minimum payment guarantees under the UAGC Services Agreement, and (d) granted Zovio a general release of all claims. In addition, UAGC hired substantially all of the UAGC Services Business employees. In turn, Zovio (i) paid to UAGC cash in the amount of $5.5 million, reflecting the allocated minimum payment owed by Zovio to UAGC for the month of July 2022, (ii) paid to UAGC cash in the amount of $5.0 million, and assigned to UAGC the right to a security deposit in the amount of $2.7 million, for assuming Zovio’s ~~expertise across academic disciplines, credential levels, learning experiences,~~obligations under the Chandler lease, (iii) granted UAGC the right to any refund achieved by Zovio after the closing of the Transaction from the State of California as a result of its appeal of that certain judgment set forth in the Statement of Decision issued by the Superior Court of the State of California, County of San Diego on March 3, 2022, (iv) released UAGC from all remaining obligations under the UAGC/Zovio Agreements, and ~~modalities has powered student~~(v) granted UAGC and ~~partner success through~~University of Arizona a ~~tailored, customer-focused approach bolstered by data analytics. The Company provides student recruitment and enrollment systems, retention strategies, educational tools and curriculums.~~general release of all claims.

In April 2019, the Company had acquired ~~both~~ Fullstack Academy, Inc (“Fullstack”) ~~and TutorMe.com, Inc. (“TutorMe”), each of~~ which ~~became~~is a wholly-owned ~~subsidiaries~~subsidiary of the Company. Fullstack is an innovative web development school offering immersive technology ~~bootcamps,~~bootcamps. Zovio will continue to support the continued growth and ~~TutorMe~~expansion of its Fullstack subsidiary and simultaneously explore strategic alternatives for that business.

The ability of the Company to continue as a going concern is ~~an online education platform that provides 24/7 on-demand tutoring~~dependent on the Company generating cash from its operations and ~~online courses.~~availability to other funding sources. Due to the Company’s negative cash flows from operations and projected future negative cash flows from operations, substantial doubt exists about the Company’s ability to continue as a going concern for the twelve months following the issuance of these condensed consolidated financial statements. Management plans to cover any shortfall from operations by selling its Fullstack subsidiary or obtaining debt financing. However, there can be no assurance the Company will be successful in its efforts to sell Fullstack.

On October 25, 2022, the Company held a Special Meeting of Stockholders (the “Special Meeting”). Of the shares of our common stock, par value $0.01 per share (“Common Stock”) outstanding as of September 22, 2022, holders of approximately 53% shares of Common Stock were represented, either by attending the Special Meeting or by proxy, and ~~TutorMe are both contributors~~constituted a quorum under the Company’s bylaws. At the Special Meeting the votes were cast to ~~Zovio's strategy~~approve the voluntary liquidation and dissolution of ~~becoming~~the Company (the “Dissolution Proposal”) pursuant to the Plan of Dissolution (the “Plan of Dissolution”) which authorizes the Company to liquidate and dissolve the Company in accordance with the Plan of Dissolution.

Factors Affecting Comparability

We believe the transactions noted above have had, or can be expected to have, a ~~best-in-class education technology services company.~~significant effect on the comparability of recent or future results of operations.

Key Financial Metrics

In evaluating our operating performance, our management focuses in large part on our revenue and operating income (loss). The following table, which should be read in conjunction with our condensed consolidated financial statements included elsewhere in this report, presents our key operating data for each of the periods presented (in thousands):
Three Months Ended
September 30, Nine Months Ended
September 30,
Consolidated Statement of Income Data: 2021 2020 2021 2020
Revenue and other revenue $ 62,226 $ 102,166 $ 208,271 $ 303,978
Operating income (loss) $ (5,091) $ 654 $ (18,917) $ (4,556)


	Three Months Ended September 30,				Nine Months Ended September 30,
Consolidated Statement of Income (Loss) Data:	2022		2021		2022		2021
Revenue and other revenue	$	22,545	$	62,226	$	135,558	$	208,271
Operating loss	$	(3,720)	$	(5,091)	$	(11,793)	$	(18,917)

Revenue and other revenue

~~On December 1, 2020,~~Revenue was primarily derived from our service agreement with our university partners. Up through July 31, 2022, the Company ~~entered into the~~had a Services Agreement with Global Campus whereby the Company ~~will provide~~provided certain educational technology and support ~~services, which has an initial term of fifteen years, subject to renewal options and certain early termination provisions.~~services. The amounts earned from the Services Agreement are denoted as revenue on the condensed consolidated statements of income (loss). ~~On December 1, 2020, the~~The Company also ~~entered into~~had a transition services agreement with Global Campus whereby the Company ~~will provide~~was providing 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 streams 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), provision for bad debt 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~~Legal expense is comprised of charges related to ~~Global Campus in~~ the ~~Sale Transaction and that are no longer incurred by~~estimated amounts to resolve 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.~~disclosed investigation for the California Attorney General.

Restructuring and impairment expenses ~~have historically been~~in the current year are comprised of impairments of long-lived assets due to the transfer of assets to Global Campus in connection with the July 31, 2022 Transaction. In the prior year, these charges are 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~~Gain on transactions, net, represents both the ~~following factors have had, or can be expected to have, a significant effect~~gain on the ~~comparability~~sale 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 took actions~~TutorMe.com subsidiary (“TutorMe”) which was sold in May ~~and July to reduce our cost structure to more appropriately align it with both our revenue expectations and~~2022, partially offset by the ~~nature~~loss on transaction for the write-off of ~~our business following~~ the Sale Transaction. As we moved through the year, 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 $60 million in annualized savings going forward, when compared to planned spending levels.

~~Seasonality~~

Our operations are generally subject to seasonal trends. Our university partners generally experience higher new enrollments during the first quarter of each year, following a 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 quartersnet asset adjustment due ~~to the holiday break in December, with an increase in the first quarter of each year.~~from Global Campus.

Trends and uncertainties regarding 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 September 30, ~~2021~~2022 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~~Based on our evaluation, we determined that our deferred tax assets were not more-likely-than-not to be realized and that a valuation allowance against our deferred tax assets should continue to be maintained as of September 30, ~~2021.~~2022.

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.

There were no material changes to these critical accounting policies and estimates during the nine months ended September 30, ~~2021.~~2022.

3027

Results of Operations

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Revenue and other revenue	Revenue and other revenue	100.0	%	100.0	%	100.0	%	100.0	%	Revenue and other revenue	100.0	%	100.0	%	100.0	%	100.0	%
Costs and expenses:	Costs and expenses:									Costs and expenses:
Technology and academic services	Technology and academic services	26.5		18.7		25.7		18.0		Technology and academic services	44.7		26.5		33.8		25.7
Counseling services and support	Counseling services and support	32.8		24.1		33.1		23.5		Counseling services and support	28.7		32.8		33.6		33.1
Marketing and communication	Marketing and communication	33.9		22.8		33.0		23.0		Marketing and communication	34.5		33.9		35.4		33.0
General and administrative	General and administrative	14.5		11.2		15.9		12.0		General and administrative	24.6		14.5		15.1		15.9
University-related expenses		—		22.4		—		23.9

Legal expense										Legal expense	—		—		0.7		—
Restructuring and impairment expense	Restructuring and impairment expense	0.5		0.2		1.3		1.1		Restructuring and impairment expense	—		0.5		26.5		1.3

Gain on transactions, net										Gain on transactions, net	(16.0)		—		(36.4)		—
Total costs and expenses	Total costs and expenses	108.2		99.4		109.0		101.5		Total costs and expenses	116.5		108.2		108.7		109.0
Operating income (loss)		(8.2)		0.6		(9.0)		(1.5)
Other income (loss), net		(0.1)		0.0		0.0		(0.0)
Income (loss) before income taxes		(8.3)		0.6		(9.0)		(1.5)
Operating loss										Operating loss	(16.5)		(8.2)		(8.7)		(9.0)
Other income (expense), net										Other income (expense), net	1.3		(0.1)		(2.7)		0.0
Loss before income taxes										Loss before income taxes	(15.2)		(8.3)		(11.4)		(9.0)
Income tax expense (benefit)	Income tax expense (benefit)	0.1		(0.5)		(0.0)		(4.2)		Income tax expense (benefit)	0.1		0.1		0.1		(0.0)
Net income (loss)		(8.4)	%	1.1	%	(9.0)	%	2.7	%
Net loss										Net loss	(15.3)	%	(8.4)	%	(11.5)	%	(9.0)	%

Three Months Ended September 30, ~~2021~~2022 Compared to Three Months Ended September 30, ~~2020~~2021

Total revenue and other revenue. Total revenue and other revenue for the three months ended September 30, 2022 and 2021, ~~and 2020,~~ was ~~$62.2~~$22.5 million and ~~$102.2~~$62.2 million, respectively, a decrease of ~~$40.0~~$39.7 million, or ~~39.1%~~63.8%. For the three months ended September 30, ~~2021~~2022 and ~~2020,~~2021, University Partners segment revenue was ~~$55.2~~$13.7 million and ~~$96.0~~$55.2 million, respectively, representing a decrease of ~~42.5%~~75.2%, and the Zovio Growth segment revenue was ~~$7.0~~$8.9 million and ~~$6.2~~$7.0 million, respectively, representing an increase of ~~14.0%~~26.0%.

The decrease in revenue in the University Partners segment of ~~$40.8~~$41.5 million between periods was primarily due to the ~~change in~~sale of that business ~~model in December 2020, and~~to Global Campus on July 31, 2022, as well as the ~~related~~ decrease in ~~university-related~~service revenue ~~as compared to the prior year. This decrease was also~~ due to a decrease in average weekly enrollment for the three ~~month~~months ended September 30, 2022, as compared to the same period ended September 30, ~~2021, as compared to the three month period ended September 30, 2020. Partially offsetting the decrease in~~2021. A component of the University Partners segment ~~was~~revenue includes the ~~new service revenue from the Services Agreement entered into in December 2020, as well as~~ other revenue generated from the Transition Services Agreement of approximately ~~$2.4~~$0.5 million.

The increase in revenue in the Zovio Growth segment between periods was primarily due to the growth in new customer contracts within the ~~related subsidiaries,~~ Fullstack ~~Academy and TutorMe.com.~~subsidiary.

Technology and academic services. Technology and academic services for the three months ended September 30, 2022 and 2021, ~~and 2020,~~ were ~~$16.5~~$10.1 million and ~~$19.1~~$16.5 million, respectively, a decrease of ~~$2.6~~$6.4 million, or ~~13.6%~~38.9%. Specific decreases between periods primarily include employee costs related allocated costs of $3.1 million, license fees of $1.1 million, consulting and outside services of ~~$1.4 million, employee costs of $1.1~~$1.0 million and ~~amortization~~instructional supplies of ~~$0.3 million, partially offset by an increase in other technology and academic services of $0.6~~$0.8 million. Technology and academic services, as a percentage of revenue, for the three months ended September 30, 2022 and 2021, were 44.7% and ~~2020, were~~ 26.5% ~~and 18.7%~~, respectively, an increase of ~~7.8%~~18.2%. This increase primarily included increases in employee costs of ~~3.8%~~8.6%, instructional supplies and other technology and academic services expenses of ~~1.7%~~5.3%, license fees of ~~1.7%~~2.2%, amortization of intangible assets of 1.2% and ~~instructional supplies~~facilities cost of 0.9%~~, partially offset by a decrease in consulting and other outside services of 0.5%~~.

Counseling services and support. Counseling services and support for the three months ended September 30, 2022 and 2021, ~~and 2020,~~ were ~~$20.4~~$6.5 million and ~~$24.7~~$20.4 million, respectively, a decrease of ~~$4.3~~$13.9 million, or ~~17.2%~~68.3%. Specific factors contributing to the overall decrease between periods were primarily ~~a decrease~~due to decreases in employee and related allocated costs of ~~$3.7~~$12.2 million, facility costs of $1.0 million and depreciation of $1.0 million, partially offset by consulting and outside services of $0.4 million.

Counseling services and support, as a percentage of revenue, for the three months ended September 30, 2022 and 2021, were 28.7% and ~~2020, were~~ 32.8% ~~and 24.1%~~,

respectively, ~~an increase~~a decrease of ~~8.7%~~4.1%. This ~~increase~~decrease primarily included ~~increases~~decreases in employee costs of ~~6.9%~~3.1%, depreciation of ~~0.7%~~1.6%, ~~facilities~~and facility costs of ~~0.6%~~1.4%, ~~and human resources~~partially offset by an increase in facility costs of ~~0.5%~~2.5%.

Marketing and communication. Marketing and communication for the three months ended September 30, 2022 and 2021, ~~and 2020,~~ were ~~$21.1~~$7.8 million and ~~$23.3~~$21.1 million, respectively, a decrease of ~~$2.2~~$13.3 million, or ~~9.5%~~63.1%. Specific factors contributing to the overall decrease between periods were decreases in advertising of ~~$1.3~~$10.4 million, ~~other marketing and communication expenses~~employee costs of ~~$0.6~~$2.2 million, and license fees of ~~$0.3~~$0.4 million and consulting and outside services of $0.2 million. Marketing and communication, as a percentage of revenue, for the three months ended September 30, 2022 and 2021, were 34.5% and ~~2020, were~~ 33.9% ~~and 22.8%~~, respectively, an increase of ~~11.1%~~0.6%. This increase was primarily ~~included~~due to increases in ~~advertising of 9.0%, employee costs of 2.0%, and~~ consulting and outside services of ~~0.6%~~1.8% and advertising of 0.3%, partially offset by a decrease in ~~other marketing and communication expenses~~employee costs of ~~0.6%~~1.6%.

General and administrative. General and administrative expenses for the three months ended September 30, 2022 and 2021, ~~and 2020,~~ were ~~$9.0~~$5.5 million and ~~$11.4~~$9.0 million, respectively, a decrease of ~~$2.4~~$3.5 million, or ~~21.2%~~38.6%. The decrease between periods was primarily due to decreases in employee costs of ~~$1.8~~$2.0 million, and legal and professional fees of ~~$0.9 million and other general and administrative expenses of $0.4~~$1.9 million, partially offset by an increase in ~~human resources costs~~other general and administrative expenses of ~~$0.6~~$0.3 million. General and administrative expenses, as a percentage of revenue, for the three months ended September 30, 2022 and 2021, were 24.6% and ~~2020, were~~ 14.5% ~~and 11.2%~~, respectively, an increase of ~~3.3%~~10.1%. This increase was primarily due to increases in ~~legal fees~~other general and administrative expenses of ~~1.4%~~3.9%, employee costs of ~~1.2%~~4.4%, and insurance of ~~0.9%, and consulting and outside services of 0.4%~~2.2%, partially offset by ~~a decrease in~~ professional fees of 0.6%.

~~University-related expenses~~. We did not record any charges to university-related expenses for the three months ended September 30, 2021. Charges incurred for the three months ended September 30, 2020 related to the legacy University.

Restructuring and impairment expense. For the three months ended September 30, ~~2021, we recorded $0.3 million of~~2022, there were no charges to restructuring and impairment expense. For the three months ended September 30, ~~2020,~~2021, we recorded a charge of ~~approximately $0.2~~$0.3 million to restructuring and impairment expense. ~~These charges were comprised primarily~~

Gain on transactions, net. For the three months ended September 30, 2022, we recorded a net gain on the sale transactions of ~~a reduction~~$3.6 million. Included in ~~force and revised estimates~~this amount was the true-up for the sale transaction of ~~lease charges.~~Global Campus on July 31, 2022.

Other ~~(expense) income,~~expense, net. Other expense, net, was $0.3 million for the three months ended September 30, 2022 and other expense, net was $0.1 million for the three months ended September 30, 2021, ~~and other income was $39 thousand for the three months ended September 30, 2020,~~ respectively. The amounts recognized during the three months ended September 30, ~~2021~~2022 relate primarily to the write-off of the unamortized financing fees for the term loan and interest expense.

Income tax expense (benefit). We recognized income tax expense of ~~$0.1 million~~$30 thousand and an income tax ~~benefit~~expense of ~~$0.4~~$0.1 million for the three months ended September 30, ~~2021~~2022 and ~~September 30, 2020,~~2021, respectively, at effective tax rates of ~~(1.1)~~(0.9)% and ~~(61.8)~~(1.1)%, respectively. ~~The income tax benefit~~

Net loss. Net loss was $3.5 million for the three months ended September 30, ~~2021 was mainly attributable~~2022, compared to ~~the current state income taxes.~~

~~Net income (loss).~~ ~~Net~~net loss ~~was~~of $5.2 million for the three months ended September 30, 2021, ~~compared to net~~a $1.7 million increase in income ~~of $1.1 million for the three months ended September 30, 2020, a $6.3 million decrease~~ as a result of the factors discussed above.

Nine Months Ended September 30, ~~2021~~2022 Compared to Nine Months Ended September 30, ~~2020~~2021

Total revenue and other revenue. Total revenue and other revenue for the nine months ended September 30, 2022 and 2021, ~~and 2020,~~ was ~~$208.3~~$135.6 million and ~~$304.0~~$208.3 million, respectively, a decrease of ~~$95.7~~$72.7 million, or ~~31.5%~~34.9%. For the nine months ended September 30, 2022 and 2021, ~~and 2020,~~the University Partners segment revenue was ~~$187.1~~$108.8 million and ~~$288.8~~$187.1 million, respectively, representing a decrease of ~~35.2%~~41.9%, and the Zovio Growth segment revenue was ~~$21.2~~$26.8 million and ~~$15.2~~$21.2 million, respectively, representing an increase of ~~39.5%~~26.5%.

The decrease in revenue in the University Partners segment of ~~$101.7~~$78.3 million between periods was primarily due to the sale of that business to Global Campus on July 31, 2022 as well as the decrease in ~~university-related~~service revenue ~~as compared to the prior year. The decrease between periods was primarily~~ due to a decrease in average weekly enrollment ~~from~~for the ~~nine month~~nine-month period ended September 30, ~~2020~~2021, as compared to the ~~nine month~~same period ended September 30, ~~2021. Partially offsetting the decrease in~~2022. A component of the University Partners segment ~~was an increase of service~~ revenue ~~due to~~includes the ~~Services Agreement entered into in December 2020, as well as an increase in~~ other revenue generated from the Transition Services Agreement of approximately ~~$7.7~~$4.2 million.

The increase in revenue in the Zovio Growth segment between periods was primarily due to the growth in customer contracts ~~experienced this year~~ within the ~~related subsidiaries,~~ Fullstack ~~Academy and TutorMe.com.~~subsidiary, as well as within the TutorMe subsidiary until its sale on May 23, 2022.

3229

Technology and academic services. Technology and academic services for the nine months ended September 30, 2022 and 2021, ~~and 2020,~~ were ~~$53.7~~$45.9 million and ~~$54.8~~$53.7 million, respectively, a decrease of ~~$1.1~~$7.8 million, or ~~2.0%~~14.6%. Specific decreases between periods include employee costs of $3.1 million, instructional supplies and other technology and academic services of $1.6 million, consulting and outside services of ~~$3.5~~$1.1 million, ~~employee costs~~bad debt expense of ~~$1.7 million, professional fees of $0.7~~$0.5 million, amortization of ~~$0.6~~$0.4 million, and ~~facilities costs of $0.5 million, partially offset by increases in other technology and academic services expenses of $3.5 million,~~ license fees ~~of $1.5 million, instructional supplies of $0.6 million, and bad debt expense~~ of $0.4 million. Technology and academic services, as a percentage of revenue, for the nine months ended September 30, 2022 and 2021, were 33.8% and ~~2020, were~~ 25.7% ~~and 18.0%~~, respectively, an increase of ~~7.7%~~8.1%. This increase primarily included increases in employee costs of ~~3.2%~~4.3%, license fees of 1.5%, other technology and academic ~~services expenses~~service of ~~2.1%, license fees of 1.6%,~~1.4% and ~~instructional supplies of 0.8%, partially offset by a decrease in~~ consulting and outside services of 0.4%.

Counseling services and support. Counseling services and support for the nine months ended September 30, 2022 and 2021, ~~and 2020,~~ were ~~$68.9~~$45.5 million and ~~$71.5~~$68.9 million, respectively, a decrease of ~~$2.6~~$23.4 million, or ~~3.6%~~34.0%. Specific ~~factors contributing to the overall decrease~~decreases between periods include decreases in ~~facilities~~employee and related allocated costs of ~~$1.8~~$20.7 million, facility costs of $2.3 million and depreciation of $1.0 million, partially offset by a increase in other counseling services and support expenses of ~~$1.0 million, partially offset by a decrease in depreciation of $0.3~~$0.8 million. Counseling services and support, as a percentage of revenue, for the nine months ended September 30, 2022 and 2021, were 33.6% and ~~2020, were~~ 33.1% ~~and 23.5%~~, respectively, an increase of ~~9.6%~~0.5%. This increase primarily included increases in ~~employee costs~~other counseling services and support expense of ~~8.6%, human resources costs of 0.5%~~0.9%, and depreciation of ~~0.5%~~0.4%, partially offset by a decrease in facility costs of 0.7%.

Marketing and communication. Marketing and communication for the nine months ended September 30, 2022 and 2021, ~~and 2020,~~ were ~~$68.6~~$48.0 million and ~~$70.0~~$68.6 million, respectively, a decrease of ~~$1.4~~$20.6 million, or ~~2.0%~~30.1%. Specific ~~factors contributing to the overall decrease~~decreases between periods were decreases in advertising of ~~$1.2~~$15.8 million, ~~other marketing and communication expenses~~employee costs of ~~$1.1~~$4.1 million, and license fees ~~of $1.0 million, partially offset by increases in employee costs of $1.4 million and consulting and outside services~~ of $0.6 million. Marketing and communication, as a percentage of revenue, for the nine months ended September 30, 2022 and 2021, were 35.4% and ~~2020, were~~ 33.0% ~~and 23.0%~~, respectively, an increase of ~~10.0%~~2.4%. This increase primarily included increases in advertising of ~~7.7%, employee costs of 1.9%~~2.1%, and consulting and outside services of ~~0.7%~~0.9%, partially offset by a decrease in ~~other marketing and communication expenses~~employee costs of ~~0.3%~~0.6%.

General and administrative. General and administrative expenses for the nine months ended September 30, 2022 and 2021, ~~and 2020,~~ were ~~$33.3~~$20.5 million and ~~$36.4~~$33.3 million, respectively, a decrease of ~~$3.1~~$12.8 million, or ~~8.6%~~38.4%. The decrease between periods was primarily due to decreases in employee costs of ~~$3.3~~$5.1 million, legal and professional fees of ~~$2.3 million, non-recurring stock compensation of $1.4~~$3.6 million, other general and administrative expenses of ~~$0.7~~$3.0 million ~~legal fees of $0.4 million,~~and consulting and outside services of ~~$0.3 million, and legal settlements of $0.3 million, partially offset by increases in executive severance of $3.7 million, human resources costs of $1.1 million, and insurance of $0.8~~$0.7 million. Our general and administrative expenses, as a percentage of revenue, for the nine months ended September 30, 2022 and 2021, were 15.1% and ~~2020, were~~ 15.9% ~~and 12.0%~~, respectively, ~~an increase~~a decrease of ~~3.9%~~0.8%. This ~~increase~~decrease was primarily due to ~~increases~~decreases in ~~executive severance of 1.8%,~~ employee costs of ~~1.2%~~1.1%, ~~insurance of 0.7%,~~and legal and professional fees of 0.6%~~, and consulting and outside services of 0.3%~~, partially offset by ~~decreases~~an increase in ~~professional fees~~insurance of ~~0.5% and non-recurring stock compensation of 0.3%~~0.9%.

~~University-related expenses~~. We did not record any charges to university-related expenses for the nine months ended September 30, 2021. Charges incurred for the nine months ended September 30, 2020 related to the legacy University.

Restructuring and impairment expense. For the nine months ended September 30, ~~2021,~~2022, we recorded ~~$2.6~~a charge of $35.9 million ofto restructuring and impairment expense. This related to the Company’s long-lived assets due to the transfer of assets to Global Campus in connection with the July 31, 2022 transaction. For the nine months ended September 30, ~~2020, there were $3.4~~2021, we recorded a charge of $2.6 million ~~of similar~~to restructuring and impairment ~~expenses.~~expense.

Gain on transactions, net. For the three months ended September 30, 2022, we recorded a net gain on the sale transactions of $49.3 million. Included in this amount was $51.5 million for the sale transaction of TutorMe, partially offset by the loss on transaction for the sale of Global Campus on July 31, 2022.

Other (expense) income, net. Other expense, net was ~~$0.1~~$3.7 million for the nine months ended September 30, ~~2021,~~2022, as compared to other income, net of $0.1 million for the nine months ended September 30, ~~2020, an increase~~2021, a decrease of ~~$0.2~~$3.8 million. The amounts recognized during the nine months ended September 30, ~~2021~~2022 relate primarily to the write-off of the unamortized financing fees and interest expense.

Income tax ~~benefit.~~expense (benefit). We recognized income tax expense of $0.1 million and an income tax benefit of $0.1 ~~million and $12.9~~ million for the nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively, at effective tax rates of ~~0.4%~~(0.8)% and ~~279.5%~~0.4%, respectively. ~~The income tax benefit~~

Net loss. Our net loss was $15.6 million for the nine months ended September 30, ~~2021 was mainly attributable~~2022 compared to ~~the tax refunds received from the federal and FTB audit examinations.~~

~~Net income (loss).~~ ~~Our~~ net loss ~~was~~of $18.7 million for the nine months ended September 30, 2021, ~~compared to net income of $8.3~~a $3.1 million ~~for the nine months ended September 30, 2020, a $27.0 million increase in~~lower net loss 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 September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, our cash and cash equivalents were ~~$31.6~~$3.1 million and ~~$35.5~~$28.3 million, respectively. At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, total restricted cash was ~~$9.8~~$2.9 million and ~~$20.0~~$9.3 million, respectively, and investments were ~~$1.3~~$0.2 million and ~~$1.5~~$1.0 million, respectively. At September 30, ~~2021,~~2022, we had ~~$2.9~~$2.8 million ofrecorded as long-term notes ~~payable.~~payable for a Fullstack contract.

There was a ~~slight~~ decrease in the fair value of our investments at September 30, ~~2021~~2022 as compared to December 31, ~~2020.~~2021, which is primarily due to distributions. We believe that any remaining fluctuations we have experienced are temporary in nature and, while 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.

On May 23, 2022, the Company sold its TutorMe subsidiary for $55.0 million (see Note 1, “Nature of Business”) and used the proceeds to pay down its debt with Blue Torch Finance, LLC in the aggregate principal amount of $31.5 million (see Note 8, “Credit Facilities”), as well as to pay the $22.4 million in statutory penalties for the final judgement in the California Attorney General lawsuit (see Note 14, “Commitments and Contingencies”).

Going Concern

The Company had negative cash flows from operations of $15.4 million for the fiscal year 2021, and negative cash flows from operations of $72.7 million for the nine months ended September 30, 2022.

Up through July 31, 2022, the majority of our cash came from our Services Agreement with Global Campus. 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. The service fees in the Services Agreement were subject to certain minimum residual liability adjustments, including performance-based adjustments, minimum profit level adjustments, and excess direct cost adjustments. These adjustments were all variable in nature in that they depended upon the Company’s performance during each service period. In connection with the Services Agreement, the minimum residual payment was to be paid annually in June.

The Company’s Services Agreement with Global Campus was subject to certain adjustments that impacted the amount and timing of cash flow. Further, Global Campus incurred higher costs in their fourth quarter (the Company's second quarter) than the Company previously budgeted. On or about June 15, 2022, Global Campus advised the Company that Global Campus received a notice from the Department of Defense that they were placed on probation which would preclude them from enrolling new military students, pending completion of a comprehensive review. Additionally, ~~our income tax receivable decreased~~there were communications from ~~December~~the Department of Defense to current Global Campus students cautioning them to consider leaving the University. We were advised by Global Campus that this matter should be resolved in a timely manner, however, it became apparent over the following weeks that these prolonged actions were having a negative impact on the University's revenue and therefore a negative impact on the Company's financial outlook. As a result, the Company entered into a new agreement with Global Campus, effective on July 31, ~~2020~~2022, which allowed Global Campus to acquire the business previously used to provide services to Global Campus. The Company will continue to support the continued growth and expansion of its Fullstack subsidiary and simultaneously explore strategic alternatives for that business.

The ability of the Company to continue as a going concern is dependent on the Company generating cash from its operations and availability to other funding sources. Due to the Company’s negative cash flows from operations and projected future negative cash flows from operations, substantial doubt exists about the Company’s ability to continue as a going concern for the twelve months following the issuance of these condensed consolidated financial statements. Management plans to cover any shortfall from operations by selling its Fullstack subsidiary or obtaining debt financing. However, there can be no assurance the Company will be successful in the efforts to sell Fullstack or to obtain adequate debt financing.

Operating Activities

Net cash used in operating activities was $72.7 million for the nine months ended September 30, 2022, compared to net cash used in operating activities of $11.6 million for the nine months ended September 30, 2021, an overall increase between periods in net cash used in operating activities of $61.1 million. The increase in cash used in operating activities is primarily attributable to the net increases in the working capital accounts, including the payment of the judgement in the California Attorney General lawsuit and the minimum residual adjustment, partially offset by the decrease in net loss of $3.1 million between periods.

Investing Activities

Net cash provided by investing activities was $44.0 million for the nine months ended September 30, 2022, compared to net cash used in investing activities of $1.4 million for the nine months ended September 30, 2021. The amount of cash provided in 2022 was primarily due to ~~$1.9~~the sale of the TutorMe subsidiary in May 2022. This was partially offset by distributions of deferred compensation and capital expenditures. Capital expenditures for the nine months ended September 30, 2022 were $24 thousand, compared to $1.2 million for the nine months ended September 30, 2021. During the nine months ended September 30, 2022 and 2021, we capitalized costs for intangibles of $0.5 million and $0.6 million, respectively. We anticipate any capital expenditures to be an immaterial amount for the year ending December 31, 2022.

Financing Activities

Net cash used in financing activities was $2.8 million for the nine months ended September 30, 2022, compared to net cash used in financing activities of $1.1 million for the nine months ended September 30, 2021. The financing activities for the nine months ended September 30, 2022 included both the borrowings and repayment of the credit facility with Blue Torch Capital. See “Debt and Financing Arrangements” below. During each of the nine months ended September 30, 2022 and 2021, net cash used included tax ~~refunds received~~withholding related to the issuance of restricted stock units vesting.

Debt and Financing Arrangements

As of September 30, 2022, the Company has a notes payable valued at $2.8 million, including accrued interest. The counterparty advanced funds to the Company for certain program development costs, which the Company is obligated to repay out of future revenues from the ~~federal~~developed program. The Company recognized these advances as a debt obligation, and ~~FTB audit examinations.~~expects to begin repayments from future program revenues four years from the contract start date.

The Company has issued letters of credit that are collateralized with cash, in the aggregate amount of $2.9 million as of September 30, 2022. The letters of credit relate primarily to the Company's leased facilities and insurance requirements. The collateralized cash is held in restricted cash on the Company's condensed consolidated balance sheets.

On April 14, 2022, the Company entered into a Financing Agreement (the “Credit Facility”) among the Company, as borrower, each of its wholly-owned subsidiaries as subsidiary guarantors (the “Guarantors”), the lenders party thereto from time to time (the “Lenders”) and Blue Torch Finance LLC, as administrative agent and collateral agent for the Lenders (the “Agent”). The Credit Facility provided for a term loan in the aggregate principal amount of $31.5 million (the “Term Loan”). Concurrent with the sale of TutorMe, the Company repaid in full all outstanding obligations of the Company owed to Blue Torch Finance, LLC and the Lenders pursuant to the Credit Facility. In connection with the Company’s repayment of the outstanding obligations under the Credit Facility, Blue Torch terminated the Credit Facility and released all of its security interests in and liens on all of the assets of the Company and its subsidiaries.

On September 16, 2022, the Company, entered into a Loan and Security Agreement (the “Loan Agreement”) among the Company and its wholly owned subsidiary Fullstack Academy, LLC, a Delaware limited liability company (“Fullstack”), as borrowers, and Calla Lily Holdings LLC, a Delaware limited liability company, as the lender (the “Lender”). The Loan Agreement provides for a revolving line of credit in the aggregate principal amount of $5.0 million (the “Revolving Line”), maturing on January 14, 2023, for which the Company to borrow against from time to time as needed to fund operations. No amounts were borrowed on the Loan Agreement as of September 30, 2022.

Subject to the terms of Loan Agreement, the Revolving Line has an interest rate per annum equal to 14.5%, payable monthly. Any amounts outstanding on the Revolving Line are due at maturity. At maturity, the Company will also pay a fee equal to 5.0% per annum of the average unused portion of the Revolving Line. The Loan Agreement contains customary representations, warranties, affirmative and negative covenants (including financial covenants), and indemnification provisions

in favor of the Lender as well as customary events of default, including payment defaults, breach of representations and warranties, and covenant defaults. The obligations of the Company and Fullstack as borrowers under the Loan agreement are secured by a first priority security interest in substantially all tangible and intangible personal property of each of the Company and Fullstack.

For further information, see Note 8, “Credit Facilities,” to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.

The Company does not have any off-balance sheet financing arrangements.

We manage our 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.

~~Operating activities~~Future Contractual Obligations

~~Net cash used in operating activities was $11.6 million for the nine months ended~~As of September 30, ~~2021, compared~~2022, we had future contractual obligations relating to ~~net cash provided by~~ operating ~~activities~~lease obligations in the amount of ~~$20.1~~$27.4 million, ~~for the nine months ended September 30, 2020, an overall decrease between periods in net cash provided by operating activities~~ of ~~$31.7 million. The decrease in cash provided by operating activities is primarily attributable to the increase in net loss of $27.0~~which approximately $1.1 million ~~between periods, including the minimum residual payment of $12.2 million to Global Campus~~was payable during the ~~period, as well as~~remainder of 2022. Subsequent to quarter end, the ~~decreases in non-cash expenses, partially offset by~~Company entered into a lease termination agreement with 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 $1.4 million for the nine months ended September 30, 2021, compared to net cash used in investing activities of $1.7 million for the nine months ended September 30, 2020. Capital expenditures for the nine months ended September 30, 2021 were $1.2 million, compared to $2.6 million for the nine months ended September 30, 2020. During the nine months ended September 30, 2021 and 2020, we capitalized costs for intangibles of $0.6 million and $0.2 million, respectively. We expect our capital expenditures to be approximately $1.8 million for the year ending December 31, 2021.

~~Financing activities~~

Net cash used in financing activities was $1.1 million for the nine months ended September 30, 2021, compared to net cash provided by financing activities of $2.3 million for the nine months ended September 30, 2020. During eachlandlord of the nine months ended September 30, 2021 and 2020, net cash used included tax withholdings related to the issuance of restricted stock units vesting. For the nine months ended September 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. An institution is subject to significant regulatory scrutiny as a result of numerous standards that must be satisfiedCompany's facility in ~~order to participate in Title IV programs.~~New York. For additional information ~~regarding Title IV programs and~~on the ~~regulation thereof,~~lease termination, see “Business—Regulation” included in Part I, Item 1 of the Form 10-K. The balance of revenues derived by Global Campus is from government tuition assistance programs for military personnel, including veterans, payments made in cash by individuals, reimbursement from corporate partnerships and private loans from third parties.Note 9, “Lease Obligations.”

~~The majority of our cash comes from our Services Agreement with Global Campus. The service fees~~We also had contractual obligations in the ~~Services Agreement are subject to certain minimum residual liability adjustments, including performance-based adjustments, minimum~~

~~profit level adjustments, and excess direct cost adjustments.~~amount of $0.4 million, of which an immaterial amount is payable during the remainder of 2022. These ~~adjustments are all variable~~obligations include agreements with vendors in ~~nature in that they depend upon~~ the ~~Company’s performance during each service period. In connection with the Services Agreement, the minimum residual payment will be paid annually, in June~~areas of ~~each year. If the Company's restructuring efforts and enrollment initiatives do not occur as planned, then the Company will need to find alternative sources to 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.

~~Significant Contractual Obligations~~

~~The following table sets forth, as of September 30, 2021, certain significant cash and contractual obligations that may affect our future liquidity:~~
Payments Due by Period
(In thousands) Total 2021 2022 2023 2024 2025 Thereafter
Operating lease obligations $ 55,358 $ 1,754 $ 7,009 $ 5,316 $ 5,022 $ 4,759 $ 31,498
Other contractual obligations 16,639 3,859 7,270 4,912 598 — —
Uncertain tax positions 28 — 28 — — — —
Total $ 72,025 $ 5,613 $ 14,307 $ 10,228 $ 5,620 $ 4,759 $ 31,498
software, telephony, licensing fees, consulting, marketing, among others.

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

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

We have no derivative financial instruments or derivative commodity instruments.

Interest Rate Risk

To the extent we borrow funds, we would be subject to fluctuations in interest rates. As of September 30, ~~2021,~~2022, we had ~~$2.9~~$2.8 million in long-term notes payable.

On April 14, 2022, the Company entered into a Credit Facility which provided for a Term Loan in the aggregate principal amount of $31.5 million and bears interest at a rate per annum equal to LIBOR plus 9.0%, payable monthly. Concurrent with the sale of TutorMe, the Company repaid in full all outstanding obligations of the Company owed to Blue Torch Finance, LLC and the Lenders pursuant to the Credit Facility. In connection with the Company’s repayment of the outstanding obligations under the Credit Facility, Blue Torch terminated the Credit Facility and released all of its security interests in and liens on all of the assets of the Company and its subsidiaries.

Our future investment income may fall short of expectations due to changes in interest rates. At September 30, ~~2021,~~2022, 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

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act, that are designed to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

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 September 30, ~~2021.~~2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting, during the three months ended September 30, ~~2021~~2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

3634

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

For information regarding our legal proceedings, refer to Note ~~15,~~14, “Commitments and Contingencies” to our condensed consolidated financial statements included in Part I, Item 1 of this report, which note is incorporated by reference into this Part II, Item 1.

Item 1A. Risk Factors

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

~~Changes to the 90/10 rule or related Title IV regulation could adversely impact our university partners,~~We may need additional capital which ~~in turn could adversely affect our revenues or~~may not be available on commercially acceptable terms, if at all, which raises questions about our ability to ~~grow.~~continue as a going concern.

~~In March~~As of September 30, 2022, we had combined cash and cash equivalents of $3.1 million, compared with combined cash and cash equivalents of $28.3 million as of December 31, 2021. We had negative cash flows from operations of $15.4 million for the fiscal year 2021, ~~President Biden signed~~and negative cash flows from operations of $72.7 million for the ~~American Rescue Plan Act (“ARPA”)~~nine months ended September 30, 2022.

Global Campus incurred higher costs in their fourth quarter (the Company's second quarter) than the Company previously budgeted. During June 2022, Global Campus advised the Company that Global Campus received a notice from the Department of ~~2021. The ARPA includes~~Defense that they were placed on probation which would preclude them from enrolling new military students, pending completion of a ~~major change~~comprehensive review. Additionally, there were communications from the Department of Defense to current Global Campus students cautioning them to consider leaving the University. We were advised by Global Campus that this matter should be resolved in a timely manner, however, it became apparent over the following weeks that these prolonged actions were having a negative impact on the University's revenue and therefore a negative impact on the Company's financial outlook. As a result, the Company entered into a new agreement with Global Campus, effective on July 31, 2022, which allowed Global Campus to acquire the business previously used to provide services to Global Campus. For additional information, see Note 1, “Nature of Business.”

We will continue to support the continued growth and expansion of our Fullstack subsidiary and simultaneously explore strategic alternatives for that business. Our ability to continue as a going concern is dependent on us generating cash from operations and availability to other funding sources. Due to our negative cash flows from operations and projected future negative cash flows from operations, substantial doubt exists about our ability to continue as a going concern for the twelve months following the issuance of these condensed consolidated financial statements. Management plans to cover any shortfall from operations by selling the Fullstack subsidiary or obtaining debt financing. However, there can be no assurance the Company will be successful in the ~~90/10 revenue test that provides for-profit institutions and their students access~~efforts to sell Fullstack.

Risks Related to the ~~FSA programs. Under~~Dissolution

We cannot assure you as to the ARPA, 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 behalfamount of ~~a student~~distributions, if any, to be ~~used~~made to ~~attend such institution” or collectively “federal education assistance funds.” The 90/10 provision is subject~~our stockholders under our Plan of Dissolution.

On October 25, 2022, the Company held a Special Meeting of Stockholders (the “Special Meeting”) at which votes were cast to ~~negotiated rulemaking after October 2021, with an earliest effective date on or after January 1, 2023. In October 2021,~~approve the ~~Department announced its in intention~~voluntary liquidation and dissolution of the Company pursuant to ~~develop new 90/10 regulations~~the Plan of Dissolution (the “Plan of Dissolution”) which authorizes the Company to liquidate and dissolve the Company in accordance with the ~~ARPA. Other negotiated rulemaking topics include borrower defense~~Plan of Dissolution.

We intend to ~~repayment for students, gainful employment requirements,~~use the dissolution process under Delaware law to liquidate our remaining assets, settle claims and, ~~change in ownership~~if available, make liquidating distributions of cash or other property to our stockholders. However, our dissolution and ~~change in control~~the liquidation of ~~institutions~~our remaining assets will be subject to uncertainties, and it is possible that there will be no additional liquidating distribution made to our stockholders.

We intend to rely on the “safe harbor” procedures under Sections 280 and 281(a) of ~~higher education~~the DGCL to, among other ~~topics. If these changes were~~things, obtain an order from the Delaware Court of Chancery establishing the amount and form of security for pending claims for which the Company is a party, contingent or unmatured contract claims for which the holder declined the Company’s offer of a security, and unknown claims that, based on facts known to ~~go into effect, it~~the Company, are likely to arise or become known within five years filing of the Certificate of Dissolution (or such longer period of time, not to exceed ten years, as the Delaware Court of Chancery may determine) (the “Court Order”), and pay or make reasonable provision for our uncontested known claims and expenses and establish reserves for other claims as required by the Court Order and the DGCL. We expect to distribute all of our remaining assets in excess of the amount to be used by us to pay claims and fund the reserves required by the Court Order and pay our operating expenses through the completion of the dissolution and winding-up process to our stockholders. The Court Order will reflect the Delaware Court of Chancery’s own determination as to the amount and form of security reasonably likely to be sufficient to provide compensation for all known, contingent and potential future claims against us. There can be no assurances that the Delaware Court of Chancery will not require us to withhold additional amounts in excess of the amounts that we believe are sufficient to satisfy our potential claims and liabilities. Accordingly, stockholders may not receive any distributions of our remaining assets for a substantial period of time.

In addition, there are numerous factors that could ~~adversely~~ impact the amount of the reserves to be determined by the Court Order, and consequently the amount of cash initially available for distribution, if any, to our ~~university partners,~~stockholders following the effective time of the Dissolution, including without limitation:

•whether any potential liabilities are resolved prior to the filing of the Certificate of Dissolution;

•whether any claim is resolved or barred pursuant to Section 280 of the DGCL;

•unanticipated costs relating to the defense, satisfaction or settlement of existing or future lawsuits or other claims threatened against us;

•whether unforeseen claims are asserted against us, in which case we would have to defend or resolve such claims and/or be required to establish additional reserves to provide for such claims; and

•whether any of the expenses incurred in ~~turn could adversely affect~~the winding-up process, including expenses of required personnel and other operating expenses (including legal, accounting and other professional fees) necessary to dissolve and liquidate the Company, are more or less than our ~~revenues or~~estimates.

Further, the amount of any distributable proceeds and our ability to ~~grow.~~make distributions to our stockholders depends on our ability to execute our monetization strategy, which is subject to significant risks and uncertainties.

In addition, as we wind down, we will continue to incur expenses from operations, such as operating costs, salaries, rental payments, directors’ and officers’ insurance, payroll and local taxes; and other legal, accounting and financial advisory fees, which will reduce any amounts available for distribution to our stockholders.

As a result of these and other factors, we cannot assure you as to any amounts to be distributed to our stockholders in dissolution.

Liquidating distributions to stockholders could be substantially reduced and/or delayed due to uncertainty regarding the resolution of certain potential tax claims, litigation matters and other unresolved contingent liabilities of the Company.

Whether any remaining assets or cash of the Company can be used to make liquidating distributions to stockholders would depend on whether claims for which we have set aside reserves are resolved or satisfied at amounts less than such reserves and whether a need has arisen to establish additional reserves. We cannot assure stockholders that our liabilities can be resolved for less than the amounts we have reserved, or that unknown liabilities that have not been accounted for will not arise. As a result, we may continue to hold back funds and delay additional liquidating distributions to stockholders. It is important for us to retain sufficient funds to pay the expenses and liabilities actually owed to our creditors, because under the DGCL, if the we fail to do so, each stockholder could be held liable for the repayment to creditors, out of the amounts previously distributed to such stockholder in the Dissolution from us or from any liquidating trust or trusts, of such stockholder’s pro rata share of such excess (up to the full amount actually received by such stockholder in Dissolution).

We cannot predict the timing of the distributions to stockholders.

Under the DGCL, before a dissolved corporation may make any distribution to its stockholders, it must pay or make reasonable provision to pay all of its claims and obligations, including all contingent, conditional or unmatured contractual claims known to the corporation. The precise amount and timing of any distributions to our stockholders will depend on and could be delayed or diminished due to many factors, including without limitation:

•whether a claim is resolved for more than the amount of reserve established for such claim pursuant to the Court Order;

•whether we are unable to resolve claims with creditors or other third parties, or if such resolutions take longer than expected;

•whether a creditor or other third party seeks an injunction against the making of additional distributions to stockholders on the basis that the amounts to be distributed are needed to satisfy our liabilities or other obligations to the extent not previously reserved for;

•whether due to new facts and developments, a new claim, as the Board reasonably determines, requires additional funds to be reserved for its satisfaction; and

•whether the expenses we incur in the winding-up process, including expenses of personnel required and other operating expenses (including legal, accounting and other professional fees), necessary to dissolve and liquidate the Company are more than anticipated.

As a result of these and other factors, it might take significant time to resolve these matters, and as a result we are unable to predict the timing of distributions, if any are made, to our stockholders.

The Dissolution pursuant to the Plan of Dissolution may be disrupted and adversely impacted by the effects of natural disasters, political crises, public health crises, and other events outside of our control.

Natural disasters, such as adverse weather, fires, earthquakes, power shortages and outages, political crises, such as terrorism, war, political instability, or other conflict, criminal activities, public health crises, such as COVID-19 and disease epidemics and pandemics, and other disruptions or events outside of our control could negatively affect our operations and the operations of entities in which we invest in. Any of these events may cause a delay in our targeted timing to file the Certificate of Dissolution with the Secretary of State of the State of Delaware. In addition, as discussed below under the heading “Risks Related to the Dissolution - The amount of cash available to distribute to our stockholders depends on our ability to successfully execute our monetization strategy and dispose of all or substantially all of our assets”, COVID-19 may materially impact the amount of cash or value of other non-cash assets available to distribute to our stockholders, including the amounts we may receive upon the disposition of all or substantially all of our assets.

The amount of cash available to distribute to our stockholders depends on our ability to successfully execute our monetization strategy and dispose of all or substantially all of our assets.

Our efforts to enhance stockholder value through our monetization strategy may not be successful, which would significantly reduce, or eliminate, the cash or value of other non-cash assets available for distribution to our stockholders. We cannot assure you that our efforts to enhance stockholder value through the conduct of our monetization strategy will succeed. There will be risks associated with any potential transactions, including whether we will attract potential acquirers for the Company, its assets or its remaining operating subsidiary or business, and whether offers made by such potential acquirors, if any, will be at valuations that we deem reasonable. Moreover, we are not able to predict how long it will take to implement our monetization strategy, the delay of which may impact the timing of the Dissolution. The timing and terms of any transaction in furtherance of our monetization strategy will depend on a variety of factors, many of which are beyond our control. A delay in, or failure to complete, any such transaction could have a material effect on our stock price and the amount of any potential distributions to our stockholders.

In addition, our ability to successfully complete our monetization strategy could be materially negatively affected by economic conditions generally, both in the United States and elsewhere around the world, including public health risks such as COVID-19. We are exploring and evaluating potential transactions, the success or timing of which may be impacted by further COVID-19 variants and/or a general economic slowdown or recession. In order to successfully monetize our assets, we must

identify and complete one or more transactions with third parties. Even if we are able to identify potential transactions in furtherance of our monetization strategy, such buyers may be operationally constrained or unable to locate financing on attractive terms or at all, which risk may be heightened due to the uncertainty of COVID-19 and its impact and/or a general economic slowdown or recession. Additionally, if financing is unavailable to potential buyers of our Company or assets, or if potential buyers are unwilling to engage in various transactions due to the uncertainty in the market or rising interest rates, our ability to complete such acquisition would be significantly impaired.

Any negative impact on such third parties due to any of the foregoing events could cause costly delays and have a material adverse effect on our ability to return value to our stockholders, including our ability to realize full value from a sale or other disposition of our assets as part of our monetization strategy. Any such negative impacts could also reduce the amount of cash or other property we are able to distribute to our shareholders.

Our stockholders may be liable to our creditors for part or all of the amount received from us in our liquidating distributions if reserves are inadequate.

If the Dissolution becomes effective, we may establish a contingency reserve designed to satisfy any additional claims and obligations that may arise. Any contingency reserve may not be adequate to cover all of our claims and obligations. Under the DGCL, if we fail to create an adequate contingency reserve for payment of our expenses, claims and obligations, each stockholder could be held liable for payment to our creditors for claims brought during the three-year period after we file the Certificate of Dissolution with the Secretary of State, up to the lesser of (i) such stockholder’s pro rata share of amounts owed to creditors in excess of the contingency reserve and (ii) the amounts previously received by such stockholder in dissolution from us and from any liquidating trust or trusts. Accordingly, in such event, a stockholder could be required to return part or all of the distributions previously made to such stockholder in Dissolution, and a stockholder could receive nothing from us under the Plan of Dissolution. Moreover, if a stockholder has paid taxes on amounts previously received, a repayment of all or a portion of such amounts received could result in a situation in which such repayment does not result in a commensurate refund of such taxes paid.

The directors and officers of the Company will continue to receive benefits from the Company following the Dissolution.

Subsequent to the shareholder meeting held on October 25, 2022, it was determined that the directors of the company would no longer receive compensation for their roles on the board. Following the effective date of the Dissolution, we will continue to indemnify each of our current and former directors and officers to the extent permitted under the DGCL and the Company’s certificate of incorporation, bylaws and agreements as in effect at the time of the filing of the Certificate of Dissolution. In addition, we intend to maintain directors’ and officers’ insurance coverage throughout the wind down period.

We will continue to incur the expenses of complying with public company reporting requirements.

We have an obligation to continue to comply with the applicable reporting requirements of the Exchange Act, even though compliance with such reporting requirements is economically burdensome. In order to curtail expenses, we currently intend, after the filing of the Certificate of Dissolution, to seek relief from the SEC from the reporting requirements under the Exchange Act. However, the SEC may not grant any such relief, in which case we would be required to continue to bear the expense of being a public reporting company.

Stockholders may not be able to recognize a loss for U.S. federal income tax purposes until they receive a final distribution from us.

Distributions made pursuant to the Plan of Dissolution are intended to be treated as received by a stockholder in exchange for the stockholder’s shares of our common stock. Accordingly, the amount of any such distribution allocable to a block of shares of our common stock owned by a U.S. stockholder will reduce the stockholder’s tax basis in such shares, but not below zero. Any excess amount allocable to such shares will be taxable as capital gain. Such gain generally will be taxable as long-term capital gain if the shares have been held for more than one year. Any tax basis remaining in a share of our common stock following the final liquidating distribution by the Company will be treated as a capital loss. The deductibility of capital losses is subject to limitations. You should consult your tax advisor as to the particular tax consequences of the Dissolution to you, including the applicability of any U.S. federal, state, local and non-U.S. tax laws.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

3739

Item 6. Exhibits


Exhibit						Description


31.1						Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2						Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1						Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by ~~Christopher L. Spohn, Office of the~~Randy J. Hendricks, Chief Executive Officer, and Kevin Royal, Chief Financial Officer.
101						The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2021,~~2022, filed with the SEC on ~~October 27, 2021,~~November 21, 2022, 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)

3840

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

~~October 27, 2021~~November 21, 2022			/s/ KEVIN ROYAL
			Kevin Royal Chief Financial Officer (Principal financial officer and duly authorized to sign on behalf of the registrant)

3941


	Three Months Ended September 30, 2020				Nine Months Ended September 30, 2020
Costs and expenses:	As Reported		As Reclassified		As Reported		As Reclassified
Technology and academic services	$	—	$	19,084	$	—	$	54,821
Counseling services and support	—		24,670		—		71,529
Marketing and communication	—		23,274��		—		70,017
Instructional costs and services	44,929		—		136,184		—
Admissions advisory and marketing	41,620		—		122,155		—
General and administrative	14,779		11,437		46,765		36,405
University-related expenses	—		22,863		—		72,332

Restructuring and impairment expense	184		184		3,430		3,430
Total costs and expenses	$	101,512	$	101,512	$	308,534	$	308,534


	As of September 30, 2021
	Level 1		Level 2		Level 3		Total
Mutual funds	$	1,322	$	—	$	—	$	1,322


	As of December 31, 2020
	Level 1		Level 2		Level 3		Total
Mutual funds	$	1,515	$	—	$	—	$	1,515


	As of September 30, 2021		As of December 31, 2020
University Partners accounts receivable	$	49	$	45
Zovio Growth accounts receivable	8,490		7,159
Total accounts receivable	$	8,539	$	7,204

University Partners deferred revenue	$	—	$	10
Zovio Growth deferred revenue	14,025		8,080
Total deferred revenue	$	14,025	$	8,090


	Three Months Ended September 30,				Nine Months Ended September 30,
Consolidated Statement of Income Data:	2021		2020		2021		2020
Revenue and other revenue	$	62,226	$	102,166	$	208,271	$	303,978
Operating income (loss)	$	(5,091)	$	654	$	(18,917)	$	(4,556)


	Payments Due by Period
(In thousands)	Total		2021		2022		2023		2024		2025		Thereafter
Operating lease obligations	$	55,358	$	1,754	$	7,009	$	5,316	$	5,022	$	4,759	$	31,498
Other contractual obligations	16,639		3,859		7,270		4,912		598		—		—
Uncertain tax positions	28		—		28		—		—		—		—
Total	$	72,025	$	5,613	$	14,307	$	10,228	$	5,620	$	4,759	$	31,498