BRIDGEPOINT EDUCATION, INC.ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
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.
8.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.
9. Lease Obligations
Operating Leases
The Company leases certainvarious office and classroom facilities and office equipment under non-cancelable lease arrangementswith terms that expire at various dates through 2023.2033. 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 contain certain renewal options. Rent expense under non-cancelablewere classified as operating leases for the period ended September 30, 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.
The Company, through Fullstack, has a lease arrangementsin New York for classrooms and office space and recorded a right-of-use asset of $13.4 million as of September 30, 2022 in exchange for lease obligations. The Company had previously begun to 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 this facility for a termination fee of $0.6 million. There is accounted for onan additional payment of $0.7 million, which is payable upon the sale of Fullstack. There is no impairment indicator as of September 30, 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 straight-line basisremaining commitment to lease of 5 months and totaled $11.3 million and $17.4 millionnet lease payments of $0.2 million. Sublease income for the nine months ended September 30, 20172022 and 2016,2021 was $0.4 million and $1.9 million, respectively. Rent expense in certain periods also includes the restructuringThe Company’s sublease does not include any options to extend or for early termination and impairment charges recorded and therefore, may differ significantly from cash payments. For additional information, refer to Note 3, “Restructuring and Impairment Charges.”
do not contain any residual value guarantees or restrictive covenants. The following table summarizes the future minimum rental payments under non-cancelablesublease was classified as an operating lease arrangements in effect atfor the period ended September 30, 2017 (in thousands):2022.
|
| | | | |
| Year Ended December 31, | | |
| Remainder of 2017 | $ | 9,080 |
|
| 2018 | 31,400 |
|
| 2019 | 20,833 |
|
| 2020 | 9,504 |
|
| 2021 | 5,112 |
|
| Thereafter | 1,949 |
|
| Total minimum payments | $ | 77,878 |
|
9. 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, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Numerator: | | | | | | | |
| Net loss | $ | (3,455) | | | $ | (5,219) | | | $ | (15,565) | | | $ | (18,745) | |
| Denominator: | | | | | | | |
| Weighted average number of common shares outstanding | 34,211 | | | 33,427 | | | 33,968 | | | 33,182 | |
| Effect of dilutive options and stock units | — | | | — | | | — | | | — | |
| | | | | | | |
| Diluted weighted average number of common shares outstanding | 34,211 | | | 33,427 | | | 33,968 | | | 33,182 | |
| Loss per share: | | | | | | | |
| Basic | $ | (0.10) | | | $ | (0.16) | | | $ | (0.46) | | | $ | (0.56) | |
| Diluted | $ | (0.10) | | | $ | (0.16) | | | $ | (0.46) | | | $ | (0.56) | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Numerator: | | | | | | | |
| Net income (loss) | $ | 39 |
| | $ | (9,477 | ) | | $ | 16,222 |
| | $ | (16,251 | ) |
| Denominator: | | | | | | | |
| Weighted average number of common shares outstanding | 29,123 |
| | 46,315 |
| | 33,333 |
| | 46,180 |
|
| Effect of dilutive options and stock units | 548 |
| | — |
| | 860 |
| | — |
|
| Diluted weighted average number of common shares outstanding | 29,671 |
| | 46,315 |
| | 34,193 |
| | 46,180 |
|
| Income (loss) per share: | | | | | | | |
| Basic | $ | 0.00 |
| | $ | (0.20 | ) | | $ | 0.49 |
| | $ | (0.35 | ) |
| Diluted | $ | 0.00 |
| | $ | (0.20 | ) | | $ | 0.47 |
| | $ | (0.35 | ) |
BRIDGEPOINT EDUCATION, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
During periods in which the Company reports a net loss, basic and diluted loss per share are the same. The following table sets forth the number of stock options RSUs and PSUs,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, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Stock options | 693 | | | 1,279 | | | 869 | | | 1,391 | |
| Stock units | 3,244 | | | 972 | | | 3,068 | | | 1,170 | |
|
| | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Stock options | 2,625 |
| | 4,258 |
| | 1,858 |
| | 4,468 |
|
| RSUs and PSUs | 19 |
| | 588 |
| | 9 |
| | 991 |
|
During the nine months ended September 30, 2017, the Company repurchased approximately 18.1 million shares of the Company’s common stock for an aggregate purchase price of approximately $150.0 million.
10.11. Stock-Based Compensation
The Company recorded $1.1 million and $1.4 milliona reversal of $139 thousand of stock-based compensation expense for the three months ended September 30, 20172022, primarily relating to the forfeitures of RSU's and 2016, respectively,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. The related income tax expense was $36 thousand for the three months ended September 30, 2022, and $2.8the related income tax benefit was $0.2 million for the three months ended September 30, 2021.
The Company recorded a reversal of $1.3 million for the nine months ended September 30, 2022, primarily relating to the forfeitures of RSU's and $5.7also 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, 2017 and 2016, respectively.
2021. The related income tax benefitexpense was $0.4 million and $0.5 million for the three months endedSeptember 30, 2017 and 2016, respectively, and $1.1 million and $2.1$0.3 million for the nine months ended September 30, 20172022, and 2016, 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, 2017,2022, the Company granted 0.51.0 million RSUs at a weighted average grant date fair value of $10.48$0.84 and 0.40.6 million RSUs vested. During the nine months ended September 30, 2016,2021, the Company granted 0.51.1 million RSUs at a weighted average grant date fair value of $10.18$3.31, and 0.51.0 million RSUs vested.
During the nine months ended September 30, 2017 and 2016,2022, the Company did notgranted 0.4 million performance-based PSUs at a weighted average grant anydate fair value of $0.90, and 0.2 million 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 each of the nine months ended September 30, 2017,2022, and 2021, the Company granted 0.3 milliondid not grant any stock options at a grant date fair value of $4.76 and 0.5 millionno stock options were exercised. During the nine months ended
ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of September 30, 2016, the Company granted 0.4 million stock options at a grant date fair value of $3.28 and 0.2 million stock options were exercised.
As of September 30, 2017, there was2022, unrecognized compensation cost of $6.8was $3.1 million related to unvested stock options, RSUs and PSUs.
11.12. Income Taxes
The Company uses the asset-liability method to account for taxes. Under this method, deferred income tax assets and liabilities result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the condensed consolidated financial statements that will result in income and deductions in future years.
The Company recognizes deferred tax assets if realization of such assets is more-likely-than-not. In order to make this determination, the Company evaluates a number of factors including the ability to generate future taxable income from reversing taxable temporary differences, forecasts of financial and taxable income or loss, and the ability to carryback certain operating losses to refund taxes paid in prior years. The cumulative loss incurred over the three-year period ended September 30, 20172022 constituted significant negative objective evidence against the Company’s ability to realize a benefit from its federal deferred tax assets. Such objective evidence limited the ability of the Company to consider in its evaluation certain subjective evidence such as the Company’s projections for future growth. On the basis of its evaluation, the Company determined that its deferred tax assets were not more-likely-than-not to be realized and that a valuation allowance against its deferred tax assets should continue to be maintained as of September 30, 2017.
The Company determines the interim income tax provision by applying the estimated effective income tax rate expected to be applicable for the full fiscal year to income before income taxes for the period. In determining the full year estimate, the
BRIDGEPOINT EDUCATION, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Company does not include the estimated impact of unusual and/or infrequent items, which may cause significant variations in the customary relationship between income tax expense and income before income taxes.2022.
The Company’s current effective income tax rate that has been applied to normal, recurring operations for the nine months ended September 30, 20172022, after discrete items, was 1.8%(0.8)%. The Company’s actual effective income tax rate was (4.6)% for the nine months ended
As of both September 30, 2017, which includes a discrete tax benefit associated with return to provision adjustments related prior years as well as a discrete tax expense associated with unrecognized tax benefit for the nine months ended September 30, 2017.
At September 30, 2017,2022, and December 31, 2021, the Company had $18.8 million ofdid not have any gross unrecognized tax benefits, of which $12.3 million, would impact the effective income tax rate if recognized. At December 31, 2016, the Company had $20.2 million of gross unrecognized tax benefits, of which $13.2 million, would impact the effective income tax rate if recognized. It is reasonably possible that the total amount of the unrecognized tax benefit could change during the next 12 months. Although the Company cannot predict the timing of resolution with taxing authorities, if any, the Company believes it is reasonably possible that the total of the unrecognized tax benefits could change in the next twelve months due to settlement with tax authorities or expiration of the applicable statute of limitations. These unrecognized tax benefits primarily relate to apportionment of on-line service revenues for corporate income tax purposes.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 ourthe Company’s historical income tax provisions and accruals.
The Company is currently under Internal Revenue Service audit examinationshas analyzed filing positions in all of the Company’s incomefederal and payroll tax returns for the years 2013 through 2015.
The Company’sstate jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The 2017 tax year and forward are being audited by the California Franchise Tax Boardopen to examination for the years 2008 through 2015. The Company was notified by the Franchise Tax Board in March 2017 that they are continuing to challenge the Company’s filing position. The Company continues to work toward resolution, and based on all available information the Company has accrued for any uncertain tax positions that may be addressed in the audit.
The Company’sfederal income tax returnspurposes, and the 2015 tax year and forward are being audited by the Oregon Department of Revenueopen to examination for the years 2012 through 2014. In January 2017, the Oregon Department of Revenue issued Notices of Deficiencies, which were appealed by the Company.state income tax purposes.
12.
13. Regulatory
The Company is subject to extensive regulation by federal and state governmental agencies and accrediting bodies. In particular, the Higher Education Act of 1965, as amended (the “Higher(“Higher Education Act”), and the regulations promulgated thereunder by the U.S. Department of Education (the “Department”) 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.Act (“Title IV programs”).
Ashford University is regionally accredited by WASC Senior College and University CommissionFollowing 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
On December 1, 2020, the parties to the Purchase Agreement entered into Amendment No. 1 to the Purchase Agreement (“WSCUC”Amendment”) andpursuant to which, among other things, the University of Arizona and Global Campus waived the Rockies is regionally accreditedclosing condition regarding issuance of a pre-acquisition review notice by the Higher Learning Commission (“HLC”).
U.S. Department of Education Open Program Review(“Department”). Under the terms of Ashford University
On July 7, 2016, Ashford Universitythe Purchase Agreement, as amended, the Closing was notified bysubject 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 that an off-site program review had been scheduledmakes a determination on the institution’s request for recertification from the Department following the change of control, including whether to assess Ashford’s administration of theimpose or place other conditions or restrictions. To be eligible to participate in Title IV programs, in which it participates. The program review commenced on July 25, 2016an institution must comply with the Higher Education Act and covered students identified in the 2009-2012 calendar year data previously providedregulations thereunder that are administered by Ashford University to the Department in response to a request for information received from the Multi-Regional and Foreign School Participation Division of the Department’s Office of Federal Student Aid (the “FSA”) on December 10, 2015, but may be expanded if appropriate.
On December 9, 2016, the Department informed Ashford that it intended to continue the program review on-site at Ashford. The on-site program review commenced on January 23, 2017 and initially covers the 2015-2016 and 2016-2017 award years, but may be expanded if appropriate.
Department.
BRIDGEPOINT EDUCATION, INC.ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Program Participation Agreement for Ashford University
On October 20, 2017, Ashford University received an updated Program Participation Agreement from the U.S. Department of Education (“Department”). Based on the updated Program Participation Agreement, Ashford University is provisionally certified to participate in Federal Student Financial Aid Programs until December 31, 2018. Ashford University was previously eligible to participate on a month-to-month basis while its reapplication for certification was pending with the Department. As a result of the updated Program Participation Agreement, Ashford University’s pending educational programs have been approved and Ashford University is required to submit its reapplication for continued certification by September 30, 2018.
WSCUC Accreditation of Ashford University
In July 2013, WSCUC granted Initial Accreditation to Ashford University for five years, until July 15, 2018. In December 2013, Ashford effected its transition to WSCUC accreditation and designated its San Diego, California facilities as its main campus and its Clinton, Iowa campus as an additional location. As part of a continuing monitoring process, Ashford hosted a visiting team from WSCUC in a special visit in April 2015. In July 2015, Ashford received an Action Letter from WSCUC outlining the findings arising out of its visiting team's special visit. The Action Letter stated that the WSCUC visiting team found evidence that Ashford continues to make progress in all six areas recommended by WSCUC in 2013. As part of its institutional review process, WSCUC will conduct a comprehensive review of Ashford scheduled to commence with an off-site review in spring 2018, followed by an on-site review in fall 2018.
Substantial Misrepresentation
The Higher Education Act prohibits an institution participating in Title IV programs from engaging in substantial misrepresentation regarding the nature of its educational programs, its financial charges or the employability of its graduates. Under the Department’s rules, a “misrepresentation” is any false, erroneous or misleading statement an institution, one of its representatives or any ineligible institution, organization or person with whom the institution has an agreement to provide educational programs or marketing, advertising, recruiting, or admissions services makes directly or indirectly to a student, prospective student or any member of the public, or to an accrediting agency, a state agency or the Department. The Department’s rules define a “substantial misrepresentation” as any misrepresentation on which the person to whom it was made could reasonably be expected to rely, or has reasonably relied, to that person’s detriment. For-profit educational institutions are also subject to the general deceptive practices jurisdiction of the Federal Trade Commission and the Consumer Financial Protection Bureau (the “CFPB”).
On December 10, 2015, Ashford University received a request for information from the Multi-Regional and Foreign School Participation Division of the FSA for (i) advertising and marketing materials provided to prospective students regarding the transferability of certain credits, (ii) documents produced in response to the August 10, 2015 Civil Investigative Demand from the CFPB related to the CFPB’s investigation to determine whether for-profit postsecondary education companies or other unnamed persons have engaged in or are engaging in unlawful acts or practices related to the advertising, marketing or origination of private student loans, (iii) certain documents produced in response to subpoenas and interrogatories issued by the Attorney General of the State of California (the “CA Attorney General”) and (iv) records created between 2009 and 2012 related to the disbursement of certain Title IV funds. The FSA is reviewing representations made by Ashford University to potential and enrolled students, and has asked the Company and Ashford to assist in its assessment of Ashford’s compliance with the prohibition on substantial misrepresentations. The Company and Ashford University are cooperating fully with the FSA with a view toward demonstrating the compliant nature of their practices.
As discussed above,1, 2022, the Department is currently conducting a program review to assess Ashford University’s administration ofnotified the Title IV programs in which it participates, which covers in part students identified in the 2009-2012 calendar year data provided by Ashford to the Department in response to the FSA’s December 10, 2015 request for information.
If the Department determines that one of the Company’s institutions has engaged in substantial misrepresentation, the Department may (i) revoke the institution’s program participation agreement, if the institution is provisionally certified, (ii) impose limitations on the institution’s participation in Title IV programs, if the institution is provisionally certified, (iii) deny participation applications made on behalf of the institution or (iv) initiate proceedings to fine the institution or to limit, suspend
BRIDGEPOINT EDUCATION, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
or terminate the participation of the institution in Title IV programs. Because Ashford University is provisionally certified, if the Department determined that Ashford has engaged in substantial misrepresentation, the Department may take the actions set forth in clauses (i) and (ii) above in addition to any other actions taken by the Department.
GI Bill Benefits
On May 20, 2016, the Company received a letter from the Iowa Department of Education (the “Iowa DOE”) indicating that as a result of the planned closureStatement of Ashford University’s residential campusDecisions issued in Clinton, Iowa, the Iowa State Approving Agency (the “ISAA”) would no longer continueCalifornia 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
During the fiscal year 2018, the Company recorded an expense of $1.5 million, in relation to approve Ashford’s programsthe 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 GI Bill benefits after June 30, 2016, and recommending Ashford seek approval through the State Approving AgencyUniversity of jurisdiction for any locationthe Rockies. This letter confirmed that meetswith the definitionexception of a “main campus” or “branch campus”. Ashfordthe 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 beganof Rockies did not close but rather merged with the process of applying for approval throughUniversity. The briefing on the State Approving Agency in California (“CSAAVE”),appeal is complete and the Company subsequently disclosed that on June 20, 2016 it received a second letter from the Iowa DOE indicating that the Iowa DOE had issued a stay of the ISAA’s withdrawal of approval of Ashford’s programs for GI Bill benefits effective immediately until the earlier of (i) 90 days from June 20, 2016 or (ii) the date on which CSAAVE completed its review and issuedis awaiting a decision regarding the approval of Ashford in California. Ashford received communication from CSAAVE indicating that additional information and documentation would be required before Ashford’s application could be considered for CSAAVE approval. Ashford subsequently withdrew the CSAAVE application and continued working with the U.S. Department of Veterans Affairs (“VA”), the Iowa DOE and the ISAA to obtain continued approval of Ashford’s programs for GI Bill benefits and to prevent any disruption of educational benefits to Ashford’s veteran students.
On September 15, 2016, in response to a Petition for Declaratory and Injunctive Relief (the “Petition”) filed by Ashford University, the Iowa District Court for Polk County entered a written order (the “Order”) staying the Iowa DOE’s announced intention to withdraw the approval of Ashford as a GI Bill eligible institution until the entry of a final and appealable order and judgment in the action. On June 23, 2017, the Iowa District Court held a hearing on Ashford’s Petition and on July 17, 2017, the Court ruled in favor of the Iowa DOE and denied the petition. Ashford filed a motion for reconsideration of this ruling, which was denied on August 17, 2017. On August 23, 2017, Ashford filed a Petition to Vacate or Modify the Iowa District Court’s July 17, 2017 ruling, based on material evidence, newly discovered, which could not with reasonable diligence have been previously discovered by Ashford (the “Petition to Vacate”). The Petition to Vacate is pending. On September 18, 2017, Ashford posted an appeal bond, which stays this matter pending resolution of Ashford’s appeal, and as a result, Ashford’s approval was not withdrawn, and Ashford’s programs remain approved for GI Bill purposes. The Assistant Attorney General handling this matter on behalf of the Iowa DOE also advised Ashford that the Iowa DOE would take no action pending the post-ruling motions and appeal. On October 12, 2017, the Iowa District Court judge that issued the July 17, 2017 ruling filed a Disclosure Statement revealing family ties to the Iowa Attorney General’s Office, and following a motion by Ashford for recusal, the judge recused herself from further proceedings concerning the Petition to Vacate on October 20, 2017. On October 24, 2017, Ashford moved to vacate the July 17, 2017 ruling and all other material orders entered by the judge, or in the alternative, for a limited remand of this matter. This motion is pending. On July 6, 2017, Ashford University received approval from the Arizona State Approving Agency to provide GI Bill benefits to its students. On September 13, 2017, the VA accepted the Arizona State Approving Agency’s approval, subject to Ashford's continued compliance with the approval requirements, which was the final step needed for Ashford University to continue to certify eligible students for GI Bill benefits.administrative law judge.
BRIDGEPOINT EDUCATION, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
13.14. Commitments and Contingencies
Litigation
From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. When the Company becomes aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. In accordance with GAAP, the Company records loss contingencies in its financial statements only for matters in which losses are probable and can be reasonably estimated. Where a range of loss can be reasonably estimated, the best estimate within that range should be accrued. If no estimate is better than another, the Company records the minimum estimated liability in the range. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the nature of the specific claim if the likelihood of a potential loss is reasonably possible and the amount involved could be material. The Company continuously assesses the potential liability related to the Company’s pending litigation and revises its estimates when additional information becomes available. Below is a list of material legal proceedings to which the Company or its subsidiaries is a party.
Compliance AuditEducation Dynamics Lawsuit
On September 15, 2022, the Company was served with a Complaint filed by Education Dynamics (a former vendor). In the Department’s OfficeComplaint, Education Dynamics asserts claims against the Company for breach of contract and unjust enrichment, alleging that the Inspector General
In January 2011, Ashford University received a final audit report fromCompany has failed to pay Education Dynamics for services previously rendered in the Department’s Officeamount of Inspector General (the “OIG”) regarding the compliance audit commenced in May 2008 and covering the period July 1, 2006 through June 30, 2007.$0.8 million. The audit covered Ashford University’s administration of Title IV program funds, including compliance with regulations governing institutional and student eligibility, awards and disbursements of Title IV program funds, verification of awards and returns of unearned funds during that period, and compensation of financial aid and recruiting personnel during the period May 10, 2005 through June 30, 2009.
The final audit report contained audit findings, in each case for the period July 1, 2006 through June 30, 2007, which are applicable to award year 2006-2007. Each finding was accompanied by one or more recommendations to the FSA. Ashford University provided the FSA a detailedCompany has not filed its response to the OIG’s final audit report in February 2011. In June 2011, in connection with two of the six findings, the FSA requested that Ashford University conduct a file review of the return to Title IV fund calculations for all Title IV recipients who withdrew from distance education programs during the 2006-2007 award year. The institution cooperated with the request and supplied the information within the time frame required.
Ashford University received a final audit determination on February 22, 2017 from the Department that was dated February 14, 2017. The determination maintained that Ashford University owed the Department $0.3 million as a result of incorrect refund calculations and refunds that were not made or were made late, and that Ashford ensure it properly enforces its policies and is in compliance with regulations related to disbursement of Title IV funds. The Department closed or required no further action on all other prior OIG findings. Ashford University made the required payment to the Department during the first quarter of 2017 and the matter is now concluded.
New York Attorney General Investigation of Bridgepoint Education, Inc.
In May 2011, the Company received from the Attorney General of the State of New York (the “NY Attorney General”) a subpoena relating to the NY Attorney General’s investigation of whether the Company and its academic institutions have complied with certain New York state consumer protection, securities and finance laws. Pursuant to the subpoena, the NY Attorney General requested from the Company and its academic institutions documents and detailed information for the time period March 17, 2005 to present. The Company cooperated with this request and cannot predict the eventual scope, duration or outcome of the investigation at this time.
North Carolina Attorney General Investigation of Ashford University
In September 2011, Ashford University received from the Attorney General of the State of North Carolina (the “NC Attorney General”) an Investigative Demand relating to the NC Attorney General’s investigation of whether the university’s business practices complied with North Carolina consumer protection laws. Pursuant to the Investigative Demand, the NC Attorney General requested from Ashford University documents and detailed information for the time period January 1, 2008 to present. Ashford University cooperated with this request and cannot predict the eventual scope, duration or outcome of the investigation at this time.
BRIDGEPOINT EDUCATION, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
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 (the “CA(“CA Attorney General”) an Investigative Subpoena relating to the CA Attorney General’s investigation of for-profit educational institutions. Pursuant to the Investigative Subpoena, the CA Attorney General requested documents and detailed information for the time period March 1, 2009 to present. On July 24, 2013, the CA Attorney General filed a petition to enforce certain categoriesdate 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.Subpoena. On January 13, 2014 and June 19, 2014, the Company received additional Investigative Subpoenas from the CA Attorney General, each requesting additional documents and information for the time period March 1, 2009 through the currenteach such date.
Representatives from the Company met with representativesand 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 continue to discussalso discussed a potential resolution involving injunctive relief, other non-monetary remedies and a payment to the CA Attorney General. TheGeneral and in the third quarter of 2016, the Company currently estimates that a reasonable range of loss for this matter is between $8.0 million and $20.0 million. The Company has accruedrecorded an expense of $8.0 million related to the cost of resolution ofresolving this matter.
Massachusetts Attorney General Investigation of Bridgepoint Education, Inc. and Ashford University
On July 21, 2014, the Company and Ashford University received from the Attorney General of the State of Massachusetts (the “MA Attorney General”) a Civil Investigative Demand (the “MA CID”) relating to the MA Attorney General’s investigation of for-profit educational institutions and whether the university’s business practices complied with Massachusetts consumer protection laws. Pursuant to the MA CID, the MA Attorney General has requested from the Company and Ashford University documents and information for the time period January 1, 2006 to present. The Company is cooperating with the investigation and cannot predict the eventual scope, duration or outcome of the investigation at this time.
Consumer Financial Protection Bureau Subpoena of Bridgepoint Education, Inc. and Ashford University
On August 10, 2015, the Company and Ashford University received from the CFPB Civil Investigative Demands related to the CFPB’s investigation to determine whether for-profit postsecondary education companies or other unnamed persons have engaged in or are engaging in unlawful acts or practices related to the advertising, marketing or origination of private student loans. The Company and Ashford University provided documents and other information to the CFPB and the CFPB attended several meetings with representatives from the Company and the CA Attorney General’s office to discuss the status of both investigations, additional information requests, and specific concerns related to possible unfair business practices in connection with the Company’s recruitment of students and debt collection practices.
All of the parties met again in the spring of 2016 to discuss the status of the investigations and explore a potential joint resolution involving injunctive relief, other non-monetary remedies and a payment to the CA Attorney General and the CFPB. On September 7, 2016, the Company consented to the issuance of a Consent Order (the “Consent Order”) by the CFPB in full resolution of the CFPB’s allegations stemming from the Civil Investigative Demands. The Consent Order includes payment by the Company of $8.0 million in penalties to the CFPB and approximately $5.0 million to be used for restitution to students who incurred debt from student loans made by the Company’s institutions, and forgiveness by the Company of approximately $18.6 million of outstanding institutional loan debt. The Consent Order also outlines certain compliance actions the Company must undertake, including that the Company must require certain students to utilize the CFPB’s Electronic Financial Impact Platform before enrolling in one of the Company’s institutions, the Company must implement a compliance plan designed to ensure its institutional loan program complies with the terms of the Consent Order, and the Company must submit reports describing its compliance with the Consent Order to the CFPB at designated times and upon request by the CFPB. The institutional loan programs were discontinued by the Company’s institutions before the CFPB investigation began. As of the end of the first quarter of 2017, the amount accrued related to this matter was paid in full.
BRIDGEPOINT EDUCATION, INC.ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
DepartmentThe parties did not reach a resolution and on November 29, 2017, the CA Attorney General filed suit against the Company. The Company vigorously defended this case and denied the allegations made by the CA Attorney General that it ever deliberately misled its students, falsely advertised its programs, or in any way were not fully accurate in its statements to investors. A trial took place in the fourth quarter of Justice Civil Investigative Demand2021.
On JulyMarch 7, 2016, the Company received from the U.S. Department of Justice (the “DOJ”) a Civil Investigative Demand (the “DOJ CID”) related to the DOJ's investigation concerning allegations that the Company may have misstated Title IV refund revenue or overstated revenue associated with private secondary loan programs and thereby misrepresented its compliance with the 90/10 rule of the Higher Education Act. Pursuant to the DOJ CID, the DOJ has requested from the Company documents and information for fiscal years 2011-2014. The Company is cooperating with the DOJ and cannot predict the eventual scope, duration or outcome of the investigation at this time. The Company has not accrued any liability associated with this action.
Securities Class Action
Zamir v. Bridgepoint Education, Inc., et al.
On February 24, 2015, a securities class action complaint was filed in the U.S. District Court for the Southern District of California by Nelda Zamir naming the Company, Andrew Clark and Daniel Devine as defendants. The complaint asserts violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, claiming that the defendants made false and materially misleading statements and failed to disclose material adverse facts regarding the Company’s business, operations and prospects, specifically regarding the Company’s improper application of revenue recognition methodology to assess collectability of funds owed by students. The complaint asserts a putative class period stemming from August 7, 2012 to May 30, 2014 and seeks unspecified monetary relief, interest and attorneys’ fees. On July 15, 2015, the Court granted plaintiff’s motion for appointment as lead plaintiff and for appointment of lead counsel.
On September 18, 2015, the plaintiff filed a substantially similar amended complaint that asserts a putative class period stemming from March 12, 2013 to May 30, 2014. The amended complaint also names Patrick Hackett, Adarsh Sarma, Warburg Pincus & Co., Warburg Pincus LLC, Warburg Pincus Partners LLC, and Warburg Pincus Private Equity VIII, L.P. as additional defendants. On November 24, 2015, all defendants filed motions to dismiss. On July 25, 2016, the Court granted the motions to dismiss and granted plaintiff leave to file an amended complaint within 30 days. Plaintiffs subsequently filed a second amended complaint and the Company filed a second motion to dismiss on October 24, 2016, which was granted by the Court with leave to amend. Plaintiffs filed a third amended complaint on April 19, 2017 and the defendants filed a third motion to dismiss, which is currently pending with the court. The outcome of this legal proceeding is uncertain at this point because of the many questions of fact and law that may arise. The Company has not accrued any liability associated with this action.
Shareholder Derivative Actions
In re Bridgepoint, Inc. Shareholder Derivative Action
On July 24, 2012, a shareholder derivative complaint was filed in California Superior Court by Alonzo Martinez. In the complaint, the plaintiff asserts a derivative claim on the Company’s behalf against certain of its current and former officers and directors. The complaint is captioned Martinez v. Clark, et al. and generally alleges that the individual defendants breached their fiduciary duties of candor, good faith and loyalty, wasted corporate assets and were unjustly enriched. The lawsuit seeks unspecified monetary relief and disgorgement on behalf of the Company, as well as other equitable relief and attorneys’ fees.On September 28, 2012, a substantially similar shareholder derivative complaint was filed in California Superior Court by David Adolph-Laroche. In the complaint, the plaintiff asserts a derivative claim on the Company’s behalf against certain of its current and former officers and directors. The complaint is captioned Adolph-Laroche v. Clark, et al. and generally alleges that the individual defendants breached their fiduciary duties of candor, good faith and loyalty, wasted corporate assets and were unjustly enriched.
On October 11, 2012, the Adolph-Laroche action was consolidated with the Martinez action and the case is now captioned In re Bridgepoint, Inc. Shareholder Derivative Action. A consolidated complaint was filed on December 18, 2012 and the defendants filed a motion to stay the case while the underlying securities class action is pending. The motion was granted by the Court on April 11, 2013. A status conference was held on October 10, 2013, during which the Court ordered the stay continued for the duration of discovery in the underlying securities class action, but permitted the plaintiff to receive copies of any discovery responses served in the underlying securities class action. The stay was lifted following the settlement of the
BRIDGEPOINT EDUCATION, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
underlying securities class action and all defendants filed demurrers on October 3, 2016, which were granted with leave to amend on October 6, 2017.
Reardon v. Clark, et al.
On March 18, 2015, a shareholder derivative complaint was filed in2022, the Superior Court of the State of California, County of San Diego (the “Court”), issued a Statement of Decision regarding the Lawsuit in San Diego. The complaint asserts derivative claims onfavor of the Company’s behalf against certainCA Attorney General. In the Statement of its current and former officers and directors. The complaint is captioned Reardon v. Clark, et al. and generally alleges that the individual defendants breached their fiduciary duties of candor, good faith and loyalty, wasted corporate assets and were unjustly enriched. The lawsuit seeks unspecified monetary relief and disgorgement, as well as other equitable relief and attorneys’ fees. Pursuant to a stipulation among the parties, on May 27, 2015,Decision, the Court ordered the case stayed during discoveryCompany to pay $22.4 million in statutory penalties. As a result, the Company accrued an additional $14.3 million in the underlying Zamir securities class action, but permittedfourth quarter of 2021, for a total of $22.4 million accrued as of December 31, 2021. The Court denied the plaintiffCA Attorney General’s demands for restitution and injunctive relief finding no evidence postdating 2017 that would necessitate an injunction. The Company 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 appeal on the 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 interest. This payment did not waive the Company’s right to receive copies ofappeal the judgment.
In connection with the Transaction closed on July 31, 2022, the Company granted UAGC the right to any discovery conducted in the underlying Zamir securities class action.
Larson v. Hackett, et al.
On January 19, 2017, a shareholder derivative complaint was filed in the Superior Court ofrefund achieved from the State of California as a result of the appeal. For additional information, see Note 1, “Nature of Business.”
15. Segment Information
The Company operates in San Diego.two reportable segments: University Partners and Zovio Growth. The complaint asserts derivative claimsCompany reports segment information based upon the management approach, and how the chief operating decision maker views the operations.
Until the 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.
Fullstack and TutorMe, through sale date, are aggregated into a single reportable segment, called Zovio Growth. The aggregation of the Fullstack and TutorMe operating segments was based on their uniform customer bases and methods of services provided as required by ASC 280-10-50-12. Based on these same quantitative tests, the Zovio operating segment is a separate reportable segment, called University Partners. The segment reporting did not have any impact on the Company'sdetermination of reporting units used to assess impairment under ASC 350, Intangibles - Goodwill and Other.
The 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. On July 31, 2022, the Company entered into the New Asset Purchase Agreement, pursuant to which Zovio sold to Global Campus all of the remaining assets related to the UAGC Services Business. For additional information, see Note 1, “Nature of Business.”
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, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Revenue by segment | | | | | | | |
| University Partners | $ | 13,675 | | $ | 55,185 | | $ | 108,792 | | $ | 187,118 |
| Zovio Growth | 8,870 | | 7,041 | | 26,766 | | 21,153 |
| Total revenue and other revenue | $ | 22,545 | | $ | 62,226 | | $ | 135,558 | | $ | 208,271 |
| | | | | | | |
| Segment profitability | | | | | | | |
| University Partners | $ | (2,806) | | $ | (408) | | $ | (2,393) | | $ | (6,499) |
| Zovio Growth | (367) | | (2,648) | | (4,942) | | (6,121) |
| 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, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Loss before income taxes | $ | (3,425) | | | $ | (5,160) | | | $ | (15,449) | | | $ | (18,827) | |
| Adjustments: | | | | | | | |
| Other expense, net | (295) | | | 69 | | | 3,656 | | | (90) | |
| Depreciation and amortization expense | 547 | | | 2,035 | | | 4,458 | | | 6,297 | |
| | | | | | | |
| Total segment profitability | $ | (3,173) | | | $ | (3,056) | | | $ | (7,335) | | | $ | (12,620) | |
During both the three months ended and nine months ended September 30, 2022 and September 30, 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, 2022 or 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, 2022 | | As of
December 31, 2021 |
| University Partners | $ | 9,325 | | | $ | 86,628 | |
| Zovio Growth | 49,231 | | | 62,406 | |
| Total assets | $ | 58,556 | | | $ | 149,034 | |
ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company’s accounts receivable in each segment are as follows (in thousands): | | | | | | | | | | | |
| 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, 2022 and December 31, 2021, the University Partners accounts receivable balance was immaterial. As of each September 30, 2022 and December 31, 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, against certainrather than university clients.
The Company’s deferred revenue and student deposit amounts as of its currentSeptember 30, 2022 and former officersDecember 31, 2021, respectively, are fully attributable to the Zovio Growth segment. For additional information on deferred revenue and directors. student deposits, see Note 3, “Revenue, Other Revenue and Deferred Revenue.”
The complaintCompany’s goodwill amounts as of September 30, 2022 and December 31, 2021, respectively, are fully attributable to the Zovio Growth segment. For additional information on goodwill, see Note 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 captioned Larson v. Hackett, et al. to be structured as a sale of membership interest and generally allegesthe 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 individual defendants breached their fiduciary duties of candor, good faithclosing bid price for its common stock had been below $1.00 for 30 consecutive business days and loyalty, wasted corporate assets and were unjustly enriched.that the Company therefore is not in compliance with the minimum bid price requirement for continued inclusion on The lawsuit seeks unspecified monetary relief and disgorgement, as well as other equitable relief and attorneys’ fees. The parties have not yet responded to the complaint, but will most likely seek to have the case dismissed or stayed during discovery in the underlying Zamir securities class action.
Nieder v. Ashford University, LLC
On October 4, 2016, Dustin Nieder filed a purported class action against Ashford University in the Superior CourtNasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2). In light of the State of California in San Diego. The complaint is captioned Dustin Nieder v. Ashford University, LLC and generally alleges various wage and hour claims under California law for failure to pay overtime, failure to pay minimum wages and failure to provide rest and meal breaks. The lawsuit seeks back pay,Company's pending dissolution as authorized by the cost of benefits, penalties and interestCompany's stockholders on behalf of the putative class members, as well as other equitable relief and attorneys' fees. The Company filed an answer denying the claims and the case is currently in discovery. The outcome of this legal proceeding is uncertain at this point because of the many questions of fact and law that may arise. Based on information available to the Company at present, it cannot reasonably estimate a range of loss for this action. Accordingly,October 25, 2022, the Company has elected not accrued any liability associatedto 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 this action.
the landlord of the Company's facility in New York. For additional information on the lease termination, see Note 9, “Lease Obligations.”
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations
The following Management’s Discussions and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto included in Part I, Item 1 of this report. For additional information regarding our financial condition and results of operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016 (the “Form2021 (“Form 10-K”), filed with the Securities and Exchange Commission (the “SEC”(“SEC”) on March 7, 2017,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 “Bridgepoint,“Zovio,” “the Company,” “we,” “us” and “our” refer to Bridgepoint Education, Inc.,Zovio Inc, a Delaware corporation, and its wholly owned and indirect subsidiaries.
Forward-Looking Statements
This Quarterly Report on Form 10-Q (“Form 10-Q”) contains “forward-looking statements”forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange(“Exchange Act”). All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements may include, among others, statements regarding future events, future financial and operating results, strategies, expectations, the competitive environment, regulation and the availability of financial resources, including, without limitation, statements regarding:
Ashford University’s•our ability to continue to operate an accredited institution subject toliquidate and dissolve the requirementsCompany in accordance with the Plan of the State of California, Department of Consumer Affairs, Bureau for Private Postsecondary Education;Dissolution;
•our ability to comply with the extensive and continually evolving regulatory framework, applicable to us and our institutions,such partners, including but not limited to Title IV of the Higher Education Act of 1965, as amended (the “Higher(“Higher Education Act”), and its implementing regulations, the gainful employment rules and regulations, the “defensedefense to repayment”repayment regulations, state authorization regulations, state laws and regulatory requirements, and accrediting agency requirements;
•projections, predictions and expectations regarding our business, financial position, results of operations, and liquidity and capital resources, and enrollment trends attrends;
•the ability of our institutions;
expectations regarding the effect of the closure of Ashford University’s residential campus in Clinton, Iowa on our business;
our abilityuniversity partners to obtain continued approval of Ashford’s programs for GI Bill benefits through the Iowa State Approving Agency (the “ISAA”), or the Arizona State Approving Agency, and to prevent any disruption of educational benefits to Ashford’sactive duty military students or to veteran students;
new •the outcome of various lawsuits, claims and legal proceedings;
•the demand for our services and the collectability of our receivables;
•initiatives focused on student success, retention and academic quality;
changes in our student fee structure;
•expectations regarding the adequacy of our cash and cash equivalents and other sources of liquidity for ongoing operations;operations, planned capital expenditures and working capital requirements;
•expectations regarding investment in onlinecapital expenditures;
•the impact of accounting standards on our financial statements;
•the reasonableness and other advertising and capital expenditures;acceptance of our tax accruals;
•the growth of our anticipated seasonal fluctuations in results of operations;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. Forward-lookingachieved, if at all. Forward-
looking statements are based on information available at the time such statements are made and the current good faith beliefs,
expectations and assumptions of management regarding future events. Such statements are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. For a discussion of some of these risks and uncertainties, see Part II, Item 1A, “Risk Factors” as well as the discussion of such risks and uncertainties contained in our other filings with the SEC, including the Form 10-K.
All forward-looking statements in this report are qualified in their entirety by the cautionary statements included in this report,herein, and you should not place undue reliance on any forward-looking statements. These forward-looking statements speak only as of the date of this report. We assume no obligation to update or revise any forward-looking statements contained herein to reflect actual results or any changes in our assumptions or expectations or any other factors affecting such forward-looking statements, except to the extent required by applicable securities laws. If we do update or revise one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
Overview
We areZovio Inc is an education technology services company that partners with higher education institutions and employers to deliver innovative, personalized solutions and learning experiences to help learners and leaders achieve their 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 providerremaining term of postsecondary education services through our regionally accredited academic institutions, Ashford University®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 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.
In April 2019, the RockiesSM. Ashford University offers associate’s, bachelor’s and master’s programs, and UniversityCompany had acquired Fullstack Academy, Inc (“Fullstack”) which is a wholly-owned subsidiary of the Rockies offers master’sCompany. Fullstack is an innovative web development school offering immersive technology bootcamps. Zovio will continue to support the continued growth and doctoral programs. Asexpansion 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 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 30, 2017, our academic institutions offered22, 2022, holders of approximately 1,140 courses53% shares of Common Stock were represented, either by attending the Special Meeting or by proxy, and approximately 80 degree programs. 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.
Factors Affecting Comparability
We are also focusedbelieve the transactions noted above have had, or can be expected to have, a significant effect on providing innovative technologies to enhance the student experience and support faculty and student engagement.comparability of recent or future results of operations.
Key operating dataFinancial Metrics
In evaluating our operating performance, our management focuses in large part on our revenue and operating income (loss) and period-end enrollment at our academic institutions.. The following table, which should be read in conjunction with our condensed consolidated financial statements included elsewhere in Part I, Item I of this report, presents our key operating data for each of the periods presented (in thousands, except for enrollment data)thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Consolidated Statement of Income (Loss) Data: | | | | | |
| Revenue | $ | 119,367 |
| | $ | 136,583 |
| | $ | 373,438 |
| | $ | 407,555 |
|
| Operating income (loss) | $ | (1,503 | ) | | $ | (8,823 | ) | | $ | 14,339 |
| | $ | (21,765 | ) |
| | | | | | | | |
| Consolidated Other Data: | | | | | | | |
Period-end enrollment (1) | | | | | | | |
| Online | 42,065 |
| | 47,733 |
| | 42,065 |
| | 47,733 |
|
| Campus-based | 67 |
| | 98 |
| | 67 |
| | 98 |
|
| Total | 42,132 |
| | 47,831 |
| | 42,132 |
| | 47,831 |
|
| |
(1) | We define period-end enrollment as the number of active studentsRevenue was primarily derived from our service agreement with our university partners. Up through July 31, 2022, the Company had a Services Agreement with Global Campus whereby the Company provided certain educational technology and support services. The amounts earned from the Services Agreement are denoted as revenue on the last day of the financial reporting period. A student is considered active if the student has attended a class within the prior 15 days or is on an institutionally-approved break not to exceed 45 days, unless the student has graduated or provided notice of withdrawal. |
Key enrollment trends
Enrollment at our academic institutions decreased 11.9% to 42,132 students at September 30, 2017 as compared to 47,831 students at September 30, 2016. Enrollment decreased by 6.6% since the end of the preceding fiscal year, from 45,087 students at December 31, 2016 to 42,132 students at September 30, 2017.
We believe the decline in enrollment over the past few years is partially attributable to a general weakening in the overall industry due to increased regulatory scrutiny, and has also been caused by the initiatives our institutions have put in place to help ensure student preparedness, raise academic quality and improve student outcomes. In addition, we believe total enrollment has also been impacted by the recent changes in our marketing strategy. This change in our marketing strategy
reflects a shift in our advertising mix in an effort to attract prospective students who have a higher probability of being academically successful, while concurrently making meaningful improvements to the efficiency of our advertising, admissions and marketing spend.
We continue to focus our efforts on stabilizing and restarting enrollment growth. We recently received approval from the Department of Education on 16 new programs and are looking forward to offering these programs to students. We plan to launch a number of these new program offerings throughout 2018 and beyond to help achieve this goal relating to restarting new enrollment growth and over time growing total enrollments. One other area in which we continue to experience positive enrollment trends is within our Educational Partnerships programs with various employers. These corporate partnership programs provide companies with the opportunity to allow their employees to pursue and complete a college degree without incurring any student debt. Enrollments through these programs remains relatively small compared to our total enrollment but are growing as a percentage year over year.
Trends and uncertainties regarding revenue and continuing operations
Restructuring and impairment charges
We have implemented various restructuring plans to better align our resources with our business strategy and the related charges are recorded in the restructuring and impairment charges line item on our condensed consolidated statements of income (loss). The restructuringCompany also had a transition services agreement with Global Campus whereby the Company was providing certain temporary transition services (the “Transition Services Agreement”). The amounts earned from the Transition Services Agreement are denoted as other revenue on the condensed consolidated statements of income (loss).
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.
Legal expense is comprised of charges related to the estimated amounts to resolve the previously disclosed investigation for the California Attorney General.
Restructuring and impairment expenses 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) severance costs related to headcount reductions (ii) estimated lease costs related to facilities vacated or consolidated, (iii) charges related tomade in connection with restructuring plans.
Gain on transactions, net, represents both the gain on the sale of TutorMe.com subsidiary (“TutorMe”) which was sold in May 2022, partially offset by the loss on transaction for the write-off of certain fixed assetsthe net asset adjustment due from Global Campus.
Trends and assets abandoned and (iv) student transfer agreement costs for Ashford University ground-based students. As required by GAAP, the estimated lease losses include sublease assumptions. Changes to these estimates could have a material impact on the Company’s condensed consolidated financial statements. For informationuncertainties regarding the restructuring and impairment charges recorded, refer to Note 3, “Restructuring and Impairment Charges” to our condensed consolidated financial statements included in Part I, Item 1 of this report.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, and the ability to carryback certain operating losses to refund taxes paid in prior years.loss. The cumulative loss incurred over the three-year period ended September 30, 20172022 constituted significant negative objective evidence against our ability to realize a benefit from our federal deferred tax assets. Such objective evidence limited our ability to consider in our evaluation of other subjective evidence such as our projections for future growth. On the basis ofBased 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, 2017.
Recent Regulatory Developments
Negotiated Rulemaking and Other Executive Action
On December 16, 2016, the Department released final regulations to clarify state authorization requirements for postsecondary institutions offering distance education that participate in federal student loan programs, as required by the Higher Education Act. Among other things, the final regulations (i) require institutions offering distance education or correspondence courses to be authorized by each state in which they enroll students, if such authorization is required by the state, (ii) require institutions to document the state process for resolving student complaints regarding distance education programs, (iii) require public and individualized disclosures to enrolled and prospective students in distance education programs, including disclosures regarding adverse actions taken against the institution, the institution’s refund policies and whether each of the institution’s programs meet applicable state licensure or certification requirements, and (iv) require institutions to explain to students the consequences of moving to a state where the school is not authorized, which could include loss of eligibility for federal student aid. The final regulations recognize authorization through participation in a state authorization reciprocity agreement, as long as the agreement does not prevent a state from enforcing its own consumer laws. The final regulations are scheduled to take effect on July 1, 2018.
Gainful Employment
On October 31, 2014, the Department published gainful employment regulations impacting programs required to prepare
graduates for gainful employment in a recognized occupation. Almost all academic programs offered by Title IV-participating private sector institutions of higher education must prepare students for gainful employment in a recognized occupation. The gainful employment regulations became effective July 1, 2015, with certain disclosure requirements that became effective in early 2017. The gainful employment regulations have a framework with three components:
Certification: Institutions must certify that each of their gainful employment programs meet state and federal licensure, certification and accreditation requirements.
Accountability Measures: To maintain Title IV eligibility, gainful employment programs will be required to meet minimum standards for the debt burden versus the earnings of their graduates.
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◦ | Pass: Programs whose graduates have annual loan payments less than 8% of total earnings or less than 20% of discretionary earnings. |
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◦ | Zone: Programs whose graduates have annual loan payments between 8% and 12% of total earnings or between 20% and 30% of discretionary earnings. |
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◦ | Fail: Programs whose graduates have annual loan payments greater than 12% of total earnings and greater than 30% of discretionary earnings. |
Programs that fail in two out of any three consecutive years or are in the Zone for four consecutive years will be disqualified from participation in the Title IV programs.
Transparency: Institutions will be required to make public disclosures regarding the performance and outcomes of their gainful employment programs. The disclosures will include information such as costs, earnings, debt and completion rates.
The accountability measures will typically weigh a calculated debt burden from graduates who completed their studies three and four years prior to the measuring academic year and earnings from the most recent calendar year prior to the conclusion of the measuring academic year. Thus for the 2014-2015 academic year, the two-year cohort will include graduates from the 2010-2011 and 2011-2012 academic years and earnings for these graduates from calendar year 2014.
On October 20, 2016, we received draft debt-to-earnings rates and certain underlying data from the Department for the first gainful employment measurement year, and on January 8, 2017 we received our institutions’ final debt-to-earnings rates for the first gainful employment measurement year. Based on the final rates, none of our programs were determined to fail. Two of our current programs, including the Associate of Arts in Early Childhood Education and the Bachelor of Arts in Early Childhood Education/Administration, were determined to be in the zone. At September 30, 2017, approximately 3% of our institutions' students were enrolled in the Associate of Arts in Early Childhood Education and approximately 8% of our institutions' students were enrolled in the Bachelor of Arts in Early Childhood Education/Administration. During the three months ended September 30, 2017, we derived revenue of approximately $3.8 million from the Associate of Arts in Early Childhood Education and approximately $11.3 million from the Bachelor of Arts in Early Childhood Education/Administration. The Company is currently working to determine what, if any, measures it might implement in order to bring these programs into the “pass” category.
The fact that none of our programs were determined to fail and only two of our current programs were determined to be in the zone is significant given the framework discussed above, as a program would be disqualified from participation in Title IV programs only if it were to fail for two out of three consecutive years, or either fail or be in the zone for three out of four consecutive years. The gainful employment regulations contemplate a transition period in the first several years to afford institutions the opportunity to make changes to their programs and retain Title IV eligibility.
On June 15, 2017, the Department announced its intention to conduct additional negotiated rulemaking on certain issues related to gainful employment. On June 30, 2017, the Department also granted institutions until July 1, 2018 to comply with disclosure provisions related to promotional materials and prospective students, and extended the deadline for all programs to file alternate earnings appeals to a soon to be announced date. The Department did not change a July 1, 2017 deadline requiring institutions to provide a completed disclosure template, or a link thereto, on gainful employment program Web pages and our schools have complied with this requirement.
We continue to review the information provided by the Department to understand the potential impact of the gainful employment regulations on our programs, and we will continue to evaluate options related to new programs or adjustments to current programs that could help mitigate the potential adverse consequences of the regulations.
Defense to Repayment
On June 8, 2015, the Department announced processes that will be established to assist students who may have been the victims of fraud in gaining relief under the “defense to repayment” provisions of the William D. Ford Federal Direct Loan Program regulations. Rarely used in the past, the defense to repayment provisions currently in effect allow a student to assert as a defense against repayment of federal direct loans any commission of fraud or other violation of applicable state law by the school related to such loans or the educational services for which the loans were provided.
On June 16, 2016, the Department published proposed regulations regarding borrower defense to repayment and related matters, and on October 28, 2016, the Department published its final regulations with an effective date of July 1, 2017. The new regulations allow a borrower to assert a defense to repayment on the basis of a substantial misrepresentation, any other misrepresentation in cases where certain other factors are present, a breach of contract or a favorable nondefault contested judgment against a school for its act or omission relating to the making of the borrower’s loan or the provision of educational services for which the loan was provided. In addition, the financial responsibility standards contained in the new regulations establish the conditions or events that trigger the requirement for an institution to provide the Department with financial protection in the form of a letter of credit or other security against potential institutional liabilities. Triggering conditions or events include, among others, certain state, federal or accrediting agency actions or investigations, and in the case of publicly traded companies, receipt of certain warnings from the SEC or the applicable stock exchange, or the failure to timely file a required annual or quarterly report with the SEC. The new regulations also prohibit schools from requiring that students agree to settle future disputes through arbitration.
On June 14, 2017, the Department announced a postponement of the defense to repayment regulations and its intention to resubmit the regulations through the negotiated rulemaking process. The Department announced an additional postponement on October 24, 2017. While rulemaking occurs, the Department will continue to process claims under the current borrower defense rules.
Cohort Default Rate
For each federal fiscal year, the Department calculates a rate of student defaults over a three-year measuring period for each educational institution, which is known as a “cohort default rate.” An institution may lose its eligibility to participate in the Direct Loan Program and the Federal Pell Grant Program if, for each of the three most recent federal fiscal years, 30% or more of its students who became subject to a repayment obligation in that federal fiscal year defaulted on such obligation by the end of the following federal fiscal year.
The most recent official three-year cohort default rates for Ashford University for the 2014, 2013 and 2012 federal fiscal years were 14.9%, 14.5% and 15.3%, respectively. The most recent official three-year cohort default rates for University of the Rockies for the 2014, 2013 and 2012 federal fiscal years were 5.5%, 3.8% and 4.3%, respectively.
For additional information regarding the regulatory environment and related risks, see Part I, Item 1, “Business” and Part I, Item 1A, “Risk Factors” of the Form 10-K.
Seasonality
Our operations are generally subject to seasonal trends. We generally experience a seasonal increase in new enrollments during the first quarter of each year, subsequent to holiday break, as well as during the third quarter each year, when most other colleges and universities begin their fall semesters. While we enroll students throughout the year, our fourth quarter revenue generally is lower than other quarters due to the holiday break in December, with an increase in the first quarter of each year.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 endedSeptember 30, 2017.
The Iran Threat Reduction and Syria Human Rights Act of 2012
During the three months ended September 30, 2017, Santander Asset Management Investment Holdings Limited (“SAMIH”) engaged in certain activities that are subject to disclosure pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 and Section 13(r) of the Exchange Act. These activities are disclosed in Exhibit 99.1 to this report. Affiliates of Warburg Pincus, LLC (i) beneficially own more than 10% of our outstanding common stock and are members of our board of directors and (ii) beneficially own more than 10% of the equity interests of and have the right to designate members of the board of directors of SAMIH. We will be required to separately file with the SEC, concurrently with this report, a notice that such activities have been disclosed in this report, which notice must also contain the information required by Section 13(r) of the Exchange Act.2022.
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Results of Operations
The following table sets forth our condensed consolidated statements of income (loss) data as a percentage of revenue for each of the periods indicated:
|
| | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Costs and expenses: | | | | | | | |
| Instructional costs and services | 48.4 |
| | 46.9 |
| | 48.7 |
| | 49.1 |
|
| Admissions advisory and marketing | 36.6 |
| | 38.5 |
| | 35.4 |
| | 38.5 |
|
| General and administrative | 9.6 |
| | 8.5 |
| | 9.9 |
| | 9.0 |
|
| Legal settlement expense | — |
| | 12.3 |
| | — |
| | 8.1 |
|
| Restructuring and impairment charges | 6.7 |
| | 0.3 |
| | 2.1 |
| | 0.7 |
|
| Total costs and expenses | 101.3 |
| | 106.5 |
| | 96.1 |
| | 105.4 |
|
| Operating income (loss) | (1.3 | ) | | (6.5 | ) | | 3.9 |
| | (5.4 | ) |
| Other income, net | 0.3 |
| | 0.4 |
| | 0.3 |
| | 0.5 |
|
| Income (loss) before income taxes | (1.0 | ) | | (6.1 | ) | | 4.2 |
| | (4.9 | ) |
| Income tax expense (benefit) | (1.0 | ) | | 0.9 |
| | (0.2 | ) | | (0.9 | ) |
| Net income (loss) | — | % | | (7.0 | )% | | 4.4 | % | | (4.0 | )% |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Revenue and other revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Costs and expenses: | | | | | | | |
| Technology and academic services | 44.7 | | | 26.5 | | | 33.8 | | | 25.7 | |
| Counseling services and support | 28.7 | | | 32.8 | | | 33.6 | | | 33.1 | |
| Marketing and communication | 34.5 | | | 33.9 | | | 35.4 | | | 33.0 | |
| General and administrative | 24.6 | | | 14.5 | | | 15.1 | | | 15.9 | |
| | | | | | | |
| Legal expense | — | | | — | | | 0.7 | | | — | |
| Restructuring and impairment expense | — | | | 0.5 | | | 26.5 | | | 1.3 | |
| Gain on transactions, net | (16.0) | | | — | | | (36.4) | | | — | |
| Total costs and expenses | 116.5 | | | 108.2 | | | 108.7 | | | 109.0 | |
| Operating loss | (16.5) | | | (8.2) | | | (8.7) | | | (9.0) | |
| Other income (expense), net | 1.3 | | | (0.1) | | | (2.7) | | | 0.0 | |
| Loss before income taxes | (15.2) | | | (8.3) | | | (11.4) | | | (9.0) | |
| Income tax expense (benefit) | 0.1 | | | 0.1 | | | 0.1 | | | (0.0) | |
| Net loss | (15.3) | % | | (8.4) | % | | (11.5) | % | | (9.0) | % |
Three Months Ended September 30, 20172022 Compared to Three Months Ended September 30, 20162021
Revenue. OurTotal revenue and other revenue. Total revenue and other revenue for the three months ended September 30, 20172022 and 2021, was $119.4$22.5 million and $62.2 million, respectively, a decrease of $39.7 million, or 63.8%. For the three months ended September 30, 2022 and 2021, University Partners segment revenue was $13.7 million and $55.2 million, respectively, representing a decrease of $17.275.2%, and the Zovio Growth segment revenue was $8.9 million or 12.6%,and $7.0 million, respectively, representing an increase of 26.0%.
The decrease in revenue in the University Partners segment of $41.5 million between periods was primarily due to the sale of that business to Global Campus on July 31, 2022, as comparedwell as the decrease in service revenue due to revenue of $136.6 milliona decrease in average weekly enrollment for the three months ended September 30, 2016. 2022, as compared to the same period ended September 30, 2021. A component of the University Partners segment revenue includes the other revenue generated from the Transition Services Agreement of approximately $0.5 million.
The decreaseincrease in revenue in the Zovio Growth segment between periods was primarily due to a decrease of 11.3%the growth in average weekly enrollment at ournew customer contracts within the Fullstack subsidiary.
Technology and academic institutions, from 47,657 students for the three months ended September 30, 2016 to 42,280 students for the three months ended September 30, 2017. Tuition revenue decreased by approximately $15.4 million, which is primarily due to the decrease in average weekly enrollment, partially offset by the approximate 2.0% tuition increase on April 1, 2017. The decrease in revenue between periods was also due to higher scholarships for the period of $0.6 million, as well as a decrease in net revenue generated from course digital materials of approximately $0.5 million.
Instructional costsservices. Technology and services. Our instructional costs andacademic services for the three months ended September 30, 20172022 and 2021, were $57.8$10.1 million representingand $16.5 million, respectively, a decrease of $6.3$6.4 million, or 9.9%, as compared to instructional38.9%. 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 $64.1$1.0 million and instructional supplies of $0.8 million. Technology and academic services, as a percentage of revenue, for the three months ended September 30, 2016. In addition to the decline2022 and 2021, were 44.7% and 26.5%, respectively, an increase of 18.2%. This increase primarily included increases in enrollment, specific decreases between periods primarily include decreases in direct compensation (including financial aid processing fees)employee costs of $2.2 million, corporate support8.6%, instructional supplies and other technology and academic services expenses of $2.1 million, instructor fees of $1.0 million,5.3%, license fees of $1.0 million,2.2%, amortization of intangible assets of 1.2% and facilities costscost of $0.8 million, partially offset by an increase in information technology costs of $0.6 million. Instructional costs0.9%.
Counseling services and support. Counseling services increased as a percentage of revenue to 48.4%and support for the three months ended September 30, 2017,2022 and 2021, were $6.5 million and $20.4 million, respectively, a decrease of $13.9 million, or 68.3%. Specific factors contributing to the overall decrease between periods were primarily due to decreases in employee and related allocated costs of $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 compared to 46.9%a percentage of revenue, for the three months ended September 30, 2016. The increase2022 and 2021, were 28.7% and 32.8%, respectively, a decrease of 1.5% as a percentage of revenue4.1%. This decrease primarily included increasesdecreases in information technologyemployee costs of 1.0%3.1%, depreciation of 1.6%, and bad debtfacility costs of 0.7%. As a percentage1.4%, partially offset by an increase in facility costs of revenue, bad debt expense was 6.3%2.5%.
Marketing and communication. Marketing and communication for the three months ended September 30, 2017, compared to 5.6% for three months ended September 30, 2016.
Admissions advisory2022 and marketing. Our admissions advisory2021, were $7.8 million and marketing expenses for the three months ended September 30, 2017 were $43.7$21.1 million, representingrespectively, a decrease of $8.9$13.3 million, or 17.0%, as compared to admissions advisory and marketing expenses of $52.6 million for the three months ended September 30, 2016. As a result of our change in marketing strategy and the shift in advertising mix, specific63.1%. Specific factors contributing to the overall decrease between periods were decreases in compensationadvertising of $5.4$10.4 million, advertisingemployee costs of $2.4$2.2 million, and facilities costslicense fees of $1.7$0.4 million partially offset by an increase in corporate supportand consulting and outside services of $1.1$0.2 million. AsMarketing and communication, as a percentage of revenue, our admissions advisory and marketing expenses decreased to 36.6% for the three months ended September 30, 2017, as compared to 38.5% for the three months ended
September 30, 2016. The decrease2022 and 2021, were 34.5% and 33.9%, respectively, an increase of 1.9% as a percentage of revenue0.6%. This increase was primarily due to increases in consulting and outside services of 1.8% and advertising of 0.3%, partially offset by a decrease in compensationemployee costs of 2.0%1.6%.
General and administrative. Our general General and administrative expenses for the three months ended September 30, 20172022 and 2021, were $11.4$5.5 million representingand $9.0 million, respectively, a decrease of $0.2$3.5 million, or 1.4%, as compared to general and administrative expenses of $11.6 million for the three months ended September 30, 2016.38.6%. The decrease between periods was primarily due to decreases in facilitiesemployee costs of $0.5$2.0 million, and administrative compensationlegal and professional fees of $0.5$1.9 million, partially offset by increasesan increase in corporate support services of $1.0 million. Ourother general and administrative expenses increasedof $0.3 million. General and administrative expenses, as a percentage of revenue, to 9.6% for the three months ended September 30, 2017, as compared to 8.5% for the three months ended September 30, 2016. The2022 and 2021, were 24.6% and 14.5%, respectively, an increase of 1.1% as a percentage of revenue10.1%. This increase was primarily due to increases in other general and administrative compensationexpenses of 0.5%3.9%, employee costs of 4.4%, and insurance of 2.2%, partially offset by professional fees of 0.4%0.6%.
Legal settlementRestructuring and impairment expense. For the three months ended September 30, 2017, we had2022, there were no expenses relatingcharges to legal settlements. The expenses for the cost of resolution of the previously disclosed civil investigative demands from the Consumer Financial Protection Bureau and the Attorney General of the State of California for the three months ended September 30, 2016 were $16.8 million.
Restructuring and impairment charges. We had $8.0 million restructuring and impairment charges for the three months ended September 30, 2017, comprised primarily of revised estimates of lease charges as well as severance costs resulting from a reduction in force.expense. For the three months ended September 30, 2016,2021, we recorded a charge of $0.3 million to restructuring and impairment charges were $0.4 million, comprised primarilyexpense.
Gain on transactions, net. For the three months ended September 30, 2022, we recorded a net gain on the sale transactions of severance costs resulting from a reduction$3.6 million. Included in force.this amount was the true-up for the sale transaction of Global Campus on July 31, 2022.
Other income,expense, net. Our other income, Other expense, net, was $0.4$0.3 million for the three months ended September 30, 20172022 and $0.6other expense, net was $0.1 million for the three months ended September 30, 2016.2021, respectively. The decrease between periods wasamounts recognized during the three months ended September 30, 2022 relate primarily due to decreasedthe write-off of the unamortized financing fees for the term loan and interest income on average cash balances.expense.
Income tax expense (benefit). We recognized an income tax benefit of $1.2 million and an income tax expense of $1.2$30 thousand and income tax expense of $0.1 million for the three months ended September 30, 20172022 and 2016,2021, respectively, at effective tax rates of 103.4%(0.9)% and (14.7)(1.1)%, respectively.
Net income. Our net incomeloss. Net loss was $39,000 for the three months ended September 30, 2017, compared to net loss of $9.5$3.5 million for the three months ended September 30, 2016, which represents2022, compared to net loss of $5.2 million for the three months ended September 30, 2021, a $9.5$1.7 million increase in net income as a result of the factors discussed above.
Nine Months Ended September 30, 20172022 Compared to Nine Months Ended September 30, 20162021
Revenue. OurTotal revenue and other revenue. Total revenue and other revenue for the nine months ended September 30, 20172022 and 2021, was $373.4$135.6 million representingand $208.3 million, respectively, a decrease of $34.2$72.7 million, or 8.4%, as compared to revenue of $407.6 million for34.9%. For the nine months ended September 30, 2016. 2022 and 2021, the University Partners segment revenue was $108.8 million and $187.1 million, respectively, representing a decrease of 41.9%, and the Zovio Growth segment revenue was $26.8 million and $21.2 million, respectively, representing an increase of 26.5%.
The decrease in revenue in the University Partners segment of $78.3 million between periods was primarily due to athe sale of that business to Global Campus on July 31, 2022 as well as the decrease of 9.6% in average weekly enrollment at our academic institutions, from 49,204 students during the nine months ended September 30, 2016 to 44,469 students during the nine months ended September 30, 2017. Tuitionservice revenue decreased by approximately $33.8 million, which is primarily due to thea decrease in average weekly enrollment partially offset byfor the approximate 2.0% tuitionnine-month period ended September 30, 2021, as compared to the same period ended September 30, 2022. A component of the University Partners segment revenue includes the other revenue generated from the Transition Services Agreement of approximately $4.2 million.
The increase on April 1, 2017. The decrease in revenue in the Zovio Growth segment between periods was alsoprimarily due to a decreasethe growth in net revenue generated from course digital materials of approximately $1.5 million.customer contracts within the Fullstack subsidiary, as well as within the TutorMe subsidiary until its sale on May 23, 2022.
Technology and academic services. Our instructional costs Technology and academic services for the nine months ended September 30, 20172022 and 2021, were $181.9$45.9 million representingand $53.7 million, respectively, a decrease of $18.2$7.8 million, or 9.1%, as compared to14.6%. Specific decreases between periods include employee costs of $3.1 million, instructional costssupplies and other technology and academic services of $200.1$1.6 million, consulting and outside services of $1.1 million, bad debt expense of $0.5 million, amortization of $0.4 million, and license fees of $0.4 million. Technology and academic services, as a percentage of revenue, for the nine months ended September 30, 2016. In addition to the decline2022 and 2021, were 33.8% and 25.7%, respectively, an increase of 8.1%. This increase primarily included increases in enrollment, specific decreases between periods include direct compensationemployee costs of $5.8 million, corporate support services of $4.9 million, instructor fees of $3.5 million, facilities costs of $3.0 million, and4.3%, license fees of $1.7 million, partially offset by an increase in information1.5%, other technology costsand academic service of $1.2 million. Instructional costs1.4% and consulting and outside services decreased as a percentage of revenue to 48.7%0.4%.
Counseling services and support. Counseling services and support for the nine months ended September 30, 2017,2022 and 2021, were $45.5 million and $68.9 million, respectively, a decrease of $23.4 million, or 34.0%. Specific decreases between periods include decreases in employee and related allocated costs of $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 $0.8 million. Counseling services and support, as compared to 49.1%a percentage of revenue, for the nine months ended September 30, 2016. The decrease2022 and 2021, were 33.6% and 33.1%, respectively, an increase of 0.4% as a percentage of revenue0.5%. This increase primarily included decreasesincreases in corporateother counseling services and support servicesexpense of 0.6%0.9%, and facilities costsdepreciation of 0.5%0.4%, partially offset by an increasea decrease in bad debt expensefacility costs of 0.8%0.7%. As a percentage of revenue, bad debt expense was 6.5%
Marketing and communication. Marketing and communication for the nine months ended September 30, 2017, compared to 5.8%2022 and 2021, were $48.0 million and $68.6 million, respectively, a decrease of $20.6 million, or 30.1%. Specific decreases between periods were decreases in advertising of $15.8 million, employee costs of $4.1 million, and license fees of $0.6 million. Marketing and communication, as a percentage of revenue, for the nine months ended September 30, 2016.
Admissions advisory2022 and marketing. Our admissions advisory2021, were 35.4% and marketing expenses for the nine months ended September 30, 2017 were $132.1 million, representing a decrease33.0%, respectively, an increase of $24.7 million, or 15.7%, as compared to admissions
advisory and marketing expenses of $156.8 million for the nine months ended September 30, 2016. As a result of our change in marketing strategy and the shift2.4%. This increase primarily included increases in advertising mix, specific factors contributing to the overall decrease between periods include decreases in compensation of $14.9 million, advertising costs of $7.7 million, facilities costs of $5.5 million2.1%, and information technology costs of $2.6 million. These decreases were partially offset by increases in corporate supportconsulting and outside services of $5.1 million and professional fees of $0.5 million. As a percentage of revenue, our admissions advisory and marketing expenses decreased to 35.4% for the nine months ended September 30, 2017 as compared to 38.5% for the nine months ended September 30, 2016. The decrease of 3.1% as a percentage of revenue was primarily due to decreases in compensation of 2.3%, facilities costs of 1.2%, and advertising costs of 0.6%0.9%, partially offset by an increasea decrease in corporate support servicesemployee costs of 1.1%0.6%.
General and administrative. Our general General and administrative expenses for the nine months ended September 30, 20172022 and 2021, were $37.0$20.5 million representing an increaseand $33.3 million, respectively, a decrease of $0.3$12.8 million, or 0.8%, as compared38.4%. The decrease between periods was primarily due to decreases in employee costs of $5.1 million, legal and professional fees of $3.6 million, other general and administrative expenses of $36.7$3.0 million and consulting and outside services of $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 15.9%, respectively, a decrease of 0.8%. This decrease was primarily due to decreases in employee costs of 1.1%, and legal and professional fees of 0.6%, partially offset by an increase in insurance of 0.9%.
Restructuring and impairment expense. For the nine months ended September 30, 2022, we recorded a charge of $35.9 million to 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, 2021, we recorded a charge of $2.6 million to restructuring and impairment 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 $3.7 million for the nine months ended September 30, 2016. The increase between periods was primarily due2022, as compared to an increase in professional feesother income, net of $3.6$0.1 million partially offset by decreases in other administrative costs of $1.4 million, administrative compensation of $1.1 million, and facilities costs of $1.1 million. Our general and administrative expenses increased as a percentage of revenue to 9.9% for the nine months ended September 30, 2017, compared2021, a decrease of $3.8 million. The amounts recognized during the nine months ended September 30, 2022 relate primarily to 9.0%the write-off of the unamortized financing fees and interest expense.
Income tax expense (benefit). We recognized income tax expense of $0.1 million and an income tax benefit of $0.1 million for the nine months ended September 30, 2016. The increase2022 and 2021, respectively, at effective tax rates of 0.9% as a percentage of revenue(0.8)% and 0.4%, respectively.
Net loss. Our net loss was primarily due to an increase in professional fees of 1.2% and administrative compensation of 0.4%, partially offset by a decrease in corporate support services of 0.5%.
Legal settlement expense. For the nine months ended September 30, 2017, we had no expenses relating to legal settlements. The expenses for the cost of resolution of the previously disclosed civil investigative demands from the Consumer Financial Protection Bureau and the Attorney General of the State of California$15.6 million for the nine months ended September 30, 2016 were $32.9 million.
Restructuring and impairment charges. We had $8.02022 compared to net loss of $18.7 million restructuring and impairment charges for the nine months ended September 30, 2017, comprised2021, a $3.1 million lower net loss as a result of the factors discussed above.
Liquidity and Capital Resources
At September 30, 2022 and December 31, 2021, our cash and cash equivalents were $3.1 million and $28.3 million, respectively. At September 30, 2022 and December 31, 2021, total restricted cash was $2.9 million and $9.3 million, respectively, and investments were $0.2 million and $1.0 million, respectively. At September 30, 2022, we had $2.8 million recorded as long-term notes payable for a Fullstack contract.
There was a decrease in the fair value of our investments at September 30, 2022 as compared to December 31, 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 revised estimatesBusiness”) and used the proceeds to pay down its debt with Blue Torch Finance, LLC in the aggregate principal amount of lease charges$31.5 million (see Note 8, “Credit Facilities”), as well as severance costs resultingto 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 a reduction in force. Foroperations 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, 2016, restructuring2022.
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 impairment chargesare 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 $2.8subject 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, 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. 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.
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.
Operating Activities
Net cash used in operating activities was $72.7 million comprisedfor 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 severance costs resulting from a reductionthe judgement in force.the California Attorney General lawsuit and the minimum residual adjustment, partially offset by the decrease in net loss of $3.1 million between periods.
Other income, net. Our other income,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 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, 2017, as compared2021. 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 $1.9be 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, 2016, representing a decrease2022, compared to net cash used in financing activities of $0.7 million. The decrease between periods was primarily due to decreased interest income on average cash balances.
Income tax expense (benefit). We recognized an income tax benefit of $0.7 million and $3.6$1.1 million for the nine months ended September 30, 2017 and 2016, at effective tax rates of (4.6)% and 18.2%, respectively.
Net income (loss). Our net income was $16.2 million2021. The financing activities for the nine months ended September 30, 2017 compared to net loss2022 included both the borrowings and repayment of $16.3 million forthe credit facility with Blue Torch Capital. See “Debt and Financing Arrangements” below. During each of the nine months ended September 30, 2016,2022 and 2021, net cash used included tax withholding related to the issuance of restricted stock units vesting.
Debt and Financing Arrangements
As of September 30, 2022, the Company has a $32.5notes payable valued at $2.8 million, changeincluding 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 developed program. The Company recognized these advances as a resultdebt obligation, and 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 factors discussed above.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.
LiquidityOn September 16, 2022, the Company, entered into a Loan and Capital Resources
We finance our operating activitiesSecurity Agreement (the “Loan Agreement”) among the Company and capital expenditures primarily through cashits 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 hand and through cash provided by operating activities. AtJanuary 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, 20172022.
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 December 31, 2016,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 cash and cash equivalents were $165.2 million and $307.8 million, respectively. At September 30, 2017 and December 31, 2016, we had restricted cashcondensed consolidated financial statements included in Part I, Item 1 of $19.9 million and $24.5 million, respectively, and investments of $27.0 million and $49.4 million, respectively. At September 30, 2017, we had no long-term debt.this Form 10-Q.
The Company does not have any off-balance sheet financing arrangements.
We manage our excess cash pursuant to the quantitative and qualitative operational guidelines of our cash investment policy. Our cash investment policy, which is managed by our Chief Financial Officer, has the following primary objectives: (i) preserving principal, (ii) meeting our liquidity needs, (iii) minimizing market and credit risk, and (iv) providing after-tax returns. Under the policy’s guidelines, we invest our excess cash exclusively in high-quality, U.S. dollar-denominated financial instruments. For a discussion of the measures we use to mitigate the exposure of our cash investments to market risk, credit risk and interest rate risk, see Part I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk.”Risk” in this Form 10-Q.
There was a slight increase in the fair value of our investments at September 30, 2017 as compared to December 31, 2016. We believe that any fluctuations we have recently experienced are temporary in nature and that while some of our
securities are classified as available-for-sale, we have the ability and intent to hold them until maturity, if necessary, to recover their full value.
Title IV and other governmental funding
Our institutions derive the substantial majority of their respective revenues from students who enroll and are eligible for various federal student financial assistance programs authorized under Title IV of the Higher Education Act. Our institutions are subject to significant regulatory scrutiny as a result of numerous standards that must be satisfied in order to participate in Title IV programs. For additional information regarding Title IV programs and the regulation thereof, see “Business—Regulation” included in Part I, Item 1 of the Form 10-K. The balance of revenues derived by our institutions is from government tuition assistance programs for military personnel, including veterans, payments made in cash by individuals, reimbursement from corporate affiliates and private loans.
If we were to become ineligible to receive Title IV funding or other governmental funding, our liquidity would be significantly impacted. The timing of disbursements under Title IV programs is based on federal regulations and our ability to successfully and timely arrange financial aid for our institutions’ students. Title IV funds are generally provided in multiple disbursements before we earn a significant portion of tuition and fees and incur related expenses over the period of instruction. Students must apply for new loans and grants each academic year. These factors, together with the timing at which our institutions’ students begin their programs, affect our revenues and operating cash flow.
Operating activities
Net cash used in operating activities was $16.7 million for the nine months ended September 30, 2017, compared to net cash used in operating activities of $12.9 million for the nine months ended September 30, 2016, an overall increase between periods in net cash used in operating activities of $3.8 million. This increase in cash used in operating activities was primarily attributable to changes in accounts payable and accrued liabilities, loss on impairment of student loan receivables in prior year, and changes in other long-term assets. This change was partially offset by the $32.5 million increase in net income between periods. Despite the cash used in operating activities during the period, we expect to generate cash from our operating activities for the foreseeable future.
Investing activities
Net cash provided by investing activities was $19.3 million for the nine months ended September 30, 2017, compared to net cash used in investing activities of $7.7 million for the nine months ended September 30, 2016. During the nine months ended September 30, 2017, we had maturities of investments of $22.7 million, purchases of investments of $0.1 million and no sales of investments. This is compared to purchases of investments of $20.2 million, no sales of investments and $14.7 million maturities of investments for the nine months ended September 30, 2016. Capital expenditures for the nine months endedSeptember 30, 2017 were $2.9 million, compared to $1.6 million for the nine months endedSeptember 30, 2016. We expect our capital expenditures to be approximately $5.8 million for the year ending December 31, 2017.
Financing activities
Net cash used in financing activities was $149.8 million for the nine months ended September 30, 2017, compared to net cash used in financing activities of $1.6 million for the nine months ended September 30, 2016. During the nine months ended September 30, 2017, we repurchased approximately 18.1 million shares of our common stock for an aggregate purchase price of $150.0 million and $2.0 million of related fees. During each of the nine months endedSeptember 30, 2017 and 2016, net cash used in financing activities included tax withholdings related to the issuance of shares upon the vesting of restricted stock units, partially offset by the cash provided by stock option exercises.
Based on our current level of operations, we believe that our future cash flows from operating activities and our existing cash and cash equivalents will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements for at least the next 12 months. However, changes could occur that would consume our available capital resources before that time. Our capital requirements depend on numerous factors, including our ability to continue to generate revenue. There can be no assurance that additional funding, if necessary, will be available to us on favorable terms, if at all.
Off-Balance Sheet Arrangements and SignificantFuture Contractual Obligations
As part of our normal business operations, we are required to provide surety bonds in certain states where we do business. In May 2009, we entered into a surety bond facility with an insurance company to provide such bonds when required. As of September 30, 2017, our total available surety bond facility was $3.5 million and the surety2022, we had issued bonds totaling $3.3 million on our behalf under such facility.
The following table sets forth, as of September 30, 2017, certain significant cash andfuture contractual obligations that will affect our future liquidity:relating to operating lease obligations in the amount of $27.4 million, of which approximately $1.1 million was payable during the remainder of 2022. Subsequent to quarter end, 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.”
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (In thousands) | Total | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Thereafter |
| Operating lease obligations | $ | 77,878 |
| | $ | 9,080 |
| | $ | 31,400 |
| | $ | 20,833 |
| | $ | 9,504 |
| | $ | 5,112 |
| | $ | 1,949 |
|
| Other contractual obligations | 49,332 |
| | 4,229 |
| | 12,535 |
| | 10,592 |
| | 8,549 |
| | 3,427 |
| | 10,000 |
|
| Uncertain tax positions | 8,290 |
| | — |
| | 8,290 |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 135,500 |
| | $ | 13,309 |
| | $ | 52,225 |
| | $ | 31,425 |
| | $ | 18,053 |
| | $ | 8,539 |
| | $ | 11,949 |
|
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Note 2, “Summary of Significant Accounting Policies” to our condensed consolidated financial statements included in Part I, Item 1 of this report.Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.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 theour investment risk mitigation strategies, we employ, we may incur investment losses as a result of unusual and unpredictable market developments, and we may experience reduced investment earnings if the yields on investments that are deemed to be low risk remain low or decline further in this time of economic uncertainty. Unusual and unpredictable market developments may also create liquidity challenges for certain of the assets in our investment portfolio.
We have no derivative financial instruments or derivative commodity instruments.
Interest Rate Risk
To the extent we borrow funds, we would be subject to fluctuations in interest rates. As of September 30, 2017,2022, we had no$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 borrowings.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, 2017,2022, 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.Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act, that are designed to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officerPrincipal Executive Officer and principal financial officerPrincipal Financial Officer or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of any possible controls and procedures.
Under the supervision and with the participation of our management, including our chief executive officerChief Executive Officer and our principal financial officer,Principal Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant todefined in Rule 13a-15(b) and Rule 15d-15(b) of the Exchange Act. Based on thisthat evaluation, our chief executive officerChief Executive Officer and our principal financial officerPrincipal Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2017.2022.
Changes in Internal Control Over Financial Reporting
We continually assess the adequacy of our internal control over financial reporting and make improvements as deemed appropriate. There have been no changes to ourin internal control over financial reporting, during the three months ended September 30, 20172022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.Proceedings
For information regarding our legal proceedings, refer to Note 13,14, “Commitments and Contingencies” to our condensed consolidated financial statements included in Part I, Item 1 of this report, which note is incorporated by reference into this Part II, Item 1.
Item 1A. Risk Factors.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 forthOther than those noted below, therehere have been no material changes in our risk factors from those previously disclosed in the Form 10-K.
We may need additional capital which may not be available on commercially acceptable terms, if at all, which raises questions about our ability to continue as a going concern.
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, and negative cash flows from operations of $72.7 million for the 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 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.”
We will continue to support the continued growth and expansion of our Fullstack subsidiary and simultaneously explore strategic alternatives for that business. Our institutionsability 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 efforts to sell Fullstack.
Risks Related to the Dissolution
We cannot assure you as to the amount of distributions, if any, to be made to 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 approve the voluntary liquidation and dissolution of the Company 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.
We intend to use the dissolution process under Delaware law to liquidate our remaining assets, settle claims and, if available, make liquidating distributions of cash or other property to our stockholders. However, our dissolution and the liquidation of 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 the DGCL to, among other 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 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 lose eligibilityimpact the amount of the reserves to participatebe determined by the Court Order, and consequently the amount of cash initially available for distribution, if any, to our 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 Title IV programswhich case we would have to defend or faceresolve such claims and/or be required to establish additional reserves to provide for such claims; and
•whether any of the expenses incurred in the winding-up process, including expenses of required personnel and other sanctionsoperating expenses (including legal, accounting and other professional fees) necessary to dissolve and liquidate the Company, are more or less than our estimates.
Further, the amount of any distributable proceeds and our ability to 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 they derive more than 90%the we fail to do so, each stockholder could be held liable for the repayment to creditors, out of their respective revenuesthe amounts previously distributed to such stockholder in the Dissolution from these programs.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 Higher Education Act,DGCL, before a proprietary institution loses eligibilitydissolved corporation may make any distribution to participate in Title IV programs ifits 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 institution derivescorporation. 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 90%the amount of its revenues (calculated in accordancereserve established for such claim pursuant to the Court Order;
•whether we are unable to resolve claims with Department regulations) from Title IV program funds for two consecutive fiscal years. This rule is commonly referredcreditors 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 “90/10 rule.” Any institution that violatesBoard reasonably determines, requires additional funds to be reserved for its satisfaction; and
•whether the 90/10 rule for two consecutive fiscal years becomes ineligibleexpenses 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 participate in Title IV programs for at least two fiscal years. In addition, an institution whose rate exceeds 90% for any single fiscal year will be placed on provisional certificationdissolve and may be subject to other enforcement measures. In the fiscal years ended December 31, 2016, 2015 and 2014, Ashford University derived 81.2%, 80.9% and 83.4%, respectively, and University of the Rockies derived 86.5%, 86.6% and 88.3%, respectively, of their respective revenues from Title IV program funds. Ashford University and University of the Rockies continue to monitor their respective 90/10 rule calculations and their compliance with the 90/10 rule.
Revenue derived from government tuition assistance for military personnel, including veterans, is not considered federal student aid for purposes of calculations under the 90/10 rule, and accordingly helps our institutions satisfy the 90/10 rule. As of December 31, 2016, approximately 25.6% of our institutions' students were affiliated with the military, some of whom are eligible to receive government tuition assistance that may be used to pursue postsecondary degrees. If there were a reduction in funding of government tuition assistance for military personnel, including veterans, or if our revenue derived from such funding were otherwise to decrease, it could be significantly more difficult for our institutions to satisfy the 90/10 rule. On May 20, 2016,liquidate the Company receivedare more than anticipated.
As a letter from the Iowa Departmentresult of Education (the “Iowa DOE”) indicating that,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 planned closureState 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 Clinton Campus, the ISAA would no longer continue to approve Ashford’s programs for GI Bill benefits after June 30, 2016.Dissolution. The Iowa DOE subsequently issued a staytiming and terms of the ISAA’s withdrawalany transaction in furtherance of approval of Ashford’s programs for GI Bill benefits until 90 days from June 20, 2016. On September 15, 2016, in response to a Petition for Declaratory and Injunctive Relief filed by Ashford University, the Iowa District Court for Polk County entered a written order (the “Order”) staying the Iowa DOE’s announced intention to withdraw the approval of Ashford as a GI Bill eligible institution until the entry of a final and appealable order and judgment in the action. On June 23, 2017, the Iowa District Court held a hearingour monetization strategy will depend on Ashford’s Petition and on July 17, 2017, the Court ruled in favor of the Iowa DOE and denied the petition. Ashford University is evaluating a variety of optionsfactors, many of which are beyond our control. A delay in, or failure to ensurecomplete, any such transaction could have a material effect on our stock price and the continued approvalamount of Ashford’s programs for GI Bill benefits, including filing of a motion for reconsideration and aany potential appeal. The Iowa DOE has indicated that it will continuedistributions to approve Ashford’s programs for GI Bill benefits and take no further action, at least through the deadline to appeal, which is 30 days following a final decision by the Iowa District Court. 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 July 25, 2017, Ashford University received approval fromattractive terms or at all, which risk may be heightened due to the stateuncertainty of ArizonaCOVID-19 and its impact and/or a general economic slowdown or recession. Additionally, if financing is unavailable to provide GI Bill benefitspotential buyers of our Company or assets, or if potential buyers are unwilling to its students,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 is currently awaiting the assignment of a facilities code from the U.S. Department of Veterans Affairs. The Company intends to continue to pursue its options in Iowa as well. At this time, we cannot predict the eventual outcome of this litigation, and any potential delays or gaps in coverage for GI Bill benefits could have a material 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 future military student enrollmentformer directors and officers to the extent permitted under the DGCL and the Company’s revenues, financial condition, cash flowscertificate of incorporation, bylaws and resultsagreements as in effect at the time of operations, and could make it significantly more difficult for our institutions to satisfy the 90/10 rule.
Changes in federal law that increase Title IV grant and loan limits may result in an increase infiling of the revenues we receive from Title IV programs and make it more difficult for our institutions to satisfy the 90/10 rule.Certificate of Dissolution. In addition, Congress couldwe 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.
37
propose and adopt legislation that amends the 90/10 rule in ways that make it more difficult for our institutions to satisfy the 90/10 rule. Failure to satisfy the 90/10 rule could result in our institutions losing eligibility to participate in Title IV programs, which would have a material adverse effect on enrollments and our revenues, financial condition, cash flows and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.Proceeds
None.
Item 3. Defaults Upon Senior Securities.Securities
None.
Item 4. Mine Safety Disclosures.Disclosures
None.
Item 5. Other Information.Information
None.
Item 6. Exhibits.
Exhibits |
| | | | | | | |
| Exhibit |
| | Description |
31.1 |
| |
| | |
| 31.1 | | | |
| 31.2 |
| | |
| 32.1 |
| | |
99.1101 |
| | |
101 |
| | The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017,2022, filed with the SEC on October 25, 2017,November 21, 2022, formatted in Extensible Business Reporting Language (“XBRL”): (i) the Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016;Sheets; (ii) the Condensed Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 2017 and 2016;; (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2017 and 2016;Stockholders’ Equity; (iv) the Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2017Cash Flows; and 2016; (v) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016; and (vi) the Notes to Condensed Consolidated Financial Statements. |
| 104 | | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
39
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 |
| |
| November 21, 2022 | BRIDGEPOINT EDUCATION, INC./s/ KEVIN ROYAL |
| |
October 25, 2017 | /s/ JOSEPH D’AMICO |
| Joseph D’AmicoKevin Royal
Interim Chief Financial Officer
(Principal financial officer and duly authorized to sign on behalf of the registrant) |