Zovio Inc - Quarter Report: 2021 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| (Mark One) | |||||
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 2021
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from________________to________________
Commission File Number: 001-34272
___________________________________________________________________________
ZOVIO INC
(Exact name of registrant as specified in its charter)
____________________________________________________________________________
| Delaware | 59-3551629 | ||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
1811 E. Northrop Blvd, Chandler, AZ 85286
(Address, including zip code, of principal executive offices)
(858) 668-2586
(Registrant’s telephone number, including area code)
____________________________________________________________________________
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||||||||||
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |||||||||||
| Emerging growth company | ☐ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, par value $0.01 per share | ZVO | The Nasdaq Stock Market LLC | ||||||
The total number of shares of common stock outstanding as of May 5, 2021, was 33,328,550.
ZOVIO INC
FORM 10-Q
INDEX
2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
ZOVIO INC
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except par value)
| As of March 31, 2021 | As of December 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 35,052 | $ | 35,462 | |||||||
| Restricted cash | 20,033 | 20,035 | |||||||||
| Investments | 1,366 | 1,515 | |||||||||
Accounts receivable, net of allowance for credit losses of $1.7 million and $1.2 million at March 31, 2021 and December 31, 2020, respectively | 6,831 | 7,204 | |||||||||
| Prepaid expenses and other current assets | 15,393 | 12,617 | |||||||||
| Total current assets | 78,675 | 76,833 | |||||||||
| Property and equipment, net | 29,565 | 30,575 | |||||||||
| Operating lease assets | 18,581 | 20,114 | |||||||||
| Goodwill and intangibles, net | 30,921 | 31,785 | |||||||||
| Other long-term assets | 2,304 | 1,999 | |||||||||
| Total assets | $ | 160,046 | $ | 161,306 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued liabilities | $ | 69,038 | $ | 62,693 | |||||||
| Deferred revenue and student deposits | 8,077 | 8,090 | |||||||||
| Total current liabilities | 77,115 | 70,783 | |||||||||
| Rent liability | 23,267 | 24,125 | |||||||||
| Other long-term liabilities | 8,758 | 7,181 | |||||||||
| Total liabilities | 109,140 | 102,089 | |||||||||
| Commitments and contingencies (see Note 15) | |||||||||||
| Stockholders' equity: | |||||||||||
Preferred stock, $0.01 par value: | |||||||||||
20,000 shares authorized; zero shares issued and outstanding at both March 31, 2021, and December 31, 2020 | — | — | |||||||||
Common stock, $0.01 par value: | |||||||||||
300,000 shares authorized; 67,017 and 66,454 issued, and 33,308 and 32,267 outstanding, at March 31, 2021 and December 31, 2020, respectively | 673 | 668 | |||||||||
| Additional paid-in capital | 170,107 | 179,489 | |||||||||
| Retained earnings | 316,826 | 326,319 | |||||||||
Treasury stock, 33,709 and 34,187 shares at cost at March 31, 2021, and December 31, 2020, respectively | (436,700) | (447,259) | |||||||||
| Total stockholders' equity | 50,906 | 59,217 | |||||||||
| Total liabilities and stockholders' equity | $ | 160,046 | $ | 161,306 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
ZOVIO INC
Condensed Consolidated Statements of Income (Loss)
(Unaudited)
(In thousands, except per share amounts)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenue | $ | 74,107 | $ | 4,073 | |||||||
| University-related revenue | — | 93,799 | |||||||||
| Other revenue | 2,752 | — | |||||||||
| Revenue and other revenue | $ | 76,859 | $ | 97,872 | |||||||
| Costs and expenses: | |||||||||||
| Technology and academic services | $ | 19,144 | $ | 18,528 | |||||||
| Counseling services and support | 25,325 | 23,319 | |||||||||
| Marketing and communication | 25,831 | 25,068 | |||||||||
| General and administrative | 15,896 | 13,387 | |||||||||
| University-related expenses | — | 25,302 | |||||||||
| Restructuring and impairment expense | — | 2,763 | |||||||||
| Total costs and expenses | 86,196 | 108,367 | |||||||||
| Operating loss | (9,337) | (10,495) | |||||||||
| Other expense, net | (73) | (262) | |||||||||
| Loss before income taxes | (9,410) | (10,757) | |||||||||
| Income tax expense (benefit) | 83 | (12,777) | |||||||||
| Net income (loss) | $ | (9,493) | $ | 2,020 | |||||||
| Income (loss) per share: | |||||||||||
| Basic | $ | (0.29) | $ | 0.07 | |||||||
| Diluted | $ | (0.29) | $ | 0.06 | |||||||
| Weighted average number of common shares outstanding used in computing income (loss) per share: | |||||||||||
| Basic | 32,769 | 30,340 | |||||||||
| Diluted | 32,769 | 32,056 | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ZOVIO INC
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | ||||||||||||||||||||||||||||||||
| Shares | Par Value | Total | |||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 65,695 | $ | 660 | $ | 192,413 | $ | 375,180 | $ | (469,315) | $ | 98,938 | ||||||||||||||||||||||||
| Adoption of accounting standard (ASU 2016-13) | — | — | — | 91 | — | 91 | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 4,138 | — | — | 4,138 | |||||||||||||||||||||||||||||
| Stock issued under stock incentive plan, net of shares held for taxes | 338 | 3 | (205) | — | — | (202) | |||||||||||||||||||||||||||||
| Net income | — | — | — | 2,020 | — | 2,020 | |||||||||||||||||||||||||||||
| Balance at March 31, 2020 | 66,033 | $ | 663 | $ | 196,346 | $ | 377,291 | $ | (469,315) | $ | 104,985 | ||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | ||||||||||||||||||||||||||||||||
| Shares | Par Value | Total | |||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 66,454 | $ | 668 | $ | 179,489 | $ | 326,319 | $ | (447,259) | $ | 59,217 | ||||||||||||||||||||||||
| Stock-based compensation | — | — | 2,382 | — | — | 2,382 | |||||||||||||||||||||||||||||
| Stock issued under stock incentive plan, net of shares held for taxes | 563 | 5 | (1,083) | — | — | (1,078) | |||||||||||||||||||||||||||||
| Contingent consideration | — | — | (122) | — | — | (122) | |||||||||||||||||||||||||||||
| Issuance of shares for acquisition | — | — | (10,559) | — | 10,559 | — | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (9,493) | — | (9,493) | |||||||||||||||||||||||||||||
| Balance at March 31, 2021 | 67,017 | $ | 673 | $ | 170,107 | $ | 316,826 | $ | (436,700) | $ | 50,906 | ||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
ZOVIO INC
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | (9,493) | $ | 2,020 | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||
| Provision for bad debts | 661 | 3,337 | |||||||||
| Depreciation and amortization | 2,285 | 2,978 | |||||||||
| Deferred income taxes | — | 32 | |||||||||
| Stock-based compensation | 2,382 | 4,138 | |||||||||
| Noncash lease expense | 2,077 | 3,911 | |||||||||
| Net loss (gain) on marketable securities | (68) | 326 | |||||||||
| Loss (gain) on disposal or impairment of fixed assets | — | (12) | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (288) | (15,007) | |||||||||
| Prepaid expenses and other current assets | (2,776) | (7,948) | |||||||||
| Other long-term assets | (305) | (193) | |||||||||
| Accounts payable and accrued liabilities | 7,457 | (3,168) | |||||||||
| Deferred revenue and student deposits | (13) | 7,245 | |||||||||
| Operating lease liabilities | (2,598) | (3,672) | |||||||||
| Other liabilities | 1,455 | (193) | |||||||||
| Net cash provided by (used in) operating activities | 776 | (6,206) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | (184) | (1,213) | |||||||||
| Purchases of investments | (30) | (36) | |||||||||
| Capitalized costs for intangible assets | (143) | (95) | |||||||||
| Sale of investments | 247 | — | |||||||||
| Net cash used in investing activities | (110) | (1,344) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Borrowings from long-term liabilities | — | 1,149 | |||||||||
| Tax withholdings on issuance of stock awards | (1,078) | (202) | |||||||||
| Net cash provided by (used in) financing activities | (1,078) | 947 | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | (412) | (6,603) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 55,497 | 92,537 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 55,085 | $ | 85,934 | |||||||
| Reconciliation of cash, cash equivalents, and restricted cash: | |||||||||||
| Cash and cash equivalents | $ | 35,052 | $ | 61,303 | |||||||
| Restricted cash | 20,033 | 24,631 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 55,085 | $ | 85,934 | |||||||
| Supplemental disclosure of non-cash transactions: | |||||||||||
| Purchase of equipment included in accounts payable and accrued liabilities | $ | 16 | $ | 158 | |||||||
| Issuance of common stock for vested restricted stock units | $ | 3,461 | $ | 714 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Nature of Business
Zovio Inc (the “Company”) is a Delaware corporation, and is an education technology services company that partners with higher education institutions and employers to deliver innovative, personalized solutions to help learners and leaders achieve their aspirations.
On December 1, 2020, the Company and AU LLC finalized a definitive Asset Purchase and Sale Agreement (the “Purchase Agreement”), by and among the Company, AU LLC, the Arizona Board of Regents, a body corporate, for and on behalf of the University of Arizona (the “University of Arizona”), and the University of Arizona Global Campus, a newly formed Arizona nonprofit corporation (“Global Campus”). Upon the closing of the Purchase Agreement (the “Sale Transaction”), the Company and Ashford University (the “University”) transferred to Global Campus the tangible and intangible academic and related operations and assets comprising the University to Global Campus.
Following the closing of the transaction of the Purchase Agreement (the “Sale Transaction”), Global Campus owns and operates the University in affiliation with the University of Arizona and with a focus on expanding access to education for non-traditional adult learners, and the Company will provide services to Global Campus under a long-term Strategic Services Agreement (the “Services Agreement”). The services that the Company provides to Global Campus under that Services Agreement include recruiting, admissions, marketing, student finance, financial aid processing, and financial aid advising, program advising, student retention advising, support services for academics, information technology and institutional support.
On April 1, 2019, the Company acquired Fullstack Academy, Inc, (“Fullstack”) and on April 3, 2019, the Company acquired TutorMe.com, Inc. (“TutorMe”), which became wholly-owned subsidiaries of the Company. The operating results of Fullstack and TutorMe subsequent to the acquisition dates have been included in the Company’s consolidated results of operations.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany transactions have been eliminated in consolidation.
Unaudited Interim Financial Information
The condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete annual financial statements and should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the Securities and Exchange Commission (“SEC”) on February 24, 2021. In the opinion of management, the condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary to present a fair statement of the Company’s condensed consolidated financial position, results of operations and cash flows as of and for the periods presented.
Operating results for any interim period are not necessarily indicative of the results that may be expected for the full year. The year-end condensed consolidated balance sheet data was derived from audited consolidated financial statements but does not include all disclosures required by GAAP for complete annual consolidated financial statements.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements. Actual results could differ from those estimates.
7
ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
Revenue and Other Revenue
Revenues are recognized when control of the promised goods or services are transferred, in an amount that reflects the consideration the Company expects to be entitled in exchange for those goods or services. Determining whether a valid customer contract exists includes an assessment of whether amounts due under the contract are collectible. The Company performs this assessment at the beginning of every contract and subsequently thereafter if new information indicates there has been a significant change in facts and circumstances.
On December 1, 2020, the Company entered into the Services Agreement with Global Campus whereby the Company will provide certain educational technology and support services, which has an initial term of fifteen years, subject to renewal options and certain early termination provisions. The amounts earned from the Services Agreement are within the scope of ASC 606, Revenue from Contracts with Customers (“ASC 606”), are denoted as revenue on the consolidated statements of income (loss). On December 1, 2020, the Company also entered into a transition services agreement with Global Campus whereby the Company will provide certain temporary transition services (the “Transition Services Agreement”), which has a term of three years. The amounts earned from the Transition Services Agreement are denoted as other revenue on the consolidated statements of income (loss).
The Services Agreement has a single performance obligation, as the promises to provide the identified services are not distinct within the context of these agreements. The single performance obligation constitutes a series of distinct services as the customer benefits as services are provided. Service revenue is recognized over time using the input method cost. The input method provides a faithful depiction of the performance toward complete satisfaction of the performance obligation and can be tied to the direct cost incurred. The service fees received over the term of the agreement are variable in nature in that they are dependent upon the number of students attending the university and revenues generated from those students during the service period. The service fees are subject to certain adjustments, including performance-based adjustments, minimum profit level adjustments, and excess direct cost adjustments. These adjustments are all variable in nature in that they depend upon the Company’s performance during each service period. Such adjustments are presented as minimum residual liability within Accounts Payable and Accrued Liabilities. For additional information, see Note 8, “Other Significant Balance Sheet Accounts - Accounts Payable and Accrued Liabilities.” The Company allocates variable consideration to the distinct increments of service to which it relates, as the variability is directly related to the Company’s effort to satisfy the distinct increments of service provided. This is consistent with the allocation objective in ASC 606. The Company meets the criteria in the standard and exercises the practical expedient to not disclose the aggregate amount of the transaction price allocated to the single performance obligation that is unsatisfied as of the end of the reporting period. The Company does not disclose the value of unsatisfied performance obligations because the variable consideration is allocated entirely to a wholly unsatisfied promise to transfer a service that forms part of a single performance obligation.
Technology and Academic Services
Technology and academic services costs consist primarily of costs related to ongoing maintenance of educational infrastructure, including online course delivery and management, student records, assessment, customer relations management and other internal administrative systems. These costs were previously components of instructional costs and services, as well as general and administrative. This also includes costs to provide support for curriculum and new program development, support for faculty training and development, technical support and assistance with state compliance. This expense category includes salaries, benefits and share-based compensation, information technology costs, curriculum and new program development costs (which are expensed as incurred) and other costs associated with these support services. This category also includes an allocation of depreciation, amortization, human resources, rent, and occupancy costs attributable to the provision of these services.
Counseling Services and Support
Counseling services and support costs consist primarily of costs including team-based counseling and other support to prospective and current students as well as financial aid processing. These costs were previously components of instructional costs and services, admissions advisory and marketing, as well as general and administrative. This expense category includes salaries, benefits and share-based compensation, and other costs such as dues, fees and subscriptions and travel costs. This
8
ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
category also includes an allocation of depreciation, amortization, human resources, rent, and occupancy costs attributable to the provision of these services.
Marketing and Communication
Marketing and communication costs consist primarily of lead acquisition, digital communication strategies, brand identity advertising, media planning and strategy, video, data science and analysis, marketing to potential students and other promotional and communication services. These costs were previously components of admissions advisory and marketing, as well as some general and administrative. This expense category includes salaries, benefits and share-based compensation for marketing and communication personnel, brand advertising, marketing leads and other promotional and communication expenses. This category also includes an allocation of depreciation, amortization, human resources, rent, and occupancy costs attributable to the provision of these services. Advertising costs are expensed as incurred.
General and Administrative
General and administrative costs consist primarily of compensation and benefit costs (including related stock-based compensation) for employees engaged in corporate management, finance, compliance, and other corporate functions. This category also includes an allocation of depreciation, amortization, human resources, rent, and occupancy costs attributable to the provision of these services.
University-Related Expenses
University-related expenses represent those costs that were transferred to University of Arizona Global Campus in the Transaction and that are no longer incurred by the Company. These costs were previously primarily components of instructional costs and services, with some costs from admissions advisory and marketing and some general and administrative, including instructor fees and other Ashford employee costs, student related bad debt expense, license fees for licenses transferred to Global Campus and other costs.
Comprehensive Income (Loss)
The Company has no components of other comprehensive income (loss), and therefore, comprehensive income (loss) equals net income (loss).
Recent Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which removes certain exceptions to the general principles in Topic 740. The amendments in this update also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this standard are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company applied the new standard, including all applicable updates, effective January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s condensed consolidated financial statements.
3. Financial Statement Reclassification
On December 1, 2020, the Company consummated the Sale Transaction. For additional information on the Sale Transaction, see Note 1, “Nature of Business” above. The Company now provides services to Global Campus, which include recruiting, financial aid, counseling, institutional support, information technology, and academic support services. The Company made changes in its presentation of its revenue line items and operating expenses and reclassified prior periods to conform to the current presentation. The Company determined that these changes would provide more meaningful information as this new presentation provides transparency for costs that will be incurred as a service provider and costs that will not reoccur in the future as they are related to university costs that were transferred to Global Campus in the Transaction.
We have reclassified our operating expenses for prior period to conform to the above disaggregation and revisions to our presentation. There were no changes to total operating expenses or operating income as a result of these reclassifications.
9
ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table presents our operating expenses as previously reported and as reclassified on our consolidated statements of income (loss) for the three-months ended March 31, 2020 (in thousands):
| Three Months ended March 31, 2020 | |||||||||||
| Costs and expenses: | As Reported | As Reclassified | |||||||||
| Technology and academic services | $ | — | $ | 18,528 | |||||||
| Counseling services and support | — | 23,319 | |||||||||
| Marketing and communication | — | 25,068 | |||||||||
| Instructional costs and services | 46,381 | — | |||||||||
| Admissions advisory and marketing | 41,733 | — | |||||||||
| General and administrative | 17,490 | 13,387 | |||||||||
| University-related expenses | — | 25,302 | |||||||||
| Restructuring and impairment expense | 2,763 | 2,763 | |||||||||
| Total costs and expenses | $ | 108,367 | $ | 108,367 | |||||||
4. Revenue, Other Revenue and Deferred Revenue
The following table presents the Company’s net revenue disaggregated based on the revenue source (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Strategic services revenue | $ | 66,927 | $ | — | |||||||
| Transition services income | 2,752 | — | |||||||||
| Tuition revenue, net | 7,089 | 89,034 | |||||||||
| Digital materials revenue, net | — | 5,972 | |||||||||
| Technology fee revenue, net | — | 2,486 | |||||||||
Other revenue, net (1) | 91 | 380 | |||||||||
| Total revenue, net | $ | 76,859 | $ | 97,872 | |||||||
(1) Primarily consists of revenues generated from services such as graduation fees, transcript fees, and other miscellaneous services.
The following table presents the Company’s net revenue disaggregated based on the timing of revenue recognition (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Over time, over period of instruction | $ | 76,768 | $ | 78,130 | |||||||
Over time, full tuition grant (1) | — | 14,201 | |||||||||
Point in time (2) | 91 | 5,541 | |||||||||
| Total revenue, net | $ | 76,859 | $ | 97,872 | |||||||
(1)Represents revenue generated from the FTG program.
(2)Represents revenue generated from digital textbooks and other miscellaneous fees.
The Company operates under two reportable segments and has no foreign operations or assets located outside of the United States. For additional information on segmentation, see Note 16, “Segment Information.”
10
ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
Deferred Revenue and Student Deposits
Deferred revenue and student deposits consisted of the following (in thousands):
| As of March 31, 2021 | As of December 31, 2020 | ||||||||||
| Deferred revenue | $ | 7,307 | $ | 7,477 | |||||||
| Student deposits | 770 | 613 | |||||||||
| Total deferred revenue and student deposits | $ | 8,077 | $ | 8,090 | |||||||
Deferred revenue consists of cash payments that are received or due in advance of the Company’s performance.
Below are the opening and closing balances of deferred revenue from the Company’s contracts with customers (in thousands):
| 2021 | 2020 | ||||||||||
| Deferred revenue opening balance, January 1 | $ | 7,477 | $ | 23,356 | |||||||
| Deferred revenue closing balance, March 31 | 7,307 | 33,344 | |||||||||
| Increase (decrease) | $ | (170) | $ | 9,988 | |||||||
For further information on receivables, refer to Note 7, “Accounts Receivable, Net” within the condensed consolidated financial statements.
For the majority of the Company’s customers, payment for services is due prior to services being provided. Under special circumstances, some customers may be offered non-interest bearing payment plan arrangements that can extend for up to three years. These payment plan arrangements give rise to significant financing components. However, since the Company historically collects substantially all of the consideration to which it expects to be entitled under such payment plans within one year or less, the impact of these significant financing components is not material to any period presented.
The difference between the opening and closing balances of deferred revenue primarily results from the timing difference between the Company’s performance and the customer’s payment. For the three months ended March 31, 2021, the Company recognized $4.7 million of revenue that was included in the deferred revenue balance as of January 1, 2021. For the three months ended March 31, 2020, the Company recognized $20.2 million of revenue that was included in the deferred revenue balance as of January 1, 2020. Amounts reported in the closing balance of deferred revenue are expected to be recognized as revenue within the next 12 months.
5. Restructuring and Impairment Expense
During the three months ended March 31, 2020, the Company recognized $2.8 million, respectively, of restructuring and impairment expense, the components of which are described below. No such expense was recorded for the three months ended March 31, 2021.
The Company had previously relocated its headquarters from California to Arizona. In addition, the Company had previously vacated or consolidated properties and subsequently reassessed its obligations on non-cancelable leases. As a result of the relocation and lease reassessments, during the three months ended March 31, 2020, the Company recognized expense of $41 thousand. No such expense was recorded for the three months ended March 31, 2021.
The Company had previously reassessed its resources through reorganization. For the three months ended March 31, 2020, the Company recognized an expense of $2.7 million of restructuring and impairment expense relating to severance costs for wages and benefits. No such credit or expense was recorded for the three months ended March 31, 2021.
11
ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table summarizes the amounts recorded in the restructuring and impairment expense line item on the Company’s condensed consolidated statements of income (loss) for each of the periods presented (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Severance costs | — | 2,722 | |||||||||
| Lease exit and other costs | — | 41 | |||||||||
| Total restructuring and impairment expense | $ | — | $ | 2,763 | |||||||
The following table summarizes the changes in the Company's restructuring and impairment liability by type during the three months ended March 31, 2021 (in thousands):
| Student Transfer Costs | Severance Costs | Lease Exit and Other Costs | Total | |||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 1,282 | $ | 742 | $ | 1,974 | $ | 3,998 | ||||||||||||||||||
| Payments and adjustments | — | (323) | (893) | (1,216) | ||||||||||||||||||||||
| Balance at March 31, 2021 | $ | 1,282 | $ | 419 | $ | 1,081 | $ | 2,782 | ||||||||||||||||||
The restructuring liability amounts are recorded within either the (i) accounts payable and accrued liabilities account, (ii) lease liability account or (iii) other long-term liabilities account on the condensed consolidated balance sheets.
6. Fair Value Measurements
The following tables summarize the fair value information as of March 31, 2021 and December 31, 2020, respectively (in thousands):
| As of March 31, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Mutual funds | $ | 1,366 | $ | — | $ | — | $ | 1,366 | |||||||||||||||
| As of December 31, 2020 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Mutual funds | $ | 1,515 | $ | — | $ | — | $ | 1,515 | |||||||||||||||
The mutual funds in the tables above, represent the deferred compensation asset balances, which are considered to be trading securities. The Company’s deferred compensation asset balances are recorded in the investments line item on the Company’s condensed consolidated balance sheets, and are classified as Level 1 securities. There were no transfers between any level categories for investments during the periods presented.
There were no differences between amortized cost and fair value of investments as of March 31, 2021 or December 31, 2020, and no reclassifications out of accumulated other comprehensive income during either the three months ended March 31, 2021 or 2020.
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ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
7. Accounts Receivable, Net
Accounts receivable, net, consisted of the following (in thousands):
| As of March 31, 2021 | As of December 31, 2020 | ||||||||||
| Accounts receivable | $ | 8,549 | $ | 8,420 | |||||||
| Less allowance for credit losses | 1,718 | 1,216 | |||||||||
| Accounts receivable, net | $ | 6,831 | $ | 7,204 | |||||||
The following table presents the changes in the allowance for credit losses for the three months ended March 31, 2021 (in thousands):
Beginning Balance | Charged to Expense | Write-offs | Recoveries of amounts | Ending Balance | |||||||||||||||||||||||||
| Non-FTG related allowance | $ | 1,216 | $ | 661 | $ | (159) | $ | — | $ | 1,718 | |||||||||||||||||||
| Total allowance for credit losses | $ | 1,216 | $ | 661 | $ | (159) | $ | — | $ | 1,718 | |||||||||||||||||||
The following table presents the changes in the allowance for credit losses for the three months ended March 31, 2020 (in thousands):
Beginning Balance | Charged to Expense | Write-offs | Recoveries of amounts | Ending Balance | |||||||||||||||||||||||||
| FTG-related allowance | $ | 1,749 | $ | 603 | $ | (404) | $ | 122 | $ | 2,070 | |||||||||||||||||||
| Non-FTG related allowance | 11,963 | 2,734 | (7,185) | 1,569 | 9,081 | ||||||||||||||||||||||||
| Total allowance for credit losses | $ | 13,712 | $ | 3,337 | $ | (7,589) | $ | 1,691 | $ | 11,151 | |||||||||||||||||||
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ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
8. Other Significant Balance Sheet Accounts
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
| As of March 31, 2021 | As of December 31, 2020 | ||||||||||
| Prepaid expenses | $ | 3,528 | $ | 3,027 | |||||||
| Prepaid licenses | 3,888 | 1,371 | |||||||||
| Prepaid income taxes | 48 | 48 | |||||||||
| Income tax receivable | 1,567 | 1,644 | |||||||||
| Prepaid insurance | 1,136 | 1,127 | |||||||||
| Insurance recoverable | 355 | 404 | |||||||||
Other current assets (1) | 4,871 | 4,996 | |||||||||
| Total prepaid expenses and other current assets | $ | 15,393 | $ | 12,617 | |||||||
(1) Other current assets includes payment of net asset adjustment due from Global Campus related to the Sale Transaction.
Property and Equipment, Net
Property and equipment, net, consisted of the following (in thousands):
| As of March 31, 2021 | As of December 31, 2020 | ||||||||||
| Furniture and office equipment | $ | 23,323 | $ | 36,146 | |||||||
| Software | 5,505 | 7,512 | |||||||||
| Leasehold improvements | 16,855 | 16,325 | |||||||||
| Vehicles | 22 | 22 | |||||||||
| Total property and equipment | 45,705 | 60,005 | |||||||||
| Less accumulated depreciation and amortization | (16,140) | (29,430) | |||||||||
| Total property and equipment, net | $ | 29,565 | $ | 30,575 | |||||||
For the three months ended March 31, 2021 and 2020, depreciation and amortization expense related to property and equipment was $1.3 million and $1.6 million, respectively.
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ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
Goodwill and Intangibles, Net
Goodwill and intangibles, net, consisted of the following (in thousands):
| March 31, 2021 | |||||||||||||||||
| Definite-lived intangible assets: | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||
| Capitalized curriculum costs | $ | 13,780 | $ | (12,711) | $ | 1,069 | |||||||||||
| Purchased intangible assets | 14,185 | (7,509) | 6,676 | ||||||||||||||
| Total definite-lived intangible assets | $ | 27,965 | $ | (20,220) | $ | 7,745 | |||||||||||
| Goodwill | 23,176 | ||||||||||||||||
| Total goodwill and intangibles, net | $ | 30,921 | |||||||||||||||
| December 31, 2020 | |||||||||||||||||
| Definite-lived intangible assets: | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||
| Capitalized curriculum costs | $ | 13,745 | $ | (12,644) | $ | 1,101 | |||||||||||
| Purchased intangible assets | 14,185 | (6,677) | 7,508 | ||||||||||||||
| Total definite-lived intangible assets | $ | 27,930 | $ | (19,321) | $ | 8,609 | |||||||||||
| Goodwill | 23,176 | ||||||||||||||||
| Total goodwill and intangibles, net | $ | 31,785 | |||||||||||||||
For the three months ended March 31, 2021 and 2020, amortization expense was $1.0 million and $1.3 million, respectively.
The following table summarizes the estimated remaining amortization expense as of each fiscal year ended below (in thousands):
| Year Ended December 31, | ||||||||
| Remainder of 2021 | $ | 1,983 | ||||||
| 2022 | 2,397 | |||||||
| 2023 | 2,239 | |||||||
| 2024 | 671 | |||||||
| 2025 | 117 | |||||||
| Thereafter | 338 | |||||||
| Total future amortization expense | $ | 7,745 | ||||||
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ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following (in thousands):
| As of March 31, 2021 | As of December 31, 2020 | ||||||||||
| Accounts payable | $ | 12,572 | $ | 11,246 | |||||||
| Accrued salaries and wages | 8,564 | 6,149 | |||||||||
| Accrued bonus | 5,061 | 11,428 | |||||||||
| Accrued vacation | 3,612 | 3,369 | |||||||||
| Accrued litigation and fees | 8,341 | 8,341 | |||||||||
| Minimum residual liability | 7,055 | 1,216 | |||||||||
| Accrued expenses | 16,835 | 12,473 | |||||||||
| Current leases payable | 5,655 | 6,934 | |||||||||
| Accrued insurance liability | 1,343 | 1,537 | |||||||||
| Total accounts payable and accrued liabilities | $ | 69,038 | $ | 62,693 | |||||||
Other Long-Term Liabilities
Other long-term liabilities consisted of the following (in thousands):
| As of March 31, 2021 | As of December 31, 2020 | ||||||||||
| Uncertain tax positions | $ | 28 | $ | 28 | |||||||
| Notes payable | 3,095 | 2,981 | |||||||||
| Other long-term liabilities | 5,635 | 4,172 | |||||||||
| Total other long-term liabilities | $ | 8,758 | $ | 7,181 | |||||||
9. Credit Facilities
The Company has issued letters of credit that are collateralized with cash (held in restricted cash) in the aggregate amount of $20.0 million as of March 31, 2021.
As part of its normal business operations, the Company is required to provide surety bonds in certain states in which the Company does business. The Company has entered into a surety bond facility with an insurance company to provide such bonds when required. As of March 31, 2021, the surety had issued $2.6 million in bonds on the Company’s behalf under this facility.
10. Lease Obligations
Operating Leases
The Company leases various office facilities with terms that expire at various dates through 2023. These facilities are used for academic operations, corporate functions, enrollment services and student support services. The Company does not have any leases other than its office facilities. All of the leases were classified as operating leases for the period ended March 31, 2021, 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.
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ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company has agreements to sublease certain portions of its office facilities, with three active subleases as of March 31, 2021. The Company’s subleases do not include any options to extend or for early termination and do not contain any residual value guarantees or restrictive covenants. All of the subleases were classified as operating leases for the period ended March 31, 2021. The Company is subleasing approximately 37,000 square feet of office space in Denver, Colorado with a remaining commitment to lease of 5 months and net lease payments of $0.4 million. The Company is subleasing additional office space of approximately 21,000 square feet in Denver, Colorado with a remaining commitment to lease of 24 months and net lease payments of $1.2 million. The Company is also subleasing approximately 24,000 square feet of office space in San Diego, California with a remaining commitment to lease of 9 months and net lease payments of $0.8 million.Sublease income for the three months ended March 31, 2021 and 2020 was $0.6 million and $0.5 million, respectively.
11. Income (Loss) Per Share
Basic income (loss) per share is calculated by dividing net income (loss) available to common stockholders for the period by the weighted average number of common shares outstanding for the period.
Diluted income (loss) per share is calculated by dividing net income (loss) available to common stockholders for the period by the sum of (i) the weighted average number of common shares outstanding for the period, plus (ii) potentially dilutive securities outstanding during the period, if the effect is dilutive. Potentially dilutive securities for the periods presented include stock options, unvested restricted stock units (“RSUs”) and unvested performance stock units (“PSUs”).
The following table sets forth the computation of basic and diluted income (loss) per share for the periods indicated (in thousands, except per share data):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Numerator: | |||||||||||
| Net income (loss) | $ | (9,493) | $ | 2,020 | |||||||
| Denominator: | |||||||||||
| Weighted average number of common shares outstanding | 32,769 | 30,340 | |||||||||
| Effect of dilutive options and stock units | — | 1,716 | |||||||||
| Diluted weighted average number of common shares outstanding | 32,769 | 32,056 | |||||||||
| Income (loss) per share: | |||||||||||
| Basic | $ | (0.29) | $ | 0.07 | |||||||
| Diluted | $ | (0.29) | $ | 0.06 | |||||||
The following table sets forth the number of stock options and stock units excluded from the computation of diluted income (loss) per share for the periods indicated below because their effect was anti-dilutive (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Stock options | 1,582 | 1,764 | |||||||||
| Stock units | 1,461 | 1,717 | |||||||||
12. Stock-Based Compensation
The Company recorded $2.4 million and $4.1 million of stock-based compensation expense for the three months ended March 31, 2021 and 2020, respectively. The related income tax benefit was $0.6 million and $1.0 million for the three months ended March 31, 2021 and 2020, respectively.
17
ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
During the three months ended March 31, 2021, the Company granted 0.5 million RSUs at a weighted average grant date fair value of $4.25 and 0.8 million RSUs vested. During the three months ended March 31, 2020, the Company granted 32,950 RSUs at a grant date fair value of $1.91, and 0.5 million RSUs vested.
During the three months ended March 31, 2021, the Company did not grant any performance-based or market-based PSUs, and no performance-based or market-based PSUs vested. During the three months ended March 31, 2020, no market-based PSUs were granted and no performance-based or market-based PSUs vested.
During the three months ended March 31, 2021, no stock options were granted and no stock options were exercised. During the three months ended March 31, 2020, the Company did not grant any stock options and no stock options were exercised.
As of March 31, 2021, unrecognized compensation cost was $5.5 million related to unvested stock options, RSUs and PSUs.
13. Income Taxes
The Company uses the asset-liability method to account for taxes. Under this method, deferred income tax assets and liabilities result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the condensed consolidated financial statements that will result in income and deductions in future years.
The Company recognizes deferred tax assets if realization of such assets is more-likely-than-not. In order to make this determination, the Company evaluates a number of factors including the ability to generate future taxable income from reversing taxable temporary differences, forecasts of financial and taxable income or loss, and the ability to carryback certain operating losses to refund taxes paid in prior years. The cumulative loss incurred over the three-year period ended March 31, 2021 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 March 31, 2021.
The Company’s current effective income tax rate that has been applied to normal, recurring operations for the three months ended March 31, 2021 was (1.0)%. The Company’s actual effective income tax rate for the three months ended March 31, 2021, after discrete items, was (0.9)%.
As of both March 31, 2021, and December 31, 2020, the Company had $19 thousand, respectively, of gross unrecognized tax benefits, of which $15 thousand, respectively, would impact the effective income tax rate if recognized. Although the Company believes the tax accruals provided are reasonable, the final determination of tax returns under review or returns that may be reviewed in the future and any related litigation could result in tax liabilities that materially differ from the Company’s historical income tax provisions and accruals.
The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The tax years 2001 through 2019 are open to examination by major taxing jurisdictions to which the Company is subject.
During the quarter ended March 31, 2021, the Company obtained the Joint Committee on Taxation approval of the net operating loss carryback refund claims filed under the 2020 CARES Act and the IRS audit examinations of the Company’s income tax returns for the years 2013 through 2016 was finalized. The IRS examinations had no adverse material impact on the Company’s overall financial results as of March 31, 2021.
During the quarter ended March 31, 2021, the FTB audit examinations of the Company’s income tax returns for the tax years ended December 31, 2013 through 2015 were finalized. The FTB examinations had no adverse material impact on the Company's overall financial results as of March 31, 2021.
18
ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
14. Regulatory
The Company is subject to extensive regulation by federal and state governmental agencies and accrediting bodies. In particular, the Higher Education Act of 1965, as amended (“Higher Education Act”), and the regulations promulgated thereunder by the U.S. Department of Education (“Department”) subject the Company and its university partners to significant regulatory scrutiny on the basis of numerous standards that institutions of higher education must satisfy in order to participate in the various federal student financial aid programs under Title IV of the Higher Education Act (“Title IV programs”).
Department of Education On-Site Program Review of former Ashford University
In December 2016, the Department informed the University that it intended to continue the on-site program review, which commenced in January 2017 and initially covered the 2015-2016 and 2016-2017 award years, but may be expanded if the Department deems such expansion appropriate. To date, the Company has not received a draft report from the Department.
Department of Education Close Out Audit of University of the Rockies
The Company previously recorded an expense of $1.5 million during the fiscal year 2018, in relation to the close out audit of University of the Rockies resulting from its merger with the University in October 2018. The expense was recorded in relation to borrower defense to repayment regulations. On September 26, 2019, the Department sent the University a Final Audit Determination letter for the University of the Rockies. This letter confirmed that with the exception of the borrower defense to repayment regulations, none of the other audit findings resulted in financial liability. The Department also stated that additional liabilities could accrue in the future. On December 19, 2019, the Company filed an administrative appeal with the Department appealing the alleged liability on the basis that the University of Rockies did not close but rather merged with the University. The briefing on the appeal is complete and the Company is awaiting a decision by the administrative law judge.
WSCUC Accreditation of former Ashford University
Global Campus is regionally accredited by WASC Senior College and University Commission (“WSCUC”). In July 2013, WSCUC granted Initial Accreditation to the University for five years, until July 2018. In December 2013, the University effected its transition to WSCUC accreditation and designated its San Diego, California facilities as its main campus and its Clinton, Iowa campus as an additional location. As part of its institutional review process, WSCUC commenced its comprehensive review of the University with an off-site review in March 2018. As part of the WSCUC Institutional Review Process a Reaffirmation of Accreditation Visit was conducted by an evaluation team in April 2019. At its meeting in June 2019, the Commission acted to reaffirm accreditation through Spring 2025.
In connection with the Purchase Agreement by and among the Company and the University of Arizona, the Company submitted to WSCUC, on July 1, 2020, a substantive change application for a change in ownership from the University to Global Campus which required review and approval by the Substantive Change Committee and the Structural Change Committee of the Commission.
On November 12, 2020, WSCUC notified Zovio that it had approved the change of control application filed to complete the Sale Transaction, subject to certain conditions. These conditions included (i) ensuring that Global Campus is differentiated effectively from the University of Arizona and its affiliates in marketing materials; (ii) providing a report to WSCUC within 90 days of the close of the transaction outlining the actionable steps it will take to address student success including in the form of retention and graduation; (iii) those officers, administrators and related parties who become Global Campus officers or administrators divest themselves of their financial and ownership interest in the Company; and (iv) Global Campus and the Company submit a revised strategic services agreement which incorporates any applicable key performance indicators into that agreement. Additionally, WSCUC notified Global Campus that the provisions of the Notice of Concern issued as part of the reaffirmation of the University in July 2019 remain in effect and that WSCUC will conduct a post-implementation site visit of Global Campus within six months of the closing of the Sale Transaction.
19
ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
Department of Education Regulation
On December 1, 2020, the parties to the Purchase Agreement entered into Amendment No. 1 to the Purchase Agreement (“Amendment”) pursuant to which, among other things, the University of Arizona and Global Campus waived the closing condition regarding issuance of a pre-acquisition review notice by the Department of Education. Under the terms of the Purchase Agreement, as amended, the Closing was subject to customary closing conditions for transactions in this sector. The Department is expected to conduct a post-closing review of Global Campus following the Sale Transaction consistent with the Department’s procedures during which the Department makes a determination on the institution’s request for recertification from the Department following the change of control, including whether to impose or place other conditions or restrictions.
To be eligible to participate in Title IV programs, an institution must comply with the Higher Education Act and the regulations thereunder that are administered by the Department. The provisions of the Higher Education Act also include being in compliance with the following:
•The 90/10 Rule - A proprietary institution loses eligibility to participate in Title IV programs if the institution derives more than 90% of its revenues from Title IV program funds for two consecutive fiscal years, as calculated in accordance with Department regulations. Any institution that violates the 90/10 rule for two consecutive fiscal years becomes ineligible to participate in Title IV programs for at least fiscal years. In addition, an institution whose rate exceeds 90% for any single fiscal year is placed on provisional certification and may be subject to other enforcement measures.
•Cohort Default Rate - For each federal fiscal year, the Department calculates a rate of student defaults over a three-year measuring period for each educational institution, which is known as a “cohort default rate.” An institution may lose eligibility to participate in the Federal Direct Loan Program and the Federal Pell Grant Program if, for each of the three most recent federal fiscal years, 30% or more of its students who became subject to a repayment obligation in that federal fiscal year defaulted on such obligation by the end of the following federal fiscal year. The most recent official three-year cohort default rates for the University prior to the Sale Transaction for the 2017 federal fiscal year, were 14.7%.
•Financial Responsibility - The Department calculates an institution’s composite score for financial responsibility based on its (i) equity ratio, which measures the institution’s capital resources, ability to borrow and financial viability; (ii) primary reserve ratio, which measures the institution’s ability to support current operations from expendable resources; and (iii) net income ratio, which measures the institution’s ability to operate at a profit. An institution that does not meet the Department’s minimum composite score of 1.5 may demonstrate its financial responsibility by posting a letter of credit in favor of the Department and possibly accepting other conditions on its participation in the Title IV programs. Following the Sale Transaction, the University is no longer owned by Zovio, and therefore Global Campus will submit its stand-alone audited financial statements to the Department for the purpose of calculating the institution’s composite score.
Defense to Repayment
On October 28, 2016, the Department published borrower defense to repayment regulations to change processes that assist students in gaining relief under certain provisions of the Direct Loan Program regulations. These defense to repayment regulations allow a borrower to assert a defense to repayment on the basis of a substantial misrepresentation, any other misrepresentation in cases where certain other factors are present, a breach of contract or a favorable nondefault contested judgment against a school for its act or omission relating to the making of the borrower’s loan or the provision of educational services for which the loan was provided. In addition, the financial responsibility standards contained in the new regulations establish the conditions or events that trigger the requirement for an institution to provide the Department with financial protection in the form of a letter of credit or other security against potential institutional liabilities. Triggering conditions or events include, among others, certain state, federal or accrediting agency actions or investigations, and in the case of publicly traded companies, receipt of certain warnings from the SEC or the applicable stock exchange, or the failure to timely file a required annual or quarterly report with the SEC. The new regulations also prohibit schools from requiring that students agree to settle future disputes through arbitration.
20
ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
On March 15, 2019, the Department issued guidance for the implementation of parts of the regulations. The guidance covers an institution’s responsibility in regard to reporting mandatory and discretionary triggers as part of the financial responsibility standards, class action bans and pre-dispute arbitration agreements, submission of arbitral and judicial records, and repayment rates.
On August 30, 2019, the Department finalized the regulations derived from the 2017-2018 negotiated rulemaking process and subsequent public comments. This version of the borrower defense regulations applies to all federal student loans made on or after July 1, 2020, and, among other things: grants borrowers the right to assert borrower defense to repayment claims against institutions, regardless of whether the loan is in default or in collection proceedings; allows borrowers to file defense to repayment claims three years from either the student’s date of graduation or withdrawal from the institution; and gives students the ability to allege a specific amount of financial harm and to obtain relief in an amount determined by the Department, which may be greater or lesser than their original claim amount. It also includes financial triggers and other factors for recalculating an institution’s financial responsibility composite score that differ from those in the 2016 regulations.
On June 8, 2020, President Trump vetoed House Joint Resolution 56, a Congressional Review Act resolution that would block the Trump administration’s rewrite of the Obama administration’s borrower defense to repayment rule. On June 26, 2020, the House of Representatives failed to override President Trump’s veto. The rewritten borrower defense to repayment rule went into effect on July 1, 2020 and will apply to any federal student loans made on that date or after.
In July 2020, the Department notified Zovio that they would be initiating a preliminary review of borrower defense applications from borrowers who made claims regarding the University. As part of the initial fact-finding process, the Department will send individual student claims to the University and allow the institution the opportunity to submit a response to the borrower’s allegations. Zovio has begun to receive these claims and is reviewing and compiling the individual facts of each case to submit to the Department for their review. Zovio has responded to everything received and cannot predict the outcome of this review at this time.
15. Commitments and Contingencies
Litigation
From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. When the Company becomes aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. In accordance with GAAP, the Company records loss contingencies in its financial statements only for matters in which losses are probable and can be reasonably estimated. Where a range of loss can be reasonably estimated, the best estimate within that range should be accrued. If no estimate is better than another, the Company records the minimum estimated liability in the range. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the nature of the specific claim if the likelihood of a potential loss is reasonably possible and the amount involved could be material. The Company continuously assesses the potential liability related to the Company’s pending litigation and revises its estimates when additional information becomes available. Other than the specific liabilities assumed by Global Campus, the Company and AU LLC will generally remain responsible for liabilities of the University relating to periods prior to the closing of the Sale Transaction. Below is a list of material legal proceedings to which the Company or its subsidiaries is a party.
California Attorney General Investigation of For-Profit Educational Institutions
In January 2013, the Company received from the Attorney General of the State of California (“CA Attorney General”) an Investigative Subpoena relating to the CA Attorney General’s investigation of for-profit educational institutions. Pursuant to the Investigative Subpoena, the CA Attorney General requested documents and detailed information for the time period March 1, 2009 to the date of the Investigative Subpoena. On July 24, 2013, the CA Attorney General filed a petition to enforce certain categories of the Investigative Subpoena related to recorded calls and electronic marketing data. On September 25, 2013, the Company reached an agreement with the CA Attorney General to produce certain categories of the documents requested in the petition and stipulated to continue the hearing on the petition to enforce from October 3, 2013 to January 9, 2014. On January 13, 2014 and June 19, 2014, the Company received additional Investigative Subpoenas from the CA Attorney General, each requesting additional documents and information for the time period March 1, 2009 through each such date.
21
ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
Representatives from the Company met with representatives from the CA Attorney General’s office on several occasions to discuss the status of the investigation, additional information requests, and specific concerns related to possible unfair business practices in connection with the Company’s recruitment of students and debt collection practices.
The parties also discussed a potential resolution involving injunctive relief, other non-monetary remedies and a payment to the CA Attorney General and in the third quarter of 2016, the Company recorded an expense of $8.0 million related to the cost of resolving this matter.
The parties did not reach a resolution and on November 29, 2017, the CA Attorney General filed suit against Ashford and the Company. The Company intends to vigorously defend this case and emphatically denies the allegations made by the CA Attorney General that it ever deliberately misled its students, falsely advertised its programs, or in any way was not fully accurate in its statements to investors. However, the outcome of this legal proceeding is uncertain at this point because of the many questions of fact and law that may arise. At present, the Company cannot reasonably estimate any updated range of loss for this action based on currently available information and as such, the prior accrual of $8.0 million remains and is recorded on the accounts payable and accrued liabilities line item on the condensed consolidated balance sheets.
Massachusetts Attorney General Investigation of Bridgepoint Education, Inc. and Ashford University
On July 21, 2014, the Company received from the Attorney General of the State of Massachusetts (“MA Attorney General”) a Civil Investigative Demand (“MA CID”) relating to the MA Attorney General’s investigation of for-profit educational institutions and whether the University’s business practices complied with Massachusetts consumer protection laws. Pursuant to the MA CID, the MA Attorney General has requested from the Company and Global Campus 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.
16. Segment Information
Prior to December 1, 2020, the Company operated in one segment for reporting purposes. Following the Sale Transaction, the Company now operates in two reportable segments: The University Partners Segment and the Zovio Growth Segment. These segments were recast based upon the Company’s respective offerings.
On December 1, 2020, the Company consummated the Sale Transaction. For additional information see Note 1, “Nature of Business.” The Company reports segment information based upon the management approach, and the Sale Transaction resulted in a change in how the chief operating decision maker viewed the operations moving forward. This change included the creation of three operating segments: Fullstack, TutorMe, and Zovio, and two reportable segments: The University Partners Segment and the Zovio Growth Segment.
The Company’s operating segments are determined based on (i) financial information reviewed by the chief operating decision maker, (ii) internal management and related reporting structure, and (iii) the basis upon which the chief operating decision maker makes resource allocation decisions. During the quarter ended March 31, 2021, in conjunction with the departure of the Company's chief executive officer, the chief operating decision maker transitioned to the Office of the CEO, which is comprised of three executives. The Fullstack and TutorMe operating segments are aggregated into a single reportable segment, the Zovio Growth Segment. The aggregation of the Fullstack and TutorMe operating segments is based on their uniform customer bases and methods of services provided, as well as evaluation of quantitative thresholds as required by ASC 280-10-50-12. Based on these same quantitative tests, the Zovio operating segment is a separate reportable segment, the University Partners Segment. This change in segment reporting did not have any impact on the determination of reporting units used to assess impairment under ASC 350, Intangibles - Goodwill and Other.
The Company’s University Partners Segment includes the technology and services provided to colleges and universities to enable the online delivery of degree programs and the goods and services. The Company’s University Partners Segment also includes the tuition revenue related to the University prior to the Sale Transaction on December 1, 2020. The Company’s Zovio Growth Segment includes its subsidiaries Fullstack and TutorMe, an online coding academy and tutoring service, respectively.
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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 March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenue by segment | |||||||||||
| University Partners Segment | $ | 69,679 | $ | 93,866 | |||||||
| Zovio Growth Segment | 7,180 | 4,006 | |||||||||
| Total revenue and other revenue | $ | 76,859 | $ | 97,872 | |||||||
| Segment profitability | |||||||||||
| University Partners Segment | $ | (5,437) | $ | (3,582) | |||||||
| Zovio Growth Segment | (1,615) | (3,935) | |||||||||
| Total segment profitability(1) | $ | (7,052) | $ | (7,517) | |||||||
(1) Segment profitability represents EBITDA.
The following table reconciles total loss before income taxes to total segment profitability (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Loss before income taxes | $ | (9,410) | $ | (10,757) | |||||||
| Adjustments: | |||||||||||
| Other expense, net | 73 | 262 | |||||||||
| Depreciation and amortization expense | 2,285 | 2,978 | |||||||||
| Total segment profitability | $ | (7,052) | $ | (7,517) | |||||||
For each the three months ended March 31, 2021 and March 31, 2020, Global Campus accounted for the entire amount of the University Partners segment revenue, respectively.
For each of the three months ended March 31, 2021 or 2020, 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 March 31, 2021 | As of December 31, 2020 | ||||||||||
| University Partners Segment | $ | 113,706 | $ | 111,830 | |||||||
| Zovio Growth Segment | 46,340 | 49,476 | |||||||||
| Total assets | $ | 160,046 | $ | 161,306 | |||||||
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ZOVIO INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company’s accounts receivable and deferred revenue in each segment are as follows (in thousands):
| As of March 31, 2021 | As of December 31, 2020 | ||||||||||
| University Partners Segment accounts receivable | $ | 3 | $ | 45 | |||||||
| Zovio Growth Segment accounts receivable | 6,828 | 7,159 | |||||||||
| Total accounts receivable | $ | 6,831 | $ | 7,204 | |||||||
| University Partners Segment deferred revenue | $ | 10 | $ | 10 | |||||||
| Zovio Growth Segment deferred revenue | 8,067 | 8,080 | |||||||||
| Total deferred revenue | $ | 8,077 | $ | 8,090 | |||||||
As of each March 31, 2021 and December 31, 2020, there were no individual partners or customers which accounted for 10% or more of the University Partners segment net accounts receivable balance. Additionally, as of each March 31, 2021 and December 31, 2020, there were no individual partners or customers which accounted for 10% or more of the Zovio Growth segment net accounts receivable balance, as customers are individual students or third parties paying on their behalf, rather than university clients.
The Company’s goodwill amounts both as of March 31, 2021 and December 31, 2020, respectively, are fully attributable to the Zovio Growth Segment. For additional information on goodwill, see Note 8, “Other Significant Balance Sheet Accounts - Goodwill and intangibles, net.”
17. Subsequent Events
Following a review of the operations and cost structure of the Company, on April 29, 2021, the Company's management adopted a plan to reduce operating expenses, implement cost reductions and conserve cash resources (the “Restructuring Plan”). The Restructuring Plan will result in a reduction in force of approximately 65 of our employees across the Company. While these cost actions were broad-based across the organization to drive overall efficiencies, they were centered primarily on administrative, non-student facing functions to ensure the Company is able to maintain the necessary resources to support our university partners. The Restructuring Plan is expected to be substantially completed by June 30, 2021. The Company plans to offer severance benefits to the affected employees, including cash severance payments and outplacement services. Each affected employee’s eligibility for the severance benefits is contingent upon such employee’s execution of a general release of claims against the Company. The Company currently expects to record a restructuring charge of approximately $2.3 million during the second quarter of 2021 as a result of the Restructuring Plan, consisting of one-time termination benefits for employee severance, benefits and related costs, all of which are expected to result in cash expenditures and substantially all of which will be paid out over the next 12 months.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussions and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto included in Part I, Item 1 of this report. For additional information regarding our financial condition and results of operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020 (“Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on February 24, 2021, as well as our consolidated financial statements and related notes thereto included in Part II, Item 8 of the Form 10-K.
Unless the context indicates otherwise, in this report the terms “Zovio,” “the Company,” “we,” “us” and “our” refer to Zovio Inc, a Delaware corporation, and its wholly owned and indirect subsidiaries.
Forward-Looking Statements
This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements may include, among others, statements regarding future events, future financial and operating results, strategies, expectations, the competitive environment, regulation and the availability of financial resources, including, without limitation, statements regarding:
•our ability and the ability of our current or any future university partners to comply with the extensive and continually evolving regulatory framework, applicable to such partners, including but not limited to Title IV of the Higher Education Act of 1965, as amended (“Higher Education Act”), and its implementing regulations, the gainful employment regulations, defense to repayment regulations, state authorization regulations, state laws and regulatory requirements, and accrediting agency requirements;
•our ability to meet any conditions of the U.S. Department of Education (the “Department”) with respect to the Asset Purchase and Sale Agreement (the “Purchase Agreement”) with the Arizona Board of Regents, for and on behalf of the University of Arizona (“University of Arizona”) and the University of Arizona Global Campus, a newly formed Arizona nonprofit corporation (“Global Campus”);
•projections, predictions and expectations regarding our business, financial position, results of operations, liquidity and capital resources and enrollment trends;
•the ability of our current or any future university partners to obtain continued approval of programs for educational benefits to active duty military students or to veteran students;
•the outcome of various lawsuits, claims and legal proceedings;
•the impact of COVID-19 on the economy, and the demand for our services and the collectibility of our receivables;
•initiatives focused on student success, retention and academic quality;
•expectations regarding the adequacy of our cash and cash equivalents and other sources of liquidity for ongoing operations, planned capital expenditures and working capital requirements;
•expectations regarding capital expenditures;
•the impact of accounting standards on our financial statements;
•the reasonableness and acceptance of our tax accruals;
•management’s goals and objectives; and
•other similar matters that are not historical facts.
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Forward-looking statements may generally be identified by the use of words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and similar expressions, as well as statements in the future tense.
Forward-looking statements should not be interpreted as a guarantee of future performance or results and will not necessarily be accurate indications of the times at or by which such performance or results will be achieved. Forward-looking statements are based on information available at the time such statements are made and the current good faith beliefs, expectations and assumptions of management regarding future events. Such statements are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. For a discussion of some of these risks and uncertainties, see Part II, Item 1A, “Risk Factors” as well as the discussion of such risks and uncertainties contained in our other filings with the SEC, including the Form 10-K.
All forward-looking statements in this report are qualified in their entirety by the cautionary statements included herein, and you should not place undue reliance on any forward-looking statements. These forward-looking statements speak only as of the date of this report. We assume no obligation to update or revise any forward-looking statements contained herein to reflect actual results or any changes in our assumptions or expectations or any other factors affecting such forward-looking statements, except to the extent required by applicable securities laws. If we do update or revise one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
Overview
Zovio Inc is an education technology services company that partners with higher education institutions and employers to deliver a suite of innovative, personalized solutions and learning experiences to help learners and leaders achieve their aspirations and help institutions grow. Zovio’s expertise across academic disciplines, credential levels, learning experiences, and modalities has powered student and partner success through a tailored, customer-focused approach bolstered by data analytics. The Company provides student recruitment and enrollment systems, retention strategies, educational tools and curriculums.
In April 2019, the Company acquired both Fullstack Academy, Inc (“Fullstack”) and TutorMe.com, Inc. (“TutorMe”), which each became wholly-owned subsidiaries of the Company. Fullstack is an innovative web development school offering immersive technology bootcamps, and TutorMe is an online education platform that provides 24/7 on-demand tutoring and online courses. Fullstack and TutorMe are both contributors to Zovio's strategy of becoming a best-in-class education technology services company.
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Key operating data
In evaluating our operating performance, our management focuses in large part on our revenue and operating income (loss). The following table, which should be read in conjunction with our annual consolidated financial statements included elsewhere in this report, presents our key operating data for each of the periods presented (in thousands):
| Three Months Ended March 31, | |||||||||||
| Consolidated Statement of Income Data: | 2021 | 2020 | |||||||||
| Revenue and other revenue | $ | 76,859 | $ | 97,872 | |||||||
| Operating loss | $ | (9,337) | $ | (10,495) | |||||||
Key Financial Metrics
Revenue and other revenue
On December 1, 2020, the Company entered into the Services Agreement with Global Campus whereby the Company will provide certain educational technology and support services, which has an initial term of fifteen years, subject to renewal options and certain early termination provisions. The amounts earned from the Services Agreement are denoted as revenue on the consolidated statements of income (loss). On December 1, 2020, the Company also entered into a transition services agreement with Global Campus whereby the Company will provide certain temporary transition services (the “Transition Services Agreement”), which has a term of three years. The amounts earned from the Transition Services Agreement are denoted as other revenue on the consolidated statements of income (loss). Subsequent to December 1, 2020, revenue is primarily derived from service revenue from our university partners.
Prior to December 1, 2020, the majority of the amounts earned by the Company were from tuition, technology fees, and digital materials related to students whose primary funding source is governmental funding. The amounts earned from these streams is denoted as university-related revenue on the consolidated statements of income (loss). Factors affecting this revenue include (i) the number of students who enroll and remain enrolled in courses, (ii) degree and program mix, (iii) changes in tuition rates and (iv) the amount of scholarships offered. Enrollments are a function of the number of continuing students at the beginning of each period and new enrollments during the period, offset by students who either graduated or withdrew during the period.
Costs and expenses
Technology and academic services costs consist primarily of costs related to ongoing maintenance of educational infrastructure, including online course delivery and management, student records, assessment, customer relations management and other internal administrative systems. This also includes costs to provide support for curriculum and new program development, support for faculty training and development, technical support and assistance with state compliance. This expense category includes salaries, benefits and share-based compensation, information technology costs, curriculum and new program development costs (which are expensed as incurred) and other costs associated with these support services. This category also includes an allocation of depreciation, amortization, rent, and occupancy costs attributable to the provision of these services.
Counseling services and support costs consist primarily of costs including team-based counseling and other support to prospective and current students as well as financial aid processing. This expense category includes salaries, benefits and share-based compensation, and other costs such as dues, fees and subscriptions and travel costs. This category also includes an allocation of depreciation, amortization, rent, and occupancy costs attributable to the provision of these services.
Marketing and communication costs consist primarily of lead acquisition, digital communication strategies, brand identity advertising, media planning and strategy, video, data science and analysis, marketing to potential students and other promotional and communication services. This category was primarily from our historical captions of advertising and marketing and promotional. This expense category includes salaries, benefits and share-based compensation for marketing and communication personnel, brand advertising, marketing leads and other promotional and communication expenses. This category also includes an allocation of depreciation, amortization, rent, and occupancy costs attributable to the provision of these services. Advertising costs are expensed as incurred.
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General and administrative costs consist primarily of compensation and benefit costs (including related stock-based compensation) for employees engaged in corporate management, finance, human resources, compliance, and other corporate functions. This category also includes an allocation of depreciation, amortization, rent, and occupancy costs attributable to the provision of these services.
University-related expenses represent those costs that were transferred to Global Campus in the Sale Transaction and that are no longer incurred by the Company. These costs were previously primarily components of instructional costs and services, with some costs from admissions advisory and marketing and some general and administrative.
Restructuring and impairment expenses have historically been primarily comprised of (i) charges related to the write off and impairment of certain assets, (ii) severance costs related to headcount reductions made in connection with restructuring plans and (iii) estimated lease losses related to facilities vacated or consolidated under restructuring plans.
Factors Affecting Comparability
We believe the following factors have had, or can be expected to have, a significant effect on the comparability of recent or future results of operations:
Sale transaction
The results of operations prior to December 1, 2020 are not comparable to those following that date. On December 1, 2020, the Company entered into the Services Agreement with Global Campus whereby the Company will provide certain educational technology and support services. On December 1, 2020, the Company also entered into the Transition Services Agreement with Global Campus whereby the Company will provide certain temporary transition services. Subsequent to December 1, 2020, revenue is primarily derived from service revenue from our university partners.
Cost reductions
Following a review of the operations and cost structure of the Company, on April 29, 2021, the Company's management adopted a plan to reduce operating expenses, implement cost reductions and conserve cash resources (the “Restructuring Plan”). We believe that these costs reductions will deliver annualized savings of $40.0 million. The Restructuring Plan will result in a reduction in force of approximately 65 of our employees across the Company. While these cost actions were broad-based across the organization to drive overall efficiencies, they were centered primarily on administrative, non-student facing functions to ensure the Company is able to maintain the necessary resources to support our university partners. The Restructuring Plan is expected to be substantially completed by June 30, 2021. The Company plans to offer severance benefits to the affected employees, including cash severance payments and outplacement services. Each affected employee’s eligibility for the severance benefits is contingent upon such employee’s execution of a general release of claims against the Company. The Company currently expects to record a restructuring charge of approximately $2.3 million during the second quarter of 2021 as a result of the Restructuring Plan, consisting of one-time termination benefits for employee severance, benefits and related costs, all of which are expected to result in cash expenditures and substantially all of which will be paid out over the next 12 months.
Seasonality
Our operations are generally subject to seasonal trends. Our university partners generally experience a seasonal increase in new enrollments during the first quarter of each year, subsequent to holiday break, as well as during the third quarter each year, when most other colleges and universities begin their fall semesters. While our university partners enroll students throughout the year, the 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.
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Trends and uncertainties regarding continuing operations
Valuation allowance
We recognize deferred tax assets if realization of such assets is more-likely-than-not. In order to make this determination, we evaluate factors including the ability to generate future taxable income from reversing taxable temporary differences, forecasts of financial and taxable income or loss. The cumulative loss incurred over the three-year period ended March 31, 2021 constituted significant negative objective evidence against our ability to realize a benefit from our federal deferred tax assets. Such objective evidence limited our ability to consider in our evaluation other subjective evidence such as our projections for future growth. On the basis of our evaluation, we determined that our deferred tax assets were not more-likely-than-not to be realized and that a valuation allowance against our deferred tax assets should continue to be maintained as of March 31, 2021.
Critical Accounting Policies and Use of Estimates
The critical accounting policies and estimates used in the preparation of our consolidated financial statements are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Use of Estimates” included in Part II, Item 7 of the Form 10-K.
There were no other material changes to these critical accounting policies and estimates during the three months ended March 31, 2021.
Results of Operations
The following table sets forth our condensed consolidated statements of income data as a percentage of revenue for each of the periods indicated:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenue and other revenue | 100.0 | % | 100.0 | % | |||||||
| Costs and expenses: | |||||||||||
| Technology and academic services | 24.9 | 18.9 | |||||||||
| Counseling services and support | 32.9 | 23.8 | |||||||||
| Marketing and communication | 33.6 | 25.6 | |||||||||
| General and administrative | 20.8 | 13.7 | |||||||||
| University-related expenses | — | 25.9 | |||||||||
| Restructuring and impairment expense | — | 2.8 | |||||||||
| Total costs and expenses | 112.2 | 110.7 | |||||||||
| Operating loss | (12.2) | (10.7) | |||||||||
| Other expense, net | (0.1) | (0.3) | |||||||||
| Loss before income taxes | (12.3) | (11.0) | |||||||||
| Income tax expense (benefit) | 0.1 | (13.1) | |||||||||
| Net income (loss) | (12.4) | % | 2.1 | % | |||||||
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Total revenue and other revenue. Our total revenue and other revenue for the three months ended March 31, 2021 and 2020, was $76.9 million and $97.9 million, respectively, a decrease of $21.0 million, or 21.5%. For the three months ended March 31, 2021 and 2020, University Partners segment revenue was $69.7 million and $93.9 million, respectively, representing a decrease of 25.8%, and the Zovio Growth segment revenue was $7.2 million and $4.0 million, respectively, representing an increase of 79.2%.
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The decrease in revenue in the University Partners segment of $24.2 million between periods was primarily due to the change in business model in December 2020, and the related decrease in university-related revenue as compared to the prior year. This decrease was due to a decrease in average weekly enrollment for the three month period ended March 31, 2021, as compared to the three month period ended March 31, 2020. Partially offsetting the decrease in the University Partners segment was the increase of service revenue due to the Services Agreement entered into in December 2020, as well as an increase in other revenue generated from Transition Services Agreement of approximately $2.8 million.
The increase in revenue in the Zovio Growth segment between periods was primarily due to the growth in customer contracts experienced this year within our subsidiaries, Fullstack Academy and TutorMe.com.
Technology and academic services. Our technology and academic services for the three months ended March 31, 2021 and 2020, were $19.1 million and $18.5 million, respectively, an increase of $0.6 million, or 3.3%. Specific increases between periods primarily include license fees of $0.7 million, bad debt expense of $0.5 million, other technology and academic services of $0.5 million, and instructional supplies of $0.4 million, partially offset by an decrease in consulting and outside services of $0.8 million and facility costs of $0.5 million. Technology and academic services, as a percentage of revenue, for the three months ended March 31, 2021 and 2020, were 24.9% and 18.9%, respectively, an increase of 6.0%. This increase primarily included increases in employee costs of 2.4%, license fees of 1.4%, other technology and academic services of 1.1%, instructional supplies of 0.8%, and bad debt expense of 0.7%, partially offset by decreases in consulting and other outside services of 0.4% and facilities costs of 0.4%.
Counseling services and support. Our counseling services and support for the three months ended March 31, 2021 and 2020, were $25.3 million and $23.3 million, respectively, an increase of $2.0 million, or 8.6%. Specific factors contributing to the overall increase between periods were increases in employee costs of $3.7 million and human resources costs of $0.4 million, partially offset by increases in facilities costs of $1.5 million and other counseling services and support expenses of $0.6 million. Counseling services and support, as a percentage of revenue, for the three months ended March 31, 2021 and 2020, were 32.9% and 23.8%, respectively, an increase of 9.1%. This increase primarily included increases in employee costs of 9.7% and human resources costs of 0.7%, partially offset by decreases in facilities costs of 1.2% and other counseling services and support expenses of 0.5%.
Marketing and communication.. Our marketing and communication for the three months ended March 31, 2021 and 2020, were $25.8 million and $25.1 million, respectively, an increase of $0.7 million, or 3.0%. Specific factors contributing to the overall increase between periods were increases in employee costs of $0.8 million, consulting and outside services of $0.5 million, and advertising of $0.5 million, partially offset by a decrease in other marketing and communication expenses of $0.6 million. Marketing and communication, as a percentage of revenue, for the three months ended March 31, 2021 and 2020, were 33.6% and 25.6%, respectively, an increase of 8.0%. This increase primarily included increases in advertising of 6.2%, employee costs of 1.7%, and consulting and outside services of 0.8%, partially offset by a decrease in other marketing and communication expenses of 0.6%.
General and administrative. Our general and administrative expenses for the three months ended March 31, 2021 and 2020, were $15.9 million and $13.4 million, respectively, an increase of $2.5 million, or 18.7%. The increase between periods was primarily due to increases in executive severance of $3.5 million, insurance of $0.3 million and employee costs of $0.1 million, partially offset by a decrease in non-recurring stock compensation of $1.6 million and legal fees of $0.4 million. General and administrative expenses, as a percentage of revenue, for the three months ended March 31, 2021 and 2020, were 20.8% and 13.7%, respectively, an increase of 7.1%. This increase was primarily due to increases in executive severance of 4.5%, employee costs of 1.9%, and insurance of 0.5%, partially offset by a decrease in non-recurring stock compensation of 1.4%.
University-related expenses. We did not record any charges to university-related expenses for the three months ended March 31, 2021. For the three months ended March 31, 2020, these charges related to the legacy University.
Restructuring and impairment expense. We did not record any charge to restructuring and impairment expense for the three months ended March 31, 2021. For the three months ended March 31, 2020, we recorded a charge of approximately $2.8 million to restructuring and impairment expense, comprised primarily of a reduction in force and revised estimates of lease charges.
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Other expense, net. Our other expense, net, was $73 thousand for the three months ended March 31, 2021 and other expense, net, was $0.3 million for the three months ended March 31, 2020. The change between periods was primarily due to a loss on deferred compensation investments for the three months ended March 31, 2021.
Income tax expense (benefit). We recognized an income tax expense of $0.1 million and an income tax benefit of $12.8 million for the three months ended March 31, 2021 and March 31, 2020, respectively, at effective tax rates of 0.9% and 118.8%, respectively. The income tax expense for the three months ended March 31, 2021 was mainly attributable to current state income taxes. The income tax benefit for the three months ended March 31, 2020 was attributable to certain changes in income tax law related to net operating loss carryback from tax years 2018 and 2019 to tax years 2013 and 2014 as a result of the CARES Act.
Net income (loss). Our net loss was $9.5 million for the three months ended March 31, 2021, compared to net income of $2.0 million for the three months ended March 31, 2020, a $11.5 million increase in the net loss as a result of the factors discussed above.
Liquidity and Capital Resources
We finance our operating activities and capital expenditures primarily through cash on hand. At March 31, 2021 and December 31, 2020, our cash and cash equivalents were $35.1 million and $35.5 million, total restricted cash was $20.0 million and $20.0 million, and we had investments of $1.4 million and $1.5 million, respectively. At March 31, 2021, we had $3.1 million of long-term notes payable.
There was a slight decrease in the fair value of our investments at March 31, 2021 as compared to December 31, 2020. We believe that any fluctuations we have experienced are temporary in nature and, while some of our securities are classified as available-for-sale, we have the ability and intent to hold them until maturity, if necessary, to recover their full value.
We manage our excess cash pursuant to the quantitative and qualitative operational guidelines of our cash investment policy. Our cash investment policy, which is managed by our Chief Financial Officer, has the following primary objectives: (i) preserving principal, (ii) meeting our liquidity needs, (iii) minimizing market and credit risk, and (iv) providing after-tax returns. Under the policy’s guidelines, we invest our excess cash exclusively in high-quality, U.S. dollar-denominated financial instruments. For a discussion of the measures we use to mitigate the exposure of our cash investments to market risk, credit risk and interest rate risk, see Part I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk” in this Form 10-Q.
Title IV and other governmental funding
Our largest university partner, Global Campus, derives the majority of its respective cash revenues from students who enroll and are eligible for various federal student financial assistance programs authorized under Title IV of the Higher Education Act. An institution is subject to significant regulatory scrutiny as a result of numerous standards that must be 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 Global Campus is from government tuition assistance programs for military personnel, including veterans, payments made in cash by individuals, reimbursement from corporate partnerships and private loans from third parties.
Operating activities
Net cash provided by operating activities was $0.8 million for the three months ended March 31, 2021, compared to net cash used in operating activities of $6.2 million for the three months ended March 31, 2020, an overall increase between periods in net cash provided by operating activities of $7.0 million. The increase in cash provided by operating activities is primarily attributable to the net increases in the working capital accounts, partially offset by the $11.5 million increase in net loss between periods and the decreases in non-cash lease expense and in non-cash stock compensation.
Investing activities
Net cash used in investing activities was $0.1 million for the three months ended March 31, 2021, compared to net cash used in investing activities of $1.3 million for the three months ended March 31, 2020. Capital expenditures for the three months ended March 31, 2021 were $0.2 million, compared to $1.2 million for the three months ended March 31, 2020. During the three months ended March 31, 2021 and 2020, we capitalized costs for intangibles of $0.1 million and $0.1 million, respectively. We expect our capital expenditures to be approximately $3.1 million for the year ending December 31, 2021.
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Financing activities
Net cash used in financing activities was $1.1 million for the three months ended March 31, 2021, compared to net cash provided by financing activities of $0.9 million for the three months ended March 31, 2020. During each of the three months ended March 31, 2021 and 2020, net cash used included tax withholdings related to the issuance of restricted stock units vesting. For the three months ended March 31, 2020, we received $1.1 million of cash which was originally to be repaid as a function of generating future revenue.
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. Following the sale transaction in December 2020, the majority of our cash comes from one source. There can be no assurance that additional funding, if necessary, will be available to us on favorable terms, if at all.
Off-Balance Sheet Arrangements
As part of our normal business operations, we are required to provide surety bonds in certain states where we do business. We entered into a surety bond facility with an insurance company to provide such bonds when required. As of March 31, 2021, the surety had issued $2.6 million of bonds on our behalf under this facility.
Significant Contractual Obligations
The following table sets forth, as of March 31, 2021, certain significant cash and contractual obligations that may affect our future liquidity:
| Payments Due by Period | |||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Total | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | ||||||||||||||||||||||||||||||||||
| Operating lease obligations | $ | 39,244 | $ | 6,252 | $ | 5,400 | $ | 3,831 | $ | 3,538 | $ | 3,077 | $ | 17,146 | |||||||||||||||||||||||||||
| Other contractual obligations | 16,959 | 6,301 | 6,314 | 4,322 | 22 | — | — | ||||||||||||||||||||||||||||||||||
| Uncertain tax positions | 28 | — | 28 | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Total | $ | 56,231 | $ | 12,553 | $ | 11,742 | $ | 8,153 | $ | 3,560 | $ | 3,077 | $ | 17,146 | |||||||||||||||||||||||||||
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Note 2, “Summary of Significant Accounting Policies” to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market and Credit Risk
Pursuant to our cash investment policy, we attempt to mitigate the exposure of our cash and investments to market and credit risk by (i) diversifying concentration to ensure we are not overly concentrated in a limited number of financial institutions, (ii) monitoring and managing the risks associated with the national banking and credit markets, (iii) investing in U.S. dollar-denominated assets and instruments only, (iv) diversifying account structures so that we maintain a decentralized account portfolio with numerous stable, highly rated and liquid financial institutions and (v) ensuring that our investment procedures maintain a defined and specific scope such that we will not invest in higher-risk investment accounts, including financial swaps or derivative and corporate equities. Accordingly, pursuant to the guidelines established by our cash investment policy, we invest our excess cash exclusively in high-quality, U.S. dollar-denominated financial instruments.
Despite the 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.
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Interest Rate Risk
To the extent we borrow funds, we would be subject to fluctuations in interest rates. As of March 31, 2021, we had approximately $3.1 million in long-term notes payable.
Our future investment income may fall short of expectations due to changes in interest rates. At March 31, 2021, a hypothetical 10% increase or decrease in interest rates would not have a material impact on our future earnings, fair value or cash flows related to interest earned on our cash, cash equivalents or investments.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act, that are designed to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Principal Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(b) and Rule 15d-15(b) of the Exchange Act. Based on that evaluation, our Chief Executive Officer and our Principal Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2021.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting, during the three months ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding our legal proceedings, refer to Note 15, “Commitments and Contingencies” to our condensed consolidated financial statements included in Part I, Item 1 of this report, which note is incorporated by reference into this Part II, Item 1.
Item 1A. Risk Factors
Investing in our common stock involves risk. Before making an investment in our common stock, you should carefully consider the risk factors discussed in Part I, Item 1A, “Risk Factors” of the Form 10-K. The risks described in the Form 10-K are those which we believe are the material risks we face, and such risks could materially adversely affect our business, prospects, financial condition, cash flows and results of operations. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may impact us. Except as set forth below, there have been no material changes in our risk factors from those previously disclosed in the Form 10-K.
Changes to the 90/10 rule or related Title IV regulation could adversely impact our university partners, which in turn could adversely affect our revenues or our ability to grow.
In March 2021, President Biden signed the American Rescue Plan Act (“ARPA”) of 2021. The ARPA includes a major change in the 90/10 revenue test that provides for-profit institutions and their students access to the FSA programs. Under the ARPA, the Higher Education Act would be modified to change the formula from counting only Title IV program funds on the 90 side to instead include all “federal funds that are disbursed or delivered to or on behalf of a student to be used to attend such institution” or collectively “federal education assistance funds.” The 90/10 provision will be subject to negotiated rulemaking after October 2021, with an earliest effective date on or after January 1, 2023. If this change were to go into effect, it could adversely impact our university partners, which in turn could adversely affect our revenues or our ability to grow.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
Item 2.05. Costs Associated with Exit or Disposal Activities.
On May 11, 2021, management initiated a plan of termination. For additional information, see Note 17, “Subsequent Events” on page 25 included in Part I, Item 1 of this report on Form 10-Q.
Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
In April 2021, Victor K. Nichols was appointed as the lead independent director for our Company. George P. Pernsteiner, our Chairman of the Board, was previously independent but is currently serving in the role of Interim CEO and Office of the CEO.
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On May 11, 2021, we notified Thomas J. McCarty, EVP, Chief Marketing Officer, that his position was being eliminated effective as of May 17, 2021. Pursuant to our Executive Severance Plan, upon the effective date Mr. McCarty shall become entitled, subject to his execution and nonrevocation of a general release of claims, to receive certain severance benefits, including:
•an aggregate amount, paid bi-weekly over 12 months, equal to $329,600, which is equal to his annual base salary;
•a prorated 2021 bonus to be paid in 2022 concurrently with 2021 bonuses paid to our other senior executives; and
•reimbursement of premiums actually paid by Mr. McCarty for continued coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 or other applicable law each month for a period of twelve months.
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Item 6. Exhibits
| Exhibit | Description | |||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 101 | The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, filed with the SEC on May 12, 2021, formatted in Extensible Business Reporting Language (“XBRL”): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Income (Loss); (iii) the Condensed Consolidated Statements of Stockholders’ Equity; (iv) the Condensed Consolidated Statements of Cash Flows; and (v) the Notes to Condensed Consolidated Financial Statements. | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
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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 | |||||
| May 12, 2021 | /s/ KEVIN ROYAL | ||||
Kevin Royal Chief Financial Officer (Principal financial officer and duly authorized to sign on behalf of the registrant) | |||||
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