zvo-20210331

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


☐			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



PART I—FINANCIAL INFORMATION		4
Item 1. Financial Statements		4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Income (Loss)	5

	Condensed Consolidated Statements of Stockholders’ Equity	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3. Quantitative and Qualitative Disclosures About Market Risk		33
Item 4. Controls and Procedures		35

PART II—OTHER INFORMATION		36
Item 1. Legal Proceedings		36
Item 1A. Risk Factors		36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		36
Item 3. Defaults Upon Senior Securities		36
Item 4. Mine Safety Disclosures		36
Item 5. Other Information		36
Item 6. Exhibits		38
SIGNATURES		39

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.

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.

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.

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.

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.

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

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.

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

SEC Form 10-Q filed by Zovio Inc.