ZOVIO INC 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 endedDecember 31, 2021 ("Form 10-K"), filed with theSecurities and Exchange Commission ("SEC") onApril 15, 2022 , as well as our consolidated financial statements and related notes thereto included in Part II, Item 8 of the Form 10-K. Unless the context indicates otherwise, in this report the terms "Zovio ," "the Company," "we," "us" and "our" refer toZovio Inc , aDelaware 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; •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 collectability of our receivables;
•initiatives focused on student success, retention and academic quality;
•expectations regarding the adequacy of our cash and cash equivalents and other sources of liquidity for ongoing operations, planned capital expenditures and working capital requirements;
•expectations regarding capital expenditures;
•the impact of accounting standards on our financial statements;
•the reasonableness and acceptance of our tax accruals;
•the continued growth of our growth segment;
•management's goals and objectives; and
•other similar matters that are not historical facts.
Forward-looking statements may generally be identified by the use of words such
as "may," "should," "could," "would," "predicts," "potential," "continue,"
"expects," "anticipates," "future," "intends," "plans," "believes," "estimates"
and similar expressions, as well as statements in the future tense.
Forward-looking statements should not be interpreted as a guarantee of future
performance or results and will not necessarily be accurate indications of the
times at or by which such performance or results will be achieved, if at all.
Forward-
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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 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. InApril 2019 , the Company acquired bothFullstack Academy, Inc ("Fullstack") andTutorMe.com, Inc. ("TutorMe"), each of which 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. OnMay 23, 2022 , the Company completed the sale of TutorMe through an Asset Purchase Agreement (the "Purchase Agreement"). Pursuant to the Purchase Agreement, the Company and TutorMe sold substantially all of the assets of TutorMe's business in consideration of$55.0 million in cash and the assumption of certain liabilities of TutorMe's business. The consideration payable pursuant to the Purchase Agreement is subject to a customary post-closing working capital adjustment. OnJuly 31, 2022 , the Company entered into a new asset purchase agreement (the "New Asset Purchase Agreement"), pursuant to whichZovio sold to Global Campus all of the remaining assets ofZovio related to the UAGC Services Business (the "Transaction"). In connection with the Transaction, the parties terminated the previous agreements. In addition, UAGC (a) paid toZovio cash in the amount of$1.00 , (b) assumed all obligations underZovio's business contracts associated with the UAGC Services Businesses, including the lease for the facilities located inChandler, Arizona , which has a remaining term of eight years and approximately$20.0 million in rent obligations, (c) released Zovio from all remaining obligations under the UAGC/Zovio Agreements, including from all indemnification obligations under the Original Asset Purchase Agreement and all minimum payment guarantees under the UAGC Services Agreement, and (d) grantedZovio a general release of all claims. In addition, UAGC hired substantially all of the UAGC Services Business employees (as determined by UAGC). In turn,Zovio (i) paid to UAGC cash in the amount of$5.5 million , reflecting the allocated minimum payment owed byZovio to UAGC for the month ofJuly 2022 , (ii) paid to UAGC cash in the amount of$5.0 million , and assigned to UAGC the right to a security deposit in the amount of$2.7 million , for assumption ofZovio's obligations under theChandler lease, (iii) granted UAGC the right to any refund achieved byZovio after the closing of the Transaction from theState of California as a result of its appeal of that certain judgment set forth in the Statement of Decision issued by theSuperior Court of the State of California , County ofSan Diego onMarch 3, 2022 , (iv) released UAGC from all remaining obligations under the UAGC/Zovio Agreements, and (v) granted UAGC andUniversity of Arizona a general release of all claims. Following the consummation of the Transaction,Zovio and UAGC have no contractual or other relationship with one another, other than an agreement to reasonably cooperate to effect the transactions contemplated by the New Asset Purchase Agreement. As of the date hereof, UAGC operates the University as an integrated, online university.Zovio will continue to support the continued growth and expansion of itsFullstack Academy subsidiary and simultaneously explore strategic alternatives for that business. For additional information, see Note 16, "Subsequent Events." The ability of the Company to continue as a going concern is dependent on the Company generating cash from its operations and availability to other funding sources. Due to the Company's negative cash flows from operations and projected future negative cash flows from operations resulting from the transaction with Global Campus and reduction of availability of 25 -------------------------------------------------------------------------------- debt financing, substantial doubt exists about the Company's ability to continue as a going concern for the twelve months following the issuance of these condensed consolidated financial statements. Management plans to cover any shortfall from operations by selling its Fullstack subsidiary or obtaining debt financing. However, there can be no assurance the Company will be successful in these efforts. Key Financial Metrics In evaluating our operating performance, our management focuses in large part on our revenue and operating income (loss). The following table, which should be read in conjunction with our condensed consolidated financial statements included elsewhere in this report, presents our key operating data for each of the periods presented (in thousands): Three Months Ended Six Months Ended June 30, June 30, Consolidated Statement of Income (Loss) Data: 2022 2021 2022 2021 Revenue and other revenue$ 51,380 $ 69,186 $ 113,013 $ 146,045 Operating loss$ (841) $ (4,489) $ (8,073) $ (13,826)
Revenue and other revenue
Revenue is primarily derived from our service agreement with our university partners. OnDecember 1, 2020 , the Company entered into the Services Agreement with Global Campus whereby the Company provides certain educational technology and support services, which has an initial term of fifteen years and seven months, subject to renewal options and certain early termination provisions. The amounts earned from the Services Agreement are denoted as revenue on the condensed consolidated statements of income (loss). OnDecember 1, 2020 , the Company also entered into a transition services agreement with Global Campus whereby the Company will provide certain temporary transition services (the "Transition Services Agreement"), which has a term of three years. The amounts earned from the Transition Services Agreement are denoted as other revenue on the condensed consolidated statements of income (loss).
Costs and expenses
Technology and academic services costs consist primarily of costs related to
ongoing maintenance of educational infrastructure, including online course
delivery and management, student records, assessment, customer relations
management and other internal administrative systems. This also includes costs
to provide support for curriculum and new program development, support for
faculty training and development and technical support. This expense category
includes salaries, benefits and share-based compensation, information technology
costs, curriculum and new program development costs (which are expensed as
incurred), provision for bad debt and other costs associated with these support
services. This category also includes an allocation of depreciation,
amortization, rent, and occupancy costs attributable to the provision of these
services.
Counseling services and support costs consist primarily of costs including
team-based counseling and other support to prospective and current students as
well as financial aid processing. This expense category includes salaries,
benefits and share-based compensation, and other costs such as dues, fees and
subscriptions and travel costs. This category also includes an allocation of
depreciation, amortization, rent, and occupancy costs attributable to the
provision of these services.
Marketing and communication costs consist primarily of lead acquisition, digital
communication strategies, brand identity advertising, media planning and
strategy, video, data science and analysis, marketing to potential students and
other promotional and communication services. This category was primarily from
our historical captions of advertising and marketing and promotional. This
expense category includes salaries, benefits and share-based compensation for
marketing and communication personnel, brand advertising, marketing leads and
other promotional and communication expenses. This category also includes an
allocation of depreciation, amortization, rent, and occupancy costs attributable
to the provision of these services. Advertising costs are expensed as incurred.
General and administrative costs consist primarily of compensation and benefit
costs (including related stock-based compensation) for employees engaged in
corporate management, finance, human resources, compliance, and other corporate
functions. This category also includes an allocation of depreciation,
amortization, rent, and occupancy costs attributable to the provision of these
services.
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Legal expense is comprised of charges related to the estimated amounts to
resolve the previously disclosed investigation for the
Restructuring and impairment expenses in the current year are comprised of impairments of long-lived assets due to the transfer of assets to Global Campus with theJuly 31, 2022 Transaction. In the prior year, these charges are primarily comprised of severance costs related to headcount reductions made in connection with restructuring plans. Gain on transactions, net amount represents the gain on the sale of TutorMe inMay 2022 , partially offset by the loss on transaction for the write-off of the net asset adjustment due from Global Campus.
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:
Seasonality
Our operations are generally subject to seasonal trends. Our university partners generally experience higher new enrollments during the first quarter of each year, following a holiday break, as well as during the third quarter each year, when most other colleges and universities begin their fall semesters. While our university partners enroll students throughout the year, fourth quarter revenue is generally lower than other quarters due to the holiday break in December, with a relative increase in the first quarter of each year.
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 endedJune 30, 2022 constituted significant negative objective evidence against our ability to realize a benefit from our federal deferred tax assets. Such objective evidence limited our ability to consider in our evaluation other subjective evidence such as our projections for future growth. Based on our evaluation, we determined that our deferred tax assets were not more-likely-than-not to be realized and that a valuation allowance against our deferred tax assets should continue to be maintained as ofJune 30, 2022 .
Critical Accounting Policies and 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 Estimates" included in Part II, Item 7 of the Form 10-K. There were no material changes to these critical accounting policies and estimates during the six months endedJune 30, 2022 . 27 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth our condensed consolidated statements of income (loss) data as a percentage of revenue for each of the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Revenue and other revenue 100.0 % 100.0 % 100.0 % 100.0 %
Costs and expenses:
Technology and academic services 33.7 26.1 31.7 25.5
Counseling services and support 34.5 33.5 34.5 33.2
Marketing and communication 35.6 31.4 35.6 32.6
General and administrative 15.3 12.2 13.2 16.6
Legal expense 1.8 - 0.8 -
Restructuring and impairment expense 69.7 3.4 31.7 1.6
Gain on transactions, net (88.9) - (40.4) -
Total costs and expenses 101.7 106.6 107.1 109.5
Operating loss (1.7) (6.6) (7.1) (9.5)
Other income (expense), net (7.4) 0.3 (3.5) 0.1
Loss before income taxes (9.1) (6.3) (10.6) (9.4)
Income tax expense (benefit) 0.0 (0.3) 0.1 (0.1)
Net loss (9.1) % (5.8) % (10.7) % (9.3) %
Three Months Ended
Total revenue and other revenue. Total revenue and other revenue for the three months endedJune 30, 2022 and 2021, was$51.4 million and$69.2 million , respectively, a decrease of$17.8 million , or 25.7%. For the three months endedJune 30, 2022 and 2021,University Partners segment revenue was$42.8 million and$62.3 million , respectively, representing a decrease of 31.3%, and theZovio Growth segment revenue was$8.6 million and$6.9 million , respectively, representing an increase of 24.0%. The decrease in revenue in theUniversity Partners segment of$19.5 million between periods was primarily due to the related decrease in service revenue due to a decrease in average weekly enrollment for the three months endedJune 30, 2022 , as compared to the same period endedJune 30, 2021 . A component of theUniversity Partners segment revenue includes the other revenue generated from the Transition Services Agreement of approximately$1.7 million .
The increase in revenue in the Zovio Growth segment between periods was
primarily due to the growth in new customer contracts within the
Technology and academic services. Technology and academic services for the three months endedJune 30, 2022 and 2021, were$17.3 million and$18.1 million , respectively, a decrease of$0.8 million , or 4.2%. Specific decreases between periods primarily include administrative expenses of$0.6 million , employee costs related allocated costs of$0.3 million and bad debt expense of$0.2 million , partially offset by an increase in license fees of$0.4 million . Technology and academic services, as a percentage of revenue, for the three months endedJune 30, 2022 and 2021, were 33.7% and 26.1%, respectively, an increase of 7.6%. This increase primarily included increases in employee costs of 3.8%, license fees of 1.9%, consulting, outside services and professional fees of 1.3%, and instructional supplies and other technology and academic services expenses of 0.7%. Counseling services and support. Counseling services and support for the three months endedJune 30, 2022 and 2021, were$17.7 million and$23.2 million , respectively, a decrease of$5.5 million , or 23.6%. Specific factors contributing to the overall decrease between periods were primarily due to decreases in employee and related allocated costs of$4.4 million , facility costs of$0.8 million and depreciation of$0.1 million . Counseling services and support, as a percentage of revenue, for 28 -------------------------------------------------------------------------------- the three months endedJune 30, 2022 and 2021, were 34.5% and 33.5%, respectively, an increase of 1.0%. This increase primarily included an increase in employee costs of 1.7%, partially offset by a decrease in facility costs of 0.8%. Marketing and communication. Marketing and communication for the three months endedJune 30, 2022 and 2021, were$18.3 million and$21.7 million , respectively, a decrease of$3.5 million , or 15.9%. Specific factors contributing to the overall decrease between periods were decreases in advertising of$2.5 million , employee costs of$1.2 million , and license fees of$0.1 million , partially offset by an increase in consulting and outside services$0.5 million . Marketing and communication, as a percentage of revenue, for the three months endedJune 30, 2022 and 2021, were 35.6% and 31.4%, respectively, an increase of 4.2%. This increase was primarily due to increases in advertising of 3.4% and consulting and outside services of 1.6%, partially offset by a decrease in employee costs of 0.7%. General and administrative. General and administrative expenses for the three months endedJune 30, 2022 and 2021, were$7.8 million and$8.4 million , respectively, a decrease of$0.5 million , or 6.4%. The decrease between periods was primarily due to decreases in employee costs of$0.6 million , and professional fees of$0.6 million , partially offset by an increase in other general and administrative expenses of$0.6 million . General and administrative expenses, as a percentage of revenue, for the three months endedJune 30, 2022 and 2021, were 15.3% and 12.2%, respectively, an increase of 3.1%. This increase was primarily due to increases in other general and administrative expenses of 1.5%, employee costs of 0.9%, and insurance of 0.9%. Legal expense. Legal expense for three months endedJune 30, 2022 , were$0.9 million , which represents the additional amounts necessary for interest and penalties on the judgement relating to theCalifornia Attorney General's lawsuit. There were no such legal expense for the three months endedJune 30, 2021 . Restructuring and impairment expense. For the three months endedJune 30, 2022 , we recorded a charge of$35.9 million to restructuring and impairment expense. This related to the Company's long-lived assets due to the transfer of assets to Global Campus with theJuly 31, 2022 transaction. For the three months endedJune 30, 2021 , we recorded a charge of$2.3 million to restructuring and impairment expense. Gain on transactions, net. For the three months endedJune 30, 2022 , we recorded a net gain on the sale transactions of$45.7 million . Included in this amount was$51.5 million for the sale transaction of TutorMe, partially offset by the loss on transaction of$5.8 million for the write-off of the net asset adjustment due from Global Campus. Other expense, net. Other expense, net, was$3.8 million for the three months endedJune 30, 2022 and other expense, net was$0.2 million for the three months endedJune 30, 2021 , respectively. The amounts recognized during the three months endedJune 30, 2022 relate primarily to the write-off of the unamortized financing fees for the term loan and interest expense. Income tax expense (benefit). We recognized income tax expense of$8 thousand and an income tax benefit of$0.2 million for the three months endedJune 30, 2022 and 2021, respectively, at effective tax rates of (0.2)% and 5.3%, respectively. Net loss. Net loss was$4.7 million for the three months endedJune 30, 2022 , compared to net loss of$4.0 million for the three months endedJune 30, 2021 , a$0.7 million increase in income as a result of the factors discussed above.
Six Months Ended
Total revenue and other revenue. Total revenue and other revenue for the six months endedJune 30, 2022 and 2021, was$113.0 million and$146.0 million , respectively, a decrease of$33.0 million , or 22.6%. For the six months endedJune 30, 2022 and 2021, theUniversity Partners segment revenue was$95.1 million and$131.9 million , respectively, representing a decrease of 27.9%, and the Zovio Growth segment revenue was$17.9 million and$14.1 million , respectively, representing an increase of 26.8%. The decrease in revenue in theUniversity Partners segment of$36.8 million between periods was primarily due to the related decrease in service revenue due to a decrease in average weekly enrollment for the six-month period endedJune 30, 2021 , as compared to the same period endedJune 30, 2022 . A component of theUniversity Partners segment revenue includes the other revenue generated from the Transition Services Agreement of approximately$3.7 million .
The increase in revenue in the Zovio Growth segment between periods was
primarily due to the growth in customer contracts within the
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Technology and academic services. Technology and academic services for the six
months ended June 30, 2022 and 2021, were $35.8 million and $37.2 million ,
respectively, a decrease of $1.4 million , or 3.8%. Specific decreases between
periods include bad debt expense of $0.7 million , other technology and academic
services of $0.6 million , amortization of $0.3 million , and facilities costs of
$0.2 million , partially offset by an increase in license fees of $0.6 million .
Technology and academic services, as a percentage of revenue, for the six months
ended June 30, 2022 and 2021, were 31.7% and 25.5%, respectively, an increase of
6.2%. This increase primarily included increases in employee costs of 3.5%,
license fees of 1.5%, consulting and outside service of 0.6% and instructional
supplies of 0.5%.
Counseling services and support. Counseling services and support for the six
months ended June 30, 2022 and 2021, were $39.0 million and $48.5 million ,
respectively, a decrease of $9.5 million , or 19.5%. Specific decreases between
periods include decreases in employee and related allocated costs of $8.5
million and facility costs of $1.3 million , partially offset by a increase in
other counseling services and support expenses of $0.5 million . Counseling
services and support, as a percentage of revenue, for the six months ended
June 30, 2022 and 2021, were 34.5% and 33.2%, respectively, an increase of 1.3%.
This increase primarily included increases in employee costs of 1.1%, other
counseling services and support expense of 0.6%, and depreciation of 0.4%,
partially offset by a decrease in facility costs of 0.6%.
Marketing and communication. Marketing and communication for the six months
ended June 30, 2022 and 2021, were $40.2 million and $47.6 million ,
respectively, a decrease of $7.4 million , or 15.5%. Specific decreases between
periods were decreases in advertising of $5.5 million , employee costs of $1.9
million , and license fees of $0.2 million , partially offset by an increase in
consulting and outside services of $0.2 million . Marketing and communication, as
a percentage of revenue, for the six months ended June 30, 2022 and 2021, were
35.6% and 32.6%, respectively, an increase of 3.0%. This increase primarily
included increases in advertising of 2.6%, and consulting and outside services
of 7.0%, partially offset by a decrease in employee costs of 0.4%.
General and administrative. General and administrative expenses for the six
months ended June 30, 2022 and 2021, were $15.0 million and $24.3 million ,
respectively, a decrease of $9.3 million , or 38.4%. The decrease between periods
was primarily due to decreases in employee costs of $4.8 million , other general
and administrative expenses of $3.3 million , and professional fees of $1.1
million . Our general and administrative expenses, as a percentage of revenue,
for the six months ended June 30, 2022 and 2021, were 13.2% and 16.6%,
respectively, a decrease of 3.4%. This decrease was primarily due to decreases
in employee costs of 2.2%, other general and administrative expenses of 1.4%,
and professional fees of 0.7%, partially offset by an increase in insurance of
0.7%.
Restructuring and impairment expense. For the six months ended June 30, 2022 , we
recorded a charge of $35.9 million to restructuring and impairment expense. This
related to the Company's long-lived assets due to the transfer of assets to
Global Campus with the July 31, 2022 transaction. For the six months ended
June 30, 2021 , we recorded a charge of $2.3 million to restructuring and
impairment expense.
Gain on transactions, net. For the three months ended June 30, 2022 , we recorded
a net gain on the sale transactions of $45.7 million . Included in this amount
was $51.5 million for the sale transaction of TutorMe, partially offset by the
loss on transaction of $5.8 million for the for the write-off of the net asset
adjustment due from Global Campus.
Other (expense) income, net. Other expense, net was $4.0 million for the six
months ended June 30, 2022 , as compared to other income, net of $0.2 million for
the six months ended June 30, 2021 , a decrease of $4.2 million . The amounts
recognized during the six months ended June 30, 2022 relate primarily to the
write-off of the unamortized financing fees and interest expense.
Income tax expense (benefit). We recognized income tax expense of $0.1 million
and an income tax benefit of $0.1 million for the six months ended June 30, 2022
and 2021, respectively, at effective tax rates of (0.7)% and 1.0%, respectively.
Net loss. Our net loss was $12.1 million for the six months ended June 30, 2022
compared to net loss of $13.5 million for the six months ended June 30, 2021 , a
$1.4 million increase in net income as a result of the factors discussed above.
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AtJune 30, 2022 andDecember 31, 2021 , our cash and cash equivalents were$20.8 million and$28.3 million , respectively. AtJune 30, 2022 andDecember 31, 2021 , total restricted cash was$6.1 million and$9.3 million , respectively, and investments were$0.2 million and$1.0 million , respectively. AtJune 30, 2022 , we had$2.8 million of long-term notes payable. There was a decrease in the fair value of our investments atJune 30, 2022 as compared toDecember 31, 2021 , which is primarily due to distributions. We believe that any remaining fluctuations we have experienced are temporary in nature and, while our securities are classified as available-for-sale, we have the ability and intent to hold them until maturity, if necessary, to recover their full value. During the three months endedJune 30, 2022 , the Company sold its TutorMe subsidiary for$55.0 million (see Note 1, "Nature of Business") and used the proceeds to pay down its debt withBlue Torch Finance, LLC in the aggregate principal amount of$31.5 million (see Note 8, "Credit Facilities"), as well as to pay the$22.4 million in statutory penalties for the final judgement in theCalifornia Attorney General lawsuit (see Note 14, "Commitments and Contingencies").
Going Concern
The Company had negative cash flows from operations of$15.4 million for the fiscal year 2021, and negative cash flows from operations of$57.2 million for the six months endedJune 30, 2022 . Up throughJuly 31, 2022 , the majority of our cash came from our Services Agreement with Global Campus. Global Campus, derives the majority of its respective cash revenues from students who enroll and are eligible for various federal student financial assistance programs authorized under Title IV of the Higher Education Act. 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. 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. The service fees in the Services Agreement are subject to certain minimum residual liability adjustments, including performance-based adjustments, minimum profit level adjustments, and excess direct cost adjustments. These adjustments are all variable in nature in that they depend upon the Company's performance during each service period. In connection with the Services Agreement, the minimum residual payment was to be paid annually in June. The Company's Services Agreement with Global Campus was subject to certain adjustments that impacted the amount and timing of cash flows, which payment terms were modified inApril 2022 for the months of July, August andSeptember 2022 . Further, Global Campus incurred higher costs in their fourth quarter (the Company's second quarter) than the Company previously budgeted. On or aboutJune 15, 2022 , Global Campus advised the Company that Global Campus received a notice from theDepartment of Defense that they were placed on probation which would preclude them from enrolling new military students, pending completion of a comprehensive review. Additionally, there were communications from theDepartment of Defense to current Global Campus students cautioning them to consider leaving the University. We were advised by Global Campus that this matter should be resolved in a timely manner, however, it became apparent over the following weeks that these prolonged actions were having a negative impact on the University's revenue and therefore a negative impact on the Company's financial outlook. As a result, the Company entered into a new agreement with Global Campus, effective onJuly 31, 2022 , which allowed Global Campus to acquire the business previously used to provide services to Global Campus. For additional information, see Note 16, "Subsequent Events." The Company will continue to support the continued growth and expansion of its Fullstack subsidiary and simultaneously explore strategic alternatives for that business. The ability of the Company to continue as a going concern is dependent on the Company generating cash from its operations and availability to other funding sources. Due to the Company's negative cash flows from operations and projected future negative cash flows from operations resulting from the transaction with Global Campus and reduction of availability of debt financing, substantial doubt exists about the Company's ability to continue as a going concern for the twelve months following the issuance of these condensed consolidated financial statements. Management plans to cover any shortfall from operations by selling its Fullstack subsidiary or obtaining debt financing. However, there can be no assurance the Company will be successful in these efforts. 31 -------------------------------------------------------------------------------- The condensed consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustment that might be necessary if the Company is unable to continue as a going concern.
Operating activities
Net cash used in operating activities was$57.2 million for the six months endedJune 30, 2022 , compared to net cash used in operating activities of$16.3 million for the six months endedJune 30, 2021 , an overall increase between periods in net cash used in operating activities of$40.9 million . The increase in cash used in operating activities is primarily attributable to the net increases in the working capital accounts, including the payment of the judgement in theCalifornia Attorney General lawsuit and the minimum residual adjustment, partially offset by the increase in net income of$1.4 million between periods.
Investing activities
Net cash provided by investing activities was$49.0 million for the six months endedJune 30, 2022 , compared to net cash used in investing activities of$0.9 million for the six months endedJune 30, 2021 . The amount of cash provided was primarily due to the sale of the TutorMe subsidiary inMay 2022 . This was partially offset by distributions of deferred compensation and capital expenditures. Capital expenditures for the six months endedJune 30, 2022 were$24 thousand , compared to$0.7 million for the six months endedJune 30, 2021 . During the six months endedJune 30, 2022 and 2021, we capitalized costs for intangibles of$0.5 million and$0.3 million , respectively. We anticipate our capital expenditures to be an immaterial amount for the year endingDecember 31, 2022 . Financing activities Net cash used in financing activities was$2.5 million for the six months endedJune 30, 2022 , compared to net cash used in financing activities of$1.1 million for the six months endedJune 30, 2021 . The financing activities for the six months endedJune 30, 2022 included both the borrowings and repayment of the credit facility withBlue Torch Capital . See "Debt and Financing Arrangements" below. During each of the six months endedJune 30, 2022 and 2021, net cash used included tax withholding related to the issuance of restricted stock units vesting.
Debt and Financing Arrangements
As ofJune 30, 2022 , the Company has a notes payable valued at$2.8 million , including accrued interest. The counterparty advanced funds to the Company for certain program development costs, which the Company is obligated to repay out of future revenues from the developed program. The Company recognized these advances as a debt obligation, and expects to begin repayments from future program revenues four years from the contract start date. The Company has issued letters of credit that are collateralized with cash, in the aggregate amount of$6.0 million as ofJune 30, 2022 . The letters of credit relate primarily to the Company's leased facilities and insurance requirements. The collateralized cash is held in restricted cash on the Company's condensed consolidated balance sheets. The Company is required to provide surety bonds in certain states in which it does business. As a result, the Company had previously entered into a surety bond facility with an insurance company to provide such bonds when required. Although there are no remaining bonds on the Company's behalf under this facility as ofJune 30, 2022 , the Company still holds certain liability associated with any required collateral. OnApril 14, 2022 , the Company entered into a Financing Agreement (the "Credit Facility") among the Company, as borrower, each of its wholly-owned subsidiaries as subsidiary guarantors (the "Guarantors"), the lenders party thereto from time to time (the "Lenders") andBlue Torch Finance LLC , as administrative agent and collateral agent for the Lenders (the "Agent"). The Credit Facility provided for a term loan in the aggregate principal amount of$31.5 million (the "Term Loan"). Concurrent with the sale of TutorMe, the Company repaid in full all outstanding obligations of the Company owed toBlue Torch Finance, LLC and the Lenders pursuant to the Credit Facility. In connection with the Company's repayment of the outstanding obligations under the Credit Facility, Blue Torch terminated the Credit Facility and released all of its security interests in and liens on all of the assets of the Company and its subsidiaries. For further information, see Note 8, "Credit Facilities," to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.
The Company does not have any off-balance sheet financing arrangements.
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We manage our cash pursuant to the quantitative and qualitative operational
guidelines of our cash investment policy. Our cash investment policy, which is
managed by our Chief Financial Officer, has the following primary objectives:
(i) preserving principal, (ii) meeting our liquidity needs, (iii) minimizing
market and credit risk, and (iv) providing after-tax returns. Under the policy's
guidelines, we invest our excess cash exclusively in high-quality, U.S.
dollar-denominated financial instruments. For a discussion of the measures we
use to mitigate the exposure of our cash investments to market risk, credit risk
and interest rate risk, see Part I, Item 3, "Quantitative and Qualitative
Disclosures About Market Risk" in this Form 10-Q.
Future Contractual Obligations
As of
We also have contractual obligations in the amount of$11.2 million , of which$1.6 million is payable during the remainder of 2022. These obligations include agreements with vendors in the areas of software, telephony, licensing fees, consulting, marketing, among others. In connection with the Transaction that was entered into with UAGC onJuly 31, 2022 , the Company will be relieved liabilities associated with that transaction as of that date.
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.
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