Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our annual consolidated financial statements and related notes thereto included in Item 8, “Financial Statements and Supplementary Data.” In addition to historical information, this discussion includes forward-looking information that involves risks and uncertainties that could cause actual results to differ materially from management's expectations. See Item 1A, “Risk Factors” and “Special Note Regarding Forward-Looking Statements” at the beginning of this report.
Overview
We are a provider of postsecondary education services through our regionally accredited academic institutions, Ashford University
®
and University of the Rockies
SM
. Ashford University offers associate’s, bachelor’s and master’s programs, and University of the Rockies offers master’s and doctoral programs.
As of
December 31, 2016
, our institutions offered over
1,200
courses and over
80
degree programs. We are also focused on developing innovative new technologies to improve the way students learn, such as Constellation, our proprietary learning platform, and the mobile applications offered by our institutions. For additional information regarding our business, see Item 1, “Business.”
Key operating data
In evaluating our operating performance, our management focuses in large part on our revenue and operating income and period-end enrollment at our academic institutions. 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 the years ended
December 31, 2016
,
2015
and
2014
(in thousands, except for enrollment data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Consolidated Statement of Income (Loss) Data:
|
|
|
|
|
|
Revenue
|
$
|
527,090
|
|
|
$
|
561,729
|
|
|
$
|
638,705
|
|
Operating income (loss)
|
(40,221
|
)
|
|
(42,295
|
)
|
|
14,311
|
|
Consolidated Other Data:
|
|
|
|
|
|
Period-end enrollment (1)
|
|
|
|
|
|
Online
|
45,007
|
|
|
48,729
|
|
|
55,081
|
|
Campus-based
|
80
|
|
|
430
|
|
|
742
|
|
Total
|
45,087
|
|
|
49,159
|
|
|
55,823
|
|
|
|
(1)
|
We define period-end enrollment as the number of active students on the last day of the financial reporting period. A student is considered active if the student has attended a class within the prior 15 days or is on an institutionally-approved break not to exceed 45 days, unless the student has graduated or provided notice of withdrawal.
|
Key enrollment trends
Enrollment at our combined academic institutions decreased to
45,087
at
December 31, 2016
as compared to
49,159
at
December 31, 2015
, representing a decrease of
8.3%
.
We believe the decline in enrollment over the past few years is partially attributable to a general weakening in the overall industry due to increased regulatory scrutiny, and has also been caused by the initiatives our institutions have put in place to help raise academic quality and improve student outcomes. In addition, we believe total enrollment has also been impacted by recent changes in our marketing channels.
Trends and uncertainties regarding revenue and continuing operations
We continue to focus our efforts on stabilizing and restarting enrollment growth. We launched new program offerings in 2016 and plan to launch additional new program offerings in 2017 to help achieve the goal of stabilizing and restarting enrollment growth. One area in which we continue to experience positive enrollment trends is within our Leadership Development Grant (“LDG”) program. This corporate partnership program provides companies with the opportunity to allow their employees to pursue and complete a college degree without incurring any student debt. While this program remains relatively small compared to our total enrollment, it continues to expand.
In connection with its reapplication for accreditation from WSCUC in 2012, Ashford University made many changes to its operations and business initiatives. These changes included hiring new leadership, implementing smaller class sizes, expanding minimum age-levels for students, implementing the Ashford Promise (an initiative that allows online students to receive a full refund for all tuition and fees if they discontinue their enrollment by the end of the third week of their first class), hiring additional full-time faculty and implementing new program review models. Many of these changes have resulted in higher expense to the organization, primarily in the areas of instructional costs and services, and have contributed to the decline in new enrollment and the resulting decline in revenue.
Restructuring and impairment charges
In July 2015, we committed to the implementation of a plan to close the Clinton Campus during the second quarter of 2016. With the closure of the Clinton Campus, ground-based Ashford University students were provided opportunities to continue to pursue their degrees as reflected in their respective student transfer agreements. We have also implemented various other restructuring plans to better align our resources with our business strategy. The related restructuring charges have primarily been comprised of (i) charges related to the write-off of certain fixed assets and assets abandoned, (ii) student transfer agreement costs, (iii) severance costs related to headcount reductions and (iv) estimated lease losses related to facilities vacated or consolidated. These charges have been recorded in the restructuring and impairment charges line item on our consolidated statements of income (loss).
For information regarding the restructuring and impairment charges recorded in the three years ended
December 31, 2016
, refer to Note 3, “Restructuring and Impairment Charges” to our annual consolidated financial statements included elsewhere in this report.
Valuation allowance
The cumulative loss incurred over the three-year period ended
December 31, 2016
constituted significant negative objective evidence against our ability to realize a benefit from our federal deferred tax assets. The presence of such objective evidence limited our ability to consider in our evaluation 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 full valuation allowance against our deferred tax assets should continue to be maintained as of
December 31, 2016
.
Liquidity and capital resources and anticipated capital expenditures
We financed our operating activities and capital expenditures during
2016
and
2015
primarily through cash on hand and cash provided by operating activities. At
December 31, 2016
, we had cash, cash equivalents, restricted cash and investments totaling
$381.8 million
and no long-term debt. For the year ending
December 31, 2017
, we expect capital expenditures to be approximately
$6.0 million
. Based on our current level of operations, we believe that our cash flows from operating activities and our existing cash and cash equivalents will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements for at least the next 12 months. However, changes could occur that would consume our available capital resources before that time. Our capital requirements depend on numerous factors, including our ability to continue to generate revenue. There can be no assurance that additional funding, if necessary, will be available to us on favorable terms, if at all.
Key Financial Metrics
Revenue
Revenue consists principally of tuition, technology fees and other miscellaneous fees and is shown net of scholarships and refunds. Factors affecting our revenue include (i) the number of students who enroll and remain enrolled in our courses, (ii) our degree and program mix, (iii) changes in our tuition rates and (iv) the amount of scholarships we offer.
Enrollments
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. Our online courses are typically five or six weeks in length and have weekly start dates throughout the year, with the exception of a two-week break during the holiday period in late December and early January.
Costs and expenses
The following is a description of the costs included in each of our current expense categories:
Instructional costs and services.
Instructional costs and services consist primarily of costs related to the administration and delivery of our institutions' educational programs. This expense category includes compensation for online faculty and administrative personnel, curriculum and new program development costs, financial aid processing costs, technology license costs, bad debt expense and costs associated with other support groups that provide services directly to the students. Instructional costs and services also include an allocation of information technology, facility, depreciation and amortization costs.
Admissions advisory and marketing.
Admissions advisory and marketing costs include compensation of personnel engaged in marketing and recruitment, as well as costs associated with purchasing leads and producing marketing materials. Our admissions advisory and marketing expenses are generally affected by the cost of advertising media and leads, the efficiency of our marketing and recruiting efforts, salaries and benefits for our enrollment personnel, and expenditures on advertising initiatives for new and existing academic programs. Advertising costs, which consist primarily of the cost of marketing leads, are expensed as incurred or the first time the advertising takes place, depending on the type of advertising activity. Admissions advisory and marketing costs also include an allocation of information technology, facility, depreciation and amortization costs.
General and administrative.
General and administrative expenses include compensation of employees engaged in corporate management, finance, human resources, compliance and other corporate functions. General and administrative expenses also include professional services fees, travel and entertainment expenses, and an allocation of information technology, facility, depreciation and amortization costs.
Legal settlement expense.
Legal settlement expense is primarily comprised of (i) charges related to the cost of resolution of the previously disclosed civil investigative demands from the CFPB and (ii) the estimate of additional amounts to resolve the previously disclosed investigative subpoenas from the Attorney General of the State of California.
Restructuring and impairment charges.
Restructuring and impairment charges are primarily comprised of (i) charges related to the write-off of certain fixed assets and assets abandoned, (ii) student transfer agreement costs, (iii) severance costs related to headcount reductions and (iv) estimated lease losses related to facilities vacated or consolidated. For additional information, see Note 3, “Restructuring and Impairment Charges” to our annual consolidated financial statements included elsewhere in this report.
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. While we enroll students throughout the year, our fourth quarter revenue generally is lower than other quarters due to the holiday break in December. We generally experience a seasonal increase in new enrollments in August and September of each year when most other colleges and universities begin their fall semesters.
Critical Accounting Policies and Use of Estimates
Critical accounting policies are those policies that, in management's view, are most important in the portrayal of our financial condition and results of operations. The footnotes to our annual consolidated financial statements included elsewhere in this report include disclosure of significant accounting policies. The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements. These critical accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain.
The discussion of our financial condition and results of operations is based upon our annual consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, costs and expenses. We evaluate our estimates and assumptions on an ongoing basis. These estimates are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our consolidated financial statements.
Revenue recognition
We recognize revenue when persuasive evidence of an arrangement exists, services have been rendered or delivery has occurred, the fee or price is fixed or determinable, and collectibility is reasonably assured. The majority of our revenue comes from tuition revenue and is shown net of scholarships and refunds. Tuition revenue is recognized on a straight-line basis over the applicable period of instruction, with the exception of an online student's first course per degree level at Ashford University. An online student's first course per degree level at Ashford University falls under a three-week conditional admission period in which the revenue is deferred until the student matriculates into the course.
Our institutions' online students generally enroll in a program that encompasses a series of five to six-week courses that are taken consecutively over the length of the program. With the exception of those students under conditional admission, online students are billed on a payment period basis on the first day of a class. Students under conditional admission are billed for the payment period upon matriculation. We assess collectibility at the start of a student’s payment period for the courses in that payment period, as well as throughout the period as facts and circumstances change.
In certain cases, our institutions provide scholarships to students for various programs. Scholarships awarded by our institutions are recorded in association with the related specific course, term or payment period. Scholarships are generally deferred and recognized against revenue over the course term. Incentive-based scholarships such as the LDG and Alumni Scholarship are recognized against revenue over the period of benefit to the student.
Deferred revenue and student deposits represents unearned tuition and fees as well as student payments in excess of charges. We record an account receivable and corresponding deferred revenue for the amount of tuition and fees for enrolled courses when a student is billed for a payment period. Payments received either directly from the student or from the student's source of funding that exceed amounts billed are recorded as student deposits. At the end of each accounting period, the deferred revenue and student deposits and related account receivable balances are reduced to present amounts attributable to the current course.
If a student withdraws from a program prior to certain dates, the student is entitled to a refund of a portion of tuition depending on the date the student last attended a class. Students under conditional admission are not obligated for payment until after their conditional admission period has lapsed, so there is no related refund. For all subsequent courses, (i) if an online student drops a class and the student's last date of attendance was in the first week of class, the student receives a full refund of the tuition for that class, (ii) if an online student drops a class and the last date of attendance was in the second week of the class, the student receives a refund of 50% of the tuition for that class and (iii) if an online student drops a class and the student's last date of attendance was after the second week of the class, the student is not entitled to a refund, subject to certain state requirements. We monitor student attendance in online courses through activity in the online program associated with that course. After two weeks have passed without attendance in a class by the student, the student is presumed to have dropped the course as of the last date of attendance, and the student's tuition is automatically refunded to the extent the student is entitled to a refund based on the refund policy above. We estimate expected refunds based on historical refund rates and record a provision to reduce revenue for the amount that is expected to be refunded. Refunds issued by us for services that have been provided in a prior period have not historically been material. Future changes in the rate of student withdrawals may result in a change to expected refunds and would be accounted for prospectively as a change in estimate. We reassess collectibility throughout the period revenue is recognized by our institutions, on a student-by-student basis. We reassess collectibility based upon new information and changes in facts and circumstances relevant to a student's ability to pay. For example, we reassess collectibility when a student drops from the institution (i.e., is no longer enrolled) and when a student attends a course that was not included in the initial assessment of collectibility at the start of a student’s payment period.
Ashford University records revenue from technology fees on a per course charge basis. The per course technology fee revenue for Ashford University is recognized on a straight-line basis over the applicable period of instruction. University of the Rockies records revenue from technology fees as one-time start up fees charged to each new online student (other than military, scholarship students or certain corporate reimbursement students), and recognizes that revenue ratably over the average expected enrollment of a student. The average expected enrollment of the student is estimated each quarter based upon historical duration of attendance and qualitative factors as deemed necessary.
Other miscellaneous fees include fees for course content and textbooks and other services, such as commencements, and are recognized upon delivery of the goods or when the related service is performed.
Allowance for doubtful accounts
Accounts receivable consists of student accounts receivable, which represent amounts due for tuition, course digital materials, technology fees and other fees from currently enrolled and former students. Students generally fund their education through grants and/or loans under various Title IV programs, tuition assistance from military or corporate employers, or personal funds. Except for those students under conditional admission, payments are due on the respective course start date and will be considered past due depending on the student's payment terms. In general, an account is considered delinquent 120 days subsequent to the course start date.
Accounts receivable are stated at the amount management expects to collect from outstanding balances. For accounts receivable, an allowance for doubtful accounts is estimated by management and is principally based on historical collection experience as well as (i) an assessment of individual accounts receivable over a specific aging and amount, (ii) consideration of the nature of the receivable accounts and (iii) potential changes in the business or economic environment. The provision for bad debt is recorded within instructional costs and services in our consolidated statements of income (loss). We charge off uncollectable accounts receivable when the student account is deemed uncollectable by internal collection efforts or by a third-party collection agency.
Impairments of intangible assets
We test indefinite-lived intangible assets for impairment annually in the fourth quarter of each fiscal year, or more frequently if events and circumstances warrant. To evaluate the impairment of the indefinite-lived intangible assets, we assess the fair value of the assets to determine whether they are in excess of the carrying values. Determining the fair value of indefinite-lived intangible assets is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions are inherently uncertain, and can include such items as growth rates used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and a determination of appropriate market comparables. Our assessment of indefinite-lived intangible assets during the fourth quarter of fiscal
2016
did not result in any impairment. There have been no impairment losses for indefinite-lived intangibles recognized by us for any periods presented.
We also have definite-lived intangible assets, which primarily consist of purchased intangibles and capitalized curriculum development costs. The definite-lived intangible assets are recognized at cost less accumulated amortization. Amortization is computed using the straight-line method based on estimated useful lives of the related assets unless there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We estimate that the useful life of the capitalized curriculum development costs is three years and the useful life of the purchased intangibles is the life of the related contract.
Impairments of long-lived assets
We assess potential impairment to our long-lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors we consider important that could cause us to assess potential impairment include significant changes in the manner of our use of the acquired assets or the strategy for our overall business and significant negative industry or economic trends. An impairment loss is recorded when the carrying amount of the long-lived asset is not recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Any required impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value, and is recorded as a reduction in the carrying value of the related asset and an expense to operating results.
We use various assumptions in determining undiscounted cash flows expected to result from the use and eventual disposition of an asset, which could include assumptions regarding revenue growth rates, operating costs, certain capital additions, assumed discount rates, disposition or terminal value and other economic factors. These variables require management to make judgments and include inherent uncertainties such as continuing acceptance of our institutions' education offerings by prospective students, our ability to manage operating costs and the impact of changes in the economy on our business. Variations in the assumptions used could lead to a different conclusion regarding the realizability of an asset and, thus, could have a significant effect on our conclusions regarding whether an asset is impaired and the amount of impairment loss recorded in the consolidated financial statements.
Income taxes
We utilize the asset-liability method of accounting for income taxes. Significant judgments are required in determining the consolidated provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax settlement is uncertain. As a result, we recognize tax liabilities based on estimates of
whether additional taxes and interest will be due. These tax liabilities are recognized when, despite our belief that our tax return positions are supportable, we believe that it is more-likely-than-not that those positions may not be fully sustained upon review by tax authorities. We believe that our accruals for tax liabilities are adequate for all open audit years based on our assessment of many factors, including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. To the extent that the final tax outcome of these matters differs from our expectations, such differences will impact income tax expense in the period in which such determination is made.
We evaluate and account for uncertain tax positions using a two-step approach. Recognition (step one) occurs when we conclude that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that is greater than 50% likely to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. Derecognition of a tax position that was previously recognized would occur when we subsequently determine that a tax position no longer meets the more-likely-than-not threshold of being sustained.
We are required to file income tax returns in the United States and in various state tax jurisdictions. The preparation of these income tax returns requires us to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by us. The income tax returns are subject to audits by the applicable federal and state taxing authorities. As part of these audits, the taxing authorities may disagree with our tax positions. The ultimate resolution of these tax positions is often uncertain until the audit is complete and any disagreements are resolved. We therefore record an amount for our estimate of the additional tax liability, including interest and penalties, for any uncertain tax positions taken or expected to be taken in an income tax return. We review and update the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, and upon completion of tax audits and expiration of statutes of limitations. We record interest and penalties related to income tax matters in income tax expense.
In addition to estimates inherent in the recognition of current taxes payable, we estimate the likelihood that we will be able to recover our deferred tax assets each reporting period. Realization of our deferred tax assets is dependent upon future taxable income. To the extent we believe it is more-likely-than-not that all or some portion of our net deferred tax assets will not be realized, we establish a valuation allowance against deferred tax assets. Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies. We recognize windfall tax benefits associated with the exercise of stock options directly to stockholders' equity only when realized. A windfall tax benefit occurs when the actual tax benefit realized by us upon an employee's disposition of a share-based award exceeds the deferred tax asset, if any, associated with the award that we had recorded. When assessing whether a tax benefit relating to share-based compensation has been realized, we follow the tax law ordering method, under which current year share-based compensation deductions are assumed to be utilized before net operating loss carryforwards and other tax attributes.
Stock-based compensation
We have granted options to purchase our common stock, restricted stock units (“RSUs”) and performance stock units (“PSUs”) to eligible persons under our 2009 Stock Incentive Plan. The benefits provided by these grants are share-based payments and are recorded in our consolidated statement of income (loss) based upon their fair values.
Stock-based compensation cost is measured using the grant date fair value of the award and is expensed over the vesting period. The fair value of RSUs is the stock price on the date of grant multiplied by the number of units awarded. The fair value of PSUs was estimated based on our stock price as of the date of grant using a Monte Carlo simulation model. We estimate the fair value of stock options on the grant date using the Black-Scholes option pricing model. Determining the fair value of stock options and PSUs at the grant date under these models requires judgment, including estimating our volatility, employee stock option exercise behaviors and forfeiture rates. The assumptions used in calculating the fair value of stock options and PSUs represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment.
Stock options awarded under our 2009 Stock Incentive Plan have an exercise price that equals or exceeds the closing price of our common stock on the date of grant. The risk-free interest rate is based on the U.S. Treasury yield of those maturities that are consistent with the expected term of the stock option or PSUs in effect on the date of grant. Dividend rates are based upon historical dividend trends and expected future dividends. As we have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future, a zero dividend rate is assumed in our calculation. We have sufficient historical stock option exercise information to compute an expected term for use as an assumption in the Black-Scholes option pricing and Monte Carlo simulation models, and as such, our computation of expected term was calculated
using our own historical data. We also have sufficient historical data on the volatility of our stock to use as a direct assumption in the option pricing models.
The amount of stock-based compensation expense we recognize during a period is based on the portion of the awards that are ultimately expected to vest. We estimate stock option forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The effect of a 10% change in estimates to any of the individual inputs to the Black-Scholes option pricing model or the Monte Carlo simulation model would not have a material impact on our consolidated financial statements.
Results of Operations
The following table sets forth our consolidated statements of income (loss) data as a percentage of revenue for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Revenue
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Costs and expenses:
|
|
|
|
|
|
Instructional costs and services
|
50.1
|
%
|
|
50.1
|
%
|
|
49.3
|
%
|
Admissions advisory and marketing
|
38.4
|
%
|
|
35.2
|
%
|
|
36.2
|
%
|
General and administrative
|
9.3
|
%
|
|
10.1
|
%
|
|
9.6
|
%
|
Legal settlement expense
|
6.3
|
%
|
|
—
|
%
|
|
—
|
%
|
Restructuring and impairment charges
|
3.7
|
%
|
|
12.2
|
%
|
|
2.6
|
%
|
Total costs and expenses
|
107.8
|
%
|
|
107.6
|
%
|
|
97.7
|
%
|
Operating income (loss)
|
(7.8
|
)%
|
|
(7.6
|
)%
|
|
2.3
|
%
|
Other income, net
|
0.5
|
%
|
|
0.5
|
%
|
|
0.5
|
%
|
Income (loss) before income taxes
|
(7.3
|
)%
|
|
(7.1
|
)%
|
|
2.8
|
%
|
Income tax expense (benefit)
|
(1.6
|
)%
|
|
5.4
|
%
|
|
1.2
|
%
|
Net income (loss)
|
(5.7
|
)%
|
|
(12.5
|
)%
|
|
1.6
|
%
|
Year Ended
December 31, 2016
Compared to Year Ended
December 31, 2015
Revenue.
Our revenue for the year ended December 31,
2016
was
$527.1 million
,
a
decrease
of
$34.6 million
, or
6.2%
, as compared to revenue of
$561.7 million
for the year ended
December 31, 2015
. The
decrease
between periods was primarily due to the decrease in student enrollment at our academic institutions between fiscal year
2015
and fiscal year
2016
. Ending student enrollment at our academic institutions was
45,087
students as of
December 31, 2016
, a decrease of
8.3%
as compared to
49,159
students as of
December 31, 2015
. The average weekly enrollment at our academic institutions during the year ended December 31,
2016
decreased to 48,647 students from 52,415 students during the year ended December 31,
2015
, or by 7.2%,
which resulted in a decrease in tuition revenue of approximately $35.9 million. The decrease in tuition revenue between periods was inclusive of the tuition increase of approximately 2.9%, effective April 1, 2016, which resulted in an increase in revenue of approximately $15.2 million. Additionally, revenue generated from course digital materials decreased by $0.5 million to $18.8 million in the year ended December 31,
2016
, compared to $19.3 million in the year ended December 31,
2015
. The decrease in revenue between periods was partially offset by a $5.9 million decrease in institutional scholarships to $96.4 million in the year ended December 31,
2016
, compared to $102.3 million in the year ended December 31,
2015
.
Instructional costs and services.
Our instructional costs and services for the year ended December 31,
2016
were
$263.9 million
,
a
decrease
of
$17.6 million
, or
6.3%
, as compared to instructional costs and services of
$281.5 million
for the year ended
December 31, 2015
. The
decrease
between periods was reflective of the decrease in student enrollment at our academic institutions as discussed above. Specific decreases between periods include decreases in facilities costs of $4.5 million, information technology costs of $3.9 million, direct compensation of $3.6 million (in the areas of academic management, financial aid support and student services), corporate support services of $2.1 million, instructor fees of $1.8 million, loan impairment charges of $1.1 million, financial aid processing fees of $0.9 million and license fees of $0.5 million. These decreases were partially offset by an increase in bad debt expense of $2.7 million. Instructional costs and services as a percentage of revenue was
50.1%
for the year ended December 31,
2016
, which was in line with the
50.1%
for the year ended December 31,
2015
. There was a slight
increase
between periods, which included increases as a percentage of revenue in bad debt expense of 0.9% and direct compensation of 0.3%, partially offset by decreases as a percentage of revenue in facilities costs of 0.6% and information technology costs of 0.5%. As a percentage of revenue, bad debt expense increased to
6.2%
for the year ended December 31,
2016
, compared to
5.3%
for the year ended December 31,
2015
. We continue to focus on enhancing our processes and procedures surrounding bad debt and our accounts receivable, including improvements and efficiencies in financial aid processing in order to reduce processing time, improved collection efforts on accounts receivable, and improved counseling to students about the financial aid process and related eligibility and amounts due from the student.
Admissions advisory and marketing.
Our admissions advisory and marketing expenses for the year ended December 31,
2016
were
$202.2 million
,
an
increase
of
$4.6 million
, or
2.3%
, as compared to admissions advisory and marketing expenses of
$197.6 million
for the year ended December 31,
2015
. The
increase
between periods was primarily due to an
increase
in advertising costs of $13.8 million, partially offset by decreases in selling compensation expense of $3.0 million, net facilities
costs of $2.8 million, information technology costs of $1.2 million, consulting and professional fees of $0.9 million and corporate support services of $0.9 million. Our admissions advisory and marketing expenses
increase
d as a percentage of revenue to
38.4%
for the year ended December 31,
2016
from
35.2%
for the year ended December 31,
2015
. The
increase
of
3.2%
was primarily due to increases as a percentage of revenue in advertising costs of 3.4% and selling compensation expense of 0.6%, partially offset by decreases as a percentage of revenue in facilities costs of 0.3% and corporate support services of 0.3%.
General and administrative.
Our general and administrative expenses for the year ended December 31,
2016
were
$48.8 million
,
a
decrease
of
$7.7 million
, or
13.7%
, as compared to general and administrative expenses of
$56.6 million
for the year ended December 31,
2015
. The
decrease
between periods was primarily due to decreases in other administrative costs of $4.7 million, administrative compensation of $3.9 million, facilities costs of $1.8 million and professional fees of $1.1 million, partially offset by increases in corporate support services of $2.9 million and legal fees of $1.5 million. Our general and administrative expenses
decrease
d as a percentage of revenue to
9.3%
for the year ended December 31,
2016
from
10.1%
for the year ended December 31,
2015
. The
decrease
of
0.8%
included decreases as a percentage of revenue in other administrative costs of 0.6%, administrative compensation of 0.3% and net facilities costs of 0.3%, partially offset by an increase as a percentage of revenue in legal fees of 0.3%.
Legal settlement expense.
For the year ended December 31,
2016
, we recorded a legal settlement expense of $33.1 million, which includes the cost of resolution of the previously disclosed civil investigative demands from the CFPB as well as an estimate of additional amounts to resolve the previously disclosed investigative subpoenas from the Attorney General of the State of California. There were no such charges for the year ended December 31,
2015
.
Restructuring and impairment charges.
Our restructuring and impairment charges for the year ended
December 31, 2016
were
$19.3 million
, comprised of
$14.5 million
of lease exit costs for properties in San Diego,
$2.7 million
relating to severance costs for wages and benefits resulting from a reduction in force to help better align personnel resources with the decline in student enrollment and
$2.2 million
for asset impairments, partially offset by a decrease in student transfer agreement costs
$0.1 million
. Our restructuring and impairment charges for the year ended December 31, 2015 were $68.4 million, comprised of $43.3 million for asset impairments, $17.1 million of lease exit costs for properties in San Diego and Denver, $4.7 million relating to severance costs for wages and benefits resulting from a reduction in force to help better align personnel resources with the decline in student enrollment and $3.3 million for student transfer agreement costs.
Other income, net.
Our other income, net, for the year ended December 31,
2016
was
$2.3 million
,
an
increase
of
$0.2 million
as compared to other income, net, of
$2.1 million
for the year ended December 31,
2015
. The increase between periods was primarily a result of
increase
d interest income due to changes in the levels of average cash and cash equivalents and investment balances.
Income tax expense (benefit).
Income tax benefit for the year ended December 31,
2016
was
$7.9 million
as compared to income tax expense of
$30.3 million
for the year ended December 31,
2015
,
a
$38.2 million
decrease
in income tax expense. Income tax expense was recognized at effective tax rates of
20.8%
and
(75.3)%
for the years ended December 31,
2016
and
2015
, respectively. The change in income tax expense between periods was primarily due to the establishment of a valuation allowance against our net deferred tax assets during the year ended
December 31, 2015
.
Net loss.
Our net loss for the year ended December 31,
2016
was
$30.0 million
compared to net loss of
$70.5 million
for the year ended December 31,
2015
, a
$40.5 million
decrease in net loss as a result of the factors discussed above.
Year Ended
December 31, 2015
Compared to Year Ended
December 31, 2014
Revenue.
Our revenue for the year ended
December 31, 2015
was
$561.7 million
,
a
decrease
of
$77.0 million
, or
12.1%
, as compared to revenue of
$638.7 million
for the year ended
December 31, 2014
. The
decrease
between periods was primarily due to the
decrease
in student enrollment at our academic institutions between fiscal year
2014
and fiscal year
2015
. Ending student enrollment at our academic institutions was
49,159
students as of
December 31, 2015
, a decrease of
11.9%
as compared to
55,823
students as of
December 31, 2014
. The average weekly enrollment at our academic institutions during the year ended
December 31, 2015
decreased to 52,415 students from 61,344 students during the year ended
December 31, 2014
, or by 14.6%, which resulted in a decrease in tuition revenue of approximately $79.1 million. These decreases in tuition revenue were inclusive of the tuition increase of approximately 2.4%, effective April 1, 2015, which resulted in an increase in revenue of approximately $12.2 million. Additionally, revenue generated from course digital materials decreased by $0.9 million to $19.3 million in the year ended
December 31, 2015
, compared to $20.2 million in the year ended
December 31, 2014
. The decrease in revenue between periods was partially offset by a $2.8 million decrease in institutional scholarships to $102.3 million in the year ended
December 31, 2015
, compared to $105.1 million in the year ended
December 31, 2014
.
Instructional costs and services.
Our instructional costs and services for the year ended
December 31, 2015
were
$281.5 million
, a decrease of
$33.6 million
, or
10.7%
, as compared to instructional costs and services of
$315.1 million
for the year ended
December 31, 2014
. The decrease between periods was reflective of the decrease in student enrollment at our academic institutions as discussed above. Specific decreases between periods include decreases in direct compensation of $14.5 million (in the areas of academic management, financial aid support and student services), facilities costs of $9.4 million, information technology costs of $4.0 million, instructor fees of $3.1 million, license fees of $1.5 million, loan impairment charges of $1.1 million and financial aid processing fees of $0.9 million. These decreases were partially offset by an increase in bad debt expense of $1.6 million. Instructional costs and services increased as a percentage of revenue to
50.1%
for the year ended
December 31, 2015
, as compared to
49.3%
for the year ended
December 31, 2014
, primarily as a result of the decreased revenue. The increase of
0.8%
included increases as a percentage of revenue in corporate support services of 0.9%, bad debt expense of 0.9% and instructor fees of 0.3%. These increases were partially offset by decreases as a percentage of revenue in facilities costs of 1.0% and direct compensation of 0.4%. As a percentage of revenue, bad debt expense increased to
5.3%
for the year ended
December 31, 2015
, compared to
4.4%
for the year ended
December 31, 2014
.
Admissions advisory and marketing.
Our admissions advisory and marketing expenses for the year ended
December 31, 2015
were
$197.6 million
, a decrease of
$33.5 million
, or
14.5%
, as compared to admissions advisory and marketing expenses of $
231.1 million
for the year ended
December 31, 2014
. Specific factors contributing to the overall decrease between periods were decreases in consulting and professional fees of $24.3 million, selling compensation of $8.4 million and facilities costs of $5.2 million. These decreases were partially offset by increases in advertising of $3.4 million and corporate support services of $1.1 million. Our admissions advisory and marketing expenses decreased as a percentage of revenue to
35.2%
for the year ended
December 31, 2015
from
36.2%
for the year ended
December 31, 2014
. The decrease of
1.0%
was primarily due to a decrease as a percentage of revenue in consulting and professional fees of 3.8%, partially offset by increases as a percentage of revenue in advertising costs of 2.0% and selling compensation expense of 0.8%.
General and administrative.
Our general and administrative expenses for the year ended
December 31, 2015
were
$56.6 million
, a decrease of
$4.8 million
, or
7.8%
, as compared to general and administrative expenses of
$61.4 million
for the year ended
December 31, 2014
. The
decrease
between periods was primarily due to decreases in other administrative costs of $3.8 million, depreciation of $3.7 million, administrative compensation of $2.8 million and corporate support services of $1.1 million. These decreases were partially offset by an increase in net facilities costs of $7.5 million. Our general and administrative expenses increased as a percentage of revenue to
10.1%
for the year ended
December 31, 2015
from
9.6%
for the year ended
December 31, 2014
. The
0.5%
increase included an increase as a percentage of revenue in net facilities costs of 1.0%, partially offset by a decrease as a percentage of revenue in corporate support services of 0.8%.
Restructuring and impairment charges.
Our restructuring and impairment charges for the year ended December 31, 2015 were $68.4 million, comprised of $43.3 million for asset impairments, $3.3 million for student transfer agreement costs, $17.1 million of lease exit costs for properties in San Diego and Denver, and $4.7 million relating to severance costs for wages and benefits resulting from a reduction in force to help better align personnel resources with the decline in student enrollment. Our restructuring and impairment charges for the year ended December 31, 2014 were $16.8 million, comprised of $4.6 million for asset write offs, $6.5 million of lease exit costs for properties in San Diego and Denver, $3.6 million relating to severance costs for wages and benefits resulting from a reduction in force to help better align personnel resources with the decline in student enrollment, and $2.2 million relating to impairment of capitalized software costs.
Other income, net.
Our other income, net, for the year ended
December 31, 2015
was
$2.1 million
,
a
decrease
of
$0.8 million
as compared to other income, net, of
$2.9 million
for the year ended
December 31, 2014
. The decrease between periods was primarily a result of
decrease
d interest income due to changes in the levels of average cash and cash equivalents and investment balances.
Income tax expense.
Income tax expense for the year ended
December 31, 2015
was
$30.3 million
, as compared to income tax expense of
$7.5 million
for the year ended
December 31, 2014
, a
$22.8 million
increase
in income tax expense. Income tax expense was recognized at effective tax rates of
(75.3)%
and
43.8%
for the years ended
December 31, 2015
and
2014
, respectively. The increase in income tax expense between periods was primarily due to the establishment of a valuation allowance against our net deferred tax assets during the year ended
December 31, 2015
. The negative effective tax rate for the year ended
December 31, 2015
is due to income tax expense on a pre-tax loss.
Net income (loss).
Our net loss for the year ended
December 31, 2015
was
$70.5 million
compared to net income of
$9.7 million
for the year ended
December 31, 2014
,
a
decrease
of
$80.1 million
as a result of the factors discussed above.
Liquidity and Capital Resources
Liquidity
We financed our operating activities and capital expenditures during the years ended
December 31, 2016
and
2015
either through cash provided by operating activities or through cash on hand. Our cash and cash equivalents were
$307.8 million
at
December 31, 2016
and
$282.1 million
at
December 31, 2015
. In addition, at
December 31, 2016
and
2015
, we had restricted cash of
$24.5 million
and
$24.7 million
, respectively, and total investments of
$49.4 million
and
$67.2 million
, respectively.
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: preserving principal, meeting our liquidity needs, minimizing market and credit risk, and 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 Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”
Stock repurchase programs
The Company's board of directors may authorized the Company to repurchase outstanding shares of its common stock from time to time in the open market through block trades or otherwise depending on market conditions and other considerations, pursuant to the applicable rules of the SEC. The Company's policy is to retain these repurchased shares as treasury shares and not to retire them. The amount and timing of future share repurchases, if any, will be made as market and business conditions warrant.
Available borrowing facilities
We previously had a $50 million revolving line of credit (the “Facility”) pursuant to an Amended and Restated Revolving Credit Agreement (the “Revolving Credit Agreement”) with the lenders signatory thereto and Comerica Bank (“Comerica”). The Facility had an original term of three years and expired on April 13, 2015. Up through the date of expiration of the Facility, we had
no
borrowings outstanding under the Facility.
The Company has issued letters of credit that are collateralized with cash in the aggregate amount of
$7.1 million
, which is included as restricted cash as of
December 31, 2016
.
As part of its normal business operations, the Company is required to provide surety bonds in certain states in which the Company does business. As of
December 31, 2016
, the Company's total available surety bond facility was
$3.5 million
and the surety had issued bonds under the facility totaling
$3.4 million
on the Company's behalf.
Title IV funding
Our institutions derive the substantial majority of their respective revenues from students who enroll and are eligible for various federal student financial assistance programs authorized under Title IV of the Higher Education Act. In the years ended
December 31, 2016
,
2015
and
2014
, Ashford University derived
81.2%
,
80.9%
and
83.4%
, respectively, and University of the Rockies derived
86.5%
,
86.6%
and
88.3%
, respectively, of their respective revenues (calculated in accordance with applicable Department regulations) from Title IV program funds. Our institutions are subject to significant regulatory scrutiny as a result of numerous standards that must be satisfied in order to participate in Title IV programs. For additional information regarding Title IV programs and the regulation thereof, see “Regulation” in Item 1, “Business”. The balance of revenues derived by our institutions is from government tuition assistance programs for military personnel, including veterans, payments made in cash by individuals, reimbursement from corporate affiliates, private loans and internal loan programs. For additional information regarding these student financing options, see the section entitled “Student Financing” in Item 1, “Business”.
If we were to become ineligible to receive Title IV funding, our liquidity would be significantly impacted. The timing of disbursements under Title IV programs is based on federal regulations and our ability to successfully and timely arrange financial aid for our institutions' students. Title IV funds are generally provided in multiple disbursements before we earn a significant portion of tuition and fees and incur related expenses over the period of instruction. Students must apply for new loans and grants each academic year. These factors, together with the timing at which our institutions' students begin their programs, affect our revenues and operating cash flow.
Financial responsibility
For the fiscal year ended
December 31, 2015
, the composite score calculated was
1.8
, satisfying the composite score requirement of the Department's financial responsibility test, which institutions must satisfy in order to participate in Title IV programs. We expect the consolidated composite score to be
2.0
for the year ended
December 31, 2016
. However, the consolidated calculation is subject to determination by the Department once it receives and reviews our audited financial statements for the year ended
December 31, 2016
. For additional information regarding Department regulations related to financial responsibility, see “Regulation — Department Regulation of Title IV Programs — Financial responsibility” in Part I, “Business.”
Operating activities
Net cash provided by operating activities was
$11.1 million
,
$18.8 million
and
$14.2 million
for
2016
,
2015
and
2014
, respectively. The
decrease
of
$7.7 million
from
2015
to
2016
was primarily related to the larger prior year loss on the disposal of fixed assets of
$41.9 million
, and decreases in deferred income taxes of
$40.9 million
. These decreases were partially offset by a lower net loss of
$40.5 million
, prepaid expenses and other current assets of
$27.7 million
, and loss on impairment of student loan receivable of
$6.2 million
. The increase in net cash provided by operating activities from 2014 to 2015 was primarily related to increases in non-cash impairments of fixed assets of $37.9 million, deferred income taxes of $48.0 million and loss on termination of leased space of $10.6 million, as well as increases in accounts payable and accrued liabilities of $13.2 million. These increases were partially offset by decreases in net income of $80.1 million as well as prepaid expenses and other current assets of $15.1 million. We expect to generate cash from our operating activities for the foreseeable future.
Investing activities
Net cash provided by investing activities was
$14.7 million
for
2016
, compared to net cash provided by investing activities of
$51.3 million
for
2015
and net cash used in investing activities of
$33.0 million
for
2014
. Our cash provided by investing activities in 2015 was primarily related to sales and maturities of investments, partially offset by purchases of investments, purchases of property and equipment, and capitalized costs for intangible assets. During
2016
, there were maturities of investments of
$37.8 million
and we purchased
$20.3 million
of investments. This is compared to maturities of investments of
$66.1 million
and purchases of investments of
$20.3 million
in
2015
, and maturities of investments of
$40.0 million
and purchases of investments of
$87.9 million
in
2014
. Capital expenditures were
$1.9 million
,
$2.5 million
and
$11.4 million
for
2016
,
2015
and
2014
, respectively. For the year ending
December 31, 2017
, we expect our capital expenditures to be approximately
$6.0 million
.
Financing activities
Net cash used in financing activities was
$0.3 million
for
2016
, compared to net cash provided by financing activities of
$3.8 million
for
2015
and net cash provided by financing activities of
$2.3 million
for
2014
. During
2016
, net cash used in financing activities primarily reflects the cash used for the tax withholdings related to vesting of restricted stock awards of $1.9 million, partially offset by the cash provided by option exercises of $1.3 million. During
2015
, net cash provided by financing activities primarily reflects the proceeds received from a sale-leaseback transaction of $4.1 million, the cash provided by option exercises of $0.3 million and the related tax benefit of those option exercises, partially offset by cash used for the tax withholdings related to vesting of restricted stock awards of $1.3 million. During
2014
, net cash provided by financing activities primarily reflects the cash provided by option exercises of $3.1 million and the related tax benefit of those option exercises, partially offset by cash used for the tax withholdings related to vesting of restricted stock awards of $2.1 million.
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.
Significant Cash and Contractual Obligations
The following table sets forth, as of
December 31, 2016
, certain significant cash and contractual obligations that will affect our future liquidity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Total
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
|
(In thousands)
|
Operating lease obligations
|
$
|
103,811
|
|
|
$
|
36,061
|
|
|
$
|
31,230
|
|
|
$
|
20,488
|
|
|
$
|
9,150
|
|
|
$
|
4,933
|
|
|
$
|
1,949
|
|
Other contractual obligations
|
63,426
|
|
|
15,585
|
|
|
12,648
|
|
|
11,642
|
|
|
9,599
|
|
|
3,952
|
|
|
10,000
|
|
Uncertain tax positions
|
8,216
|
|
|
—
|
|
|
8,216
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
175,453
|
|
|
$
|
51,646
|
|
|
$
|
52,094
|
|
|
$
|
32,130
|
|
|
$
|
18,749
|
|
|
$
|
8,885
|
|
|
$
|
11,949
|
|
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. In May 2009, we entered into a surety bond facility with an insurance company to provide such bonds when required. As of
December 31, 2016
, our total available surety bond facility was
$3.5 million
and the surety had issued bonds totaling
$3.4 million
on our behalf under such facility.
Segment Information
We operate in one reportable segment as a single educational delivery operation using a core infrastructure that serves the curriculum and educational delivery needs of our institution's students regardless of geography. Our chief operating decision maker, our CEO and President, manages our operations as a whole, and no expense or operating income information is evaluated by our chief operating decision maker on any component level.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Note 2, “Summary of Significant Accounting Policies” to our annual consolidated financial statements included elsewhere in this report.
Item 7A. 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.
Interest Rate Risk
To the extent we borrow funds, we would be subject to fluctuations in interest rates. As of
December 31, 2016
, we had no outstanding borrowings.
Our future investment income may fall short of expectations due to changes in interest rates. At
December 31, 2016
, a hypothetical 10% increase or decrease in interest rates would not have a material impact on our future earnings, fair value or cash flows related to interest earned on our cash, cash equivalents or investments.
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
BRIDGEPOINT EDUCATION, INC. AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Bridgepoint Education, Inc.
We have audited the accompanying consolidated balance sheet of Bridgepoint Education, Inc. and subsidiaries (the “Company”) as of December 31, 2016, and the related consolidated statements of income (loss), comprehensive income (loss), stockholders' equity, and cash flows for the year ended December 31, 2016. We also have audited the Company's internal control over financial reporting as of December 31, 2016, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bridgepoint Education, Inc. and subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
March 7, 2017
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Bridgepoint Education, Inc.
In our opinion, the consolidated balance sheet as of December 31, 2015 and the related consolidated statements of income, of comprehensive income, of stockholders' equity and of cash flows for each of the two years in the period ended December 31, 2015 present fairly, in all material respects, the financial position of Bridgepoint Education, Inc. and its subsidiaries as of December 31, 2015, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
March 8, 2016, except for the change in the manner in which the Company presents restricted cash on the statement of cash flows
as discussed in Note 2 to the consolidated financial statements, as to which the date is
March 7, 2017
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
BRIDGEPOINT EDUCATION, INC.
Consolidated Balance Sheets
(In thousands, except par value)
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
307,802
|
|
|
$
|
282,145
|
|
Restricted cash
|
24,533
|
|
|
24,685
|
|
Investments
|
49,434
|
|
|
19,387
|
|
Accounts receivable, net
|
26,457
|
|
|
24,091
|
|
Student loans receivable, net
|
—
|
|
|
775
|
|
Prepaid expenses and other current assets
|
23,467
|
|
|
52,192
|
|
Total current assets
|
431,693
|
|
|
403,275
|
|
Property and equipment, net
|
12,218
|
|
|
21,742
|
|
Investments
|
—
|
|
|
47,770
|
|
Student loans receivable, net
|
—
|
|
|
7,394
|
|
Goodwill and intangibles, net
|
17,419
|
|
|
21,265
|
|
Other long-term assets
|
2,046
|
|
|
5,320
|
|
Total assets
|
$
|
463,376
|
|
|
$
|
506,766
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable and accrued liabilities
|
77,866
|
|
|
79,196
|
|
Deferred revenue and student deposits
|
74,666
|
|
|
88,756
|
|
Total current liabilities
|
152,532
|
|
|
167,952
|
|
Rent liability
|
16,508
|
|
|
20,118
|
|
Other long-term liabilities
|
13,630
|
|
|
15,046
|
|
Total liabilities
|
182,670
|
|
|
203,116
|
|
Commitments and contingencies (see Note 21)
|
|
|
|
Stockholders' equity:
|
|
|
|
Preferred stock, $0.01 par value:
|
|
|
|
20,000 shares authorized; zero shares issued and outstanding at both December 31, 2016, and December 31, 2015
|
—
|
|
|
—
|
|
Common stock, $0.01 par value:
|
|
|
|
300,000 shares authorized; 64,035 issued and 46,478 outstanding at December 31, 2016; 63,407 issued and 45,850 outstanding at December 31, 2015
|
641
|
|
|
634
|
|
Additional paid-in capital
|
195,854
|
|
|
188,863
|
|
Retained earnings
|
421,281
|
|
|
451,321
|
|
Accumulated other comprehensive loss
|
(1
|
)
|
|
(99
|
)
|
Treasury stock, 17,557 shares at cost at both December 31, 2016, and December 31, 2015
|
(337,069
|
)
|
|
(337,069
|
)
|
Total stockholders' equity
|
280,706
|
|
|
303,650
|
|
Total liabilities and stockholders' equity
|
$
|
463,376
|
|
|
$
|
506,766
|
|
The accompanying notes are an integral part of these consolidated financial statements.
BRIDGEPOINT EDUCATION, INC.
Consolidated Statements of Income (Loss)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
Revenue
|
$
|
527,090
|
|
|
$
|
561,729
|
|
|
$
|
638,705
|
|
Costs and expenses:
|
|
|
|
|
|
Instructional costs and services
|
263,898
|
|
|
281,496
|
|
|
315,079
|
|
Admissions advisory and marketing
|
202,206
|
|
|
197,584
|
|
|
231,134
|
|
General and administrative
|
48,843
|
|
|
56,588
|
|
|
61,353
|
|
Legal settlement expense
|
33,088
|
|
|
—
|
|
|
—
|
|
Restructuring and impairment charges
|
19,276
|
|
|
68,356
|
|
|
16,828
|
|
Total costs and expenses
|
567,311
|
|
|
604,024
|
|
|
624,394
|
|
Operating income (loss)
|
(40,221
|
)
|
|
(42,295
|
)
|
|
14,311
|
|
Other income, net
|
2,306
|
|
|
2,106
|
|
|
2,884
|
|
Income (loss) before income taxes
|
(37,915
|
)
|
|
(40,189
|
)
|
|
17,195
|
|
Income tax expense (benefit)
|
(7,875
|
)
|
|
30,265
|
|
|
7,527
|
|
Net income (loss)
|
$
|
(30,040
|
)
|
|
$
|
(70,454
|
)
|
|
$
|
9,668
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
Basic
|
$
|
(0.65
|
)
|
|
$
|
(1.54
|
)
|
|
$
|
0.21
|
|
Diluted
|
$
|
(0.65
|
)
|
|
$
|
(1.54
|
)
|
|
$
|
0.21
|
|
Weighted average number of common shares outstanding used in computing earnings (loss) per share:
|
|
|
|
|
|
Basic
|
46,228
|
|
|
45,665
|
|
|
45,204
|
|
Diluted
|
46,228
|
|
|
45,665
|
|
|
46,512
|
|
The accompanying notes are an integral part of these consolidated financial statements.
BRIDGEPOINT EDUCATION, INC.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(30,040
|
)
|
|
$
|
(70,454
|
)
|
|
$
|
9,668
|
|
Other comprehensive gain (loss), net of tax:
|
|
|
|
|
|
Unrealized gains (losses) on investments
|
98
|
|
|
76
|
|
|
(223
|
)
|
Comprehensive income (loss)
|
$
|
(29,942
|
)
|
|
$
|
(70,378
|
)
|
|
$
|
9,445
|
|
The accompanying notes are an integral part of these consolidated financial statements.
BRIDGEPOINT EDUCATION, INC.
Consolidated Statements of Stockholders' Equity
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated Other
Comprehensive
Gain/(Loss)
|
|
Treasury
Stock
|
|
|
|
Shares
|
|
Par Value
|
|
Total
|
Balance at December 31, 2013
|
62,331
|
|
|
$
|
623
|
|
|
$
|
168,829
|
|
|
$
|
512,107
|
|
|
$
|
48
|
|
|
$
|
(337,069
|
)
|
|
$
|
344,538
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
10,558
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,558
|
|
Exercise of stock options
|
388
|
|
|
4
|
|
|
3,104
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,108
|
|
Excess tax benefit of option exercises and restricted stock, net of tax shortfall
|
—
|
|
|
—
|
|
|
326
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
326
|
|
Stock issued under restricted stock plan, net of shares held for taxes
|
238
|
|
|
3
|
|
|
(2,097
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,094
|
)
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
9,668
|
|
|
—
|
|
|
—
|
|
|
9,668
|
|
Unrealized losses on investments, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(223
|
)
|
|
—
|
|
|
(223
|
)
|
Balance at December 31, 2014
|
62,957
|
|
|
630
|
|
|
180,720
|
|
|
521,775
|
|
|
(175
|
)
|
|
(337,069
|
)
|
|
365,881
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
9,710
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,710
|
|
Exercise of stock options
|
206
|
|
|
2
|
|
|
282
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
284
|
|
Excess tax shortfalls of option exercises and restricted stock, net of tax benefit
|
—
|
|
|
—
|
|
|
(767
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(767
|
)
|
Stock issued under employee stock purchase plan
|
33
|
|
|
—
|
|
|
261
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
261
|
|
Stock issued under restricted stock plan, net of shares held for taxes
|
211
|
|
|
2
|
|
|
(1,343
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,341
|
)
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(70,454
|
)
|
|
—
|
|
|
—
|
|
|
(70,454
|
)
|
Unrealized gains on investments, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
76
|
|
|
—
|
|
|
76
|
|
Balance at December 31, 2015
|
63,407
|
|
|
634
|
|
|
188,863
|
|
|
451,321
|
|
|
(99
|
)
|
|
(337,069
|
)
|
|
303,650
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
7,317
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,317
|
|
Exercise of stock options
|
306
|
|
|
3
|
|
|
1,328
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,331
|
|
Stock issued under employee stock purchase plan
|
35
|
|
|
1
|
|
|
245
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
246
|
|
Stock issued under restricted stock plan, net of shares held for taxes
|
287
|
|
|
3
|
|
|
(1,899
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,896
|
)
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(30,040
|
)
|
|
—
|
|
|
—
|
|
|
(30,040
|
)
|
Unrealized gains on investments, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
98
|
|
|
—
|
|
|
98
|
|
Balance at December 31, 2016
|
64,035
|
|
|
$
|
641
|
|
|
$
|
195,854
|
|
|
$
|
421,281
|
|
|
$
|
(1
|
)
|
|
$
|
(337,069
|
)
|
|
$
|
280,706
|
|
The accompanying notes are an integral part of these consolidated financial statements.
BRIDGEPOINT EDUCATION, INC.
Consolidated Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Cash flows from operating activities
|
|
|
|
|
|
Net income (loss)
|
$
|
(30,040
|
)
|
|
$
|
(70,454
|
)
|
|
$
|
9,668
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
Provision for bad debts
|
32,583
|
|
|
29,863
|
|
|
28,184
|
|
Depreciation and amortization
|
13,082
|
|
|
19,578
|
|
|
23,317
|
|
Amortization of premium/discount
|
68
|
|
|
475
|
|
|
206
|
|
Deferred income taxes
|
28
|
|
|
40,944
|
|
|
(7,096
|
)
|
Stock-based compensation
|
7,317
|
|
|
9,710
|
|
|
10,558
|
|
Excess tax benefit of option exercises
|
—
|
|
|
(460
|
)
|
|
(1,271
|
)
|
Loss on impairment of student loans receivable
|
7,542
|
|
|
1,328
|
|
|
2,435
|
|
Net loss (gain) on marketable securities
|
(164
|
)
|
|
91
|
|
|
(34
|
)
|
Loss on termination of leased space
|
13,244
|
|
|
17,047
|
|
|
6,470
|
|
Loss on disposal or impairment of fixed assets
|
3,024
|
|
|
44,949
|
|
|
7,028
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
(34,790
|
)
|
|
(32,383
|
)
|
|
(27,323
|
)
|
Prepaid expenses and other current assets
|
13,225
|
|
|
(14,446
|
)
|
|
659
|
|
Student loans receivable
|
876
|
|
|
1,139
|
|
|
809
|
|
Other long-term assets
|
3,274
|
|
|
(2,845
|
)
|
|
266
|
|
Accounts payable and accrued liabilities
|
4,778
|
|
|
1,104
|
|
|
(12,102
|
)
|
Deferred revenue and student deposits
|
(14,078
|
)
|
|
(19,170
|
)
|
|
(24,411
|
)
|
Other liabilities
|
(8,886
|
)
|
|
(7,669
|
)
|
|
(3,186
|
)
|
Net cash provided by operating activities
|
11,083
|
|
|
18,801
|
|
|
14,177
|
|
Cash flows from investing activities
|
|
|
|
|
|
Capital expenditures
|
(1,925
|
)
|
|
(2,477
|
)
|
|
(11,429
|
)
|
Purchases of investments
|
(20,260
|
)
|
|
(20,280
|
)
|
|
(87,933
|
)
|
Capitalized costs for intangible assets
|
(830
|
)
|
|
(2,153
|
)
|
|
(3,634
|
)
|
Sales of investments
|
—
|
|
|
10,101
|
|
|
30,000
|
|
Maturities of investments
|
37,756
|
|
|
66,096
|
|
|
40,000
|
|
Net cash provided by (used in) investing activities
|
14,741
|
|
|
51,287
|
|
|
(32,996
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
Proceeds from exercise of stock options
|
1,331
|
|
|
284
|
|
|
3,108
|
|
Excess tax benefit of option exercises
|
—
|
|
|
460
|
|
|
1,271
|
|
Proceeds from the issuance of stock under employee stock purchase plan
|
246
|
|
|
261
|
|
|
—
|
|
Tax withholding on issuance of stock awards
|
(1,896
|
)
|
|
(1,341
|
)
|
|
(2,095
|
)
|
Proceeds from failed sale-leaseback transaction
|
—
|
|
|
4,141
|
|
|
—
|
|
Net cash provided by (used in) financing activities
|
(319
|
)
|
|
3,805
|
|
|
2,284
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
25,505
|
|
|
73,893
|
|
|
(16,535
|
)
|
Cash, cash equivalents and restricted cash at beginning of period
|
306,830
|
|
|
232,937
|
|
|
249,472
|
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
332,335
|
|
|
$
|
306,830
|
|
|
$
|
232,937
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
Cash paid for interest
|
$
|
62
|
|
|
$
|
198
|
|
|
$
|
128
|
|
Cash (received) paid for income taxes, net
|
$
|
(20,788
|
)
|
|
$
|
6,136
|
|
|
$
|
15,534
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash transactions:
|
|
|
|
|
|
|
|
Purchase of equipment included in accounts payable and accrued liabilities
|
$
|
—
|
|
|
$
|
4,160
|
|
|
$
|
109
|
|
Issuance of common stock for vested restricted stock units
|
$
|
4,847
|
|
|
$
|
3,285
|
|
|
$
|
5,327
|
|
The accompanying notes are an integral part of these consolidated financial statements.
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements
1. Nature of Business
Bridgepoint Education, Inc. (together with its subsidiaries, the “Company”), incorporated in 1999, is a provider of postsecondary education services. Its wholly-owned subsidiaries, Ashford University
®
and University of the Rockies
SM
, are regionally accredited academic institutions. Ashford University offers associate’s, bachelor’s and master’s programs, and University of the Rockies offers master’s and doctoral programs.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Bridgepoint Education, Inc. and its wholly-owned subsidiaries. Intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the prior years’ financial statements to conform to the current year presentation. During 2016, the Company adopted Accounting Standards Update (“ASU”) 2016-18,
Statement of Cash Flows (Topic 230)
and has reclassified certain restricted cash amounts for the years ended December 31, 2015 and 2014 within the consolidated statements of cash flows. Additionally, the accounts payable and accrued liabilities are now presented on a combined basis within the consolidated balance sheets and related footnotes and the Company has reclassified these amounts for the years ended December 31, 2015 and 2014. These reclassifications had no effect on previously reported results of operations or retained earnings.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents is comprised of cash and other short-term highly liquid investments that are readily convertible into known amounts of cash. The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.
The Company's restricted cash is primarily held in money market accounts, and is excluded from cash and cash equivalents on the Company's consolidated balance sheets. The majority of restricted cash represents funds held for students from Title IV financial aid programs that result in credit balances on a student’s account or funds held for students to be refunded in connection with a legal settlement. To a lesser extent, restricted cash also represents amounts held as collateral for letters of credit. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statement of cash flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
|
2014
|
Cash and cash equivalents
|
$
|
307,802
|
|
|
$
|
282,145
|
|
|
$
|
207,003
|
|
Restricted cash
|
24,533
|
|
|
24,685
|
|
|
25,934
|
|
Total cash, cash equivalents and restricted cash
|
$
|
332,335
|
|
|
$
|
306,830
|
|
|
$
|
232,937
|
|
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
Investments
As of
December 31, 2016
, the Company held investments that consisted of mutual funds, corporate notes and bonds and certificates of deposit. The Company's investments are denominated in U.S. dollars, are investment grade and are readily marketable. The Company considers as current assets those investments which will mature or are likely to be sold in less than one year.
The Company classifies its investments as either trading, available-for-sale or held-to-maturity. Trading securities are those bought and held principally to sell in the short-term, with gains or losses from changes in fair value flowing through current earnings. Available-for-sale securities are carried at fair value as determined by quoted market prices, with unrealized gains and losses, net of tax, reported as a separate component of comprehensive income (loss) and stockholders’ equity. Held-to-maturity securities would be carried at amortized cost. Amortization of premiums, accretion of discounts, interest, and realized gains and losses are included in other income, net in the consolidated statement of income (loss).
The Company regularly monitors and evaluates the realizable value of its investments. If events and circumstances indicate that a decline in the value of these assets has occurred and is other-than-temporary, the Company would record a charge to other income, net in the consolidated statements of income (loss).
Deferred Compensation
The Company has a deferred compensation plan, into which certain members of management are eligible to defer a maximum of
80%
of their regular compensation and a maximum of
100%
of their incentive compensation. The amounts deferred by the participant under this plan are credited with earnings or losses based upon changes in values of participant elected notional investments. Each participant is fully vested in the participant amounts deferred. The Company may make contributions that will generally vest according to a four-year vesting schedule. After
four
years of service, participants become
100%
vested in the employer contributions upon reaching normal retirement age, death, disability or a change in control. The Company's obligations under the deferred compensation plan totaled
$1.3 million
and
$1.2 million
as of
December 31, 2016
and 2015, respectively, and are included in other long-term liabilities in the consolidated balance sheets.
Fair Value Measurements
The Company uses the three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: (i) Level 1, defined as observable inputs such as quoted prices in active markets; (ii) Level 2, defined as inputs other than quoted prices in active markets that are either observable directly or indirectly, through market corroboration, for substantially the full term of the financial instrument; and (iii) Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consists of student accounts receivable, which represent amounts due for tuition, course digital materials, technology fees and other fees from currently enrolled and former students. Students generally fund their education through grants and/or loans under various Title IV programs, tuition assistance from military and corporate employers or personal funds. Except for those students under conditional admission, payments are due on the respective course start date and are considered past due dependent upon the student's payment terms. In general, an account is considered delinquent 120 days subsequent to the course start date.
Accounts receivable are stated at the amount management expects to collect from outstanding balances. For accounts receivable, an allowance for doubtful accounts is estimated by management and is principally based on historical collection experience as well as (i) an assessment of individual accounts receivable over a specific aging and amount, (ii) consideration of the nature of the receivable accounts and (iii) potential changes in the business or economic environment. The provision for bad debt is recorded within instructional costs and services in the consolidated statements of income (loss). The Company writes off uncollectable accounts receivable when the student account is deemed uncollectable by internal collection efforts or by a third-party collection agency.
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
Student Loans Receivable and Loan Loss Reserves
In accordance with the terms of the settlement reached between the Company and the Consumer Financial Protection Bureau in September 2016, all existing student loans receivable were written off during the third quarter of 2016. For additional information regarding the settlement, refer to Note
21
, “Commitments and Contingencies.”
Historically, student loans receivable consisted of loans to qualified students and have a repayment period of
10 years
from the date of graduation or withdrawal from the Company's institutions. The interest rate charged on student loans was a fixed rate of either
4.5%
or
0.0%
depending upon the repayment plan selected. If the student selected the rate of
0.0%
, the student must pay
$50
per month on the loan while enrolled in school and during the
six
months of grace period (after graduation or withdrawal) before the repayment period begins. On the
0.0%
student loans, the Company imputed the interest using the rate that would be used in a market transaction with similar terms. Interest income on student loans was recognized using the effective interest method and is recorded within other income in the consolidated statements of income (loss).
Before being written off, student loans receivable were stated at the amount management expected to collect from outstanding balances. For tuition related student loan receivables, the Company had estimated an allowance for doubtful accounts, similar to that of accounts receivable, based on (i) an assessment of individual loans receivable over a specific aging and amount, (ii) consideration of the nature of the receivable accounts, (iii) potential changes in the business or economic environment and (iv) related FICO scores and other industry metrics. The related provision for bad debts is recorded within instructional costs and services in the consolidated statements of income (loss).
For non-tuition related student loans, the Company utilized an impairment methodology, under which management determined whether a loan would be impaired if unable to collect all amounts due in accordance with the contractual terms of the individual loan agreement. This assessment was based on an analysis of several factors, including aging history and delinquency trending, the risk characteristics, credit quality and loan performance of the specific loans, and current economic conditions and industry trends. Credit quality was assessed at the outset of a loan, based upon the applicant's FICO score during the loan application process. The Company considered loans to be impaired when they reach a delinquency status that requires specialized collection efforts. The Company defined delinquency for loans as those students whose last activity was more than 120 days old. The Company records a loss reserve for the full book value of the impaired loans. For the years ended December 31, 2016, and 2015 there was
$0.2 million
and
$1.3 million
recorded for loan loss reserves, respectively. The loan loss reserve was maintained at a level deemed adequate by management based on a periodic analysis of the individual loans and is recorded within instructional costs and services in the consolidated statements of income (loss).
Property and Equipment
Property and equipment are recognized at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on estimated useful lives of the related assets as follows:
|
|
|
Furniture and office equipment
|
3 - 7 years
|
Software
|
3 - 5 years
|
Vehicles
|
5 years
|
Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the assets. Upon the retirement or disposition of property and equipment, the related cost and accumulated depreciation is removed and a gain or loss is recorded in the consolidated statements of income (loss). Repairs and maintenance costs are expensed in the period incurred.
Leases
Leases are evaluated and classified as either operating or capital leases. Leased property and equipment meeting certain criteria would be capitalized, and the present value of the related lease payments is recognized as a liability on the consolidated balance sheets. Amortization of capitalized leased assets is computed on the straight-line method over the term of the lease or the life of the related asset, whichever is shorter.
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
If the Company receives tenant allowances from the lessor for certain improvements made to the leased property, these allowances are capitalized as leasehold improvements and a long-term liability is established. The long-term liability is amortized on a straight-line basis over the corresponding lease term. The Company records rent expense on a straight-line basis over the initial term of a lease. The difference between the rent payment and the straight-line rent expense is recorded as either a short-term or long-term liability.
The Company recognizes liabilities for exit and disposal activities on non-cancelable lease obligations at fair value in the period the liability is incurred. For the non-cancelable lease obligations, the Company records the obligation when the contract is terminated.
Impairment of Long-Lived Assets
The Company assesses potential impairment to its long-lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recorded if the carrying amount of the long-lived asset is not recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Any required impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds fair value and is recorded as a reduction in the carrying value of the related asset and an expense to operating results.
Goodwill and Other Intangible Assets
The Company tests goodwill and indefinite-lived intangible assets for impairment annually in the fourth quarter of each fiscal year, or more frequently if events and circumstances warrant.
The Company adopted accounting guidance which simplifies how an entity tests goodwill for impairment. The Company first assesses qualitative factors, such as deterioration in general economic conditions or negative company financial performance, to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. The Company's assessment of goodwill during the fourth quarter of fiscal
2016
indicated that it was not more likely than not that the fair value of a reporting unit is less than its carrying amount, and therefore, goodwill was not impaired. There have been no related impairment losses recognized by the Company for any periods presented. If negative qualitative indicators had been noted above, the Company would then need to assess the fair value of its reporting unit to determine whether they were in excess of the carrying values.
To evaluate the impairment of the indefinite-lived intangible assets, the Company assessed the fair value of the assets to determine whether they were in excess of the carrying values. Determining the fair value of indefinite-lived intangible asset is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions are inherently uncertain, and may include such items as growth rates used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and a determination of appropriate market comparables. The Company's assessment of indefinite-lived intangible assets during the fourth quarter of fiscal
2016
did not result in any impairment. There have been no impairment losses for indefinite-lived intangibles recognized by the Company for any periods presented.
The Company also has definite-lived intangible assets, which primarily consist of purchased intangibles and capitalized curriculum development costs. The definite-lived intangible assets are recognized at cost less accumulated amortization. Amortization is computed using the straight-line method based on estimated useful lives of the related assets.
Revenue and Deferred Revenue
The Company recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered or delivery has occurred, its fees or price is fixed or determinable, and collectibility is reasonably assured. The Company's revenue consists of tuition, technology fees, course digital materials and other miscellaneous fees. Tuition revenue is deferred and recognized on a straight-line basis over the applicable period of instruction net of scholarships and expected refunds, with the exception of an online student's first course per degree level at Ashford University. An online student's first course per degree level at Ashford University falls under a
three
-week conditional admission period in which the revenue is deferred until the student matriculates into the course.
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
The Company's institutions' online students generally enroll in a program that encompasses a series of
five
to
six
-week courses that are taken consecutively over the length of the program. With the exception of those students under conditional admission, the online students are billed on a payment period basis on the first day of class. Students under conditional admission are billed for the payment period upon matriculation. The Company assesses collectibility at the start of a student’s payment period for the courses in that payment period, as well as throughout the period as facts and circumstances change.
If a student's attendance in a class precedes the receipt of cash from the student's source of funding, the Company establishes an account receivable and corresponding deferred revenue in the amount of the tuition due for that payment period. Cash received either directly from the student or from the student's source of funding reduces the balance of accounts receivable due from the student. Financial aid from sources such as the federal government's Title IV programs pertains to the online student's award year and is generally divided into
two
disbursement periods. As such, each disbursement period may contain funding for up to
four
courses. Financial aid disbursements are typically received during the online student's attendance in the first or second course. Since the majority of disbursements cover more courses than for which a student is currently enrolled, the amount received in excess effectively represents a prepayment from the online student for up to
four
courses. At the end of each accounting period, the deferred revenue and student deposits and related account receivable balances are reduced to present amounts attributable to the current course.
Students under conditional admission are not obligated for payment until after their conditional admission period has lapsed, so there is no related refund. For all subsequent courses, the Company records a provision for expected refunds and reduces revenue for the amount that is expected to be subsequently refunded. Provisions for expected refunds have not been material to any period presented. If a student withdraws from a program prior to a specified date, a portion of such student's tuition is refunded, subject to certain state requirements. The Company reassess collectibility throughout the period revenue is recognized by the Company's institutions, on a student-by-student basis. The Company reassesses collectibility based upon new information and changes in facts and circumstances relevant to a student's ability to pay. For example, the Company reassesses collectibility when a student drops from the institution (i.e., is no longer enrolled) and when a student attends a course that was not included in the initial assessment of collectibility at the start of a student’s payment period.
In certain cases, the Company's institutions provide scholarships to students for various programs. Scholarships issued by the universities are recorded in association with the related specific course, term or payment period. Scholarships are generally deferred and recognized against revenue over the course term. Incentive-based scholarships, such as the Leadership Development Grant (“LDG”) and Alumni Scholarship are recognized against revenue over the period of benefit to the student.
Ashford University records revenue from technology fee on a per course charge basis. The per course technology fee revenue for Ashford University is recognized on a straight-line basis over the applicable period of instruction. University of the Rockies records revenue from technology fees as one-time start up fees charged to each new online student (other than military, scholarship students or certain corporate reimbursement students), and then recognizes that revenue ratably over the average expected enrollment of a student. The average expected enrollment of the student was estimated each quarter based upon historical duration of attendance and qualitative factors as deemed necessary.
Other miscellaneous fees include fees for course content and textbooks and other services, such as commencements, and are recognized upon delivery of the goods or when the related service is performed.
Workers Compensation
The Company records a gross liability for estimated workers compensation claims, incurred but not yet reported, as of each balance sheet date. The Company also records the gross insurance recoverable due for individual claim amounts. This is recorded as an other asset and as an equal accrued liability. The stop-loss premium is determined annually, but invoiced and paid on a quarterly basis. The related insurance premiums are expensed ratably over the coverage period.
Income Taxes
The Company accounts for its income taxes using the asset-liability method whereby deferred tax assets and liabilities are determined based on temporary differences between the bases used for financial reporting and income tax reporting purposes. Deferred income taxes are provided based on the enacted tax rates expected to be in effect at the time such temporary
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
differences are expected to reverse. A valuation allowance is provided for deferred tax assets if it is more-likely-than-not that the Company will not realize those tax assets through future operations.
The Company evaluates and accounts for uncertain tax positions using a two-step approach. Recognition (step one) occurs when the Company concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that is greater than 50% likely to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. Derecognition of a tax position that was previously recognized would occur when the Company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained.
Stock-Based Compensation
Stock-based compensation expense is measured at the grant date fair value of the award and is expensed over the vesting period. The Company estimates the fair value of stock options on the grant date using the Black-Scholes option pricing model. The Company estimates the fair value of its performance stock units (“PSUs”) on the grant date using a Monte Carlo simulation model. Determining the fair value of stock-based awards at the grant date under these models requires judgment, including estimating volatility, employee stock option exercise behaviors and forfeiture rates. The assumptions used in calculating the fair value of stock-based awards represent the Company's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. The fair value of the Company's restricted stock units (“RSUs”) is based on the market price of the Company's common stock on the date of grant.
The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest. The Company estimates award forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company's equity incentive plans require that stock option awards have an exercise price that equals or exceeds the closing price of the Company's common stock on the date of grant.
Stock-based compensation expense for stock-based awards is recorded in the consolidated statement of income (loss), net of estimated forfeitures, using the graded-vesting method over the requisite service periods of the respective stock awards. The requisite service period is generally the period over which an employee is required to provide service to the Company in exchange for the award.
Instructional Costs and Services
Instructional costs and services consist primarily of costs related to the administration and delivery of the Company's educational programs. These expenses include compensation for faculty and administrative personnel, curriculum and new program development costs, financial aid processing costs, technology license costs, bad debt expense and costs associated with other support groups that provide services directly to the students. Instructional costs and services also include an allocation of information technology, facility, depreciation and amortization costs.
Admissions Advisory and Marketing
Admissions advisory and marketing costs include compensation of personnel engaged in marketing and recruitment, as well as costs associated with purchasing leads and producing marketing materials. Such costs are generally affected by the cost of advertising media and leads, the efficiency of the Company's marketing and recruiting efforts, compensation for the Company's enrollment personnel and expenditures on advertising initiatives for new and existing academic programs. Admissions advisory and marketing costs also include an allocation of information technology, facility, depreciation and amortization costs.
Advertising costs, a subset of admissions advisory and marketing costs, consists primarily of marketing leads and other branding and promotional activities. These advertising activities are expensed as incurred, or the first time the advertising takes place, depending on the type of advertising activity. Advertising costs were
$83.0 million
,
$68.4 million
and
$89.0 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
General and Administrative
General and administrative expenses include compensation of employees engaged in corporate management, finance, human resources, compliance and other corporate functions. General and administrative expenses also include professional services fees, travel and entertainment expenses and an allocation of information technology, facility, depreciation and amortization costs.
Legal Settlement Expense
Legal settlement expense is primarily comprised of (i) charges related to the cost of resolution of the previously disclosed civil investigative demands and (ii) the estimate of additional amounts to resolve the previously disclosed investigative subpoenas.
Restructuring and Impairment Charges
Restructuring and impairment charges are primarily comprised of i) charges related to the write off of certain fixed assets and assets abandoned, ii) student transfer agreement costs, iii) severance costs related to headcount reductions made in connection with restructuring plans, iv) estimated lease losses related to facilities vacated or consolidated under restructuring plans, and v) the impairment of capitalized software costs.
Earnings (Loss) Per Share
Basic earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated by dividing net income available to common stockholders by the sum of (i) the weighted average number of common shares outstanding during the period and (ii) potentially dilutive securities outstanding during the period, if the effect is dilutive. Potentially dilutive common shares consist of incremental shares of common stock issuable upon the exercise of the stock options and upon the settlement of RSUs and PSUs.
Segment Information
The Company operates in
one
reportable segment as a single educational delivery operation using a core infrastructure that serves the curriculum and educational delivery needs of its students regardless of geography. The Company's chief operating decision maker, its CEO and President, manages the Company's operations as a whole, and no revenue, expense or operating income information is evaluated by the chief operating decision maker on any component level.
Comprehensive Income
Comprehensive income consists of net income and other gains and losses affecting stockholders’ equity that, under GAAP, are excluded from net income. For the year ended
December 31, 2016
, such items consisted of unrealized gains and losses on investments. The following table summarizes the components of other comprehensive gain (loss) and the related tax effects for the years ended
December 31, 2016
,
2015
and
2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on investments
|
Year ended:
|
Before-Tax Amount
|
|
Tax Effect
|
|
Net-of-Tax Amount
|
December 31, 2016
|
$
|
157
|
|
|
$
|
(59
|
)
|
|
$
|
98
|
|
December 31, 2015
|
$
|
125
|
|
|
$
|
(49
|
)
|
|
$
|
76
|
|
December 31, 2014
|
$
|
(359
|
)
|
|
$
|
136
|
|
|
$
|
(223
|
)
|
The Company reclassified an immaterial amount out of other comprehensive income for the year ended December 31, 2014, relating to the net realized gain on the sale of securities. There was no such reclassification during the years ended
December 31, 2016
or
2015
.
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) Topic 605,
Revenue Recognition
. This literature is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The accounting guidance also requires additional disclosure regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 can be adopted using one of two retrospective application methods. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date,
which defers the effective date of ASU 2014-09 by one year, to fiscal years beginning after December 15, 2017. The Company currently expects to adopt ASU 2014-09 and related topics in its first quarter of 2018, and is evaluating which transition approach to use. During the fourth quarter of 2016, the Company completed an initial evaluation of its existing revenue streams based upon the new standards and continues to evaluate the impact the adoption of ASU 2014-09 will have on the Company’s consolidated financial statements. The Company has not determined the effect of the update on our internal control over financial reporting, but will do so throughout the next year.
Additionally, the FASB issued the following various updates affecting the guidance in ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which is not yet effective. The effective dates and transition requirements are the same as those in ASC Topic 606 above. In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).
This update relate to when another party, along with the entity, is involved in providing a good or service to a customer. ASC Topic 606, requires an entity to determine whether the nature of its promise is to provide that good or service to the customer (i.e., the entity is a principal) or to arrange for the good or service to be provided to the customer by another party (i.e., the entity is an agent). In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.
This update clarifies Topic 606 with respect to (i) the identification of performance obligations and (ii) the licensing implementation guidance. The update does not change the core principle of the guidance in Topic 606. In May 2016, the FASB issued ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.
This update addresses narrow-scope improvements to the guidance on collectibility, noncash consideration and completed contracts at transition. The update provides a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. Then, in December 2016, the FASB issued ASU 2016-20
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
. The updates in ASU 2016-20 affect narrow aspects of the guidance issued in ASU 2014-09.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842).
Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the lease commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606,
Revenue from Contracts with Customers
. The new lease guidance simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Public companies should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company continues to evaluate the impact the adoption of ASU 2016-02 will have on the Company’s consolidated financial statements.
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. The update includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income, EPS and the statement of cash flows. Implementation and administration may present challenges for companies with significant share-based payment activities. ASU 2016-09 is effective for public companies for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company plans to adopt this update as of January 1, 2017. The Company does not believe the adoption of ASU 2016-09 will have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
The update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The update requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The update requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. The update is effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application will be permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company does not believe the adoption of ASU 2016-13 will have a material impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230).
The update is intended to improve financial reporting in regards to how certain transactions are classified in the statement of cash flows. This update requires that debt extinguishment costs be classified as cash outflows for financing activities and provides additional classification guidance for the statement of cash flows. The update also requires that the classification of cash receipts and payments that have aspects of more than one class of cash flows to be determined by applying specific guidance under generally accepted accounting principles. The update also requires that each separately identifiable source or use within the cash receipts and payments be classified on the basis of their nature in financing, investing or operating activities. The update is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-15 as of December 31, 2016, and it did not have a material impact on the Company’s consolidated financial statements.
In October 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230), Restricted Cash.
The update applies to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows. The update addresses diversity in practice that exists in the classification and presentation of changes in restricted cash on the statement of cash flows, and requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The update is effective for public companies for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The updates should be applied using a retrospective transition method to each period presented. The Company adopted ASU 2016-15 as of December 31, 2016, and although it changed the historical presentation on the consolidated statements of cash flows, it did not have any other material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805):
Clarifying the Definition of a Business.
The update affects all companies and other reporting organizations that must determine whether they have acquired or sold a business. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The update is intended to help companies and other organizations evaluate whether transactions should be
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
accounted for as acquisitions (or disposals) of assets or businesses. The update provides a more robust framework to use in determining when a set of assets and activities is a business, and also provides more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. For public companies, the update is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company does not believe the adoption of ASU 2017-01 will have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. The update simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The update also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The update should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. For public companies, the update is effective for any annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not believe the adoption of ASU 2017-04 will have a material impact on the Company’s consolidated financial statements.
3. Restructuring and Impairment Charges
The Company has implemented various restructuring plans to better align its resources with its business strategy. The related restructuring charges are recorded in the restructuring and impairment charges line item on the Company’s consolidated statements of income (loss).
In July 2015, the Company committed to the implementation of a plan to close Ashford University’s residential campus in Clinton, Iowa (the “Clinton Campus”) during the second quarter of 2016. As part of the planned campus closure, as well as the vacating certain other leased property, the Company recognized asset impairment charges of
$2.2 million
,
$43.3 million
and
$4.6 million
relating to the write-off of certain fixed assets during the years ended December 31, 2016, 2015 and 2014, respectively.
With the closure of the Clinton Campus, ground-based Ashford University students were provided opportunities to continue to pursue their degrees as reflected in their respective student transfer agreements. For the year ended December 31, 2015, the Company recorded restructuring charges relating to future cash expenditures for student transfer agreements of approximately
$3.3 million
. This estimate was based upon several assumptions that were subject to change, including assumptions related to the number of students who elected to continue to pursue their degrees through Ashford University’s online programs. For the year ended December 31, 2016, the Company reassessed this estimate and decreased the related restructuring charges by approximately
$0.1 million
.
In recent years, the Company has implemented reductions in force to help better align personnel resources with the decline in enrollment. During the years ended December 31, 2016, 2015 and 2014, the Company recognized
$2.7 million
,
$4.7 million
and
$3.6 million
, respectively, as restructuring charges related to severance costs for wages and benefits resulting from the reductions in force. We anticipate these costs will be paid out by the end of the first quarter of 2017 from existing cash on hand.
As part of its continued efforts to streamline operations, the Company vacated or consolidated properties in Denver and San Diego and reassessed its obligations on non-cancelable leases. The fair value estimate of these non-cancelable leases is based on the contractual lease costs over the remaining term, partially offset by estimated future sublease rental income. The estimated rental income considers subleases the Company has executed or expects to execute, current commercial real estate market data and conditions, comparable transaction data and qualitative factors specific to the related facilities. During the years ended December 31, 2016, 2015 and 2014, the Company recorded
$14.5 million
,
$17.0 million
and
$6.5 million
, respectively, for lease exit costs, primarily related to properties in Denver and San Diego.
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
During the fourth quarter of 2014, the Company terminated a software development program for internal operations due to a change in the Company's operating plan. As a result, the Company recorded an asset impairment charge of
$2.2 million
during the year ended December 31, 2014 for previously capitalized software costs.
The following table summarizes the amounts recorded in the restructuring and impairment charges line item on the Company's consolidated statements of income (loss) for each of the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Asset impairment
|
$
|
2,215
|
|
|
$
|
43,328
|
|
|
$
|
4,566
|
|
Student transfer agreement costs
|
(142
|
)
|
|
3,264
|
|
|
—
|
|
Severance costs
|
2,668
|
|
|
4,717
|
|
|
3,560
|
|
Lease exit and other costs
|
14,535
|
|
|
17,047
|
|
|
6,470
|
|
Capitalized software costs
|
—
|
|
|
—
|
|
|
2,232
|
|
Total restructuring and impairment charges
|
$
|
19,276
|
|
|
$
|
68,356
|
|
|
$
|
16,828
|
|
The following table summarizes the changes in the Company's restructuring liability by type during the three-year period ended
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Impairment
|
|
Student Transfer Agreement Costs
|
|
Severance Costs
|
|
Lease Exit and Other Costs
|
|
Capitalized Software Costs
|
|
Total
|
Balance at December 31, 2013
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
328
|
|
|
$
|
—
|
|
|
$
|
328
|
|
Restructuring and impairment charges
|
4,566
|
|
|
—
|
|
|
3,560
|
|
|
6,470
|
|
|
2,232
|
|
|
16,828
|
|
Payments
|
—
|
|
|
—
|
|
|
(2,700
|
)
|
|
(218
|
)
|
|
—
|
|
|
(2,918
|
)
|
Non-cash transaction
|
(4,566
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,232
|
)
|
|
(6,798
|
)
|
Balance at December 31, 2014
|
—
|
|
|
—
|
|
|
860
|
|
|
6,580
|
|
|
—
|
|
|
7,440
|
|
Restructuring and impairment charges
|
43,328
|
|
|
3,264
|
|
|
4,717
|
|
|
17,047
|
|
|
—
|
|
|
68,356
|
|
Payments
|
—
|
|
|
(40
|
)
|
|
(3,833
|
)
|
|
(9,706
|
)
|
|
—
|
|
|
(13,579
|
)
|
Non-cash transaction
|
(43,328
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(43,328
|
)
|
Balance at December 31, 2015
|
—
|
|
|
3,224
|
|
|
1,744
|
|
|
13,921
|
|
|
—
|
|
|
18,889
|
|
Restructuring and impairment charges
|
2,215
|
|
|
(142
|
)
|
|
2,668
|
|
|
14,535
|
|
|
—
|
|
|
19,276
|
|
Payments
|
—
|
|
|
(1,490
|
)
|
|
(3,845
|
)
|
|
(9,999
|
)
|
|
—
|
|
|
(15,334
|
)
|
Non-cash transaction
|
(2,215
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,215
|
)
|
Balance at December 31, 2016
|
$
|
—
|
|
|
$
|
1,592
|
|
|
$
|
567
|
|
|
$
|
18,457
|
|
|
$
|
—
|
|
|
$
|
20,616
|
|
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
4. Investments
The following tables summarize the fair value information of short and long-term investments as of
December 31, 2016
and
2015
, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Mutual funds
|
$
|
1,688
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,688
|
|
Corporate notes and bonds
|
—
|
|
|
22,746
|
|
|
—
|
|
|
22,746
|
|
Certificates of deposit
|
—
|
|
|
25,000
|
|
|
—
|
|
|
25,000
|
|
Total
|
$
|
1,688
|
|
|
$
|
47,746
|
|
|
$
|
—
|
|
|
$
|
49,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Mutual funds
|
$
|
1,314
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,314
|
|
Corporate notes and bonds
|
—
|
|
|
40,843
|
|
|
—
|
|
|
40,843
|
|
Certificates of deposit
|
—
|
|
|
25,000
|
|
|
—
|
|
|
25,000
|
|
Total
|
$
|
1,314
|
|
|
$
|
65,843
|
|
|
$
|
—
|
|
|
$
|
67,157
|
|
The tables above include amounts related to investments classified as other investments, such as certificates of deposit, which are carried at amortized cost. The amortized cost of such investments approximated fair value at each balance sheet date. The assumptions used in these fair value estimates are considered as other observable inputs and are therefore categorized as Level 2 measurements under the accounting guidance. The Company's Level 2 investments are valued using readily available pricing sources that utilize market observable inputs, including the current interest rate for similar types of instruments. There were no transfers between levels during the periods presented. The Company also holds money market securities within its cash and cash equivalents on the consolidated balance sheets that are classified as Level 1 securities.
The following tables summarize the differences between amortized cost and fair value of short and long-term investments as of
December 31, 2016
and
2015
, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
Gross unrealized
|
|
|
|
Maturities
|
|
Amortized Cost
|
|
Gain
|
|
Loss
|
|
Fair Value
|
Short-term
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
1 year or less
|
|
$
|
22,747
|
|
|
$
|
2
|
|
|
$
|
(3
|
)
|
|
$
|
22,746
|
|
Certificates of deposit
|
1 year or less
|
|
25,000
|
|
|
—
|
|
|
—
|
|
|
25,000
|
|
Total
|
|
|
$
|
47,747
|
|
|
$
|
2
|
|
|
$
|
(3
|
)
|
|
$
|
47,746
|
|
The above table does not include
$1.7 million
of mutual funds for
December 31, 2016
, which are recorded as trading securities.
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
Gross unrealized
|
|
|
|
Maturities
|
|
Amortized Cost
|
|
Gain
|
|
Loss
|
|
Fair Value
|
Short-term
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
1 year or less
|
|
$
|
18,113
|
|
|
$
|
—
|
|
|
$
|
(40
|
)
|
|
$
|
18,073
|
|
Long-term
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
3 years or less
|
|
22,887
|
|
|
—
|
|
|
(117
|
)
|
|
22,770
|
|
Certificate of deposit
|
3 years or less
|
|
25,000
|
|
|
—
|
|
|
—
|
|
|
25,000
|
|
Total
|
|
|
$
|
66,000
|
|
|
$
|
—
|
|
|
$
|
(157
|
)
|
|
$
|
65,843
|
|
The above table does not include
$1.3 million
of mutual funds for
December 31, 2015
, which are recorded as trading securities.
As of
December 31, 2016
, there were
three
investments that were in an unrealized loss position for less than 12 months. There were
no
investments that were in an unrealized loss position for greater than 12 months. There was no impairment considered other-than-temporary, as it is more likely than not the Company will hold the securities until maturity or a recovery of the cost basis. The Company accumulates unrealized gains and losses on the available-for-sale debt securities, net of tax, in accumulated other comprehensive gain (loss) in the stockholders’ equity section of the Company's balance sheets. As of
December 31, 2015
, there were
no
investments that were in an unrealized loss position for greater than 12 months.
5. Accounts Receivable, Net
Accounts receivable, net, consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Accounts receivable
|
$
|
42,611
|
|
|
$
|
34,205
|
|
Less allowance for doubtful accounts
|
16,154
|
|
|
10,114
|
|
Accounts receivable, net
|
$
|
26,457
|
|
|
$
|
24,091
|
|
There are an immaterial amount of accounts receivable, net, at each balance sheet date with a payment due date of greater than one year.
The following table presents the changes in the allowance for doubtful accounts for accounts receivable for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
Charged to
Expense
|
|
Deductions(1)
|
|
Ending
Balance
|
Allowance for doubtful accounts receivable:
|
|
|
|
|
|
|
|
For the year ended December 31, 2016
|
$
|
10,114
|
|
|
$
|
32,423
|
|
|
$
|
(26,383
|
)
|
|
$
|
16,154
|
|
For the year ended December 31, 2015
|
$
|
27,567
|
|
|
$
|
29,782
|
|
|
$
|
(47,235
|
)
|
|
$
|
10,114
|
|
For the year ended December 31, 2014
|
$
|
26,901
|
|
|
$
|
27,853
|
|
|
$
|
(27,187
|
)
|
|
$
|
27,567
|
|
|
|
(1)
|
Deductions represent accounts written off, net of recoveries.
|
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
6. Student Loans Receivable, Net
In accordance with the terms of the settlement reached between the Company and the Consumer Financial Protection Bureau in September 2016, all existing student loans receivable were written off during the third quarter of 2016. For additional information regarding the settlement, refer to Note
21
, “Commitments and Contingencies”. Student loans receivable, net, consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Current student loans receivable
|
$
|
—
|
|
|
$
|
865
|
|
Less allowance for doubtful accounts
|
—
|
|
|
90
|
|
Current student loans receivable, net
|
$
|
—
|
|
|
$
|
775
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Non-current student loans receivable
|
$
|
—
|
|
|
$
|
8,257
|
|
Less allowance for doubtful accounts
|
—
|
|
|
863
|
|
Non-current student loans receivable, net
|
$
|
—
|
|
|
$
|
7,394
|
|
At December 31, 2015, student loans receivable is presented net of any related discount, and the balances approximated fair value. The Company estimates the fair value of the student loans receivable by discounting the future cash flows using an interest rate of
4.5%
, which approximates the interest rates used in similar arrangements. The assumptions used in this estimate are considered unobservable inputs and are therefore categorized as Level 3 measurements under the accounting guidance.
There was no revenue recognized related to student loans during the year ended December 31, 2016 and the revenue recognized related to student loans was immaterial during the year ended December 31, 2015. The following table presents the changes in the allowance for doubtful accounts for student loans receivable (tuition related) for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
Charged to
Expense
|
|
Deductions(1)
|
|
Ending
Balance
|
Allowance for doubtful student loans receivable:
|
|
|
|
|
|
|
|
For the year ended December 31, 2016
|
$
|
953
|
|
|
$
|
160
|
|
|
$
|
(1,113
|
)
|
|
$
|
—
|
|
For the year ended December 31, 2015
|
$
|
1,495
|
|
|
$
|
81
|
|
|
$
|
(623
|
)
|
|
$
|
953
|
|
For the year ended December 31, 2014
|
$
|
2,144
|
|
|
$
|
331
|
|
|
$
|
(980
|
)
|
|
$
|
1,495
|
|
|
|
(1)
|
Deductions represent accounts written off, net of recoveries.
|
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
7. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Prepaid expenses
|
$
|
7,160
|
|
|
$
|
7,005
|
|
Prepaid licenses
|
5,183
|
|
|
5,221
|
|
Income tax receivable
|
7,432
|
|
|
20,169
|
|
Prepaid insurance
|
1,291
|
|
|
1,619
|
|
Insurance recoverable
|
702
|
|
|
16,659
|
|
Legal insurance recoverable
|
325
|
|
|
—
|
|
Interest receivable
|
142
|
|
|
299
|
|
Other current assets
|
1,232
|
|
|
1,220
|
|
Total prepaid expenses and other current assets
|
$
|
23,467
|
|
|
$
|
52,192
|
|
8. Property and Equipment, Net
Property and equipment, net, consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Furniture and office equipment
|
$
|
41,528
|
|
|
$
|
63,354
|
|
Software
|
11,979
|
|
|
12,605
|
|
Leasehold improvements
|
4,332
|
|
|
11,136
|
|
Vehicles
|
22
|
|
|
22
|
|
Total property and equipment
|
57,861
|
|
|
87,117
|
|
Less accumulated depreciation and amortization
|
(45,643
|
)
|
|
(65,375
|
)
|
Total property and equipment, net
|
$
|
12,218
|
|
|
$
|
21,742
|
|
Depreciation and amortization expense associated with property and equipment totaled $
8.4 million
, $
13.9 million
and $
17.6 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
Included in the table above is
$4.1 million
as of December 31, 2015, which represents equipment sold and subsequently leased-back by the Company prior to December 31, 2015. These amounts are classified as financing activities in proceeds from failed sale-leaseback transaction on the Company's consolidated statements of cash flows.
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
9. Goodwill and Intangibles, Net
Goodwill and intangibles, net, consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Definite-lived intangible assets:
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Capitalized curriculum costs
|
$
|
21,153
|
|
|
$
|
(17,397
|
)
|
|
$
|
3,756
|
|
Purchased intangible assets
|
15,850
|
|
|
(4,754
|
)
|
|
11,096
|
|
Total definite-lived intangible assets
|
$
|
37,003
|
|
|
$
|
(22,151
|
)
|
|
$
|
14,852
|
|
Goodwill and indefinite-lived intangibles
|
|
|
|
|
2,567
|
|
Total goodwill and intangibles, net
|
|
|
|
|
$
|
17,419
|
|
|
|
|
|
|
|
|
December 31, 2015
|
Definite-lived intangible assets:
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Capitalized curriculum costs
|
$
|
20,323
|
|
|
$
|
(13,954
|
)
|
|
$
|
6,369
|
|
Purchased intangible assets
|
15,850
|
|
|
(3,521
|
)
|
|
12,329
|
|
Total definite-lived intangible assets
|
$
|
36,173
|
|
|
$
|
(17,475
|
)
|
|
$
|
18,698
|
|
Goodwill and indefinite-lived intangibles
|
|
|
|
|
2,567
|
|
Total goodwill and intangibles, net
|
|
|
|
|
$
|
21,265
|
|
Goodwill and indefinite-lived intangibles includes the goodwill resulting from prior period acquisitions and the indefinite-lived intangibles attributable to the accreditation of the Company's institutions. Definite-lived intangibles include trademark agreements and digital course materials.
For the years ended
December 31, 2016
,
2015
and
2014
, amortization expense was
$4.7 million
,
$5.7 million
and
$5.7 million
, respectively. The following table summarizes the estimated remaining amortization expense as of each fiscal year ended below (in thousands):
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
$
|
3,370
|
|
2018
|
2,373
|
|
2019
|
1,613
|
|
2020
|
1,321
|
|
2021
|
1,240
|
|
Thereafter
|
4,935
|
|
Total future amortization expense
|
$
|
14,852
|
|
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
10. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Accounts payable
|
$
|
4,519
|
|
|
$
|
4,762
|
|
Accrued salaries and wages
|
8,967
|
|
|
10,476
|
|
Accrued bonus
|
5,087
|
|
|
4,295
|
|
Accrued vacation
|
9,313
|
|
|
9,628
|
|
Accrued litigation and fees
|
13,946
|
|
|
720
|
|
Accrued expenses
|
15,793
|
|
|
17,227
|
|
Rent liability
|
17,232
|
|
|
13,406
|
|
Accrued insurance liability
|
3,009
|
|
|
18,666
|
|
Accrued income taxes payable
|
—
|
|
|
16
|
|
Total accrued liabilities
|
$
|
77,866
|
|
|
$
|
79,196
|
|
11. Deferred Revenue and Student Deposits
Deferred
revenue
and student
deposits consists of
the following
(in
thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Deferred revenue
|
$
|
21,733
|
|
|
$
|
23,311
|
|
Student deposits
|
52,933
|
|
|
65,445
|
|
Total deferred revenue and student deposits
|
$
|
74,666
|
|
|
$
|
88,756
|
|
12. Other Long-Term Liabilities
Other long-term liabilities consists of
the following
(in
thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Uncertain tax positions
|
$
|
8,216
|
|
|
$
|
7,870
|
|
Legal settlements
|
—
|
|
|
178
|
|
Other long-term liabilities
|
5,414
|
|
|
6,998
|
|
Total other long term liabilities
|
$
|
13,630
|
|
|
$
|
15,046
|
|
13
.
Credit Facilities
The Company has issued letters of credit that are collateralized with cash in the aggregate amount of
$7.1 million
, which is included as restricted cash as of
December 31, 2016
.
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
December 31, 2016
, the Company's total available surety bond facility was
$3.5 million
and the surety had issued bonds totaling
$3.4 million
on the Company's behalf under such facility.
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
14. Lease Obligations
Operating leases
The Company leases certain office facilities and office equipment under non-cancelable lease arrangements that expire at various dates through 2023. The office leases contain certain renewal options. Rent expense under non-cancelable operating lease arrangements is accounted for on a straight-line basis and totaled
$23.3 million
,
$38.5 million
and
$42.2 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
The following table summarizes the future minimum rental payments under non-cancelable operating lease arrangements in effect at
December 31, 2016
(in thousands):
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
$
|
36,061
|
|
2018
|
31,230
|
|
2019
|
20,488
|
|
2020
|
9,150
|
|
2021
|
4,933
|
|
Thereafter
|
1,949
|
|
Total minimum payments
|
$
|
103,811
|
|
The Company has agreements to sublease certain portions of its office facilities, with
four
active subleases as of
December 31, 2016
. The Company is subleasing approximately
41,000
square feet of office space in San Diego, California with a commitment to lease for
40
months and a net sublease value of
$1.8 million
. In addition, the Company is subleasing approximately
72,000
square feet of office space in Denver, Colorado with a commitment to lease for
56
months and a net sublease value of
$6.6 million
.
15. Earnings (Loss) Per Share
Basic earnings (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 earnings (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 during the period, plus (ii) potentially dilutive securities outstanding during the period, if the effect is dilutive. Potentially dilutive securities for the periods presented include incremental stock options, unvested restricted stock units (“RSUs”) and unvested performance stock units (“PSUs”).
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
The following table sets forth the computation of basic and diluted earnings (loss) per share for the periods indicated (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Numerator:
|
|
|
|
|
|
Net income (loss)
|
$
|
(30,040
|
)
|
|
$
|
(70,454
|
)
|
|
$
|
9,668
|
|
Denominator:
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
46,228
|
|
|
45,665
|
|
|
45,204
|
|
Effect of dilutive options and restricted stock units
|
—
|
|
|
—
|
|
|
1,308
|
|
Diluted weighted average number of common shares outstanding
|
46,228
|
|
|
45,665
|
|
|
46,512
|
|
Earnings (loss) per share:
|
|
|
|
|
|
Basic
|
$
|
(0.65
|
)
|
|
$
|
(1.54
|
)
|
|
$
|
0.21
|
|
Diluted
|
$
|
(0.65
|
)
|
|
$
|
(1.54
|
)
|
|
$
|
0.21
|
|
The following table sets forth the number of stock options, RSUs and PSUs excluded from the computation of diluted loss per share for the periods indicated because their effect was anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Options
|
4,359
|
|
|
5,063
|
|
|
2,660
|
|
RSUs and PSUs
|
730
|
|
|
762
|
|
|
—
|
|
16
. Stock-Based Compensation
The Company recorded
$7.3 million
,
$9.7 million
and
$10.6 million
of compensation expense related to equity awards for the years ended
December 31, 2016
,
2015
and
2014
, respectively. The related income tax benefit was
$2.7 million
,
$3.6 million
and
$4.0 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. The Company records stock-based compensation expense over the vesting term using the graded-vesting method.
Stock Options
The Company grants stock options from its 2009 Stock Incentive Plan (the “2009 Plan”). The compensation committee of the Company's board of directors, or the full board of directors, determines eligibility, vesting schedules and exercise prices for stock options granted under the 2009 Plan. Stock options granted under the 2009 Plan typically have a maximum contractual term of
10 years
, subject to the option holder's continuing service with the Company. Stock options are generally granted with a
four
-year vesting requirement, pursuant to which the option holder must continue providing service to the Company at the applicable vesting date. All stock options granted during the years ended December 31,
2016
,
2015
and
2014
were awarded pursuant to the 2009 Plan. Under the 2009 Plan, the number of authorized shares is subject to automatic increase each January 1 through and including January 1, 2019, pursuant to a formula contained in the 2009 Plan, without the need for further approval by the Company's board of directors or stockholders.
Before the adoption of the 2009 Plan, the Company awarded stock options pursuant to the Company's Amended and Restated 2005 Stock Incentive Plan (the “2005 Plan”). Effective upon the closing of the Company's initial public offering, the 2005 Plan was terminated and no further stock options may be issued under the 2005 Plan, provided that all stock options then outstanding under the 2005 Plan will continue to remain outstanding pursuant to the terms of the 2005 Plan and the applicable award agreements.
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
The following table presents a summary of stock option activity during the years ended December 31,
2016
,
2015
and
2014
(in thousands, except for exercise prices and contractual terms):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic Value
|
December 31, 2013
|
5,490
|
|
|
$
|
14.25
|
|
|
6.52
|
|
$
|
28,769
|
|
Granted
|
403
|
|
|
$
|
14.35
|
|
|
|
|
|
Exercised
|
(388
|
)
|
|
$
|
8.01
|
|
|
|
|
|
Forfeitures and expired
|
(337
|
)
|
|
$
|
21.43
|
|
|
|
|
|
December 31, 2014
|
5,168
|
|
|
$
|
14.26
|
|
|
5.73
|
|
$
|
7,732
|
|
Granted
|
455
|
|
|
$
|
9.44
|
|
|
|
|
|
Exercised
|
(206
|
)
|
|
$
|
1.38
|
|
|
|
|
|
Forfeitures and expired
|
(764
|
)
|
|
$
|
18.15
|
|
|
|
|
|
December 31, 2015
|
4,653
|
|
|
$
|
13.72
|
|
|
4.84
|
|
$
|
2,556
|
|
Granted
|
375
|
|
|
$
|
10.44
|
|
|
|
|
|
Exercised
|
(306
|
)
|
|
$
|
4.35
|
|
|
|
|
|
Forfeitures and expired
|
(1,115
|
)
|
|
$
|
15.41
|
|
|
|
|
|
December 31, 2016
|
3,607
|
|
|
$
|
13.64
|
|
|
4.80
|
|
$
|
2,025
|
|
Vested and expected to vest at December 31, 2016
|
3,544
|
|
|
$
|
13.70
|
|
|
4.73
|
|
$
|
2,006
|
|
Exercisable at December 31, 2016
|
2,996
|
|
|
$
|
14.25
|
|
|
4.03
|
|
$
|
1,868
|
|
As of
December 31, 2016
, the Company had
5.7 million
shares of common stock reserved for issuance upon the exercise of outstanding stock options and settlement of outstanding stock awards under the Company's equity incentive plans. Shares issued upon stock option exercises and settlements of stock awards are drawn from the authorized but unissued shares of common stock.
During the year ended
December 31, 2016
, there were
0.3 million
stock options exercised with an intrinsic value of
$1.2 million
. The windfall tax benefit realized from these exercises was
$0.3 million
. The Company also recognized a tax benefit shortfall of
$0.4 million
related to stock options exercised at values lower than the related compensation expense. During the year ended
December 31, 2015
, there were
0.2 million
stock options exercised with an intrinsic value of
$1.6 million
. The windfall tax benefit realized from these exercises was
$0.5 million
. The Company also recognized a tax benefit shortfall of
$0.1 million
related to stock options exercised at values lower than the related compensation expense. During the year ended
December 31, 2014
, there were
0.4 million
stock options exercised with an intrinsic value of
$3.3 million
. The windfall tax benefit realized from these exercises was
$0.7 million
. The Company also recognized a tax benefit shortfall of
$0.1 million
related to stock options exercised at values lower than the related compensation expense.
Approximately
1.0 million
and
0.6 million
stock options expired during the years ended
December 31, 2016
and
2015
, respectively.
The fair value of each stock option award granted during the years ended
December 31, 2016
,
2015
and
2014
was estimated on the date of grant using the Black-Scholes option pricing model. The Company's determination of the fair value of share-based awards is affected by the Company's common stock price as well as assumptions regarding a number of complex and subjective variables.
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
Below is a summary of the assumptions used for the stock options granted in the years indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Weighted average exercise price per share
|
$
|
10.44
|
|
|
$
|
9.44
|
|
|
$
|
14.35
|
|
Risk-free interest rate
|
1.4
|
%
|
|
1.6
|
%
|
|
2.0
|
%
|
Expected dividend yield
|
—
|
|
|
—
|
|
|
—
|
|
Expected volatility
|
49.8
|
%
|
|
50.7
|
%
|
|
55.1
|
%
|
Expected life (in years)
|
5.75
|
|
|
5.75
|
|
|
5.75
|
|
Forfeiture rate
|
9.0
|
%
|
|
7.0
|
%
|
|
6.0
|
%
|
Weighted average grant date fair value per share
|
$
|
4.91
|
|
|
$
|
4.52
|
|
|
$
|
7.43
|
|
The risk-free interest rate is based on the currently available rate on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the stock option converted into a continuously compounded rate. The Company has never declared or paid any cash dividends on its common stock and does not currently anticipate paying cash dividends in the future. The Company has enough historical option exercise information to compute an expected term for use as an assumption in the Black-Scholes option pricing model, and as such, its computation of expected term was calculated using its own historical data. The volatility of the Company's common stock is also based upon its own historical volatility.
As of
December 31, 2016
,
2015
and
2014
, there was
$1.4 million
,
$1.7 million
and
$3.2 million
, respectively, of unrecognized compensation costs related to unvested stock options. At
December 31, 2016
, the unrecognized compensation costs of stock options were expected to be recognized over a weighted average period of
1.2
years.
Stock Awards
The Company also grants RSUs to its employees under the 2009 Plan. Each RSU represents the future issuance of
one
share of the Company's common stock contingent upon the recipient's continued service with the Company through the applicable vesting date. Upon the vesting date, RSUs are automatically settled for shares of the Company's common stock unless the applicable award agreement provides for delayed settlement. If prior to the vesting date the employee's status as a full-time employee is terminated, the unvested RSUs are automatically canceled on the employment termination date, unless otherwise specified in an employee's individual employment agreement. The fair value of an RSU is calculated based on the market value of the common stock on the grant date and is amortized over the applicable vesting period using the graded-vesting method.
During the years ended December 31, 2014 and 2015, the Company also granted PSUs under the 2009 Plan to certain individuals.
No
PSUs were granted during the year ended December 31, 2016. Each PSU represents the future issuance of
one
share of the Company's common stock contingent upon achievement of the applicable performance target and the recipient's continued service with the Company through the applicable vesting date. Certain of the PSUs previously granted may be earned based on the achievement of a market-based measure, the Company's stock price, and certain of the PSUs previously granted may be earned based on the achievement of a performance-based measure, the Company's diluted earnings per share. With respect to each award of PSUs, one-fourth of the PSUs may be earned during the applicable 12-month period based on the achievement of the applicable performance target, and PSUs earned during the applicable 12-month period will vest on a future date as set forth in the applicable PSU award agreement, subject to the employee's continued service with the Company through the applicable vesting date. Upon the vesting date, earned PSUs are automatically settled for shares of the Company's common stock. If prior to the vesting date the employee's status as a full-time employee is terminated, the unvested PSUs are automatically canceled on the employment termination date, unless otherwise specified in an employee's individual employment agreement.
PSUs are amortized over the applicable vesting period using the graded-vesting method. The fair value of the portion of the PSU awards subject to earning based on the achievement of a performance-based measure was based on the Company's stock price as of the date the applicable performance target was approved by the Company's board of directors. Compensation cost for the portion of the PSU awards subject to earning based on the achievement of a performance-based measure is recorded based on the probable outcome of the performance conditions associated with the shares, as determined by
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
management. The fair value of the portion of the PSU awards subject to earning based on the achievement of a market-based measure was estimated based on the Company's stock price as of the date of grant using a Monte Carlo simulation model.
The assumptions for the portion of the PSU awards subject to earning based on the achievement of a market-based measure are noted in the following table:
|
|
|
|
|
|
2015
|
Grant price per share
|
$
|
9.46
|
|
Risk-free interest rate
|
0.7
|
%
|
Expected dividend yield
|
—
|
|
Historical volatility
|
50.0
|
%
|
Expected life (in years)
|
4.0
|
|
Forfeiture rate
|
7.0
|
%
|
Weighted average grant date fair value per share
|
$
|
4.04
|
|
A summary of the RSU and PSU activity and related information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units and Performance Stock Units
|
|
Time-Based RSU
|
|
Performance-Based PSU
|
|
Market-Based PSU
|
|
Number of Shares
|
|
Weighted Average
Purchase Price
|
|
Number of Shares
|
|
Weighted Average
Purchase Price
|
|
Number of Shares
|
|
Weighted Average
Purchase Price
|
Balance at December 31, 2013
|
1,098,517
|
|
|
$
|
10.38
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Awarded
|
786,250
|
|
|
$
|
14.33
|
|
|
—
|
|
|
—
|
|
|
975,295
|
|
|
$
|
5.39
|
|
Vested
|
(393,106
|
)
|
|
$
|
10.15
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Canceled
|
(212,572
|
)
|
|
$
|
11.89
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at December 31, 2014
|
1,279,089
|
|
|
$
|
12.63
|
|
|
—
|
|
|
—
|
|
|
975,295
|
|
|
$
|
5.39
|
|
Awarded
|
983,473
|
|
|
$
|
9.33
|
|
|
455,765
|
|
|
$
|
9.86
|
|
|
229,017
|
|
|
$
|
4.04
|
|
Vested
|
(353,126
|
)
|
|
$
|
12.34
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Canceled
|
(519,425
|
)
|
|
$
|
11.51
|
|
|
(96,621
|
)
|
|
$
|
9.86
|
|
|
(238,084
|
)
|
|
$
|
5.21
|
|
Balance at December 31, 2015
|
1,390,011
|
|
|
$
|
10.78
|
|
|
359,144
|
|
|
$
|
9.86
|
|
|
966,228
|
|
|
$
|
5.11
|
|
Awarded
|
504,770
|
|
|
$
|
10.18
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Vested
|
(472,091
|
)
|
|
$
|
10.84
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Canceled
|
(288,767
|
)
|
|
$
|
10.69
|
|
|
(92,028
|
)
|
|
$
|
9.86
|
|
|
(231,290
|
)
|
|
$
|
5.19
|
|
Balance at December 31, 2016
|
1,133,923
|
|
|
$
|
10.52
|
|
|
267,116
|
|
|
$
|
9.86
|
|
|
734,938
|
|
|
$
|
5.09
|
|
As of
December 31, 2016
and
2015
, there was
$4.7 million
and
$6.9 million
, respectively, of unrecognized compensation costs related to unvested RSUs. At
December 31, 2016
, the unrecognized compensation costs of RSUs were expected to be recognized over a weighted average period of
1.2
years.
During the year ended
December 31, 2016
,
0.5 million
RSUs vested and were released with a market value of
$4.8 million
. The tax benefit shortfall realized from the RSUs released was
$0.2 million
. During the year ended
December 31, 2015
,
0.4 million
RSUs vested and were released with a market value of
$3.3 million
. The actual tax benefit windfall realized from the RSUs released was
$0.4 million
. During the year ended December 31,
2014
,
0.4 million
RSUs vested and were released with a market value of
$5.3 million
. The actual tax benefit windfall realized from the RSUs released was
$0.5 million
.
As of
December 31, 2016
, there was
$1.5 million
of unrecognized compensation costs related to unvested PSUs. At
December 31, 2016
, the unrecognized compensation costs of PSUs were expected to be recognized over a weighted average
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
period of
1.2
years, to the extent the applicable performance criteria are met. No PSUs vested during the year ended December 31, 2016, 2015 or 2014.
17
. Stock Repurchase Programs
The Company's board of directors may authorize the Company to repurchase outstanding shares of its common stock from time to time in the open market through block trades or otherwise depending on market conditions and other considerations, pursuant to the applicable rules of the Securities and Exchange Commission (“SEC”). The Company's policy is to retain these repurchased shares as treasury shares and not to retire them. The amount and timing of future share repurchases, if any, will be determined as market and business conditions warrant. The Company did not repurchase any shares of our common stock during the years ended
December 31, 2016
and
2015
.
18. 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 financial statements that will result in income and deductions in future years. The components of income tax expense (benefit) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
Federal
|
$
|
(8,433
|
)
|
|
$
|
(10,370
|
)
|
|
$
|
12,686
|
|
State
|
530
|
|
|
(309
|
)
|
|
1,937
|
|
|
(7,903
|
)
|
|
(10,679
|
)
|
|
14,623
|
|
Deferred:
|
|
|
|
|
|
Federal
|
25
|
|
|
33,482
|
|
|
(6,216
|
)
|
State
|
3
|
|
|
7,462
|
|
|
(880
|
)
|
|
28
|
|
|
40,944
|
|
|
(7,096
|
)
|
Total
|
$
|
(7,875
|
)
|
|
$
|
30,265
|
|
|
$
|
7,527
|
|
Each reporting period, the Company assesses the likelihood that it will be able to recover its deferred tax assets, which represent timing differences in the recognition of certain tax deductions for accounting and tax purposes. The realization of deferred tax assets is dependent in part upon future taxable income. Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, the Company considers all available evidence, including past operating results, estimates of future taxable income given current business conditions affecting the Company, and the feasibility of ongoing tax planning strategies.
As of December 31, 2016, the Company continues to record a full valuation allowance against all net deferred tax assets, as was the case at December 31, 2015. The Company intends to maintain a valuation allowance against its deferred tax assets until sufficient positive evidence exists to support its reversal.
Deferred income tax balances reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are paid or recovered.
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
Significant components of the Company’s deferred tax assets and liabilities and balance sheet classifications are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
Net operating loss
|
$
|
1,052
|
|
|
$
|
737
|
|
Fixed assets
|
(1,241
|
)
|
|
(1,328
|
)
|
Bad debt
|
1,979
|
|
|
2,412
|
|
Vacation accrual
|
3,249
|
|
|
3,305
|
|
Stock-based compensation
|
12,827
|
|
|
15,766
|
|
Deferred rent
|
12,687
|
|
|
12,585
|
|
State tax
|
2,534
|
|
|
2,154
|
|
Bonus accrual
|
1,873
|
|
|
1,609
|
|
Unearned interest
|
—
|
|
|
898
|
|
Accrued expenses
|
5,994
|
|
|
3,939
|
|
Revenue reserves
|
135
|
|
|
64
|
|
Other
|
760
|
|
|
278
|
|
Total deferred tax assets
|
41,849
|
|
|
42,419
|
|
Valuation allowance
|
(41,849
|
)
|
|
(42,419
|
)
|
Net deferred tax assets
|
—
|
|
|
—
|
|
Deferred tax liabilities:
|
|
|
|
Fixed assets and intangibles
|
—
|
|
|
—
|
|
Indefinite-lived intangibles
|
(773
|
)
|
|
(744
|
)
|
Total deferred tax liabilities
|
(773
|
)
|
|
(744
|
)
|
Total net deferred tax assets (liabilities)
|
$
|
(773
|
)
|
|
$
|
(744
|
)
|
At
December 31, 2016
, the Company had federal net operating loss carryforwards of
$0.6 million
, which are available to offset future taxable income. The federal net operating loss carryforwards will begin to expire in
2021
. The Company’s utilization of net operating loss carryforwards may be subject to annual limitations due to ownership change provisions of Section 382 of Internal Revenue Code of 1986, as amended. The Company has performed a Section 382 analysis and has determined that there is no material effect on the net operating loss carryforwards.
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
The following table presents a reconciliation of the income tax expense (benefit) computed using the federal statutory tax rate of
35%
and the Company's provision for income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Computed expected federal tax expense
|
$
|
(13,270
|
)
|
35.0
|
%
|
|
$
|
(14,066
|
)
|
35.0
|
%
|
|
$
|
6,018
|
|
35.0
|
%
|
State taxes, net of federal benefit
|
(551
|
)
|
1.5
|
|
|
(655
|
)
|
1.6
|
|
|
426
|
|
2.5
|
|
Permanent differences
|
341
|
|
(0.9
|
)
|
|
1,033
|
|
(2.6
|
)
|
|
1,125
|
|
6.5
|
|
Penalty
|
2,800
|
|
(7.4
|
)
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Uncertain tax positions
|
346
|
|
(1.0
|
)
|
|
480
|
|
(1.2
|
)
|
|
424
|
|
2.5
|
|
Credits
|
(402
|
)
|
1.1
|
|
|
(206
|
)
|
0.5
|
|
|
(470
|
)
|
(2.7
|
)
|
Stock compensation
|
116
|
|
(0.3
|
)
|
|
1,246
|
|
(3.1
|
)
|
|
—
|
|
—
|
|
Valuation allowance
|
2,708
|
|
(7.1
|
)
|
|
42,419
|
|
(105.5
|
)
|
|
—
|
|
—
|
|
Other
|
37
|
|
(0.1
|
)
|
|
14
|
|
—
|
|
|
4
|
|
—
|
|
Income tax expense (benefit)
|
$
|
(7,875
|
)
|
20.8
|
%
|
|
$
|
30,265
|
|
(75.3
|
)%
|
|
$
|
7,527
|
|
43.8
|
%
|
The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Unrecognized tax benefits at beginning of period
|
$
|
20,589
|
|
|
$
|
20,877
|
|
|
$
|
7,387
|
|
Gross increases-tax positions in prior period
|
176
|
|
|
169
|
|
|
13,869
|
|
Gross decreases-tax positions in prior period
|
(517
|
)
|
|
(2
|
)
|
|
(23
|
)
|
Gross increases-current period tax positions
|
—
|
|
|
—
|
|
|
53
|
|
Settlements
|
—
|
|
|
(455
|
)
|
|
(409
|
)
|
Lapse of statute of limitations
|
—
|
|
|
—
|
|
|
—
|
|
Unrecognized tax benefits at end of period
|
$
|
20,248
|
|
|
$
|
20,589
|
|
|
$
|
20,877
|
|
Included in the amount of unrecognized tax benefits at
December 31, 2016
and
2015
is
$13.2 million
and
$13.4 million
, respectively, of tax benefits that, if recognized, would affect the Company's effective tax rate. Also included in the balance of unrecognized tax benefits at
December 31, 2016
and
2015
is
$7.1 million
and
$7.2 million
, respectively, of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred tax assets. It is reasonably possible that the total amount of the unrecognized tax benefit will change during the next 12 months; however, the Company does not expect the potential change to have a material effect on the results of operations or financial position in the next year.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. At
December 31, 2016
and
2015
, the Company had approximately
$2.4 million
and
$2.0 million
, respectively, of accrued interest, before any tax benefit, related to uncertain tax positions.
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 2015 are open to examination by major taxing jurisdictions to which the Company is subject.
The Company was notified by the Internal Revenue Service in January 2017 that they will be conducting an audit examination of the Company’s income tax returns for the years 2013 through 2015.
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
The Company is currently under audit by the California Franchise Tax Board for the years 2008 through 2012. The Company has agreed to settle all years under audit and anticipates that the Franchise Tax Board will issue a Notice of Action during the first half of 2017.
The Company is also currently under audit by the Oregon Department of Revenue for the years 2012 through 2014. In January 2017, the Oregon Department of Revenue issued Notices of Deficiencies, which were recently appealed by the Company.
The Company is also subject to various other state audits. With regard to all audits, the Company does not expect any significant adjustments to amounts already reserved.
19
.
Regulatory
The Company is subject to extensive regulation by federal and state governmental agencies and accrediting bodies. In particular, the Higher Education Act of 1965, as amended (the “Higher Education Act”), and the regulations promulgated thereunder by the U.S. Department of Education (the “Department”) subject the Company 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”).
Ashford University is regionally accredited by WASC Senior College and University Commission (“WSCUC”) and University of the Rockies is regionally accredited by the Higher Learning Commission (“HLC”).
Department of Education Completed Program Review of Ashford University
In July 2014, the Company and Ashford University received notification from the Department that it intended to conduct a program review of Ashford’s administration of the Title IV programs in which the university participates. The review commenced in August 2014 and covered federal financial aid years 2012-2013 and 2013-2014, as well as compliance with the Jeanne Clery Disclosure of Campus Security Policy and Campus Crime Statistics Act (the “Clery Act”), the Drug-Free Schools and Communities Act, and related regulations. Ashford was provided with the Department's initial program review report and responded to such initial report.
On August 2, 2016, the Department issued a Final Program Review Determination (“FPRD”), which stated that Ashford University’s responses have resolved eight of the twelve findings from the Department’s initial report. Of the four findings that were not resolved by Ashford’s responses, the first three related to (i) overawards in excess of financial need, (ii) lack of verifications of enrollment status before disbursement and (iii) disbursement of direct subsidized loan funds in excess of the aggregate maximum, respectively. With respect to these three findings, the Department found that Ashford’s revised policies and procedures, if implemented as drafted, are adequate, and the Department assessed monetary liabilities of approximately
$138,000
against Ashford related to overpayments to students. With respect to the fourth unresolved finding, which related to compliance with Drug and Alcohol Abuse Prevention Program requirements, the FPRD noted that this finding would not have been designated as a reportable condition if accurate and complete information to substantiate Ashford’s claims of compliance had been provided during the site visit. The FPRD stated that in spite of this concern, the Department’s examination showed that the identified compliance issue was, for the most part, satisfactorily addressed by Ashford’s response and enhanced internal policies and procedures, and that the Department has accepted the university’s response and considers this finding to be closed for purposes of the program review. On October 5, 2016, Ashford received a letter from the Department indicating that, in reference to the documentation received from Ashford in response to instructions provided in the FPRD, all requirements have been addressed and the institution may now consider the program review closed, with no further action required.
Department of Education Open Program Review of Ashford University
On July 7, 2016, Ashford University was notified by the Department that an off-site program review had been scheduled to assess Ashford’s administration of the Title IV programs in which it participates. The off-site program review commenced on July 25, 2016 and initially covers students identified in the 2009-2012 calendar year data previously provided by Ashford to the Department in response to a request for information received from the Multi-Regional and Foreign School Participation Division of the Department’s Office of Federal Student Aid (the “FSA”) on December 10, 2015, but may be expanded if appropriate. On December 9, 2016, the Department informed Ashford that it intended to continue the program review on-site at
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
Ashford. The on-site program review commenced on January 23, 2017 and initially covers the 2015-2016 and 2016-2017 award years, but may be expanded if appropriate.
WSCUC Accreditation of Ashford University
In July 2013, WSCUC granted Initial Accreditation to Ashford University for five years, until July 15, 2018. In December 2013, Ashford effected its transition to WSCUC accreditation and designated its San Diego, California facilities as its main campus and its Clinton, Iowa campus as an additional location. As part of a continuing monitoring process, Ashford hosted a visiting team from WSCUC in a special visit in April 2015. In July 2015, Ashford received an Action Letter from WSCUC outlining the findings arising out of its visiting team's special visit. The Action Letter stated that the WSCUC visiting team found substantial evidence that Ashford continues to make sustained progress in all six areas recommended by WSCUC in 2013. As part of its institutional review process, WSCUC will conduct a comprehensive review of Ashford scheduled to commence with an off-site review in spring 2018, followed by an on-site review in fall 2018.
Licensure by California BPPE
To be eligible to participate in Title IV programs, an institution must be legally authorized to offer its educational programs by the states in which it is physically located. In connection with its transition to WSCUC accreditation, Ashford University designated its San Diego, California facilities as its main campus for Title IV purposes and submitted an Application for Approval to Operate an Accredited Institution to the State of California, Department of Consumer Affairs, Bureau for Private Postsecondary Education (the “BPPE”) on September 10, 2013.
In April 2014, the application was granted, and Ashford University was approved by the BPPE to operate in California until July 15, 2018. As a result, the university is subject to laws and regulations applicable to private, postsecondary educational institutions located in California, including reporting requirements related to graduation, employment and licensing data, certain changes of ownership and control, faculty and programs, and student refund policies. Ashford also remains subject to other state and federal student employment data reporting and disclosure requirements.
The BPPE is required to conduct compliance inspections for each of its approved institutions. On October 12, 2016, the BPPE conducted a compliance inspection of Ashford University. Ashford is working with the BPPE to resolve any issues identified in connection with the compliance inspection.
The “90/10” Rule
Under the Higher Education Act, a proprietary institution loses eligibility to participate in Title IV programs if the institution derives more than
90%
of its revenues (calculated in accordance with Department regulations) from Title IV program funds for two consecutive fiscal years. This rule is commonly referred to as the “90/10 rule.” Any institution that violates the 90/10 rule for two consecutive fiscal years becomes ineligible to participate in Title IV programs for at least
two
fiscal years. In addition, an institution whose rate exceeds
90%
for any single fiscal year is placed on provisional certification and may be subject to other enforcement measures.
For the years ended
December 31, 2016
,
2015
and
2014
, Ashford University derived
81.2%
,
80.9%
and
83.4%
, respectively, and University of the Rockies derived
86.5%
,
86.6%
and
88.3%
, respectively, of their respective revenues from Title IV program funds.
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 William D. Ford 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.
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
The most recent official three-year cohort default rates for Ashford University for the 2013, 2012 and 2011 federal fiscal years, were
14.5%
,
15.3%
and
15.3%
, respectively. The most recent official three-year cohort default rates for University of the Rockies for the 2013, 2012 and 2011 federal fiscal years, were
3.8%
,
4.3%
and
6.6%
, respectively.
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.
For the fiscal year ended
December 31, 2015
, the consolidated composite score calculated was
1.8
, satisfying the composite score requirement of the Department's financial responsibility test, which institutions must satisfy in order to participate in Title IV programs. The Company expects the consolidated composite score to be
2.0
for the year ended
December 31, 2016
. However, the consolidated calculation is subject to determination by the Department once it receives and reviews our audited financial statements for the year ended
December 31, 2016
.
Substantial Misrepresentation
The Higher Education Act prohibits an institution participating in Title IV programs from engaging in substantial misrepresentation regarding the nature of its educational programs, its financial charges or the employability of its graduates. Under the Department’s rules, a “misrepresentation” is any false, erroneous or misleading statement an institution, one of its representatives or any ineligible institution, organization or person with whom the institution has an agreement to provide educational programs or marketing, advertising, recruiting, or admissions services makes directly or indirectly to a student, prospective student or any member of the public, or to an accrediting agency, a state agency or the Department. The Department’s rules define a “substantial misrepresentation” as any misrepresentation on which the person to whom it was made could reasonably be expected to rely, or has reasonably relied, to that person’s detriment. For-profit educational institutions are also subject to the general deceptive practices jurisdiction of the Federal Trade Commission and the Consumer Financial Protection Bureau (the “CFPB”).
On December 10, 2015, Ashford University received a request for information from the Multi-Regional and Foreign School Participation Division of the FSA for (i) advertising and marketing materials provided to prospective students regarding the transferability of certain credit, (ii) documents produced in response to the August 10, 2015 Civil Investigative Demand from the CFPB related to the CFPB’s investigation to determine whether for-profit postsecondary education companies or other unnamed persons have engaged in or are engaging in unlawful acts or practices related to the advertising, marketing or origination of private student loans, (iii) certain documents produced in response to subpoenas and interrogatories issued by the Attorney General of the State of California (the “CA Attorney General”) and (iv) records created between 2009 and 2012 related to the disbursement of certain Title IV funds. The FSA is investigating representations made by Ashford University to potential and enrolled students, and has asked the Company and Ashford to assist in its assessment of Ashford’s compliance with the prohibition on substantial misrepresentations. The Company and Ashford University intend to provide the FSA with their full cooperation with a view toward demonstrating the compliant nature of their practices.
As discussed above, the Department is currently conducting a program review to assess Ashford University’s administration of the Title IV programs in which it participates, which covers in part students identified in the 2009-2012 calendar year data provided by Ashford to the Department in response to the FSA’s December 10, 2015 request for information.
If the Department determines that one of the Company’s institutions has engaged in substantial misrepresentation, the Department may (i) revoke the institution’s program participation agreement, if the institution is provisionally certified, (ii) impose limitations on the institution’s participation in Title IV programs, if the institution is provisionally certified, (iii) deny participation applications made on behalf of the institution or (iv) initiate proceedings to fine the institution or to limit, suspend or terminate the participation of the institution in Title IV programs. Because Ashford University is provisionally certified, if
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
the Department determined that Ashford has engaged in substantial misrepresentation, the Department may take the actions set forth in clauses (i) and (ii) above in addition to any other actions taken by the Department.
GI Bill Benefits
On May 20, 2016, the Company received a letter from the Iowa Department of Education (the “Iowa DOE”) indicating that, as a result of the planned closure of the Clinton Campus, the Iowa State Approving Agency (the “ISAA”) would no longer continue to approve Ashford University’s programs for GI Bill benefits after June 30, 2016, and recommending Ashford seek approval through the State Approving Agency of jurisdiction for any location that meets the definition of a “main campus” or “branch campus”. Ashford began the process of applying for approval through the State Approving Agency in California (“CSAAVE”), and the Company subsequently disclosed that on June 20, 2016 it received a second letter from the Iowa DOE indicating that the Iowa DOE had issued a stay of the ISAA’s withdrawal of approval of Ashford’s programs for GI Bill benefits effective immediately until the earlier of (i) 90 days from June 20, 2016 or (ii) the date on which CSAAVE completed its review and issued a decision regarding the approval of Ashford in California. Ashford received communication from CSAAVE indicating that additional information and documentation would be required before Ashford’s application could be considered for CSAAVE approval. Ashford subsequently withdrew the CSAAVE application and continued working with the U.S. Department of Veterans Affairs, the Iowa DOE and the ISAA to obtain continued approval of Ashford’s programs for GI Bill benefits and to prevent any disruption of educational benefits to Ashford’s veteran students.
On September 15, 2016, in response to a Petition for Declaratory and Injunctive Relief filed by Ashford University, the Iowa District Court for Polk County entered a written order (the “Order”) staying the Iowa DOE’s announced intention to withdraw the approval of Ashford as a GI Bill eligible institution until the entry of a final and appealable order and judgment in the action. Pursuant to the Order, the ISAA will continue to approve Ashford’s programs for GI Bill benefits until such final and appealable order has been entered.
20. Retirement Plans
The Company maintains an employee savings plan (the “401(k) Plan”) that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code of 1986, as amended. Under the 401(k) Plan, participating employees may contribute a portion of their pre-tax earnings up to the Internal Revenue Service annual contribution limit. Additionally, the Company may elect to make matching contributions into the 401(k) Plan in its sole discretion. The Company's total expense related to the 401(k) Plan was
$3.1 million
,
$3.4 million
and
$3.7 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
21
. 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 authoritative guidance, 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 with no best estimate in the range, the Company records the minimum estimated liability. 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 is material. The Company continuously assesses the potential liability related to the Company’s pending litigation and revises its estimates when additional information becomes available. Below is a list of material legal proceedings to which the Company or its subsidiaries is a party.
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
Compliance Audit by the Department's Office of the Inspector General
In January 2011, Ashford University received a final audit report from the Department's Office of Inspector General (the “OIG”) regarding the compliance audit commenced in May 2008 and covering the period July 1, 2006 through June 30, 2007. The audit covered Ashford University's administration of Title IV program funds, including compliance with regulations governing institutional and student eligibility, awards and disbursements of Title IV program funds, verification of awards and returns of unearned funds during that period, and compensation of financial aid and recruiting personnel during the period May 10, 2005 through June 30, 2009.
The final audit report contained audit findings, in each case for the period July 1, 2006 through June 30, 2007, which are applicable to award year 2006-2007. Each finding was accompanied by one or more recommendations to the FSA. Ashford University provided the FSA a detailed response to the OIG’s final audit report in February 2011. In June 2011, in connection with two of the six findings, the FSA requested that Ashford University conduct a file review of the return to Title IV fund calculations for all Title IV recipients who withdrew from distance education programs during the 2006-2007 award year. The institution cooperated with the request and supplied the information within the time frame required.
Ashford University received a final audit determination on February 22, 2017 from the Department that was dated February 14, 2017. The determination maintains that Ashford University owes the Department
$0.3 million
as a result of incorrect refund calculations and refunds that were not made or made late, and that Ashford ensure it properly enforces its policies and is in compliance with regulations related to disbursement of Title IV, HEA funds. The Department closed or required no further action on all other prior OIG findings. Ashford University is evaluating the determination and has 45 days to submit an appeal to the Secretary of Education. As of December 31, 2016, the Company has recorded an expense of
$0.3 million
related to this matter.
New York Attorney General Investigation of Bridgepoint Education, Inc.
In May 2011, the Company received from the Attorney General of the State of New York (the “NY Attorney General”) a subpoena relating to the NY Attorney General's investigation of whether the Company and its academic institutions have complied with certain New York state consumer protection, securities and finance laws. Pursuant to the subpoena, the NY Attorney General has requested from the Company and its academic institutions documents and detailed information for the time period March 17, 2005 to present. The Company is cooperating with the investigation and cannot predict the eventual scope, duration or outcome of the investigation at this time.
North Carolina Attorney General Investigation of Ashford University
In September 2011, Ashford University received from the Attorney General of the State of North Carolina (the “NC Attorney General”) an Investigative Demand relating to the NC Attorney General's investigation of whether the university's business practices complied with North Carolina consumer protection laws. Pursuant to the Investigative Demand, the NC Attorney General has requested from Ashford University documents and detailed information for the time period January 1, 2008 to present. Ashford University is cooperating with the investigation and cannot predict the eventual scope, duration or outcome of the investigation at this time.
California Attorney General Investigation of For-Profit Educational Institutions
In January 2013, the Company received from the Attorney General of the State of California (the “CA Attorney General”) an Investigative Subpoena relating to the CA Attorney General’s investigation of for-profit educational institutions. Pursuant to the Investigative Subpoena, the CA Attorney General requested documents and detailed information for the time period March 1, 2009 to present. On July 24, 2013, the CA Attorney General filed a petition to enforce certain 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 the current date.
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
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 continue to discuss a potential resolution involving injunctive relief, other non-monetary remedies and a payment to the CA Attorney General. The Company currently estimates that a reasonable range of loss for this matter is between
$8.0 million
and
$20.0 million
. The Company has recorded an expense of
$8.0 million
related to this matter which represents its current best estimate of the cost of resolution of this matter.
Massachusetts Attorney General Investigation of Bridgepoint Education, Inc. and Ashford University
On July 21, 2014, the Company and Ashford University received from the Attorney General of the State of Massachusetts (the “MA Attorney General”) a Civil Investigative Demand (the “MA CID”) relating to the MA Attorney General's investigation of for-profit educational institutions and whether the university's business practices complied with Massachusetts consumer protection laws. Pursuant to the MA CID, the MA Attorney General has requested from the Company and Ashford University documents and information for the time period January 1, 2006 to present. The Company is cooperating with the investigation and cannot predict the eventual scope, duration or outcome of the investigation at this time.
Securities & Exchange Commission Subpoena of Bridgepoint Education, Inc.
On July 22, 2014, the Company received from the SEC a subpoena relating to certain of the Company’s accounting practices, including revenue recognition, receivables and other matters relating to the Company’s previously disclosed intention to restate its financial statements for fiscal year ended December 31, 2013 and revise its financial statements for the years ended December 31, 2011 and 2012, and the prior revision of the Company’s financial statements for the fiscal year ended December 31, 2012. Pursuant to the subpoena, the SEC has requested from the Company documents and detailed information for the time period January 1, 2009 to present.
On May 18, 2016, the Company received a second subpoena from the SEC seeking additional information from the Company, including information with respect to the accrual disclosed by the Company in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 with respect to the potential joint resolution of investigations by the CA Attorney General and the CFPB (the “CAAG/CFPB Investigations”), the Company’s scholarship and institutional loan programs and any other extensions of credit made by the Company to students, and student enrollment and retention at the Company’s academic institutions. Pursuant to the subpoena, the SEC has requested from the Company documents and detailed information for, in the case of the CAAG/CFPB Investigations, the periods at issue in such investigations, in the case of the Company’s scholarship and institutional loan programs and related matters, the period from January 1, 2011 to the present, and for all other matters, the period from January 1, 2014 to the present.
The Company is cooperating with the SEC and cannot predict the eventual scope, duration or outcome of the investigation at this time. As a result, the Company cannot reasonably estimate a range of loss for this action and accordingly has not accrued any liability associated with this action.
Consumer Financial Protection Bureau Subpoena of Bridgepoint Education, Inc. and Ashford University
On August 10, 2015, the Company and Ashford University received from the CFPB Civil Investigative Demands related to the CFPB's investigation to determine whether for-profit postsecondary education companies or other unnamed persons have engaged in or are engaging in unlawful acts or practices related to the advertising, marketing or origination of private student loans. The Company and Ashford University provided documents and other information to the CFPB and the CFPB attended several meetings with representatives from the Company and the CA Attorney General’s office to discuss the status of both investigations, additional information requests, and specific concerns related to possible unfair business practices in connection with the Company’s recruitment of students and debt collection practices.
All of the parties met again in the spring of 2016 to discuss the status of the investigations and explore a potential joint resolution involving injunctive relief, other non-monetary remedies and a payment to the CA Attorney General and the CFPB. On September 7, 2016, the Company consented to the issuance of a Consent Order (the “Consent Order”) by the CFPB in full resolution of the CFPB’s allegations stemming from the Civil Investigative Demands. The Consent Order includes payment by
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
the Company of
$8.0 million
in penalties to the CFPB and approximately
$5.0 million
to be used for restitution to students who incurred debt from student loans made by the Company’s institutions, and forgiveness by the Company of approximately
$18.6 million
of outstanding institutional loan debt. The Consent Order also outlines certain compliance actions the Company must undertake, including that the Company must require certain students to utilize the CFPB’s Electronic Financial Impact Platform before enrolling in one of the Company’s institutions, the Company must implement a compliance plan designed to ensure its institutional loan program complies with the terms of the Consent Order, and the Company must submit reports describing its compliance with the Consent Order to the CFPB at designated times and upon request by the CFPB. The institutional loans programs were discontinued by the Company’s institutions before the CFPB investigation began. As of December 31, 2016, the Company had a remaining accrual of approximately
$5.6 million
related to this matter.
Department of Justice Civil Investigative Demand
On July 7, 2016, the Company received from the U.S. Department of Justice (the “DOJ”) a Civil Investigative Demand (the “DOJ CID”) related to the DOJ's investigation concerning allegations that the Company may have misstated Title IV refund revenue or overstated revenue associated with private secondary loan programs and thereby misrepresented its compliance with the 90/10 rule of the Higher Education Act. Pursuant to the DOJ CID, the DOJ has requested from the Company documents and information for fiscal years 2011-2015. The Company is cooperating with the DOJ and cannot predict the eventual scope, duration or outcome of the investigation at this time. As a result, the Company cannot reasonably estimate a range of loss for this action and accordingly has not accrued any liability associated with this action.
Securities Class Actions
Consolidated Securities Class Action
On July 13, 2012, a securities class action complaint was filed in the U.S. District Court for the Southern District of California by Donald K. Franke naming the Company, Andrew Clark, Daniel Devine and Jane McAuliffe as defendants for allegedly making false and materially misleading statements regarding the Company’s business and financial results, specifically the concealment of accreditation problems at Ashford University. The complaint asserted a putative class period stemming from May 3, 2011 to July 6, 2012. A substantially similar complaint was also filed in the same court by Luke Sacharczyk on July 17, 2012 making similar allegations against the Company, Andrew Clark and Daniel Devine. The Sacharczyk complaint asserted a putative class period stemming from May 3, 2011 to July 12, 2012. On July 26, 2012, another purported securities class action complaint was filed in the same court by David Stein against the same defendants based upon the same general set of allegations and class period. The complaints alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder and sought unspecified monetary relief, interest, and attorneys’ fees.
On October 22, 2012, the Sacharczyk and Stein actions were consolidated with the Franke action and the Court appointed the City of Atlanta General Employees' Pension Fund and the Teamsters Local 677 Health Services & Insurance Plan as lead plaintiffs. A consolidated complaint was filed on December 21, 2012 and the Company filed a motion to dismiss on February 19, 2013. On September 13, 2013, the Court granted the motion to dismiss with leave to amend for alleged misrepresentations relating to Ashford University’s quality of education, the WSCUC accreditation process and the Company’s financial forecasts. The Court denied the motion to dismiss for alleged misrepresentations concerning Ashford University’s persistence rates.
Following the conclusion of discovery, the parties entered into an agreement to settle the litigation for
$15.5 million
, which was recorded by the Company during the third quarter of 2015 and funded by the Company’s insurance carriers in the first quarter of 2016. The settlement was granted preliminary approval by the Court on December 14, 2015, proceeded through the shareholder claims administration process, and was granted final approval by the Court on April 25, 2016.
Zamir v. Bridgepoint Education, Inc., et al.
On February 24, 2015, a securities class action complaint was filed in the U.S. District Court for the Southern District of California by Nelda Zamir naming the Company, Andrew Clark and Daniel Devine as defendants. The complaint asserts violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, claiming that the defendants made false and materially misleading statements and failed to disclose material adverse facts regarding the
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
Company's business, operations and prospects, specifically regarding the Company’s improper application of revenue recognition methodology to assess collectability of funds owed by students. The complaint asserts a putative class period stemming from August 7, 2012 to May 30, 2014 and seeks unspecified monetary relief, interest and attorneys' fees. On July 15, 2015, the Court granted plaintiff's motion for appointment as lead plaintiff and for appointment of lead counsel.
On September 18, 2015, the plaintiff filed a substantially similar amended complaint that asserts a putative class period stemming from March 12, 2013 to May 30, 2014. The amended complaint also names Patrick Hackett, Adarsh Sarma, Warburg Pincus & Co., Warburg Pincus LLC, Warburg Pincus Partners LLC, and Warburg Pincus Private Equity VIII, L.P. as additional defendants. On November 24, 2015, all defendants filed motions to dismiss. On July 25, 2016, the Court granted the motions to dismiss and granted plaintiff leave to file an amended complaint within 30 days. Plaintiffs subsequently filed a second amended complaint and the Company filed a second motion to dismiss on October 24, 2016, which is currently pending with the Court. The outcome of this legal proceeding is uncertain at this point because of the many questions of fact and law that may arise. Based on information available to the Company at present, it cannot reasonably estimate a range of loss for this action. Accordingly, the Company has not accrued any liability associated with this action.
Shareholder Derivative Actions
In re Bridgepoint, Inc. Shareholder Derivative Action
On July 24, 2012, a shareholder derivative complaint was filed in California Superior Court by Alonzo Martinez. In the complaint, the plaintiff asserts a derivative claim on the Company's behalf against certain of its current and former officers and directors. The complaint is captioned
Martinez v. Clark, et al.
and generally alleges that the individual defendants breached their fiduciary duties of candor, good faith and loyalty, wasted corporate assets and were unjustly enriched. The lawsuit seeks unspecified monetary relief and disgorgement on behalf of the Company, as well as other equitable relief and attorneys' fees.
On September 28, 2012, a substantially similar shareholder derivative complaint was filed in California Superior Court by David Adolph-Laroche. In the complaint, the plaintiff asserts a derivative claim on the Company's behalf against certain of its current and former officers and directors. The complaint is captioned
Adolph-Laroche v. Clark, et al.
and generally alleges that the individual defendants breached their fiduciary duties of candor, good faith and loyalty, wasted corporate assets and were unjustly enriched.
On October 11, 2012, the Adolph-Laroche action was consolidated with the Martinez action and the case is now captioned
In re Bridgepoint, Inc. Shareholder Derivative Action
. A consolidated complaint was filed on December 18, 2012 and the defendants filed a motion to stay the case while the underlying securities class action is pending. The motion was granted by the Court on April 11, 2013. A status conference was held on October 10, 2013, during which the Court ordered the stay continued for the duration of discovery in the underlying securities class action, but permitted the plaintiff to receive copies of any discovery responses served in the underlying securities class action. The stay was lifted following the settlement of the underlying securities class action and all defendants filed demurrers on October 3, 2016, which are currently pending with the Court.
Cannon v. Clark, et al.
On November 1, 2013, a shareholder derivative complaint was filed in the U.S. District Court for the Southern District of California by James Cannon. In the complaint, the plaintiff asserts a derivative claim on the Company's behalf against certain of its current officers and directors. The complaint is captioned
Cannon v. Clark, et al
. and is substantially similar to the previously filed California State Court derivative action now captioned
In re Bridgepoint, Inc. Shareholder Derivative Action
. In the complaint, plaintiff generally alleges that the individual defendants breached their fiduciary duties of candor, good faith and loyalty, wasted corporate assets and were unjustly enriched. The lawsuit seeks unspecified monetary relief and disgorgement on behalf of the Company, as well as other equitable relief and attorneys' fees. Pursuant to a stipulation among the parties, on January 6, 2014, the Court ordered the case stayed during discovery in the underlying securities class action, but permitted the plaintiff to receive copies of any discovery responses served in the underlying securities class action. In September 2016, Plaintiff filed a request to voluntarily dismiss the case, which was approved by the Court.
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
Di Giovanni v. Clark, et al.
, and
Craig-Johnston v. Clark, et al
.
On December 9, 2013, two nearly identical shareholder derivative complaints were filed in the United States District Court for the Southern District of California. The complaints assert derivative claims on the Company's behalf against the members of the Company's board of directors as well as against Warburg Pincus & Co., Warburg Pincus LLC, Warburg Pincus Partners LLC, and Warburg Pincus Private Equity VIII, L.P. The two complaints are captioned
Di Giovanni v. Clark, et al.
and
Craig-Johnston v. Clark, et al
. The complaints generally allege that all of the defendants breached their fiduciary duties and were unjustly enriched and that the individual defendants wasted corporate assets in connection with the tender offer commenced by the Company on November 13, 2013. The lawsuits seek unspecified monetary relief and disgorgement, as well as other equitable relief and attorneys’ fees. On February 28, 2014, the defendants filed motions to dismiss, which were granted by the Court on October 17, 2014. On December 13, 2016, the dismissal was affirmed on appeal by the United States Court of Appeals for the Ninth Circuit.
Klein v. Clark, et al.
On January 9, 2014, a shareholder derivative complaint was filed in the Superior Court of the State of California in San Diego. The complaint asserts derivative claims on the Company's behalf against the members of the Company's board of directors as well as against Warburg Pincus & Co., Warburg Pincus LLC, Warburg Pincus Partners LLC, and Warburg Pincus Private Equity VIII, L.P. The complaint is captioned
Klein v. Clark, et al.
and generally alleges that all of the defendants breached their fiduciary duties and were unjustly enriched and that the individual defendants wasted corporate assets in connection with the tender offer commenced by the Company on November 13, 2013. The lawsuit seeks unspecified monetary relief and disgorgement, as well as other equitable relief and attorneys’ fees. On March 21, 2014, the Court granted the parties' stipulation to stay the case until the motions to dismiss in the related federal derivative action were decided. On November 14, 2014, the Court dismissed the case but retained jurisdiction in the event the dismissal in the federal case is reversed on appeal by the United States Court of Appeals for the Ninth Circuit.
Reardon v. Clark, et al.
On March 18, 2015, a shareholder derivative complaint was filed in the Superior Court of the State of California in San Diego. The complaint asserts derivative claims on the Company's behalf against certain of its current and former officers and directors. The complaint is captioned
Reardon v. Clark, et al.
and generally alleges that the individual defendants breached their fiduciary duties of candor, good faith and loyalty, wasted corporate assets and were unjustly enriched. The lawsuit seeks unspecified monetary relief and disgorgement, as well as other equitable relief and attorneys’ fees. Pursuant to a stipulation among the parties, on May 27, 2015, the Court ordered the case stayed during discovery in the underlying
Zamir
securities class action, but permitted the plaintiff to receive copies of any discovery conducted in the underlying
Zamir
securities class action.
Larson v. Hackett, et al.
On January 19, 2017, a shareholder derivative complaint was filed in the Superior Court of the State of California in San Diego. The complaint asserts derivative claims on the Company's behalf against certain of its current and former officers and directors. The complaint is captioned
Larson v. Hackett, et al.
and generally alleges that the individual defendants breached their fiduciary duties of candor, good faith and loyalty, wasted corporate assets and were unjustly enriched. The lawsuit seeks unspecified monetary relief and disgorgement, as well as other equitable relief and attorneys’ fees. The parties have not yet responded to the complaint, but will most likely seek to have the case stayed during discovery in the underlying
Zamir
securities class action.
Nieder v. Ashford University, LLC
On October 4, 2016, Dustin Nieder filed a purported class action against Ashford University in the Superior Court of the State of California in San Diego. The complaint is captioned
Dustin Nieder v. Ashford University, LLC
and generally alleges various wage and hour claims under California law for failure to pay overtime, failure to pay minimum wages and failure to provide rest and meal breaks. The lawsuit seeks back pay, the cost of benefits, penalties and interest on behalf of the putative class members, as well as other equitable relief and attorneys' fees. The Company filed an answer denying the claims and the
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
case is currently in discovery. The outcome of this legal proceeding is uncertain at this point because of the many questions of fact and law that may arise. Based on information available to the Company at present, it cannot reasonably estimate a range of loss for this action. Accordingly, the Company has not accrued any liability associated with this action.
22. Concentration of Risk
Concentration of Revenue
In
2016
, Ashford University derived
81.2%
and University of the Rockies derived
86.5%
of their respective revenues (calculated in accordance with Department regulations) from students whose source of funding is through Title IV programs. See Note
19
, “Regulatory - The “90/10” Rule.” Title IV programs are subject to political and budgetary considerations and are subject to extensive and complex regulations. The Company's administration of these programs is periodically reviewed by various regulatory agencies. Any regulatory violation could be the basis for the initiation of potentially adverse actions including a suspension, limitation or termination proceeding, which could have a material adverse effect on the Company's enrollments, revenues and results of operations.
Students obtain access to federal student financial aid through a Department-prescribed application and eligibility certification process. Student financial aid funds are generally made available to students at prescribed intervals throughout their expected length of study. Students typically apply the funds received from the federal financial aid programs first to pay their tuition and fees. Any remaining funds are distributed directly to the student.
Concentration of Credit Risk
The Company maintains its cash and cash equivalents accounts in financial institutions. Accounts at these institutions are insured by the Federal Deposit Insurance Corporation (FDIC) up to
$250,000
. The Company performs ongoing evaluations of these institutions to limit its concentration risk exposure.
Concentration of Sources of Supply
The Company is dependent on a third-party provider for its online platform, which includes a learning management system that stores, manages and delivers course content, enables assignment uploading, provides interactive communication between students and faculty, and supplies online assessment tools. The partial or complete loss of this source may have an adverse effect on enrollments, revenues and results of operations.
23. Quarterly Results of Operations (Unaudited)
The following tables set forth unaudited results of operations and certain operating results for each quarter during the years ended December 31,
2016
and
2015
. The Company believes the information reflects all adjustments necessary to present fairly the information below. Basic and diluted earnings (loss) per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted earnings (loss) per share information may not equal annual basic and diluted earnings (loss) per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
(In thousands, except per share data)
|
2016
|
|
|
|
|
|
|
|
Revenue
|
$
|
133,002
|
|
|
$
|
137,970
|
|
|
$
|
136,583
|
|
|
$
|
119,535
|
|
Operating income (loss)
|
(16,299
|
)
|
|
3,357
|
|
|
(8,823
|
)
|
|
(18,456
|
)
|
Net income (loss)
|
(10,112
|
)
|
|
3,338
|
|
|
(9,477
|
)
|
|
(13,789
|
)
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.22
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.20
|
)
|
|
$
|
(0.30
|
)
|
Diluted
|
$
|
(0.22
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.20
|
)
|
|
$
|
(0.30
|
)
|
BRIDGEPOINT EDUCATION, INC.
Notes to Annual Consolidated Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
(In thousands, except per share data)
|
2015
|
|
|
|
|
|
|
|
Revenue
|
$
|
142,518
|
|
|
$
|
147,057
|
|
|
$
|
140,762
|
|
|
$
|
131,392
|
|
Operating income (loss)
|
(1,200
|
)
|
|
(512
|
)
|
|
(34,479
|
)
|
|
(6,104
|
)
|
Net income (loss)
|
(371
|
)
|
|
(650
|
)
|
|
(62,746
|
)
|
|
(6,687
|
)
|
Loss per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(1.37
|
)
|
|
$
|
(0.15
|
)
|
Diluted
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(1.37
|
)
|
|
$
|
(0.15
|
)
|