Zovio Inc - 10-K filing on 2015-03-10

Stock-Based Compensation

12 Months Ended

Dec. 31, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

The Company recorded $10.6 million, $13.9 million and $13.7 million of compensation expense related to equity awards for the years ended December 31, 2014, 2013 and 2012, respectively. The related income tax benefit was $4.0 million, $5.2 million and $5.1 million for the years ended December 31, 2014, 2013 and 2012, 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 to 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 each vesting date. All stock options granted in 2014, 2013 and 2012, 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.

The following table presents a summary of stock option activity in 2014, 2013 and 2012 (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, 2011	8,280		$	7.70	5.90	$	127,308
Granted	1,595		22.59
Exercised	(3,128	)	0.72
Forfeitures and expired	(335	)	19.79
December 31, 2012	6,412		14.17		7.21	$	9,010
Granted	483		10.23
Exercised	(1,060	)	9.87
Forfeitures and expired	(345	)	20.65
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
Vested and expected to vest at December 31, 2014	5,134		$	14.25	5.71	$	7,720
Exercisable at December 31, 2014	4,070		$	13.72	5.11	$	7,367

As of December 31, 2014, the Company has reserved 10.5 million shares of common stock for issuance upon the exercise of 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, 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, and $0.8 million related to stock options that expired unexercised during the year. During the year ended December 31, 2013, there were 1.1 million stock options exercised with an intrinsic value of $9.4 million. The windfall tax benefit realized from these exercises was $2.1 million. The Company also recognized a tax benefit shortfall of $0.6 million related to stock options exercised at values lower than the related compensation expense, and $0.5 million related to stock options that expired unexercised during the year. During the year ended December 31, 2012, there were 3.1 million stock options exercised with an intrinsic value of $45.2 million. The windfall tax benefit realized from these exercises was $10.1 million. The Company also recognized a tax benefit shortfall of $1.5 million related to stock options exercised at values lower than the related compensation expense, and $0.2 million related to stock options that expired unexercised during the year.

During the years ended December 31, 2014 and 2013, approximately 203,000 and 137,000 stock options expired, respectively.

The fair value of each option award granted during the years ended December 31, 2014, 2013 and 2012, 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. Below is a summary of the assumptions used for the stock options granted in the years indicated:



	2014			2013			2012
Weighted average exercise price per share	$	14.35		$	10.23		$	22.59
Risk-free interest rate	2.0		%	1.0		%	1.2		%
Expected dividend yield	—			—			—
Expected volatility	55.1		%	58.9		%	54.6		%
Expected life (in years)	5.75			5.85			5.67
Forfeiture rate	6.0		%	5.0		%	4.0		%
Weighted average grant date fair value per share	$	7.43		$	5.48		$	11.26

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 dividend yield reflects the fact that 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 volatility of the Company's common stock is based upon a blended rate of the Company's historical volatility and that of publicly-traded securities of a peer group of comparable companies in the Company's industry. The peer group volatility supplements the Company's historical volatility in order to calculate a volatility that approximates the expected term used in the Black-Scholes option pricing model. In evaluating comparability, the Company considered factors such as industry, stage of life cycle and size. The Company now has enough historical option exercise information to be able to accurately 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.

As of December 31, 2014, 2013 and 2012, there was $3.2 million, $5.6 million and $12.9 million, respectively, of unrecognized compensation costs related to unvested stock options.

At December 31, 2014, the unrecognized compensation costs of stock options are expected to be recognized over a weighted average period of 1.04 years.

Stock Awards

In 2011, the Company began granting RSUs under the 2009 Plan. The Company now primarily grants RSUs to its employees. Each RSU represents a future issuance of one share of common stock contingent upon the recipient's continued service to the Company through the 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, then the RSU is 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.

In December 2014, the Company also authorized 1.4 million PSUs under the 2009 Plan. This total authorized amount is comprised of 1.0 million shares that will vest contingently based upon a market-based measure, the Company's stock price, and 0.4 million shares that will vest contingently based upon a performance-based measure, the Company's diluted earnings per share. The portion of the PSU awards related to the market-based measure was granted for accounting purposes on December 18, 2014. The portion of the PSU awards related to the performance-based measure is anticipated to be granted for accounting purposes in March 2015, after the final approval of the 2015 budget by the Company's board of directors.

Each PSU represents a future issuance of one share of common stock contingent upon achieving certain performance measures and the recipient's continued service to the Company through the vesting date. The PSUs are subject to cliff vesting equally over four years at the end of each annual service period upon meeting the performance-based and/or market-based measures applicable to such service period. Upon the vesting date, PSUs 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, then the PSU is automatically canceled on the employment termination date, unless otherwise specified in an employee's individual employment agreement.

The fair value and compensation expense of the market-based measure portion of the PSU awards was estimated based on the Company's stock price as of the date of grant using a Monte Carlo simulation model. The fair value of these awards on the grant date was $5.3 million. The fair value of the performance-based portion of the PSU awards will be based on the Company's stock price as of the date the target is approved by the Company's board of directors. Compensation cost for the portion of the PSUs with a performance-based measure is recorded based on the probable outcome of the performance conditions associated with the respective shares, as determined by management. PSUs are amortized over the applicable vesting period using the graded-vesting method.

The assumptions for the market-based portion of the PSUs granted in 2014 are noted in the following table:



	2014
Grant price per share	$	11.54
Risk-free interest rate	1.4		%
Expected dividend yield	—
Historical volatility	50.0		%
Expected life (in years)	4.0
Forfeiture rate	6.0		%
Weighted average grant date fair value per share	$	5.39

A summary of the RSU and PSU activity and related information is as follows:



	Restricted Stock Units and Performance Stock Units
	Time Based				Performance-Based			Market-Based
	Number of Shares		Weighted Average Grant Date Fair Value		Number of Shares	Weighted Average Grant Date Fair Value		Number of Shares	Weighted Average Grant Date Fair Value
Balance at December 31, 2011	56,855		$	23.97	—	$	—	—	$	—
Awarded	362,199		9.72		—	—		—	—
Vested	(56,855	)	23.97		—	—		—	—
Canceled	—		—		—	—		—	—
Balance at December 31, 2012	362,199		9.72		—	—		—	—
Awarded	1,016,035		10.50		—	—		—	—
Vested	(181,104	)	9.72		—	—		—	—
Canceled	(98,613	)	10.39		—	—		—	—
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

As of December 31, 2014 and 2013, there was $8.5 million and $6.5 million, respectively, of unrecognized compensation costs related to unvested RSUs. The unrecognized compensation costs of RSUs are expected to be recognized over a weighted average period of 1.5 years.

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 realized from the RSUs released was $0.5 million. During the year ended December 31, 2013, 0.2 million RSUs vested and were released with a market value of $3.0 million. The actual tax benefit realized from the RSUs released was $0.5 million. During the year ended December 31, 2012, 0.1 million RSUs vested and were released with a market value of $0.8 million. The Company recognized a tax benefit shortfall of $0.2 million related to RSUs vesting at values lower than the related compensation expense. There were no RSUs granted prior to 2011.

As of December 31, 2014, there was $5.2 million of unrecognized compensation costs related to unvested PSUs. The unrecognized compensation costs of PSU' are expected to be recognized over a weighted average period of 2.7 years, to the extent the performance criteria is met. There were no PSUs granted in 2013 or 2012, and no PSUs vested during 2014.

Warrants

The Company previously issued warrants to purchase common stock to various employees, consultants, licensors and lenders. Each warrant represented the right to purchase one share of common stock. No warrants were issued during any of the years ended December 31, 2014, 2013 or 2012. During the years ended December 31, 2013 and 2012, approximately 104,000 and 174,000 warrants to purchase shares of common stock were exercised, respectively. All outstanding warrants expired in the fourth quarter of 2013.