What changed in this filing

/stocks — the workspaceLOADING

Item 1A. Risk Factors

2022-08-09 compared with 2022-05-10 · 110 added, 13 removed, 21 unchanged (85% of the section changed)

5 unchanged sentences

In March 2022, ED completed negotiated rulemaking processes intended to develop regulations related to Title IV participation.

Topics addressed include 90/10 Rule modifications, gainful employment requirements, public service student loan forgiveness programs, mandatory pre-dispute arbitration, prohibition of class-action lawsuits, ability to benefit provisions, certification procedures for participation in Title IV programs, change of ownership and change in control rules and procedures, financial responsibility standards, and standards of administrative capability, among others.

Topics addressed included modifications to the 90/10 Rule, gainful employment requirements, public service student loan forgiveness programs, mandatory pre-dispute arbitration, prohibition of class-action lawsuits, ability to benefit provisions, certification procedures for participation in Title IV programs, change in ownership and change in control rules and procedures, financial responsibility standards, and standards of administrative capability, among others.

The negotiated rulemaking committees did not reach consensus on most of the draft regulations that they addressed, which means ED is not bound to use language developed during the negotiated rulemaking process for those regulations, and we cannot predict the nature or final form of any regulations ultimately adopted by ED.

Any final regulations adopted by ED are not expected to go into effect until July 1, 2023 at the earliest, and we cannot ascertain whether those regulations could harm our business or materially and adversely affect our financial conditions and results of operations.

Any final regulations adopted by ED are not expected to go

into effect until July 1, 2023 at the earliest (assuming publication by November 1, 2022), and we cannot ascertain whether those regulations could harm our business or materially and adversely affect our financial conditions and results of operations.

On July 6, 2022, ED announced proposed regulations relating to borrower defenses to repayment, or BDTR, arbitration proceedings, the public service loan forgiveness program, interest capitalization, total and permanent disability discharges, closed school discharges, and false certification of a student’s eligibility for Title IV loans.

The proposed regulations with respect to BDTR would:

create a single standard and streamlined process for relief that would apply to all future and pending BDTR claims as of July 1, 2023 instead of standards varying based on the date of the borrower’s first loan disbursement;

define what kinds of misconduct could lead to borrower defense discharges;

establish a presumption that borrowers reasonably relied upon misrepresentations or omissions;

establish a reconsideration process for borrowers whose claims are not approved for a full discharge;

and create a process for forming groups of borrowers and adjudicating claims based on the common facts of those group claims, as well as provide a clear timeline for adjudication of group and individual claims.

The proposed regulations set a clear expectation that ED will hold colleges accountable for the cost of discharges, including establishing a recoupment process separate from the approval of BDTR claims.

In addition, the proposed rule would prohibit institutions from requiring borrowers to sign mandatory pre-dispute arbitration agreements or class action waivers for claims related to the making of a Federal Direct Loan or the provision of educational services for which the loan was obtained.

With respect to closed school discharges, ED described that the proposed regulations would provide automatic discharges to any borrower who was enrolled within 180 days prior to a school’s closure and who did not complete their education at the school or through an approved teach-out agreement at another school within one year after the closure of their original school.

The proposed regulations would shorten the period for automatic discharge so borrowers do not default on their loans after a closure of their school.

On July 26, 2022, ED announced proposed regulations relating to the 90/10 Rule.

The HEA requires all for-profit education institutions to comply with the 90/10 Rule.

In March 2021, the American Rescue Plan Act of 2021, or ARPA, which modified the 90/10 Rule to require that a for-profit institution derive not less than 10% of its revenue from sources other than “federal education assistance funds,” was signed into law.

One of the recent negotiated rulemaking committees reached consensus on draft regulations to implement ARPA’s modifications to the 90/10 Rule, which means ED is required to use the consensus-based language in the proposed regulations that it publishes for public notice and comment.

This language provides that for fiscal years beginning on or after January 1, 2023, federal funds used to calculate the revenue percentage will include Title IV funds and any other educational assistance funds provided by a federal agency directly to an institution or a student, including the federal portion of any grant funds provided by or administered by a non-federal agency, except for non-Title IV federal funds provided directly to a student to cover expenses other than tuition, fees, and other institutional charges.

The consensus-based language also provides that ED will identify the federal agency and the other educational assistance funds provided by that agency in a notice published in the Federal Register, with updates published as needed.

As a result of this language, we expect that TA and VA benefits will be included in the “90%” side of the ratio, and our institutions’ 90/10 Rule percentages will increase, particularly at APUS.

In March 2021, the American Rescue Plan Act of 2021, or ARPA, was enacted and modified the 90/10 Rule to require that a for-profit institution derive not less than 10% of its revenue from sources other than “federal education assistance funds”.

The proposal provides that for fiscal years beginning on or after January 1, 2023, federal funds used to calculate the revenue percentage will include Title IV funds and any other educational assistance funds provided by a federal agency directly to an institution or a student, including the federal portion of any grant funds provided by or administered by a non-federal agency, except for non-Title IV federal funds provided directly to a student to cover expenses other than tuition, fees, and other institutional charges.

Under the proposed regulations, ED will identify in future publications the federal agencies to which the provision applies, as well as the “other educational assistance funds” provided by that agency, with updates published as needed.

In connection with its announcement of the proposed regulations, ED confirmed that the proposal would no longer permit institutions to count federal aid for veterans and service members as part of the “10%” side of the ratio.

As a result, we expect that TA and VA benefits will be included in the “90%” side of the ratio, and our institutions’ 90/10 Rule percentages will increase, particularly at APUS.

Inclusion of TA in the 90/10 calculation could also cause other educational institutions to decrease their focus on serving military-affiliated students using TA benefits, and while that could have a positive impact on our enrollments from those students, it could also have an adverse impact on our ability to meet the requirements of the 90/10 Rule.

This change, and any resulting actions we take to adjust the operations of our institutions to comply with the 90/10 Rule, could have a material adverse impact on the financial condition and operations of our institutions.

The proposed regulations also include other requirements, including:

institutions must request and disburse Title IV funds before the end of the fiscal year (or, for institutions operating under the reimbursement method or the heightened cash monitoring method, make disbursements by the end of the fiscal year and report the funds in the “90%” side of the ratio for that fiscal year);

institutions are restricted in when and how they can count institutional loans and alternative financing arrangements as non-federal revenue;

institutions may, under certain circumstances, include non-federal revenue from non-Title IV programs in their 90/10 calculation;

and institutions must notify ED and students in a timely manner if they fail the 90/10 Rule.

These changes, and any resulting actions we take to adjust the operations of our institutions to comply with the 90/10 Rule, could have a material adverse impact on the financial condition and operations of our institutions.

On July 26, 2022, ED also announced proposed regulations relating to change in ownership and change in control rules and procedures.

The proposed regulations would, for example:

require institutions to notify ED and students of a planned change in ownership at least 90 days in advance;

lower the threshold for reporting changes in ownership from 25 percent ownership interest to 5 percent ownership interest;

require additional financial protection ( i.e.

, letters of credit) when a new owner is lacking financial statements or as ED determines necessary;

and eliminate the existing requirement that ED continue an institution’s participation with the same terms and conditions in their Title IV agreement as prior to the transaction.

The proposed regulations also modify the definition of “additional location” to clarify that a location must be within the same “ownership structure” of the institution.

These changes may affect our acquisition and growth strategies.

Any resulting actions we take to adjust our operations could have an adverse impact on the financial condition and operations of our institutions.

The negotiated rulemaking committee focused on draft gainful employment regulations did not reach consensus.

However, in connection with that process, ED released informational rates that it calculated for the two metrics that ED is contemplating using for purposes of determining Title IV eligibility of gainful employment programs.

However, in connection with the negotiated rulemaking process, ED released information rates data that it calculated for the

two metrics that ED is contemplating using for purposes of determining Title IV eligibility of gainful employment programs.

Those two metrics are referred to as the debt-to-earnings rates (which involve two rates, namely the discretionary earnings rate and the annual earnings rate) and the earnings threshold measure.

2 unchanged sentences

Out of the 30 RU programs, 47 APUS programs, and five HCN programs that ED assessed in the informational rates and subject to the qualifications set forth in ED’s related memorandum, eight RU programs and three APUS programs failed one or both measures.

identified as failing in the informational rates will in fact fail or whether other programs will fail or pass.

At this time, the outcome of any future gainful employment rulemaking is uncertain and it is difficult to predict whether our institutions’ programs will satisfy any future gainful employment metrics, including whether any programs identified as failing in the informational rates will in fact fail or whether other programs will fail or pass.

The failure of any of our institutions’ programs to meet the required metrics could adversely impact those institutions and programs.

ED’s Spring 2022 Agency Rule List indicates a target date of April 2023 for publication of the gainful employment proposed regulations, which would mean any changes would be effective no earlier than July 1, 2024.

ED’s Spring 2022 Agency Rule List also indicated a target date of April 2023 for publication of proposed regulations relating to ability to benefit, financial responsibility, administrative capability, and certification procedures.

Failure to improve certain of our programs NCLEX pass rates and to more generally satisfy NCLEX requirements could reduce our enrollments and revenue, lead to adverse actions taken by state boards of nursing, and limit our ability to offer educational programs.

As discussed more fully in “Regulatory Environment – State Authorization/Licensure of Our Institutions” in Part I, Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2021, failure to satisfy NCLEX pass rate requirements imposed by state boards of nursing can result in the state boards of nursing taking certain adverse actions, including placement of a program on provisional approval status or withdrawal of approval pursuant to an adjudication proceeding, and NCLEX exam pass rate requirements could limit our institutions’ ability to expand into new states.

HCN’s Associate Degree in Nursing, or ADN, Program has been on provisional approval status in Ohio since March 2017 due to not meeting OBN’s first-time pass rate standard for four consecutive years.

HCN has been implementing changes, including curriculum, admissions, and academic achievement and course retake policy changes that are designed to improve NCLEX scores over time, but there is no assurance that these changes will be successful or will not have negative effects on HCN’s enrollment.

In addition, RU’s ADN Programs in Bloomington, Minnesota, in Illinois, and in Kansas each experienced 2021 first-time NCLEX pass rates below the applicable state threshold.

This was the third consecutive year of below threshold pass rates for the Bloomington program and the second consecutive year for the Illinois and Kansas programs.

As a result of the Bloomington program’s pass rates, the Minnesota Board of Nursing, or MBN, conducted a survey of the program and found that RU had not complied with certain MBN rules.

In August 2022, RU entered into a stipulation and consent stemming from the survey findings that requires the program to comply with the established first-time NCLEX pass rate by the end of 2023, maintain a specified student to faculty ratio in 2023, comply with MBN rules and provide the MBN with quarterly status reports in 2023, with a potential penalty for non-compliance up to and including withdrawal of approval of the program.

By limiting the student to faculty ratio, the order constrains our ability to enroll students based on our ability to attract and retain qualified faculty.

RU has implemented a variety of measures in an effort to improve student performance and raise NCLEX scores, including taking action prior to entrance of the order to voluntarily reduce enrollment in the Bloomington, Minnesota ADN Program, but there can be no assurance that this effort will improve NCLEX scores above the applicable threshold if at all or that the program will be found to be in full compliance with the terms of the order.

The order could have an adverse impact on our reputation and ability to enroll students, and any failure to comply with the order could have an adverse impact on our ability to continue the Bloomington ADN Program, any of which would have an adverse effect on our results of operations, cash flows, and financial condition.

In February 2022, the Illinois ADN Program was placed on probationary status by the Illinois Department of Professional Regulation, or IDPR, as a result of which RU is required to temporarily reduce enrollment in the program by 25% and has two years to demonstrate evidence of implementing strategies to correct deficiencies and satisfy the required NCLEX pass rate.

If after two years the pass rate does not satisfy the required standard, the program will be reevaluated by the IDPR for a determination as to whether the program will be allowed to continue on probation or whether it should be disapproved.

Any voluntary or required reduction in enrollment will have an adverse impact on RU’s revenue.

In addition, if RU and HCN are unable to improve NCLEX first-time scores over time in relevant locations, this situation could have an adverse impact on our ability to enroll students and eventually our ability to continue the ADN Programs, either of which would have an adverse effect on our results of operations, cash flows, and financial condition.

Our institutions’ failure to meet financial responsibility standards may result in additional regulatory requirements that may negatively impact cash flow.

ED evaluates institutions on an annual basis for compliance with specified financial responsibility standards, including a composite score calculation based on line items from an institution’s audited financial statements.

The composite score calculation focuses on three financial ratios:

(1) equity ratio (which measures the institution’s capital resources, financial viability, and ability to borrow);

(2) primary reserve ratio (which measures the institution’s viability and liquidity);

and (3) net income ratio (which measures the institution’s profitability or ability to operate within its means).

Generally, an institution’s composite score must be at 1.5 or above for the institution to be deemed financially responsible.

Under certain circumstances, institutions with a composite score less than 1.5 may be able to establish financial responsibility on an alternative basis by complying with various conditions.

For purposes of evaluating the financial responsibility of our institutions, including the composite score calculation, we supply consolidated financial statements to ED.

As a result of the non-cash impairment charges recorded during the three months ended June 30, 2022 to reduce the carrying value of RU Segment goodwill and intangible assets and to reflect the corresponding tax impact, we currently expect that our consolidated composite score may fall between 1.0 and 1.4 at our next financial responsibility test.

A composite score between 1.0 and 1.4 is considered by ED to be in the “zone”, and the “zone alternative” permits institutions to demonstrate financial responsibility by meeting specific monitoring requirements.

Under the zone alternative, an institution:

must request and receive funds under the heightened cash monitoring or reimbursement payment methods (resulting in a delayed method of cash funding for Title IV aid);

may be required to provide additional information to ED upon request (e.g., early submission of financial statement and compliance audit, information about current operations and future plans);

must require its auditor to express an opinion regarding compliance with zone alternative requirements;

and must provide timely information to ED regarding certain oversight and financial events.

While we believe if our composite score is in the zone that we will be able to otherwise demonstrate our financial responsibility and continue to provide educational services, being subject to zone alternative requirements may adversely affect our results of operations and our operations.

Our student registrations and revenue have been adversely impacted and we could continue to experience adverse impacts as a result of the Army’s transition from GoArmyEd to ArmyIgnitED.

Army service members participating in TA programs constituted approximately 16% of APUS’s adjusted net course registrations for 2021.

APUS relies on the ability of the Army, and the other branches of the Armed Forces, to process service members’ participation in TA programs, and from time to time, changes to processes have impacted the ability of service members to participate in those programs.

For example, the Army in 2021 transitioned from its legacy system, GoArmyEd, to a new system, ArmyIgnitED, for soldiers to use to request TA.

This transition has been beset by delays and disruption of the Army’s TA programs.

In connection with the transition, we experienced challenges related to system performance, process changes and software defects, and there was an adverse impact on registrations and revenue for the second and third quarters of 2021.

Soldiers could continue to directly register for courses with the expectation TA could be retroactively applied for, and the Army created a process for soldiers to seek reimbursement for out-of-pocket costs incurred as a result of this disruption and related processes for institutions.

However, in July 2022, the Army ended the process for institutions, meaning that students now need to retroactively seek and obtain TA on their own, and the student process will expire on August 26, 2022.

Failure to submit a TA request by that date for courses that would have been covered by this process will result in no TA funding being provided.

We believe that the expiration of the process for institutions is adversely impacting APUS enrollments in the third quarter of 2022.

In addition, TA will have to be retroactively sought and obtained for soldiers who registered for courses during the period beginning March 8, 2021.

As a result of the requirement to retroactively seek TA and the pending expiration of related processes, it is possible that we could incur bad debt expenses if soldiers who expect to receive TA do not receive it and do not otherwise pay the tuition for their courses.

The disruption to the Army’s systems has also adversely impacted APUS’s ability to invoice the Army for Army registrations and has adversely impacted accounts receivable.

As of June 30, 2022, approximately $12.5 million, of which $6.9 million is older than 60 days from the course start date, was due from the Army due to the disruption caused by the transition to ArmyIgnitED.

While we have seen improvement in Army’s processing of invoices and payments to APUS during recent periods, this improvement may not continue, and we cannot predict when this disruption will be resolved with the Army’s systems fully operational or the timing of expected cash receipts from the Army.

In addition, the Army has announced that it will soon transition from the initial version of ArmyIgnitED to an upgraded ArmyIgnitED 2.0, that all TA requests for courses beginning on or after October 1, 2022 will be required to be submitted via ArmyIgnitED 2.0, and that the Army will be transitioning to a new third-party service provider for ArmyIgnitED.

As part of this change, the Army stopped allowing institutions to submit invoices until ArmyIgnitED 2.0 is implemented, which could impact our ability to collect on our accounts receivable and could cause our accounts receivable to increase.

While we are taking efforts to mitigate the impact of this change in policy, we believe it will not be remedied in full until ArmyIgnitED 2.0 is successfully

However, there can be no assurance that ArmyIgnitED 2.0 will work as expected or at all.

Difficulties associated with the upgrade and transition to a new service provider could cause further disruption to soldiers’ ability to seek and obtain TA and to the Army’s processing of invoices and payments to APUS.

The inability of soldiers to participate in TA programs, or continued or additional limitations on their ability to apply and participate, would have an adverse effect on our results of operations and financial condition, particularly because soldiers make up the largest group of TA participants at APUS.

Our planned transition away from Collegis for currently outsourced RU information technology and marketing functions may not be timely, efficient, or cost-effective, or may pose other operational challenges.

1 unchanged sentence

RU’s contracts with Collegis expire in September 2024, and in April 2022 we notified Collegis that we intend to permit the contracts to expire by their terms, which could have adverse impacts on our ongoing relationship with Collegis or the level of service that they provide.

We plan to transition all of the services currently outsourced to Collegis back to our operations or to one or more other third-party vendors, and we have already begun work on the transition of certain marketing services.

As we are presently preparing transition plans, at this time, we are unable to predict the full costs of the transition, in which periods we will incur those costs, or the impact on our financial results.

We plan to transition all of the services currently outsourced to Collegis back to our operations or to one or more other third-party vendors.

We have transitioned some services and continue work on the transition of certain marketing services.

At this time, we are unable to predict the full costs of the transition, in which periods we will incur those costs, or the impact on our financial results.

However, the transition will cause us to incur significant time and expense, may not be timely, efficient, or cost-effective, or may otherwise be difficult to implement or pose operational challenges, any of which could adversely affect our business, financial condition, results of operations, and cash flows.

1 unchanged sentence

In addition, there is no assurance that any contracts with third parties that replace Collegis for any of these services will be on terms that are favorable to us.

If we are unable to attract, retain, and develop skilled personnel and management, our business and growth prospects could be severely harmed, and changes in management could cause disruption and uncertainty.

We must attract, retain, and develop diverse and highly qualified faculty, management, administrators, and other skilled personnel to our institutions.

As we continue to grow our business, make acquisitions, and expand our geographic scope, we need to ensure effective succession for key executive and employee roles in order to meet the growth, development, and profitability goals of our business.

Hiring competition is intense, especially for faculty in specialized areas and qualified executives.

For example, due to COVID-19 there was an increase in demand for nursing professionals, which we believe impacted our ability to recruit and retain qualified nursing faculty at RU and HCN.

We also believe that current job market dynamics, where the monthly percentage of non-farm workers in the United States who quit their jobs broke multiple all-time U.S.

records in 2021 in what is being referred to as the “Great Reshuffling”, and current low unemployment, has further increased the challenge of hiring and employee retention.

Overall, turnover of our employees during 2021 was approximately 6% to 10% higher than turnover in 2020, depending on segment.

In parts of the country where RU operates, the challenge with recruiting qualified faculty has been particularly difficult, and in 2022 our faculty to student ratio has increased, which contributed to RU reducing enrollments in certain markets in order to focus on student success and improving NCLEX outcomes.

Specifically, enrollment in RU’s Bloomington, Minnesota ADN Program was reduced 30.1% year-over-year in the 2022 summer quarter.

Recent MBN action requiring the program to maintain a specified faculty to student ratio in 2023 also constrains our ability to enroll students based on our ability to attract and retain qualified faculty.

While we continue to work to strengthen our management team and to attract and retain high-caliber talent, including through various human resources programs and what we believe are competitive market compensation and benefit practices, our efforts may not be successful.

If we fail to attract new faculty, management, administrators, or skilled personnel or fail to retain, develop, and motivate our existing faculty, management, administrators, and skilled personnel, our institutions and our ability to serve our students, acquire new students, expand our programs, open new locations, make investments or acquisitions, and update or enhance our technology could be severely harmed, and changes in management could disrupt our business and cause uncertainty.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors