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Item 1A. Risk Factors

2021-02-17 compared with 2020-02-20 · 119 added, 108 removed, 289 unchanged (44% of the section changed)

You should carefully consider the risks and uncertainties described below and all other information contained in this Annual Report on Form 10-K.

In order to help assess the major risks in our business, we have identified many, but not all, of these risks.

Due to the scope of our operations, a wide range of factors could materially affect future developments and performance.

If any of the following risks, or risks that we do not anticipate, are realized, our business, financial condition, cash flow or results of operations could be materially and adversely affected, and as a result, the trading price of our common stock could be materially and adversely impacted.

These risk factors should be read in conjunction with other information set forth in this Annual Report, including Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , and Item 8, Consolidated Financial Statements and Supplementary Data, including the related Notes to Consolidated Financial Statements .

There are many factors that affect our business, financial condition, operating results, cash flows and distributions, as well as the market price for our securities.

The following is a description of important factors that may cause our actual results of operations in future periods to differ materially from those currently expected or discussed in forward-looking statements set forth in this Annual Report.

Additional risks and uncertainties not presently known to us or that we may currently deem immaterial also may impair our business operations.

Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Annual Report, and we expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law.

See “Forward-Looking Statements.” These risk factors should be read in conjunction with other information set forth in this Annual Report, including Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Consolidated Financial Statements and Supplementary Data, including the related Notes to Consolidated Financial Statements.

Upon the consummation of the Transaction with GCU on July 1, 2018 (as discussed in “ Part I.

Business – The Transaction ”), we became a third-party provider of education services to GCU, our only university partner during 2018.

On January 22, 2019, we completed the acquisition of Orbis Education, an education services company that supports healthcare education programs for 22 university partners across the United States.

In January 2019, we began providing education services to numerous university partners across the United States, through our wholly-owned subsidiary, Orbis Education, which we acquired on January 22, 2019.

In the healthcare field, GCE, together with Orbis Education, works in partnership with a growing number of top universities and healthcare networks across the country, offering health care related academic programs at off-campus classroom and laboratory sites located near healthcare providers and developing high-quality, career-ready graduates who enter the workforce ready to meet the demands of the healthcare industry .

While we currently provide services to 25 university partners across the United States, GCU is, and will for the foreseeable future remain, our most significant university partner.

Given that our revenue from operations during 2018 was derived entirely from GCU, and that our revenue from operations will continue to be derived substantially from our contractual relationship with GCU for the foreseeable future, the risk factors set forth below include risks attributable to GCU operating as a non-profit university, which could materially affect us.

Risks Related to Our Business

Accordingly, the risk factors set forth below include risks attributable to GCU’s operations, which could materially affect us.

Risks Related to Our Relationship with GCU

A large percentage of our revenue is attributable to our contractual relationship as a service provider to GCU, and the loss of, or a decline in enrollment in, GCU programs could significantly reduce our revenue and impact our overall financial performance.

We expect the programs of GCU to account for a large percentage of our revenue for the foreseeable future.

We expect the revenue derived from our Master Services Agreement with GCU to account for a large percentage of our revenue for the foreseeable future.

Any decline in reputation or changes in policies of GCU could adversely affect its student enrollment and its overall financial and operating results, which could materially impact us.

Furthermore, GCU has the right to terminate the Master Services Agreement early after the later of seven (7) years or the payment in full of the Secured Note and, upon the expiration of the Management Services Agreement, GCU is not required to continue using us as the provider of the services set forth thereunder.

If GCU were to terminate or not renew its relationship with us, or if certain of the programs

with GCU pursuant to the Master Services Agreement were to materially underperform for any reason, it could negatively affect our reputation, revenue and future operating results.

GCU’s board of trustees and management have fiduciary and other duties that require them to focus on the best interests of GCU and, over time, those interests could diverge from those of the Company.

GCU is a separate non-profit entity under the control of an independent board of trustees, none of whose members have ever served in a management or corporate board role at the Company.

Accordingly, the Company’s relationship with GCU, both pursuant to the Master Services Agreement and operationally, is no longer as owner and operator, but as a third-party service provider to an independent customer.

While the Company believes that its relationship with GCU will remain strong, GCU’s board of trustees and management have fiduciary and other duties that require them to focus on the best interests of GCU and, over time, those interests could diverge from those of the Company.

Our Chief Executive Officer’s role as President of GCU may adversely affect his ability to run the Company .

Mueller has served as the Chief Executive Officer of the Company since 2008, the Chairman of the Board of the Company since 2017 and the President of GCU since 2012.

In connection with the Transaction, the Board of Directors of the Company and the board of trustees of GCU each determined that Mr.

Furthermore, GCU has the right to terminate the Master Services Agreement early after the later of seven (7) years or the payment in full of the Secured Note (defined below) and, upon the termination or expiration of the Master Services Agreement, GCU is not required to continue using us as the provider of the services set forth thereunder.

If GCU were to terminate or not renew its relationship with us, or if certain of the programs offered by GCU pursuant to the Master Services Agreement were to materially underperform for any reason, it could negatively affect our reputation, revenue and future operating results.

GCU’s board of trustees and management have fiduciary and other duties that require them to focus on the best interests of GCU and, over time, those interests could diverge from those of GCE.

GCU is a separate Arizona non-profit corporation under the control of an independent board of trustees, none of whose members have ever served in a management or corporate board role at GCE.

Accordingly, GCE’s relationship with GCU, both pursuant to the Master Services Agreement and operationally, is no longer as owner and operator, but as a third-party service provider to an independent customer.

While GCE believes that its relationship with GCU will remain strong, GCU’s board of trustees and management have fiduciary and other duties that require them to focus on the best interests of GCU and, over time, those interests could diverge from those of GCE.

Our Chief Executive Officer’s role as President of GCU may adversely affect his ability to run GCE .

Mueller has served as the Chief Executive Officer of GCE since 2008, the Chairman of the Board of GCE since 2017 and the President of GCU since 2012.

In connection with the Transaction, the Board of Directors of GCE and the board of trustees of GCU each determined that Mr.

Mueller should retain those roles.

Accordingly, Mr.

Mueller serves as the Chairman of the Board and Chief Executive Officer of the Company and as the President of GCU, although he is prohibited from serving on the board of trustees of GCU.

Mueller serves as the Chairman of the Board and Chief Executive Officer of GCE and as the President of GCU, although he is prohibited from serving on the board of trustees of GCU.

Our Board and the board of trustees of GCU each recognized that Mr.

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We also jointly imposed a structure, through GCU’s governance documents and through express provisions of the Master Services Agreement, that prevent Mr.

Mueller from participating in day-to-day management of, or negotiations between the Company and GCU relating to, the Master Services Agreement .

Mueller from participating in day-to-day management of, or negotiations between GCE and GCU relating to, the Master Services Agreement .

In addition , Mr.

Mueller’s dual capacity may at times adversely affect his ability to devote time, attention, and effort to the Company.

Mueller’s dual capacity may at times adversely affect his ability to devote time, attention, and effort to GCE.

The purchase price for the Transferred Assets in the Transaction was paid in the form of a senior Secured Note, and our ability to realize the negotiated value of the acquired assets is subject to GCU’s performance and its ability to pay amounts due under the Secured Note as they come due.

GCU paid the purchase price for the Transferred Assets by issuing to the Company a Secured Note that is governed by the Credit Agreement between the Company and GCU.

The Credit Agreement contains customary commercial credit terms, including affirmative and negative covenants applicable to GCU, and provides that the Secured Note bears interest at an annual rate of 6.0%, has a maturity date of June 30, 2025, and is secured by all of the assets of GCU.

The Secured Note provides for GCU to make interest only payments during the term, with all principal and accrued and unpaid interest due at maturity and also provides that the Company will lend additional amounts to GCU to fund GCU-approved capital expenditures during the first three years of the term.

GCU paid the purchase price for the Transferred Assets by issuing to GCE a secured note (the “Secured Note”) that is governed by a credit agreement between GCE and GCU.

That credit agreement contains customary commercial credit terms, including affirmative and negative covenants applicable to GCU, and provides that the Secured Note bears interest at an annual rate of 6.0%, has a maturity date of June 30, 2025, and is secured by all of the assets of GCU.

The Secured Note provides for GCU to make interest only payments during the term, with all principal and accrued and unpaid interest due at maturity and also provides that GCE will lend additional amounts to GCU to fund GCU-approved capital expenditures during the first three years of the term.

Our ability to realize the negotiated value of the acquired assets depends on GCU’s performance and its ability to pay amounts due under the Secured Note as they come due.

If GCU were to lose its ability to continue participating in the Title IV programs, its students would lose their access to Title IV program funds.

On November 6, 2019, ED informed GCU that it had approved the Transaction and granted to GCU a provisional Program Participation Agreement (PPA), permitting GCU to participate in Title IV, HEA programs on a provisional basis for the period through September 30, 2022.

This PPA, which was automatically granted on a provisional basis due to the fact that the Transaction constituted a change of control of GCU, was granted without any requirement to post a letter of credit or any growth restrictions.

Accordingly, GCU is authorized to participate in Title IV, HEA programs for the stated period.

GCU will need to reapply for certification on or before June 30, 2022 to continue its participation in the Title IV HEA programs and, at that time, a determination will be made whether GCU meets the requirements for full certification.

There can be no assurance that ED will recertify GCU or that it will not impose conditions or other restrictions on GCU as a condition of granting GCU a provisional certification following its change in control.

time as GCU seeks renewal of the PPA in 2022, ED does not renew or withdraws the certification of GCU to participate in the Title IV programs, or if such certification is withdrawn at any other time, GCU’s students would no longer be able to receive Title IV program funds.

Similarly, ED could renew GCU’s certification, but restrict or delay its students receipt of Title IV funds, limit the students to whom it could disburse funds, or place other restrictions on the university.

Any of these outcomes would have a material adverse effect on GCU and on us.

ED’s determination to treat GCU as a proprietary institution for Title IV, HEA purposes could adversely impact GCU’s enrollment.

On November 6, 2019, in connection with its approval of the Transaction, ED also informed GCU that GCU does not satisfy ED’s definition of a nonprofit entity and, as a result, that ED will continue to treat GCU as a proprietary institution for purposes of its continued participation in Title IV programs.

While the Company does not believe that ED’s determination will impact GCU’s ability to meet all regulatory requirements applicable to proprietary institutions, the determination, if upheld, would have the impact of limiting GCU’s ability to identify itself as a nonprofit university in its advertising or other materials.

Such a limitation could harm GCU’s ability to compete against other nonprofit universities for students and could have a material adverse effect on its enrollment and, consequently, on its and our financial condition, results of operations and cash flows.

Other Risks Related to Our Business

The recent global coronavirus outbreak could harm our business, results of operations, and financial condition, and has harmed our most significant university partner .

In March 2020, the World Health Organization declared COVID-19 a global pandemic.

This contagious outbreak, which has continued to spread, and the related adverse public health developments, including orders to shelter-in-place, travel restrictions and mandated non-essential business closures, have adversely affected workforces, organizations, customers, economies and financial markets globally, leading to an economic downturn and increased market volatility.

It has also disrupted the normal operations of many businesses, including ours, and those of our university partners.

This outbreak, as well as measures taken to contain the spread of COVID-19, has impacted GCU’s students and its business in a number of ways, including the closure of dormitories and GCU’s hotel and various ancillary businesses near the end of the Spring 2020 semester , limitations on the number of residential students, doctoral residencies and the various ancillary businesses in the summer and fall months , and a delay in the start of its Fall 2020 ground traditional student semester including when residential students could move on to campus.

A significant number of traditional ground students chose to take the Fall semester in an online modality rather than living on campus.

These actions served to reduce GCU’s non-tuition revenue and, consequently, the service revenue we earned under the Master Services Agreement.

The COVID-19 outbreak also impacted some of our other university partners’ students and their businesses as well, including, but not limited to decreasing the student enrollments at some of our other university partners as some prelicensure nursing and occupational therapy students delayed their education including those that had to relocate to attend class.

The COVID-19 outbreak could cause future disruptions to our university partners, including, but not limited to:

● d ecreasing the student enrollments at our university partners as students might delay their education including those that relocate to attend class;

● decreasing the number of residential students at GCU;

● i mpacting current and prospective university partners’ desire to launch new locations with us;

● n egatively impacting collections of accounts receivable from university partners;

● n egatively impacting our ability to facilitate placements for students in clinical graduate programs which could delay their path to graduation;

● h arming our business, results of operations and financial condition.

The outbreak also presents challenges as approximately 90% of our entire workforce is currently, and is expected to continue for the foreseeable future, working remotely and this could cause increased risks in the areas of internal control, cyber security and the use of remote technology, which could result in interruptions or disruptions in normal operational processes.

We have eliminated all non-essential travel as a result of the pandemic and as a result are seeing a decrease in travel costs.

The COVID-19 pandemic presents material uncertainty and risk with respect to our financial condition, results of operations, cash flows and performance and it is not possible for us to completely predict the duration or magnitude of the adverse results of the outbreak and its effects on us.

The COVID-19 pandemic may also have the effect of heightening many of the risk factors identified in this Annual Report on Form 10-K, such as those related to disruption or failures of our learning platform.

If we are determined to have paid improper incentive compensation to our covered employees, or tuition sharing arrangements are deemed to violate the incentive compensation regulations, our business will be impaired.

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We are also precluded from offering our covered employees that work on financial aid matters (if any), any bonus or incentive-based compensation based on the award of financial aid to students enrolled in a postsecondary institution.

In addition, the regulation raises a question as to whether companies like ours, as an entity, are prohibited from entering into tuition revenue-sharing arrangements with university clients.

In addition, the regulation raises a question as to whether companies like ours, as an entity, are prohibited from entering into tuition revenue-sharing arrangements with university partners.

On March 17, 2011, ED issued official agency guidance, known as a "Dear Colleague Letter,"

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"A third party that is not affiliated with the institution it serves and is not affiliated with any other institution that provides educational services, provides bundled services to the institution including marketing, enrollment application assistance, recruitment services, course support for online delivery of courses, the provision of technology, placement services for internships, and student career counseling.

The institution may pay the entity an amount based on tuition generated for the institution by the entity’s activities for all the bundled services that are offered and provided collectively, as long as the entity does not make prohibited compensation payments to its employees, and the institution does not pay the entity separately for student recruitment services provided by the entity."

The institution may pay the entity an amount based on tuition generated for the institution by the entity’s activities for all the bundled

services that are offered and provided collectively, as long as the entity does not make prohibited compensation payments to its employees, and the institution does not pay the entity separately for student recruitment services provided by the entity."

The DCL guidance indicates that an arrangement that complies with Example 2-B will be deemed to be in compliance with the incentive compensation provisions of the HEA and ED’s regulations.

Our business model and contractual arrangements with our university client closely follow Example 2-B in the DCL.

Our business model and contractual arrangements with our university partners closely follow Example 2-B in the DCL.

In addition, we assure that none of our "covered employees"

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Because the bundled services rule was promulgated in the form of agency guidance issued by ED in the form of a DCL and is not codified by statute or regulation, the rule could be altered or removed without prior notice, public comment period or other administrative procedural requirements that accompany formal agency rulemaking.

Similarly, a court could invalidate the rule in an action involving our company or our university clients, or in action that does not involve us at all.

Similarly, a court could invalidate the rule in an action involving our company or our university partners, or in action that does not involve us at all.

The revision, removal or invalidation of the bundled services rule by Congress, ED or a court could require us to change our business model.

We may have difficulty integrating future acquisitions, which would reduce the anticipated benefits of those transactions and the Acquisition.

In addition to our Acquisition of Orbis Education, we intend to continually evaluate potential acquisitions of complementary businesses, products, services and technologies, including those that are significant in size and scope.

In addition to the Acquisition in January 2019, we intend to continually evaluate potential acquisitions of complementary businesses, products, services and technologies, including those that are significant in size and scope.

The risks we may encounter in acquisitions include:

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Our success depends, in part, on the effectiveness of our marketing and advertising programs in recruiting new students.

Building awareness of GCU and any other university partner institution, and the programs they offer, is critical to our ability to attract prospective students.

Building awareness of our university partner institutions, and the programs they offer, is critical to our ability to attract prospective students.

It is also critical to our success that we convert prospective students to enrolled students in a cost-effective manner and that these enrolled students remain active in the programs of our client institutions.

Some of the factors that could prevent us from successfully recruiting, enrolling, and retaining students in those programs include:

the factors that could prevent us from successfully recruiting, enrolling, and retaining students in those programs include:

● w ith respect to GCU, ED’s determination to treat GCU as a proprietary institution for Title IV purposes, which could impact our ability to recruit students to GCU;

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Based on industry analyses, we believe that enrollment growth in degree-granting, post-secondary institutions is slowing and that the number of high school graduates that are eligible to enroll in degree-granting, post-secondary institutions is expected to decrease over the next few years.

In order to maintain current growth rates, we will need to attract a larger percentage of students in existing markets to our client institutions and work with university partner institutions to create new academic programs.

In order to maintain current growth rates, we will need to

attract a larger percentage of students in existing markets to our client institutions and work with university partner institutions to create new academic programs.

In addition, if job growth in the fields related to our university partners’ core disciplines is weaker than expected, as a result of any regional or national economic downturn or otherwise, fewer students may seek the types of degrees that our clients offer.

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We expect existing competitors and new entrants to the educational services market to revise and improve their business models constantly in response to challenges from competing businesses, including ours.

If these or other market participants introduce new or improved delivery of online education and technology-enabled services that we cannot match or exceed in a timely or cost-effective manner, our ability to continue to grow could be compromised.

Our primary competitors include EmbanetCompass (owned by Pearson), Wiley Education Services, and 2U.

There are also several new and existing vendors providing some or all of the services we provide to other segments of the education market, and these vendors may pursue the institutions we target.

In addition, colleges and universities may choose to continue using or to develop their own online learning solutions in-house, rather than pay for our solutions.

In addition, colleges and universities may choose to continue using or to develop their own solutions in-house, rather than pay for our solutions.

Increased competition may result in changes in the revenue share percentage we are able to negotiate to receive from a university partner.

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If we cannot compete successfully against our competitors, our ability to grow our business could be impaired.

Our success depends upon our ability to recruit and retain key personnel.

Our success to date has largely depended on, and will continue to depend on, the skills, efforts, and motivation of our executive officers, who generally have significant experience with our business and the education industry, and we may have difficulties in locating and hiring qualified personnel and in retaining such personnel once hired.

In addition, other than non-compete agreements of limited duration that we have with certain executive officers, we have not historically sought non-compete agreements with key personnel and they may leave and subsequently compete against us.

The loss of the services of any of our key personnel, many of whom are not party to employment agreements with us, or our failure to attract and retain other qualified and experienced personnel on acceptable terms, could cause our business to suffer.

The protection of our exclusive proprietary rights and intellectual property is limited, and from time to time we may encounter disputes relating to the use by us of intellectual property of third parties, any of which could harm our operations and prospects.

We have developed and own, or are licensed to use, intellectual property that is or will be the subject of copyright, trademark, service mark, patent, trade secret, or other protections.

This intellectual property includes but is not limited to technology, courseware materials and business know-how and internal processes and procedures developed to respond to the requirements of operating a post-secondary educational institution with a significant online campus and to comply

with the rules and regulations of various education regulatory agencies.

We rely on a combination of copyrights, trademarks, service marks, trade secrets, domain names, and agreements to protect our intellectual property.

Protecting intellectual property rights can be difficult, particularly as it relates to the development by competitors of competing content delivery and related technologies, and unauthorized third parties may attempt to duplicate or copy the proprietary aspects of our systems and seek to offer competing services to those offered by us.

We cannot assure you that protective measures taken by us will be adequate or that we have secured, or will be able to secure, appropriate protections for all of our proprietary rights in the United States, or that third parties will not infringe upon or violate our proprietary rights.

We may from time to time encounter disputes over rights and obligations concerning intellectual property and may not always prevail in these disputes.

Any such intellectual property claim could subject us to costly litigation and impose a significant strain on financial resources and management personnel regardless of whether such claim has merit.

Our credit agreement may restrict our operations and our ability to complete certain transactions.

Our credit agreement imposes certain operating restrictions on us, including limitations on our ability to incur additional debt or make certain investments, and requires us to maintain compliance with certain applicable regulatory standards.

In addition, the credit agreement requires us to maintain a maximum leverage ratio, a minimum fixed charge coverage ratio and a minimum tangible net worth, in each case as such terms are defined in the credit agreement.

We cannot assure you that these covenants will not adversely affect our ability to finance our future operations or capital needs or to pursue available business opportunities.

A breach of any of these covenants or our inability to maintain the required financial ratios could result in a default in respect of the related indebtedness.

If a default occurs, the affected lenders could elect to declare the indebtedness, together with accrued interest and other fees, to be immediately due and payable.

The Company may face risk associated with the discontinuation of and transition from London Interbank Offered Rate (LIBOR) as a benchmark interest rate.

Our indebtedness under our credit agreement bears interest at variable interest rates that use LIBOR as a benchmark rate.

On July 27, 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit LIBOR quotations after 2021 (the "FCA Announcement").

The FCA Announcement indicates that the continuation of LIBOR on the current basis cannot and will not be assured after 2021, and LIBOR may cease to exist or otherwise be unsuitable for use as a benchmark.

Recent proposals for LIBOR reforms may result in the establishment of new methods of calculating LIBOR or the establishment of one or more alternative benchmark rates.

As a result, this change may adversely impact the interest rate paid on some of our loans and our interest expense may increase and our available cash flow and /or financial condition may be adversely affected.

We are subject to laws and regulations as a result of our collection and use of personal information, and any violations of such laws or regulations, or any breach, theft, or loss of such information, could adversely affect our reputation and operations.

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Such privacy laws could impose conditions that limit the way we market and provide our services.

Our computer networks and the networks of certain of our vendors that hold and manage confidential information on our behalf may be vulnerable to unauthorized access, employee theft or misuse, computer hackers, computer viruses, and other security threats.

and other security threats.

Confidential information may also inadvertently become available to third parties when we integrate systems or migrate data to our servers in connection with periodic hardware or software upgrades.

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A user who circumvents security measures could misappropriate sensitive information or cause interruptions or malfunctions in our operations.

Although we use security and business controls to

limit access and use of personal information, a third party may be able to circumvent those security and business controls, which could result in a breach of student or employee privacy.

Although we use security and business controls to limit access and use of personal information, a third party may be able to circumvent those security and business controls, which could result in a breach of student or employee privacy.

In addition, errors in the storage, use, or transmission of personal information could result in a breach of privacy for current or prospective students or employees.

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As an entity that provides services to institutions participating in Title IV programs, we are indirectly subject to FERPA, and we may not transfer or otherwise disclose any personally identifiable information from a student record to another party other than in a manner permitted under the statute.

If we violate FERPA, it could result in a material breach of contract with one or more of our university clients and could harm our reputation.

Further, in the event that we disclose student information in violation of FERPA, the DOE could require a university client to suspend our access to their student information for at least five years.

If we violate FERPA, it could result in a material breach of contract with one or more of our university partners and could harm our reputation.

Further, in the event that we disclose student information in violation of FERPA, the DOE could require a university partner to suspend our access to their student information for at least five years.

Capacity constraints, system disruptions, or security breaches in our online computer networks and phone systems could have a material adverse effect on our ability to attract and retain students.

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Our computer networks may also be vulnerable to unauthorized access, computer hackers, computer viruses, malicious code, organized cyber-attacks and other security problems.

A user who circumvents security measures could misappropriate proprietary information or cause interruptions to or malfunctions in operations.

A user who circumvents security

measures could misappropriate proprietary information or cause interruptions to or malfunctions in operations.

As a result, we may be required to expend significant resources to protect against the threat of these security breaches or to alleviate problems caused by these incidents.

Any interruption to our operations could have a material adverse effect on our ability to attract students to our university partner’s programs and to retain those students.

A failure of our information systems to properly store, process and report relevant data may reduce our management’s effectiveness, interfere with our regulatory compliance and increase our operating expenses.

We are dependent on the integrity of our data management systems.

If these systems do not effectively collect, store and process relevant data for the operation of our business, whether due to equipment malfunctions or constraints, software deficiencies, or human error, our ability to effectively report, plan, forecast and execute our business plan and comply with applicable laws and regulations, including the HEA, as reauthorized, and the regulations thereunder, will be impaired, perhaps materially.

Any such impairment could materially and adversely affect our financial condition, results of operations, and cash flows.

Risks Related to the Extensive Regulation of The Higher Education Industry

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An institution must also apply for recertification by ED if it undergoes a change in control, as defined by ED regulations, and may be subject to similar review if it expands its operations or educational programs in certain ways.

As an example, on November 6, 2019, ED informed GCU that it had approved the Transaction and granted to GCU a provisional Program Participation Agreement (“PPA”), permitting GCU to participate in Title IV, HEA programs on a provisional basis for the period through September 30, 2022.

Accordingly, GCU is authorized to participate in Title IV, HEA programs for the stated period.

There can be no assurance that ED will recertify any university partner institution at that time or that it will not impose conditions or other restrictions on any university partner institution as a condition of approving any future recertification.

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Our primary university partner, GCU has been regionally accredited by the HLC and its predecessor since 1968, most recently obtaining reaccreditation in 2017 for the ten-year period through 2027, and the HLC approved the Transaction in February 2018.

Future clients may be accredited by different accrediting bodies that are likely to have standards that are different from those of the HLC.

Some of our other partners are accredited by HLC while the others are accredited by different accrediting bodies that are likely to have standards that are different from those of the HLC.

Accrediting bodies review the accredited status of institutions periodically (for example, the HLC reviews institutions every ten years, along with a mid-term report in year four).

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In addition, an institution may lose its eligibility to participate in some or all of the Title IV programs if the default rate of its students exceeds 40% for any single year.

While GCU’s cohort default rates have historically been significantly below these levels, we cannot assure you that this will continue to be the case.

While GCU’s cohort default rates, for example, have historically been significantly below these levels, we cannot assure you that this will continue to be the case.

Increases in interest rates or declines in income or job losses for students could contribute to higher default rates on student loans.

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However, if ED were to determine that a university partner institution did not meet the financial responsibility standards due to a failure to meet the composite score or other financial responsibility factors, ED could impose a range of sanctions on the institution, such as requiring the institution to post a letter of credit, accept provisional certification (which would hamper the ability of the institution to add new programs), comply with additional ED monitoring requirements, agree to receive Title IV program funds under an arrangement other than ED’s standard advance funding arrangement, such as the reimbursement system of payment or heightened cash monitoring, and to comply with or accept other limitations on the ability to increase the number of programs offered by our client institutions or the number of students they enroll, any of which sanctions could have an adverse impact on our business.

Our most significant university partner, GCU, calculated its first composite score following the Transaction with respect to its fiscal year ending June 30, 2019, which score must be provided to ED by March 31, 2020.

As of June 30, 2019, GCU’s composite score was 2.2 using the proprietary school calculation.

For example , GCU, calculated its composite score with respect to its fiscal years ending June 30, 2020 and 2019.

As of June 30, 2020 and 2019, GCU’s composite score was 1.5 and 2.2, respectively, using the proprietary school calculation.

If GCU’s future composite scores do not exceed 1.5 or if ED would impose any sanctions on GCU if its composite score is below 1.5.

If any such sanctions were imposed, it could have a negative impact on our ability to conduct our business.

If any such sanctions were imposed on GCU or one of our other partners, it could have a negative impact on our ability to conduct our business.

If our university partner institutions do not comply with ED’s administrative capability standards, we could suffer harm.

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The HEA prohibits an institution that participates in Title IV programs from engaging in “substantial misrepresentation” of the nature of its educational program, its financial charges, or the employability of its graduates.

Under these rules, a misrepresentation is any statement made by the institution or a third party that provides educational programs, marketing, advertising, recruiting, or admissions services to the institution that is false, erroneous or has the

likelihood or tendency to deceive or confuse.

A substantial misrepresentation is 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.

A substantial misrepresentation is 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.

The regulation also covers statements made by any representative of an institution, including agents, employees and subcontractors, and statements made directly or indirectly to any third party, including state agencies, government officials or the public, and not just to students or prospective students.

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Changes to the HEA, including changes in eligibility and funding for Title IV programs, are likely to occur in subsequent reauthorizations, but we cannot predict the scope or substance of any such changes.

Any action by Congress that significantly reduces Title IV program funding, whether through across-the-board funding reductions, sequestration or otherwise, or materially impacts the eligibility of our client institutions or students to participate in Title IV programs would have a material adverse effect on our client institutions enrollment, financial

condition, results of operations and cash flows.

Congressional action could also require us to modify our practices in ways that could increase our administrative costs and reduce our operating income, which could have a material adverse effect on our financial condition, results of operations and cash flows.

Congressional action could also require us to modify our practices in

ways that could increase our administrative costs and reduce our operating income, which could have a material adverse effect on our financial condition, results of operations and cash flows.

We cannot offer new programs for our university partners or expand university partner operations into certain states if such actions are not timely approved by the applicable regulatory agencies, and our university partners may have to repay Title IV funds disbursed to students enrolled in any such programs, schools, or states if they do not obtain prior approval.

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If our university partner institutions are unable to obtain the necessary approvals for such new programs or operations, or if our university partner institutions are unable to obtain such approvals in a timely manner, our ability to consummate the planned actions and the ability of our university partner institutions to provide Title IV funds to any affected students would be impaired, which could have a material adverse effect on our expansion plans.

In addition, if we were to determine erroneously that a new program did not need approval or that we had all required approvals, our university partners could be liable for repayment of the Title IV program funds provided to students in that program or at that location.

GCU, because it is currently certified to participate in the Title IV programs through September 30, 2022, is required to obtain ED approval for new programs, which required could impede GCU’s ability to introduce new programs and slow its growth.

For example, GCU, because it is currently certified to participate in the Title IV programs through September 30, 2022 on a provisional basis, is required to obtain ED approval for new programs, which requirement could impede GCU’s ability to introduce new programs and slow its growth.

If our university partner institutions do not maintain state authorization, they may not operate or participate in the Title IV programs.

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SARA is overseen by a national council (NC-SARA) and administered by four regional education compacts.

GCU has been granted membership in SARA in Arizona (AZ-SARA), which is administered by the Western Interstate Commission for Higher Education (referred to as W-SARA).

GCU, for example, has been granted membership in SARA in Arizona (AZ-SARA), which is administered by the Western Interstate Commission for Higher Education (referred to as W-SARA).

There is a yearly renewal for participating in NC-SARA and AZ-SARA and institutions must agree to meet certain requirements to participate.

As of June 30, 2018, all states other than California are members of SARA.

Any state that does not participate in SARA may impose regulatory requirements on out-of-state post-secondary institutions operating within their boundaries, such as those having a physical facility or conducting certain academic

activities within the state.

GCU, for example, enrolls students in all 50 states and the District of Columbia.

Although it is currently licensed, authorized, in-process, or exempt in all non-SARA jurisdictions in which it operates, if GCU fails to comply with state licensing or authorization requirements for a state, or fails to obtain licenses or authorizations when required, it could lose its state license or authorization by that state or be subject to other sanctions, including restrictions on its activities in, and fines and penalties imposed by, that state, as well as fines, penalties, and sanctions imposed by ED.

required, it could lose its state license or authorization by that state or be subject to other sanctions, including restrictions on its activities in, and fines and penalties imposed by, that state, as well as fines, penalties, and sanctions imposed by ED.

The loss of licensure or authorization in any non-SARA state by a client institution could prohibit us from recruiting prospective students or offering services to current students in that state, which could significantly reduce our university partner’s enrollments.

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The regulatory guidance governing third-party servicers imposes a number of requirements on our business and may expose us to liability for certain regulatory violations that are coextensive with our university partner institutions.

A “Third-party servicer” is any person or entity used by “any eligible institution of higher education to administer, through either manual or automated processing, any aspect of such institution’s student assistance programs.” Third

party servicers have a number of requirements.

For example, they must conduct and submit to ED compliance audits under 34 C.F.R.

For example, they must conduct and submit to ED compliance audits

under 34 C.F.R.

In addition, they must comply with the requirements of 34 C.F.R.

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Congress may impact general public perception of the industry in a negative manner resulting in a material and adverse impact on our business.

The process of re-authorization of the Higher Education Act (“HEA”) began in 2014 and is ongoing.

The process of re-authorization of the HEA began in 2014 and is ongoing.

Congressional hearings began in 2013 and will continue to be scheduled by the U.S.

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These changes may place additional regulatory burdens on postsecondary schools generally, and specific initiatives may be targeted at or have an impact upon companies like us that provide services to institutions of higher education.

The adoption of any laws or regulations that limit our ability to provide our bundled services to our university clients could compromise our ability to drive revenue through their programs or make our platform less attractive to them.

The adoption of any laws or regulations that limit our ability to provide our bundled services to our university partners could compromise our ability to drive revenue through their programs or make our platform less attractive to them.

Congress could also enact laws or regulations that require us to modify our practices in ways that could increase our costs.

Changing requirements related to data privacy may create increased costs and operational difficulties for university partner institutions and, potential for GCE.

On December 18, 2020, the ED announced that it was finalizing a new Campus Cybersecurity Program framework.

This proposed multi-year phased implementation would begin with a self-assessment of the National Institute of Standards and Technology Special Publication 800–171 Rev.

2, Controlled Unclassified Information in

Nonfederal Systems (NIST 800–171 Rev.

2) readiness and outreach activities.

The ED specifically said it was “committed to fully advancing and encouraging all postsecondary institutions implementation of NIST 800-171 controls.” This announcement was addressed both to institutions of higher education and their third-party servicers.

While details related to this announcement are few, it does suggest that the ED will be taking a greater role in ensuring universities and their service providers meet NIST standards and are protecting the students and Department data received.

Although management is reviewing this letter and the issues it raises, compliance with NIST will likely increase operational cost if required to come into compliance.

Risks Related to Owning our Common Stock

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We have not declared or paid cash dividends on our common stock to date.

We currently intend to retain our future earnings, if any, to fund the development and growth of our business.

We currently intend to retain our future earnings, if any, to fund the development and growth of our business or to repurchase shares of our common stock.

In addition, the terms of our existing credit facility preclude, and the terms of any future debt agreements is likely to similarly preclude, us from paying dividends.

As a result, capital appreciation, if

any, of our common stock will be your sole source of gain for the foreseeable future.

As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

Investors seeking cash dividends should not purchase our common stock

Other General Risks

Our success depends upon our ability to recruit and retain key personnel.

Our credit agreement may restrict our operations and our ability to complete certain transactions.

We cannot assure you that these covenants will not adversely affect our ability to finance our future operations or capital needs or to pursue available business opportunities.

A breach of any of these covenants or our inability to maintain the required financial ratios could result in a default in respect of the related indebtedness.

If a default occurs, the affected lenders could elect to declare the indebtedness, together with accrued interest and other fees, to be immediately due and payable.

We are dependent on the integrity of our data management systems.

Any such impairment could materially and adversely affect our financial condition, results of operations, and cash flows.

Occurrence of natural or man-made catastrophes could materially and adversely affect our business, financial condition, results of operations and prospects.

Natural events, health epidemics (including the outbreak of the COVID-19 pandemic), acts of God, terrorist attacks and other acts of violence, computer cyber-terrorism or other catastrophes could result in significant worker absenteeism, increased student attrition rates for our university partners, lower asset utilization rates, voluntary or mandatory closure of facilities, our inability to meet dynamic employee health and safety requirements, our inability to meet contractual service levels, our inability to procure essential supplies, travel restrictions on our employees and other disruptions to our business.

In addition, these events could adversely affect the economy, financial markets and activity levels of our

university partners.

Any of these events, their consequences or the costs related to mitigation or remediation could have a material adverse effect on our business, financial condition, results of operations and prospects.

Unresolved Staff Comments

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-K

Item 1A. Risk Factors