What changed in this filing

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Item 1A. Risk Factors

2022-02-16 compared with 2021-02-17 · 37 added, 63 removed, 345 unchanged (22% of the section changed)

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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.

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 .

Since the Acquisition, GCE, together with Orbis Education, has continued to add additional university partners.

In the healthcare field, we work in partnership with a growing number of top universities and healthcare networks across the country, offering healthcare-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 .

In addition, we have begun providing certain services to a university partner to assist them in expanding their online graduate programs.

While we currently provide services to 27 university partners across the United States, GCU is, and will for the foreseeable future remain, our most significant university partner.

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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 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.

Other Risks Related to Our Business

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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.

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.

See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Impact of COVID-19.

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

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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 continues to present 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.

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An institution that participates in the Title IV programs may not provide any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any person or entity engaged in any student recruitment, admissions, or financial aid awarding activity.

Current regulations provide that higher education institutions agree that it will not "provide any commission, bonus, or other incentive payment based in any part, directly or indirectly, upon success in securing enrollments or the award of financial aid, to any person or entity who is engaged in any student recruitment or admission activity, or in making decisions regarding the award of title IV, HEA program funds."

Pursuant to this regulation, we are prohibited from offering our covered employees, which are those involved with or responsible for recruiting or admissions activities, any bonus or incentive-based compensation based on the successful recruitment, admission or enrollment of students into a postsecondary institution.

Current regulations provide that higher education institutions agree that it will not “provide any commission, bonus, or other incentive payment based in any part, directly or indirectly, upon success in securing enrollments or the award of financial aid, to any person or entity who is engaged in any student recruitment or admission activity, or in making decisions regarding the award of title IV, HEA program funds.” Pursuant to this regulation, we are prohibited from offering our covered employees, which are those involved with or responsible for recruiting or admissions activities, any bonus or incentive-based compensation based on the successful recruitment, admission or enrollment of students into a postsecondary institution.

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 partners.

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

or the DCL, providing guidance on this point.

The DCL states that "[t]he Department generally views payment based on the amount of tuition generated as an indirect payment of incentive compensation based on success in recruitment and therefore a prohibited basis upon which to measure the value of the services provided"

and that "[t]his is true regardless of the manner in which the entity compensates its employees."

But the DCL also provides an important exception to the ban on tuition revenue-sharing arrangements between institutions and third parties.

that provides a set of "bundled services"

that includes recruitment services, such as those we provide.

Example 2-B in the DCL is described as a "possible business model"

developed "with the statutory mandate in mind."

Example 2-B describes the following as a possible business model:

"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."

On March 17, 2011, ED issued official agency guidance, known as a “Dear Colleague Letter,” or the DCL, providing guidance on this point.

The DCL states that “[t]he Department generally views payment based on the amount of tuition generated as an indirect payment of incentive compensation based on success in recruitment and therefore a prohibited basis upon which to measure the value of the services provided” and that “[t]his is true regardless of the manner in which the entity compensates its employees.” But the DCL also provides an important exception to the ban on tuition revenue-sharing arrangements between institutions and third parties.

According to the DCL, ED does not consider payment based on the amount of tuition generated by an institution to violate the incentive compensation ban if the payment compensates an “unaffiliated third party” that provides a set of “bundled services” that includes recruitment services, such as those we provide.

Example 2-B in the DCL is described as a “possible business model” developed “with the statutory mandate in mind.” Example 2-B describes the following as a possible business model:

“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 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 partners closely follow Example 2-B in the DCL.

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

is paid any bonus or other incentive compensation in violation of the rule.

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” is paid any bonus or other incentive compensation in violation of the rule.

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.

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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.

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

Some of 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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A decline in the overall growth of enrollment in post-secondary institutions, or in the number of students seeking degrees online, could cause our university partner institutions to experience lower enrollment, which could negatively impact our future growth.

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.

Based on industry analyses, 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 continue 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 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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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.

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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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.

Further, in the event that we disclose student information in violation of FERPA, the ED 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.

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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.

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.

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In addition, while we will conduct appropriate diligence on new university partner institutions, we cannot guarantee that all university partner institutions will have a cohort default rate as low as GCU.

Having a university partner exceed the student loan default rate thresholds and losing eligibility to participate in the Title IV programs would have a material adverse effect on our business, prospects, financial condition, and results of

Any future changes in the formula for calculating student loan default rates, economic conditions, or other factors that cause default rates to increase, could materially adversely affect us.

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As of June 30, 2021 and 2020, GCU’s composite score was 1.9 and 1.5, 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 GCU’s future composite scores do not exceed 1.5, ED could impose sanctions.

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.

In addition, if its composite score dropped low enough, it could cause GCU to be ineligible for participation in NC-SARA, which would require GCU to become authorized in numerous states in which it operates or has students.

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

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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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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.

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.

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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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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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, 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.

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.

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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.

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.

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.

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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.

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.

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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