What changed in this filing

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Item 1A. Risk Factors

2023-02-16 compared with 2022-02-16 · 52 added, 61 removed, 321 unchanged (26% 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.

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.

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.

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

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.

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

Risks Related to Our Relationship with GCU

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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 (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.

Furthermore, GCU has the right to terminate the Master Services Agreement early after seven (7) years 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.

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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.

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:

● 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.

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.

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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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.

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.

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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 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.

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

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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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:

● 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;

The tightness of the job market has historically had an impact on our ability to successfully recruit new students especially for students considering re-careering into a different field.

Historically the percentage of students we recruited that were re-careering was low but with the increase in university partners and off-campus classroom and laboratory sites and the growth in new online licensure programs by GCU, the number of students we recruit that are re-careering is growing.

Therefore, changes in the job market will impact our ability to recruit students.

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

● t he reduced availability of, or higher interest rates and other costs associated with, Title IV loan funds or other sources of financial aid;

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Possession and use of personal information in our operations subjects us to risks and costs that could harm our business.

We collect, use, and retain large amounts of personal information regarding our primary university partner’s applicants and students, including social security numbers, tax return information, personal and family financial data, and credit card numbers.

and credit card numbers.

We also collect and maintain personal information of our employees in the ordinary course of our business.

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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 ED 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, 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.

The performance and reliability of the infrastructure of our computer networks and phone systems, including the online programs of our university partners, is critical to our operations, reputation and to our ability to attract and retain students on our university partners’ behalf.

retain students on our university partners’ behalf.

Any computer system disruption or failure, or a sudden and significant increase in traffic on the servers that host our online operations, may result in the online courses and programs being unavailable for a period of time.

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We cannot predict with certainty how all of these regulatory requirements will be applied, or whether we will be able to comply with all of the applicable requirements in the future.

Rulemaking by the ED could materially and adversely affect our business.

Over the past few years, the ED has regularly promulgated new regulations and guidance that impact our university partners and our business directly.

Rulemaking by ED could materially and adversely affect our business.

Over the past few years, ED has regularly promulgated new regulations and guidance that impact our university partners and our business directly.

These and other regulations and guidance documents, including those discussed above under “Business – Regulation,” can increase our operating costs and, in some cases, change the manner in which we operate our business.

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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.

As an example, on November 6, 2019, ED informed GCU that it had approved the Transaction and granted to GCU a provisional 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.

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

As required, GCU filed a renewal application three months in advance of the scheduled expiration date.

ED has not made a decision on its recertification application, and therefore its provisional certification to participate in the Title IV programs has been automatically extended on a month-to-month basis until ED makes its decision.

Institutions are routinely given a month-to-month extension on their PPA until ED has completed its review of the application.

For example, when GCU’s provisional PPA expired in June 2008, it continued to receive a month-to-month extension between that date and April 2011 when ED issued it a new, provisional PPA.

For a school that is certified on a provisional basis, the ED may revoke the institution’s certification without advance notice or advance opportunity for the institution to challenge that action.

For a school that is provisionally certified on a month-to-month basis, like GCU, the ED may allow the institution’s certification to expire at the end of any month without advance notice, and without any formal procedure for review of such action.

To our knowledge, such action is very rare and has only occurred upon a determination that an institution is in substantial violation of material Title IV requirements .

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.

If ED does not renew or withdraws certification to participate in the Title IV programs from any university partners, students at that institution would no longer be able to receive Title IV program funds.

Alternatively, ED could renew a university partner institution’s certification, but restrict or delay students’ receipt of Title IV funds, limit the number of students to whom it can disburse such funds, place other restrictions on the institution, or it could delay recertification after any university partners’ program participation agreement expires, in which case our university partner’s certification would continue on a month-to-month basis.

Any of these outcomes could have a material adverse effect on our university partners’ enrollments and us.

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In addition, many university partner institutions will have educational programs that are also accredited by specialized accrediting commissions or approved by specialized state agencies.

If our university partner institutions fail to satisfy the standards of any of those specialized accrediting commissions or state agencies, the institution could lose the specialized accreditation or approval for the affected programs, which could result in materially reduced student enrollments in those programs and have a material adverse effect on us.

If our university partner institutions fail to satisfy the standards of any of those specialized

accrediting commissions or state agencies, the institution could lose the specialized accreditation or approval for the affected programs, which could result in materially reduced student enrollments in those programs and have a material adverse effect on us.

A university partner institution may lose eligibility to participate in the Title IV programs if its student loan default rates are too high.

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For example , GCU, calculated its composite score with respect to its fiscal years ending June 30, 2022 and 2021.

As of June 30, 2021 and 2020, GCU’s composite score was 1.9 and 1.5, respectively, using the proprietary school calculation.

As of June 30, 2022 and 2021, GCU’s composite score per GCU’s audited financial statements was 1.8 and 1.9, respectively, using the proprietary school calculation.

If GCU’s future composite scores do not exceed 1.5, ED could impose sanctions.

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To continue participating in the Title IV programs, an institution must demonstrate to ED that the institution is capable of adequately administering the Title IV programs under specific standards prescribed by ED.

These administrative capability criteria require, among other things, the institution to have an adequate number of qualified personnel to administer the Title IV programs, have adequate procedures for disbursing and safeguarding Title IV funds and for maintaining records, submit all required reports and consolidated financial statements in a timely manner, and not have significant problems that affect the institution’s ability to administer the Title IV programs.

These administrative capability criteria require, among other things, the institution to have an adequate number of qualified

personnel to administer the Title IV programs, have adequate procedures for disbursing and safeguarding Title IV funds and for maintaining records, submit all required reports and consolidated financial statements in a timely manner, and not have significant problems that affect the institution’s ability to administer the Title IV programs.

As a service provider, we assist our university partners with some facets of these areas.

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A school participating in the Title IV programs must calculate the amount of unearned Title IV program funds that it has disbursed to students who withdraw from their educational programs before completing such programs and must return those unearned funds to the appropriate lender or ED in a timely manner, generally within 45 days of the date the school determines that the student has withdrawn.

To the extent our services for a university partner include conducting returns to Title IV, as they do with our primary university partner, GCU, we would likely be jointly and severally liable to ED, along with the relevant client, for return of those funds.

To the extent our services for a university partner include conducting returns to Title IV, as they do with our primary university partner, GCU, we would likely be jointly and

severally liable to ED, along with the relevant client, for return of those funds.

Further, we could be fined or otherwise sanctioned by ED, which could increase our cost of regulatory compliance and materially adversely affect us.

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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.

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.

For example, GCU, because it is currently certified to participate in the Title IV programs on a month-to-month 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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Individual state laws establish standards in areas such as educational programs, facilities, instructional and administrative staff, marketing and recruitment, financial operations, addition of new locations and educational programs, and various operational and administrative procedures, some of which are different than the standards prescribed by other regulators.

Several states have sought to assert jurisdiction over educational institutions offering online degree programs that have no physical location in the state but that have some activity in the state, such as enrolling or offering educational services to students who reside in the state, employing faculty who reside in the state, or advertising to or recruiting prospective students in the state.

Several states have sought to assert jurisdiction over educational institutions offering online degree programs that have no physical location in the state but that have some

activity in the state, such as enrolling or offering educational services to students who reside in the state, employing faculty who reside in the state, or advertising to or recruiting prospective students in the state.

State regulatory requirements for online education have historically varied among the states.

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

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).

GCU, for example, is a member of 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.

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

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.

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.

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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Similarly, we could be subject to those same reviews.

If the result of any such proceeding is unfavorable to our university partners, they may lose or have limitations imposed on their state licensing, accreditation, or Title IV program participation;

result of any such proceeding is unfavorable to our university partners, they may lose or have limitations imposed on their state licensing, accreditation, or Title IV program participation;

be required to pay monetary damages (including triple damages in certain whistleblower suits);

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To the extent we continue to provide third party servicer functions, we will be subject to these requirements, the compliance with which can materially impact our business model.

Additionally, o n January 4, 2023, ED announced their intention to issue new regulations in eight different areas of higher education regulations via negotiated rulemaking including those regulations related to third-party services.

ED has not put forth any specific proposals at this time.

We will monitor this rulemaking as it develops.

Proposed legislation, additional rulemaking or additional examinations from U.S.

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Adverse media coverage regarding educational institutions – whether or not a university partner – or regarding third party services such as us directly could damage our reputation.

The environment surrounding access to and the costs of student loans remains in a state of flux.

The environment surrounding access to and the costs of

student loans remains in a state of flux.

The uncertainty surrounding these issues, and any resolution of these issues that increases loan costs or reduces students’ access to Title IV loans or to student extended payment plans, could reduce student demand for educational programs which would adversely impact our revenues and operating profit or result in increased regulatory scrutiny.

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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.

On December 18, 2020, 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.

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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.

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 ED will be taking a greater role in ensuring universities and their service providers meet NIST standards and are protecting the students and ED 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.

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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.

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.

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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