Item 1A. Risk Factors
Item 1A. Risk Factors
There have been no material changes in our risk factors, except as noted below, from those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2023.
Empire Education Group, Inc. (EEG) may be unsuccessful, and we may be unable to close the sale of our ownership stake in it, which could adversely affect our financial results.
EEG has experienced, and continues to experience, poor financial performance. In 2020, we entered into an agreement to sell to the other owner our 55.1% ownership stake in EEG. The transaction is subject to approval by each of the states in which EEG’s schools operate, as well as EEG’s institutional accrediting agency, the National Accrediting Commission of Career Arts and Sciences (NACCAS). Some state approvals and the NACCAS approval must be obtained prior to the closing of the transaction. Additionally, while these approval processes are ongoing, three state agencies have previously indicated that the pertinent EEG schools may be required to post surety bonds as a condition of transaction approval and ongoing authorization to operate. The U.S. Department of Education similarly may require a letter of credit as a condition of EEG’s participation in the Title IV programs following the transaction. If the other owner of EEG is not able to obtain the required surety bonds or letter of credit to facilitate a closing of the transaction, there is no guarantee that we will be able to close the sale. If the transaction does not close, our financial results may be adversely affected.
We may be responsible for Empire Education Group, Inc.'s (EEG's) liabilities.
The Company owns a majority stake in Empire Education Group, Inc. (EEG). To be eligible to participate in Title IV programs, the schools operated by EEG must comply with specific standards and procedures set forth in the Higher Education Act and the regulations issued thereunder by the Department of Education. On October 10, 2023, the Department of Education issued a final rule applicable to “gainful employment” programs, which under the Higher Education Act, include all programs offered by the Empire Education Group schools and other proprietary institutions. Under this final rule, which becomes effective July 1, 2024, the continued Title IV eligibility of such programs will be based on meeting both a debt-to-earnings metric and an earnings premium metric. A program that fails either metric in a single year will be required to provide warnings to current and prospective students that it could be at risk of losing Title IV program eligibility. A program that fails to meet the same metric twice in a three-year period will lose Title IV program eligibility. The first measurement will be assessed in fiscal year 2025. To the extent that EEG is unable to meet the required metrics for gainful employment programs, or it fails to comply with other existing or revised Title IV program regulations, its schools and programs may become ineligible for continued Title IV program participation. Upon a loss of institutional or programmatic eligibility, EEG’s students would lose access to Title IV program funds and that could be detrimental to EEG's business model. Additionally, EEG students who are unable to complete their educational program with EEG, or who do not accept a teach-out opportunity with another institution, may be eligible for discharges of their federal student loan debt. Those discharged loan amounts and other Title IV funds disbursed to EEG students that do not complete their program, as well as other Title IV program funds, may constitute liabilities to the Department of Education. Because the Company holds a majority ownership interest in EEG and is a co-signatory to the Title IV program participation agreements of the EEG schools with the Department of Education, the Department of Education could hold the Company responsible for EEG's Title IV program liabilities.
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There are uncertainties introduced by our announcement of our exploration and evaluation of strategic alternatives to enhance value.
On November 1, 2023, the Company announced that the Board has initiated a strategic review to proactively assess the Company's capital structure. The Board of Directors has established a Special Committee to evaluate various strategic alternatives and initiatives to enhance value. There is no set timetable for this process, and there can be no assurances as to the results of the review. The Company does not intend to comment further on developments or status of this process until it deems further disclosure is appropriate or required by law. We may also incur substantial costs in connection with the pursuit of strategic alternatives which are not ultimately consummated.
We were previously subject to delisting proceedings and we may not be able to maintain compliance with the continued listing standards of any national securities exchange.
Since January 9, 2024, the Company’s common stock has traded on the Global Market tier of The Nasdaq Stock Market LLC (Nasdaq). The Company moved its trading to the Nasdaq after failing to regain compliance with the New York Stock Exchange's minimum market capitalization requirement. Under Nasdaq's continued listing standards currently applicable to the Company, the Company is required to maintain, among other things, a market value of publicly held shares of at least $15.0 million. We estimate that the market value of our publicly held shares has been below $15.0 million since April 15, 2024. If the market value of the Company’s publicly held shares remains below $15.0 million for a period of 30 consecutive business days, we will be considered out of compliance with such standard . We are currently in compliance with the Nasdaq continued listing standards. However, if we fail to comply with the currently applicable listing standards, including with regard to the market value of the Company’s publicly held shares, we do not believe we will be able to satisfy alternative listing standards for the Nasdaq Global Market tier and we do not believe we would qualify to transfer to another Nasdaq tier; therefore, our common stock may be delisted from Nasdaq. If, for any reason, Nasdaq were to suspend or remove our securities from trading on the Nasdaq Global Market and we were unable to qualify for listing on another tier or national securities exchange, a reduction in some or all of the following may occur, each of which could materially adversely affect our shareholders:
• the liquidity and marketability of our common stock;
• the market price of our common stock;
• our ability to obtain financing for the continuation of our operations;
• the number of institutional and general investors that will consider investing in our common stock;
• the number of market makers in our common stock;
• the availability of information concerning the trading prices and volume of our common stock; and
• the number of broker-dealers willing to execute trades in shares of our common stock.
In addition, if we ceased eligibility for trading on the Nasdaq Global Market, we may have to pursue trading on a less recognized or accepted market, such as the over-the-counter markets, our stock may be traded as a “penny stock” which would make transactions in our stock more difficult and cumbersome, and we may be unable to access capital on favorable terms or at all, as companies trading on alternative markets may be viewed as less attractive investments with higher associated risks, such that existing or prospective institutional investors may be less interested in, or prohibited from, investing in our common stock. This may also cause the market price of our common stock to further decline.
We face the risk of possible future goodwill impairment.
Due to the decrease in the Company's stock price, the Company determined a triggering event occurred in the second quarter of fiscal year 2024. Therefore, the Company engaged a third-party valuation specialist to perform an impairment analysis on the Franchise reporting unit as of November 30, 2023. For the goodwill impairment analysis, the analysis utilized a combination of both a discounted cash flows approach and a market approach to evaluate the Franchise reporting unit. The model used reflects management's assumptions regarding revenue growth rates, economic and market trends, cost structure, expectations of operating results, and a discount rate. Based on this analysis, it was determined that the Franchise reporting unit had a fair value in excess of its carrying value at 6%, and thus, no impairment existed at that time.
In accordance with U.S. GAAP, the Company's goodwill is evaluated for impairment on an annual basis, during the fourth fiscal quarter, or more frequently if an event occurs or circumstances change that indicate that a potential impairment exists. Fair value determination requires considerable judgment and is sensitive to changes in underlying assumptions, estimates and market factors. If any estimates, market factors or assumptions change in the future, these amounts are susceptible to impairments. As such, any future evaluations of goodwill may result in an impairment charge on the Company's current goodwill balance, which could have a material adverse impact on our business, results of operations and financial condition.
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Our Board has adopted a Tax Benefits Preservation Plan, which may not protect the future availability of the Company’s tax assets in all circumstances and which could delay or discourage takeover attempts that some shareholders may consider favorable.
As of June 30, 2023, we had approximately $645 million of U.S. federal net operating losses (“NOLs”) as well as other tax attributes that could be available in certain circumstances to reduce future U.S. corporate income tax liabilities. Pursuant to Section 382 (“Section 382”) of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), and the Treasury Regulations issued thereunder, a corporation that undergoes an “ownership change” is subject to limitations on its use of its existing NOL and interest expense carryforwards and certain other tax attributes (collectively, “Tax Assets”), which can be utilized in certain circumstances to offset future U.S. tax liabilities. Generally, an “ownership change” occurs if the percentage of the Company’s stock owned by one or more “five percent stockholders” increases by more than fifty percentage points over the lowest percentage of stock owned by such stockholders at any time during the prior three-year period or, if sooner, since the last “ownership change” experienced by the Company. In the event of such an “ownership change,” Section 382 imposes an annual limitation on the amount of post-change taxable income a corporation may offset with pre-change Tax Assets. Similar rules apply in various U.S. state and local jurisdictions. However, with respect to the substantial majority of our Tax Assets, while we have, in recent years, experienced significant changes in the ownership of our stock, we do not believe we have undergone an “ownership change” that would limit our ability to use these Tax Assets. However, there can be no assurance that the Internal Revenue Service will not challenge this position.
On January 28, 2024, our Board of Directors authorized and declared a dividend of one preferred stock purchase right for each outstanding share of Common Stock. See Note 1 of the unaudited Condensed Consolidated Financial Statements for additional information on the terms and operation of the Tax Benefits Preservation Plan, dated as of January 28, 2024, as the same may be amended from time to time (the “Plan”), between the Company and Equiniti Trust Company, LLC, as Rights Agent. By adopting the Plan, the Board of Directors is seeking to protect the Company’s ability to use its NOLs and other tax attributes to offset potential future income tax liabilities. The Company’s ability to use such NOLs and other tax attributes would be substantially limited if the Company experiences an “ownership change,” as defined in Section 382. The Plan is intended to make it more difficult for the Company to undergo an ownership change by deterring any person from acquiring 4.95% or more of the outstanding shares of stock without the approval of the Board of Directors. However, there can be no assurance that the Plan will prevent an “ownership change” from occurring for purposes of Section 382, and events outside of our control and which may not be subject to the Plan, such as sales of our stock by certain existing shareholders, may result in such an “ownership change” in the future. While we currently have a valuation allowance against our NOLs and other historic Tax Assets for financial accounting purposes, if we have undergone or in the future undergo an ownership change that applies to our Tax Assets, our ability to use these Tax Assets could be substantially limited after the ownership change, and this limit could have a substantial adverse effect on our cash flows and financial position.
Although the Plan is not principally intended to prevent a takeover, it may have an anti-takeover effect because an “acquiring person” thereunder may be diluted upon the occurrence of a triggering event. Accordingly, the Plan may complicate or discourage a merger, tender offer, accumulations of substantial blocks of our stock, or assumption of control by a substantial holder of our securities. The Plan, however, should not interfere with any merger or other business combination approved by the Board of Directors as we continue to explore our previously announced strategic review. Because the Board of Directors may consent to certain transactions, the Plan gives our Board of Directors significant discretion to act in the best interests of shareholders.
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