We structure our program offerings to provide our students with a practical, career-oriented education and position them for attractive entry-level job opportunities in their chosen fields. Our diploma/certificate programs typically take between 19 to 136 weeks to complete, with tuition ranging from $7,000 to $41,000.$45,000. Our associate’s degree programs typically take between 64 to 98 weeks to complete, with tuition ranging from $26,000$28,000 to $37,000.$38,000. As of December 31, 2018,2021, all of our schools offer diploma and certificate programs and nine of our schools are currently approved to offer associate’s degree programs. In order to accommodate the schedules of our students and maximize classroom utilization at some of our campuses, we typically offer courses four to five days a week in three shifts per day and start new classes every month. We update and expand our programs frequently to reflect the latest technological advances in the field, providing our students with the specific skills and knowledge required in the current marketplace. Classroom instruction combines lectures and demonstrations by our experienced faculty with comprehensive hands-on laboratory exercises in simulated workplace environments.
We utilize a variety of marketing and recruiting methods to attract students and increase enrollment. Our marketing and recruiting efforts are targeted at prospective students who are high school graduates entering the workforce, or who are currently underemployed or unemployed and require additional training to enter or re-enter the workforce.
The for-profit, post-secondary education industry is highly competitive and highly fragmented with no one provider controlling significant market share. Direct competition between career-oriented schools like ours and traditional four-year colleges or universities is limited. Thus, our main competitors are other for-profit, career-oriented schools, not-for-profit public schools and private schools, and public and private two-year junior and community colleges, most of which are eligible to receive funding under the federal programs of student financial aid authorized by Title IV Programs. Competition is generally based on location, the type of programs offered, the quality of instruction, placement rates, reputation, recruiting and tuition rates.rates; therefore, our competition is different in each market depending on, among other things, the availability of other options. Public institutions are generally able to charge lower tuition than our school,schools, due in part to government subsidies and other financial sources not available to for-profit schools. In addition, some of our other competitors have a more extensive network of schools and campuses than we do, which enables them to recruit students more efficiently from a wider geographic area. Nevertheless, we believe that we are able to compete effectively in our local markets because of the diversity of our program offerings, quality of instruction, the strength of our brands, our reputation and our graduates’ success in securing employment after completing their program of study.
Our competition differs in each market depending on the curriculum that we offer. For example, a school offering automotive technology, healthcare services and skilled trades programs will have a different group of competitors than a school offering healthcare business/services and IT and skilled tradestechnology programs. Also, because schools can add new programs within six to twelve months, competition can emerge relatively quickly. Moreover, with the introduction of online education, the number of competitors in each market has increased because students can now attend classes from an online institution. On average, each of our schools has at least three direct competitors and at least a dozen indirect competitors.
We use hazardous materials at our training facilities and campuses, and generate small quantities of regulated waste such as used oil, antifreeze, paint and car batteries. As a result, our facilities and operations are subject to a variety of environmental laws and regulations governing, among other things, the use, storage and disposal of solid and hazardous substances and waste, and the clean-up of contamination at our facilities or off-site locations to which we send or have sent waste for disposal. We are also required to obtain permits for our air emissions and to meet operational and maintenance requirements.requirements at certain of our campuses. In the event we do not maintain compliance with any of these laws and regulations, or are responsible for a spill or release of hazardous materials, we could incur significant costs for clean-up, damages, and fines or penalties. Climate change has not had and is not expected to have a significant impact on our operations.
Each of our schools must be authorized by the applicable education agencies in the states in which the school is physically located, and in some cases other states, in order to operate on ground and online and to grant degrees, diplomas or certificates to its students. State agency authorization is also required in each state in which a school is physically located in order for the school to become and remain eligible to participate in Title IV Programs. The DOE also generally requires schools that offer a program through distance education to students in a state in which the school is not physically located to meet the requirements of the state to offer programs by distance education in the state. Currently, each of our schools is authorized by the applicable state education agencies in the states in which the school is physically located and in which it recruits students. If we are found not to be in compliance with the applicable state regulationregulations and a state seeks to restrict one or more of our business activities within its boundaries, we may not be able to recruit or enroll students in that state and may have to stop providing services in that state, which could have a significant impact on our business and results of operations. Currently, each of our schools is authorized by the applicable state education agencies in the states in which the school is physically located and in which it recruits students.
The DOE published regulations that took effect on July 1, 2011, that expanded the requirements for an institution to be considered legally authorized in the state in which it is physically located for Title IV Program purposes. In some cases, the regulations required states to revise their current requirements and/or to license schools in order for institutions to be deemed legally authorized in those states and, in turn, to participate in Title IV Programs. If the states do not amend their requirements where necessary and if schools do not receive approvals where necessary that comply with these new requirements, then the institution could be deemed to lack the state authorization necessary to participate in Title IV Programs. The DOE stated when it published the final regulations that it will not publish a list of states that meet, or fail to meet, the requirements, and it is uncertain how the DOE will interpret these requirements in each state.
If any of our schools fail to comply with state licensing requirements, they are subject to the loss of state licensure or authorization. If any one of our schools lost its authorization from the education agency of the state in which the school is located, or failed to comply with the DOE’s state authorization requirements, that school would lose its eligibility to participate in Title IV Programs, the Title IV Program eligibility of its related additional locations could be affected, the impacted schools would be unable to offer its programs, and we could be forced to close the schools. If one of our schools lost its state authorization from a state other than the state in which the school is located, the school would not be able to recruit students or to operate in that state.
Due to state budget constraints in certain states in which we operate, it is possible that those states may continue to reduce the number of employees in, or curtail the operations of, the state education agencies that oversee our schools. A delay or refusal by any state education agency in approving any changes in our operations that require state approval could prevent us from making such changes or could delay our ability to make such changes. States periodically change their laws and regulations applicable to our schools and such changes could require us to change our practices and could have a significant impact on our business and results of operations.
Accreditation is a non-governmental process through which a school submits to ongoing qualitative and quantitative review by an organization of peer institutions. Accrediting commissions primarily examine the academic quality of the school'sschool’s instructional programs, and a grant of accreditation is generally viewed as confirmation that the school'sschool’s programs meet generally accepted academic standards. Accrediting commissions also review the administrative and financial operations of the schools they accredit to ensure that each school has the resources necessary to perform its educational mission.
Accreditation by an accrediting commission recognized by the DOE is required for an institution to be certified to participate in Title IV Programs. In order to be recognized by the DOE, accrediting commissions must adopt specific standards for their review of educational institutions. As of December 31, 2018,2021, all 22 of our campuses are nationally accredited by the Accrediting Commission of Career Schools and Colleges, or ACCSC. The following is a list of the dates on which each campus was accredited by its accrediting commission and the date by which its accreditation must be renewed and the type of accreditation.renewed.
| 4 | Campus undergoing re-accreditation. Campus has received written confirmation that it remains accredited pending consideration of its application for reaccreditation.going through reaccreditation |
The Company received a letter dated January 31, 2019 from ACCSC, which indicated thatIn February 2022, the ACCSC commission voteddetermined to discontinue previously required system-wide financial reporting of our schools and instead determined to continue ourmonitoring financial stability with system-wide heightened monitoring which is not considered reporting and accordingly the restrictions applied to a school subject to reporting do not apply to schools on financial reporting with a subsequent review scheduled for ACCSC’s August 2019 meeting. The commission continuedsubject to heightened monitoring. We plan to provide the financial reporting status based on the net working capital deficit, accumulated deficit, and net loss reported in the nine-month financial statements submitted to ACCSC. The commission recognized the Company’s continued efforts to improve its financial position through, among other things, closing underperforming schools and growing student enrollments, and determined that, while improvements are being realized, additional monitoring of the Company’s financial position is warranted. The letter requires us to submit certain financial information torequested by ACCSC by July 12, 2019the requested deadline at the end of June 2022 for consideration at ACCSC’sthe Commission’s August 20192022 meeting.
If one of our schools fails to comply with accrediting commission requirements, the institution and its main and/or branch campuses are subject to the loss of accreditation or may be placed on probation or a special monitoring or reporting status which, if the noncompliance with accrediting commission requirements is not resolved, could result in loss of accreditation or restrictions on the addition of new locations, new programs, or other substantive changes. If any one of our schools loses its accreditation, students attending that school would no longer be eligible to receive Title IV Program funding, and we could be forced to close that school.
On October 28, 2021, the DOE announced that it had notified ACCSC that a decision on the recognition by the DOE of ACCSC as an accrediting agency was being deferred pending the submission of additional information about ACCSC’s monitoring, evaluation, and actions related to high-risk institutions. DOE staff reportedly has up to 75 days after receipt of the written response from ACCSC (on or before January 10, 2022) to provide a written response. A designated senior DOE official is expected to make a decision regarding the continued recognition of ACCSC after the receipt and review of the responses. The DOE regulations indicate that ACCSC may appeal an adverse decision to the DOE Secretary and potentially to federal court.
If the DOE withdraws the recognition of an accrediting agency, the HEA indicates that the DOE may continue the eligibility of qualified institutions accredited by the accrediting agency for a period of up to 18 months from the date of the withdrawal of the DOE’s recognition of the accrediting agency. If provided, this period would provide time for institutions to apply for accreditation from another DOE-recognized accrediting body. The DOE could impose provisional certification and other conditions and restrictions on such institutions during this time period. If the DOE declines to continue its recognition of ACCSC and if the subsequent period for obtaining accreditation from another DOE-recognized accrediting agency lapses before we obtain accreditation from another DOE-recognize accrediting agency (or if the DOE does not provide such a period for institutions to obtain other accreditation), our schools could lose our Title IV eligibility.
We cannot predict the timing and outcome of the DOE’s decision on the continuation of its recognition of ACCSC, the timing and outcome of any appeal that ACCSC might pursue in the event of an adverse decision, or the duration and conditions of any period the DOE may elect to provide to institutions to obtain accreditation from another DOE-recognized accrediting agency.
Programmatic accreditation is the process through which specific programs are reviewed and approved by industry and program-specific accrediting entities. Although programmatic accreditation is not generally necessary for Title IV Program eligibility, such accreditation may be required to allow students to sit for certain licensure exams or to work in a particular profession or career or to meet other requirements. Failure to obtain or maintain such programmatic accreditation may lead to a decline in enrollments in such programs. Under the current gainful employment regulations issued by the DOE, institutions may be required to certify that they have programmatic accreditation under certain circumstances. See “—Regulatory Environment – Gainful Employment.”
Nature of Federal and State Support for Post-Secondary Education
The federal government provides a substantial part of the support for post-secondary education through Title IV Programs, in the form of grants and loans to students who can use those funds at any institution that has been certified as eligible by the DOE. Most aid under Title IV Programs is awarded on the basis of financial need, generally defined as the difference between the cost of attending the institution and the expected amount a student and his or her family can reasonably contribute to that cost. A recipient of Title IV Program funds must maintain a satisfactory grade point average and progress in a timely manner toward completion of his or her program of study and must meet other applicable eligibility requirements for the receipt of Title IV Program funds. In addition, each school must ensure that Title IV Program funds are properly accounted for and disbursed in the correct amounts to eligible students.students and provide reports on recipient data.
Other Financial Assistance Programs
Some of our students receive financial aid from federal sources other than Title IV Programs, such as programs administered by the U.S. Department of Veterans Affairs and under the Workforce Investment Act.(“VA”). In addition, some states also provide financial aid to our students in the form of grants, loans or scholarships. The eligibility requirements for state financial aid and these other federal aid programs vary among the funding agencies and by program. States that provide financial aid to our students are facing significant budgetary constraints. Someconstraints and some of these states have reduced the level of state financial aid available to our students. Due to state budgetary shortfalls and constraints in certain states in which we operate, we believe that the overall level of state financial aid for our students is likely to continue to decrease in the near term, but we cannot predict how significant any such reductions will be or how long they will last. Federal budgetary shortfalls and constraints, or decisions by federal lawmakers to limit or prohibit access by our institutions or their students to federal financial aid, could result in a decrease in the level of federal financial aid for our students.
In 2021, we derived approximately 7% of our revenues, on a cash basis, from veterans’ benefits programs, which include the Post-9/11 GI Bill and Veteran Readiness and Employment services. To continue participation in veterans’ benefits programs, an institution must comply with certain requirements established by the VA, including that the institution report on the enrollment status of eligible students; maintain student records and make such records available for inspection; follow rules applicable to the individual benefits programs; comply with rules applicable to distance education and hybrid programs; and comply with applicable limits on the percentage of students having a portion of their tuition or other institutional charges paid by the school or with certain veterans’ benefits.
The VA shares responsibility for VA benefit approval and oversight with designated State Approving Agencies (“SAAs”). SAAs play a critical role in evaluating institutions and their programs to determine if they meet VA benefit eligibility requirements. Processes and approval criteria, as well as interpretation of applicable requirements, can vary from state to state. Therefore, approval in one state does not necessarily result in approval in all states.
The VA imposes limitations on the percentage of students per program who have a portion of their tuition or other institutional charges paid by the school or with certain veterans’ benefits, unless the program qualifies for certain exemptions. If the VA determines that a program is out of compliance with these limitations, the VA will continue to provide benefits to current students, but new students will not be eligible to use their veterans’ benefits for an affected program until we demonstrate compliance. Additionally, the VA requires a campus be in operation for two years before it can apply to participate in VA benefit programs. All of our campuses are eligible to participate in VA education benefit programs.
During 2012, President Obama signed an Executive Order directing the Department of Defense (“DOD”), Veterans Affairs and Education to establish “Principles of Excellence” (“Principles”), based on certain guidelines set forth in the Executive Order, to apply to educational institutions receiving federal funding for service members, veterans and family members. As requested, we provided written confirmation of our intent to comply with the Principles to the VA in June 2012. We are required to comply with the Principles to continue recruitment activities on military installations. Additionally, there is a requirement to possess a memorandum of understanding (“MOU”) with the DOD as well as with certain individual installations. Our access to bases for student recruitment has become more limited due to recent changes in the Transition Assistance Program (Transition Goals, Plans, Success) and increased enforcement of the MOU requirement. Each of our institutions has an MOU with the DOD. We have MOUs with certain key individual installations and are pursuing MOUs at additional locations; however, some installations will not provide MOUs to institutions that do not teach at the installation. We continue to strengthen and develop relationships with our existing contacts and with new contacts in order to maintain and rebuild our access to military installations.
In addition to Title IV Programs and other government-administered programs, all of our schools participate in alternative loanoffer extended financing programs forto their students. Alternative loansThis extension of credit helps fill the gap between what the student receives from all financial aid sources and what the student may need to cover the full cost of his or her education. Students or their parents can apply to a number of different lenders for this funding at current market interest rates. We are required to comply with applicable federal and state laws related to certain consumer and educational loans and credit extensions. On December 21, 2021, we received a letter from the Consumer Financial Protection Bureau (“CFPB”) stating that the CFPB is assessing whether we are subject to CFPB’s supervisory authority based on its activities related to consumer lending. The letter states that the CFPB has the authority to supervise certain entities in the private education loan market and certain other consumer financial products and services. The CFPB requested a list of information from us in order to conduct its assessment. We have provided the requested information to the CFPB and are waiting for the CFPB to respond.
On January 20, 2022, the CFPB issued a press release announcing that it would begin examining the “operations of post-secondary schools, such as for-profit colleges, that extend private loans directly to students.” The CFPB also issued an update to its exam procedures including a new section on institutional loans. The CFPB examiners will consider both general lending issues and issues specific to educational institutions. The CFPB announcement indicates that CFPB examiners will look into issues such as enrollment restrictions for students late on payments, withholding transcripts, accelerating payments when a student withdraws, failing to issue appropriate refunds, and improper lending relationships. The CFPB could decide to conduct further reviews of private lending to students at our schools, initiate proceedings against us, or seek to impose requirements on us or private lending to students at our schools. We also extend credit for tuition and feescannot predict whether the CFPB or other regulators will conduct further reviews or take actions that could require us to many ofchange private lending to students at our students that attendschools or have a material adverse impact on our campuses.operations.
Regulation of Federal Student Financial Aid Programs
To participate in Title IV Programs, an institution must be authorized to offer its programs by the relevant state education agencies in the state in which it is physically located, be accredited by an accrediting commission recognized by the DOE and be certified as eligible by the DOE. The DOE will certify an institution to participate in Title IV Programs only after reviewing and approving an institution’s application to participate in the Title IV Programs. The DOE defines an institution to consist of both a main campus and its additional locations, if any. Under this definition, for DOE purposes as of December 31, 2021 we had the following fourthree institutions, as of December 31, 2018, collectively consisting of fourthree main campuses and 1819 additional locations:
| Main Institution/Campus(es) | | Additional Location(s) |
| Iselin, NJ | | Moorestown, NJ |
| | | Paramus, NJ |
| | | Somerville, MA |
| | | Lincoln, RI |
| | | Marietta, GA |
| | | Las Vegas, NV (Summerlin) |
| | | |
| New Britain, CT | | Shelton, CT |
| | | Philadelphia, PA |
| | | East Windsor, CT |
| | | Melrose Park, IL |
| | | Allentown, PA |
| | | Columbia, MD |
| | | |
| Indianapolis, IN | | Grand Prairie, TX |
| | | Nashville, TN |
| | | Denver, CO |
| | | Union, NJ |
| | | Mahwah, NJ |
| | | Queens, NY |
| | | South Plainfield, NJ |
| | |
Columbia, MD | | |
Each institution must periodically apply to the DOE for continued certification to participate in Title IV Programs. The institution also must apply for recertification when it undergoes a change in ownership resulting in a change of control. The institution also may come under DOE review when it undergoes a substantive change that requires the submission of an application, such as opening an additional location or raising the highest academic credential it offers. All institutions are recertified on various dates for various amountsperiods of time. The following table sets forth the expiration dates for each of our institutions'institutions’ current Title IV Program participation agreements:
Institution | | Expiration Date of Current Program Participation Agreement |
Columbia, MD | | March 31, 2020 |
Iselin, NJ | | September 30, 2020December 31, 20221 |
Indianapolis, IN | | December 31, 2018September 30, 20221,21
|
New Britain, CT | | MarchDecember 31, 202020221 |
| 1 | Provisionally certified. |
| 2 | Institution is on a month-to-month approval during the re-certification process. |
The DOE typically provides provisional certification to an institution following a change in ownership resulting in a change of control and also may provisionally certify an institution for other reasons, including, but not limited to, noncompliance with certain standards of administrative capability and financial responsibility. One institution, namely Indianapolis, is provisionally certified by the DOE. This institution generates 51%These institutions generate 100% of the Company’s revenue. Indianapolis isrevenue based on revenues for the 2021 fiscal year. All of our institutions are provisionally certified based on findings in recent audits of the existence of pending program reviews with DOE. Theinstitutions’ Title IV Program reviews at our Union and Indianapolis schools, which wascompliance that the basis for provisional certification, have been resolved and are now closed.DOE alleges identified deficiencies related to DOE regulations regarding an institutions’ level of administrative capability. An institution that is provisionally certified receives fewer due process rights than those received by other institutions in the event the DOE takes certain adverse actions against the institution, is required to obtain prior DOE approvals of new campuses and educational programs, and may be subject to heightened scrutiny by the DOE. However,Provisional certification makes it easier for the DOE to revoke or decline to renew our Title IV eligibility if the DOE under the new administration chooses to take such an action against us and other provisionally certified for-profit schools without undergoing a formal administrative appeal process. The DOE could attempt to use an institution’s provisional certification as a basis for imposing additional conditions or restrictions on the institution. The DOE is currently engaged in a negotiated rulemaking process that is considering, among other issues, establishing rules to authorize additional conditions and restrictions on provisionally certified institutions. See “Regulatory Environment – Negotiated Rulemaking.” Provisional certification does not otherwise limit an institution’s access to Title IV Program funds.
The DOE is responsible for overseeing compliance with Title IV Program requirements. As a result, each of our schools is subject to detailed oversight and review, and must comply with a complex framework of laws and regulations. Because the DOE periodically revises its regulations and changes its interpretation of existing laws and regulations, we cannot predict with certainty how the Title IV Program requirements will be applied in all circumstances.
Significant factors relating to Title IV Programs that could adversely affect us include the following:
Congressional Action. Political and budgetary concerns significantly affect Title IV Programs. Congress periodically revises the Higher Education Act of 1965, as amended (“HEA”) and other laws governing Title IV Programs. Congress is currently considering reauthorization of Title IV Programs, but itIt is not known if or when Congress will pass final legislation that comprehensively reauthorizes and amends the Higher Education Act or other laws affecting U.S. Federal student aid.
In addition, Congress reviews and determines federal appropriations for Title IV Programs on an annual basis. Congress can also make changes in the laws affecting Title IV Programs in the annual appropriations bills and in other laws it enacts between the HEA reauthorizations.reauthorizations such as its recent amendment to the 90/10 rule in the HEA. See “Regulatory Environment – 90/10 Rule.” Because a significant percentage of our revenues are derived from Title IV Programs, any action by Congress or the DOE that significantly reduces Title IV Program funding, that limits or restricts the ability of our schools, programs, or students to receive funding through the Title IV Programs, or that imposes new restrictions or constraints upon our business or operations could reduce our student enrollment and our revenues, and could increase our administrative costs and require us to modify our practices in order for our schools to comply fully with Title IV Program requirements. The potential for changes that may be adverse to us and other for-profit schools like ours may increase as a result of the change in administration and changes in Congress.
In addition,Further, current requirements for student or school participation in Title IV Programs may change or one or more of the present Title IV Programs could be replaced by other programs with materially different student or school eligibility requirements. If we cannot comply with the provisions of the HEA, as they may be amended, or if the cost of such compliance is excessive, or if funding is materially reduced, our revenues or profit margin could be materially adversely affected.
Gainful Employment.In October 2014, the DOE issued final gainful employment regulations requiring each educational program offered by our institutions to achieve threshold rates in at least one of two debt measure categories related to an annual debt to annual earnings ratio and an annual debt to discretionary income ratio. The various formulas are calculated under complex methodologies and definitions outlined in the final regulations and, in some cases, are based on data that may not be readily accessible to institutions, such as income information compiled by the Social Security Administration. The regulations outline various scenarios under which programs could lose Title IV eligibility for failure to achieve threshold rates in one or more measures over certain periods of time ranging from two to four years. The regulations also require an institution to provide warnings to students in programs which may lose Title IV eligibility at the end of an award year. The final regulations also contain other provisions that, among other things, include disclosure, reporting, new program approval, and certification requirements. The certification requirements require each institution to certify to the DOE, among other things, that each gainful employment program is programmatically accredited, if such accreditation is required by a Federal governmental entity or by governmental entity in the state in which the institution is physically located.
The final regulations had a general effective date ofOn July 1, 2015. In January 2017,2019, the DOE issued final regulations that rescind the first set of gainful employment rates for each of our programs forregulations effective July 1, 2020, although the debt measure year ended June 30, 2015. Sixty of our programs achieved passing rates, 13 of our programs had ratesDOE provided institutions with the opportunity to implement the new regulations early. It is possible that are in a category calledCongress or the “zone,” and five of our programs had failing rates. Our programs with rates inDOE could enact or establish new law or regulations that could restore the zone are not subject to loss of Title IV eligibility unless they accumulate a combination of zone and failing rates for four consecutive years (or failing rates for two out of any three consecutive years). Each of our programs with failing rates will lose its Title IV eligibility if it receives a failing gainful employment rate for either of the 2016requirements or 2017 debt measure years. The DOE has yet to begin the process of issuing gainful employment rates for the 2016 debt measure year, although it could begin that process at any time. While we did submit an appeal, we have not received any final decision from the DOE. However, that appeal is no longer relevant as all students in that failing program have since been taught out as December 31, 2018.
The table below provides a summary of the percentage of total student enrollment by gainful employment program classification for each of our reporting segments based on student enrollment as of the debt measure year ended December 31, 2018.
Reporting Segment | | Passing Programs | | | Zone Programs | | | Failing Programs | |
Transportation | | | 92.9 | % | | | 7.1 | % | | | 0.0 | % |
HOPS | | | 96.1 | % | | | 3.9 | % | | | 0.0 | % |
The table below provides a summary of estimated yearly revenue related to the programs either in the zone or failing programs for the fiscal year ended December 31, 2018. The Company has implemented program modificationssimilar and tuition reductions or is teaching out the program or has appealed the program’s gainful employment rate.
Reporting Segment | | Zone Programs | | | Failing Programs | |
Transportation | | $ | 7,800,000 | | | $ | - | |
HOPS | | $ | 2,400,000 | | | $ | 1,000,000 | |
The table below provides a summary of each of the zone or failing programs and the actions implemented by the Company with respect to those particular gainful employment (“GE”) programs.
| GE Program Code | | | |
Reporting Segment | OPEID | CIP Code | Credential Level | GE Program Name | GE Classification | Actions implemented |
Transportation | 007936 | 120503 | Certificate | Culinary Arts/Chef Training | Zone | Teachout, Program Modification, Tuition Reduction |
Transportation | 007938 | 470603 | Certificate | Autobody/Collision And Repair Technology/Technician | Zone | Program Modification, Tuition Reducation |
Transportation | 007936 | 470604 | Certificate | Automobile/Automotive Mechanices Technology/Technician | Zone | Program Modification, Tuition Reducation |
HOPS | 012461 | 120401 | Certificate | Cosmetology/Cosmetologist General | Zone | Program Modification |
HOPS | 007303 | 120503 | Certificate | Culinary Arts/Chef Training | Fail | Appeal, Teachout, Program Modification, Tuition Reducation |
HOPS | 007303 | 120599 | Certificate | Culinary Arts and Related Services, Other | Zone | Teachout |
HOPS | 0012461 | 470101 | Certificate | Electrical/ Electronics Equipment Installation And Repair, General | Fail | Teachout, Program Modification |
HOPS | 0012461 | 470101 | Associate Degree | Electrical/ Electronics Equipment Installation And Repair, General | Zone | Program Modification |
HOPS | 0012461 | 510713 | Associate Degree | Medical Insurance Coding Specialist/Coder | Zone | Teachout |
Transitional | 0012461 | 120503 | Certificate | Culinary Arts/Chef Training | Zone | Teachout |
Transitional | 0012461 | 120503 | Certificate | Culinary Arts/Chef Training | Zone | Teachout |
Transitional | 0012461 | 470201 | Certificate | Heating, Air Conditioning, Ventilation And Refrigeration Maintenance Technology/Technician | Fail | Teachout |
Transitional | 0012461 | 470604 | Certificate | Automobile/Automotive Mechanices Technology/Technician | Fail | Teachout |
Transitional | 0012461 | 470604 | Associate Degree | Automobile/Automotive Mechanics Technology/Technician | Zone | Teachout |
Transitional | 0012461 | 510716 | Associate Degree | Medical Administrative/Executive Assistant And Medical Secretory | Zone | Teachout |
Transitional | 0012461 | 510801 | Associate Degree | Medical/Clinical Assistant | Zone | Teachout |
1Gainful Employment programs are identified by the combination of: (1) the institution’s Office of Postsecondary Education Identification number (“OPEID #”); (2) Program Classification of Instruction (“CIP”); and (3) Credential Level.
In August 2018, the DOE published proposed regulations that would eliminate the existing gainful employment regulations. The DOE indicated that its plans include, but are not limited to, publishing outcomes data at the program level on a DOE website such as the College Scorecard or some other website. The DOE permitted the submission of public comments to the proposed regulations until September 13, 2018. Any regulations published in final form by November 1, 2018 typically would have taken effect on July 1, 2019,potentially stricter requirements, but we cannot provide any assurances as topredict the likelihood, timing or contentscope of any such regulations. However, therequirements. The DOE announcedcommenced a negotiated rulemaking process in January 2022 in which it has proposed to establish new gainful employment requirements that it would not publish the regulationsbe applicable to all of our educational programs. The negotiated rulemaking process is expected to take place during 2022 and to result in final form by November 1, 2018 and has not yet issued the final regulations. If the regulations are published prior to November 1, 2019, they typicallythat would take effect on July 1, 2020 unless2023, but we cannot predict the DOE is willing and able to provide for an earlier implementation date. We cannot provide any assurance as to theprecise timing, content, and ultimate effective date of any such final regulations.
In June 2018, the DOE announced the further extensionand content of the compliance date for certain other gainful employment disclosure requirements until July 1, 2019. The DOE statedregulations that institutions are still requiredexpected to comply with other gainful employment disclosure requirements in the interim.
On August 18, 2017, the DOE announced new deadlines for submitting notices of intent to file alternate earnings appeals of gainful employment rates and for submitting alternate earnings appeals of those rates. The deadline to file a notice of intent to file an appeal was October 6, 2017 and the deadline to file the alternate earnings appeal was February 1, 2018. We cannot predict when the DOE will calculate and issue new draft or final gainful employment rates in the future. emerge from this process. We also cannot predict whether the extent to which our programs may be adversely impacted by the tests that might be established by new regulations. The implementation of new gainful employment rulemaking processregulations could require us to eliminate or the extension ofmodify certain gainful employment deadlines mayeducational programs, could result in the DOE delayingloss of our students’ access to Title IV Program funds for the issuanceaffected programs, and could have a significant impact on the rate at which students enroll in our programs and on our business and results of new draftoperations. If our programs are adversely impacted or final gainful employment rates in the future.we must eliminate or modify certain programs or our students lose access to Title IV Program funds there could be a material adverse effect on our business and results of operations.
Borrower Defense to Repayment Regulations. In January 2016,On July 1, 2020, the DOE’s previously published final Borrower Defense to Repayment regulations became effective. Among other things, these regulations amended the processes for borrowers to receive from the DOE began negotiated rulemakinga discharge of the obligation to develop proposed regulations regarding, among other things, a borrower’s ability to allegerepay certain Title IV Program loans first disbursed on or after July 1, 2020 based on certain acts or omissions by anthe institution asor a defensecovered party. The new and existing DOE regulations establish detailed procedures and standards for the loan discharge processes for periods prior to the repayment of certain Title IV loans and the consequences to the borrower, the DOE, and the institution. On NovemberJuly 1, 2016, the DOE published in the Federal Register the final version of these regulations with a general effective date of2017, between July 1, 2017 and which, among other things, include rules for:
| · | establishing new processes, and updating existing processes, for enabling borrowers to obtain from the DOEJune 30, 2020, and on or after July 1, 2020, including the information required for borrowers to receive a loan discharge, and the authority of some or all of their federal student loans based on circumstances such as certain acts or omissions of the institution and for the DOE to impose and collect liabilities against the institution following the loan discharges; |
| · | establishing expanded standards of financial responsibility (see “Regulatory Environment – Financial Responsibility Standards”); |
| · | requiring institutions to make disclosures to current and prospective students regarding the existence of certain of the circumstances identified in the expanded standards of financial responsibility; |
| · | calculating a loan repayment rate for each proprietary institution under standards established by the regulations and requiring institutions to provide warnings to current and prospective students if the institution has a loan repayment rate below specified thresholds; |
| · | prohibiting certain contractual provisions imposed by or on behalf of schools on students regarding arbitration, dispute resolution, and participation in class actions; and |
| · | expanding the existing definition of misrepresentations that could result in grounds for discharge of student loans and in liabilities and sanctions against the institution, including, without limitation, potential loss of Title IV eligibility. |
On January 19, 2017, the DOE issued new regulations that updateto seek recovery from the Department’s hearing procedures for actions to establish liability against an institution and to establish procedural rules governing recovery proceedings under the DOE’s borrower defense to repayment regulations.
The DOE delayed the effective date of a majority of the borrower defense to repaymentamount of discharged loans. The regulations until July 1, 2019 to ensure that there would be adequate time to conduct negotiated rulemaking and, as necessary, develop revised regulations. However, a federal court ruled that the delay in the effective datealso modify certain components of the financial responsibility regulations, was unlawful and, on October 16, 2018, denied a request to extend a stay preventingincluding the regulations from taking effect. The DOE has not yet issued subsequent guidance regarding how the DOE will implement the regulations. There is ongoing litigation challenging the regulations, but we cannot provide any assurance as to whether the litigationlist of triggering events that could result in the future suspensionDOE determining that the institution lacks financial responsibility and must submit to the DOE a letter of credit or invalidationother form of some or all of those regulations.
The DOE published proposed regulationsacceptable financial protection and accept other conditions on July 31, 2018 that would modify the defense to repayment regulations, including regulations regarding, among other things, (i) acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of certaininstitution’s Title IV loans; (ii) permittingProgram eligibility. See Part I, Item 1. “Business - Regulatory Environment – Financial Responsibility Standards.” The final regulations also generally permit the use of arbitration clauses and class action waivers in enrollment agreements and (iii) triggering events that would result in recalculating a school’s financial responsibility score and require the schoolwhile requiring institutions to post a letter of credit or other surety. We are in the process of evaluating the proposed regulations. Any regulations published in final form by November 1, 2018 typically would have taken effect on July 1, 2019. However, the DOE announced that it would not publish the regulations in final form by November 1, 2018 and has not yet issued the final regulations. If the regulations are published priormake certain disclosures to November 1, 2019, they typically would take effect on July 1, 2020 unless the DOE is willing and able to provide for an earlier implementation date. We cannot provide any assurance as to the timing, content, and ultimate effective date of any such final regulations. We cannot predict how the DOE will interpret and enforce current borrower defense to repayment rules, or any final rules that may arise out of the DOE’s ongoing rulemaking process, or how the current or future rules may impact our schools’ participation in the Title IV Programs; however, thestudents.
The current and future rules could have a material adverse effect on our schools’ business and results of operations, and the broad sweep of the rules may, in the future, require our schools to submit a letter of credit based on expanded standards of financial responsibility. See “Regulatory “Business - Regulatory Environment – Financial Responsibility Standards.” Moreover, Congress or the DOE could enact or establish new laws or regulations that could restore prior versions of the borrower defense to repayment requirements or similar and potentially stricter requirements. The DOE convened a negotiated rulemaking committee in late 2021 aimed at developing new regulations on a variety of topics including borrower defense to repayment. The DOE is expected to develop and publish proposed regulations that typically would be subject to a notice and comment period during which the public may comment on the proposed regulations and the DOE may respond to such comments and ultimately publish final regulations. The DOE generally is required to publish final regulations by November 1 in order for the regulations to become effective on July 1 of the following year. We cannot predict the ultimate timing or content of the regulations that are anticipated to emerge from this process. The final regulations could result in new requirements that would make it easier for borrowers to obtain discharges of their loans and for the DOE to recover liabilities from institutions and impose other sanctions. The implementation of new borrower defense to repayment regulations by the DOE and the enforcement of the existing borrower defense to repayment regulations could have a material adverse effect on our business and results of operations. See “Business – Regulatory Environment – Negotiated Rulemaking.”
On April 29, 2021, the Company received communication from the DOE indicating that the DOE was in receipt of a number of borrower defense applications containing allegations concerning us and requiring the DOE to undertake a fact-finding process pursuant to DOE regulations. Among other things, the communication outlines a process by which the DOE would provide to us the applications and llow us the opportunity to submit responses to them. Further, the communication outlines certain information requests, relating to the period between 2007 and 2013, in connection with the DOE’s preliminary review of the borrower defense applications. Based upon publicly available information, it appears that the DOE has undertaken similar reviews of other educational institutions which have also been the subject of various borrower defense applications. We have received the borrower application claims and have completed the process of thoroughly reviewing and responding to each borrower application as well as providing information in response to the DOE’s requests.
Given the early stage of this matter, management is not able to predict the outcome of the DOE’s review at this time. If the DOE disagrees with our legal and factual grounds for contesting the applications, the DOE may impose liabilities on the Company based on the discharge of the loans at issue in the pending applications which could have a material adverse effect on our business and results of operations.
It is possible that we may receive from the DOE in the future borrower defense applications submitted by or on behalf of prior, current, or future students and that the DOE could seek to recover liabilities from us for discharged loans.
If the DOE grants any pending or future borrower applications, the DOE regulations state that the DOE may initiate an appropriate proceeding to recover liabilities arising from the loans in the applications. If the DOE initiates such a proceeding, we would request reconsideration of the liabilities. We cannot predict the timing or amount of all borrower defense applications that borrowers may submit to the DOE or that the DOE may grant in the future, or the timing or amount of any possible liabilities that the DOE may seek to recover from the Company, if any.
The "90/“90/10 Rule."” Under the HEA, a proprietary institution that derives more than 90% of its total revenue from Title IV Programs (its “90/10 Rule percentage”) for two consecutive fiscal years becomes immediately ineligible to participate in Title IV Programs and may not reapply for eligibility until the end of at least two fiscal years. An institution with revenues exceeding 90% for a single fiscal year will be placed on provisional certification and may be subject to other enforcement measures.measures, including a potential requirement to submit a letter of credit. See Part I, Item 1. “Business - Regulatory Environment – Financial Responsibility Standards.” If an institution violated the 90/10 Rule and became ineligible to participate in Title IV Programs but continued to disburse Title IV Program funds, the DOE would require the institution to repay all Title IV Program funds received by the institution after the effective date of the loss of eligibility.
We have calculated that, for our 20182021 fiscal year, our institutions'institutions’ 90/10 Rule percentages ranged from 74%72% to 84%80%. For 2017 and 2016,2020, none of our existing institutions derived more than 90% of their revenues from Title IV Programs. Our calculations are subject to review by the DOE.
If Congress or the DOE were to amend the 90/10 Rule to treat other forms of federal financial aid as Title IV Program revenue for 90/10 Rule purposes, lower the 90% threshold, or otherwise change the calculation methodology, (each of which has been proposed by some Congressional members in proposed legislation), or make other changes to the 90/10 Rule, those changes could make it more difficult for our institutions to comply with the 90/10 Rule. A loss of eligibility to participate in Title IV Programs for any of our institutions would have a significant impact on the rate at which our students enroll in our programs and on our business and results of operations.
In March 2021, the American Rescue Plan Act of 2021 (“ARPA”) was signed into law. The ARPA includes a provision that amends the 90/10 rule. The ARPA amends the 90/10 rule by treating other “Federal funds that are disbursed or delivered to or on behalf of a student to be used to attend such institution” in the same way as Title IV Program funds are currently treated in the 90/10 rule calculation. This means that our institutions will be required to limit the combined amount of Title IV Program funds and applicable “Federal funds” revenue in a fiscal year to no more than 90% in a fiscal year as calculated under the rule. Consequently, the ARPA change to the 90/10 rule is expected to increase the 90/10 rule calculations at our institutions. The ARPA does not identify the specific Federal funding programs that will be covered by this provision, but it is expected to include funding from federal student aid programs such as the veterans’ benefits programs, which include the Post-9/11 GI Bill and Veterans Readiness and Employment services and from which we derived approximately 7% of our revenues on a cash basis in 2021. For the year ended December 31, 2021, approximately 75% (calculated based on cash receipts) of our revenues were derived from the Title IV Programs.
The ARPA states that the amendments to the 90/10 rule apply to institutional fiscal years beginning on or after January 1, 2023 and are subject to the HEA’s negotiated rulemaking process. Accordingly, the ARPA change to the 90/10 rule is not expected to apply to our 90/10 rule calculations until 2024 relating to our fiscal year ended 2023. Moreover, we cannot predict the additional changes to the 90/10 rule or other regulations that might occur as a result of negotiated rulemaking that recently began in January 2022 as required by the ARPA. The negotiated rulemaking committee is expected to meet on a periodic basis through March 2022. The DOE is expected to publish proposed regulations thereafter that typically are subject to a notice and comment period before the DOE publishes final regulations after consideration of public comments. We cannot predict the ultimate timing and content of the final regulations, but the future regulations on 90/10 could have a material adverse effect on us and other schools like ours.
We anticipate making changes to our operations in order to address the possible future provisions in the 90/10 rule and in order to maintain the 90/10 percentages at our institutions below the 90% threshold as calculated under DOE regulations. However, we do not have significant control over the amount of Title IV Program funds that our students may receive and borrow. Our institutions’ 90/10 percentages can be increased by increases in Title IV Programs aid availability (including, for example, increases in Pell Grant funds) and can be decreased by decreases in the availability of state grant program funding and other sources of student aid that do not count as Title IV Programs funds in the 90/10 calculation. Our institutions’ 90/10 percentages also will increase when the ARPA amendments to the 90/10 rule take effect to the extent that students eligible to receive military and veteran education assistance enroll and use their financial assistance at our institutions. We cannot be certain that the changes we make in the future will succeed in maintaining our institutions’ 90/10 percentages below required levels or that the changes will not materially impact our business operations, revenues, and operating costs.
If any of our institutions lose eligibility to participate in Title IV Programs, that loss would cause an event of default under our credit agreement, would also adversely affect our students’ access to various government-sponsored student financial aid programs, and would have a significant impact on the rate at which our students enroll in our programs and on our business and results of operations.
Student Loan Defaults. The HEA limits participation in Title IV Programs by institutions whose former students defaulted on the repayment of federally guaranteed or funded student loans above a prescribed rate (the “cohort default rate”). The DOE calculates these rates based on the number of students who have defaulted, not the dollar amount of such defaults. The cohort default rate is calculated on a federal fiscal year basis and measures the percentage of students who enter repayment of a loan during the federal fiscal year and default on the loan on or before the end of the federal fiscal year or the subsequent two federal fiscal years.
Under the HEA, an institution whose Federal Family Education Loan, or FFEL, and Federal Direct Loan, or FDL, cohort default rate is 30% or greater for three consecutive federal fiscal years loses eligibility to participate in the FFEL, FDL, and Pell programs for the remainder of the federal fiscal year in which the DOE determines that such institution has lost its eligibility and for the two subsequent federal fiscal years. An institution whose FFEL and FDL cohort default rate for any single federal fiscal year exceeds 40% loses its eligibility to participate in the FFEL and FDL programs for the remainder of the federal fiscal year in which the DOE determines that such institution has lost its eligibility and for the two subsequent federal fiscal years. If an institution’s three-year cohort default rate equals or exceeds 30% in two of the three most recent federal fiscal years for which the DOE has issued cohort default rates, the institution may be placed on provisional certification status and could be required to submit a letter of credit to the DOE. See Part I, Item 1. “Business - Regulatory Environment – Financial Responsibility Standards.”
In September 2018,2021, the DOE released the final cohort default rates for the 20152018 federal fiscal year. These are the most recent final rates published by the DOE. The rates for our existing institutions for the 20152018 federal fiscal year range from 8.7%6.6% to 13.2%11.3%. None of our institutions had a cohort default rate equal to or greater than 30% for the 20152018 federal fiscal year.
In February 2019,2022, the DOE released draft three-year cohort default rates for the 20162019 federal fiscal year. The draft cohort default rates are subject to change pending receipt of the final cohort default rates, which the DOE is expected to publish in September 2019.2022. The draft rates for our institutions for the 20162019 federal fiscal year range from 8.3%2.0% to 16.6%3.0%. None of our institutions had draft cohort default rates of 30% or more.
Financial Responsibility Standards.
All institutions participating in Title IV Programs must satisfy specific standards of financial responsibility. The DOE evaluates institutions for compliance with these standards each year, based on the institution'sinstitution’s annual audited financial statements, as well as following a change in ownership resulting in a change of control of the institution.
The most significant financial responsibility measurement is the institution'sinstitution’s composite score, which is calculated by the DOE based on three ratios:
| · | The equity ratio, which measures the institution's capital resources, ability to borrow and financial viability; |
The equity ratio, which measures the institution’s capital resources, ability to borrow and financial viability;
| · | The primary reserve ratio, which measures the institution'sThe primary reserve ratio, which measures the institution’s ability to support current operations from expendable resources; and |
The net income ratio, which measures the institution’s ability to operate at a profit.
| · | The net income ratio, which measures the institution's ability to operate at a profit. |
The DOE assigns a strength factor to the results of each of these ratios on a scale from negative 1.0 to positive 3.0, with negative 1.0 reflecting financial weakness and positive 3.0 reflecting financial strength. The DOE then assigns a weighting percentage to each ratio and adds the weighted scores for the three ratios together to produce a composite score for the institution. The composite score must be at least 1.5 for the institution to be deemed financially responsible without the need for further oversight.
If an institution'sinstitution’s composite score is below 1.5, but is at least 1.0, it is in a category denominated by the DOE as "the“the zone."” Under the DOE regulations, institutions that are in the zone typically may be permitted by the DOE to continue to participate in the Title IV Programs by choosing one of two alternatives: 1) the “Zone Alternative” under which an institution is required to make disbursements to students under the Heightened Cash Monitoring 1 (“HCM1”) payment method, or a different payment method other than the advance payment method, and to notify the DOE within 10 days after the occurrence of certain oversight and financial events or 2) submit a letter of credit to the DOE equal to 50 percent of the Title IV Program funds received by the institution during its most recent fiscal year. The DOE permits an institution to participate under the “Zone Alternative” for a period of up to three consecutive fiscal years. Under the HCM1 payment method, the institution is required to make Title IV Program disbursements to eligible students and parents before it requests or receives funds for the amount of those disbursements from the DOE. As long as the student accounts are credited before the funding requests are initiated, an institution is permitted to draw down funds through the DOE’s electronic system for grants management and payments for the amount of disbursements made to eligible students. Unlike the Heightened Cash Monitoring 2 (“HCM2”) and the reimbursement payment methods, the HCM1 payment method typically does not require schools to submit documentation to the DOE and wait for DOE approval before drawing down Title IV Program funds. Effective July 1, 2016, a school under HCM1, HCM2 or reimbursement payment methods must also pay any credit balances due to a student before drawing down funds for the amount of those disbursements from the DOE, even if the student or parent provides written authorization for the school to hold the credit balance.
If an institution'sinstitution’s composite score is below 1.0, the institution is considered by the DOE to lack financial responsibility. If the DOE determines that an institution does not satisfy the DOE'sDOE’s financial responsibility standards, depending on its composite score and other factors, that institution may establish its financial responsibilityeligibility to participate in the Title IV Programs on an alternative basis by, among other things:
Posting a letter of credit in an amount equal to at least 50% of the total Title IV Program funds received by the institution during the institution’s most recently completed fiscal year; or
Posting a letter of credit in an amount equal to at least 10% of the Title IV Program funds received by the institution during its most recently completed fiscal year accepting provisional certification; complying with additional DOE monitoring requirements and agreeing to receive Title IV Program funds under an arrangement other than the DOE’s standard advance funding arrangement.
| · | Posting a letter of credit in an amount equal to at least 50% of the total Title IV Program funds received by the institution during the institution's most recently completed fiscal year; or |
| · | Posting a letter of credit in an amount equal to at least 10% of the Title IV Program funds received by the institution during its most recently completed fiscal year accepting provisional certification; complying with additional DOE monitoring requirements and agreeing to receive Title IV Program funds under an arrangement other than the DOE's standard advance funding arrangement |
The DOE has evaluated the financial responsibility of our institutions on a consolidated basis. We have submitted to the DOE our audited financial statements for the 2016 and 20152018 fiscal year reflecting a composite score of 1.5 and 1.9, respectively,1.1 based upon our calculations. The DOE reviewedindicated in a January 13, 2020 letter its determination that our 2016institutions are “in the zone” based on our composite score for the 2018 fiscal year and concluded that we were no longerare required to operate under the Zone Alternative requirements, including the requirement to make disbursements under the HCM1 payment method and to notify the DOE within 10 days of the occurrence of certain oversight and financial events. We also were required to submit to the DOE bi-weekly cash balance submissions outlining our available cash on hand, monthly actual and projected cash flow statements, and monthly student rosters.
On February 16, 2021, we received a letter from the DOE confirming our composite score of 1.5 for fiscal year 2019 as well as removing the Company from the Zone Alternative requirements. On August 26, 2021, the DOE sent us correspondence stating that weour three institutions had operated under followingperformed all of the DOE’s reviewrequirements of the February 16, 2021, letter and notifying us that the DOE had returned our 2014 composite score.institutions to advance pay on August 19, 2021.
For the 20172020 and 2021 fiscal year, we calculated our composite score to be 1.1. This score is2.7 and 3.0, respectively. These scores are subject to determination by the DOE based on its review of our consolidated audited financial statements for the 20172020 and 2021 fiscal year, but we have not received a determination yet from the DOE. We believe it is likely that the DOE will determine that our institutions are “in the zone” and that we will be required to operate under the Zone Alternative requirements as well as any other requirements that the DOE might impose in its discretion. For the 2018 fiscal year, we have calculated our composite score to be 1.1. This score is subject to determination by the DOE once it receives and reviews our consolidated audited financial statements for the 2018 fiscal year,years, but we believe it is likely that the DOE will determine that our institutions are “incomply with the zone” and that we will be required to operate under the Zone Alternative requirements as well as any other requirements that the DOE might impose in its discretion.composite score requirement.
On November 1, 2016,September 23, 2019, the DOE published new Borrower Defense to Repaymentfinal regulations with a general effective date of July 1, 2020 that, included expanded standardsamong other things, modified the list of financial responsibilitytriggering events that could result in a requirementthe DOE determining that wethe institution lacks financial responsibility and must submit to the DOE a substantial letter of credit or other form of acceptable financial protection in an amountand accept other conditions on the institution’s Title IV Program eligibility. The regulations create lists of mandatory triggering events and discretionary triggering events. An institution is not able to meet its financial or administrative obligations if a mandatory triggering event occurs. The mandatory triggering events include:
the institution’s recalculated composite score is less than 1.0 as determined by the DOE and be subjectas a result of an institutional liability from a settlement, final judgment, or final determination in an administrative or judicial action or proceeding brought by a Federal or State entity;
the institution’s recalculated composite score goes from less than 1.5 to other conditions and requirements, based on anyless than 1.0 as determined by the DOE as a result of a withdrawal of owner’s equity from the institution;
the SEC takes certain actions against the institution or the institution fails to comply with certain filing requirements; or
the occurrence of two or more discretionary triggering events (as described below) within a certain time period.
The DOE also may determine that an institution lacks financial responsibility if one of an extensive list ofthe following discretionary triggering circumstances. The DOE delayedevents occurs and the effective date ofevent is likely to have a majoritymaterial adverse effect on the financial condition of the borrower defense to repayment regulations until July 1, 2019 to ensureinstitution:
a show cause or similar order from the institution’s accrediting agency that there would be adequate time to conduct negotiated rulemaking and, as necessary, develop revised regulations. However, a federal court ruled that the delay in the effective date of the regulations was unlawful and, on October 16, 2018, denied a request to extend a stay preventing the regulations from taking effect. The DOE has not yet issued subsequent guidance regarding how the DOE will implement the regulations. There is ongoing litigation challenging the regulations, but we cannot provide any assurance as to whether the litigation could result in the futurewithdrawal, revocation or suspension of institutional accreditation;
a notice from the institution’s state licensing agency of an intent to withdraw or invalidationterminate the institution’s state licensure if the institution does not take steps to comply with state requirements;
a default, delinquency, or other event occurs as a result of somean institutional violation of a security or allloan agreement that enables the creditor to require an increase in collateral, a change in contractual obligations, an increase in interest rates or payment, or other sanctions, penalties or fees;
a failure to comply with the 90/10 Rule during the institution’s most recently completed fiscal year;
high annual drop-out rates from the institution as determined by the DOE; or
official cohort default rates of thoseat least 30 percent for the two most recent years unless a pending appeal could sufficiently reduce one of the rates.
The regulations. require the institution to notify the DOE of the occurrence of a mandatory or discretionary triggering event and to provide certain information to the DOE to demonstrate why the event does not establish the institution’s lack of financial responsibility or require the submission of a letter of credit or imposition of other requirements.
The expanded financial responsibility regulations could result in the DOE recalculating and reducing our composite score to account for DOE estimates of potential losses under one or more of the extensive list of triggering circumstances and also could result in the imposition of conditions and requirements including a requirement to provide financial protection in amounts that are difficult to predict, calculated by the DOE under potentially subjective standards and, in some cases, could be based solely on the existence of proceedings or circumstances that ultimately may lack merit or otherwise not result in liabilities or losses.
For example, one of the triggering circumstances in the regulations is if an institution’s accrediting agency requires the institution to submit a teach-out plan that covers the closing of the institution or one of its locations. We notified the DOE that we intended to close our Southington campus and that our accrediting agency required a teach-out plan. The DOE could attempt to recalculate our composite score, could seek to treat all Title IV funds received by the school in its most recently completed fiscal year at that campus as a loss in the recalculation, and could seek to impose a letter of credit based on the reduced composite score. However, it is uncertain whether the DOE would apply the regulation to the accrediting agency’s request for a teach-out plan which occurred after the July 1, 2017 effective date of the regulations, but prior to the expiration of the stay of the regulation on October 16, 2018; whether the DOE’s recalculation of the composite score would result in a letter of credit requirement; or whether the DOE would require a letter of credit given that the campus is currently closed.
The regulations indicate that the letter of credit or other form of financial protection required for an institution under the regulations must equal 10 percent of the total amount of Title IV Program funds received by the institution during its most recently completed fiscal year plus any additional amount that the DOE determines is necessary to fully cover any estimated losses unless the institution demonstrates that the additional amount is unnecessary to protect, or is contrary to, the Federal interest. The regulations state that the DOE maintains the full amount of financial protection until the DOE determines that the institution has a composite score of 1.0 or greater based on a review of the institution’s audited financial statements for the fiscal year in which all losses from the aforementioned events have been fully recognized or if the recalculated composite score is 1.0 or greater and the aforementioned events have ceased to exist. Consequently, itprotection.
It is difficult to predict the amount or duration of any letter of credit requirement that the DOE might impose under the regulation. The requirement to submit a letter of credit or to accept other conditions or restrictions could have a material adverse effect on our schools’ business and results of operations.
As reported above, in January 2022, the DOE commenced a series of meetings with a negotiated rulemaking committee in order to develop new regulations on a variety of topics including financial responsibility. The committee meetings are expected to take place through March 2022 after which the DOE is expected to publish proposed regulations for public comment and ultimately publish final regulations after consideration of public comments. The regulations typically would take effect on July 1, 2023 if the DOE publishes the final regulations by November 1, 2022. We cannot predict the ultimate timing and content of the financial responsibility regulations that are expected to emerge from this process. However, the DOE is considering proposals that, among other things, would expand the list and scope of triggering events and other circumstances that could result in the DOE determining that the institution lacks financial responsibility and must submit to the DOE a letter of credit or other form of acceptable financial protection and accept other conditions on the institution’s Title IV Program eligibility. The implementation of new financial responsibility regulations could increase the likelihood of the DOE concluding that we lack financial responsibility and must submit to the DOE a letter of credit and accept other conditions that could have a material adverse effect on our schools’ business and results of operations.
Return of Title IV Program Funds. An institution participating in Title IV Programs must calculate the amount of unearned Title IV Program funds that have been disbursed to students who withdraw from their educational programs before completing them, and must return those unearned funds to the DOE or the applicable lending institution in a timely manner, which is generally within 45 days from the date the institution determines that the student has withdrawn.
If an institution is cited in an audit or program review for returning Title IV Program funds late for 5% or more of the students in the audit or program review sample or if the regulatory auditor identifies a material weakness in the institution’s report on internal controls relating to the return of unearned Title IV Program funds, the institution may be required to post a letter of credit in favor of the DOE in an amount equal to 25% of the total amount of Title IV Program funds that should have been returned for students who withdrew in the institution'sinstitution’s prior fiscal year.
On January 11, 2018, the DOE sent letters to our then Columbia, Maryland and Iselin, New Jersey institutions requiring each institution to submit a letter of credit to the DOE based on findings of late returns of Title IV Program funds in the annual Title IV Program compliance audits submitted to the DOE for the fiscal year ended December 31, 2016. Our Iselin institution provided evidence demonstrating that only 3% of the Title IV Program funds returned were late. However, the DOE concluded that a letter of credit would nevertheless be required for each institution because the regulatory auditor included a finding that there was a material weakness in our report on internal controls relating to return of unearned Title IV Program funds. We disagree with the regulatory auditor’s conclusion that a material weakness could exist if the error rate in the expanded audit sample is only 3% or approximately $20,000 and we believe that the regulatory auditor’s conclusion is erroneous. We requested that the DOE reconsider the letter of credit requirement; however, by letter dated February 7, 2018, the DOE maintained that the refund letters of credit were necessary but agreed that the amount of each letter of credit could be based on the returns that were required to be made by each institution in the 2017 fiscal year rather than in the 2016 fiscal year. Accordingly, we submitted letters of credit in the amounts of $0.5 million and $0.1 million to the DOE by the February 23, 2018 deadline and expect that these letterswe continue to comply with the letter of credit will remainrequirement. By letter dated February 16, 2021, the DOE notified us that our Columbia and Iselin institutions failed to comply with the refund requirements based on their 2017, 2018, and 2019 audits. Consequently, the DOE has required us to maintain with the DOE a letter of credit in place for a minimumthe amount of two years.$600,020. The expiration date of this letter of credit has been extended until January 31, 2023.
Negotiated Rulemaking. The DOE periodically issues new regulations and guidance that can have an adverse effect on our institutions. We cannot predict the timing and content of any new regulations or guidance that the DOE may seek to impose or whether and to what extent the DOE under the new administration may issue new regulations and guidance that could adversely impact for-profit schools including our institutions.
The DOE engaged in additional negotiated rulemaking in 2019 that resulted in new regulations with a general effective date of July 1, 2020. On October 15, 2018, the DOE published a notice in the Federal Register announcing its intent to establish a negotiated rulemaking committee and three subcommittees to develop proposed regulations related to several matters, including, but not limited to, requirements for accrediting agencies in their oversight of member institutions and programs; criteria used by the DOE to recognize accrediting agencies; simplification of the DOE’s recognition and review of accrediting agencies; clarification of the core oversight responsibilities amongst accrediting agencies, states and the DOE to hold institutions accountable; clarification of the permissible arrangements between an institution of higher education and another organization to provide a portion of an educational program; roles and responsibilities of institutions and accrediting agencies in the teach-out process; regulatory changes required to ensure equitable treatment of brick-and-mortar and distance education programs; regulatory changes required to enable expansion of direct assessment programs, distance education, and competency-based education; regulatory changes required to clarify disclosure and other requirements of state authorization; protections to ensure that accreditors recognize and respect institutional mission and evaluate an institution’s policies and educational programs based on that mission; simplification of state authorization requirements related to distance education; defining “regular and substantive interaction” as it relates to distance education; defining the term “credit hour”; defining the requirements related to the length of educational programs and entry level requirements for the occupation; addressing regulatory barriers in the DOE’s institutional eligibility and general provision regulations; addressing direct assessment programs and competency-based education; and other matters. On January 7, 2019, theThe DOE released a set of draft proposed regulations for consideration and negotiation by the negotiated rulemaking committee and subcommittees. Thesubcommittees that covered additional topics and made additional revisions and updates to the draft proposed regulations also cover additional topicsprior to subsequent meetings of the committee and subcommittee in early 2019, including, but not limited to, amendments to current regulations regarding the clock to credit hour conversion formula; the requirements for measuring the lengths of certain educational programs; the requirements for returning unearned Title IV Program funds received for students who withdraw before completing their educational programs; and the requirements for measuring a student’s satisfactory academic progress. The committee and subcommittees completed their meetings in April 2019 and reached consensus on draft proposed changesregulations. On June 12, 2019, the DOE published proposed regulations on some of the topics in a notice of proposed rulemaking in the Federal Register for public comment and to consider revisions to the regulations remain subjectin response to further changethe comments before publishing final versions of the regulations. The regulations have a general effective date of July 1, 2020.
The DOE conducted additional negotiated rulemaking in 2020 that resulted in new regulations with a general effective date of July 1, 2021. On April 2, 2020, the DOE published proposed regulations related primarily to distance education and to topics addressed during negotiated rulemaking committee meetings that took place in early 2019. The proposed regulations address topics including, among other things, correspondence courses, direct assessment programs, foreign institutions, written arrangements with ineligible institutions or organizations to provide a portion of an educational program, requirements for prompt action by the DOE on certain Title IV eligibility applications, requirements related to the length of educational programs and entry level requirements for the occupation, the clock to credit hour conversion formula, the requirements for returning unearned Title IV Program funds received for students who withdraw before completing their educational programs, and the requirements for measuring a student’s satisfactory academic progress. On September 2, 2020, the DOE published the final regulations with some amendments and a general effective date of July 1, 2021.
The DOE initiated two additional negotiated rulemaking processes in 2021 and 2022, respectively. The first of the two negotiated rulemaking sessions took place during the negotiated rulemaking process.last quarter of 2021. The committeetopics included borrower defense to repayment (including, among other things, potential expanded limitations on recruitment tactics and subcommitteesconduct that are deemed to be aggressive or deceptive), the return of prohibitions on pre-dispute arbitration agreements and class action waivers, closed school loan discharges (including the reinstatement of automatic closed school loan discharges), total and permanent disability discharges, public student loan forgiveness, income driven repayment, interest capitalization, false certification discharges, and prison exchange programs. The DOE is expected to publish proposed regulations in the processFederal Register for public comment during 2022. If the final regulations are published by or before November 1, 2022, then the regulations typically would not take effect until July 1, 2023. The future borrower defense to repayment and closed school loan discharge rules are expected to be extensive and to make it easier for borrowers to obtain discharges of meeting duringstudent loans and for the first three monthsDOE to assess liabilities and other sanctions on institutions based on the loan discharges. Moreover, the potential for expanded rules regarding recruitment tactics and conduct could lead to increased scrutiny of 2019. Werecruiting and marketing practices and the potential for sanctions on schools deemed to be noncompliant up to and including loss of Title IV eligibility. However, we cannot provide any assurances as topredict the ultimate timing and content or impact of any final regulations arising fromfollowing the conclusion of the rulemaking process.
The second of the two negotiated rulemaking sessions began in January 2022 and are scheduled to finish during March 2022. The topics include the 90/10 rule, gainful employment, administrative capability standards, financial responsibility standards, eligibility certification procedures, changes in ownership, and ability to benefit. The DOE is expected to publish proposed regulations in the Federal Register for public comment during 2022. If the final regulations are published by or before November 1, 2022, then the regulations typically would not take effect until July 1, 2023. The new regulations that the DOE ultimately will publish and implement are expected to impose a broad range of additional requirements on institutions and especially on for-profit institutions like our schools. In turn, the new regulations are likely to increase the possibility that our schools could be subject to additional reporting requirements, to potential liabilities and sanctions such as letter of credit amounts, and to potential loss of Title IV eligibility if our efforts to modify our operations to comply with the new regulations are unsuccessful. However, we cannot predict the ultimate timing and content of any final regulations following the conclusion of the rulemaking process.
15We also cannot predict with certainty the ultimate combined impact of the regulatory changes which have occurred in recent years and that may occur as a result of the upcoming negotiated rulemaking, nor can we predict the effect of future legislative or regulatory action by federal, state or other agencies regulating our education programs or other aspects of our operations, how any resulting regulations will be interpreted or whether we and our institutions will be able to comply with these requirements in the future. Any such actions by legislative or regulatory bodies that affect our programs and operations could have a material adverse effect on our student population and our institutions, including the need to cease offering a number of programs.
Substantial Misrepresentation. The DOE’s regulations prohibit an institution that participates in the Title IV Programs from engaging in substantial misrepresentation of the nature of its educational programs, financial charges, graduate employability or its relationship with the DOE. A “misrepresentation” includes any false, erroneous, or misleading statement (whether made in writing, visually, orally, or through other means) that is made by an eligible institution, by one of its representatives, or by a third party that provides to the institution educational programs, marketing, advertising, recruiting, or admissions services and that is made to a student, prospective student, any member of the public, an accrediting or state agency, or to DOE. The DOE defines a “substantial misrepresentation” to include 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 definition of “substantial misrepresentation” is broad and, therefore, it is possible that a statement made by the institution or one of its service providers or representatives could be construed by the DOE to constitute a substantial misrepresentation. If the DOE determines that one of our institutions has engaged in substantial misrepresentation, the DOE may impose sanctions or other conditions upon the institution including, but not limited to, initiating an action to fine the institution or limit, suspend, or terminate its eligibility to participate in the Title IV Programs and may seek to discharge students’ loans and impose liabilities upon the institution. See Part I, Item 1. “Business - Regulatory Environment – Borrower Defense To Repayment Regulations.” The DOE has initiated a negotiated rulemaking process that may result in, among other things, an expansion of the categories of conduct deemed to be a misrepresentation and that also may result in new prohibitions on certain types of recruiting tactics and conduct that the DOE deems to be aggressive or deceptive. The implementation of such regulations could result in further scrutiny of marketing and recruiting practices by institutions like our schools and could increase the chances of the DOE finding practices to be noncompliant and imposing sanctions based on the alleged noncompliance up to and including fines and potential loss of Title IV eligibility. The rulemaking process is ongoing and, therefore, we cannot predict the ultimate timing and content of new regulations that the DOE may publish and implement. See Part I, Item 1. “Business – Regulatory Environment – Negotiated Rulemaking.”
School Acquisitions. When a company acquires a school that is eligible to participate in Title IV Programs, that school undergoes a change of ownership resulting in a change of control as defined by the DOE. Upon such a change of control, a school'sschool’s eligibility to participate in Title IV Programs is generally suspended until it has applied for recertification by the DOE as an eligible school under its new ownership, which requires that the school also re-establish its state authorization and accreditation. The DOE may temporarily and provisionally certify an institution seeking approval of a change of control under certain circumstances while the DOE reviews the institution'sinstitution’s application. The time required for the DOE to act on such an application may vary substantially. The DOE recertification of an institution following a change of control will be on a provisional basis. Thus, any plans to expand our business through acquisition of additional schools and have them certified by the DOE to participate in Title IV Programs must take into account the approval requirements of the DOE and the relevant state education agencies and accrediting commissions. The DOE has initiated a negotiated rulemaking process that may result in new rules that, among other things, may expand the requirements applicable to school acquisitions in ways that could make it more difficult to acquire additional schools. The rulemaking process is ongoing and, therefore, we cannot predict the ultimate timing and content of new regulations that the DOE may publish and implement. See Part I, Item 1. “Business – Regulatory Environment – Negotiated Rulemaking.”
Change of Control. In addition to school acquisitions, other types of transactions can also cause a change of control. The DOE, most state education agencies and our accrediting commissions have standards pertaining to the change of control of schools, but these standards are not uniform. DOE regulations describe some transactions that constitute a change of control, including the transfer of a controlling interest in the voting stock of an institution or the institution'sinstitution’s parent corporation. For a publicly traded corporation, DOE regulations provide that a change of control occurs in one of two ways: (a) if a person acquires ownership and control of the corporation so that the corporation is required to file a Current Report on Form 8-K with the Securities and Exchange Commission disclosing the change of control or (b) if the corporation has a shareholder that owns at least 25% of the total outstanding voting stock of the corporation and is the largest shareholder of the corporation, and that shareholder ceases to own at least 25% of such stock or ceases to be the largest shareholder. These standards are subject to interpretation by the DOE. A significant purchase or disposition of our common stock could be determined by the DOE to be a change of control under this standard.
Most of the states and our accrediting commissions include the sale of a controlling interest of common stock in the definition of a change of control although some agencies could determine that the sale or disposition of a smaller interest would result in a change of control. A change of control under the definition of one of these agencies would require the affected school to reaffirm its state authorization or accreditation. Some agencies would require approval prior to a sale or disposition that would result in a change of control in order to maintain authorization or accreditation. The requirements to obtain such reaffirmation from the states and our accrediting commissions vary widely.
A change of control could occur as a result of future transactions in which the Company or our schools are involved. Some corporate reorganizations and some changes in the board of directors of the Company are examples of such transactions. Moreover, the potential adverse effects of a change of control could influence future decisions by us and our stockholdersshareholders regarding the sale, purchase, transfer, issuance or redemption of our stock. In addition, the adverse regulatory effect of a change of control also could discourage bids for shares of our common stock and could have an adverse effect on the market price of our shares.The DOE has initiated a negotiated rulemaking process that may result in new rules that, among other things, may change the rules associated with the ownership and control of Title IV participating schools in ways that could further influence future decisions by us or by current or prospective shareholders regarding the sale, purchase, transfer, issuance or redemption of our stock, or that could impact our ability or willingness to make certain organizational changes. The rulemaking process is ongoing and, therefore, we cannot predict the ultimate timing and content of new regulations that the DOE may publish and implement. See Part I, Item 1. “Business – Regulatory Environment – Negotiated Rulemaking.”
Opening Additional Schools and Adding Educational Programs. For-profit educational institutions must be authorized by their state education agencies and be fully operational for two years before applying to the DOE to participate in Title IV Programs. However, an institution that is certified to participate in Title IV Programs may establish an additional location and apply to participate in Title IV Programs at that location without reference to the two-year requirement, if such additional location satisfies all other applicable DOE eligibility requirements. Our expansion plans are based, in part, on our ability to open new schools as additional locations of our existing institutions and take into account the DOE'sDOE’s approval requirements.
A student may use Title IV Program funds only to pay the costs associated with enrollment in an eligible educational program offered by an institution participating in Title IV Programs. Generally, unless otherwise required by the DOE or by DOE regulations, an institution that is eligible to participate in Title IV Programs may add a new educational program without DOE approval if that new program leads to an associate’s level or higher degree and the institution already offers programs at that level, or if that program prepares students for gainful employment in the same or a related occupation as an educational program that has previously been designated as an eligible program at that institution and meets minimum length requirements. Institutionsapproval. However, institutions that are provisionally certified may be required to obtain approval of certainnew educational programs. Our institution in Indianapolis, isNew Britain, and Columbia institutions are provisionally certified and required to obtain prior DOE approval of new degree, non-degree,locations and short-term training educational programs. Our Iselin institution also is subject to prior approval requirements for substantive changes such asof new campuses and educational programs as a resultbecause of its accrediting agency’s loss of DOE recognition, and the DOE has indicated that such changes only will be approved in limited circumstances.our composite score. If an institution erroneously determines that an educational program is eligible for purposes of Title IV Programs, the institution would likely be liable for repayment of Title IV Program funds provided to students in that educational program. Our expansion plans are based, in part, on our ability to add new educational programs at our existing schools.
Some of the state education agencies and our accrediting commission also have requirements that may affect our schools'schools’ ability to open a new campus, establish an additional location of an existing institution or begin offering a new educational program. The DOE has initiated a negotiated rulemaking process that may result in new rules that, among other things, may further restrict the ability of some schools – such as schools that are provisionally certified – to add new locations or educational programs which could impact our ability to make such changes if we are provisionally certified or subject to other criteria in the regulations that ultimately are adopted. The rulemaking process is ongoing and, therefore, we cannot predict the ultimate timing and content of new regulations that the DOE may publish and implement. See Part I, Item 1. “Business – Regulatory Environment – Negotiated Rulemaking.”
Closed School Loan Discharges.The DOE may grant closed school loan discharges of Federal student loans based upon applications by qualified students. TheDOE also may initiate discharges on its own for students who have not reenrolled in another Title IV Program eligible school within three years after the closure and who attended campuses that closed on or after November 1, 2013, as did some of our former campuses. If the DOE discharges some or all of these loans, the DOE may seek to recover the cost of the loan discharges from us. The DOE is currently conducting a negotiated rulemaking process on a variety of topics, including closed school loan discharges (and, among other things, the reintroduction of automatic closed school loan discharges), which could result in regulations that would make it easier for borrowers to obtain discharges of their loans and for the DOE to recover liabilities from institutions. See Part I, Item 1. “Business – Regulatory Environment – Negotiated Rulemaking.”.
We have received five separate letters from the DOE since September 3, 2020, asserting liabilities for closed school loan discharges in connection with the closure of some of our campuses. The total liability paid to the DOE since September 3, 2020, has been approximately $345,000. We previously operated four other campuses that closed in the past and that could be subject to closed school loan discharges in the future, including automatic closed school loan discharges that could be granted by the DOE. We cannot predict any additional loan discharges that the DOE may approve or the liabilities that the DOE may seek from us for these campuses or other campuses that have closed in the past.
Administrative Capability. The DOE assesses the administrative capability of each institution that participates in Title IV Programs under a series of separate standards. Failure to satisfy any of the standards may lead the DOE to find the institution ineligible to participate in Title IV Programs or to place the institution on provisional certification as a condition of its participation. These criteria require, among other things, that the institution:
Comply with all applicable federal student financial aid requirements;
| · | Comply with all applicable federal student financial aid requirements; |
Have capable and sufficient personnel to administer the federal student Title IV Programs;Administer Title IV Programs with adequate checks and balances in its system of internal controls over financial reporting;
| · | Have capable and sufficient personnel to administer the federal student Title IV Programs; |
Divide the function of authorizing and disbursing or delivering Title IV Program funds so that no office has the responsibility for both functions;Establish and maintain records required under the Title IV Program regulations;
| · | Administer Title IV Programs with adequate checks and balances in its system of internal controls over financial reporting; |
Develop and apply an adequate system to identify and resolve discrepancies in information from sources regarding a student’s application for financial aid under the Title IV Program;Have acceptable methods of defining and measuring the satisfactory academic progress of its students;
| · | Divide the function of authorizing and disbursing or delivering Title IV Program funds so that no office has the responsibility for both functions; |
Refer to the Office of the Inspector General any credible information indicating that any applicant, student, employee, third party servicer or other agent of the school has been engaged in any fraud or other illegal conduct involving Title IV Programs;Not be, and not have any principal or affiliate who is, debarred or suspended from federal contracting or engaging in activity that is cause for debarment or suspension;
| · | Establish and maintain records required under the Title IV Program regulations; |
Provide adequate financial aid counseling to its students;Submit in a timely manner all reports and financial statements required by the Title IV Program regulations; and
| · | Develop and apply an adequate system to identify and resolve discrepancies in information from sources regarding a student’s application for financial aid under the Title IV Program; |
Not otherwise appear to lack administrative capability.
| · | Have acceptable methods of defining and measuring the satisfactory academic progress of its students; |
| · | Refer to the Office of the Inspector General any credible information indicating that any applicant, student, employee, third party servicer or other agent of the school has been engaged in any fraud or other illegal conduct involving Title IV Programs; |
| · | Not be, and not have any principal or affiliate who is, debarred or suspended from federal contracting or engaging in activity that is cause for debarment or suspension; |
| · | Provide adequate financial aid counseling to its students; |
| · | Submit in a timely manner all reports and financial statements required by the Title IV Program regulations; and |
| · | Not otherwise appear to lack administrative capability. |
The DOE has placed three of our institutions on provisional certification based on findings in recent audits of the institutions’ Title IV compliance that the DOE alleges identified deficiencies in regulations related to DOE regulations regarding an institutions’ level of administrative capability. See Part I. Item 1. “Business - Regulatory Environment – Regulation of Federal Student Financial Aid Programs.” Failure by us to satisfy any of these or other administrative capability criteria could cause our institutions to be subject to sanctions or other actions by the DOE or to lose eligibility to participate in Title IV Programs, which would have a significant impact on our business and results of operations. The DOE has initiated a negotiated rulemaking process that may result in new rules that, among other things, may expand the scope of the administrative capability regulations to include other requirements (such as, for example, providing adequate career services and refraining from misrepresentations and certain types of recruiting practices). The rulemaking process is ongoing and, therefore, we cannot predict the ultimate timing and content of new regulations that the DOE may publish and implement. See Part I, Item 1. “Business – Regulatory Environment – Negotiated Rulemaking.”
Restrictions on Payment of Commissions, Bonuses and Other Incentive Payments. An institution participating in 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 recruiting or admission activities or in making decisions regarding the awarding of Title IV Program funds. The DOE’s regulations established twelve “safe harbors” identifying types of compensation that could be paid without violating the incentive compensation rule. On October 29, 2010, the DOE adopted final rules that took effect on July 1, 2011 and amended the incentive compensation rule by, among other things, eliminating the twelve safe harbors (thereby reducing the scope of permissible compensatory payments under the rule) and expanding the scope of compensatory payments and employees subject to the rule. The DOE has stated that it does not intend to provide private guidance regarding particular compensation structures in the future and will enforce the regulations as written. We cannot predict how the DOE will interpret and enforce the revised incentive compensation rule.rule and the limited published guidance that the DOE has provided, nor how it will apply the rule and guidance to our past, present, and future compensation practices. The implementation of the final regulations required us to change our compensation practices and has had and will continue to have a significant impact the productivity of our employees, on the retention of our employees and on our business and results of operations.
Compliance with Regulatory Standards and Effect of Regulatory Violations. Our schools are subject to audits, program reviews, site visits, and other reviews by various federal and state regulatory agencies, including, but not limited to, the DOE, the DOE'sDOE’s Office of Inspector General (“OIG”), state education agencies and other state regulators, the U.S. Department of Veterans Affairs and other federal agencies (such as, for example, the Federal Trade Commission (“FTC”) or the Consumer Financial Protection Board (“CFPB”)), and by our accrediting commissions. In addition, each of our institutions must retain an independent certified public accountant to conduct an annual audit of the institution'sinstitution’s administration of Title IV Program funds. The institution must submit the resulting audit report to the DOE for review. Some of the findings in the annual Title IV Program compliance audits for some of our institutions resulted in the DOE placing those institutions on provisional certification. See Part I. Item 1. “Business - Regulatory Environment – Regulation of Federal Student Financial Aid Programs.”
In 2021, our New Britain, Iselin and Indianapolis institutions received final audit determination letters from the DOE in connection with the Title IV Program compliance audits conducted for the 2020 fiscal year. The letters contain findings of alleged noncompliance with certain Title IV Program requirements for each institution. The total amount of questioned funds in the reports were immaterial and had been repaid prior to the issuance of the final audit determination letters. In addition to the payment of the questioned amounts, the letters require the institutions to correct all of the deficiencies noted in the audit reports and require the auditor to comment in the 2021 fiscal year audit on the actions taken by the institutions in response to the findings and required actions. The letters indicate that repeat findings in future audits or failure to satisfactorily resolve the findings of the audit could lead to an adverse action. Each letter also notes that, due to the seriousness of one or more of the findings, the letter has been referred to a separate office within the DOE for consideration of possible adverse action including the possible imposition of a fine; the limitation, suspension, or termination of the institution’s Title IV Program eligibility; the revocation of the institution’s provisional program participation agreement; or the denial of a future application for renewal of the institution’s Title IV Program certification. Each letter indicates that the DOE will notify the institution if the DOE initiates an adverse action and will notify the institution of its appeal rights and procedures on how to contest the action if any is taken. We are continuing to cooperate with the audit process and to respond to the DOE’s requests for information in connection with the audits.
On December 16, 2020, the OIG began an audit of our Indianapolis institution to ensure that we used the funds provided under the Higher Education Emergency Relief Fund (“HEERF”) for allowable and intended purposes and to perform limited work on the institution’s cash management practices and HEERF reporting. We have been cooperating with the OIG during its audit of the institution. In September 2021, the OIG issued a final audit report containing 3 findings of alleged non-compliance and 2 additional topics that were each classified as an “other matter.” The final report is inclusive of our response to the findings and other matters. The final audit report has been sent to the DOE for further consideration. We cannot predict the outcome of the audit, any liabilities or other actions the DOE might initiate in response to the audit findings, or the outcome of any appeal that might result in response to a DOE action related to the findings. We are continuing to cooperate with the ongoing audit process.
If one of our schools fails to comply with accrediting or state licensing requirements, such school and its main and/or branch campuses could be subject to the loss of state licensure or accreditation, which in turn could result in a loss of eligibility to participate in Title IV Programs. If the DOE or another agency determined that one of our institutions improperly disbursed Title IV Program funds or violated a provision of the HEA or DOE regulations, the institution could be required to repay such funds and related costs to the DOE and lenders, and could be assessed an administrative fine. The DOE could also place the institution on provisional certification status and/or transfer the institution to the reimbursement or cash monitoring system of receiving Title IV Program funds, under which an institution must disburse its own funds to students and document the students'students’ eligibility for Title IV Program funds before receiving such funds from the DOE. See “RegulatoryPart I, Item 1. “Business - Regulatory Environment – Financial Responsibility Standards.”
Significant violations of Title IV Program requirements by the Company or any of our institutions could be the basis for the DOE to limit, suspend, terminate, revoke, or terminatedecline to renew the participation of the affected institution in Title IV Programs or to seek civil or criminal penalties. Generally, such a termination of Title IV Program eligibility extends for 18 months before the institution may apply for reinstatement of its participation. There is no DOE proceeding pending to fine any of our institutions or to limit, suspend or terminate any of our institutions'institutions’ participation in Title IV Programs, nor has the DOE notified us of an intent to revoke or decline to renew any of our institutions’ participation in Title IV Programs.
We and our schools are also subject to claims and lawsuits relating to regulatory compliance brought not only by federal and state regulatory agencies and our accrediting bodies, but also by third parties, such as present or former students or employees and other members of the public. If we are unable to successfully resolve or defend against any such claim or lawsuit, we may be required to pay money damages or be subject to fines, limitations, loss of federal funding, injunctions or other penalties. Moreover, even if we successfully resolve or defend against any such claim or lawsuit, we may have to devote significant financial and management resources in order to reach such a result.
Scrutiny of the For-Profit Postsecondary Education Sector.In recent years, Congress, the DOE, state legislatures, accrediting agencies, the CFPB, the FTC, state attorneys general and the media have scrutinized the for-profit postsecondary education sector. Congressional hearings and roundtable discussions were held regarding various aspects of the education industry, including issues surrounding student debt as well as publicly reported student outcomes that may be used as part of an institution’s recruiting and admissions practices, and reports were issued that are highly critical of for-profit colleges and universities. A group of influential U.S. senators, consumer advocacy groups and some media outlets have strongly and repeatedly encouraged agencies such as the DOE, the FTC, the CFPB, the Department of Defense and the Department of Veterans Affairs and its state approving agencies to take action to limit or terminate the participation of institutions such as ours in existing tuition assistance programs. Both major political parties have conveyed significantly different views on how they would propose to reauthorize the Title IV Programs and the various conditions on program or institutional eligibility they would require. As a result of the election of President Biden and the new leadership of the DOE, there is an increased likelihood of scrutiny of our institutions by federal agencies. It is not possible to know how this may affect the Company, however, any actions that limit our participation in Title IV Programs or the amount of student financial aid for which our students are eligible would negatively impact our business.
On December 21, 2021, we received a letter from the Consumer Financial Protection Bureau (“CFPB”) stating that the CFPB is assessing whether we are subject to CFPB’s supervisory authority based on its activities related to consumer lending. The letter states that the CFPB has the authority to supervise certain entities in the private education loan market and certain other consumer financial products and services. The CFPB requested a list of information from us in order to conduct its assessment. We have provided the requested information to the CFPB and are waiting for the CFPB to respond. See Part I. Item 1. “Business - Regulatory Environment – Other Financial Assistance Programs.”
On October 6, 2021, the FTC issued an announcement regarding its plan to target false claims by for-profit colleges on topics such as promises about graduates’ job and earnings prospects and other outcomes, its intent to impose “significant financial penalties” on violators, and its intent to monitor the market carefully with federal and state partners. The FTC indicated in the announcement that it had put 70 for-profit higher education institutions on notice that the agency would be “cracking down” on any such false promises. All of our institutions were among the 70 institutions who received this notice. Although the FTC stated that a school’s presence on the list of 70 institutions does not reflect any assessment as to whether they have engaged in deceptive or unfair conduct, the FTC’s announcement and its issuance of notices to schools could lead to further scrutiny, investigations, and potential attempted enforcement actions by the FTC and other regulators against for-profit schools, including our schools.
On October 8, 2021, the DOE announced the establishment of an Office of Enforcement within the Federal Student Aid office that oversees institutions participating in the Title IV programs. The action restored an office that previously was established in 2016 but deprioritized during the prior presidential administration. The office will comprise four existing divisions including the Administrative Actions and Appeals Services Group (which among other things initiates adverse actions against institutions), the Borrower Defense Group (which analyzes borrower defense to repayment claims), the Investigations Group (which evaluates and investigates potential institutional noncompliance and collaborates with other federal and state regulators), and the Resolution and Referral Management Group (which tracks and resolves referrals, allegations and complaints about institutions and other parties that participate in the Title IV programs). The establishment of the Office of Enforcement could result in an increase in enforcement actions and other activities against for-profit schools and school companies, including us.
Coronavirus Aid, Relief, and Economic Security (“CARES”). On March 27, 2020, the CARES Act was signed into law, which includes a $2 trillion federal economic relief package providing financial assistance and other relief to individuals and businesses impacted by the spread of COVID-19. The CARES Act includes provisions for financial assistance and other regulatory relief benefitting students and their postsecondary institutions.
Among other things, the CARES Act includes a $14 billion HEERF funds for the DOE to distribute directly to institutions of higher education. Institutions are required to use at least half of the HEERF funds for emergency grants to students for expenses related to disruptions in campus operations (e.g., food, housing, etc.). Institutions are permitted to use the remainder of the funds for additional emergency grants to students or to cover institutional costs associated with significant changes to the delivery of instruction due to the COVID-19 emergency, provided that those costs do not include payment to contractors for the provision of pre-enrollment recruitment activities, endowments, or capital outlays associated with facilities related to athletics, sectarian instruction, or religious worship. The law requires institutions receiving funds to continue to the greatest extent practicable to pay its employees and contractors during the period of any disruptions or closures related to the COVID-19 emergency.
The DOE has allocated funds to each institution of higher education based on a formula contained in the CARES Act. The formula is heavily weighted toward institutions with large numbers of Pell Grant recipients. The DOE allocated $27.4 million to our schools distributed in two equal installments and required them to be utilized by April 30, 2021 and May 14, 2021, respectively. The Company has distributed the full $13.7 million of its first installment as emergency grants to students and has utilized the full $13.7 million of its second installment. If the funds are not spent or accounted for in accordance with applicable requirements, we could be required to return funds or be subject to other sanctions. The DOE is currently reviewing a final audit report issued by the OIG on September 24, 2021 regarding several matters including whether we used HEERF funds for allowable and intended purposes. See Part I. Item 1. “Business - Regulatory Environment – Compliance with Regulatory Standards and Effect of Regulatory Violations.”
Coronavirus Response and Relief Supplemental Appropriations Act, 2021 (“CRRSAA”) and ARPA. On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law. This annual appropriations bill contained the CRRSAA. CRRSAA provided an additional $81.9 billion to the Education Stabilization Fund including $22.7 billion for the HEERF, which were originally created by the CARES Act in March 2020. The higher education provisions of the CRRSAA are intended in part to provide additional financial assistance benefitting students and their postsecondary institutions in the wake of the spread of COVID-19 across the country and its impact on higher educational institutions. In March 2021, the $1.9 trillion American Rescue Plan Act of 2021 (“ARPA”) was signed into law. Among other things, theARPA provides $40 billion in relief funds that will go directly to colleges and universities with $395.8 million going to for-profit institutions. The DOE has allocated a total of $24.4 million to our schools from the funds made available under CRRSAA and ARPA. As of December 31, 2021, the Company has drawn down and distributed to our students $14.8 million of these allocated funds. The remainder of the funds are on hold by the DOE and will be distributed to the students upon release. Failure to comply with requirements for the usage and reporting of these funds could result in requirements to repay some or all of the allocated funds and in other sanctions.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on our website at www.lincolntech.edu under the “Investor Relations - Financial Information - SEC Filings” captions, as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC. Reports of our executive officers, directors and any other persons required to file securities ownership reports under Section 16(a) of the Exchange Act are also available through our website. Information contained on our website is not a part of this Annual Report on Form 10-K and is not incorporated herein by reference.
The risk factors described below and other information included elsewhere in this Annual Report on Form 10-K are among the numerous riskedrisks faced by our Company and should be carefully considered before deciding to invest in, sell or retain shares of our common stock. TheThese are factors that, individually or in the aggregate, could cause our actual results to differ materially from expected and historical results and the risks and uncertainties described below are not the only ones we face. Investors should understand that it is not possible to predict or identify all such risks and, as such, should not consider the following to be a complete discussion of all potential risks and uncertainties that may affect the Company. Investors should consider carefully the risks and uncertainties described below in addition to other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and related notes.
RISKS RELATED TO COVID-19
Public health outbreaks, epidemics and pandemics such as the COVID-19 pandemic can have far-reaching and negative impacts on world economies. The pandemic caused by COVID-19 has had a significant impact on the U.S. economy which has continued through 2021 and could have a materially adverse impact on our business, results of operations, financial condition and/or cash flows.
The COVID-19 pandemic has caused significant disruption to the U.S. and world economies, including the closing of many schools and businesses for extended periods of time, significantly higher unemployment and underemployment, significantly lower interest rates and equity market valuations, and extreme volatility in the U.S. and world financial markets. The impact of the COVID-19 pandemic on the U.S. economy has continued to be significant during 2021.
The extent to which the COVID-19 pandemic, including its variants, continues to impact our business, results of operations, financial condition and/or cash flows will depend on future developments, which are highly uncertain, unpredictable and largely beyond our control, including, among others: the scope and duration of COVID-19 and its variants; the number of our employees, students, and vendors adversely affected by the pandemic; the broader public health and economic dislocations resulting from the pandemic; any legislative or regulatory changes or other actions taken by governmental authorities to limit the public health, financial and economic impacts of the COVID-19 pandemic; any reputational damage related to the public perception of our or our industry’s response to the COVID-19 pandemic; and the impact of the COVID-19 pandemic on local, and U.S. economies.
RISKS RELATED TO OUR INDUSTRY
Our failure to comply with the extensive regulatory requirements for participation in Title IV Programs and school operations could result in financial penalties, restrictions on our operations and loss of external financial aid funding, which could affect our revenues and impose significant operating restrictions on us.
Our industry is highly regulated by federal and state governmental agencies and by accrediting commissions. In particular, the HEA and DOE regulations specify extensive criteria and numerous standards that an institution must satisfy to establish to participate in the Title IV Programs. For a description of these criteria, see “Regulatory Environment.”
If we are found not to have satisfied the DOE's requirements for Title IV Programs funding, one or more of our institutions, including its additional locations, could be limited in its access to, or lose, Title IV Program funding, which could adversely affect our revenue, as we received approximately 78% of our revenue (calculated based on cash receipts) from Title IV Programs in 2018, and have a significant impact on our business and results of operations. Furthermore, if any of our schools fails to comply with applicable regulatory requirements, the school and its related main campus and/or additional locations could be subject to, among other things, the loss of state licensure or accreditation, the loss of eligibility to participate in and receive funds under the Title IV Programs, the loss of the ability to grant degrees, diplomas and certificates, provisional certification, or the imposition of liabilities or monetary penalties, any of which could adversely affect our revenues and impose significant operating restrictions upon us. In addition, the loss by any of our schools of its accreditation, its state authorization or license, or its eligibility to participate in Title IV Programs would constitute an event of default under our credit agreement with our lender, which could result in the acceleration of all amounts then outstanding with respect to our outstanding loan obligations. The various regulatory agencies applicable to our business periodically revise their requirements and modify their interpretations of existing requirements and restrictions. We cannot predict with certainty how any of these regulatory requirements will be applied or whether each of our schools will be able to comply with thesesuch revised requirements or any additional requirements instituted in the future.
If we fail Given the complex nature of the regulations and the fact that they are subject to demonstrate "administrative capability"interpretation, it is reasonable to conclude that in the DOE,conduct of our business, could suffer.
we may inadvertently violate such regulations. In particular, the HEA and DOE regulations specify extensive criteria and numerous standards that an institution must satisfy to establish that it has the requisite "administrative capability" to participate in the Title IV Programs. For a description of these federal, state, and accrediting agency criteria, see “Regulatory Environment – Administrative Capability.Part I, Item 1. “Business - Regulatory Environment.”
If we are found not to have satisfied the DOE's "administrative capability"HEA or the DOE’s requirements or otherwise failed to comply with one or more DOE requirements, for Title IV Programs funding, one or more of our institutions, including its additional locations, could be limited in its access to, or lose, Title IV Program funding. A loss or decrease in Title IV funding, which could adversely affect our revenue, as we received approximately 78%75% of our revenue (calculated based on cash receipts) from Title IV Programs in 2018,2021, and have a significant impact on our business and results of operations. If any of our schools fail to comply with applicable HEA or regulatory requirements, our regulators could take a variety of adverse actions against us, and our schools could be subject to, among other things, a) the loss of, or placement of material restrictions or conditions on (i) state licensure or accreditation, (ii) eligibility to participate in and receive funds under the Title IV Programs or other federal or state financial assistance programs, or (iii) capacity to grant degrees, diplomas and certificates or b) the imposition of liabilities or monetary penalties, any of which could have a material adverse effect on academic or operational initiatives, revenues or financial condition, and impose significant operating restrictions upon us. See Part I, Item 1. “Business – Regulatory Environment – Compliance with Regulatory Standards and Effect of Regulatory Violations.”
If we fail to demonstrate “administrative capability” to the DOE, our business could suffer.
DOE regulations specify extensive criteria an institution must satisfy to establish that it has the requisite “administrative capability” to participate in Title IV Programs, and the DOE is currently engaged in a rulemaking process that may expand the number and scope of these criteria. For a description of these criteria, see Part I, Item 1. “Business - Regulatory Environment – Administrative Capability.”
If we are found not to have satisfied the DOE’s “administrative capability” requirements, or otherwise failed to comply with one or more DOE requirements, one or more of our institutions and its additional locations, could be limited in its access to, or lose, Title IV Program funding. This could adversely affect our revenue, as we received approximately 75% of our revenue (calculated based on cash receipts) from Title IV Programs in 2021, which would have a significant impact on our business and results of operations.The DOE has placed all of our institutions on provisional certification based on findings in recent audits of the institutions’ Title IV compliance that the DOE alleges identified deficiencies in regulations related to DOE regulations regarding an institutions’ level of administrative capability. See Part I. Item 1. “Business - Regulatory Environment – Regulation of Federal Student Financial Aid Programs.”
Congress and the DOE may make changes to the laws and regulations applicable to, or reduce funding for, Title IV Programs, which could reduce our student population, revenues or profit margin.
Congress periodically revises the HEA and other laws governing Title IV Programs and annually determines the funding level for each Title IV Program. We cannot predict what, if any, legislative or other actions will be taken or proposed by Congress in connection with the reauthorization of the HEA or with other such activities of Congress.Congress, although Congress recently made a change to the 90/10 rule that will make it harder for schools like ours that are subject to the rule to comply with the rule. See “RegulatoryPart I, Item 1. “Business - Regulatory Environment – Congressional Action.” Because a significant percentage of our revenues are derived from the Title IV programs,Programs, any action by Congress or the DOE that significantly reduces funding for Title IV Programs or that limits or restricts the ability of our schools, programs, or students to receive funding through those Programssuch programs or that imposes new restrictions or constraints upon our business or operations could reduce our student enrollment and our revenues, and could increase our administrative costs, require us to arrange for alternative sources of financial aid for our students, and require us to modify our practices in order for our schools to comply fully with Title IV program requirements.comply. In addition, current requirements for student or school participation in Title IV ProgramsProgram participation may change or one or more of the present Title IV Programs could be replaced by other programs with materially different student or school eligibility requirements. The potential for changes that may be adverse to us and other for-profit schools like ours may increase as a result of the change in administration and changes in Congress. The DOE is currently engaged in a process to establish new regulations that are expected to increase the number and scope of regulatory requirements applicable to our schools. See Part I, Item 1. “Business – Regulatory Environment – Negotiated Rulemaking.” If we cannot comply with the provisions of the HEA and the regulations of the DOE, as they may be revised, or if the cost of such compliance is excessive, or if funding is materially reduced, our revenues or profit margin could be materially adversely affected.
We could be subject to liabilities, letter of credit requirements, and other sanctions under the DOE’s Borrower Defense to Repayment Regulations.
On July 1, 2020, the DOE’s published final Borrower Defense to Repayment regulations became effective. Among other things, these new regulations amend the processes for borrowers to receive from DOE a discharge of the obligation to repay certain Title IV Program loans first disbursed on or after July 1, 2020 based on certain acts or omissions by the institution or a covered party. The new and existing DOE regulations establish detailed procedures and standards for the loan discharge processes for periods prior to July 1, 2017, between July 1, 2017 and June 30, 2020, and on or after July 1, 2020, including the information required for borrowers to receive a loan discharge, and the authority of the DOE to seek recovery from the institution of the amount of discharged loans. See Part I, Item 1. “Business - Regulatory Environment – Borrower Defense to Repayment Regulations.” The regulations also modify certain components of the financial responsibility regulations, including the list of triggering events that could result in the DOE determining that the institution lacks financial responsibility and must submit to the DOE a letter of credit or other form of acceptable financial protection and accept other conditions on the institution’s Title IV Program eligibility. See Part I, Item 1. “Business - Regulatory Environment – Financial Responsibility Standards.” The DOE is currently engaged in a process to establish additional regulations that could make it easier for borrowers to obtain loan discharges and for the DOE to impose liabilities and other sanctions on schools based on the discharge of loans and that could increase the number and scope of financial responsibility requirements. See Part I, Item 1. “Business – Regulatory Environment – Negotiated Rulemaking.”
The DOE has changed its regulations, and may make other changes in the future, in a manner which could require us to incur additional costs in connection with our administration of the Title IV Programs,, affect our ability to remain eligible to participate in the Title IV Programs,, impose restrictions on our participation in the Title IV Programs,, affect the rate at which students enroll in our programs, or otherwise have a significant impact on our business and results of operations.
In October 2014, the DOE issued final regulations on gainful employment requiring each educational program to achieve threshold rates in two debt measure categories related to an annual debt to annual earnings ratio and an annual debt to discretionary income ratio. The regulations outline various scenarios under which programs could lose Title IV Program eligibility for failure to achieve threshold rates in one or more measures over certain periods of time ranging from two to four years. The regulations also require an institution to provide warnings to students in programs which may lose Title IV Program eligibility at the end of an award year. The final regulations also contain other provisions that, among other things, include disclosure, reporting, new program approval, and certification requirements. See “Regulatory Environment – Gainful Employment.”
In August 2018, the DOE published proposed regulations that would eliminate the existing gainful employment regulations. The DOE indicatedperiodically issues new regulations and guidance that its plans include, but are not limited to, publishing outcomes data at the program level on a DOE website such as the College Scorecard or some other website. The DOE permitted the submission of public comments to the proposed regulations until September 13, 2018. Any regulations published in final form by November 1, 2018 typically wouldcan have takenan adverse effect on July 1, 2019. However, the DOE announced that it would not publish the regulations in final form by November 1, 2018 and has not yet issued the final regulations. If the regulations are published prior to November 1, 2019, they typically would take effect on July 1, 2020 unless the DOE is willing and able to provide for an earlier implementation date. We cannot provide any assurance as to the timing, content, and ultimate effective date of any such final regulations.
In June 2018, the DOE announced the further extension of the compliance date for certain other gainful employment disclosure requirements until July 1, 2019. The DOE stated that institutions are still required to comply with other gainful employment disclosure requirements in the interim.
On August 18, 2017, the DOE announced in the Federal Register new deadlines for submitting notices of intent to file alternate earnings appeals of gainful employment rates and for submitting alternate earnings appeals of those rates. The deadline to file a notice of intent to file an appeal was October 6, 2017 and the deadline to file the alternate earnings appeal was February 1, 2018.our institutions. We cannot predict whenthe timing and content of any new regulations or guidance that the DOE will calculatemay seek to impose or whether and to what extent the DOE under the new administration may issue new draft or final gainful employment rates in the future. We also cannot predict whether the gainful employment rulemaking process or the extensionregulations and guidance that could adversely impact for-profit schools including our institutions. The DOE recently published new regulations on a variety of certain gainful employment deadlines may result in the DOE delaying the issuance of new draft or final gainful employment rates in the future.
In January 2016, the DOE began negotiated rulemaking to develop proposed regulations regarding a borrower’s ability to allege acts or omissions by an institution as a defense to the repayment of certain Title IV loans and the consequences to the borrower, the DOE, and the institution. See “Regulatory Environment – Borrower Defense to Repayment Regulations.” Ontopics on November 1, 2016, the DOE published in the Federal Register the final version of these regulations2019 with a general effective date of July 1, 20172020 and which, among other things, include rules for:
| · | establishing new processes, and updating existing processes, for enabling borrowers to obtain from the DOE a discharge of some or all of their federal student loans based on circumstances such as certain acts or omissions of the institution and for the DOE to impose and collect liabilities against the institution following the loan discharges; |
| · | establishing expanded standards of financial responsibility (see “Financial Responsibility Standards”); |
| · | requiring institutions to make disclosures to current and prospective students regarding the existence of certain of the circumstances identified in the expanded standards of financial responsibility; |
| · | calculating a loan repayment rate for each proprietary institution under standards established by the regulations and requiring institutions to provide warnings to current and prospective students if the institution has a loan repayment rate below specified thresholds; |
| · | prohibiting certain contractual provisions imposed by or on behalf of schools on students regarding arbitration, dispute resolution, and participation in class actions; and |
| · | expanding the existing definition of misrepresentations that could result in grounds for discharge of student loans and in liabilities and sanctions against the institution, including, without limitation, potential loss of Title IV eligibility. |
On January 19, 2017, the DOE issued newpublished additional regulations that update the Department’s hearing procedures for actions to establish liability against an institution and to establish procedural rules governing recovery proceedings under the DOE’s borrower defense to repayment regulations.
The DOE had delayed theon additional topics on September 2, 2020 with a general effective date of July 1, 2021. The DOE is currently engaged in a majorityrulemaking process that is expected to result in new regulations on a broad range of topics that could adversely impact institutions including our institutions. See Part I, Item 1, “Business – Regulatory Environment – Negotiated Rulemaking. If we cannot comply with the provisions of these regulations until July 1, 2019 to ensure that there is adequate time to conduct negotiated rulemaking and, as necessary, develop revised regulations. However, a federal court ruled that the delay in the effective date of the regulations was unlawful and, on October 16, 2018, denied a request to extend a stay preventing the regulations from taking effect. The DOE has not yet issued subsequent guidance regarding how the DOE will implement the regulations. There is ongoing litigation challenging the regulations, but we cannot provide any assurance as to whether the litigation could result in the future suspension or invalidation of some or all of those regulations.
The DOE published proposed regulations on July 31, 2018 that would modify the defense to repayment regulations, including regulations regarding, among other things, acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of certain Title IV loans. The proposed regulations also include regulations regarding other topics such as permitting the use of arbitration clauses and class action waivers in enrollment agreements and triggering events that would result in recalculating a school’s financial responsibility score and require the school to post a letter of credit or other surety. We are inregulations, as they currently exist or may be revised, or if the processcost of evaluating the proposed regulations. Any regulations published in final form by November 1, 2018 typically would have taken effect on July 1, 2019. However, the DOE announced that it would not publish the regulations in final form by November 1, 2018 and has not yet issued the final regulations. If the regulations are published prior to November 1, 2019, they typically would take effect on July 1, 2020 unless the DOEsuch compliance is willing and able to provide for an earlier implementation date. We cannot provide any assurance as to the timing, content, and ultimate effective date of any such final regulations. excessive, or if funding is materially reduced, our revenues or profit margin could be materially adversely affected.
We cannot predict how the DOE willwould interpret and enforce the current borrower defense to repayment rules,or future regulations or how these regulations, or any final rulesregulations that may arise out of the DOE’s ongoinga negotiated rulemaking process or how the current or future rulesany other regulations that DOE may promulgate, may impact our schools’ participation in the Title IV Programs; however, the current andor future rulesregulations could have a material adverse effect on our schools’ business and results of operations, and the broad sweep of the recent rules and the rules that the Department is currently developing may, in the future, require our schools to submit a letter of credit based on expanded standards of financial responsibility. See “Regulatory Environment – Financial Responsibility Standards.” We cannot predict how the DOE would interpret and enforce current or future borrower defense to repayment rules or how these rules, or any rules that may arise out of the negotiated rulemaking process or any other rules that DOE may promulgate on this or other topics, may impact our schools’ participation in the Title IV programs; however, the new rules could have a material adverse effect on our schools’ business and results of operations, and the broad sweep of the rules may, in the future, require our schools to submit a letter of credit based on expanded standards of financial responsibility.
On October 15, 2018, the DOE published a notice in the Federal Register announcing its intent to establish a negotiated rulemaking committee and three subcommittees to develop proposed regulations related to several matters. See “Regulatory Environment – Negotiated Rulemaking.”. On January 7, 2019, the DOE released a set of draft proposed regulations for consideration and negotiation by the negotiated rulemaking committee and subcommittees. The draft proposed regulations also cover additional topics including, but not limited to, amendments to current regulations regarding the clock to credit hour conversion formula for measuring the lengths of certain educational programs, the return of unearned Title IV funds received for students who withdraw before completing their educational programs, and the measurement of student academic progress. The proposed changes to the regulations remain subject to further change during the negotiated rulemaking process and we continue to monitor and review those proposals as they evolve. The committee and subcommittees are scheduled to meet during the first three months of 2019. At this time, we cannot provide any assurances as to the timing, content or impact of any final regulations arising from this planned negotiated rulemaking process.
If we or our eligible institutions do not meet the financial responsibility standards prescribed by the DOE, we may be required to post letters of credit or our eligibility to participate in Title IV Programs could be terminated or limited, which could significantly reduce our student population and revenues.
To participate in Title IV Programs, an eligible institution must satisfy specific measures of financial responsibility prescribed by the DOE or post a letter of credit in favor of the DOE and possibly accept other conditions on its participation in Title IV Programs. The DOE published new regulations that establish expanded standards of financial responsibility that could result in a requirement that we submit to the DOE a substantial letter of credit or other form of financial protection in an amount determined by the DOE, and be subject to other conditions and requirements, based on any one of an extensive list of triggering circumstances.circumstances. See “RegulatoryPart I, Item 1. “Business - Regulatory Environment – Financial Responsibility Standards.” The DOE is currently engaged in a rulemaking process that is expected to result in new regulations that, among other things, may increase the number and scope of financial responsibility requirements and triggering circumstances that could lead to a letter of credit requirement or other sanctions. Any obligation to post one or more letters of credit would increase our costs of regulatory compliance. Our inability to obtain a required letter of credit or limitations on, or termination or revocation of, our participation in Title IV Programs could limit our students'students’ access to various government-sponsored student financial aid programs, which could significantly reduce our student population and revenues.
We are subject to fines and other sanctions if we pay impermissible commissions, bonuses or othermake incentive payments to individuals involved in certain recruiting, admissions or financial aid activities, which could increase our cost of regulatory compliance and adversely affect our results of operations.
An institution participating in Title IV Programs may not provide any commission, bonus or other incentive payment based directly or indirectly on success in enrolling students or securing financial aid to any person involved in any student recruiting or admission activities or in making decisions regarding the awarding of Title IV Program funds. See “RegulatoryPart I, Item 1. “Business - Regulatory Environment -- Restrictions on Payment of Commissions, Bonuses and Other Incentive Payments.” We cannot predict how the DOE will interpret and enforce the incentive compensation rule. The implementation of theserule and the limited published guidance that the DOE has provided, nor how it will apply the rule and guidance to our past, present, and future compensation practices. These regulations has required us to change our compensation practices and hashave had and may continue to have a significant impact on the rate at which students enroll in our programs and on our business and results of operations. If we are found to have violated this law, we could be fined or otherwise sanctioned by the DOE or we could face litigation filed under the qui tam provisions of the Federal False Claims Act.
If our schools do not maintain their state licensure and accreditation, they may not participate in Title IV Programs, which could adversely affect our student population and revenues.
An institution must be accredited by an accrediting commission recognized by the DOE and by applicable state educational agencies in order to participate in Title IV Programs. See “RegulatoryPart I, Item 1. “Business - Regulatory Environment – State Authorization” and “Business – Regulatory Environment – Accreditation.,” Our schools are currently on financial reporting status with ACCSC. If any of our schools fails to comply with accrediting commission requirements, the institution and its main and/or branch campuses are subject to the loss of accreditation or may be placed on probation or a special monitoring or reporting status which, if the noncompliance with accrediting commission requirements is not resolved, could result in loss of accreditation. Loss of accreditation by any of our main campuses would result in the termination of eligibility of that schoolschool’s eligibility and all of its branch campuses to participate in Title IV Programs and could cause us to close the school and its branches, which could have a significant adverse impact on our business and operations.
On October 28, 2021, the DOE announced that it had notified ACCSC that a decision on the recognition by the DOE of ACCSC as an accrediting agency was being deferred pending the submission of additional information about ACCSC’s monitoring, evaluation, and actions related to high-risk institutions. See Part 1, Item 1. “Business – Regulatory Environment – Accreditation.” If the DOE declines to continue its recognition of ACCSC and if the subsequent period for obtaining accreditation from another DOE-recognized accrediting agency lapses before we obtain accreditation from another DOE-recognize accrediting agency (or if the DOE does not provide such a period for institutions to obtain other accreditation), our schools could lose our Title IV eligibility. We cannot predict the timing and outcome of the DOE’s decision on the continuation of its recognition of ACCSC, the timing and outcome of any appeal that ACCSC might pursue in the event of an adverse decision, or the duration and conditions of any period the DOE may elect to provide to institutions to obtain accreditation from another DOE-recognized accrediting agency.
Programmatic accreditation is the process through which specific programs are reviewed and approved by industry- and program-specific accrediting entities. Although programmatic accreditation is not generally necessary for Title IV Program eligibility, such accreditation may be required to allow students to sit for certain licensure exams or to work in a particular profession or career or to meet other requirements. Failure to obtain or maintain such programmatic accreditation may lead to a decline in enrollments in such programs. Moreover, under new gainful employment regulations issued by the DOE, institutions are required to certify that they have programmatic accreditation under certain circumstances. See “Regulatory Environment – Gainful Employment.” Failure to comply with these new requirements could impact the Title IV eligibility of educational programs that are required to maintain such programmatic accreditation.
Our institutions would lose eligibility to participate in Title IV Programs if the percentage of their revenues derived from those programs exceeds 90%, which could reduce our student population and revenues.
Under the HEA reauthorization, aA proprietary institution that derives more than 90% of its total revenue from Title IV Programs Programs for two consecutive fiscal years becomes immediately ineligible to participate in Title IV Programs and may not reapply for eligibility until the end of at least two fiscal years. An institution with revenues exceeding 90% for a single fiscal year will be placed on provisional certification and may be subject to other enforcement measures. If Congress or the DOE were to amend the 90/10 Rule to treat other forms of federal financial aid as Title IV Program revenue for 90/10 Rule purposes, lower the 90% threshold, or otherwise change the calculation methodology, or make other changes to the 90/10 Rule, those changes could make it more difficult for our institutions to comply with the 90/10 Rule. See “RegulatoryPart I, Item 1. “Business - Regulatory Environment – 90/10 Rule.” If any of our institutions loses eligibility to participate in Title IV Programs, that loss would cause an event of default under our credit agreement, would also adversely affect our students’ access to various government-sponsored student financial aid programs, and would have a significant impact on the rate at which our students enroll in our programs and on our business and results of operations.
In March 2021, the ARPA amended the 90/10 rule by treating other “Federal funds that are disbursed or delivered to or on behalf of a student to be used to attend such institution” in the same way as Title IV funds are currently treated in the 90/10 rule calculation. See Part I, Item 1. “Business – Regulatory Environment – 90/10 Rule.” The ARPA states that the amendments to the 90/10 rule apply to institutional fiscal years beginning on or after January 1, 2023 and are subject to the HEA’s negotiated rulemaking process. The DOE initiated a negotiated rulemaking process to amend the 90/10 rule in January 2022. We cannot predict the ultimate timing and content of the final regulations, but the future regulations on 90/10 could have a materially adverse effect on us and other schools like ours. See Part I, Item 1. “Business – Regulatory Environment – 90/10 Rule” and “Business – Regulatory Environment – Negotiated Rulemaking.”
Our institutions would lose eligibility to participate in Title IV Programs if their former students defaulted on repayment of their federal student loans in excess of specified levels, which could reduce our student population and revenues.
An institution may lose its eligibility to participate in some or all Title IV Programs if the rates at which the institution'sinstitution’s current and former students default on their federal student loans exceed specified percentages. See “RegulatoryPart I, Item 1. “Business - Regulatory Environment – Student Loan Defaults.” If former students defaulted on repayment of their federal student loans in excess of specified levels, our institutions would lose eligibility to participate in Title IV Programs, would cause an event of default under our credit agreement, would also adversely affect our students’ access to various government-sponsored student financial aid programs, and would have a significant impact on the rate at which our students enroll in our programs and on our business and results of operations.
We are subject to sanctions if we fail to correctly calculate and timely return Title IV Program funds for students who withdraw before completing their educational program, which could increase our cost of regulatory compliance and decrease our profit margin.
An institution participating in Title IV Programs must correctly calculate the amount of unearned Title IV Program funds that have been credited to students who withdraw from their educational programs before completing them and must return those unearned funds in a timely manner, generally within 45 days of the date the institution determines that the student has withdrawn.such student’s withdrawal. If the unearned funds are not properly calculated and timely returned, we may have to post a letter of credit in favor of the DOE or may be otherwise sanctioned by the DOE, which could increase our cost of regulatory compliance and adversely affect our results of operations. Based upon the findings of an annual Title IV Program compliance audit of our Columbia Maryland and Iselin New Jersey institutions, the Company submitted letterswe are required to submit a letter of credit in the amountsamount of $0.5 million and $0.1 million$600,020 to the DOE. We are required to maintain those letters of credit in place for a minimum of two years. See “RegulatoryPart I, Item 1. “Business - Regulatory Environment – Return of Title IV Program Funds.”
We are subject to sanctions if we fail to comply with the DOE’s regulations regarding prohibitions against substantial misrepresentations, which could increase our cost of regulatory compliance and decrease our profit margin.
The DOE’s regulations prohibit an institution that participates in the Title IV Programs from engaging in substantial misrepresentation of the nature of its educational programs, financial charges, graduate employability or its relationship with the DOE. The DOE has initiated a negotiated rulemaking process that may result in, among other things, an expansion of the categories of conduct deemed to be a misrepresentation and that also may result in new prohibitions on certain types of recruiting tactics and conduct that the DOE deems to be aggressive or deceptive. See “RegulatoryPart I, Item 1. “Business - Regulatory Environment – Substantial Misrepresentation.Misrepresentation” and “Business – Regulatory Environment – Negotiated Rulemaking.” If the DOE determines that one of our institutions has engaged in substantial misrepresentation, the DOE may impose sanctions or other conditions upon the institution including, but not limited to, initiating an action to fine the institution or limit, suspend, or terminate its eligibility to participate in the Title IV Programs and may seek to discharge students’ loans and impose liabilities upon the institution.
All of our institutions are provisionally certified by the DOE which may make them more vulnerable to unfavorable DOE action and place additional regulatory burdens on its operations.
All of our institutions are provisionally certified by the DOE. See Part I, Item 1. “Business - Regulatory Environment – Regulation of Federal Student Financial Aid Programs.” The DOE typically places an institution on provisional certification following a change in ownership resulting in a change of control, and may provisionally certify an institution for other reasons including, but not limited to, failure to comply with certain standards of administrative capability or financial responsibility. During the time when an institution is provisionally certified, it may be subject to adverse action with fewer due process rights than those afforded to other institutions. In addition, an institution that is provisionally certified must apply for and receive approval from the DOE for certain substantive changes including, but not limited to, the establishment of an additional location, an increase in the level of academic offerings or the addition of new programs. The DOE is currently engaged in a negotiated rulemaking process that is considering, among other issues, establishing rules to authorize additional conditions and restrictions on provisionally certified institutions. See Part I, Item 1. “Business – Regulatory Environment – Negotiated Rulemaking.” Any adverse action by the DOE or increased regulatory burdens as a result of the provisional status of one of our institutions could have a material adverse effect on enrollments and our revenues, financial condition, cash flows and results of operations.
Regulatory agencies or third parties may conduct compliance reviews, bring claims or initiate litigation against us. If the results of these reviews or claims are unfavorable to us, our results of operations and financial condition could be adversely affected.
Because we operate in a highly regulated industry, we are subject to compliance reviews and claims of noncompliance and lawsuits by government agencies and third parties. We may be subject to further reviews related to, among other things, issues of noncompliance identified in recent audits and reviews related to our institutions’ compliance with Title IV Program requirements or related to liabilities for the discharge of loans to certain students who attended campuses of our institutions that are now closed. See Part I, Item 1. “Business - Regulatory Environment – Compliance with Regulatory Standards and Effect of Regulatory Violations.” If the results of these reviews or proceedings are unfavorable to us, or if we are unable to defend successfully against third-party lawsuits or claims, we may be required to pay money damages or be subject to fines, limitations on the operations of our business, loss of federal and state funding, injunctions or other penalties. Even if we adequately address issues raised by an agency review or successfully defend a third-party lawsuit or claim, we may have to divert significant financial and management resources from our ongoing business operations to address issues raised by those reviews or defend those lawsuits or claims. Certain of our institutions are subject to ongoing reviews and proceedings. See “RegulatoryPart I, Item 1. “Business – Regulatory Environment – State Authorization,Accreditation,” “Regulatory Environment – Accreditation,Other Financial Assistance Programs,” and“Regulatory Environment – Borrower Defense to Repayment,” “Regulatory Environment - Compliance with Regulatory Standards and Effect of Regulatory Violations.Violations,” and “Regulatory Environment - Scrutiny of the For-Profit Postsecondary Education Sector.”
A decline in the overall growth of enrollment in post-secondary institutions, or in our core disciplines, could cause us to experience lower enrollment at our schools, which could negatively impact our future growth.
Enrollment in post-secondary institutions over the next ten years is expected to be slower than in the prior ten years. In addition, the number of high school graduates eligible to enroll in post-secondary institutions is expected to fall before resuming a growth pattern for the foreseeable future. In order to increase our current growth rates in degree granting programs, we will need to attract a larger percentage of students in existing markets and expand our markets by creating new academic programs. In addition, if job growth in the fields related to our 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 diploma or degree granting programs that we offer or seek to offer. Our failure to attract new students, or the decisions by prospective students to seek diploma or degree programs in other disciplines, would have an adverse impact on our future growth.
Our business could be adversely impacted by additional legislation, regulations, or investigations regarding private student lending because students attending our schools rely on private student loans to pay tuition and other institutional charges.
The U.S. Consumer Financial Protection Bureau (“CFPB”), under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, has exercised supervisory authority over private education loan providers. The CFPB has been active in conducting investigations into the private student loan market and issuing several reports with findings that are critical of the private student loan market. The CFPB has initiated investigations into the lending practices of other institutions in the for-profit education sector. The CFPBsector and has issued procedures for further examination of private education loans and published requests for information regarding repayment plans and regarding arrangements between schools and financial institutions. On August 31, 2017,indicated to the DOE informed CFPBCompany that it was terminating anis assessing whether we are subject to CFPB’s supervisory authority based on our activities related to consumer lending. We have provided requested information sharing Memorandum of Understanding between the two agencies, in part becauseto the CFPB was acting on student complaints rather than referring them to the DOEand are waiting for action. The DOE asserted full oversight responsibility for federal student loans, but not with respect to private loans. In late November 2017, new leadership at the CFPB began taking steps to end or pause certain investigations and to restrict or reconsider some its enforcement activities. However, it is unclear the extent to whichrespond. We cannot predict whether the CFPB or other regulators will continueconduct further reviews or take actions that could require us to exercise oversight authority overchange private education loan providers.
lending to students at our schools or have a material adverse impact on our operations. See Part I, Item 1. “Business – Regulatory Environment – Other Financial Assistance Programs.” We cannot predict whether any of this activity, or other activities, will result in Congress, the DOE, the CFPB or other regulators adopting new legislation or regulations, or conducting newadditional investigations, into the private student loan market or into the loans received by our students to attend our institutions. Any new legislation, regulations, or investigations regarding private student lending could limit the availability of private student loans to our students, which could have a significant impact on our business and operations.
22Changes in the executive branch of our federal government as a result of the outcome of elections or other events could result in further legislation, appropriations, regulations and enforcement actions that could materially or adversely affect our business.
Our industry is subject to an intensive ongoing federal and state regulatory environment that affects our industry. The composition of federal and state executive offices, executive agencies and legislatures that are subject to change based on the results of elections, appointments and other events, may adversely impact our industry through constant changes in that regulatory environment resulting from the disparate views towards the for-profit education industry. See Part I, Item 1. “Business – Regulatory Environment – Scrutiny of the For-Profit Postsecondary Education Sector.” Any laws that are adopted that limit our or our students’ participation in Title IV Programs or in programs to provide funds for active duty service members and veterans or the amount of student financial aid for which our students are eligible, or any decreases in enrollment related to the Congressional activity concerning this sector, could have a material adverse effect on our academic or operational initiatives, cash flows, results of operations, or financial condition.
Adverse publicity arising from scrutiny of us or other for-profit postsecondary schools may negatively affect us or our schools.
In recent years, Congress, the DOE, state legislatures, accrediting agencies, the CFPB, the FTC, state attorneys general and the media have scrutinized the for-profit postsecondary education sector. See Part I, Item 1. “Business – Regulatory Environment – Scrutiny of the For-Profit Postsecondary Education Sector.” Adverse publicity regarding any past, pending, or future investigations, claims, settlements, and/or actions against us or other for-profit postsecondary schools could negatively affect our reputation, student enrollment levels, revenue, profit, and/or the market price of our common stock. Unresolved investigations, claims, and actions, or adverse resolutions or settlements thereof, could also result in additional inquiries, administrative actions or lawsuits, increased scrutiny, the loss or withholding of accreditation, state licensure, or eligibility to participate in the Title IV Programs or other financial assistance programs, and/or the imposition of other sanctions by federal, state, or accrediting agencies which, individually or in the aggregate, could have a material adverse effect on our business, financial condition, results of operations, and cash flows and result in the imposition of significant restrictions on us and our ability to operate.
RISKS RELATED TO OUR BUSINESS
Our success depends in part on our ability to update and expand the content of existing programs and develop new programs in a cost-effective manner and on a timely basis.
Prospective employers of our graduates increasingly demand that their entry-level employees possess appropriate technological skills. These skills are becoming more sophisticated in line with technological advancements in the automotive, diesel, information technology, and skilled trades. Accordingly, educational programs at our schools must keep pace with those technological advancements. The expansion of our existing programs and the development of new programs may not be accepted by our students, prospective employers or the technical education market. Even if we are able to develop acceptable new programs, we may not be able to introduce these new programs as quickly as our competitorsstudents require or as quickly ascompetitors or employers demand. If we are unable to adequately respond to changes in market requirements due to financial or regulatory constraints, unusually rapid technological changes or other factors, our ability to attract and retain students could be impaired, our placement rates could suffer and our revenues could be adversely affected.
In addition, if we are unable to adequately anticipate the requirements of the employers we serve, we may offer programs that do not teach skills useful to prospective employers, or students seeking a technical or career-oriented education which could affect our placement rates and our ability to attract and retain students, causing our revenues to be adversely affected.
Competition could decrease our market share and cause us to lower our tuition rates.
The post-secondary education market is highly competitive. Our schoolsWe compete for students and faculty with traditional public and private two-year and four-year colleges and universities and other proprietary schools, many of which have greater financial resources than we do. Some traditional public and private colleges and universities, as well as other private career-oriented schools, offer programs that may be perceived by students to be similar to ours. Most public institutions are able to charge lower tuition than our schools, due in part to government subsidies and other financial resources not available to for-profit schools. Some of our competitors also have substantially greater financial and other resources than we have which may, among other things, allow our competitors to secure strategic relationships with some or all of our existing strategic partners or develop other high profile strategic relationships, or devote more resources to expanding their programs and their school network, or provide greater financing alternatives to their students, all of which could affect the success of our marketing programs. In addition, some of our competitors have a larger network of schools and campuses than we do, enabling them to recruit students more effectively from a wider geographic area. If we are unable to compete effectively with these institutions for students,This strong competition could adversely affect our student enrollment and revenues will be adversely affected.business.
We may be required to reduce tuition or increase spending in response to competition in order to retain or attract students or pursue new market opportunities. As a result, our market share, revenues and operating margin may be decreased. We cannot be sure that we will be able to compete successfully against current or future competitors or that the competitive pressures we face will not adversely affect our revenues and profitability.
Our financial performance depends in part on our ability to continue to develop awareness and acceptance of our programs among high school graduates and working adults looking to return to school.
The awareness of our programs among high school graduates and working adults looking to return to school is critical to the continued acceptance and growth of our programs. Our inability to continue to develop awareness of our programs could reduce our enrollments and impair our ability to increase our revenues or maintain profitability. The following are some of the factors that could prevent us from successfully marketing our programs:
Student dissatisfaction with our programs and services;
| · | Student dissatisfaction with our programs and services; |
Diminished access to high school student populations;Our failure to maintain or expand our brand or other factors related to our marketing or advertising practices; and
| · | Diminished access to high school student populations; |
Our inability to maintain relationships with employers in the automotive, diesel, skilled trades and IT services industries.
| · | Our failure to maintain or expand our brand or other factors related to our marketing or advertising practices; and |
| · | Our inability to maintain relationships with employers in the automotive, diesel, skilled trades and IT services industries. |
An increase in interest rates could adversely affect our ability to attract and retain students.
Our students and their families have benefitted from historic lows on student loan interest rates in recent years. Much of the financing our students receive is tied to floating interest rates. Recently, however, student loan interest rates have been edging higher, making borrowing for education more expensive. Increases in interest rates result in a corresponding increase in the cost to our existing and prospective students of financing their education, which could result in a reduction in the number of students attending our schools and could adversely affect our results of operations and revenues. Higher interest rates could also contribute to higher default rates with respect to our students'students’ repayment of their education loans. Higher default rates may in turn adversely impact our eligibility for Title IV Program participation or the willingness of private lenders to make private loan programs available to students who attend our schools, which could result in a reduction in our student population.
A substantial decrease in student financing options, or a significant increase in financing costs for our students, could have a significant impact on our student population, revenues and financial results.
The consumer credit markets in the United States have recently suffered from increases in default rates and foreclosures on mortgages. Adverse market conditions for consumer and federally guaranteed student loans could result in providers of alternative loans reducing the attractiveness and/or decreasing the availability of alternative loans to post-secondary students, including students with low credit scores who would not otherwise be eligible for credit-based alternative loans. Prospective students may find that these increased financing costs make borrowing prohibitively expensive and abandon or delay enrollment in post-secondary education programs. Private lenders could also require that we pay them new or increased fees in order to provide alternative loans to prospective students. If any of these scenarios were to occur, our students’ ability to finance their education could be adversely affected and our student population could decrease, which could have a significant impact on our financial condition, results of operations and cash flows.
In addition, any actions by the U.S. Congress or by states that significantly reduce funding for Title IV Programs or other student financial assistance programs, or the ability of our students to participate in these programs, or establish different or more stringent requirements for our schools to participate in those programs, could have a significant impact on our student population, results of operations and cash flows.
Our total assets include substantial intangible assets. In the event that our schools do not achieve satisfactory operating results, we may be required to write-off a significant portion of unamortized intangible assets which would negatively affect our results of operations.
Our total assets reflect substantial intangible assets. At December 31, 2018, goodwill associated with our acquisitions increased to approximately 10.0% from 9.4% of total assets at December 31, 2017. On at least an annual basis, we assess whether there has been an impairment in the value of goodwill. If the carrying value of the tested asset exceeds its estimated fair value, impairment is deemed to have occurred. In this event, the amount is written down to fair value. Under current accounting rules, this would result in a charge to operating earnings. Any determination requiring the write-off of a significant portion of goodwill would negatively affect our results of operations and total capitalization, which could be material.
We cannot predict our future capital needs, and if we are unable to secure additional financing when needed, our operations and revenues would be adversely affected.
We may need to raise additional capital in the future to fund acquisitions, working capital requirements, expand our markets and program offerings or respond to competitive pressures or perceived opportunities. We cannot be sure that additional financing will be available to us on favorable terms, or at all. If adequate funds are not availableunavailable when required or on acceptable terms, we may be forced to forego attractive acquisition opportunities, cease our operations and, even if we are able to continue our operations, our ability to increase student enrollment and revenues would be adversely affected.
We may not be able to retain our key personnel or hire and retain the personnel we need to sustain and grow our business.
Our success has depended, and will continue to depend, largely on the skills, efforts and motivation of our executive officers who generally have significant experience within the post-secondary education industry. Our success also depends in large part upon our ability to attract and retain highly qualified faculty, school directors, administrators and corporate management. Due to the nature of our business, we face significant competition in the attraction and retention of personnel who possess the skill sets that we seek. In addition, key personnel may leave us and subsequently compete against us. Furthermore, we do not currently carry "key man"“key man” life insurance on any of our employees. The loss of the services of any of our key personnel, or our failure to attract and retain other qualified and experienced personnel on acceptable terms, could have an adverse effect on our ability to operate our business efficiently and to execute our growth strategy.
Strikes by our employees may disrupt our ability to hold classes as well as our ability to attract and retain students, which could materially adversely affect our operations. In addition, we contribute to multiemployer benefit plans that could result in liabilities to us if these plans are terminated or we withdraw from them.
As of December 31, 2018,2021, the teaching professionals at six of our campuses are represented by unions and covered by collective bargaining agreements that expire between 20192022 and 2022.2024. Although we believe that we have good relationships with these unions and with our employees, any strikes or work stoppages by our employees could adversely impact our relationships with our students, hinder our ability to conduct business and increase costs.
We also contribute to multiemployer pension plans for some employees covered by collective bargaining agreements. These plans are not administered by us, and contributions are determined in accordance with provisions of negotiated labor contracts. The Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendments Act of 1980, imposes certain liabilities upon employers who are contributors to a multiemployer plan in the event of the employer’s withdrawal from, or upon termination of, such plan. We do not routinely review information on the net assets and actuarial present value of the multiemployer pension plans’ unfunded vested benefits allocable to us, if any, and we are not presently aware of any material amounts for which we may be contingently liable if we were to withdraw from any of these plans. In addition, if any of these multiemployer plans enters “critical status” under the Pension Protection Act of 2006, we could be required to make significant additional contributions to those plans.
Anti-takeover provisions in our amended and restated certificate of incorporation, our bylaws and New Jersey law could discourage a change of control that our stockholders may favor, which could negatively affect our stock price.
Provisions in our amended and restated certificate of incorporation and our bylaws and applicable provisions of the New Jersey Business Corporation Act may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our stockholders. These provisions could discourage potential takeover attempts and could adversely affect the market price of our common stock. For example, applicable provisions of the New Jersey Business Corporation Act may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of five years after the person becomes an interested stockholder. Furthermore, our amended and restated certificate of incorporation and bylaws:
| · | authorize the issuance of blank check preferred stock that could be issued by our board of directors to thwart a takeover attempt; |
| · | prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of stock to elect some directors; |
| · | require super-majority voting to effect amendments to certain provisions of our amended and restated certificate of incorporation; |
| · | limit who may call special meetings of both the board of directors and stockholders; |
| · | prohibit stockholder action by non-unanimous written consent and otherwise require all stockholder actions to be taken at a meeting of the stockholders; |
| · | establish advance notice requirements for nominating candidates for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholders' meetings; and |
| · | require that vacancies on the board of directors, including newly created directorships, be filled only by a majority vote of directors then in office. |
We can issue shares of preferred stock without stockholder approval, which could adversely affect the rights of common stockholders.
Our amended and restated certificate of incorporation permits us to establish the rights, privileges, preferences and restrictions, including voting rights, of future series of our preferred stock and to issue such stock without approval from our stockholders. The rights of holders of our common stock may suffer as a result of the rights granted to holders of preferred stock that may be issued in the future. In addition, we could issue preferred stock to prevent a change in control of our Company, depriving common stockholders of an opportunity to sell their stock at a price in excess of the prevailing market price.
The trading price of our common stock may continue to fluctuate substantially in the future.
Our stock price has declined substantially over the past five years and has and may fluctuate significantly as a result of a number of factors, some of which are not in our control. These factors include:
· | general economic conditions; |
· | general conditions in the for-profit, post-secondary education industry; |
· | negative media coverage of the for-profit, post-secondary education industry; |
· | failure of certain of our schools or programs to maintain compliance under the gainful employment regulation, 90-10 Rule or with financial responsibility standards; |
· | the impact of DOE rulemaking and other changes in the highly regulated environment in which we operate; |
· | the initiation, pendency or outcome of litigation, accreditation reviews and regulatory reviews, inquiries and investigations; |
· | quarterly variations in our operating results; |
· | our ability to meet or exceed, or changes in, expectations of investors and analysts, or the extent of analyst coverage of us; and |
· | decisions by any significant investors to reduce their investment in our common stock. |
In addition, the trading volume of our common stock is relatively low. This may cause our stock price to react more to these factors and various other factors and may impact an investor’s ability to sell our common stock at the desired time at a price considered satisfactory. Any of these factors may adversely affect the trading price of our common stock, regardless of our actual operating performance, and could prevent an investor from selling shares of our common stock at or above the price at which the investor purchased them.
System disruptions to our technology infrastructure could impact our ability to generate revenue and could damage the reputation of our institutions.
The performance and reliability of our technology infrastructure is critical to our reputation and to our ability to attract and retain students. We license the software and related hosting and maintenance services for our online platform and our student information system from third-party software providers. Any system error or failure, or a sudden and significant increase in bandwidth usage, could result in the unavailability of systems to us or our students or result in delays and/or errors in processing student financial aid and related disbursements. Any such system disruptions could impact our ability to generate revenue and affect our ability to access information about our students and could also damage the reputation of our institutions. Any of the cyber-attacks, breaches or other disruptions or damage described above could interrupt our operations, result in theft of our and our students’ data or result in legal claims and proceedings, liability and penalties under privacy laws and increased cost for security and remediation, each of which could adversely affect our business and financial results. We may be required to expend significant resources to protect against system errors, failures or disruptions or to repair problems caused by any actual errors, disruptions or failures.
We are subject to privacy and information security laws and regulations due to our collection and use of personal information, and any violations of those laws or regulations, or any breach, theft or loss of that information, could adversely affect our reputation and operations.
Our efforts to attract and enroll students result in us collecting, using and storing substantial amounts of personal information regarding applicants, our students, their families and alumni, including social security numbers and financial data. We also maintain personal information about our employees in the ordinary course of our activities. Our services, the services of many of our health plan and benefit plan vendors, and other information can be accessed globally through the Internet. We rely extensively on our network of interconnected applications and databases for day to day operations as well as financial reporting and the processing of financial transactions. Our computer networks and those of our vendors that manage confidential information for us or provide services to our student may be vulnerable to computer hackers, organized cyber-attacks and physical or electronic breaches or unauthorized access, acts of vandalism, ransomware, software viruses and other similar types of malicious activities.
Regular patching of our computer systems and frequent updates to our virus detection and prevention software with the latest virus and malware signatures may not catch newly introduced malware and viruses or “zero-day” viruses, prior to their infecting our systems and potentially disrupting our data integrity, taking sensitive information or affecting financial transactions. While we utilize security and business controls to limit access to and use of personal information, any breach of student or employee privacy or errors in storing, using or transmitting personal information could violate privacy laws and regulations resulting in fines or other penalties. A wide range of high profile data breaches in recent years has led to renewed interest in federal data and cybersecurity legislation that could increase our costs and/or require changes in our operating procedures or systems. A breach, theft or loss of personal information held by us or our vendors, or a violation of the laws and regulations governing privacy could have a material adverse effect on our reputation or result in lawsuits, additional regulation, remediation and compliance costs or investments in additional security systems to protect our computer networks, the costs of which may be substantial. We cannot assure you that a breach, loss, or theft of personal information will not occur.
Changes in U.S. tax laws or adverse outcomes from examination of our tax returns could have an adverse effect upon our financial results.
We are subject to income tax requirements in various jurisdictions in the United States. Legislation or other changes in the tax laws of the jurisdictions where we do business could increase our liability and adversely affect our after-tax profitability. In addition, we are subject to examination of our income tax returns by the Internal Revenue Service and the taxing authorities of various states. We regularly assess the likelihood of adverse outcomes resulting from tax examinations to determine the adequacy of our provision for income taxes and we have accrued tax and related interest for potential adjustments to tax liabilities for prior years. However, there can be no assurance that the outcomes from these tax examinations will not have a material effect, either positive or negative, on our business, financial conditions and results of operation.
RISKS RELATED TO OUR CAPITAL STRUCTURE
The current holders of our Series A Preferred Stock, Juniper Investment Company Inc. and Talanta Investment Group, Inc., with their affiliates, beneficially own approximately 18% and 7%, respectively, of our outstanding common stock on an “as converted basis.” As such, each holder of Series A Preferred Stock possesses significant voting power over the common stock, and there can be no assurance that their interests will align with the interests of the other common shareholders.
In November 2019, we issued shares of Series A Preferred Stock to two investors that requires us to obtain the approval of the holders of a majority of the outstanding Series A Preferred Stock to authorize numerous actions, including to pay dividends on our common stock, repurchase our common stock, issue certain new classes of preferred stock, and incur indebtedness. There can be no assurance that we will be able to obtain such approval should we seek to take an action requiring their approval.
In addition to the blocking rights noted above, the holders of the Series A Preferred Stock vote with the holders of shares of common stock and not as a separate class, at any annual or special meeting of shareholders of our Company, and may act by written consent in the same manner as the holders of common stock, on an as-converted basis, but in all cases each holder of Series A Preferred Stock together with its affiliates, may not vote more than 19.99% of the total number of shares of common stock outstanding after giving effect to the shares being voted by the holder (the “Hard Cap”), unless prior shareholder approval is obtained or no longer required by the rules of the Nasdaq Stock Market. The current holders of our Series A Preferred Stock, Juniper Investment Company Inc. and Talanta Investment Group, Inc., with their affiliates, beneficially own approximately 18% and 7%, respectively, of our outstanding common stock on an “as converted basis.” As such, each holder of Series A Preferred Stock possesses significant voting power over the common stock, and there can be no assurance that their interests will align with the interests of the other common shareholders.
In addition to possessing significant common stock voting power on any matter put to a vote of the common shareholders, which includes the appointment of directors, the holders of Series A Preferred Stock, voting as a separate class, have the right to appoint one director to the Company’s Board of Directors (the “Series A Director”) who may serve on any committees of the Board, until the later of (i) the time that the shares of Series A Preferred Stock have been converted into common stock or (ii) the time that a holder still owns shares of Series A Preferred Stock that are subject to conversion and the sum of such shares plus any other shares of common stock represent at least 10% of the total outstanding shares of common stock. John A. Bartholdson currently serves as the Series A Director.
We have an obligation to pay dividends on our shares of Series A Preferred Stock.
Beginning on September 30, 2020, dividends on the Series A Preferred Stock (“Series A Dividends”), at the initial annual rate of 9.6% are paid, in advance, from the date of issuance quarterly on each December 31, March 31, June 30 and September 30. The Company, at its option, may pay dividends in cash or by increasing the number of shares of common stock issuable upon conversion of the Series A Preferred Stock (the “Conversion Shares”). The value of any dividend paid in Conversion Shares will increase the dollar amount subject to the dividend rate and thereby increase subsequent dividend amounts.
The dividend rate is subject to increase (a) by 2.4% per annum on the fifth anniversary of the issuance of the Series A Preferred Stock and (b) by 2% per annum but in no event above 14% per annum should the Company fail to perform certain obligations owed to the holders of our Series A Preferred Stock. In order to pay Series A Dividends in cash, we require the approval of our lender under our credit agreement and there can be no assurance that even were we able to pay Series A Dividends in cash, we would be able to secure the necessary lender approvals to do so.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
While we have not paid dividends to our common shareholders since February 2015 and we do not foresee doing so in the future, in addition to obtaining the approval of the holders of the Series A Preferred Stock, of which there can be no assurance, the holders of the Series A Preferred Stock are required to participate in any such cash dividend on an “as converted basis” thereby diluting any such dividend payment to the common shareholders.
The Series A Preferred Stock is perpetual.
The Series A Preferred Stock is perpetual having no fixed maturity date. However, on and after November 14, 2024, the Company may redeem all or any of the Series A Preferred Stock for a cash price (the “Liquidation Preference”) equal to the greater of (i) the sum of $1,000 (subject to adjustment) plus the dollar amount of any declared Series A Dividends not paid in cash and (ii) the value of the Conversion Shares were such shares of Series A Preferred Stock converted. There can be no assurance that we will have sufficient funds or available financing sources to redeem the Series A Preferred Stock, or if we had the necessary funding we would be able to obtain the consent of our then lender to redeem the Series A Preferred Stock. It is therefore possible that the Series A Preferred Stock will be outstanding for an indefinite period of time.
We may not be able to force the conversion of the Series A Preferred Stock.
Each share of Series A Preferred Stock, at any time, is convertible into a number of shares of common stock equal to the quotient of (i) the sum of (A) $1,000 (subject to adjustment) plus (B) the dollar amount of any declared Series A Dividends not paid in cash divided by (ii) the Series A Conversion Price as of the applicable Conversion Date, but subject to the Hard Cap. The initial Conversion Price is $2.36 (the “Convertible Formula”).
If, at any time following November 14, 2022, the volume weighted average price of the Company’s common stock for a period of 20 consecutive trading days and on each such trading day at least 20,000 shares of common stock was traded, equals or exceeds $5.31 per share (2.25 times the Conversion Price) the Company may, at its option and subject to the Hard Cap, require that any or all of the then outstanding shares of Series A Preferred Stock be automatically converted into shares of common stock at the then applicable Convertible Formula. To the extent that we satisfy our Series A Dividend obligation by increasing the number of common shares issuable upon conversion of the Series A Preferred Stock, that would further dilute our common stock and likely result in downward pressure on the trading price of our common stock. There can be no assurance that our common stock will trade at the per share price, for the necessary period of time and with the required volume to cause the conversion of the Series A Preferred Stock into common stock, at any time or at all.
Registration of the Conversion Shares may cause overhang.
The holders of the Series A Preferred Stock are entitled to unlimited registration rights for the Conversion Shares, including 2 of which that may require us to effectuate an underwritten offering. Although unless our stock price significantly increases, it is likely that the Series A Holders will hold their Series A Preferred Stock and not convert them into shares of common stock, we were obligated to file with the SEC by November 13, 2020 a registration statement for the shelf covering the Conversion Shares (the “Resale Shelf”) and use our commercially reasonable efforts to cause the Resale Shelf to be declared effective by the SEC not later than 60 days after the filing thereof. The filing of the Resale Shelf covering the Conversion Shares may create market overhang on our common stock and thereby downward pressure on the price of our common stock. Should we be unable to maintain the effectiveness of the Resale Shelf (and certain other registration statements concerning the Conversion Shares), or certain other events occur with respect to such registration statements, some of which are beyond our control, we will be required to pay the holders of Series A Preferred Stock an amount equal to 1.5% of the value of the Conversion Shares covered thereby for each 30 day period that such registration statements are not effective, up to a maximum of 7.5%.
Shareholders of Series A Preferred Stock may transfer their shares after November 13, 2020 without our approval.
The holders of Series A Preferred Stock may, subject to compliance with the securities laws, sell their Series A Preferred Stock to any purchaser, without our prior approval. While we believe we have a good relationship with the current holders of Series A Preferred Stock, there can be no assurance that we will continue to enjoy good relations with them or with any purchaser of their Series A Preferred Stock.
In the event of certain changes of control, holders of Series A Preferred Stock shall be entitled to receive a liquidation preference.
In the event of certain changes of control, some of which are not within the Company’s control (as defined in the Company’s amended and restated certificate of incorporation as a “Fundamental Change” or a “Liquidation”), the holders of Series A Preferred Stock shall be entitled to receive the Liquidation Preference, unless such Fundamental Change is a stock merger in which certain value and volume requirements are met, in which case the Series A Preferred Stock will be converted into common stock in connection with such stock merger. As a result, this provision (along with the other provisions of the Series A Preferred Stock) may make the Company less attractive to a potential acquirer.
Our principal shareholder owns a significant percentage of our capital stock and is able to influence certain corporate matters.
As of December 31, 2018,2021, Juniper Investment Company, LLC and its affiliates (“Juniper”) beneficially owned, in the aggregate, approximately 3% of our outstanding common stock and 88% of our outstanding Series A Preferred Stock, which votes on an as-converted basis subject to a voting cap, as described below. The voting power of Juniper, including the common stock and the as-converted preferred stock with the voting cap described below, was approximately 19% as of December 31, 2021.
Each share of Series A Preferred Stock is convertible, at any time, into a number of shares of common stock equal to (“Convertible Formula”) the quotient of (i) the sum of (A) $1,000 (subject to adjustment as provided in the Company’s certificate of incorporation, as amended) plus (B) the dollar amount of any dividends applicable to the Series A Preferred Stock and not paid in cash divided by (ii) the Series A Conversion Price (as defined and adjusted in the Company’s certificate of incorporation) as of the applicable date of conversion. The initial conversion price is $2.36. At all times, however, the number of shares of common stock that can be issued to any holder of Series A Preferred Stock may not result in such holder and its affiliates owning more than 19.99% of the total number of shares of common stock outstanding after giving effect to the conversion (the “Hard Cap”), unless prior shareholder approval is obtained or no longer required by the rules of the Nasdaq Stock Market. If, at any time following November 14, 2022 the volume weighted average price of the Company’s common stock equals or exceeds 2.25 times the conversion price for a period of 20 consecutive trading days and on each such trading day at least 20,000 shares of common stock was traded, the Company may, at its option and subject to the Hard Cap, require that any or all of the then outstanding shares of Series A Preferred Stock be automatically converted into shares of common stock at the then applicable Convertible Formula.
The holders of Series A Preferred Stock, voting as a separate class, have the right to appoint one director to the Company’s Board of Directors (the “Series A Director”) who may serve on any committees of the Board, until such time as the later of (i) the shares of Series A Preferred Stock have been converted into common stock or (ii) a holder still owns shares of Series A Preferred Stock that are subject to conversion and the sum of such shares plus any other shares of common stock represent at least 10% of the total outstanding shares of common stock.
Holders of shares of Series A Preferred Stock are entitled to vote with the holders of shares of common stock and any other class or series similarly entitled to vote with the holders of common stock and not as a separate class, at any annual or special meeting of shareholders of our Company, and may act by written consent in the same manner as the holders of common stock, on an as-converted basis, in all cases subject to the Hard Cap. In addition, a majority of the voting power of the Series A Preferred Stock must approve certain significant actions of the Company, including (i) declaring a dividend or otherwise redeeming or repurchasing any shares of common stock and other junior securities, if any, subject to certain exceptions, (ii) incurring indebtedness, except for certain permitted indebtedness and (iii) creating a subsidiary other than a wholly-owned subsidiary.
Anti-takeover provisions in our amended and restated certificate of incorporation, our bylaws and New Jersey law could discourage a change of control that our shareholders may favor, which could negatively affect our stock price.
In addition to the Series A Preferred Stock, provisions in our amended and restated certificate of incorporation and our bylaws and applicable provisions of the New Jersey Business Corporation Act may make it more difficult and expensive for a third party to acquire control of the Company even if a change of control would be beneficial to the interests of our shareholders. These provisions could discourage potential takeover attempts and could adversely affect the market price of our common stock. For example, applicable provisions of the New Jersey Business Corporation Act may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested shareholder for a period of five years after the person becomes an interested shareholder. Furthermore, our amended and restated certificate of incorporation and bylaws:
authorize the issuance of blank check preferred stock that could be issued by our board of directors to thwart a takeover attempt;
prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of stock to elect some directors;
require super-majority voting to effect amendments to certain provisions of our amended and restated certificate of incorporation;
limit who may call special meetings of both the board of directors and shareholders;
prohibit shareholder action by non-unanimous written consent and otherwise require all shareholder actions to be taken at a meeting of the shareholders;
establish advance notice requirements for nominating candidates for election to the board of directors or for proposing matters that can be acted upon by shareholders at shareholders’ meetings; and
require that vacancies on the board of directors, including newly created directorships, be filled only by a majority vote of directors then in office.
We can issue shares of preferred stock without general shareholder approval (thought approval of the holders of Series A Preferred Stock would be necessary), which could adversely affect the rights of common shareholders.
Our amended and restated certificate of incorporation permits us to establish the rights, privileges, preferences and restrictions, including voting rights, of future series of our preferred stock and to issue such stock without approval from our shareholders. The rights of holders of our common stock may suffer as a result of the rights granted to holders of preferred stock that may be issued in the future. In addition, we could issue preferred stock to prevent a change in control of our Company, depriving common shareholders of an opportunity to sell their stock at a price in excess of the prevailing market price.
The trading price of our common stock may continue to fluctuate substantially in the future.
Our stock price has declined substantially over the past five years and has and may fluctuate significantly as a result of a number of factors, some of which are not in our control. These factors include:
general economic conditions;
general conditions in the for-profit, post-secondary education industry;
negative media coverage of the for-profit, post-secondary education industry;
failure of certain of our schools or programs to maintain compliance under the gainful employment regulation, 90-10 Rule or with financial responsibility standards;
the impact of DOE rulemaking and other changes in the highly regulated environment in which we operate;
the initiation, pendency or outcome of litigation, accreditation reviews and regulatory reviews, inquiries and investigations;
loss of key personnel;
quarterly variations in our operating results;
our ability to meet or exceed, or changes in, expectations of investors and analysts, or the extent of analyst coverage of us; and decisions by any significant investors to reduce their investment in our common stock.
In addition, the trading volume of our common stock is relatively low. This may cause our stock price to react more to these factors and various other factors and may impact an investor’s ability to sell our common stock at the desired time at a price considered satisfactory. Any of these factors may adversely affect the trading price of our common stock, regardless of our actual operating performance, and could prevent an investor from selling shares of our common stock at or above the price at which the investor purchased them.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
As of December 31, 2021, we leased all of our facilities, except for our campuses in Nashville, Tennessee Grand Prairie, Texas, and Denver, Colorado, and former school property in Suffield, Connecticut, all of which we own. We continue to re-evaluate our facilities to maximize our facility utilization and efficiency and to allow us to introduce new programs and attract more students. As of December 31, 2018,2021, all of our existing leases expire between 20192022 and 2030.2041.
The following table provides information relating to our facilities as of December 31, 2018,2021, including our corporate office:
Location | | Brand | | Approximate Square Footage |
Las Vegas, Nevada | | Euphoria Institute | | 19,000 |
Southington, Connecticut | | Former Lincoln College of New England | | 113,000 23,000 |
Columbia, Maryland | | Lincoln College of Technology | | 110,000 111,000 |
Denver, Colorado | | Lincoln College of Technology | | 212,000 213,000 |
Grand Prairie, Texas | | Lincoln College of Technology | | 146,000 157,000 |
Indianapolis, Indiana | | Lincoln College of Technology | | 189,000 126,000 |
Marietta, Georgia | | Lincoln College of Technology | | 30,000 |
Melrose Park, Illinois | | Lincoln College of Technology | | 88,000 |
Allentown, Pennsylvania | | Lincoln Technical Institute | | 26,000 25,000 |
East Windsor, Connecticut | | Lincoln Technical Institute | | 289,000 |
Iselin, New Jersey | | Lincoln Technical Institute | | 32,000 |
Lincoln, Rhode Island | | Lincoln Technical Institute | | 39,000 |
Mahwah, New Jersey | | Lincoln Technical Institute | | 79,000 |
Moorestown, New Jersey | | Lincoln Technical Institute | | 35,000 |
New Britain, Connecticut | | Lincoln Technical Institute | | 35,000 36,000 |
Paramus, New Jersey | | Lincoln Technical Institute | | 30,000 |
Philadelphia, Pennsylvania | | Lincoln Technical Institute | | 29,000 30,000 |
Queens, New York | | Lincoln Technical Institute | | 48,000 |
Shelton, Connecticut | | Lincoln Technical Institute and Lincoln Culinary Institute | | 47,000 |
Somerville, Massachusetts | | Lincoln Technical Institute | | 33,000 |
South Plainfield, New Jersey | | Lincoln Technical Institute | | 60,000 |
Union, New Jersey | | Lincoln Technical Institute | | 56,000 |
Nashville, Tennessee | | Lincoln College of Technology | | 281,000350,000 |
West Orange,Parsippany, New Jersey | | Corporate Office | | 52,000 |
Plymouth Meeting, Pennsylvania | | Corporate Office | | 4,000 17,000 |
Suffield, Connecticut | | Former Lincoln Technical Institute | | 132,000 |
We believe that our facilities are suitable for their present intended purposes.
In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations and claims, including, but not limited to, claims involving students or graduates and routine employment matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party will have a material effect on our business, financial condition, results of operations or cash flows.
Following a wave of hundreds of class action lawsuits being served upon colleges and universities across the country by students in connection with transitioning from in-person to online classes due to COVID-19, a class action lawsuit, captioned John Gaviria vs. Lincoln Educational Services Corporation, was filed against the Company in New Jersey Federal District Court and served on December 21, 2020. Like most of the other similar lawsuits across the country, the suit alleged breach of contract, unjust enrichment and conversion. In lieu of an answer, on January 25, 2021, the Company filed a Motion to Dismiss Plaintiff’s Complaint for Failure to State a Claim. On July 9, 2021, the court granted the Company’s Motion to Dismiss three of the four claims finding that the ruling on the claim for student and technology fees was premature. In response to the Company’s Motion for Reconsideration as to the remaining claim, the court granted the Company’s Motion to Dismiss the lawsuit in its entirety whereupon the Plaintiff filed an appeal to the Third Circuit Court. On January 27, 2022, counsel for the Plaintiff contacted the Company’s counsel to request a voluntary dismissal of the case and the Company agreed to and accepted the dismissal with prejudice.
As reported elsewhere under Part I, Item 1. Business – Regulatory Environment, in December 2021, we received a letter from the Consumer Financial Protection Bureau (“CFPB”) stating that the CFPB is assessing whether we are subject to CFPB’s supervisory authority based on our activities related to certain extensions of credit to our students and requesting certain information. The letter states that the CFPB has the authority to supervise certain entities in the private education loan market and certain other consumer financial products and services. We have provided the requested information to the CFPB and are waiting for the CFPB to respond.
Not applicable.
Our common stock, no par value per share, is quoted on the Nasdaq Global Select Market under the symbol “LINC”.
The Company has not declared or paid any cash dividends on its common stock since the Company’s Board of Directors discontinued our quarterly cash dividend program in February 2015. The Company has no current intentions to resume the payment of cash dividends on its common stock in the foreseeable future.
The Company did not repurchase any shares of our common stock during the fourth quarter of the fiscal year ended December 31, 2018.2021.
We have various equity compensation plans under which equity securities are authorized for issuance. Information regarding these securities as of December 31, 20182021 is as follows: