UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended June 30, 2024
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from ________ to _________
Commission
file number: 001-42283
LEGACY
EDUCATION INC.
(Exact
name of registrant as specified in charter)
(Address of principal executive offices) (Zip code)
(661)940-9300
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common stock, $0.001 par value LGCY NYSE American LLC
Securities
registered pursuant to Section 12(g) of the Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☒
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ☐
If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate
by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate
by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The
aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant as of September 30, 2024,
based upon the $4.00 per share closing price of the registrant’s common stock on the date of its initial public offering was
approximately $22,868,544.00.
Number
of common shares outstanding as of September 27, 2024 was 11,867,162.
Documents
Incorporated by Reference: None.
Table
of Contents
Page
Part I
Item 1. Business 6
Item 1A. Risk Factors 39
Item 1B. Unresolved Staff Comments 63
Item 1C. Cybersecurity 63
Item 2. Properties 63
Item 3. Legal Proceedings 63
Item 4. Mine Safety Disclosures 63
Part II
Item 6. [Reserved] 64
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 72
Item 8. Financial Statements and Supplementary Data 73
Item 9A. Controls and Procedures 74
Item 9B. Other Information 74
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 74
Part III
Item 10. Directors, Executive Officers and Corporate Governance 75
Item 11. Executive Compensation 78
Item 14. Principal Accountant Fees and Services 87
Part IV
Item 15. Exhibits and Financial Statement Schedules 88
Signatures 89
CAUTIONARY
NOTE ON FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of
the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). These statements may be identified by such forward-looking terminology as “may,”
“should,” “expects,” “intends,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other
comparable terminology. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections
about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually
achieve the plans, intentions or expectations disclosed in these forward-looking statements. Actual results or events could differ materially
from the plans, intentions and expectations disclosed in these forward-looking statements. Our business and our forward-looking statements
involve substantial known and unknown risks and uncertainties, including the risks and uncertainties inherent in our statements regarding:
● successful implementation of our strategic plan;
● changes in the state regulatory environment or budgetary constraints;
● a loss of members of our senior management or other key employees;
● uncertainties associated with integration of acquired schools;
● industry competition;
● the effect of any cybersecurity incident;
● general economic conditions; and
All
of our forward-looking statements are as of the date of this Annual Report on Form 10-K only. In each case, actual results may differ
materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will
prove to be correct. An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties
referred to in this Annual Report on Form 10-K or included in our other public disclosures or our other periodic reports or other documents
or filings filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”) could materially and adversely
affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan
to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections
or other circumstances affecting such forward-looking statements occurring after the date of this Annual Report on Form 10-K, even if
such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements
or disclosures by us following this Annual Report on Form 10-K that modify or impact any of the forward-looking statements contained
in this Annual Report on Form 10-K will be deemed to modify or supersede such statements in this Annual Report on Form 10-K.
RISK
FACTOR SUMMARY
Our
business is subject to significant risks and uncertainties that make an investment in us speculative and risky. Below we summarize what
we believe are the principal risk factors but these risks are not the only ones we face, and you should carefully review and consider
the full discussion of our risk factors in the section titled “Risk Factors,” together with the other information in this
Annual Report on Form 10-K. If any of the following risks actually occurs (or if any of those listed elsewhere in this Annual Report
on Form 10-K occur), our business, reputation, financial condition, results of operations, revenue, and future prospects could be seriously
harmed. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important
factors that adversely affect our business.
● We do not intend to pay cash dividends in the future.
PART
I
Throughout
this Annual Report on Form 10-K, references to “we,” “our,” “us,” the “Company,” or “Legacy,”
refer to Legacy Education Inc., individually, or as the context requires, collectively with its subsidiaries.
ITEM
1. BUSINESS
Overview
We
provide career-focused, post-secondary education services to students at all stages of adult life, from recent high school graduates
to working parents, through our accredited academic institutions: High Desert Medical College, which we acquired in July 2010, Central
Coast College, which we acquired in January 2019, and Integrity College of Health. On December 31, 2019, we entered into a Membership
Interest Purchase Agreement with the sole member of Integrity. We purchased from the sole member of Integrity on that date 24.5% of her
interest and obtained an exclusive option to acquire her remaining membership interest upon payment of $100, which was exercised on September
15, 2020. For purposes of our financial statements, the acquisition of Integrity is deemed to have been effective as of December 31,
2019.
High
Desert Medical College
HDMC
was established in the State of California in 2002 and began offering classes in 2003. It started with campuses in Lancaster, California,
and added its first branch in 2008 in Bakersfield, California. Due to enrollment growth and high demand for its services, HDMC expanded
to add a branch campus in Temecula, California campus in order to accommodate 250 to 400 additional students. HDMC offers UT, VN, VN
Associate of Applied Science degree program, Associate Degree of Nursing, nursing assistant, MRI Associate of Applied Science, cardiac
sonography, pharmacy technician, dental assisting, clinical medical assisting, medical administrative assisting programs, medical billing
and coding, veterinary assistant, phlebotomy technician avocational, nursing assistant avocational, and UT Associate of Applied Science
degree programs. HDMC also plans to offer an emergency medical technician (EMT) program beginning in October 2024 and is in the process
of obtaining approvals for the program (for which HDMC is not planning to apply for ED approval to make Title IV Program funds available
for students who enroll in the program). As of June 30, 2024, HDMC had 1,537 students enrolled in its programs.
Central
Coast College
CCC
was established in the State of California in 1983. In 1991, CCC moved to its current location in Salinas, California to accommodate
growing enrollment numbers and the addition of new training programs.
CCC
offers the following certificate or degree programs: business administrative specialist, computer specialist: accounting, medical administrative
assistant, medical assisting, nursing assistant, UT, UT Associate of Applied Science, veterinary assistant, veterinary technology Associate
of Applied Science, and VN. CCC also offers an avocational phlebotomy technician program. CCC also has obtained approval from ACCET to
offer the following programs and plans to begin doing so in October 2024, pending additional approvals: surgical technology (Associate
of Applied Science), dental assisting, and sterile processing technician. CCC is also in the process of applying for approvals for a
pharmacy technician program and an Associate Degree in Nursing program that it intends to provide in the future. As of June 30, 2024,
CCC had 462 students enrolled in its programs.
Integrity
College of Health
Integrity
was established in the State of California in 2007. Integrity’s campus is located in Pasadena, California. Integrity offers VN,
VN Associate of Applied Science, Registered Nurse to Bachelor of Science in Nursing (“RN to BSN”), medical assisting, medical
billing and coding, veterinary assistant, and Diagnostic Medical Sonography programs. Integrity also plans to offer an emergency medical
technician (EMT) program beginning in October 2024 and is in the process of obtaining approvals for the program (for which Integrity
is not planning for ED approval to make Title IV funds available for students who enroll in the program). For purposes of our financial
statements, Legacy Education, L.L.C. is deemed to have acquired Integrity in December 2019. As of June 30, 2024, Integrity had 167 students
enrolled in its programs.
Our
History
● In 2003, HDMC began offering classes in Lancaster, CA (main campus).
● In 2008, HDMC began offering classes in Bakersfield, CA (branch campus).
● In July 2010, we acquired HDMC.
● In April 2013, HDMC received ACCET accreditation.
● In July 2018, HDMC received branch approval for the Temecula, CA campus.
● In January 2019, we acquired CCC.
● In February 2019, the UT AAS degree program was approved by ED.
● In February 2019, HDMC opened its campus in Temecula, CA.
● In December 2019, we acquired a 24.5% ownership interest in Integrity.
● In September 2020, we acquired the remaining 75.5% interest in Integrity
Industry
Background
In
the United States, the post-secondary education marked is large, fragmented, and competitive. According to National Center for Educational
Statistics, as of 2022, degree granting career colleges served approximately 1.2 million undergraduate students, which was approximately
6.3% of the estimated 19.0 million total undergraduates in degree programs. Further, the COVID-19 pandemic significantly reduced the
number of students enrolled in post-secondary education institutions in recent years. According to estimates released by the National
Student Clearinghouse Research Center, total enrollments in all higher education sectors declined 0.7% and 2.5% in the fall of 2022 and
2021, respectively. Enrollment at proprietary colleges increased 2.6% in the fall of 2022 and declined 2.1% in the fall of 2021. The
industry is heavily dependent on continued availability of federal student financial assistance under Title IV of the Higher Education
Act (“Title IV Programs”), and concerns about potential reductions in such funding also could negatively affect demand for
higher education.
Notwithstanding
weaker demand dynamics in past years, including the more recent adverse impact from the COVID-19 pandemic, we believe that over time,
demand for post-secondary education in the United States will continue to increase as a result of demographic, economic, and social trends.
The 2022 U.S. Census Bureau reported that approximately 64.5 million adults over the age of 25 in the United States did not have more
than a high school education, and approximately 33.0 million adults over the age of 25 had some college experience but had not completed
a college degree. Other trends that could positively impact demand for our programs include:
Our
Market Opportunity
We
believe that the community college system in California, where we currently operate, is not meeting current educational and workforce
needs. Plagued by poor completion rates, uncertain career pathways and corresponding poor job placement rates, California community colleges
are not the stepping stones to success they once were. Aspiring students who want in-demand skills are often stuck between choosing an
expensive four-year school with course requirements unrelated to their interests, on one hand, and a community college that lacks a clear
mission and the ability to place them in their desired careers, on the other hand.
Our
colleges directly address this employment need through our focused, high-quality programs. Our campuses are strategically located near
hospitals and clinics to allow easy access for our students to externships and full-time employment opportunities.
The
geographic footprint of our colleges extends from Southern to Central California, home to approximately 24 million people, including
an aging population who will depend on the skills our students are able to provide as healthcare workers.
Our
target demographic is early to mid-20-year-old with a desire to better their economic situation by choosing a program with strong job
opportunities, primarily within a 100-mile radius of each campus for most programs for ease of drive and availability. Students choose
a for-profit career college because they can get trained and on the job within months. Prospective students need caring career direction
and advice, more so than your traditional college students.
According
to the Bureau of Labor Statistics, employment in the healthcare industry is projected to grow 16% from 2020 to 2030 resulting in over
2.6 million new jobs. This growth rate is much stronger than other industries. In addition, the aging population has a greater demand
for healthcare.
Our
Growth Strategies
Our
growth strategy goals consist of the following:
● Plan for moderate growth in existing programs.
● Add Associate of Applied Sciences degrees to our shorter programs.
● Add registered dental assisting to our dental assistant program.
● New programs in dental hygiene and surgical technician.
● Continued Launch of new program offerings, including online offerings.
● Meet benchmark standards for completion and placement.
Our
business strategy is based on helping our graduates succeed, which we believe will drive our financial results. To that end, we are pursuing
the following operating strategies:
We
are focused on the following operational priorities to deliver these strategies:
Curriculum
and Assessment. Across our portfolio, we continue to refine and implement best practices for teaching and learning models and
focus on learner success to improve completion rates and align the curriculum to employers’ needs to drive career success. Our
goal is to further strengthen our position as a recognized leader in high quality learning.
We
are committed to delivering a superior academic, professionally aligned, real-world education to our students. We seek to develop a deep
understanding of the professions we serve and the competencies required of skilled professionals in these fields. This commitment guides
the development of our curricula, the recruitment of our faculty and staff, and the design of our support services.
Graduate
Success. We look for opportunities to improve our student’s educational experience and increase the likelihood of students
successfully completing their programs. Our programs surround students with a supportive, flexible, and engaging environment to help
them achieve academic success. To foster that environment, we maintain a comprehensive focus on improving early cohort persistence, a
personalized on-boarding experience for new learners, simplified administrative interactions, and continuous improvements in the quality
and frequency of interaction between our learners and our faculty.
Relationship-Based
Marketing. We continue to focus on building our brands and establishing our strong differentiation as a provider of high quality
and professionally aligned educational offerings as well as an innovative and leading provider of job-ready skills for the 21st
century workforce. We continue to expand on this differentiation through a variety of initiatives, including creating brand recognition,
optimizing marketing efforts, interacting with prospective students earlier in the decision process and expanding strategic employer
relationships. Our marketing strategy is designed to attain greater strategic control over our new enrollment growth and strengthen engagement
with prospective as well and current students and graduates, who can act as advocates for our institutions.
Innovation
and Diversification. We seek to expand the addressable market by investing in innovation, student success, academic infrastructure,
and new business models. We also seek to drive growth through a multifaceted strategy of enhancing existing program offerings, developing
new and innovative programs, and branching and acquisitions.
Competition
The
for-profit, post-secondary education industry is highly competitive and highly fragmented with no single participant controlling a significant
market share. We compete for students with traditional public and private two-year and four-year degree-granting accredited colleges
and universities, other proprietary degree-granting accredited schools, and alternatives to higher education. In addition, we face competition
from various non-traditional, credit-bearing and noncredit-bearing education programs, provided by both proprietary and not-for-profit
providers, including massive open online courses offered worldwide without charge by traditional educational institutions and other direct-to-consumer
education services. As the proportion of traditional colleges providing alternative learning modalities increases, we will face increasing
competition for students from traditional colleges, including colleges with well-established reputations for excellence. As online learning
matures as a modality for education delivery across higher education, we believe that the intensity of the competition we face will continue
to increase.
We
believe the key factors affecting our competitive position include the quality of the programs offered, the quality of other services
provided to students, our reputation among students and in the general marketplace, the cost and perceived value of our offerings, the
employment rate and terms of employment for our graduates, the ease of access to our offerings, the quality and reputation of our faculty
and other employees, the quality of our campus facilities and online platform, the time commitment required to complete our program and
obtain a degree, the quality and size of our alumni base, and our relationship with other learning institutions.
Some
of our local competitors include San Joaquin Valley College, Charter College Lancaster, Career Care Institute, UEI College, Bakersfield
College and the Pima Medical Institute. Such competitors may have greater financial resources and greater brand recognition than us.
For example, public institutions receive government subsidies and other financial sources not available to for-profit schools.
Marketing
and Recruiting
We
use 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.
Marketing
and Advertising. We advertise through a variety of marketing channels to inform prospective students interested in entering or
advancing their healthcare careers about the college and the programs we offer. We utilize a fully integrated marketing approach in our
lead generation and admissions process that includes the use of traditional media such as radio, billboards, direct mail, a variety of
print media and event marketing campaigns. Our digital marketing efforts, which include paid search, search engine optimization, online
video and display advertising and social media, have grown significantly in recent years and currently drive the majority of our new
student leads and enrollments. Our websites’ integrated marketing campaigns direct prospective students to call us or visit the
HDMC, CCC and Integrity websites where they will find details regarding our programs and campuses and can request additional information
regarding the programs that interest them.
Referrals.
Referrals from current students, high school counselors and satisfied graduates and their employers have historically represented
approximately 36% of our new enrollments. Our school administrators actively work with our current students to encourage them to recommend
our programs to prospective students. We continue to build strong relationships with high school guidance counselors and instructors
by offering annual seminars at our training facilities to further familiarize these individuals on the strengths of our programs.
Recruiting.
Our recruiting efforts are conducted by a group of approximately 10 campus-based and field representatives who meet directly
with prospective students during presentations conducted at high schools, or during a visit to one of our campuses.
Student
Support
Admissions.
Students enrolling in our programs must have a high school diploma or a General Educational Development Certificate and demonstrate
competence in writing and logical reasoning. Students must also complete an application and pass one or more entrance assessments, including
the Wonderlic Scholastic Level Exam (SLE) or HESI for the Veterinary Nurse program. While each of our programs has different admissions
criteria, we screen all applications and counsel the students on the most appropriate program to increase the likelihood that our students
complete the requisite coursework and obtain and sustain employment following graduation. As of June 30, 2024, our diverse student body
war comprising 72% Hispanic, 10% White, 6% Black/African American, 5% Asian, and 2% American Indian students. The age distribution shows
43% of our students are 25 and older, while 57% are 24 and younger, with a significant majority of 92% being women and 8% men.
Enrollment.
We enroll students continuously throughout the year, with our largest classes enrolling in late summer or early fall following
high school graduation. We had 2,187 students enrolled as of June 30, 2024, an increase of 28.2% compared to 1,705
students as of June 30, 2023 Our expanding student body reflects the trust and confidence in our educational offerings and our
ability to prepare students for successful careers.
The
chart below outlines our quarterly consolidated new student starts and end of quarter student enrollment across our colleges.
Consolidated
Year over Year (%)
Retention.
To maximize student retention, the staff at each school is trained to recognize the early warning signs of a potential drop and
to assist and advise students on academic, financial, employment and personal matters. We monitor weekly our retention rates by instructor,
course, program and school. When we become aware that a particular instructor or program is experiencing a higher than normal dropout
rate, we quickly seek to determine the cause of the problem and attempt to correct it. When we identify that a student is experiencing
difficulty academically, we offer tutoring, remediation and assistance and guidance from the program director. With an average program
retention rate of 86%, our focus on student success and support throughout their educational journey is evident.
Outcome.
Our core mission is to prepare students for competitive careers in their chosen fields. As of June 30, 2024, we boast an average
placement rate of 78%, with individual rates of 76% for High Desert Medical College, 73% for Central Coast College, and an impressive
85% for Integrity College of Health. Additionally, our students have achieved a 79% NCLEX Pass Rate and a 64% Vet Tech Pass Rate, demonstrating
the effectiveness of our programs.
Faculty
and Employees
Across
the organization, we seek to hire faculty who have teaching and/or practitioner experience in their particular discipline and who possess
significant and appropriate academic credentials. We hire our faculty in accordance with established criteria set by the California Code
of Regulations and accreditation standards, including relevant work experience and educational background. We require meaningful industry
experience of our teaching staff in order to maintain the quality of instruction in all of our programs and to address current and industry-specific
issues in our course content. In addition, we provide intensive instructional training and continuing education, including quarterly
instructional development seminars, annual reviews, technical upgrade training, faculty development plans and weekly staff meetings.
We
also employ non-faculty staff in student services, academic advising and academic support, enrollment services, administration, financial
aid, information technology, human resources, finance and other administrative functions. The staff of each campus typically includes
a campus director, a career services coordinator, a financial-aid officer and a career advisor and instructors, all of whom are industry
professionals with experience in our areas of study.
As
of June 30, 2024, we had approximately 68 full-time faculty, including program directors, as well as approximately 71 part-time faculty.
As
of June 30, 2024, we and our institution also employed approximately 127 combined non-faculty staff in the areas of university services,
academic advising and academic support, enrollment services, university administration, financial aid, information technology, human
resources, corporate accounting, finance and other administrative functions. None of our employees is a party to any collective bargaining
or similar agreement with us.
Education
Regulations
As
a provider of postsecondary education, we are subject to extensive regulation by federal, state and accrediting agencies. The applicable
educational regulatory requirements cover virtually all phases of the operations of our institutions, including, but not limited to,
educational program offerings, facilities, instructional and administrative staff, administrative procedures, marketing and recruiting,
financial operations, data security and privacy, adequacy and substantiation of graduation and job placement rates and other student
outcomes, distribution of information to current and prospective students, professional licensure requirements, payment of refunds to
students who withdraw, the receipt of federal and state financial aid by our students (including institutional, programmatic, and student
eligibility requirements), private and institutional loan programs, distance education, third party servicers, written arrangements with
other institutions or organizations to provide some or all of an educational program, student complaints, student services, student admissions,
transfer of academic credits, acquisitions or openings of new institutions, additions of new campuses and educational programs, closure
or relocation of existing locations and changes in corporate structure and ownership.
Each
of our institutions (HDMC, CCC, and Integrity) participate in the Title IV Programs, as well as other federal and state financial aid
programs and are subject to extensive regulation by ED, other federal and state educational agencies and accreditors. CCC and HDMC are
approved to offer, and must comply with applicable requirements related to, veterans education assistance administered by the Department
of Veterans Affairs (“VA”), Cal Grants administered by the California Student Aid Commission, and funds administered under
the Workforce Innovation and Opportunity Act. We derive a substantial portion of our revenue and cash flows from the Title IV Programs
and a significant portion of our students rely on financial aid received under the Title IV Programs in order to attend our institutions.
To participate in the Title IV Programs, an institution must receive and maintain authorization by the appropriate state education agencies,
be accredited by an accrediting body recognized by ED, hold programmatic accreditation if required by a state or federal agency (including
as a condition of employment in the occupation for which the institutional program prepares the students), and be certified by ED as
an eligible institution.
The
laws, regulations, standards and policies of our regulators change periodically and are subject to new and changing interpretation by
our regulators. Changes in, or new interpretations of, applicable laws, regulations, standards, or policies, or our failure to comply
with those laws, regulations, standards, or policies could have a material adverse effect on our receipt of funds under the Title IV
Programs and other federal and state financial aid programs, the accreditation of our institutions and programs, the authorization of
our institutions to operate in various states, our permissible activities, or our costs of doing business. We cannot predict with certainty
how all of the requirements applied by our regulators will be interpreted or whether our institutions will be able to comply with these
requirements in the future. Given the complex nature of these requirements and the fact that they are subject to interpretation, it is
possible that we may inadvertently violate these laws, regulations, standards, or policies. If we are found to have violated any applicable
regulations, laws, standards or policies, we may be subject to liabilities, sanctions, and other consequences. See “Risk Factor
- If our institutions fail to comply with the extensive regulatory requirements applicable to our business, we could incur financial
penalties, restrictions on our operations, loss of federal and state financial aid funding for our students, loss of accreditation, or
loss of our authorization to operate our institutions or our educational programs.”
Under
the provisions of the HEA, an institution must apply to ED for continued certification to participate in the Title IV Programs at least
every six years or when it undergoes a change in ownership resulting in a change of control. ED defines an institution to consist of
both a main campus and its additional locations, if any. Under this definition, for ED purposes, we operate the following three institutions,
collectively consisting of three main campuses and two additional locations: HDMC with locations in Lancaster, Bakersfield, and Temecula,
CCC with a location in Salinas, and Integrity with a location in Pasadena. Generally, the recertification process includes a review by
ED of an institution’s educational programs and locations, administrative capability, financial responsibility and other oversight
categories. The current expiration date of the program participation agreements for HDMC and CCC is September 30, 2026. Integrity is
currently participating in the Title IV Programs under a temporary provisional program participation agreement in connection with its
change in ownership and control resulting from our acquisition of the institution. The temporary provisional program participation agreement
had an expiration date of November 30, 2020 but continues on a month-to-month basis thereafter based on the institution’s submission
to ED of certain required documentation and remains in effect until the conclusion of ED’s review of Integrity’s pending
application for approval of its change in ownership and control.
ED
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. Our Integrity institution is currently approved under a temporary provisional program participation
agreement which (as described in a subsequent section) permits an institution to continue participating in the Title IV Programs on a
month-to-month basis while ED reviews the change in ownership and as long as the institution timely submits certain documentation to
ED during the process. An institution that is provisionally certified receives fewer due process rights than those received by other
institutions in the event ED takes certain adverse actions against the institution, is required to obtain prior ED approvals of new campuses
and educational programs and may be subject to heightened scrutiny by ED. However, provisional certification does not otherwise limit
an institution’s access to Title IV Program funds.
On
October 31, 2023, ED published a final rule revising its Title IV Program certification regulations with an effective date of July 1,
2024. The rule codifies additional grounds for placing an institution on provisional certification, including a determination by ED that
an institution is at risk of closure and ED’s consideration of supplementary performance measures that include an institution’s
withdrawal rate, recruiting expenses, and licensure pass rate. The revised certification regulations also increase the number of requirements
contained in an institution’s Program Participation Agreement (including, for example, a requirement to comply with all state laws
related to closure), require certain ownership entities to sign the Program Participation Agreement, establish new standards for maximum
program length (including a prohibition on the length of certain educational programs from exceeding the required minimum number of hours
established by applicable state(s) for entry-level training requirements for the occupation for which the programs train students), requires
certification that an institution’s programs meet applicable educational requirements for graduates to obtain required occupational
licensure or certification in a state, and restricts the ability of institutions to withhold transcripts. The revised regulations also
impose new potential conditions on provisionally certified institutions, including but not limited to the submission of teach-out and/or
document retention plans, growth restrictions, acquisition restrictions, additional reporting requirements, limitations on written arrangements,
and additional conditions applicable to institutions found to have engaged in substantial misrepresentations or institutions seeking
to convert to nonprofit status following a change in ownership. The revised certification regulations are expansive, complex and could
be difficult for our institutions to comply with its applicable requirements as interpreted by ED. If ED finds that any of our institutions
do not fully satisfy all required eligibility and certification standards, ED could limit, condition, suspend, terminate, revoke, or
decline to renew our institutions’ participation in the Title IV Programs or impose liabilities or other sanctions. Continued Title
IV Program eligibility is critical to the operation of our business. If our institutions become ineligible to participate in the Title
IV Programs, or have that participation significantly conditioned, we may be unable to conduct our business as it is currently conducted
which would have a material adverse effect on our business, financial condition, results of operations and cash flows.
State
Authorization. Our institutions are subject to the educational laws and regulations of the State of California where our physical
campuses are located. We also may be subject to the educational laws of other states if we acquire a new institution in the state or
if one of our institutions adds a new campus in the state or otherwise conducts other operations in the state covered by applicable state
educational law including, but not limited to, student recruitment, advertising, or certain types of distance education. State educational
laws establish standards and requirements for, among other things, student instruction, faculty qualifications, campuses and facilities,
educational programs, financial stability, administrative staff, marketing and recruiting, distribution of information to current and
prospective students, payment of refunds to students who withdraw, private and institutional loans, distance education, student services,
student complaints, student admissions, transfer of academic credits, substantive changes, acquisitions, and policies and minimum graduation
and job placement outcomes for institutions and/or their individual educational programs. Our institutions are authorized to operate
by the California Bureau for Private Postsecondary Education (“BPPE”). We also may be required to obtain approvals and comply
with requirements of state agencies that regulate certain occupational educational programs such as, for example, VN and phlebotomy.
The California Board of Registered Nurses approves the Associate degree of Nursing program at HDMC. The VN programs at HDMC and Integrity
are approved by BVNPT. The phlebotomy programs at HDMC and CCC are approved by California Department of Public Health. In addition, we
are subject to state consumer protection laws.
Attorneys
general in many states have become more active in enforcing consumer protection laws, including, for example, laws related to marketing,
advertising and recruiting practices and the financing of education at for-profit educational institutions. Further, some state attorneys
general have partnered with the CFPB, the FTC, and other federal and state agencies to review industry practices and collaborate on enforcement
actions against educational institutions. These actions increase the likelihood of scrutiny of marketing, advertising, recruiting, financing,
and other practices of educational institutions and may result in unforeseen consequences, increasing risk and making our operating environment
more challenging.
Adverse
media coverage regarding the allegations of state consumer protection law violations by us or other for-profit education companies could
damage our reputation, result in decreased enrollments, revenues and profitability and have a negative impact on our stock price. Such
coverage could also result in continued scrutiny and regulation by ED, Congress, accreditors, state legislatures, state attorneys general
or other governmental authorities of us and other for-profit educational institutions.
State
education laws and regulations may limit our campuses’ ability to operate or to award degrees, diplomas, or certificates or offer
new programs. Moreover, under the HEA, authorization by state education agencies is necessary to maintain eligibility to participate
in the Title IV Programs. ED regulations also require institutions offering postsecondary education through distance education to students
located in a state in which the institution is not physically located (as determined by the institution at the time of a student’s
initial enrollment and, if applicable, upon formal receipt of information from the student that their location has changed to another
state) to meet state educational requirements in that state or participate in a state authorization reciprocity agreement in order to
disburse Title IV funds to such students. We have obtained approval to offer portions of our programs via distance education from ACCET
for CCC and HDMC, ABHES for Integrity, and from BPPE for HDMC, CCC, and Integrity. The State of California does not, however, presently
participate in any state authorization reciprocity agreement whereby our institutions may offer programs via distance education to students
located in other states without our applicable state authorizations from those other states. Our institutions presently do not have any
state postsecondary authorizations outside of California. In addition, an institution must make disclosures readily available to enrolled
and prospective students regarding whether programs leading to professional licensure or certification meet state educational requirements,
and provide a direct disclosure to students in writing if the program leading to professional licensure or certification does not meet
state educational requirements in the state in which the student is located (which is only California for our current students). Under
ED’s rules effective July 1, 2024, an institution must certify that its programs satisfy the applicable educational requirements
for professional licensure or certification needed to practice or find employment in an occupation for which the program prepares a student
in the state in which the school or where a student is located or intends to seek employment (which, although our current students are
located in California, could be a state other than California and could require us to refrain from enrolling students in a state if our
program does not satisfy the applicable educational requirements in the state). We believe the Title IV-eligible educational programs
offered by our institutions satisfy all currently applicable state educational requirements for professional licensure or certification.
ED also commenced a negotiated rulemaking process to develop new regulations on topics that include state authorization and convened
a negotiated rulemaking committee to consider proposals from January through March 2024. On July 17, 2024, ED announced that proposed
rules related to cash management, state authorization and accreditation will be published by next year. We cannot predict the ultimate
timing or content of any new regulations that might emerge from this process. See Risk Factors at “Additional ED or other rulemaking
could materially and adversely affect our operations, business, results of operations, financial condition and cash flows.”
State
legislatures often consider legislation affecting regulation of postsecondary educational institutions. Our institutions are located
in California which has expansive laws and regulations impacting for-profit schools like our institutions. Enactment of this legislation
and ensuing regulations, or changes in interpretation of existing regulations, may impose substantial costs on our institutions and require
them to modify their operations in order to comply with the new regulations. If we are unable to comply with applicable past, current
or future state education, consumer protection, licensing, authorization or other requirements, or determine that we are unable to cost
effectively comply with new or revised requirements, we could be subject to liabilities, sanctions and other consequences. See “Risk
Factor – Any failure to comply with educational laws and regulatory requirements, including educational requirements, or new
state legislative or regulatory initiatives affecting our institutions, could have a material adverse effect on our total student enrollment,
results of operations, financial condition and cash flows.”
Institutional
Accreditation. In the U.S., accrediting agencies are non-governmental entities that periodically review the academic quality
of an institution’s instructional programs and its administrative and financial operations to ensure the institution has the resources
to perform its educational mission. Accrediting agencies impose standards that extend to most aspects of an institution’s operations
and educational programs including, but not limited to, requirements to maintain threshold graduation and job placement rates for its
educational programs. HDMC and CCC are currently accredited by ACCET through April 2029 and April 2025, respectively. Integrity is accredited
by ABHES through February 2026. ED requires an institution to be accredited by an ED-recognized accrediting agency in order for the institution
to participate in the Title IV Programs. ACCET and ABHES are ED-recognized accrediting agencies. The failure to comply with accreditation
standards could subject an institution to additional requirements, sanctions, and consequences including the potential loss of accreditation.
See “Risk Factor - If one or more of our institutions fails to maintain institutional accreditation, or if certain of our programs
cannot obtain or maintain programmatic accreditation, our student enrollments would diminish and our business would suffer.”
Programmatic
Accreditation. Many states and professional associations require professional programs to be accredited. While programmatic
accreditation is not a sufficient basis to qualify for institutional Title IV Program certification, programmatic accreditation may improve
employment opportunities for program graduates in their chosen field. Moreover, ED requires an institution to hold programmatic accreditation
for an educational program if required by a state or federal agency (including as a condition of employment in the occupation for which
the institutional program prepares the students). The veterinary technology program at CCC is accredited by American Veterinary Medical
Association. Integrity’s Registered Nurse to Bachelor of Science in Nursing holds pre-accreditation candidacy status from the Commission
for Nursing Education Accreditation. All of the Title IV-eligible educational programs offered by our institutions are within the scope
of institutional accreditation from either ACCET or ABHES, and we do not believe any of our Title IV-eligible educational programs that
do not hold programmatic accreditation are required to hold programmatic accreditation by any currently applicable state or federal agency.
Those of our programs that do not have programmatic accreditation, where available, or fail to maintain such accreditation, may experience
adverse publicity, loss of access to Title IV funds, declining enrollments, litigation or other claims from students or suffer other
adverse impacts, which could result in it being impractical for us to continue offering such programs.
ED
Recognition of Accrediting Agencies. Our participation in the Title IV Programs is dependent on ED continuing to recognize the
accrediting agencies that accredit our colleges and universities. Each of our institutions currently are accredited by an ED-recognized
accrediting agency. The standards and practices of these agencies have become a focus of attention by state attorneys general, members
of Congress, ED’s Office of Inspector General and ED over recent years, and are the subject of upcoming rulemaking. ED held negotiated
rulemaking sessions between January and March 2024, and the negotiators did not reach consensus on proposed language. ED proposed expanding
requirements related to accrediting agencies’ conflict of interest policies and student achievement standards, for example. On
July 17, 2024, ED announced that proposed rules related to cash management, state authorization and accreditation will be published by
next year. ED has indicated during negotiated rulemaking its intent to require accreditors to take action against institutions more promptly
when accreditors identify noncompliance and to modify accreditor review of substantive changes and limit the time an institution can
remain in noncompliance with accrediting agency standards, which could increase the amount of enforcement activities by accrediting agencies
against institutions like ours. ED also proposed expanding requirements related to accrediting agencies’ conflict of interest policies
and student achievement standards, for example.
This
focus may make the accreditation review process longer and potentially more challenging for our institutions when they undergo their
normal accreditation review processes. It may also make the process by which ED evaluates and recognizes accreditors as appropriate Title
IV Program gatekeepers longer and more challenging for our accreditors. ED recognized accreditors are facing increased political pressure
as part of this recognition process to apply heightened levels of scrutiny or review and/or apply new requirements or standards to for-profit
institutions. These pressures may result in future modifications to accreditation criteria, practices or other policies and procedures,
with which our institutions may not be able to comply. If ED withdraws recognition from ACCET and/or ABHES, ED may continue our schools’
eligibility for a period of up to 18 months from the date of the withdrawal of recognition, and our schools could apply for accreditation
from the other ED-recognized accrediting agencies. ED could impose provisional certification and other conditions and restrictions on
our schools during this period. If ACCET and/or ABHES lose recognition from ED and our schools are unable to obtain accreditation from
a different ED-recognized accrediting agency in the quired time period, our schools could lose eligibility to participate in Title IV
Programs.
Congressional
Action. The U.S. Congress must periodically reauthorize the HEA and other laws governing the Title IV Programs and annually determine
the funding level for each Title IV Program, and may pass new laws or revise existing laws at any time. Political and budgetary concerns
significantly affect the Title IV Programs. We cannot predict when or whether Congress will consider or vote on legislation to reauthorize
the HEA or to create new laws or revise existing laws. Furthermore, we cannot predict with any certainty the outcome of the HEA reauthorization
process nor the extent to which any legislation that Congress could adopt at any time could materially affect our business, financial
condition and results of operations. However, recent elections have increased the number and influence of legislators and regulators
who have been critical of the for-profit postsecondary education sector that includes our institutions, which has led and could continue
to lead to significant legislative changes in connection with amendments to the HEA, annual appropriations, or other changes to laws,
that have been and may continue to be adverse to our institutions and other for-profit institutions. Moreover, 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. For example, ARPA was signed into law in March 2021
and included, among other things, a provision that amended the 90/10 Rule in the HEA. See “Risk Factors - Our institutions could
lose their eligibility to participate in federal student financial aid programs if the percentage of their revenues derived from applicable
federal student aid programs is too high.” If we cannot comply with the provisions of the HEA, as they may be enforced or 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.
Financial
Value Transparency and Gainful Employment Regulations. In May 2021, ED announced its intention to initiate a rulemaking process
on several topics, including gainful employment. On May 19, 2023, ED published a notice of proposed rulemaking on financial value transparency
and gainful employment, and on October 10, 2023, ED published final regulations which became effective on July 1, 2024. Multiple lawsuits
have been filed challenging these regulations, however, we cannot predict the outcome of these cases. The financial value transparency
and gainful employment regulations include standards for annually evaluating postsecondary educational programs based on the calculation
of debt-to-earnings rates and an “earnings premium” measure. The rule establishes formulae for calculating these rates using
data such as student debt, student earnings data, and median earnings data for working adults with only a high school diploma or GED,
which the rule uses to compare to median earnings data of the institution’s graduates. Under the regulations, ED will annually
calculate and publish the debt-to-earnings rates and median earnings data for our educational programs. If these calculations show that