Item 1. Business. Overview
National
American University Holdings, Inc. is a provider of professional
and technical postsecondary education primarily designed for
working adults and other non-traditional students. We own and
operate National American University, a regionally accredited,
proprietary institution of higher learning founded in
1941.
In
addition to the university operations, the Company operates a real
estate business known as Fairway Hills Developments, or Fairway
Hills. The real estate business rents apartment units, and develops
and sells condominium units, in the Fairway Hills Planned
Residential Development area of Rapid City, South Dakota. Fairway
Hills completed the sale of all condominium units during fiscal
year ended May 31, 2019.
The
university’s enrollment declined from 5,648 students as of
May 31, 2018 to 3,313 students as of May 31, 2019, representing a
decrease of 41.3% from 2018 to 2019. We believe the decline in
student enrollment and revenue is partially the result of the
regulatory scrutiny of the industry and the current environment in
higher education. Similar to our peers, many working adults have
chosen not to attend school. The decline is also partially the
result of the 2019 strategic shift that was
implemented during fiscal year 2019. See the “University
History” section below for more
information.
During
the same periods, total revenue declined from $77.2 million for
fiscal year ended May 31, 2018 to $53.1 million for the fiscal year
ended May 31, 2019, representing an annual decrease of 31.2%.
Income before income taxes for the fiscal year ended May 31, 2018
was a loss of $12.3 million, compared to a loss of $25.1 million
for the fiscal year ended May 31, 2019.
Revenue
for the NAU segment declined from $74.8 million in fiscal year 2018
to $50.9 million in fiscal year 2019, representing a decrease of
32% from 2018 to 2019. Loss before income taxes for the NAU segment
was $12.1 million in fiscal year 2018, increasing to a loss of
$22.2 million in fiscal year 2019. Total assets for the NAU segment
decreased from $35.4 million in fiscal year 2018 to $26.6 million
in fiscal year 2019.
Revenue
for the Other segment (primarily Fairway Hills), decreased from
$2.4 million in fiscal year 2018 to $2.2 million in fiscal year
2019, representing a decrease of 7.4% from 2018 to 2019. Income
before taxes for this segment went from a loss of $0.2 million in
fiscal year 2018 to a loss of $1.1 million in fiscal year 2019.
Total assets for the Other segment decreased from $13.4 million in
fiscal year 2018 to $11.4 million in fiscal year 2019.
University History
Founded
in 1941, NAU, then operating under the name National School of
Business, offered specialized business training designed for women
in western South Dakota wanting to work outside the home. During
the late 1960s and early 1970s, the university progressed from a
two-year business school to a four-year college of business and
embarked on a recruitment of qualified graduates of one- and
two-year programs from accredited business schools in the eastern
United States. Such programs allowed students to continue their
education and receive appropriate transfer credits for their
previous academic achievements. In 1974, the university, then known
as National College, added its first branch campus in Sioux Falls,
SD, followed later that year by branch campuses in Denver and
Colorado Springs, CO, and Minneapolis and St. Paul, MN. The
university offered conveniently scheduled courses that would lead
to a degree appealing to working adults and other non-traditional
students.
In
1998, the university began offering online degree programs. Through
campus-based, blended, and fully online instruction, the university
offers diploma, associate, baccalaureate, master’s, and
doctoral degrees in business-related disciplines, such as
accounting, management, business administration, and information
technology; in healthcare-related disciplines, such as occupational
therapy, medical assisting, nursing, surgical technology, and
healthcare information and management; in legal-related
disciplines, such as paralegal, criminal justice, and professional
legal studies; and in higher education. The mission is to prepare
students of diverse interests, cultures, and abilities for careers
in our core fields in a caring and supportive
environment.
In
2009, the Higher Learning Commission (“HLC”) approved
the change of control request in which Dlorah, Inc.
(“Dlorah”), a South Dakota corporation doing business
as National American University, became a wholly owned subsidiary
of NAUH, a publicly traded Delaware corporation. Following this
transaction, NAU added 23 educational locations in growing
communities with expanding workforce development needs, reaching
approximately 35 locations at its peak. The largest expansion
occurred from 2010 to 2012.
The
university also developed 24 new undergraduate academic programs in
health care, information technology, business, and management, as
well as a certificate and Doctor of Education in Community College
Leadership. In order to support this growth, the number of
university faculty and staff more than doubled from 855 in 2007 to
1,766 by fall 2013. The financial data from this time-period
reflected that the university had experienced an 86% growth in
total assets from FY2010 to FY2013. At the time of the
re-accreditation site visit in September 2014, National American
University’s development was characterized by consistent,
planned growth in enrollment through the timely addition of
educational locations; an enhanced distance delivery operation; new
programming offerings; a strong and stable financial position; an
action-oriented assessment program; the adoption and implementation
of performance-based curricula; and the overall maturation and
development of faculty, staff, administration, and governing
board.
In the ensuing five years, a variety of external factors disrupted
higher education in the United States, including declining
enrollments across higher education, significant numbers of new
regulations, increased scrutiny and regulation targeting for-profit
institutions, and a steady shift of working adult students from
ground to online learning. At NAU, student enrollments declined
from a high of 11,683 students in fall quarter 2012 to 4,797
students in fall quarter 2018. During the same time-period, the
percentage of students registered in fully online courses increased
from 59% to 78% and surpassed 83% in the winter quarter 2018-19. By
summer 2019, only 15% of the student body was enrolled in
location-based nursing and allied health programs while 75% of the
budget was being spent to support these programs. As of May 31,
2019, in addition to its central administration location in Rapid
City, South Dakota, NAU operated five instructional locations
across the states of Colorado, Indiana, Kansas, and Texas. NAU also
continued to conduct educational programs at Ellsworth Air Force
Base, South Dakota, and Kings Bay Naval Base, Georgia.
The university responded to the shift in demand from ground to
online learning by preparing a strategic shift to an online
university, although it intends to continue on-ground instruction
at military installations. To support its strategic shift to an
online university, the board and senior leaders identified, and
continues to execute, on three carefully planned and coordinated
strategies, which also address declining enrollments and escalating
costs at NAU’s ground locations:
1.
The creation of the One Stop student service center in July
2018;
2.
Investment in distinctive and mission-brand online graduate and
undergraduate programs with an orderly exit of ground-based
programs and locations launched November 1, 2018; and
3.
Reorganization of the academic structure to better align the
educational enterprise and governance structures, while protecting
students through the teach-out.
The One Stop effectively integrates all marketing, admissions,
student advising and mentoring, academic support, and instructional
quality services into a single working group responsible for
enrollment, retention, and student success. We believe that
centralizing these functions promotes a student-focused entry into
the university and a sustained focus on and collective commitment
to retention and student success. Further, the strategy allows NAU
to reduce duplicative admissions and financial services staff at
different locations and respond to increasing student expectations
for online services. Kansas City is the hub for the One Stop as the
city has scalability of resources for the future, whereas these
resources and scalability are limited in Rapid City, SD, the main
campus and administrative hub for NAU. Rapid City remains the
location of the main campus and location of central and online
administration. Two additional locations exist on military bases in
South Dakota and Georgia. On-base locations continue in the current
strategic plan and comprise the only locations with ground courses
and programs.
In October of 2018, the board approved the decision to teach out
all remaining ground programs and exit physical locations, focusing
the future on the distinctive online strategic security offerings
and on long-standing online “mission brand” offerings
in business, accounting, and health management in which enrollment
has remained strong. On November 1, 2018, NAU announced the
suspension of new enrollments in 34 of its 128 programs, including
seven allied health, nursing, and other ground programs across the
system.
To ensure that NAU could focus simultaneously on investing and
growing the distinctive and mission-brand programs while also
effectively teaching out ground locations, the university created a
separate division and operational plan focused on teach-out
programs and discontinued operations. With goals for sustained
quality and academic support, this division serves students through
the completion of the suspended programs or through transfer to
other institutions if transfer proves to provide a superior
teaching and learning environment than what NAU can provide. In
many cases, the students remaining in programs numbered five or
fewer. Larger institutions providing more peer-to-peer learning and
degree flexibility, particularly for students recently enrolled,
have had the potential to serve the students more
effectively.
The strategies detailed above required organizational
restructuring. Thus, NAU began the academic reorganization and
staffing changes in October 2018. These changes (a) aligned the
ongoing educational enterprise with the One Stop and (b)
established the separate division dedicated to overseeing and
supporting the teaching out of suspended programs and the phasing
out of discontinued ground operations. NAU also continues to
conduct educational programs at Ellsworth Air Force Base, South
Dakota, and at Kings Bay Naval Base, Georgia.
The financial plan supporting the strategies included (a) financial
and personnel investment in core business and new strategic
security programs; (b) consolidation of admissions, marketing, and
student success staff (all student-facing services, retention, and
support); (c) reduction or realignment of central and location
operations personnel; and (d) process and other expenditure
reductions as a result of the elimination of duplication at
locations.
The decision to complete a strategic shift while also maintaining
marginal student enrollments in suspended programs at closing
locations had a negative effect on NAU’s financial position
during fiscal years 2018 and 2019. The decision to maintain
locations with limited enrollments was specifically intended to
ensure minimal impact on students in the suspended programs, while
NAU also worked proactively to arrange suitable and seamless
transfer or teach-out opportunities for students. NAU leadership
chose this approach, which stands in stark contrast to the abrupt
campus closures and displaced students that have occurred too often
in the postsecondary sector in recent years (an approach NAU does
not endorse because of the impact on displaced students). NAU
anticipates completing the location closures and program teach-outs
in 2019. The complex plan addresses each program, location, and
student individually. While this strategic shift has had some
negative financial impacts in the short term, it is expected to
have substantial benefits to the university’s financial
position as early as fall 2019.
Corporate Information
National
American University Holdings, Inc., formerly known as Camden
Learning Corporation, was organized under the laws of the State of
Delaware on April 10, 2007, as a blank check company to acquire one
or more domestic or international assets in the education industry.
On November 23, 2009, as a result of the merger transaction with
Dlorah, which owns and operates NAU, Dlorah became our wholly owned
subsidiary. For accounting purposes, Dlorah was the acquirer and
accounted for the transaction as a recapitalization. Accordingly,
the consolidated financial statements included in this annual
report on Form 10-K reflect the results of Dlorah. We conduct
substantially all of our business and generate substantially all of
our revenue through Dlorah. Our primary business is the operation
of National American University, which generated 95.8% of our
revenue in fiscal year 2019. We also have Fairway Hills, a
multi-family residential real estate operation in Rapid City, South
Dakota, which generated 4.2% of our revenue in fiscal year 2019.
The NAU website is www.national.edu. The information on the website
is not incorporated by reference in this Annual Report on Form
10-K. We upload the 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 on the website as soon as reasonably practicable
after we electronically file such material with, or furnish to, the
Securities and Exchange Commission (SEC).
The Company’s common stock was listed as NAUH on Nasdaq
Global Market through January 17, 2019, at which time the Company
voluntarily delisted and transferred its listing to the Over the
Counter Quotation Bureau (“OTCQB”) Market, effective
January 22, 2019. The delisting and transfer was the result of the
Company’s market value of publicly held shares no longer
meeting the requirement to maintain a minimum Market Value of
Publicly Held Shares of $5,000, as set forth in Nasdaq Listing Rule
5450(b)(1)(C), as well as consideration of the probability of
regaining compliance, the common stock’s current trading
volume and price, and the costs of maintaining eligibility to list
the Company’s common stock on Nasdaq Global Market. As of
June 5, 2019, the Company is no longer a reporting company under
the Securities and Exchange Act of 1934, as
amended.
Our Core Values
Since
inception, the following core values have guided the university,
which we believe have contributed to our success in obtaining and
retaining students and faculty:
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offer
high quality instructional programs and services;
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provide
a caring and supportive learning environment; and
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offer
technical and professional career programs.
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These
core values have remained our foundation as we have transitioned
from a ground to an online university. We promote understanding and
support of our mission and core values through participation of
students, faculty, staff administrators and the board of governors
in the governance and administrative structures of the university.
We have adopted and implemented policies and procedures to ensure
adherence to our core values and to operate with integrity as we
fulfill our mission. Our commitment to these core values is
evidenced in the daily interactions among our students, faculty,
staff, and administrators.
Approach to Academic Quality
We have
identified several academic initiatives to promote a high level of
academic quality, including:
Student engagement, learning, academic achievement, persistence to
credential, and career success. The urgency of now is to
assist working adults in getting the credit they deserve at NAU; to
teach, assess, mentor, and support until every student acquires the
skills, knowledge, and abilities they need; and to create policies,
processes, programs, and learning experiences that exceed
expectations.
Comprehensive overhaul of all NAU course curricula, student
educational experience, and learning management system. We
are reconceiving the entire student experience online and updating
all assignments, assessments, and competency clusters across
learning outcomes in ways that allow them to be unbundled into
micro-credentials or integrated into new course and program
combinations. We design our curricula to address specific
career-oriented objectives we believe working adult and other
non-traditional students are seeking. We have invested significant
human and financial resources in the implementation of this
curricula development to support faculty and students in achieving
prescribed student learning outcomes. The newly-launched programs
in strategic security offer a potential point of distinction,
particularly in graduate programming. The performance-based
curricula are designed and delivered by faculty members who are
committed to delivering a high quality, current and relevant
education to prepare students for their professions.
Qualified faculty.
NAU seeks to hire and retain highly qualified faculty members with
relevant practical experience and the necessary skills to provide a
high-quality education for our students. More than 90% of our
faculty members hold graduate degrees, as well as the key
professional positions to support the distinctive offerings in
strategic security. We seek faculty members who can integrate
relevant, practical experiences from their professional careers
into the courses they teach. We also invest in the professional
development of our faculty members by providing training in online
teaching techniques, hosting events and discussion forums
that
foster
sharing of best practices and continually assessing teaching
effectiveness through administrative reviews and student
evaluations.
Standardized course design. We employ a standardized
curriculum development process to promote consistent, authentic
learning experiences in our online courses. We also regularly
review student survey data to identify opportunities for course
modifications and enhancements. NAU has completed implementation
and upgrade of Bright Space by D2L. Upgrades include live chat,
texting, live tutoring, full mobile integration, and other new
tools for faculty-student engagement. In addition, the D2L/Bright
space course room prototype for all 450+ undergraduate and graduate
courses has been developed by NAU staff, faculty, and students. We
have defined a curricular model that evaluates the competencies,
learning outcomes, and related assignments and assessments across
an academic program. By the end of 2019, all programs and courses
should have the ability to be unbundled and offered on a pure
competency-based or laddered credential model.
Effective student services. Through the establishment of the
One Stop, NAU has established teams of academic and administrative
personnel who act as the primary support for our students,
beginning at the application stage and continuing through
graduation. In recent years, we have also concentrated on improving
the technology used to support student learning, including
enhancing our online learning platform and student services. As a
result, all support services, including academic, administrative,
library and career services are accessible online, allowing users
to access these services at a time and in a manner convenient to
them.
Continual academic oversight. The provost’s office, in
conjunction with other academic offices, conducts academic
oversight and assessment functions for all programs, and evaluates
the content, delivery method, faculty performance and desired
student learning outcomes. We continually assess outcomes data to
determine whether students graduate with the knowledge and skills
necessary to succeed in the workplace. The provost also initiates
and manages periodic examinations of the curricula to evaluate and
verify academic program quality and workplace applicability. In
conjunction with the One Stop, the University seeks ongoing
student, faculty, and external feedback to determine whether to
create new programs, modify current programs, or discontinue those
that do not meet our standards or market needs.
Board of Governors. We maintain a separate board of
governors to oversee the academic mission of the university. Among
other things, the board of governors is responsible for determining
the mission and purposes of the university, approving educational
programs and ensuring the well-being of students, faculty and
staff. A majority of the board of governors’ members are
independent, experienced in education, administration, business,
international business, government, law, communications, and
occupational therapy. Board membership has remained stable for many
years. The oversight and guidance of the board of governors has
been critical to the development and the maintenance of academic
standards.
Industry and Outlook
NAU
operates in the same market as for-profit and non-profit public and
private professional and technical institutions and community
colleges. Competition is generally based on program offerings,
modality, the quality of instruction, placement rates, selectivity
of admissions, recruiting, transfer credit and credit for prior
learning, and tuition rates. We compete for enrollments by offering
more frequent start dates, more flexible hours, better
instructional resources, shorter program length and maximum
transfer credit. We also compete with other institutions by
focusing on offering high demand, career-oriented programs,
providing individual attention to students and focusing on flexible
degrees for working adults and other non-traditional students. We
believe we can compete effectively because of the diversity of our
program offerings, quality of instruction, strength of our brand,
distinctive programs in strategic security, and success in awarding
transfer credit and credit for prior learning.
Certain
institutions have competitive advantages over us. Non-profit and
public institutions receive substantial government subsidies,
government and foundation grants and tax-deductible contributions
and have other financial resources generally not available to
for-profit schools. In addition, some of our for-profit competitors
have a more extended or dense network of schools and campuses,
which may enable them to recruit students more efficiently from a
wider geographic area. Furthermore, some of our competitors,
including both traditional colleges and universities and other
for-profit schools, have substantially greater financial resources
and name recognition, which may enable them to compete more
effectively for potential students. We expect to face continued
competition because of new entrants to the online education market
with similar programmatic offerings.
Competitive Strengths
We
believe the following strengths enable us to compete effectively in
the postsecondary education market:
Our diversified, technical, and professional program mix.
Programs target in-demand associate, baccalaureate, and
master’s programs in professional and technical areas,
including business, accounting, education, strategic security, and
information technology. Program evaluation and development
processes allow the university to continually update academic
offerings relevant to the field, as well as design new programs to
meet current industry needs.
Our multiple accreditations and regulatory approvals. NAU is
regionally accredited through the Higher Learning Commission. In
addition, many of our programs maintain specialized or professional
accreditation and approvals.
Our affiliations with other educational institutions. NAU
began offering online academic programs in 1998, and has
continually developed expertise in curricula and technology related
to online education. We have established a number of affiliations
with other educational institutions to provide curriculum
development services and technology support services. We also
believe NAU provides an appealing opportunity for students with
transfer credit and training, as well as displaced students of
closed schools who seek to continue their education through
transfer- and teach-out options.
Our commitment to high demand professional and technical
programs. We are committed to offering quality,
performance-based educational programs to meet the needs of
employers. Our programs are designed to help our students achieve
their career objectives in a competitive job market. The entire
student experience online is being re-conceived and all
assignments, assessments, and competency clusters across learning
outcomes are being updated in ways that allow them to be unbundled
into micro-credentials or integrated into new course and program
combinations. Qualified faculty members, who often have practical
experience in their respective fields, teach our programs and offer
students “real-world experience” perspectives. We
periodically review and assess our programs to ensure that our
programs are current and meet the changing demands of employers. In
addition, our faculty are continually evaluated on nine specific
behaviors focused on student engagement and instructional
quality.
Our focus on individual attention to students. We believe in
providing individual attention to our students to ensure an
excellent educational experience. We provide student support
services, including administrative, financial aid, library, career,
and technology support, to help maximize their success. We also
provide personal guidance to our students during the admissions
process, academic advising, financial services, learner support and
career services.
Our focus on flexible scheduling. We have designed our
program offerings and our online delivery platform with flexible
scheduling to meet the needs of working adults and other
non-traditional students. We believe working adults and other
non-traditional students are attracted to the convenience and
flexibility of our programs because they can study and interact
with faculty and classmates during times and at places that suit
their needs.
Our focus on improving processes. In collaboration with the
One Stop, academic and other leaders have developed and launched
cloud-based comprehensive service points for math, writing, career,
and library support, as well as 24/7 student support. The results
from previous quarters indicate that the successful completion rate
in math and English have risen. Use of the math and writing support
systems and tutoring have doubled in the past year. TEAMS 3, a
cloud-based version of NAU’s signature data analytics system
to improve persistence and completion allows faculty, advisors,
campus directors, and college and associate deans to track student
progress, attendance, grades, posted assignments, etc., to
intervene proactively if a student becomes in any way at risk. The
university has also implemented a new process to ensure that
faculty and student advisors respond to at-risk student alerts
within 24 hours and post a resolution within 48 if
possible.
Our focus on improving faculty-student engagement. All new
and continuing faculty complete an orientation on new expectations
for weekly synchronous and asynchronous faculty-student engagement
in discussion boards, assignments, labs, and other support within
every course. The Faculty Quality Review system (FQR) now evaluates
all faculty on nine behaviors and expectations for quality
instruction and substantive and iterative engagement with students.
The upgrade to BrightSpace, now completed, includes course designs
that require enhanced faculty-student engagement and synchronous
interaction.
Our focus on faculty development and scholarship. Both
graduate and undergraduate faculty are required to participate in
scholarship and development, whether through offerings provided by
NAU, other institutions for which they teach, or documented
attendance at professional conferences and trainings. Each year,
NAU sponsors quarterly trainings, mentoring, and professional
development webinars focused on quality teaching and learning for
working adults. In addition, NAU hosts a January faculty
development conference with requirements for attendance by all
adjunct and full-time faculty.
Our focus on the military. With the asset purchase of
Henley-Putnam University in 2018, the university expanded its
options for quality education and premier student service to the
needs and demands of service members, their dependents, and
veterans. The Henley-Putnam School of Strategic Security, along
with the continued focus on serving the military on base, has
provided new programs and opportunities for serving active
military, veterans, and their dependents.
Our experienced executive management team with strong operating
history. NAU’s executive management team possesses
extensive experience in the management and operation of
postsecondary education institutions. The president and chief
executive officer, Dr. Ronald Shape, began his career in higher
education with us in 1991. He began teaching courses in accounting,
auditing and finance in 1995, became the chief fiscal officer in
2002, and the chief executive officer in April 2009. Dr. Lynn
Priddy, provost and chief academic officer of the university,
joined NAU in 2013. She began her career in education in 1986,
serving as English faculty, director, dean, and vice president of
several institutions. In 1999, she joined the largest regional
accreditor, the Higher Learning Commission, where she served
fourteen years, the last five as vice president. Mr. Thomas Bickart
joined the university in February of 2019. Mr. Bickart has over
twenty years of financial and operational experience, the majority
at dynamic educational organizations. Most recently, he
assisted Edison Learning, Inc. restructure its operations and
position the organization for new market growth. Mr. Bickart
previously served as the Chief Financial Officer ("CFO") at TCI
College of Technology from 2013 to 2016, where he executed a
turnaround strategy. From 2008 through 2013, he was CFO at
Neumont University where he was integral in assisting the school to
become a highly recognized institution. Michael Buckingham was
appointed president of the real estate operations in November 2009.
Mr. Buckingham oversees the maintenance of all the facilities in
the NAU system, as well as properties being developed by the real
estate operations. Mr. Buckingham served as corporate vice
president of Dlorah from 1992, and the president of Dlorah’s
real estate operations from 1988, until the closing of the Dlorah
merger in 2009.
Business Development and Expansion
There
has been a fundamental shift in how our student population chooses
to engage in their educational pursuits and in response, the
university has executed a strategy to become a predominantly online
institution, reserving ground-based locations for military bases.
There are several approaches to building the online operations of
the university, including integrating online operations in one
location, acquiring certain assets of Henley-Putnam University,
launching the One Stop, and integrating new mobile and online IT
systems.
NAU has
integrated the operations of the Rapid City, SD and Kansas City, MO
online operations into the One Stop. This integrated operation is
fully functional and is providing stability to the overall online
enrollment of the university. We expect this integrated operation
will add the necessary capacity to scale and grow our online
enrollment population for the foreseeable future.
The
asset purchase transaction with Henley-Putnam University closed on
March 21, 2018, and the university has completed the integration of
programs, students, faculty, and staff into NAU. The acquisition of
these assets has provided eight new degree areas and more than 40
undergraduate and graduate certificates in high demand areas of
strategic security, protection management, terrorism and
counterterrorism, nuclear enterprise studies, cybersecurity, and
intelligence management. We continue to use traditional marketing
and relationship networks to provide greater exposure to these
programs. These programs are offered entirely online.
NAU
began offering academic degree and diploma programs online in 1998,
through what we refer to as our online campus. We were one of the
first regionally accredited universities to be approved by the HLC
to offer full degree programs under an Internet-based delivery
methodology. We have invested heavily in the creation and evolution
of a sophisticated and reliable online delivery system. The online
campus has grown as an organizational structure, providing a scope
of service consistent with the university’s other campuses.
Careful consideration was afforded to preserving the
student-centered philosophy of the university while capitalizing on
the technological advancements in online delivery. Since 2016,
students have been able to access all support services, tutoring,
library, career services, courses, and program information via
their smart phones. NAU conducts virtual graduation that allows for
live streaming of graduates, faculty, and testimonials. The
organization of the online campus continues to evolve in response
to increasing enrollment and the expanding sphere of quality
services available to our students.
Growth Strategies
Increase enrollment in existing academic programs. We focus
on increasing enrollment in our core academic programs, including
strategic security, by refining our marketing and recruiting
efforts to identify, and enroll students seeking degrees or
diplomas in the academic programs we offer. We also focus on
retaining students so they may achieve their educational goals. We
believe that the depth and quality of our existing core programs
will provide opportunity for additional growth. The business-related
master’s programs continue to increase in enrollment,
benefitting from the dual credit at the bachelor’s level and
other solid changes and improvements made at the graduate
school.
Expand relationships with private sector and government
employers. We seek additional relationships with security
agencies, businesses, and other employers, including governmental
and military employers, through which we can market our program
offerings to their employees. These relationships provide
enrollment opportunities for the university’s programs, build
recognition among employers in our core disciplines, and enable us
to identify new degree and diploma programs that are in demand by
students and employers.
Leverage infrastructure. We intend to continue investing in
our people, processes, technology infrastructure, and the One Stop
student service center. Through the overhaul of the learning
management, data analytics, and student support systems, NAU has
developed an experience that refreshes and engages working adult
learners, solidifying NAU as the place for our students to achieve
a better life and more fulfilling work. We intend to leverage these
investments as we seek to grow enrollment, which we believe will
allow us to increase our operating margins over time.
Continue to explore
affiliations with other educational institutions. NAU
provides online course hosting and technical assistance to
approximately 2,500 students through affiliated institutions. We
will continue to seek to expand the number of affiliations with
other educational institutions to provide online program services.
These services can meet the needs of other institutions while
providing us with additional sources of revenue.
Accreditation and Program Approvals
The
quality of our academic programs is evidenced by institutional and
program-specific accreditations and approvals. We received initial
accreditation from the HLC in 1985. Since then, we have continued
to grow and expand, and have obtained HLC approval for new
geographic sites and graduate degree programs. In addition to
institution-wide accreditation, numerous specialized commissions
accredit or approve specific programs or schools, particularly in
healthcare and professional fields. Accreditation or approval of
specific programs by one of these specialized commissions signifies
that those programs have met the additional standards of those
agencies. For a list of our institutional and specialized or
professional accreditation see “Regulatory Matters —
Accreditation.”
We are
approved for veterans training and for administering various
educational programs sponsored by federal and state agencies, such
as the Bureau of Indian Affairs, the Social Security Administration
and various state rehabilitation services.
Programs and Areas of Study
NAU
offers a Doctorate of Education, Community College Leadership, a
Doctorate in Strategic Security, the Master of Business
Administration, Master of Management, Master of Science, Bachelor
of Science, Associate of Applied Science and Associate of Science
degrees, with a variety of program options leading to each of these
degrees. Many of the degree programs offer multiple specialties,
concentrations, or certifications. As of May 31, 2019, we offered
the following degree, diploma and certificate
programs:
Undergraduate
Accounting
AAS
Accounting
BS
Aviation
Management BS
Business
Administration AAS
Business
Administration BS
Business
Administration BS, Emphasis in Accounting
Business
Administration BS, Emphasis in Entrepreneurship
Business
Administration BS, Emphasis in Financial Management
Business
Administration BS, Emphasis in Human Resource
Management
Business
Administration BS, Emphasis in Management
Business
Administration BS, Emphasis in Management Information
Systems
Business
Administration BS, Emphasis in Marketing
Business
Administration BS, Emphasis Supply Chain Management
Business
Administration BS, Emphasis in Tourism and Hospitality
Management
Business
Logistics AAS
Construction
Management BS
Health
and Beauty Management AAS
Healthcare
Coding Diploma
Healthcare
Management BS
Health
Information Technology AAS
Health
Information Management BS
Human
Resource Management
Information
Technology AAS
Information
Technology BS
Information
Technology BS, Emphasis in Cybersecurity and Forensics
Management
AAS
Management
BS
Medical
Administrative Assistant AAS
Medical
Billing and Coding Diploma
Medical
Office Management - Clinical Specialist AAS
Medical
Staff Services Management AAS
Small
Business Management AAS
Criminal
Justice AAS
Criminal
Justice BS
Intelligence
Management BS
Nuclear
Enterprise Security/Studies BS
Strategic
Security and Protection Management BS
Terrorism
and Counterterrorism Studies BS
CERTIFICATES
Applied
Radiologic Response Techniques Certificate
Consequence
Modeling Certificate
Consequence
Assessment-GEOINT Certificate
Consequence
Assessment-WMD Certificate
Counterterrorism
Entry-Level Certificate
Executive
Protection Entry-Level Certificate
Hazard
Prediction and Assessment Certificate Capability
(HPAC)-CBR
Hazard
Prediction and Assessment Certificate Capability
(HPAC)-Nuclear
Intelligence
Analysis Entry-Level Certificate
Intelligence
Collection Certificate
Intelligence
Collection and Analysis Certificate
Integrated
Munitions Effects Assessment-Conventional Certificate
Integrated
Munitions Effects Assessment-Nuclear Certificate
Nuclear
Emergency Team Operations Certificate
Nuclear
Weapons Operations and Policy Certificate
Physical
Security and Risk Assessment Certificate
Security
Certificate
Security
Management Certificate
FOREIGN LANGUAGE CERTIFICATES
Arabic
Certificate
Dari
Certificate
Farsi
Certificate
French
Certificate
Hindi
Certificate
Mandarin
Chinese Certificate
Portuguese
Certificate
Russian
Certificate
Spanish
Certificate
Urdu
Certificate
Master’s Degrees
Master
of Business Administration emphasis in Accounting
Master
of Business Administration emphasis in E-Marketing
Master
of Business Administration emphasis in Health Care
Administration
Master
of Business Administration emphasis in Human Resource
Management
Master
of Business Administration emphasis in Information Technology
Management
Master
of Business Administration emphasis in International
Business
Master
of Business Administration emphasis in Management
Master
of Business Administration emphasis in Operations and Configuration
Management
Master
of Business Administration emphasis in Project and Process
Management
Master
of Management
Master
of Management emphasis in Criminal Justice Management
Master
of Management emphasis in E-Marketing
Master
of Management emphasis in Health Care Administration
Master
of Management emphasis in Higher Education
Master
of Management emphasis in Human Resource Management
Master
of Management emphasis in Information Technology
Management
Master
of Management emphasis in Operations and Configuration
Management
Master
of Management emphasis in Project and Process
Management
Master
of Science in Intelligence Management
Master
of Science in Strategic Security and Protection
Management
Master
of Science in Terrorism and Counterterrorism
Graduate Certificates
Certificate
in Accounting
Certificate
in E-Marketing
Certificate
in Global Supply Chain Management
Certificate
in Human Resources Management
Mid-Level
Certificate in Counterterrorism
Senior-Level
Certificate in Counterterrorism
Mid-Level
Certificate in Intelligence Analysis
Senior-Level
Certificate in Intelligence Analysis
Certificate
in Advanced Intelligence Collection and Analysis
Certificate
in Intelligence and Terrorism Profiling
Certificate
in Strategic Intelligence
Certificate
in Cybersecurity
Mid-Level
Certificate in Executive Protection
Senior-Level
Certificate in Executive Protection
Certificate
in Advanced Physical Security and Risk Assessment
Certificate
in Homeland Security
Certificate
in Advanced Security Management
Certificate
in Strategic Security Management
Certificate
in Community College Leadership
Doctoral Degrees
Doctor
of Education, Community College Leadership
Doctorate
in Strategic Security
Doctoral Certificates
Certificate
in Community College Leadership
Third-Party Relationships
Affiliations
NAU
began offering online academic programs in 1998, and has
continually developed expertise in curricula and technology related
to online education. We have established a number of affiliations
with other educational institutions to provide curriculum
development services and technology support services. We also
believe NAU provides an appealing opportunity for displaced
students of closed schools who seek to continue their education
through transfer- and teach-out options.
Educational and Administrative Sites
The
central administration is in Rapid City, South Dakota. We lease our
educational, administrative and student services sites from third
parties. As of May 31, 2019, we provided educational offerings and
support services in the following locations:
|
State
|
|
Address
|
|
Approximate Size
|
|
Colorado
|
|
8242 S. University Boulevard, Suite 100
|
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4,600 sq. ft.
|
|
|
|
Centennial, CO 80122-3178
|
|
|
|
|
|
|
|
|
|
Indiana
|
|
3600 Woodview Trace, Suite 200
|
|
16,375 sq.ft.
|
|
|
|
Indianapolis, IN 46268-3167
|
|
|
|
|
|
|
|
|
|
Kansas
|
|
10310 Mastin St.
|
|
25,500 sq. ft.
|
|
|
|
Overland Park, KS 66212-5451
|
|
|
|
|
|
|
|
|
|
|
|
7309 E. 21st St. North, Suite G40
|
|
10,100 sq. ft.
|
|
|
|
Wichita, KS 67206-1179
|
|
|
|
|
|
|
|
|
|
Texas
|
|
1015 West University Avenue Suite 700
|
|
7,170 sq. ft.
|
|
|
|
Georgetown, TX 78628-5355
|
|
|
NAU
also continues to conduct educational programs at Ellsworth Air
Force Base, South Dakota, and at Kings Bay Naval Base,
Georgia.
Faculty and Other Employees
NAU’s
faculty includes full-time and part-time campus-based and online
faculty members. Approximately 61% of our current faculty members
hold a master’s degree in their respective field and
approximately 26% hold a doctoral degree or first professional
degree. As of May 31, 2019, the university employed approximately
19 full-time and 450 part-time faculty members; more than 267
faculty members are active each quarter. These numbers reflect
NAU’s efforts to effectively manage redundant course
offerings and maintain academically sound class sizes.
We
follow a specific process for hiring faculty in accordance with
published standards for faculty members based on state regulations,
HLC requirements, the university’s faculty quality review
system, and other specialized accreditation standards.
NAU
recruits qualified faculty through national postings, postings on
the university’s website, as well as placement of
advertisements in local and national media. We review official
transcripts to validate academic qualifications and faculty vitae
to verify academic preparation consistent with the
university’s qualification guidelines, as well as engagement
in relevant professional activities.
Training,
evaluating and recognizing faculty members originates with the
college dean and associate academic deans. All faculty members
complete an online faculty orientation, coordinated by the system
academics office, which consists of seven modules addressing the
university’s mission and core values, the instructor’s
role at the university, learning concepts and theories, good
practices in teaching and assessment, classroom management, and
accreditation standards and regulatory requirements related to
academics. Regularly scheduled webinars are also available for
faculty development each quarter. Finally, all faculty participate
in the faculty quality review system which evaluates all online
courses in all terms multiple times and provides ratings on nine
expected instructional qualities. Deans and associate deans
intervene based on ratings from the FQR system, providing
corrective action, mentoring, and ongoing development. Central
academics establishes and upholds the university’s policies
and practices for faculty appraisal. We provide ongoing and
meaningful feedback on individual performance to our faculty
members for their professional growth and for the continued
advancement of the university. Retention of quality adjunct faculty
is a priority.
Faculty
and staff are encouraged to participate in a variety of academic
and non-academic organizations. Faculty members participate in a
wide variety of professional associations and activities at the
local, state and regional level. We encourage our faculty and staff
to stay current on changes and trends within higher education, as
well as their respective industries. Participation in professional
organizations by faculty and staff bring current information
relevant to the university’s mission and programming to
students and the workplace.
In
addition to our faculty, as of May 31, 2019, we employed
approximately 225 staff and administrative personnel in university
services, academic advising and 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 the
university.
Marketing, Recruitment, and Retention
Marketing. We engage in a range of activities designed to
generate awareness among prospective students, such as building
brand awareness via internet platforms, television and radio
advertising, direct mail, email, and print. The marketing
department’s goal is to distribute relevant content to our
target audiences in order to gain brand awareness, create a desire
to attend NAU by engaging our audiences, and support admissions in
enrollment growth. NAU’s audience is primarily adult learners
choosing to advance their education for personal and career-related
goals.
Recruitment. Once a prospective student has indicated an
interest in enrolling, the university’s lead management
system identifies and directs an admissions representative to
initiate prompt communication. The enrollment and completion
advisor serves as the primary, direct contact for the prospective
student, and the advisor’s goal is to help the student gain
sufficient knowledge and understanding of the university’s
programs so the prospective student can assess whether the
university’s offerings satisfy his or her goals.
Retention. The One Stop and the academic team support
students in advancing from matriculation through attainment of
educational goals. The enrollment counselors and success coaches
monitor a set of defined risk factors via data analytics provided
through the student information, TEAMS 3, PowerBI, and other
systems, intervening proactively with any student demonstrating
signs of being at risk.
Student Support Services
Encouraging
students to complete their degree programs is critical to our
success. We invest in developing and providing resources that
simplify the student enrollment process, acclimate students to our
programs and online environment, and support the student
educational experience. Our support services, including academic,
administrative and library services, are accessible online,
allowing users to access these services at a time and in a manner
convenient for them.
The
student support services we provide include:
Academic and learner support services. We provide students
with a variety of services designed to support their academic
studies. We offer students entrance orientation, academic advising,
technical support, research services, writing services, ADA
accommodations, access to counseling, and tutoring. New
faculty-student high-touch, high-engagement strategies continue to
improve both persistence rates and academic
achievement.
Administrative
services. We provide students with access to a variety of
administrative services via in person meeting as well as
telephonically and over the Internet. For example, students can
review class schedules, apply for financial aid, pay tuition, and
access their unofficial transcripts online. The university’s
financial service representatives provide personalized online and
telephonic support to the students.
Library services. NAU provides an extensive array of online
library resources, services, and instruction to support the
educational and research endeavors of our students, faculty and
staff, as well as online libraries and online library resources
available 24/7. In 2018, the university launched full cloud-based
service points for library support and online course
resources.
Career services. For those students seeking to change
careers or explore new career opportunities, we offer career
services support, including resume review and evaluation, career
planning workshops and access to career services information for
advice and support.
Technology support services. We provide online technical
support to help students remedy technology-related issues. We also
provide online tutorials and “Frequently Asked
Questions” for students who are new to online
coursework.
Admissions
Prospective
students complete an application to enroll in our programs. Once
the application has been submitted, an admissions representative
and student services personnel assist the applicant through the
admissions process, course registration and matriculation.
Financial services representatives, if needed, assist with
financial aid. Prospective students complete placement tests to
determine areas of opportunity, which enables the university to
best serve students by enrolling them in classes to build needed
skills, thereby increasing their chances of success.
Applicants
to the MBA and MM programs must have a minimum of a baccalaureate
degree or equivalent from an institution recognized or accredited
by an appropriate government or third-party agency.
Applicants
to the university’s MSN program must have graduated from a
baccalaureate degree program in nursing from an accredited
institution; have a current active unencumbered registered nurse
(RN) license from any state within the United States; and have a
minimum cumulative grade point average of 3.0 or above on a 4.0
scale during the baccalaureate degree completion.
International
applicants to the university’s master’s programs must
provide evidence of completion of a baccalaureate degree in the
form of official transcripts from (i) an international higher
education institution recognized by the ministry of education or
other appropriate government agency and a transcript evaluation
from an organization approved by National Association of Credential
Evaluation Services or (ii) a U.S. higher education institution;
must complete and submit the International Financial Certification
form and attach an original bank statement. International students
are required, as part of the application process, to show evidence
of sufficient funding during their studies. The amount and source
of funds are also shown on the Certificate of Eligibility (I-20)
needed to apply for an F-1 visa. In addition, students planning to
bring a spouse and/or children are required to show additional
funds for those individuals. Applicants must demonstrate
proficiency in English through satisfaction of one of the following
requirements:
●
Provide an official
Test of English as a Foreign Language ("TOEFL") score report
indicating a minimum score of 550 for a paper-based, 213 for a
computer-based or 80 for an Internet-based exam. The TOEFL must
have been taken within the past two calendar years and official
test scores must be sent from the testing agency to National
American University.
●
Provide an official
International English Language Testing System ("IELTS") score
report with an overall minimum score of 6.0. The IELTS must have
been taken within the past two calendar years and official test
scores must be sent from the testing agency to National American
University.
●
Provide evidence of
completion of two trimesters (or equivalent) of college-level
English (excluding ESL courses) with a grade of C or higher at a
college or university whose language of instruction is
English.
●
Provide evidence of
English language proficiency as deemed appropriate by National
American University.
Undergraduate
applicants must have graduated from a recognized high school (or
the Department of Education or state-required accepted equivalent)
or submit an official transcript from an accredited higher
education institution in the United States indicating completion of
a postsecondary education program of at least two years that is
acceptable for full credit toward a bachelor’s degree, with a
minimum cumulative grade point average of 2.0. Non-native English
speaking applicants must provide either (i) an official TOEFL score
report indicating a minimum score of 520 for a paper-based, 190 for
a computer-based, or 68 for an Internet-based exam; (ii) an
official Test of English for International Communication score
report indicating a minimum score of 750 (not applicable to student
enrolled in the nursing program); (iii) an official IELTS score
report with an overall minimum score of 5; (iv) evidence of
completion of two semesters (or the equivalent) of college-level
English (excluding ESL courses) with a grade of “C” or
higher at an accredited college or university whose language of
instruction is English; or (v) evidence of English language
proficiency by completing the Accuplacer ESL English assessment
exam with minimum scores or 102 or higher in reading, 100 or higher
in sentence meaning, 95 or higher in language usage and 5 or higher
in writing sample.
Enrollment
Enrollments
have decreased from 5,648 students as of May 31, 2018 to 3,313
students as of May 31, 2019, representing an annual decrease of
approximately 41.3% mainly because of a decrease in undergraduate
and diploma students. As of May 31, 2019, we had 2,760 students
enrolled in our online programs and 553 students enrolled
on-campus.
The
following is a summary of our student enrollment by degree type and
by instructional delivery method:
|
|
May 31, 2019
(Spring 2019 Term)
|
May 31, 2018
(Spring 2018 Term)
|
|
|
|
|
|
|
|
|
Continuing
Ed
|
-
|
0.0%
|
59
|
1.0%
|
-100.0%
|
|
Doctoral
|
175
|
5.3%
|
111
|
2.0%
|
57.7%
|
|
Graduate
|
355
|
10.7%
|
449
|
8.0%
|
-20.9%
|
|
Undergraduate
& Diploma
|
2,783
|
84.0%
|
5,029
|
89.0%
|
-44.7%
|
|
Total
|
3,313
|
100.0%
|
5,648
|
100.0%
|
-41.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-Campus
|
553
|
16.7%
|
724
|
12.8%
|
-23.6%
|
|
Online
|
2,760
|
83.3%
|
4,342
|
76.9%
|
-36.4%
|
|
Hybrid
|
-
|
0.0%
|
582
|
10.3%
|
-100.0%
|
|
Total
|
3,313
|
100.0%
|
5,648
|
100.0%
|
-41.3%
|
Tuition and Fees
Our
tuition rates vary by educational site. Total tuition varies based
upon several factors, including the number of credit hours for each
program, the degree level of the program, and geographic
location.
Our
students finance their education through a variety of sources,
including government sponsored financial aid, private and NAU
provided scholarships, employer provided tuition assistance,
veteran’s benefits, private loans, and cash payments. A
substantial number of our students rely on funds received under
various government-sponsored student financial aid programs,
predominately Title IV programs. In the fiscal years ended May 31,
2019 and 2018, approximately 78.2% and 82.1%, respectively, of our
revenues (calculated on a cash basis) were attributable to funds
derived from Title IV programs. In the future, we expect to
continue the current initiatives to increase revenue from sources
other than Title IV programs, such as continuing education
programming that is not eligible for Title IV program
funding.
We have
a refund policy for tuition and fees based upon quarterly start
dates. If a student drops or withdraws from a course during the
first week of classes, 100% of the charges for tuition and fees are
refunded. After the first week but during the first 60% of
scheduled classes the percentage of tuition charges refunded for a
student who totally withdraws from NAU is based on a daily
proration based on a percent of the term completed thru the last
day of attendance. If the last day of attendance is beyond 60% of
the scheduled classes, tuition and fees are not refunded. A $75
administrative fee is assessed against each prorated refund. A
refund minus a $75 administrative fee is made within 45 days of the
day the student’s withdrawal is determined. If the student
was a financial aid recipient, federal regulations establish a
methodology for determining the amount of Title IV funds that must
be returned to the financial aid programs for students not
completing 60% of the enrollment period.
Technology Systems
We
remain focused on leveraging the use of technology to increase
efficiencies in our academic programs and our general
administrative operations. This commitment requires not only
institutional budget expenditures, but also orientation and
training in the use of this technology.
To
service our online teaching, we utilize Desire2Learn TM, or D2L, an
Internet-based learning management system. The features of this
product include content display and organization, synchronous and
asynchronous chat, private messaging, quizzing, student surveys and
assignment submission and student tracking and grading. The system
is used to present online courses to both domestic and
international students. In collaboration with the IT team, academic
leaders have developed and launched or will launch three new
cloud-based comprehensive service points for math, writing, career,
and library support—as well as student support
24/7.
Together
with the IT team, academics has developed ROCKET and TEAMS 3, the
online, cloud-based version of NAU’s signature undergraduate
persistence and completion system. The cloud-based system allows
faculty, advisors, campus directors, and college deans and
associate deans to track student progress, attendance, grades,
posted assignments, etc., so as to intervene proactively if a
student becomes in any way at risk.
Recognizing
the need to manage content used in the D2L learning management
system, we implemented the Desire2Learn Learning Object
Repository™ application to input, organize, manage and
display course materials. This application provides an
Internet-based, content entry and editing interface that allows
content experts to create and edit course content. Additionally, it
organizes text, images, documents and multimedia resources in a
relational database, allowing the university to more easily
identify and re-task existing content for new projects and courses
through the use of Meta data. Finally, the application is
integrated with the learning management system and is used to
display and deliver content seamlessly through D2L to
students.
Intellectual Property
We rely
on a combination of copyrights, trademarks, service marks, trade
secrets, domain names and agreements with third parties to protect
proprietary rights. Through the extensive development of electronic
instructional materials, courseware and related processes, we
continue to accumulate intellectual property that has provided the
basis for improving quality of instruction, programs and services
to our students.
We rely
on trademark and service mark protections in the United States and
other countries for our name and distinctive logos, along with
various other trademarks and service marks related to specific
offerings. We own federal registrations for the principal
trademarks, National American University® and NAU® in the
United States. These marks are important symbols for us and are
used on our educational services, educational materials, and a
range of other items, including clothing and other memorabilia.
These brands appear in advertising and are seen by members of the
public as well as direct constituents. We own domain name rights to
“national.edu” as well as its derivatives, and a number
of “NAU” related domain names.
NAU
publishes intellectual property policies in both the faculty and
employee handbooks that outline the ownership of creative works and
inventions produced by employees within the scope of their
employment, compliance with copyright law, and the use of
copyrighted materials. When content experts are hired to develop
curriculum, they are required to execute a standard agreement to
confirm that all materials created under the scope of their work
becomes NAU’s exclusive intellectual property. These
agreements also require the content experts to comply with all laws
related to copyright and the use of copyrighted
materials.
Real Estate Operations
Fairway
Hills, the real estate operations, conducts business through
various projects and associations, including Fairway Hills I and
II, Park West, Vista Park, Fairway Hills Park and Recreational
Association, the Vista Park Homeowners’ Association and the
Park West Homeowners’ Association. Fairway Hills I and
Fairway Hills II are apartment buildings consisting of 52 rental
units, referred to as Doral Apartments, of which 94% were leased as
of May 31, 2019. Park West originally consisted of 48 apartment
units and is owned by a partnership that is 50% owned by the
Company and 50% owned by members of the Buckingham family
(including Robert Buckingham, chairman of our board of directors,
and his siblings and the spouses and estates of his siblings). Two
of the original Park West apartments were combined into one large
unit and later sold. Four additional apartments were sold,
resulting in 42 rental apartments. Park West is 91% leased as of
May 31, 2019. Vista Park consists of 24 total condominium units of
all 24 were sold as of May 31, 2019. Prices for Vista Park
condominium units start at approximately $215,000. Early in the
fiscal year ended May 31, 2018, Fairway Hills completed
construction on a 24-unit luxury apartment complex referred to as
Arrowhead View. Arrowhead View is 92% leased as of May 31,
2019.
In
connection with the development of Vista Park and the Park West
apartments, Fairway Hills has created two homeowners’
associations, the Vista Park Homeowner’s Association and the
Park West Homeowner’s Association, each of which is a
non-profit corporation, to manage and sell the condominiums. In
addition, the Fairway Hills Park and Recreational Association,
which is also a non-profit corporation, was created to operate as a
homeowner’s association covering substantially all of the
Fairway Hills development.
Environmental
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. If 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 costs for clean-up, damages, and fines or
penalties.
Compliance with Applicable Laws
We
strive to comply with applicable federal, state, and local laws and
regulations. We have a designated university compliance officer and
maintain an institutional compliance program that:
|
●
|
monitors
compliance and, when gaps or violations occur, develops responses
to correct deficiencies in a timely manner;
|
|
●
|
communicates
institutional principles designed to deter wrongdoing and to
promote ethical conduct and conducts periodic audits to ensure
compliance with applicable laws;
|
|
●
|
ensures
that federally required Title IV student financial assistance
program compliance attestation examinations are conducted annually
to determine compliance and to identify any deficiencies requiring
correction;
|
|
●
|
ensures
an audit of 401(k) retirement plans is conducted annually for
compliance with applicable laws and fiduciary duties;
and
|
|
●
|
engages
an independent auditing firm to audit the annual financial
statements.
|
REGULATORY MATTERS
NAU is
subject to extensive regulation by state education agencies,
accrediting commissions, and the United States federal government
through the U.S. Department of Education (the “Department of
Education”) under the Higher Education Act of 1965, as
amended (the “Higher Education Act”). The regulations,
standards and policies of these agencies cover substantially all
our operations, including the educational programs, facilities,
instructional and administrative staff, administrative procedures,
marketing, recruiting, finances, results of operations and
financial condition.
As an
institution of higher education that grants degrees and diplomas,
we are required to comply with the requirements of state education
authorities. To participate in federal programs of student
financial assistance, we are required to be accredited by an
accrediting commission recognized by the Department of Education.
Accreditation is a non-governmental process through which an
institution submits to qualitative review by an organization of
peer institutions, based on the standards of the accrediting
commission and the stated aims and purposes of the institution. The
Higher Education Act requires accrediting commissions recognized by
the Department of Education to review and monitor many aspects of
an institution’s operations and to take appropriate action if
the institution fails to meet the accrediting commission’s
standards.
NAU’s
operations are also subject to regulation by the Department of
Education due to our participation in Title IV programs. To
participate in Title IV programs, a school must receive and
maintain authorization by the appropriate state education agency or
agencies, be accredited by an accrediting commission recognized by
the Department of Education and be certified as an eligible
institution by the Department of Education. Prior to July 1, 2010,
Title IV programs included educational loans provided directly by
the federal government, grant programs for students with
demonstrated financial need, and educational loans issued by
private banks with below-market interest rates that were guaranteed
by the federal government in the event of a student’s default
on repayment of the loan. As of July 1, 2010, the federal
government provides all educational loans under Title
IV.
We plan
and implement our business activities to comply with the standards
of these regulatory agencies. Our chief executive officer and chief
financial officer, also provide oversight designed to ensure that
we meet the requirements of this regulatory
environment.
State Authorization and Regulation
NAU is
subject to extensive regulations by the states in which we are
authorized or licensed to operate. State laws and regulations
typically establish standards in areas such as instruction,
qualifications of faculty, administrative procedures, marketing,
recruiting, financial operations and other operational matters,
which can be different than and conflict with the requirements of
the Department of Education and other applicable regulatory bodies.
State laws and regulations may limit our ability to offer
educational programs and offer certain degrees. Some states may
also prescribe financial regulations that are different from those
of the Department of Education and many require the posting of
surety bonds.
In
addition, several states have jurisdiction over educational
institutions offering online degree programs although there is no
physical location or other presence in the state. The institution
may be enrolling or offering educational services to students who
reside in the state, conducting practicums or sponsoring
internships in the state, employing faculty who reside in the state
or advertising or recruiting prospective students in the state.
State regulatory requirements for online education vary, are not
well developed in many states, are imprecise or unclear in some
states and can change frequently.
We have
determined that our activities in certain states constitute a
presence requiring licensure or authorization under the current
requirements of the state education agency, and in other states we
have approvals in connection with our marketing and recruiting
activities. We review the state licensure requirements to determine
whether our activities constitute a presence or otherwise require
licensure or authorization by the state education agency. When
necessary we submit additional applications for licensure or
authorization.
We are
required by the Higher Education Act to be authorized by applicable
state educational agencies in South Dakota and other states where
we are physically located to participate in Title IV programs. On
December 19, 2016, the Department of Education published final
regulations regarding state authorization for programs offered
through distance education and state authorization for foreign
locations of institutions (the “2016 State Authorization
Final Rule”). Among other provisions, the 2016 State
Authorization Final Rule requires that an institution participating
in the Title IV federal student aid programs and offering
postsecondary education through distance education be authorized by
each state in which a student resides, if such authorization is
required by the state. The 2016 State Authorization Final Rule
recognizes authorization through participation in a state
authorization reciprocity agreement, if the agreement does not
prevent a state from enforcing its own laws. The 2016 State
Authorization Final Rule also requires that foreign additional
locations and branch campuses be authorized by the appropriate
foreign government agency and, if at least 50% of a program can be
completed at the location/branch, be approved by the
institution’s accrediting agency and be reported to the state
where the main campus is located. The 2016 State Authorization
Final Rule also requires institutions to: (i) document the state
process for resolving complaints from students enrolled in programs
offered through distance education or correspondence courses; and
(ii) make certain public and individualized disclosures to enrolled
and prospective students about their distance education programs.
The provisions of the 2016 State Authorization Final Rule relating
to foreign locations of domestic institutions became effective July
1, 2018. On June 29, 2018, the Department of Education delayed the
effective date of the 2016 State Authorization Final Rule in all
other respects from July 1, 2018, to July 1, 2020. However, on
April 26, 2019, the U.S. District Court for the Northern District
of California issued a decision concluding that the above-described
delay of the 2016 State Authorization Final Rule was improper, and
further ordered that the 2016 State Authorization Rule would become
effective on May 26, 2019. On July 23, 2019, the Department of
Education released regulatory guidance to postsecondary
institutions confirming that the 2016 State Authorization Final
Rule became effective on May 26, 2019.
On June
12, 2019, the Department of Education published in the Federal
Register proposed regulations (the “2018 State Authorization
Proposed Rule”) to revise the 2016 State Authorization Final
Rule. The 2018 State Authorization Proposed Rule, if adopted as a
final regulation, would continue to recognize authorization through
participation in a state authorization reciprocity agreement, but
would revise the requirement for state authorization to be based on
the location of a student rather than whether or not a student
legally resides in a state. The 2018 State Authorization Proposed
Rule also would revise requirements for institutional notifications
to students concerning the eligibility of graduates for
professional licensure in their states. See also “Regulatory
Matters – Regulation of Federal Student Financial Aid
Programs – State Authorization.”
In
addition, in recent years several states have voluntarily entered
into State Authorization Reciprocity Agreements
(“SARA”) that establish standards for interstate
offering of postsecondary distance education courses and programs.
If an institution’s home state participates in SARA and
authorizes the institution to provide distance education in
accordance with SARA standards, then the institution need not
obtain additional authorizations for distance education from any
other SARA member state. The SARA participation requirements and
process are administered by the four regional higher education
compacts in the United States (the Midwestern Higher Education
Compact, the New England Board of Higher Education, the Southern
Regional Education Board and the Western Interstate Commission for
Higher Education) and are overseen by the National Council for
State Authorization Reciprocity Agreements. NAU is approved to
participate in SARA, through the SARA Coordinator of the South
Dakota Board of Regents as a state portal agency with its most
recent full approval effective from April 20, 2018 through April
19, 2019. On April 1, 2019, SDBOR informed NAU that, based on our
most recent financial responsibility composite score as determined
by the Department of Education and a review by SDBOR of additional
f3inancial information provided by us, SDBOR extended NAU’s
participation in SARA on a provisional basis effective April 1,
2019 through March 31, 2020. In connection with that provisional
status, we must submit quarterly reports to SDBOR, including any
updates to, and specifically noting deviations from, the financial
information previously provided to SDBOR. The April 1, 2019 letter
from SDBOR also informed NAU of the conditions under which its
provisional participation in SARA may be extended beyond March 31,
2020. If NAU is unable to satisfy the conditions set forth in the
April 1, 2019 letter for extension of its SARA participation beyond
March 31, 2020, we may be required to obtain state licensure or
authorization in states beyond those where we operate physical
facilities.
We do
not believe that any of the states in which we are currently
licensed or authorized, other than, South Dakota, Colorado,
Indiana, Kansas, and Texas, are individually material to our
operations. If we fail to comply with state licensing requirements,
we may lose our state licensure or authorizations. If we lose state
licensure in a state in which we have a physical location, or in a
state where we are required to maintain authorization for online
education activities, we would also lose Title IV eligibility in
that state. If we are found not to be in compliance with state
requirements for online learning, and a state seeks to restrict one
or more of our business activities within its boundaries, we may
not be able to recruit students from that state and may have to
cease providing educational programs to students in that state or
may be subject to other sanctions, including fines or penalties.
Compliance with these new and changing laws, regulations or
interpretations related to state authorization and offering
programs via online delivery could increase our cost of doing
business and affect our ability to recruit students in particular
states, which may, in turn, adversely affect enrollments, revenues
and our business.
State Professional Licensure
Many
states have specific licensure requirements that an individual must
satisfy to be licensed as a professional in specified fields,
including fields such as education and healthcare. These
requirements vary by state and by field. A student’s success
in obtaining licensure following graduation typically depends on
several factors, including the background and qualifications of the
individual graduate, as well as the following factors, among
others:
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whether
the institution and the program were approved by the state in which
the graduate seeks licensure, or by a professional
association;
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whether
the program from which the student graduated meets all requirements
for professional licensure in that state;
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whether
the institution and the program are accredited and, if so, by what
accrediting commissions; and
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whether
the institution’s degrees are recognized by other states in
which a student may seek to work.
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Many
states also require that graduates pass a state test or examination
as a prerequisite to becoming certified in certain fields, such as
nursing. Many states also may require a criminal background
clearance before granting certain professional licensures or
certifications. The catalog informs students that it is incumbent
upon the student to verify whether a specific criminal background
clearance is required in their field of study prior to beginning
course work.
Accreditation
We have
been institutionally accredited since 1985 by the Higher Learning
Commission, a regional accrediting commission recognized by the
Department of Education. Our accreditation by the HLC was most
recently affirmed in January 2015; however, on May 23, 2019, HLC
assigned its Financial Distress designation to NAU based on
statements regarding our financial condition made by us in an April
2019 filing with the Securities and Exchange Commission.
Accreditation is a private, non-governmental process for evaluating
the quality of educational institutions and their programs in
areas, including student performance, governance, integrity,
educational quality, faculty, physical resources, administrative
capability and resources and financial stability. To be recognized
by the Department of Education, accrediting commissions must comply
with Department of Education regulations, which require, among
other things, that accrediting agencies adopt specific criteria for
their review of educational institutions, conduct peer review
evaluations of institutions, and publicly designate those
institutions that meet their criteria. An accredited institution is
subject to periodic review by its accrediting commissions to
determine whether it continues to meet the performance, integrity
and quality required for accreditation. HLC most recently conducted
a site visit at NAU on June 27-28, 2019. On July 19, 2019, HLC
informed NAU that the visiting team concluded that NAU is in
compliance with the HLC Criteria for Accreditation and Assumed
Practices that were the focus of the visit, including criteria
related to institutional finances, integrity, academic and student
support resources, and faculty; therefore, HLC removed its
Financial Distress designation from NAU as of that date. HLC also
required NAU to submit an interim report regarding its financial
resources on or before December 31, 2019. A mid-cycle comprehensive
evaluation visit by HLC is scheduled to occur in May
2020.
There
are six regional accrediting commissions recognized by the
Department of Education, each with a specified geographic scope of
coverage, which together cover the entire United States. Most
traditional, public and private non-profit, degree-granting
colleges and universities are accredited by one of these six
regional accrediting commissions. The HLC, which accredits NAU,
accredits other degree-granting public and private colleges and
universities in the states of Arizona, Arkansas, Colorado,
Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri,
Nebraska, New Mexico, North Dakota, Ohio, Oklahoma, South Dakota,
West Virginia, Wisconsin and Wyoming.
Accreditation
by the HLC is important for several reasons, one being that it
enables students to receive Title IV financial aid. Other colleges
and universities depend, in part, on an institution’s
accreditation in evaluating transfers of credit and applications to
graduate schools. Employers rely on the accredited status of
institutions when evaluating candidates’ credentials, and
students and corporate and government sponsors under tuition
reimbursement programs consider accreditation as assurance that an
institution maintains quality educational standards. If we fail to
satisfy the criteria of the HLC, we could lose our accreditation by
that commission, which would cause us to lose our eligibility to
participate in Title IV programs.
The
reauthorization of the Higher Education Act in 2008, and Department
of Education regulations that became effective July 1, 2010,
require accrediting commissions to monitor the growth of
institutions that they accredit. The HLC requires all affiliated
institutions, including NAU, to complete an annual data report. If
the non-financial data, enrollment information, or any other
information submitted by the institution indicate problems, rapid
change or significant growth, the HLC staff may require that the
institution address any concerns arising from the data report in
the next comprehensive evaluation or may recommend additional
monitoring. In addition, the Department of Education regulations
that became effective July 1, 2010 require the HLC to notify the
Department of Education if an institution accredited by the HLC
that offers distance learning programs, such as NAU, experiences an
increase in its headcount enrollment of 50% or more in any fiscal
year. The Department of Education may consider that information in
connection with its own regulatory oversight
activities.
In
addition to institution-wide accreditation, there are numerous
specialized accrediting commissions that accredit specific programs
or schools within their jurisdiction, many of which are in
healthcare and professional fields. Accreditation of specific
programs by one of these specialized accrediting commissions
signifies that those programs have met the additional standards of
those agencies. In addition to being accredited by the HLC at the
institutional level, we also had the following specialized
accreditations as of May 31, 2019:
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Specialized or Programmatic Accreditation or Approval
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Accrediting or Approving Body
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Selected
Business Degree Programs (Associate of Applied Science, Bachelor of
Science, Master of Management, Master of Business Administration
degrees)
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International
Assembly for Collegiate Business Education
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Medical
Laboratory Technician (Overland Park, Kansas location)
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National
Accrediting Agency for Clinical Laboratory Sciences
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Health
Information Technology (online program)
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Commission
on Accreditation for Health Informatics and
Information
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Invasive
Cardiovascular Technology (Georgetown, Texas location)
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Commission
on Accreditation of Allied Health Education Programs on the
recommendation of the Joint Review Committee on Education in
Cardiovascular Technology
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Medical
Assisting (Georgetown TX, Sioux Falls, South Dakota
locations)
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Commission
on Accreditation of Allied Health Education Programs on the
recommendation of the Medical Assisting Education Review
Board
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Occupational
Therapy Assistant (Centennial, Colorado. and Independence,
Missouri. locations)
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Accreditation
Council for Occupational Therapy Education
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Paralegal
Studies (Rapid City location)
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American
Bar Association
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Surgical
Technology (Bellevue, NE, Overland Park and Wichita, Kansas;
locations)
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Accrediting
Bureau of Health Education Schools
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Bachelor
of Science and Master of Science in Nursing Programs
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Commission
on Collegiate Nursing Education Initial Accreditation
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Online
Registered Nurse to Bachelor of Science in Nursing Program
(Distance Learning)
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South
Dakota Board of Nursing Approval
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Pre-
and Post-licensure baccalaureate degree programs in nursing
(Distance Learning) (all states except Tennessee)
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Commission
on Collegiate Nursing Education Initial Accreditation
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Bachelor
of Science and Master of Science in Nursing Programs
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Commission
on Collegiate Nursing Education Initial Accreditation
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Bachelor
of Science in Nursing Program (Austin, Texas campus)
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Texas
Board of Nursing Initial Approval
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Bachelor
of Science in Nursing and Licensed Practical Nurse Bridge to
Bachelor of Science in Nursing Program (Overland Park, and Wichita,
Kansas. campuses)
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Kansas
State Board of Nursing Approval
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If we
fail to satisfy the standards of any of these specialized
accrediting commissions, we could lose the specialized
accreditation for the affected programs, which could result in
materially reduced student enrollments in those programs. Per its
strategy to shift the university to a predominantly online
institution, NAU has succeed in teaching out most ground locations.
In doing so, the university has sustained all of the programmatic
accreditations above, working closely with each accreditor to
ensure students complete their studies from an accredited
program.
Regulation of Federal Student Financial Aid Programs
To be
eligible to participate in Title IV programs, an institution must
comply with specific requirements contained in the Higher Education
Act and the regulations issued thereunder by the Department of
Education. An institution must, among other things, be licensed or
authorized to offer its educational programs by the state or states
in which it is physically located. As of May 31, 2019, in addition
to its central administration location in Rapid City, South Dakota,
NAU operated five instructional locations across the states of
Colorado, Indiana, Kansas, and Texas. NAU also continued to conduct
educational programs at Ellsworth Air Force Base, South Dakota, and
Kings Bay Naval Base, Georgia. An institution must also maintain
institutional accreditation by an accrediting commission recognized
by the Department of Education.
The
substantial amount of federal funds disbursed to schools through
Title IV programs, the large number of students and institutions
participating in these programs and allegations of fraud and abuse
by certain for-profit educational institutions have caused Congress
to require the Department of Education to exercise considerable
regulatory oversight over for-profit educational institutions. As a
result, for-profit educational institutions, including ours, are
subject to extensive oversight and review. Because the Department
of Education periodically revises its regulations and changes its
interpretations 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. Congress must reauthorize the Higher
Education Act on a periodic basis, usually every five to six years.
The most recent reauthorization of the Higher Education Act
occurred in August 2008, which means that the next reauthorization
was due in 2013. Congress failed to pass a one-time reauthorization
bill; therefore, an automatic one-year extension to December 2014
was established. In late 2014, Congress passed an extension to
further delay reauthorization. Congress has taken actions required
to continue to extend Title IV programs while a Higher Education
Act reauthorization remains pending and the Title IV programs
remain authorized and functioning. Congress must continue to pass
legislation to extend the Act until a reauthorization can occur. We
cannot predict when or whether Congress may reauthorize the Higher
Education Act, but it is possible that Congress may work to either
reauthorize the Higher Education Act in its entirety or pass a
series of smaller bills that focus on individual parts of the
Higher Education Act, primarily Title IV programs.
In
addition, Congress must determine funding levels for Title IV
programs on an annual basis and can change the laws governing Title
IV programs at any time. Apart from Title IV programs, eligible
veterans and military personnel may receive educational benefits
for the pursuit of higher education. A reduction in federal funding
levels for Title IV programs, or for programs providing educational
benefits to veterans and military personnel, could reduce the
ability of some students to finance their education. Any action by
Congress that significantly reduces Title IV program funding or the
ability of our students to participate in Title IV programs could
have a material effect on our enrollments, business, financial
condition and results of operations. Congressional action also may
require us to modify our practices in ways that could increase
administrative costs and reduce profit margins, which could have a
material effect on our business, financial condition and results of
operations.
Various
Congressional hearings and roundtable discussions have been held,
beginning in 2010, by the U.S. Senate Committee on Health,
Education, Labor and Pensions (“HELP Committee”) and
other Congressional members and committees regarding various
aspects of the education industry, including student debt, student
recruiting, student outcomes and accreditation matters. In July
2012, the majority staff of the HELP Committee released a report
analyzing information requested from 30 companies operating
proprietary institutions (including us and other publicly traded
companies providing proprietary postsecondary education services).
While stating that proprietary colleges and universities have an
important role to play in higher education and should be
well-equipped to meet the needs of non-traditional students who now
constitute the majority of the postsecondary educational
population, the report was highly critical of these institutions.
Further, in July 2014, the majority staff of the HELP Committee
released a report claiming that eight of the ten top recipients of
post-9/11 GI Bill funds are for-profit companies. During the
current Congress, both the House Education and Labor Committee and
the House Oversight and Reform Committee have conducted hearings
regarding Department of Education regulatory oversight activities,
particularly with respect to proprietary institutions.
In
recent years, various pieces of legislation have been proposed in
Congress that, if adopted, would affect our business. For example,
from time to time, legislation is introduced to make a proprietary
institution ineligible to participate in Title IV programs if it
derives more than 85% of its revenues from federal funds, including
Title IV programs, revenues from the GI Bill and Department of
Defense Tuition Assistance funds. Some legislation would also
prohibit proprietary institutions, including us, from using
federally-derived funds for marketing, advertising and recruiting
expenses. This and similar proposals could be used as a basis of
discussion during the reauthorization of the Higher Education Act.
Any actions that change the requirements for our participation in
Title IV programs or the amount of student financial aid for which
our students are eligible could negatively impact our
business.
Government-wide Focus on Proprietary Educational
Institutions. In October 2014, the Department of Education
announced an interagency task force composed of the Department of
Education, the U.S. Federal Trade Commission (the
“FTC”), the U.S. Departments of Justice, Treasury and
Veterans Affairs, the Consumer Financial Protection Bureau (the
“CFPB”), the SEC, and numerous state attorney general.
Attorneys general in several states have become more active in
enforcing consumer protection laws, especially related to
recruiting practices and the financing of education at proprietary
educational institutions. In addition, several state attorney
generals have recently partnered with the CFPB to review industry
practices. The FTC has also recently issued civil investigative
demands to several other U.S. proprietary educational institutions,
which require the institutions to provide documents and information
related to the advertising, marketing, or sale of secondary or
postsecondary educational products or services, or educational
accreditation products or services. If our past or current business
practices are found to violate applicable consumer protection laws,
or if we are found to have made misrepresentations to our current
or prospective students about our educational programs, we could be
subject to monetary fines or penalties and possible limitations on
the manner in which we conduct our business, which could materially
and adversely affect our business, financial condition, results of
operations and cash flows. To the extent that more states or
government agencies commence investigations, act in concert, or
direct their focus on us, the cost of responding to these inquiries
and investigations could increase significantly, and the potential
impact on our business would be substantially greater.
U.S. Military Tuition Assistance. Service members of the
United States Armed Forces are eligible to receive tuition
assistance from their branch of service through the Uniform Tuition
Assistance Program (the “tuition assistance program”)
of the Department of Defense. Service members may use this tuition
assistance to pursue postsecondary degrees at postsecondary
institutions that are accredited by accrediting agencies that are
recognized by the Department of Education. Each branch of the armed
forces has established its own rules for the tuition assistance
programs of the Department of Defense. Institutions cannot enroll
service members under tuition assistance program unless they have
signed a Memorandum of Understanding, which, among other things,
requires an institution to agree to support Department of Defense
regulatory guidance, adhere to a bill of rights that is specified
in the regulations, and participate in the proposed Military
Voluntary Education Review program. In addition, institutions must
also agree to adhere to the principles and criteria established by
the Service Members Opportunity Colleges Degree Network System
regarding the transferability of credit and the awarding of credit
for military training and experience.
In
2010, Congress and the Department of Defense increased their focus
on Department of Defense tuition assistance that is used for
distance education and programs at proprietary institutions. In
2012, President Obama issued an Executive Order regarding the
establishment of “Principles of Excellence” for
educational institutions receiving funding from the tuition
assistance programs administered by the Department of Defense and
veteran’s educational benefits programs administered by the
Department of Veterans Affairs. The goals of the Principles of
Excellence are broadly stated and relate to disclosures on costs
and amounts of costs covered by federal educational benefits,
marketing standards, state authorization, accreditation approvals,
standard institutional refund policies, educational plans and
academic and financial advising. In August 2013, the Department of
Defense began incorporating the Principles of Excellence outlined
in the President’s 2012 Executive Order into their current
Memorandum of Understanding.
We
cannot predict whether further focus on military tuition assistance
will result in legislation or further rulemaking affecting our
participation in Title IV programs. To the extent that any laws or
regulations are adopted that limit our participation in Title IV
programs or the amount of student financial aid for which our
students are eligible, our enrollments, revenues and results of
operation could be materially affected.
Changes in Department of Education Regulations. As part of
its negotiated rulemaking process, the Department of Education
consults with members of the postsecondary education community to
identify issues of concern and attempts to agree on proposed
regulatory revisions to address those issues before formally
proposing regulations. If the Department of Education and
negotiators cannot reach consensus on the entire package of draft
regulations, the Department of Education is authorized to propose
regulations without being bound by any agreements made in the
negotiation process.
On
November 1, 2016, the Department of Education published final
regulations that, among other provisions, establish new standards
and processes for determining whether a Direct Loan Program
borrower has a defense to repayment (“Borrower
Defense”) on a loan due to acts or omissions by the
institution at which the loan was used by the borrower for
educational expenses. These final regulations (the “2016
Borrower Defense Final Rule”) were published with an
effective date of July 1, 2017. Among other topics, the 2016
Borrower Defense Final Rule establishes permissible borrower
defense claims for discharge, procedural rules under which claims
will be adjudicated, time limits for borrowers’ claims, and
guidelines for recoupment by the Department of Education of
discharged loan amounts from institutions of higher education. The
2016 Borrower Defense Final Rule also prohibits schools from using
any pre-dispute arbitration agreements, prohibits schools from
prohibiting relief in the form of class actions by student
borrowers, and invalidates clauses imposing requirements that
students pursue and internal dispute resolution process before
contacting authorities regarding concerns about an institution. For
proprietary institutions, the 2016 Borrower Defense Final Rule
describes the threshold for loan repayment rates that will require
specific disclosures to current and prospective students and the
applicable loan repayment rate methodology. The 2016 Borrower
Defense Final Rule also establishes important new financial
responsibility and administrative capacity requirements for both
not-for-profit and for-profit institutions participating in the
Title IV programs. For example, certain events would automatically
trigger the need for a school to obtain a letter of credit,
including for publicly traded institutions, if the SEC warns the
school that it may suspend trading on the school’s stock the
school failed to timely file a required annual or quarterly report
with the SEC or the exchange on which the stock is traded notifies
the school that it is not in compliance with exchange requirements
or the stock is delisted. Other events would require a
recalculation of an institution’s composite score of
financial responsibility including, for a proprietary institution
whose score is less than 1.5, any withdrawal of an owner’s
equity by any means, including by declaring a dividend, unless the
equity is transferred within the affiliated group on whose basis
the composite score was calculated. The 2016 Borrower Defense Final
Rule also sets forth events that are discretionary triggers for
letters of credit, meaning that if any of them occur, the
Department of Education may choose to require a letter of credit,
increase an existing letter of credit requirement or demand some
other form of surety from the institution. The 2016 Borrower
Defense Final Rule provides that if an institution fails to meet
the composite score requirement for longer than three years under
provisional certification, the Department of Education may mandate
additional financial protection from the institution or any party
with “substantial control” over the institution. Such
parties with “substantial control” must agree to
jointly and severally guarantee the Title IV liabilities of the
institution at the end of the three-year provisional certification
period. Under current regulations, a party may be deemed to have
“substantial control” over an institution if, among
other factors, the party directly or indirectly holds an ownership
interest of 25% or more of an institution, or is a member of the
board of directors, a general partner, the chief executive officer
or other executive officer of the institution.
On June
15, 2017, the Department of Education announced an indefinite delay
to its implementation of the 2016 Borrower Defense Final Rule, and
on June 16, 2017 published a notice of intent to establish a
negotiated rulemaking committee to develop proposed revisions to
the rule. On August 30, 2017, the Department of Education published
a Federal Register notice requesting nominations for individuals to
serve on this negotiated rulemaking committee, and on October 24,
2017, the Department of Education promulgated an interim final rule
under which the effective date of most substantive provisions of
the 2016 Borrower Defense Final Rule were delayed until July 1,
2019. The negotiated rulemaking committee sessions occurred in
November 2017, January 2018, and February 2018, during which the
Department of Education and negotiators failed to reach consensus
on a revised regulation. Additionally, on July 6, 2017, the
attorney general of 18 states and the District of Columbia filed
suit against the Department of Education claiming that its delay of
the 2016 Borrower Defense Final Rule violated applicable law,
including the Administrative Procedure Act. On September 12, 2018,
the U.S. District Court for the District of Columbia issued a
decision concluding that the above-described delay of the 2016
Borrower Defense Final Rule was improper. In a series of opinions
and orders on September 17 and October 12, 2018, the Court
reinstated the 2016 Borrower Defense Final Rule and it is now in
effect. We cannot predict with any certainty the outcome or impact
of that now-effective rule on our business and
operations.
On July
31, 2018, the Department of Education published in the Federal
Register a proposed rule (the “2018 Borrower Defense Proposed
Rule”) which would replace most substantive provisions of the
2016 Borrower Defense Final Rule. The 2018 Borrower Defense
Proposed Rule would establish a federal standard for individual
borrowers to raise as a defense to repaying loans disbursed on or
after July 1, 2019. This proposed regulation would permit borrowers
to challenge repayment of loans based on misrepresentation, defined
to include acts or omissions by an institution which are false,
misleading or deceptive, and which are made with knowledge of their
falsity, deception, or misleading nature, or with reckless
disregard for the truth. The 2018 Borrower Defense Proposed Rule
seeks comment as to whether such a defense may be raised
affirmatively or may only arise defensively, out of a collection
action. The proposed regulation also would establish a five-year
window following a final decision on borrower defense for the
Department of Education to seek recoupment from an institution. The
2018 Borrower Defense Proposed Rule would permit schools to use
class-action waivers and pre-dispute arbitration agreements, but
would require schools to provide additional disclosures and
borrower counseling when including such provisions in enrollment
agreements. The 2018 Borrower Defense Proposed rule also sets forth
automatic and discretionary triggers under which the Department of
Education may require the school to provide a letter of credit,
cash, or other form of surety, or may agree to provide surety
through an offset of future Title IV funds for a
six-to-twelve-month period. For example, certain events would
automatically trigger the need for a school to obtain a letter of
credit or other surety, including for publicly traded institutions,
if the SEC warns the school that it may suspend trading on the
school’s stock, the school failed to timely file a required
annual or quarterly report with the SEC, or the exchange on which
the stock is traded notifies the school that it is not in
compliance with exchange requirements or the stock is delisted.
Other events would require a recalculation of an
institution’s composite score of financial responsibility
including, for a proprietary institution whose score is less than
1.5, any withdrawal of an owner’s equity by any means,
including by declaring a dividend, unless the equity is transferred
within the affiliated group on whose basis the composite score was
calculated; or for any institution, the incursion of a borrower
defense liability which reduces the institution’s composite
score to under 1.0. The 2018 Borrower Defense Proposed Rule also
sets forth events that are discretionary triggers for letters of
credit or other forms of surety, meaning that if any of them occur,
the Department of Education may choose to require a letter of
credit, increase an existing letter of credit requirement or demand
some other form of surety from the institution. The 2018 Borrower
Defense Proposed Rule also includes provisions regarding the
treatment of operating leases in the financial responsibility
composite score methodology, would more specifically define and
require disclosures concerning the composite score’s
inclusion of debt obtained for long-term purposes, and would revise
limited aspects of the composite score formula to account for
changes in accounting terminology. The Department of Education is
expected to issue a final rule by November 1, 2019, taking effect
July 1, 2020. We cannot predict the extent to which that final rule
may differ from the 2018 Borrower Defense Proposed Rule, or may
differ from the now-effective 2016 Borrower Defense Final Rule, nor
the impact that any such revised rule might have on our
business.
On
December 19, 2016, the Department of Education published final
regulations regarding state authorization for programs offered
through distance education and state authorization for foreign
locations of institutions (the “2016 State Authorization
Final Rule”). Among other provisions, the 2016 State
Authorization Final Rule requires that an institution participating
in the Title IV federal student aid programs and offering
postsecondary education through distance education be authorized by
each state in which a student resides, if such authorization is
required by the state. The 2016 State Authorization Final Rule
recognizes authorization through participation in a state
authorization reciprocity agreement, if the agreement does not
prevent a state from enforcing its own laws. The 2016 State
Authorization Final Rule also requires that foreign additional
locations and branch campuses be authorized by the appropriate
foreign government agency and, if at least 50% of a program can be
completed at the location/branch, be approved by the
institution’s accrediting agency and be reported to the state
where the main campus is located. The 2016 State Authorization
Final Rule also requires institutions to: document the state
process for resolving complaints from students enrolled in programs
offered through distance education or correspondence courses; and
make certain public and individualized disclosures to enrolled and
prospective students about their distance education programs. The
provisions of the 2016 State Authorization Final Rule relating to
foreign locations of domestic institutions became effective July 1,
2018. On June 29, 2018, the Department of Education delayed the
effective date of the 2016 State Authorization Final Rule in all
other respects from July 1, 2018, to July 1, 2020. However, on
April 26, 2019, the U.S. District Court for the Northern District
of California issued a decision concluding that the above-described
delay of the 2016 State Authorization Final Rule was improper, and
further ordered that the 2016 State Authorization Rule would become
effective on May 26, 2019. On July 23, 2019, the Department of
Education released regulatory guidance to postsecondary
institutions confirming that the 2016 State Authorization Final
Rule became effective on May 26, 2019.
On June
12, 2019, the Department of Education published in the Federal
Register proposed regulations (the “2018 State Authorization
Proposed Rule”) to revise the 2016 State Authorization Final
Rule. The 2018 State Authorization Proposed Rule, if adopted as a
final regulation, would continue to recognize authorization through
participation in a state authorization reciprocity agreement, but
would revise the requirement for state authorization to be based on
the location of a student rather than whether or not a student
legally resides in a state. The 2018 State Authorization Proposed
Rule also would revise requirements for institutional notifications
to students concerning the eligibility of graduates for
professional licensure in their states. We cannot predict with
certainty the impact that such regulations might have on our
business if finalized in their current form.
Gainful Employment. Under the Higher Education Act,
proprietary schools generally are eligible to participate in Title
IV programs in respect of educational programs that lead to
“gainful employment in a recognized occupation.” On
October 31, 2014, the Department of Education published final
regulations to define “gainful employment” which became
effective on July 1, 2015. Historically, the concept of
“gainful employment” has not been defined in detail.
The gainful employment regulations require each educational program
offered by a proprietary institution to achieve threshold rates in
two debt measure categories: an annual-debt-to-annual-earnings
(“DTE”) ratio and an annual debt-to-discretionary
income (“DTI”) ratio.
The
ratios 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 us. The DTE ratio is
calculated by comparing (i) the annual loan payment required on the
median student loan debt incurred by students receiving Title IV
Program funds who completed a particular program and (ii) the
higher of the mean or median of those students’ annual
earnings approximately two to four years after they graduate. The
DTI ratio is calculated by comparing (x) the annual loan payment
required on the median student loan debt incurred by students
receiving Title IV
Program
funds who completed a particular program and (y) the higher of the
mean or median of those students’ discretionary income
approximately two to four years after they graduate. An educational
program must achieve a DTE ratio at or below 8%, or a DTI ratio at
or below 20%, to be considered “passing.” An
educational program with a DTE ratio greater than 8% but less than
or equal to 12%, or a DTI ratio greater than 20% but less than or
equal to 30%, is considered to be “in the zone.” An
educational program with a DTE ratio greater than 12% and a DTI
ratio greater than 30% is considered “failing.” An
educational program will cease to be eligible for students to
receive Title IV Program funds if its DTE and DTI ratios are
failing in two out of any three consecutive award years or if both
of those rates are failing or in the zone for four consecutive
award.
The
gainful employment regulations also require an institution to
provide warnings to current and prospective students in programs
which may lose Title IV eligibility at the end of an award or
fiscal year. If an educational program could become ineligible
based on its ratios for the next award year, the institution must:
(1) deliver a warning to current and prospective students in the
program and (2) not enroll, register or enter into a financial
commitment with a prospective student until three business days
after the warning is provided or a subsequent warning is provided
if more than thirty days have passed since the first warning. If a
program becomes ineligible for students to receive Title IV program
funds, the institution cannot seek to reestablish eligibility of
that program, or establish the eligibility of a similar program
having the same classification of instructional program
(“CIP”) code with the same first four digits of the CIP
code of the ineligible program for three years.
Additionally,
the gainful employment regulations require an institution to
certify to the Department of Education that its educational
programs subject to the regulations, which include all programs
offered by NAU, meet the applicable requirements for graduates to
be professionally or occupationally licensed or certified in the
state in which the institution is located. If we are unable to
certify that our programs meet the applicable state requirements
for graduates to be professionally or occupationally certified in
that state, then we may need to cease offering certain programs in
certain states or to students who are residents in certain
states.
In
January 2017, the Department of Education issued to institutions
final debt-to-earnings rates for the first gainful employment debt
measurement year. Two of our programs, both of which are no longer
enrolling students, were determined to be failing programs under
those debt-to-earnings rates. Five of our programs, one of which is
no longer enrolling students, were determined to be
“zone” programs under those rates. We continue to
evaluate making changes to our educational program offerings as a
result of gainful employment regulations. Effective September 6,
2017, we have suspended enrollment in the Associates of Applied
Science in Veterinary Technology program and phased out the program
in 2018. Effective June 6, 2017, we also suspended enrollments in
the Associates in Medical Assisting and plan to phase out the
program by August 31, 2019.
The
failure of any program or programs offered by NAU to satisfy any
gainful employment regulations could render that program or
programs ineligible for Title IV program funds. If a particular
educational program ceased to become eligible for Title IV program
funds, either because it fails to prepare students for gainful
employment in a recognized occupation or due to other factors, we
may choose to cease offering that program. We also could be
required to make changes to certain programs or to increase student
loan repayment efforts in order to comply with the rule or to avoid
the uncertainty associated with such compliance.
On July
5, 2017, the Department of Education announced that it would allow
additional time, until July 1, 2018, for institutions to comply
with certain disclosure requirements in the gainful employment
regulations. On June 15, 2018, the Department of Education further
announced that it would allow additional time, until July 1, 2019,
for institutions to comply with those disclosure
requirements.
On
August 14, 2018, the Department of Education published in the
Federal Register a proposed rule (the “Gainful Employment
Proposed Rule”) following a negotiated rulemaking process
that occurred from December 2017 through March 2018 and that failed
to achieve consensus. On July 1, 2019, following a public comment
period on the Gainful Employment Proposed Rule, the Department of
Education published final regulations (the “Gainful
Employment Final Rule”) rescinding the current gainful
employment regulations applicable to all of our educational
programs. Among other things, the Gainful Employment Final Rule
removes from the Department of Education’s regulations the
debt-to-earnings metric calculations for our programs, and
sanctions and alternate earnings appeals related to those
calculations, and related reporting, disclosure, and certification
requirements. Although the Gainful Employment Final Rule is not
effective until July 1, 2020, the Department of Education announced
on June 28, 2019 that it was exercising its discretion under the
Higher Education Act to permit postsecondary institutions to
implement the Gainful Employment Final Rule as early as July 1,
2019; however, institutions that do not early implement the Gainful
Employment Final Rule are expected to maintain compliance with the
current gainful employment regulations until July 1, 2020. NAU has
taken the steps described by the Department of Education’s
announcement of June 28, 2019 to implement the Gainful Employment
Final Rule as of July 1, 2019.
Incentive Compensation. Under the Higher Education Act, an
educational institution that participates in Title IV programs may
not make any commission, bonus or other incentive payments to any
persons or entities involved in recruitment or admissions
activities or in the awarding of financial aid. The statutory
prohibition against incentive compensation applies to any person
engaged in student recruitment or admissions activities or in
making financial aid award decisions, and any higher level
employees with responsibility for such activities. Since July 1,
2011 the Department of Education’s implementing regulations
have effectively deemed any commission, bonus, or other incentive
compensation based in any part, directly or indirectly, on securing
enrollment or awarding financial aid to be inconsistent with the
statutory prohibition against incentive compensation payments The
Department of Education also issued a “Dear Colleague”
letter in March 2011 providing additional guidance regarding the
scope of the prohibition on incentive compensation and to what
employees and types of activities the prohibition applies. The July
1, 2011 revisions to the Department of Education’s
regulations required us to change our compensation practices and
has had and will continue to have a significant impact on the rate
at which students enroll in our programs and on our business,
financial condition and results of operations.
Whistleblower Claims. In recent years, several for-profit
education companies have been faced with whistleblower lawsuits
under the Federal False Claims Act, known as “qui tam”
cases, by current or former employees alleging violations of the
prohibition against incentive compensation. In such cases, the
whistleblower’s claims are reviewed under seal by the
Department of Justice for potential intervention. If the Department
of Justice elects to intervene, it assumes primary control over the
litigation. These types of claims against for-profit educational
companies, and the Department of Justice’s interest in
intervention, are expected to increase in the future. If the
Department of Education were to determine that we violated any
requirement of Title IV programs, or if we were to be found liable
in a False Claims action, or if any third parties we have engaged
were to violate this law, we could be fined or sanctioned by the
Department of Education or subjected to other monetary liability or
penalties that could be substantial, including the possibility of
treble damages under a False Claims action, any of which could harm
our reputation, impose significant costs and have a material effect
on our business, financial condition and results of
operations.
In
April 2017, a former NAU employee filed a qui tam suit against NAU,
the Company, and Dlorah, alleging certain violations of the Higher
Education Act and Title IV program requirements, including alleged
misrepresentations to a programmatic accrediting agency, alleged
miscalculating its percentage of revenues derived from Title IV
program funds under the 90/10 Rule, and alleged noncompliance with
the incentive compensation prohibition. The U.S. government decided
to not intervene in the lawsuit at that time, and the complaint was
then unsealed by the court in January 2018, with an amended
complaint being filed on April 24, 2018. The U.S. government
reserved the right to intervene at a later time. The case is styled
U.S. ex rel. Brian Gravely V. National American University, et al.,
No. 5:17-cv-05032-JLV, and remains pending in the U.S. District
Court for the District of South Dakota. The Company cannot predict
the outcome of this litigation, nor its ability to harm our
reputation, impose litigation costs, or materially adversely affect
our business, financial condition, and results of
operations.
State Authorization. To be eligible to participate in Title
IV programs, an institution must be licensed or authorized to offer
its educational programs by the states in which it is physically
located, in accordance with the Department of Education’s
regulations. The Department of Education’s regulations
require that institutions demonstrate specific state authorization
to operate educational programs beyond secondary education and
clarify what is required for an institution to be considered
“legally authorized” in a state for purpose of
participation in Title IV programs. Specifically, the Department of
Education considers an institution to be legally authorized by a
state if the state has a process, applicable to all institutions
except tribal and federal institutions, to review and appropriately
act on complaints concerning the institution and to enforce
applicable state laws, and the institution further satisfies one of
the following requirements:
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the
state establishes the institution by name as an educational
institution by charter, statute, constitutional provision or other
action issued by an appropriate state agency or state entity, and
the institution is authorized to operate educational programs
beyond secondary education, including programs leading to a
certificate or degree;
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the
institution complies with applicable state approval or licensure
requirements, except that a state may exempt an institution from
any such requirement based on (1) the institution’s
accreditation by one or more accrediting agencies recognized by the
Department of Education or (2) the institution being in operation
for at least 20 years; and
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the
state has a process, applicable to all institutions except federal
and tribal institutions, to review and appropriately act on
complaints concerning the institution and applicable state
laws.
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As of
May 31, 2019, in addition to its central administration location in
Rapid City, South Dakota, NAU operated five instructional locations
across the states of Colorado, Indiana, Kansas, and Texas. NAU also
continued to conduct educational programs at Ellsworth Air Force
Base, South Dakota and Kings Bay Naval Base, Georgia. In each of
these states, we maintain the required authorizations to offer our
educational programs under state law.
Where
required under applicable law, these authorizations from state
educational agencies are very important to us. To maintain
requisite state authorizations, we are required to continuously
meet standards relating to, among other things, educational
programs, facilities, instructional and administrative staff,
marketing and recruitment, financial operations, addition of new
locations and educational programs and various operational and
administrative procedures. Failure to comply with applicable
requirements of the state educational agencies could result in us
losing our authorization to offer educational programs in those
states. If that were to occur, the applicable state educational
agency could force us to cease operations in that state. Even if
the applicable state educational agency does not require the
university to cease operations on an immediate basis, the loss of
authorization by the state educational agency in such state would
then cause our campuses in such state to lose eligibility to
participate in Title IV programs, and such loss of Title IV program
eligibility could force us to cease operations in such state.
Alternatively, the state educational licensing agencies could
restrict our ability to offer certain degree programs.
Additionally, if the Department of Education were to determine that
our authorizations in Colorado, Indiana, Kansas, and Texas did not
satisfy the Department of Education’s state authorization
requirements, the campuses in the relevant states could lose their
eligibility to participate in Title IV programs, and such loss of
Title IV program eligibility could force us to cease operations in
such state.
As
described above under “Changes in Department of Education
Regulations,” the Department of Education published final
regulations regarding state authorization for programs offered
through distance education and state authorization for foreign
locations of institutions. Among other provisions, these final
regulations require that an institution participating in the Title
IV federal student aid programs and offering postsecondary
education through distance education be authorized by each state in
which the institution enrolls students, if such authorization is
required by state. Independent of this matter of federal
regulation, several states have jurisdiction over educational
institutions offering online programs that have no physical
location or other presence in the state. The institution may be
enrolling or offering educational services to students who reside
in the state, conducting practica or sponsoring internships in the
state, employing faculty who reside in the state or advertising or
recruiting prospective students in the state. Thus, our activities
in certain states constitute a presence requiring licensure or
authorization under requirements of state educational agency law,
regulation, or policy, even though we do not have a physical
facility in such states. Therefore, in addition to the states where
we maintain physical facilities, we have either obtained or are
currently in the process of obtaining approvals or exemptions that
we believe are necessary because they may constitute a presence
requiring state licensure or authorization based on the laws, rules
or regulations of that state. Notwithstanding our efforts to obtain
approvals or exemptions, state regulatory requirements for online
education vary among the states, are not well developed in many
states, are imprecise or unclear in some states and can change
frequently. Because we enroll students in online programs in all 50
states and the District of Columbia, we expect that regulatory
authorities in other states where we are not currently licensed or
authorized may request that we seek additional licenses or
authorizations for these institutions in their states in the
future. In recent years several states have voluntarily entered
into SARA that establish standards for interstate offering of
postsecondary distance education courses and programs. If an
institution’s home state participates in SARA and authorizes
the institution to provide distance education in accordance with
SARA standards, then the institution need not obtain additional
authorizations for distance education from any other SARA member
state. The SARA participation requirements and process are
administered by the four regional higher education compacts in the
United States (the Midwestern Higher Education Compact, the New
England Board of Higher Education, the Southern Regional Education
Board and the Western Interstate Commission for Higher Education)
and are overseen by the National Council for State Authorization
Reciprocity Agreements. NAU is approved to participate in SARA,
through the SARA Coordinator of the South Dakota Board of Regents
as a state portal agency with its most recent full approval
effective April 20, 2018 through April 19, 2019. On April 1, 2019,
SDBOR informed NAU that, based on our most recent financial
responsibility composite score as determined by the Department of
Education and a review by SDBOR of additional financial information
provided by us, SDBOR extended NAU’s participation in SARA on
a provisional basis effective April 1, 2019 through March 31, 2020.
In connection with that provisional status, we must submit
quarterly reports to SDBOR, including any updates to, and
specifically noting deviations from, the financial information
previously provided to SDBOR. The April 1, 2019 letter from SDBOR
also informed NAU of the conditions under which its provisional
participation in SARA may be extended beyond March 31, 2020. If NAU
is unable to satisfy the conditions set forth in the April 1, 2019
letter for extension of its SARA participation beyond March 31,
2020, we may be required to obtain state licensure or authorization
in states beyond those where we operate physical
facilities.
If we
fail to comply with state licensing or authorization requirements
for a state, or fail to obtain licenses or authorizations when
required, we could lose state licensure or authorization by that
state, which could prohibit us from recruiting prospective students
or offering services to current students in that state. We could
also be subject to other sanctions, including restrictions on
activities in that state, fines, and penalties. We review the
licensure requirements of other states when we believe that it is
appropriate to determine whether our activities in those states may
constitute a presence or otherwise may require licensure or
authorization by the respective state education agencies. New laws,
regulations or interpretations related to offering educational
programs online could increase our cost of doing business and
affect our ability to recruit students in particular states, which
could, in turn, adversely affect our enrollments and revenues and
have a material effect on our business.
Misrepresentation. An institution participating in Title IV
programs is prohibited from making misrepresentations regarding the
nature of its educational programs, the nature of financial charges
and availability of financial assistance, or the employability of
graduates. A misrepresentation is defined in the regulations as any
false, erroneous, or misleading statement to any student or
prospective student, any member of the public, an accrediting
agency, a state agency or the Department of Education. If we
– or any entity, organization, or person with whom we have an
agreement to provide educational programs or to provide marketing,
advertising, recruiting, or admissions services – commit a
misrepresentation for which a person could reasonably be expected
to rely, or has reasonably relied, to that person’s
detriment, the Department of Education could initiate proceedings
to revoke our institutions’ Title IV eligibility, deny
applications made by our institutions, impose fines, or initiate a
limitation, suspension or termination proceeding against us.
Further, although the Department of Education claims not to have
created any private right of action, the misrepresentation
regulations could increase risk of qui tam actions under the False
Claims Act.
Clery Act. On October 20, 2014, the Department of Education
published final regulations implementing changes to the Jeanne
Clery Disclosure of Campus Security Policy and Campus Crime
Statistics Act (20 U.S.C. § 1092(f)), or the Clery Act,
required by March 2013 amendments to the Violence Against Women
Act, or VAWA. The final regulations became effective July 1, 2015.
Among other things, VAWA and the revised Clery Act regulations
require institutions to compile statistics on additional categories
of crimes reported to campus security authorities or local police
agencies, to implement ongoing crime awareness and prevention
programs for students and employees, and to ensure that
institutional disciplinary proceedings for certain enumerated
crimes meet specific standards.
Eligibility and certification procedures. Each institution
must apply periodically to the Department of Education for
continued certification to participate in Title IV programs. Such
recertification generally is required every six years, but may be
required earlier, including when an institution undergoes a change
in control. An institution may also come under the Department of
Education’s review when it expands its activities in certain
ways, such as opening an additional location, adding a new
educational program, or modifying the academic credentials it
offers. The Department of Education may place an institution on
provisional certification status if it finds that the institution
does not fully satisfy all eligibility and certification standards
and in certain other circumstances, such as when an institution is
certified for the first time or undergoes a change in control.
During the period of provisional certification, the institution
must comply with any additional conditions included in the
school’s program participation agreement with the Department
of Education. In addition, the Department of Education may more
closely review an institution that is provisionally certified if it
applies for recertification or approval to open a new location, add
an educational program, acquire another school, or make any other
significant change. If the Department of Education determines that
a provisionally certified institution is unable to meet its
responsibilities under its program participation agreement, it may
seek to revoke the institution’s certification to participate
in Title IV programs without advance notice or opportunity for the
institution to challenge the action. Students attending
provisionally certified institutions remain eligible to receive
Title IV program funds. Our most recent certification to
participate in the Title IV programs, which was not provisional,
was effective from June 2013 through March 31, 2019. Because NAU
timely submitted an application for recertification to the
Department of Education, its existing certification to participate
in the Title IV programs continues on a month-to-month provisional
basis until the Department of Education issues a decision on the
application for recertification. There can be no assurance that the
Department of Education will recertify us after our current period
of certification or that it would not impose restrictions in
connection with any such recertification.
Administrative capability. Department of Education
regulations specify extensive criteria by which an institution must
establish that it has the requisite “administrative
capability” to participate in Title IV programs. To meet the
administrative capability standards, an institution must, among
other things:
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comply
with all applicable Title IV program requirements;
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have an
adequate number of qualified personnel to administer Title IV
programs;
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have
acceptable standards for measuring the satisfactory academic
progress of its students;
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not
have student loan cohort default rates above specified
levels;
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have
various procedures in place for awarding, disbursing and
safeguarding Title IV program funds and for maintaining required
records;
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administer
Title IV programs with adequate checks and balances in its system
of internal controls;
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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;
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provide
financial aid counseling to its students;
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refer
to the Department of Education’s Office of Inspector General
any credible information indicating that any student, parent,
employee, third- party servicer or other agent of the institution
has engaged in any fraud or other illegal conduct involving Title
IV programs;
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submit
all required reports and financial statements in a timely manner;
and
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not
otherwise appear to lack administrative capability.
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If an
institution fails to satisfy any of these criteria, the Department
of Education may:
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require
the institution to repay Title IV funds its students previously
received;
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transfer
the institution from the advance method of payment of Title IV
funds to heightened cash monitoring status or the reimbursement
method of payment;
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place
the institution on provisional certification status;
or
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commence
a proceeding to impose a fine or to limit, suspend or terminate the
institution’s participation in Title IV
programs.
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If the
Department of Education determines that we failed to satisfy its
administrative capability requirements, then our students could
lose, or be limited in their access to, Title IV program
funding.
Financial responsibility. The Higher Education Act and
Department of Education regulations establish extensive standards
of financial responsibility that institutions such as us must
satisfy to participate in Title IV programs. The Department of
Education evaluates institutions for compliance with these
standards on an annual basis based on the institution’s
annual audited financial statements as well as when the institution
applies to the Department of Education to have its eligibility to
participate in Title IV programs recertified. The most significant
financial responsibility standard is the institution’s
composite score, which is derived from a formula established by the
Department of Education based on three financial
ratios:
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equity
ratio, which measures the institution’s capital resources,
financial viability and ability to borrow;
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primary
reserve ratio, which measures the institution’s ability to
support current operations from expendable resources;
and
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net
income ratio, which measures the institution’s ability to
operate at a profit or within its means.
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The
Department of Education 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 Department of Education 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 Department of Education oversight. In addition to
having an acceptable composite score, an institution must, among
other things, provide the administrative resources necessary to
comply with Title IV program requirements, meet all of its
financial obligations including required refunds to students and
any Title IV liabilities and debts, be current in its debt payments
and not receive an adverse, qualified or disclaimed opinion by its
accountants in its audited financial statements.
If an
institution’s composite score is less than 1.5 but is 1.0 or
higher, it is still considered financially responsible, and the
institution may continue to participate in the Title IV programs as
a financially responsible institution for up to three years under
the Department of Education’s “zone” alternative.
Under the zone alternative, the Department of Education may subject
the institution to various operating or other requirements, which
may include complying with additional Department of Education
monitoring requirements, agreeing to receive Title IV program funds
under an arrangement other than the Department of Education’s
standard advance funding arrangement, such as the reimbursement
method of payment or heightened cash monitoring, or complying with
or accepting other limitations on the institution’s ability
to increase the number of programs it offers or the number of
students it enrolls.
If an
institution does not achieve a composite score of at least 1.0, it
is subject to additional requirements in order to continue its
participation in the Title IV programs, including submitting to the
Department of Education a letter of credit in an amount equal to at
least ten percent, and at the Department of Education’s
discretion up to 50%, of the Title IV funds received by the
institution during its most recently completed fiscal year, and
being placed on provisional certification status, under which the
institution must receive Department of Education approval before
implementing new locations or educational programs and comply with
other restrictions, including reduced due process rights in
subsequent proceedings before the Department of
Education.
In
addition, under regulations that took effect on July 1, 2016,
institutions placed on either the heightened cash monitoring
payment method or the reimbursement payment method must pay Title
IV credit balances to students or parents before requesting Title
IV funds from the Department of Education and may not hold Title IV
credit balances on behalf of students or parents, even if such
balances are expected to be applied to future tuition
payments.
Also,
as part of the 2016 Borrower Defense Final Rule, the Department of
Education revised its general standards of financial responsibility
to include various actions and events that would require
institutions to provide the Department of Education with
irrevocable letters of credit. On March 8, 2019, NAU received a
letter from the Department of Education which noted several
financial matters described in the footnotes to our audited
financial statements for the fiscal year ended May 31, 2018 and our
Form 10-Q filed with the Securities and Exchange Commission on
January 22, 2019, and the Company’s delisting from Nasdaq and
transfer of shares to the OTCQB, and determined that NAU did not
meet its financial responsibility standards for institutions that
participate in Title IV programs. As a result, the Department of
Education’s letter of March 8, 2019 imposed additional
reporting requirements on NAU with respect to its financial
condition including bi-weekly cash balance submissions and monthly
submissions of actual and projected cash flow statements, and
notification requirements regarding certain enumerated events
should they occur in the future; required NAU to process Title IV
program funds under the Heightened Cash Monitoring Type 1 method of
payment; and informed NAU that it could continue to participate in
Title IV programs by either (1) posting a letter of credit to the
Department of Education in the amount of $36,653, representing 50%
of the Title IV program funds awarded during the Company’s
fiscal year ended May 31, 2018, or (2) posting a letter of credit
to the Department of Education in the amount of $10,996,
representing 15% of the Title IV program funds awarded during the
Company’s fiscal year ended May 31, 2018, accompanied by the
provisional form of certification to participate in the Title IV
programs. On March 22, 2019, we submitted a request to the
Department of Education for reconsideration of its imposition of
the letter of credit, as well as the amount and timing for any
required letter of credit. In response to our request, the
Department of Education provided two additional options for a
letter of credit accompanied by provisional certification: (1)
posting of an irrevocable letter of credit in the amount of $7,331,
representing 10% of Title IV program funds for its fiscal year
ended May 31, 2018, or (2) placement on the Heightened Cash
Monitoring Type 2 payment method, with a percentage of each payment
withheld until an account equal to the required letter of credit
amount can be funded. On April 30, 2019, the Company responded to
the Department’s letter and selected the posting of an
irrevocable letter of credit in the amount of $7,331 for the
benefit of the Department. The letter of credit was issued on May
10, 2019.
Similarly,
the 2018 Borrower Defense Proposed Rule includes various actions
and events that would require institutions to provide additional
surety, including irrevocable letters of credit. For additional
information regarding this proposed rule, see “Item 1 –
Business – Regulatory Matters – Changes in Department
of Education Regulations.”
Our
audited financial statements for the fiscal year ended May 31, 2019
indicate our most recent composite score is 1.1. This score is
subject to a final determination by the Department of Education
once it receives and reviews our consolidated audited financial
statements for the 2019 fiscal year. We believe it is likely that
the Department of Education will determine that our institutions
are “in the zone” and that we will be required to
continue operating under the requirements imposed by the March 8,
2019 letter, including the letter of credit issued to the
Department of Education on May 10, 2019, as well as any other
requirements that the Department of Education might impose in its
discretion. If we are unable to meet the minimum composite score or
to comply with the other standards of financial responsibility, and
could not post a required letter of credit or comply with the
alternative bases for establishing financial responsibility, then
our students could lose their access to Title IV program
funding.
Return of Title IV funds for students who withdraw. When a
student who has received Title IV funds withdraws from school, the
institution must determine the amount of Title IV program funds the
student has “earned.” If the student withdraws during
the first 60% of any period of enrollment or payment period, the
amount of Title IV program funds that the student has earned is
equal to a pro rata portion of the funds the student received or
for which the student would otherwise be eligible. If the student
withdraws after the 60% threshold, then the student is deemed to
have earned 100% of the Title IV program funds he or she received.
The institution must then return the unearned Title IV program
funds to the appropriate lender or the Department of Education in a
timely manner, which is generally no later than 45 days after the
date the institution determined that the student withdrew. If such
payments are not timely made, the institution will be required to
submit a letter of credit to the Department of Education equal to
25% of the Title IV funds that the institution should have returned
for withdrawn students in its most recently completed fiscal year.
Under Department of Education regulations, late returns of Title IV
program funds for 5% or more of the withdrawn students in the audit
sample in the institution’s annual Title IV compliance audit
for either of the institution’s two most recent fiscal years
or in a Department of Education program review triggers this letter
of credit requirement. NAU did not exceed this 5% threshold in our
annual Title IV compliance audit for either of our two most recent
fiscal years.
The “90/10” Rule. A requirement of the Higher
Education Act, commonly referred to as the “90/10
Rule,” provides that an institution will be placed on
provisional certification and may be subject to other conditions
from the Department of Education if, under a complex regulatory
formula that requires cash basis accounting and other adjustments
to the calculation of revenue, the institution derives more than
90% of its revenues for any fiscal year from Title IV program
funds, and, further, the institution is subject to loss of
eligibility to participate in Title IV programs if it exceeds the
90% threshold for two consecutive fiscal years. This rule applies
only to for-profit postsecondary educational institutions,
including NAU.
Using
the Department of Education’s formula under the 90/10 Rule,
for the 2019 and 2018 fiscal years, we derived approximately 78.2%
and 82.1%, respectively, of our revenues (calculated on a cash
basis) from Title IV program funds. Recent changes in federal law
that increased Title IV grant and loan limits, and any additional
increases in the future, may result in an increase in the revenues
NAU receives from Title IV programs, which could make it more
difficult for us to satisfy the 90/10 Rule. In addition, economic
downturns that adversely affect students’ employment
circumstances could also increase their reliance on Title IV
programs. Furthermore, from time to time, legislation is introduced
that would make a proprietary institution ineligible to participate
in Title IV programs if it derives more than 85% of its revenues
from federal funds, including Title IV programs, revenues from the
GI Bill and Department of Defense Tuition Assistance
funds.
Student loan defaults. Under the Higher Education Act, an
educational institution may lose its eligibility to participate in
some or all Title IV programs if defaults by its students on the
repayment of loans received through either the Federal Family
Education Loan (“FFEL”) Program or the Federal Direct
Loan programs exceed certain levels. For each federal fiscal year,
the Department of Education calculates a rate of student defaults
on such loans for each institution, known as a “cohort
default rate.” An institution’s cohort default rate for
a federal fiscal year is calculated by determining the rate at
which borrowers that became subject to their repayment obligation
in that federal fiscal year defaulted by the end of the following
federal fiscal year. Before July 1, 2010, we participated in both
the FFEL and Federal Direct Loan programs. As of July 1, 2010,
following the elimination of the FFEL program under federal law, we
participate only in the Federal Direct Loan program. Defaults by
students on the repayment of loans received through the FFEL
program still will be counted; however, in the calculation to
determine our eligibility to participate in the Federal Direct Loan
program.
If the
Department of Education notifies an institution that its cohort
default rates for each of the three most recent federal fiscal
years are 30% or greater, the institution’s participation in
the Federal Direct Loan and Pell Grant programs ends 30 days after
that notification, unless the institution appeals the determination
in a timely manner on specified grounds and according to specified
procedures. In addition, an institution’s participation in
the Federal Direct Loan programs ends 30 days after notification by
the Department of Education that the institution’s most
recent cohort default rate is greater than 40%, unless the
institution timely appeals that determination on specified grounds
and according to specified procedures. An institution whose
participation ends under either of these provisions may not
participate in the Federal Direct Loan and Pell Grant programs, as
applicable, for the remainder of the fiscal year in which the
institution receives the notification and for the next two federal
fiscal years.
If an
institution’s cohort default rate equals or exceeds 30% in
any single federal fiscal year or any subsequent fiscal year, the
institution may be placed on provisional certification status.
Provisional certification does not limit an institution’s
access to Title IV program funds, but it does subject an
institution to closer review by the Department of Education if the
institution applies for recertification or approval to open a new
location, add an educational program, acquire another school or
make any other significant change. Additionally, the Department of
Education may revoke the certification of a provisionally-certified
institution without advance notice if the Department of Education
determines that the institution is not fulfilling material Title IV
program requirements. We were approved to participate in the FFEL
program before its expiration on July 1, 2010, and we currently are
approved to participate in the Federal Direct Loan program. The
potential sanctions discussed in this section are based on the
combined cohort default rate for loans issued to students under
both the FFEL program and the Federal Direct Loan
program.
The
Department of Education generally publishes draft cohort default
rates in February of each year for the repayment period that ended
the prior September 30. Draft cohort default rates do not result in
sanctions, are subject to subsequent data corrections and appeals
by an institution, and can change between their issuance to
institutions and the Department of Education’s release of
official cohort default rates, which are typically issued annually
in September. Our official cohort default rates for federal fiscal
years 2015 and 2014 are 23.7% and 24.1%, respectively. The draft
cohort rate for federal fiscal year 2016 is 20.1%.
Compliance reviews. We are subject to announced and
unannounced compliance reviews and audits by various external
agencies, including the Department of Education, its Office of
Inspector General, institutional and programmatic accreditors,
state licensing agencies, agencies that have previously guaranteed
FFEL loans, various state approving agencies for financial
assistance to veterans and accrediting commissions. The Department
of Education conducted an on-site review of NAU’s
administration of Title IV programs from June 10, 2019 through June
14, 2019, for which no program review determination letter has been
received to date. As part of the Department of Education’s
ongoing monitoring of institutions’ administration of Title
IV programs, the Higher Education Act also requires institutions to
annually submit to the Department of Education a Title IV
compliance audit conducted by an independent certified public
accountant in accordance with applicable federal and Department of
Education audit standards. In addition, to enable the Department of
Education to make a determination of an institution’s
financial responsibility, each institution must annually submit
audited financial statements prepared in accordance with Department
of Education regulations.
Data privacy and protection of personal information. The
Family Educational Rights and Privacy Act of 1974, or FERPA, and
the Department of Education’s FERPA regulations require
educational institutions to protect the privacy of students’
educational records by limiting an institution’s disclosure
of a student’s personally identifiable information without
the student’s prior written consent. FERPA also requires
institutions to allow students to review and request changes to
their educational records maintained by the institution, to notify
students at least annually of this inspection right and to maintain
records in each student’s file listing requests for access to
and disclosures of personally identifiable information and the
interest of such party in that information. If an institution fails
to comply with FERPA, the Department of Education may require
corrective actions by the institution or may terminate an
institution’s receipt of further federal funds. In addition,
educational institutions are obligated to safeguard student
information pursuant to the Gramm-Leach-Bliley Act, or GLBA, a
federal law designed to protect consumers’ personal financial
information held by financial institutions and other entities that
provide financial services to consumers. GLBA and the applicable
GLBA regulations require an institution to, among other things,
develop and maintain a comprehensive, written information security
program designed to protect against the unauthorized disclosure of
personally identifiable financial information of students, parents
or other individuals with whom such institution has a customer
relationship. If an institution fails to comply with the applicable
GLBA requirements, it may be required to take corrective actions,
be subject to monitoring and oversight by the Federal Trade
Commission, or FTC, and be subject to fines or penalties imposed by
the FTC. For-profit educational institutions are also subject to
the general deceptive practices jurisdiction of the FTC with
respect to their collection, use and disclosure of student
information. The institution must also comply with the FTC Red
Flags Rule, a section of the federal Fair Credit Reporting Act,
that requires the establishment of guidelines and policies
regarding identity theft related to student credit accounts.
Possession and use of personal information in our operations also
subjects us to various U.S. state regulatory requirements with
respect to such information. Moreover, certain of our operations
may involve the collection of personal information from individuals
outside the U.S., which may render us subject to global privacy and
data security laws. For example, the European Union General Data
Protection Regulation (“GDPR”), which became
enforceable May 25, 2018, contains a number of requirements that
are different from or exceed those in U.S. federal and state
privacy and data security laws. The GDPR may apply to certain of
our operations. Were it to apply and if we were out of compliance,
there is the potential for administrative, civil, or criminal
liability with significant monetary penalties as well as
reputational harm to us and our employees. In addition, various
U.S. state legislatures have begun to enact data privacy statutes.
Effective January 1, 2020, the California Consumer Privacy Act
(“CCPA”) will apply to any for-profit entity doing
business in California, that has a gross revenue greater than
$25 million; annually buys, receives, sells, or shares the
personal information of more than 50,000 consumers, households, or
devices for commercial purpose; or derives 50 percent or more
of its annual revenues from selling consumers’ personal
information. The CCPA contains requirements that that are different
from or exceed those in U.S. federal and other states’
privacy and data security laws. Additional data privacy regulation
at the state level, which may differ from or conflict with other
state, federal, or EU requirements, may have an effect on our
business, revenues, and results of operations.
Potential effect of regulatory violations. If we fail to
comply with the regulatory standards governing Title IV programs,
the Department of Education could impose one or more sanctions,
including transferring NAU to the reimbursement or cash monitoring
method of payment, requiring us to repay Title IV program funds,
requiring us to post a letter of credit in favor of the Department
of Education as a condition for continued Title IV certification,
taking emergency action against us, initiating proceedings to
impose a fine or to limit, suspend or terminate our participation
in Title IV programs or referring the matter for civil or criminal
prosecution. If such sanctions or proceedings were imposed against
us and resulted in a substantial curtailment or termination of our
participation in Title IV programs, our enrollments, revenues and
results of operations could be materially affected.
In
addition to the actions that may be brought against us as a result
of our participation in Title IV programs, we are also subject to
complaints and lawsuits relating to regulatory compliance brought
not only by regulatory agencies, but also by other government
agencies and third parties, such as current or former students or
employees and other members of the public.
Regulatory Standards that May Restrict Institutional Expansion or
Other Changes
Many
actions that we may wish to take in connection with expanding our
operations or other changes are subject to review or approval by
the applicable regulatory agencies.
Adding teaching locations, implementing new educational programs
and increasing enrollment. The requirements and standards of
state education agencies, accrediting commissions and the
Department of Education limit our ability in certain instances to
establish additional teaching locations, implement new educational
programs or increase enrollment in certain programs. Many states
require review and approval before institutions can add new
locations or programs. The state educational agencies, the HLC and
the specialized accrediting commissions that authorize or accredit
us and our programs generally require institutions to notify them
in advance of adding new locations or implementing new programs,
and upon notification may undertake a review of the quality of the
facility or the program and the financial, academic, and other
qualifications of the institution.
As a
condition for an institution to participate in Title IV programs on
a provisional basis, the Department of Education can require prior
approval of such programs or otherwise restrict the number of
programs an institution may add or the extent to which an
institution can modify existing educational programs. If an
institution that is required to obtain the Department of
Education’s advance approval for the addition of a new
program or new location fails to do so, the institution may be
liable for repayment of the Title IV program funds received by the
institution or students in connection with that program or enrolled
at that location. Additionally, any delay in obtaining a required
Department of Education approval could delay the introduction of
the program, which could negatively impact our enrollment
growth.
Provisional certification. Each institution must apply to
the Department of Education for continued certification to
participate in Title IV programs at least every six years and when
it undergoes a change in control. An institution may also come
under the Department of Education’s review when it expands
its activities in certain ways, such as opening an additional
location, adding an educational program or modifying the academic
credentials that it offers.
The
Department of Education may place an institution on provisional
certification status if it finds that the institution does not
fully satisfy all of the eligibility and certification standards.
In addition, if a company acquires a school from another entity,
the acquired school will automatically be placed on provisional
certification when the Department of Education approves the
transaction. During the period of provisional certification, the
institution must comply with any additional conditions or
restrictions included in its program participation agreement with
the Department of Education. Students attending provisionally
certified institutions remain eligible to receive Title IV program
funds, but if the Department of Education finds that a
provisionally certified institution is unable to meet its
responsibilities under its program participation agreement, it may
seek to revoke the institution’s certification to participate
in Title IV programs without advance notice or advance opportunity
for the institution to challenge that action. In addition, the
Department of Education may more closely review an institution that
is provisionally certified if it applies for recertification or
approval to open a new location, add an educational program,
acquire another school or make any other significant change. Our
most recent certification to participate in the Title IV programs,
which was not provisional, was effective from June 2013 through
March 31, 2019. Because NAU timely submitted an application for
recertification to the Department of Education, its existing
certification to participate in the Title IV programs continues on
a month-to-month provisional basis until the Department of
Education issues a decision on the application for recertification.
There can be no assurance that the Department of Education will
recertify us after our current period of certification or that it
would not impose restrictions in connection with any such
recertification.
Acquiring other schools. The Department of Education and
virtually all state education agencies and accrediting commissions
require a company to obtain their approval if it wishes to acquire
another school. The level of review varies by individual state and
accrediting commission, with some requiring approval of such an
acquisition before it occurs while others only consider approval
after the acquisition has occurred. The approval of the applicable
state education agencies and accrediting commissions is a necessary
prerequisite to the Department of Education certifying the acquired
school to participate in Title IV programs. The restrictions
imposed by any of the applicable regulatory agencies could delay or
prevent our acquisition of other schools in some
circumstances.
On July
21, 2017, we entered into an agreement to acquire substantially all
of the assets of Henley-Putnam University ("HPU"), a for profit,
postsecondary educational institution that offers 100% online
programs focused in the field of strategic security. The
transaction, which closed on March 21, 2018, did not contemplate
the continued operation of HPU as a stand-alone postsecondary
institution following the closing of the transaction. Rather, upon
the closing of the transaction, HPU’s educational programs
became part of NAU’s degree and certificate program
offerings. Subsequent to the transaction closing date, we were
granted approval from the Department of Education in order to
disburse Title IV program funds to students in the acquired
programs.
Change in ownership
resulting in a change in control. Many states and
accrediting commissions require institutions of higher education to
report or obtain approval of certain changes in control and changes
in other aspects of institutional organization or control. The
types of and thresholds for such reporting and approval vary among
the states and accrediting commissions. The HLC provides that an
institution must obtain its approval in advance of a change in
control, structure, or organization for the institution to retain
its accredited status. In addition, in the event of a change in
control, structure, or organization, the HLC requires a
post-transaction focused visit or other evaluation to review the
appropriateness of its approval of the change and whether the
institution has met the commitment it made to the HLC prior to the
approval. Other specialized accrediting commissions also require an
institution to obtain similar approval before or after the event
that constitutes a change in control under their
standards.
Many
states include the transfer of a controlling interest of common
stock in the definition of a change in control requiring approval,
but their thresholds for determining a change in control vary
widely. A change in control under the definition of one state
educational agency that regulates us might require us to obtain
approval of the change in control to maintain authorization to
operate in that state, and in some cases such states could require
us to obtain advance approval of the change in
control.
Under
Department of Education regulations, an institution that undergoes
a change in control loses its eligibility to participate in Title
IV programs and must apply to the Department of Education to
reestablish such eligibility. If an institution files the required
application and follows other procedures, the Department of
Education may temporarily certify the institution on a provisional
basis following the change in control, so that the
institution’s students retain access to Title IV program
funds until the Department of Education completes its full review.
In addition, the Department of Education will extend such temporary
provisional certification if the institution timely files other
required materials, including the approval of the change in control
by its state authorizing agency and accrediting commission and an
audited balance sheet showing the financial condition of the
institution or its parent corporation as of the date of the change
in control. If the institution fails to meet any of these
applications and other deadlines, its certification will expire and
its students will not be eligible to receive Title IV program funds
until the Department of Education completes its full review, which
commonly takes several months and may take longer. If the
Department of Education approves the application after a change in
control, it will certify the institution on a provisional basis for
a period of up to approximately three years.
Any
failure by us to comply with the requirements of the Department of
Education, the HLC or the state educational agencies from which we
have a license or authorization, or a failure to obtain their
approval of the change in control, could result in loss of
authorization, accreditation, or eligibility to participate in
Title IV programs and cause a significant decline in our student
enrollments.
A
change in control also could occur as a result of future
transactions in which we are involved. Some corporate
reorganizations and some changes in the board of directors are
examples of such transactions. In addition, Department of Education
regulations provide that a change in control occurs for a publicly
traded corporation if either: (a) there is an event that would
obligate the corporation to file a Current Report on Form 8-K with
the SEC disclosing a change in control, or (b) the corporation has
a stockholder that owns at least 25% of the total outstanding
voting stock of the corporation and is the largest stockholder of
the corporation, and that stockholder ceases to own at least 25% of
such stock or ceases to be the largest stockholder. These standards
are subject to interpretation by the Department of Education. A
significant purchase or disposition of our voting stock in the
future, including a disposition of our voting stock by Robert
Buckingham’s partnership or living trust, could be determined
by the Department of Education to be a change in control under this
standard. The potential adverse effects of a change in control
could influence future decisions by us and our stockholders
regarding the sale, purchase, transfer, issuance or redemption of
stock. In addition, the adverse regulatory effect of a change in
control also could discourage bids for our common stock and could
have an adverse effect on the market price of our common
stock.
The following risk factors and other information included in this
Form 10-K should be carefully considered. The risks and
uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or
that we currently believe are not material may also adversely
affect our business, financial condition, operating results, cash
flows and prospects.
Risks Related to the Extensive Regulation of our
Business
If we fail to comply with the extensive regulatory requirements
governing our university, we could incur significant monetary
liabilities, fines and penalties, including loss of access to
federal student loans and grants for our students, on which we are
substantially dependent.
For our
fiscal year ended May 31, 2019, we derived approximately 78.2% of
our revenues (calculated on a cash basis) from federal student
financial aid programs, known as Title IV programs, administered by
the United States Department of Education, or the Department of
Education. A significant
percentage of our students rely on the availability of Title IV
program funds to finance their cost of attending NAU. To
participate in Title IV programs, a postsecondary institution must
be authorized by the appropriate state education agency or
agencies, be accredited by an accrediting commission recognized by
the Department of Education, and be certified as an eligible
institution by the Department of Education. In addition,
NAU’s operations and programs are regulated by other state
education agencies and additional accrediting commissions. We are
subject to extensive regulation by the education agencies of
multiple states, the HLC, which is our institutional accrediting
commission, various specialized accrediting commissions, and the
Department of Education. These regulatory requirements cover the
vast majority of our operations, including our educational
programs, instructional and administrative staff, administrative
procedures, marketing, student recruiting and admissions, and
financial operations. These regulatory requirements also affect our
ability to open additional schools and locations, add new
educational programs, change existing educational programs and
change our ownership structure.
The
agencies and commissions that regulate our operations periodically
revise their requirements and modify their interpretations of
existing requirements. Regulatory requirements are not always
precise and clear, and regulatory agencies may sometimes disagree
with the way we interpret or apply these requirements. Any
misinterpretation by us of regulatory requirements could adversely
affect our business, financial condition and results of operations.
If we fail to comply with any of these regulatory requirements, we
could suffer financial penalties, limitations on our operations,
loss of accreditation, termination of or limitations on our ability
to grant degrees and certificates, or limitations on or termination
of our eligibility to participate in Title IV programs, each of
which could materially affect our business, financial condition and
results of operations. In addition, if we are charged with
regulatory violations, our reputation could be damaged, which could
have a negative impact on our enrollments and materially affect our
business, financial condition and results of operations. We cannot
predict with certainty how all of these regulatory requirements
will be applied, or whether we will be able to comply with all of
the applicable requirements in the future.
If we
lose our eligibility to participate in Title IV programs for any
reason, we would experience a dramatic and adverse decline in
revenue, financial condition, results of operations and future
growth prospects. Furthermore, we would be unable to continue our
business as it currently is conducted, which would be expected to
have a material effect on our ability to continue as a going
concern.
Congress may revise the laws governing Title IV programs or reduce
funding for those programs which could reduce our enrollment and
revenue and increase costs of operations.
Political and
budgetary concerns significantly affect Title IV programs. The
Higher Education Act of 1965, as amended (the “HEA”),
which is a federal law that governs Title IV programs, must be
periodically reauthorized by Congress and was most recently
reauthorized in August 2008. Congress also must determine funding
levels for Title IV programs on an annual basis and can change the
laws governing Title IV programs at any time. Apart from Title IV
programs, eligible veterans and military personnel may receive
educational benefits for the pursuit of higher education. A
reduction in federal funding levels for Title IV programs, or for
programs providing educational benefits to veterans and military
personnel, could reduce the ability of some students to finance
their education. We cannot predict with certainty the nature of any
new regulatory requirements, other future revisions to the law or
funding levels for Title IV programs. Because a significant
percentage of our revenue is and is expected to be derived from
Title IV programs, any action by Congress that significantly
reduces Title IV program funding or the ability of us or our
students to participate in Title IV programs could have a material
effect on our enrollments, business, financial condition and
results of operations. Congressional action also may require us to
modify our practices in ways that could increase administrative
costs and reduce profit margins, which could have a material effect
on our business, financial condition, and results of
operations.
If
Congress significantly reduced the amount of available Title IV
program funding, we would attempt to arrange for alternative
sources of financial aid for our students, such as private sources.
We cannot provide assurance that one or more private organizations
would be willing or able to provide sufficient loans to students
attending one of our schools or programs, or that the interest rate
and other terms of such loans would be as favorable as Title IV
program loans or acceptable to our students or that such private
sources would be adequate to replace the full amount of the
reduction in Title IV program funding. Therefore, even if some form
of private financing sources becomes available, our enrollment
could be materially affected. In addition, private organizations
could require us to guarantee all or part of this assistance
resulting in additional costs to us. If we were to provide more
direct financial assistance to our students, we would assume
increased credit risks and incur additional costs, which could have
a material effect on our business, financial condition, and results
of operations. Furthermore, we cannot predict with any certainty
the outcome of the HEA reauthorization process nor the extent to
which any legislation, if adopted, could materially affect our
business, financial condition, and results of
operations.
New rulemaking by the Department of Education could result in
regulatory changes that could reduce our enrollment and revenue,
increase costs of operations, and adversely affect our
business.
Negotiated
rulemaking is a process whereby the Department of Education
consults with members of the postsecondary education community to
identify issues of concern and attempts to agree on proposed
regulatory revisions to address those issues before the Department
of Education formally proposes any regulations. If the Department
of Education and negotiators cannot reach consensus on the entire
package of draft regulations, the Department of Education is
authorized to propose regulations without being bound by any
agreements made in the negotiation process. In recent years, the
Department of Education has held negotiated rulemaking sessions and
published regulations on various topics, as described further in
“Item 1 – Business – Regulatory Matters –
Changes in Department of Education Regulations.”
On
October 15, 2018, the Department of Education announced that it
would establish a new negotiated rulemaking committee to develop
proposed regulations relating to, among other things,
accreditation, state authorization, distance education programs and
educational innovation, TEACH grants, and participation in the
Title IV programs by faith-based educational entities. The
negotiated rulemaking committee and three related subcommittees
have held meetings in January, February, March and April of 2019.
On June 12, 2019, the Department of Education published in the
Federal Register proposed regulations (the “2018 State
Authorization Proposed Rule”) to revise the 2016 State
Authorization Final Rule. The 2018 State Authorization Proposed
Rule, if adopted as a final regulation, would continue to recognize
authorization through participation in a state authorization
reciprocity agreement, but would revise the requirement for state
authorization to be based on the location of a student rather than
whether or not a student legally resides in a state. The 2018 State
Authorization Proposed Rule also would revise requirements for
institutional notifications to students concerning the eligibility
of graduates for professional licensure in their states. We cannot
predict with certainty the impact that such regulations might have
on our business if finalized in their current form.
We
cannot predict with certainty when or whether the Department of
Education will propose or finalize regulations on other topics that
may impact us, or the impact of any regulations resulting from the
Department of Education’s current or future rulemaking
activities. In addition, Congress may promulgate legislation, and
the executive branch may issue executive orders which would impact
us. Any such actions could reduce our enrollments, increase our
cost of doing business, and have a material effect on our business.
In addition, any regulations that reduce or eliminate our
students’ access to Title IV program funds, that require us
to change or eliminate programs or that increase our costs of
compliance could have an adverse effect on our
business.
The recently increased focus by Congress on the for-profit
education sector could result in legislation or further Department
of Education rulemaking restricting Title IV program participation
by proprietary schools in a manner that could materially affect our
business.
Recently, Congress
has placed increased focus on the role that for-profit educational
institutions play in higher education, which is described further
in “Item 1 – Business – Regulatory Matters
– Changes in Department of Education Regulations.”
Various House and Senate members and committees have scrutinized
aspects of the education industry, including student debt, student
recruiting, student outcomes and accreditation matters. During the
current Congress, both the House Education and Labor Committee and
the House Oversight and Reform Committee have conducted hearings
regarding Department of Education regulatory oversight activities,
particularly with respect to proprietary institutions. There has
also been an increased focus on the provision of educational
benefits for military personnel and veterans.
We
cannot predict whether, or the extent to which, these hearings,
reports or reviews will result in legislation or further rulemaking
affecting our participation in Title IV programs. To the extent
that any laws or regulations are adopted that limit our
participation in Title IV programs or the amount of student
financial aid for which the students at our institutions are
eligible, our enrollments, revenues and results of operation could
be materially affected. Any actions that change the requirements
for our participation in Title IV Programs or the amount of student
financial aid for which our students are eligible would negatively
impact our business.
Recent statutory and regulatory changes substantially increased
reporting and other requirements that could impair our reputation
and adversely affect our enrollments. Our failure to comply with or
accurately interpret pertinent disclosure requirements may subject
us to penalties and other sanctions.
The
most recent reauthorization of the Higher Education Act, in August
2008, contains numerous revisions to the requirements governing
Title IV programs. Among other things, institutions participating
in Title IV programs are subject to extensive additional reporting
and disclosure requirements. Additionally, the Department of
Education’s gainful employment regulations require a number
of specific disclosures to students and prospective students
regarding our educational programs. Such disclosures include the
occupations that NAU’s educational programs prepare students
to enter upon completing their program, total program costs and
median student debt incurred for our programs, along with program
completion and placement rates for our programs. Any failure by us
to properly interpret these new requirements could subject us to
limitation, suspension or termination of our eligibility to
participate in Title IV programs, the imposition of conditions on
our participation in Title IV programs, monetary liabilities, fines
and penalties or other sanctions imposed by the Department of
Education, which could have a material effect on our business,
financial condition and results of operations. The prospect of such
sanctions may cause us to conservatively interpret the new
reporting requirements of Title IV programs by the Department of
Education, which may limit our flexibility in operating our
business.
If any of the education regulatory agencies or commissions that
regulate us do not approve or delay any required approvals of
transactions involving a change of control, our ability to operate
or participate in Title IV programs may be impaired.
If we
experience a change in control under the standards of the
Department of Education, the HLC, any applicable state educational
licensing agency, or any specialized accrediting agency commission,
we must notify or seek the approval of each such agency. These
agencies do not have uniform criteria for what constitutes a change
in control. Transactions or events that typically constitute a
change in control include significant acquisitions or dispositions
of the voting stock of an institution or its parent company, and
significant changes in the composition of the board of directors of
an institution or its parent company. Some of these transactions or
events may be beyond our control. Our failure to obtain, or a delay
in receiving, approval of any change in control from the Department
of Education, the HLC or applicable state educational licensing
agencies could impair our ability to operate or participate in
Title IV programs, which could have a material effect on our
business, financial condition and results of operations. Failure to
obtain, or a delay in receiving, approval of any change in control
from any state in which we are currently licensed or authorized, or
from any of our specialized accrediting commissions, could require
us to suspend our activities in that state or suspend offering the
applicable programs until we receive the required approval, or
could otherwise impair our operations. The potential adverse
effects of a change in control could influence future decisions by
us and our stockholders regarding the sale, purchase, transfer,
issuance or redemption of our stock, which could discourage bids
for outstanding shares of the stock and could have an adverse
effect on the market price of our shares.
We cannot offer new
programs, expand our operations into certain states or acquire
additional schools if such actions are not approved by the
applicable regulatory and accrediting agencies, and we may have to
repay Title IV funds disbursed to students enrolled in any such
programs, schools or states if we do not obtain prior
approval.
Our
expansion plans include offering new educational programs. If we
are unable to obtain the necessary approvals for new programs,
operations or acquisitions from the Department of Education, the
HLC or any applicable state educational licensing agency or
accrediting commission, or if we are unable to obtain such
approvals in a timely manner, our ability to consummate the planned
actions and provide Title IV program funds to any affected students
would be impaired, which could have a material effect on our
expansion plans and growth. If we were to determine erroneously
that any such action did not need approval or that we had obtained
all required approvals, including all required approvals for each
of our current programs and locations, we could be liable for
repayment of Title IV program funds provided to students in that
program or at that location.
If the Department of Education does not recertify us to continue
participating in Title IV programs, our students would lose their
access to Title IV program funds, or we could be recertified but
required to accept significant limitations as a condition of our
continued participation in Title IV programs.
The
Department of Education certification to participate in Title IV
programs lasts a maximum of six years, and institutions are
required to seek recertification from the Department of Education
on a regular basis to continue their participation in Title IV
programs. An institution must also apply for recertification by the
Department of Education if it undergoes a change in control, as
defined by Department of Education regulations, and may be subject
to similar review if it expands its operations or educational
programs in certain ways. Generally, the recertification process
includes a review by the Department of Education of the
institution’s educational programs and locations,
administrative capability, financial responsibility and other
oversight categories. The Department of Education could limit,
suspend or terminate an institution’s participation in Title
IV programs for violations of the Higher Education Act or Title IV
regulations. Our most recent certification to participate in the
Title IV programs, which was not provisional, was effective from
June 2013 through March 31, 2019. Because NAU timely submitted an
application for recertification to the Department of Education, its
existing certification to participate in the Title IV programs
continues on a month-to-month provisional basis until the
Department of Education issues a decision on the application for
recertification.
There
can be no assurance that the Department of Education will recertify
us after our current period of certification or that it would not
impose restrictions in connection with any such recertification. In
addition, the Department of Education may take emergency action to
suspend our certification without advance notice if it receives
reliable information that we are violating Title IV requirements
and it determines that immediate action is necessary to prevent
misuse of Title IV funds. If the Department of Education does not
renew or withdraws our certification to participate in Title IV
programs at any time, our students would no longer be able to
receive Title IV program funds. Similarly, the Department of
Education could renew our certification, but restrict or delay our
students’ receipt of Title IV funds, limit the number of
students to whom it could disburse such funds or impose other
restrictions. Any of these outcomes could have a material effect on
NAU’s enrollments and our business, financial condition and
results of operations.
We would lose our ability to participate in Title IV programs if we
fail to maintain our institutional accreditation, and our student
enrollments could decline if we fail to maintain any of our
accreditations or approvals.
An
institution must be accredited by a postsecondary accrediting
commission recognized by the Department of Education to participate
in Title IV programs. We have been granted institutional
accreditation by the HLC, which is a regional accrediting agency
recognized by the Department of Education. To remain accredited, we
must continuously meet accreditation standards relating to, among
other things, performance, governance, institutional integrity,
educational quality, faculty, administrative capability, resources
and financial stability. Our accreditation by the HLC was most
recently affirmed in January 2015; however, on May 23, 2019, HLC
assigned its Financial Distress designation to NAU based on
statements regarding our financial condition made by us in an April
2019 filing with the Securities and Exchange Commission. HLC most
recently conducted a site visit at NAU on June 27-28, 2019. On July
19, 2019, HLC informed NAU that the visiting team concluded that
NAU is in compliance with the HLC Criteria for Accreditation and
Assumed Practices that were the focus of the visit, including
criteria related to institutional finances, integrity, academic and
student support resources, and faculty; therefore, HLC removed its
Financial Distress designation from NAU as of that date. HLC also
required NAU to submit an interim report regarding its financial
resources on or before December 31, 2019. A mid-cycle comprehensive
evaluation visit by HLC is scheduled to occur in May
2020.
In
addition, many of our individual educational programs are also
accredited by specialized accrediting commissions or approved by
specialized state agencies. If we fail to satisfy the standards of
any of those specialized accrediting commissions or state agencies,
we could lose the specialized accreditation or approval for the
affected programs, which could result in materially reduced student
enrollments in those programs and have a material effect on our
business, financial condition and results of
operations.
If we fail to maintain any of our state authorizations, we would
lose our ability to operate in that state and for campuses in the
state to participate in Title IV programs.
As of
May 31, 2019, in addition to its central administration location in
Rapid City, South Dakota, NAU operated five instructional locations
across the states of Colorado, Indiana, Kansas, and Texas. NAU also
continued to conduct educational programs at Ellsworth Air Force
Base, South Dakota, and Kings Bay Naval Base, Georgia. To maintain
our state authorizations, we must continuously meet standards
relating to, among other things, educational programs, facilities,
instructional and administrative staff, marketing and recruitment,
financial operations, addition of new locations and educational
programs and various operational and administrative procedures. We
may need to apply for additional authorization in these or other
states in which we are authorized in order to comply with the
Department of Education’s state authorization requirements,
and the authorization process could result in unexpected delays or
other setbacks that could jeopardize our Title IV eligibility. If
we fail to satisfy any of these standards, we could lose our
authorization from the applicable state educational agency to offer
educational programs and could be forced to cease operations in
such state. Such a loss of authorization would also cause our
physical campus in the state to lose eligibility to participate in
Title IV programs. Some states may also prescribe financial
regulations that are different from those of the Department of
Education and many require the posting of surety bonds. If we fail
to comply with state licensing requirements, we may lose our state
licensure or authorizations. If we lose state licensure in a state
in which we have a physical location, we would also lose Title IV
eligibility in that state. Any such event could have a material
effect on our business, financial condition and results of
operations.
On
December 19, 2016, the Department of Education published final
regulations regarding state authorization for programs offered
through distance education and state authorization for foreign
locations of institutions (the “2016 State Authorization
Final Rule”). Among other provisions, the 2016 State
Authorization Final Rule requires that an institution participating
in the Title IV federal student aid programs and offering
postsecondary education through distance education be authorized by
each state in which a student resides, if such authorization is
required by the state. The 2016 State Authorization Final Rule
recognizes authorization through participation in a state
authorization reciprocity agreement, if the agreement does not
prevent a state from enforcing its own laws. The 2016 State
Authorization Final Rule also requires that foreign additional
locations and branch campuses be authorized by the appropriate
foreign government agency and, if at least 50% of a program can be
completed at the location/branch, be approved by the
institution’s accrediting agency and be reported to the state
where the main campus is located. The 2016 State Authorization
Final Rule also requires institutions to: document the state
process for resolving complaints from students enrolled in programs
offered through distance education or correspondence courses; and
make certain public and individualized disclosures to enrolled and
prospective students about their distance education programs. The
provisions of the 2016 State Authorization Final Rule relating to
foreign locations of domestic institutions became effective July 1,
2018. On June 29, 2018, the Department of Education delayed the
effective date of the 2016 State Authorization Final Rule in all
other respects from July 1, 2018, to July 1, 2020. However, on
April 26, 2019, the U.S. District Court for the Northern District
of California issued a decision concluding that the above-described
delay of the 2016 State Authorization Final Rule was improper, and
further ordered that the 2016 State Authorization Rule would become
effective on May 26, 2019. On July 23, 2019, the Department of
Education released regulatory guidance to postsecondary
institutions confirming that the 2016 State Authorization Final
Rule became effective on May 26, 2019.
On June
12, 2019, the Department of Education published in the Federal
Register proposed regulations (the “2018 State Authorization
Proposed Rule”) to revise the 2016 State Authorization Final
Rule. The 2018 State Authorization Proposed Rule, if adopted as a
final regulation, would continue to recognize authorization through
participation in a state authorization reciprocity agreement, but
would revise the requirement for state authorization to be based on
the location of a student rather than whether or not a student
legally resides in a state. The 2018 State Authorization Proposed
Rule also would revise requirements for institutional notifications
to students concerning the eligibility of graduates for
professional licensure in their states, and is further described in
“Item 1 – Business – Regulation of Federal
Financial Aid Programs – State Authorization.” We
cannot predict with certainty the impact that such regulations
might have on our business if finalized in their current
form.
Independent
of this matter of federal regulation, several states have asserted
jurisdiction over educational institutions offering online programs
that have no physical location or other presence in the state, but
that have some activity in the state, such as enrolling or offering
educational services to students who reside in the state,
conducting practice or sponsoring internships in the state,
employing faculty who reside in the state or advertising to or
recruiting prospective students in the state. Thus, our activities
in certain states constitute a presence requiring licensure or
authorization under requirements of state law, regulation or policy
of the state educational agency, even though we do not have a
physical facility in such states. Therefore, in addition to the
states where we maintain physical facilities, we have either
obtained approvals or exemptions, or are currently in the process
of obtaining such approvals or exemptions, that we believe are
necessary in connection with our activities that may constitute a
presence in such states requiring licensure or authorization by the
state educational agency based on the laws, rules or regulations of
that state. Notwithstanding our efforts to obtain approvals or
exemptions, state regulatory requirements for online education vary
among the states, are not well developed in many states, are
imprecise or unclear in some states and can change frequently.
Because we enroll students in online programs in all 50 states and
the District of Columbia, we expect that regulatory authorities in
other states where we are not currently licensed or authorized may
request that we seek additional licenses or authorizations for
these institutions in their states in the future. In recent years
several states have voluntarily entered into SARA that establish
standards for interstate offering of postsecondary distance
education courses and programs. If an institution’s home
state participates in SARA and authorizes the institution to
provide distance education in accordance with SARA standards, then
the institution need not obtain additional authorizations for
distance education from any other SARA member state. The SARA
participation requirements and process are administered by the four
regional higher education compacts in the United States (the
Midwestern Higher Education Compact, the New England Board of
Higher Education, the Southern Regional Education Board and the
Western Interstate Commission for Higher Education) and are
overseen by the National Council for State Authorization
Reciprocity Agreements. NAU is approved to participate in SARA,
through the SARA Coordinator of the South Dakota Board of Regents
as a state portal agency with its recent full approval effective
from April 20, 2018 through April 19, 2019. On April 1, 2019, SDBOR
informed NAU that, based on our most recent financial
responsibility composite score as determined by the Department of
Education and a review by SDBOR of additional financial information
provided by us, SDBOR extended NAU’s participation in SARA on
a provisional basis effective April 1, 2019 through March 31, 2020.
In connection with that provisional status, we must submit
quarterly reports to SDBOR, including any updates to, and
specifically noting deviations from, the financial information
previously provided to SDBOR. The April 1, 2019 letter from SDBOR
also informed NAU of the conditions under which its provisional
participation in SARA may be extended beyond March 31, 2020. If NAU
is unable to satisfy the conditions set forth in the April 1, 2019
letter for extension of its SARA participation beyond March 31,
2020, we may be required to obtain state licensure or authorization
in states beyond those where we operate physical
facilities.
If we
fail to comply with state licensing or authorization requirements
for a state, or fail to obtain licenses or authorizations when
required, we could lose state licensure or authorization by that
state, which could prohibit us from recruiting prospective students
or offering services to current students in that state. We could
also be subject to other sanctions, including restrictions on
activities in that state, fines and penalties. We review the
licensure requirements of other states when we believe that it is
appropriate to determine whether our activities in those states may
constitute a presence or otherwise may require licensure or
authorization by the respective state education agencies. New laws,
regulations or interpretations related to offering educational
programs online could increase our cost of doing business and
affect our ability to recruit students in particular states, which
could, in turn, adversely affect our enrollments and revenues and
have a material effect on our business.
If we do not comply with the Department of Education’s
“administrative capability” standards, we could suffer
financial penalties, be required to accept other limitations to
continue participating in Title IV programs or lose our eligibility
to participate in Title IV programs.
Department
of Education regulations specify extensive criteria an institution
must satisfy to establish that it has the requisite
“administrative capability” to participate in Title IV
programs. These criteria require, among other things, that
we:
●
comply
with all applicable Title IV program regulations;
●
have
capable and sufficient personnel to administer the federal student
financial aid programs;
●
not
have student loan cohort default rates in excess of specified
levels;
●
have
acceptable methods of defining and measuring the satisfactory
academic progress of our students;
●
have
various procedures in place for safeguarding federal
funds;
●
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
financial aid counseling to our students;
●
refer
to the Department of Education’s Office of Inspector General
any credible information indicating that any applicant, student,
employee or agent of the institution has been engaged in any fraud
or other illegal conduct involving Title IV programs;
●
submit
in a timely manner all reports and financial statements required by
Title IV regulations; and
●
not
otherwise appear to lack administrative capability.
If an
institution fails to satisfy any of these criteria or comply with
any other Department of Education regulations, the Department of
Education may:
●
require
the institution to repay Title IV program funds;
●
transfer the
institution from the “advance” system of payment of
Title IV program funds to cash monitoring status or to the
“reimbursement” system of payment;
●
place
the institution on provisional certification status;
or
●
commence a
proceeding to impose a fine or to limit, suspend or terminate the
participation of the institution in Title IV programs.
If we
were found not to have satisfied the Department of
Education’s “administrative capability”
requirements, we could be limited in our access to, or lose, Title
IV program funding, which could significantly reduce our
enrollments and have a material effect on our business, financial
condition and results of operations.
The Department of Education may adopt regulations governing federal
student loan debt forgiveness that could result in liability for
amounts based on borrower defenses or affect the Department of
Education’s assessment of our institutional
capability.
On
November 1, 2016, the Department of Education published final
regulations that among other provisions, establish new standards
and processes for determining whether a Direct Loan Program
borrower has a defense to repayment on a loan due to acts or
omissions by the institution at which the loan was used by the
borrower for educational expenses. These final regulations (the
“2016 Borrower Defense Final Rule”) were published with
an effective date of July 1, 2017. Among other topics, the 2016
Borrower Defense Final Rule establishes permissible borrower
defense claims for discharge, procedural rules under which claims
will be adjudicated, time limits for borrowers’ claims, and
guidelines for recoupment by the Department of Education of
discharged loan amounts from institutions of higher education. The
2016 Borrower Defense Final Rule also prohibits schools from using
any pre-dispute arbitration agreements, prohibits schools from
prohibiting relief in the form of class actions by student
borrowers, and invalidates clauses imposing requirements that
students pursue an internal dispute resolution process before
contacting authorities regarding concerns about an institution. For
proprietary institutions, the 2016 Borrower Defense Final Rule
describes the threshold for loan repayment rates that will require
specific disclosures to current and prospective students and the
applicable loan repayment rate methodology. The 2016 Borrower
Defense Final Rule also establishes important new financial
responsibility and administrative capacity requirements for both
not-for-profit and for-profit institutions participating in the
Title IV programs. For example, certain events would automatically
trigger the need for a school to obtain a letter of credit,
including for publicly traded institutions, if the SEC warns the
school that it may suspend trading on the school’s stock, the
school failed to timely file a required annual or quarterly report
with the SEC, or the exchange on which the stock is traded notifies
the school that it is not in compliance with exchange requirements
or the stock is delisted.
Other
events would will require a recalculation of an institution’s
composite score of financial responsibility, including, for a
proprietary institution whose score is less than 1.5, any
withdrawal of an owner’s equity by any means, including by
declaring a dividend, unless the equity is transferred within the
affiliated entity group on whose basis the composite score was
calculated. The 2016 Borrower Defense Final Rule also sets forth
events that are discretionary triggers for letters of credit,
meaning that if any of them occur, the Department of Education may
choose to require a letter of credit, increase an existing letter
of credit requirement or demand some other form of surety from the
institution. The 2016 Borrower Defense Final Rule provides that if
an institution fails to meet the composite score requirement for
longer than three years under provisional certification, the
Department of Education may mandate additional financial protection
from the institution or any party with “substantial
control” over the institution. Such parties with
“substantial control” must agree to jointly and
severally guarantee the Title IV program liabilities of the
institution at the end of the three-year provisional certification
period. Under current regulations, a party may be deemed to have
“substantial control” over an institution if, among
other factors, the party directly or indirectly holds an ownership
interest of 25% or more of an institution, or is a member of the
board of directors, a general partner, the chief executive officer
or other executive officer of the institution.
On June
15, 2017, the Department of Education announced an indefinite delay
to its implementation of the 2016 Borrower Defense Final Rule, and
on June 16, 2017 published a notice of intent to establish a
negotiated rulemaking committee to develop proposed revisions to
the rule. On August 30, 2017, the Department of Education published
a Federal Register notice requesting nominations for individuals to
serve on this negotiated rulemaking committee, and on October 24,
2017, the Department of Education promulgated an interim final rule
under which the effective date of most substantive provisions of
the 2016 Borrower Defense Final Rule were delayed until July 1,
2019. The negotiated rulemaking committee sessions occurred in
November 2017, January 2018, and February 2018, during which the
Department of Education and negotiators failed to reach consensus
on a revised regulation. Additionally, on July 6, 2017, the
attorney general of 18 states and the District of Columbia filed
suit against the Department of Education claiming that its delay of
the 2016 Borrower Defense Final Rule violated applicable law,
including the Administrative Procedure Act. On September 12, 2018,
the U.S. District Court for the District of Columbia issued a
decision concluding that the above-described delay of the 2016
Borrower Defense Final Rule was improper. In a series of opinions
and orders on September 17 and October 12, 2018, the Court
reinstated the 2016 Borrower Defense Final Rule and it is now in
effect. As described above, under the 2016 Borrower Defense Final
Rule, certain events would automatically trigger the need for a
school to obtain a letter of credit, including for publicly traded
institutions, if the Securities and Exchange Commission warns the
school that it may suspend trading on the school’s stock, the
school failed to timely file a required annual or quarterly report
with the Securities and Exchange Commission, or the exchange on
which the stock is traded notifies the school that it is not in
compliance with exchange requirements or the stock is delisted. On
September 28, 2018, the Company received written notice from Nasdaq
that the closing bid price for its common stock was not in
compliance with the minimum bid price requirement for continued
inclusion on Nasdaq. On December 26, 2018, the Company also
received a written deficiency notice from Nasdaq indicating that
the Company no longer meets the requirement to maintain a minimum
market value of publicly held shares. On December 31, 2018, the
Company notified Nasdaq of its intention to voluntarily delist from
Nasdaq and to transfer the listing of its common stock to the OTCQB
Market, a centralized electronic quotation service for
over-the-counter securities.
On
March 8, 2019, NAU received a letter from the Department of
Education which noted several financial matters described in the
footnotes to our audited financial statements for the fiscal year
ended May 31, 2018 and our Form 10-Q filed with the Securities and
Exchange Commission on January 22, 2019, and the Company’s
delisting from Nasdaq and transfer of shares to the OTCQB, and
determined that NAU did not meet its financial responsibility
standards for institutions that participate in Title IV programs.
As a result, the Department of Education’s letter of March 8,
2019 imposed additional reporting requirements on NAU with respect
to its financial condition including bi-weekly cash balance
submissions and monthly submissions of actual and projected cash
flow statements, and notification requirements regarding certain
enumerated events should they occur in the future; required NAU to
process Title IV program funds under the Heightened Cash Monitoring
Type 1 method of payment; and informed NAU that it could continue
to participate in Title IV programs by either (1) posting a letter
of credit to the Department of Education in the amount of $36,653,
representing 50% of the Title IV program funds awarded during the
Company’s fiscal year ended May 31, 2018, or (2) posting a
letter of credit to the Department of Education in the amount of
$10,996, representing 15% of the Title IV program funds awarded
during the Company’s fiscal year ended May 31, 2018,
accompanied by the provisional form of certification to participate
in the Title IV programs. On March 22, 2019, we submitted a request
to the Department of Education for reconsideration of its
imposition of the letter of credit, as well as the amount and
timing for any required letter of credit. In response to our
request, the Department of Education provided two additional
options for a letter of credit accompanied by provisional
certification: (1) posting of an irrevocable letter of credit in
the amount of $7,331, representing 10% of Title IV program funds
for its fiscal year ended May 31, 2018, or (2) placement on the
Heightened Cash Monitoring Type 2 payment method, with a percentage
of each payment withheld until an account equal to the required
letter of credit amount can be funded. On April 30, 2019, the
Company responded to the Department’s letter and selected the
posting of an irrevocable letter of credit in the amount of $7,331
for the benefit of the Department. The letter of credit was issued
on May 10, 2019.
On July
31, 2018, the Department of Education published in the Federal
Register a proposed rule (the “2018 Borrower Defense Proposed
Rule”) which would replace most substantive provisions of the
2016 Borrower Defense Final Rule. The 2018 Borrower Defense
Proposed Rule would establish a federal standard for individual
borrowers to raise as a defense to repaying loans disbursed on or
after July 1, 2020, at the earliest. This proposed regulation would
permit borrowers to challenge repayment of loans based on
misrepresentation, defined to include acts or omissions by an
institution which are false, misleading or deceptive, and which are
made with knowledge of their falsity, deception, or misleading
nature, or with reckless disregard for the truth. The 2018 Borrower
Defense Proposed Rule seeks comment as to whether such a defense
may be raised affirmatively or may only arise defensively, out of a
collection action. The proposed regulation also would establish a
five-year window following a final decision on borrower defense for
the Department of Education to seek recoupment from an institution.
The 2018 Borrower Defense Proposed Rule would permit schools to use
class action waivers and pre-dispute arbitration agreements, but
would require schools to provide additional disclosures and
borrower counseling when including such provisions in enrollment
agreements. The 2018 Borrower Defense Proposed rule also sets forth
automatic and discretionary triggers under which the Department of
Education may require the school to provide a letter of credit,
cash, or other form of surety, or may agree to provide surety
through an offset of future Title IV funds for a
six-to-twelve-month period. For example, certain events would
automatically trigger the need for a school to obtain a letter of
credit or other surety, including for publicly traded institutions,
if the SEC warns the school that it may suspend trading on the
school’s stock, the school failed to timely file a required
annual or quarterly report with the SEC, or the exchange on which
the stock is traded notifies the school that it is not in
compliance with exchange requirements or the stock is delisted.
Other events would require a recalculation of an
institution’s composite score of financial responsibility
including, for a proprietary institution whose score is less than
1.5, any withdrawal of an owner’s equity by any means,
including by declaring a dividend, unless the equity is transferred
within the affiliated group on whose basis the composite score was
calculated; or for any institution, the incursion of a borrower
defense liability which reduces the institution’s composite
score to under 1.0. The 2018 Borrower Defense Proposed Rule also
sets forth events that are discretionary triggers for letters of
credit or other forms of surety, meaning that if any of them occur,
the Department of Education may choose to require a letter of
credit, increase an existing letter of credit requirement or demand
some other form of surety from the institution. The 2018 Borrower
Defense Proposed Rule also includes provisions regarding the
treatment of operating leases in the financial responsibility
composite score methodology, would more specifically define and
require disclosures concerning the composite score’s
inclusion of debt obtained for long-term purposes, and would revise
limited aspects of the composite score formula to account for
changes in accounting terminology. We cannot predict when the
Department of Education will publish a final rule, the extent to
which that final rule may differ from the 2018 Borrower Defense
Proposed Rule, its differences from the previously promulgated 2016
Borrower Defense Final Rule, or the impact that any such revised
rule might have on our business. Any regulation that increases
potential borrower defense liabilities or affects the Department of
Education’s assessment of our institutional capability could
have a material effect on our business, financial condition and
results of operations.
If we do not meet specific financial responsibility standards
established by the Department of Education, we may be required to
post an additional letter of credit or accept other limitations to
continue participating in Title IV programs, or we could lose our
eligibility to participate in Title IV programs.
To
participate in Title IV programs, an eligible institution must
satisfy specific measures of financial responsibility prescribed by
the Department of Education, or post a letter of credit in favor of
the Department of Education and possibly accept other conditions on
its participation in Title IV programs. These financial
responsibility tests are applied to each institution on an annual
basis based on the institution’s audited financial
statements, and may be applied at other times, such as if the
institution undergoes a change in control. The Department of
Education may also apply such measures of financial responsibility
to the operating company and ownership entities of an eligible
institution and, if such measures are not satisfied by the
operating company or ownership entities, require the institution to
post a letter of credit in favor of the Department of Education and
possibly accept other conditions on its participation in Title IV
programs. The operating restrictions that may be placed on an
institution that does not meet the quantitative standards of
financial responsibility include being transferred from the
“advance payment” method of receiving Title IV program
funds to either the “reimbursement” or the
“heightened cash monitoring” system, which could result
in a significant delay in the institution’s receipt of those
funds. Limitations on, or termination of, our participation in
Title IV programs as a result of our failure to demonstrate
financial responsibility would limit our students’ access to
Title IV program funds, which could significantly reduce
enrollments and have a material effect on our business, financial
condition and results of operations.
As
described in more detail under “Item 1 – Business -
Regulatory Matters — Regulation of Federal Student Aid
Programs — Financial Responsibility,” the Department of
Education annually assesses our financial responsibility through a
composite score determination. Our audited financial statements for
the fiscal year ended May 31, 2019, indicated our most recent
composite score is 1.1. This score is subject to a final
determination by the Department of Education once it receives and
reviews our consolidated audited financial statements for the 2019
fiscal year. We believe
it is likely that the Department of Education will determine that
our institutions are “in the zone” and that we will be
required to continue operating under the requirements imposed by
the March 8, 2019 letter, including the letter of credit issued to
the Department of Education on May 10, 2019, as well as any other
requirements that the Department of Education might impose in its
discretion. If we are unable to meet the minimum composite score or
to comply with the other standards of financial responsibility, and
could not post a required letter of credit or comply with the
alternative bases for establishing financial responsibility, then
our students could lose their access to Title IV program
funding.
On
November 1, 2016, as part of the 2016 Borrower Defense Final Rule,
the Department of Education adopted final regulations that revise
its general standards of financial responsibility to include
various actions and events that would require institutions to
provide the Department of Education with irrevocable letters of
credit. On June 15, 2017, the Department of Education announced an
indefinite delay to its implementation of the 2016 Borrower Defense
Final Rule, and on June 16, 2017 published a notice of intent to
establish a negotiated rulemaking committee to develop proposed
revisions to the rule. Additionally, on July 6, 2017, the attorney
general of 18 states and the District of Columbia filed suit
against the Department of Education claiming that its delay of the
2016 Borrower Defense Final Rule violated applicable law, including
the Administrative Procedure Act. On September 12, 2018, the U.S.
District Court for the District of Columbia issued a decision
concluding that the above-described delay of the 2016 Borrower
Defense Final Rule was improper. In a series of opinions and orders
on September 17 and October 12, 2018, the Court reinstated the 2016
Borrower Defense Final Rule and it is now in effect. Under the 2016
Borrower Defense Final Rule, certain events would automatically
trigger the need for a school to obtain a letter of credit,
including for publicly traded institutions, if the SEC warns the
school that it may suspend trading on the school’s stock, the
school failed to timely file a required annual or quarterly report
with the SEC, or the exchange on which the stock is traded notifies
the school that it is not in compliance with exchange requirements
or the stock is delisted.
On
September 28, 2018, the Company received written notice from Nasdaq
that the closing bid price for its common stock was not in
compliance with the minimum bid price requirement for continued
inclusion on Nasdaq. On December 26, 2018, the Company also
received a written deficiency notice from Nasdaq indicating that
the Company no longer meets the requirement to maintain a minimum
market value of publicly held shares. On December 31, 2018, the
Company notified Nasdaq of its intention to voluntarily delist from
Nasdaq and to transfer the listing of its common stock to the OTCQB
Market, a centralized electronic quotation service for
over-the-counter securities. On March 8, 2019, NAU received a
letter from the Department of Education which noted several
financial matters described in the footnotes to our audited
financial statements for the fiscal year ended May 31, 2018 and our
Form 10-Q filed with the Securities and Exchange Commission on
January 22, 2019, and the Company’s delisting from Nasdaq and
transfer of shares to the OTCQB, and determined that NAU did not
meet its financial responsibility standards for institutions that
participate in Title IV programs. As a result, the Department of
Education’s letter of March 8, 2019 imposed additional
reporting requirements on NAU with respect to its financial
condition including bi-weekly cash balance submissions and monthly
submissions of actual and projected cash flow statements, and
notification requirements regarding certain enumerated events
should they occur in the future; required NAU to process Title IV
program funds under the Heightened Cash Monitoring Type 1 method of
payment; and informed NAU that it could continue to participate in
Title IV programs by either (1) posting a letter of credit to the
Department of Education in the amount of $36,653, representing 50%
of the Title IV program funds awarded during the Company’s
fiscal year ended May 31, 2018, or (2) posting a letter of credit
to the Department of Education in(2) posting a letter of credit to
the in the amount of $10,996, representing 15% of the Title IV
program funds awarded during the Company’s fiscal year ended
May 31, 2018, accompanied by the provisional form of certification
to participate in the Title IV programs. On March 22, 2019, we
submitted a request to the Department of Education for
reconsideration of its imposition of the letter of credit, as well
as the amount and timing for any required letter of credit. In
response to our request, the Department of Education provided two
additional options for a letter of credit accompanied by
provisional certification: (1) posting of an irrevocable letter of
credit in the amount of $7,331, representing 10% of Title IV
program funds for its fiscal year ended May 31, 2018, or (2)
placement on the Heightened Cash Monitoring Type 2 payment method,
with a percentage of each payment withheld until an account equal
to the required letter of credit amount can be funded. On April 30,
2019, the Company responded to the Department’s letter and
selected the posting of an irrevocable letter of credit in the
amount of $7,331 for the benefit of the Department. The letter of
credit was issued on May 10, 2019. Any regulations that require NAU
to post letters of credit or to accept other limitations to
continue participating in the Title IV programs could materially
affect our business, financial condition and results of
operations.
We may lose our eligibility to participate in the federal student
financial aid programs if the percentage of our revenues derived
from Title IV programs is too high.
A
provision of the Higher Education Act commonly referred to as the
90/10 Rule, as amended in August 2008, provides that a for-profit
educational institution loses its eligibility to participate in
Title IV programs if, under a complex regulatory formula that
requires cash basis accounting and other adjustments to the
calculation of revenue, the institution derives more than 90% of
its revenues from Title IV program funds for any two consecutive
fiscal years. An institution that derives more than 90% of its
revenue (on a cash basis) from Title IV programs for any single
fiscal year will be placed on provisional certification for at
least two fiscal years and may be subject to additional conditions
or sanctions imposed by the Department of Education. During the
period of provisional certification, the institution must comply
with any additional conditions included in the institution’s
program participation agreement with the Department of Education.
In addition, the Department of Education may more closely review an
institution that is provisionally certified if it applies for
recertification or approval to open a new location, add an
educational program, acquire another school or make any other
significant change. If the Department of Education determines that
a provisionally certified institution is unable to meet its
responsibilities under its program participation agreement, the
Department of Education may seek to revoke the institution’s
certification to participate in Title IV programs without advance
notice or opportunity for the institution to challenge the action.
If we were to violate the 90/10 Rule, we would become ineligible to
participate in Title IV programs as of the first day of the fiscal
year following the second consecutive fiscal year in which we
exceeded the 90% threshold and would be unable to regain
eligibility for two fiscal years thereafter. Under regulations that
were published by the Department of Education in October 2009, a
proprietary institution must disclose in a footnote to its annual
audited financial statements its 90/10 calculation and the amounts
of the federal and non-federal revenues, by source, included in its
90/10 calculation. The certified public accountant that prepares
the institution’s audited financial statements is required to
review that information and test the institution’s
calculation. For our 2019 and 2018 fiscal years, we derived
approximately 78.2% and 82.1%, respectively, of our revenues
(calculated on a cash basis) from Title IV program funds. If we
violate the 90/10 Rule and continue to disburse Title IV program
funds to students after the effective date of our loss of
eligibility to participate in Title IV programs, we would be
required to return those funds to the Department of Education. We
are exploring the feasibility of various potential measures that
would be intended to reduce the percentage of NAU’s cash
basis revenue attributable under the 90/10 Rule to Title IV Program
funds. If we were to violate the 90/10 Rule, we would become
ineligible to participate in Title IV programs as of the first day
of the fiscal year following the second consecutive fiscal year in
which we exceeded the 90% Title IV program funds threshold and
would be unable to regain eligibility for two fiscal years
thereafter.
Increases in Title
IV grant and loan limits currently or in the future may result in
an increase in the revenues we receive from Title IV programs.
Further, a significant number of states in which we operate have
faced budget constraints, which have caused or may cause them to
reduce state appropriations in a number of areas, including with
respect to the amount of financial assistance provided to
postsecondary students, which could further increase our percentage
of revenues derived from Title IV program funds. Also, the
employment circumstances of our students or their parents could
also increase reliance on Title IV program funds. Furthermore, from
time to time, legislation is introduced that would make a
proprietary institution ineligible to participate in Title IV
programs if it derives more than 85% of its revenues from federal
funds, including Title IV programs, revenues from the GI Bill and
Department of Defense Tuition Assistance funds. We are exploring
the feasibility of various potential measures that would be
intended to reduce the percentage of NAU’s cash basis revenue
attributable under the 90/10 Rule to Title IV Program funds.
Certain measures that could be taken to maintain compliance with
the 90/10 Rule may reduce our revenues, increase our operating
expenses, or both, perhaps significantly. If we become ineligible
to participate in Title IV programs as a result of noncompliance
with the 90/10 Rule, it can be expected to have a material effect
on our business, financial condition and results of
operations.
We may lose our eligibility to participate in Title IV programs if
our student loan default rates are too high.
An
educational institution may lose its eligibility to participate in
Title IV programs if, for three consecutive years, 30% or more of
its students who were required to begin repayment on their student
loans in the relevant fiscal year default on their payment by the
end of the next federal fiscal year or the subsequent fiscal year.
In addition, an institution may lose its eligibility to participate
in Title IV programs if the default rate of its students exceeds
40% for any single year.
The
Department of Education generally publishes draft cohort default
rates in February of each year for the prepayment period that ended
the prior September. Draft cohort default rates do not result in
sanctions, are subject to subsequent data corrections and appeals
by an institution, and can change between their issuance to
institutions and the Department of Education’s release of
official cohort default rates, which are typically issued annually
in September. Our official cohort default rates for federal fiscal
years 2015 and 2014 are 23.7% and 24.1%, respectively. The draft
cohort rate for federal fiscal year 2016 is 20.1%. Any increase in
interest rates or reliance on “self-pay” students, as
well as declines in income or job losses for our students, could
contribute to higher default rates on student loans. Exceeding the
student loan default rate thresholds and losing eligibility to
participate in Title IV programs would have a material effect on
our business, financial condition and results of operations. Any
future changes in the formula for calculating student loan default
rates, economic conditions or other factors that cause our default
rates to increase, could place us in danger of losing our
eligibility to participate in Title IV programs, which would have a
material effect on our business, financial condition and results of
operations.
We would be subject to sanctions if we were to pay impermissible
commissions, bonuses or other incentive payments to individuals
involved in certain recruiting, admission or financial aid
activities.
The
Higher Education Act prohibits an educational institution that
participates in Title IV programs from making any commission, bonus
or other incentive payments based directly or indirectly on
securing enrollments or financial aid to any persons or entities
involved in student recruiting or admissions activities, or in
making decisions about the award of student financial assistance.
The statutory prohibition against incentive compensation applies to
any person engaged in student recruitment or admissions activities
or in making financial aid award decisions, and any higher level
employees with responsibility for such activities. Since July 1,
2011, the Department of Education’s implementing regulations
have effectively deemed any commission, bonus or other incentive
compensation based in any part, directly or indirectly, on securing
enrollment or awarding financial aid to be inconsistent with the
statutory prohibition against incentive compensation payments. The
Department of Education also issued a “Dear Colleague”
letter in March 2011, providing additional guidance regarding the
scope of the prohibition on incentive compensation and to what
employees and types of activities the prohibition applies. The July
1, 2011 revisions to the Department of Education’s
regulations required us to change our compensation practices and
has had and will continue to have a significant impact on the rate
at which students enroll in our programs and on our business,
financial condition and results of operations.
In
addition, in recent years, other postsecondary educational
institutions have been named as defendants to whistleblower
lawsuits, known as “qui tam” cases, brought by current
or former employees pursuant to the Federal False Claims Act,
alleging that their institution’s compensation practices did
not comply with the incentive compensation rule. A qui tam case is
a civil lawsuit brought by one or more individuals, referred to as
a relator, on behalf of the federal government for an alleged
submission to the government of a false claim for payment. The
relator, often a current or former employee, is entitled to a share
of the government’s recovery in the case, including the
possibility of treble damages. A qui tam action is always filed
under seal and remains under seal until the government decides
whether to intervene in the case. If the government intervenes, it
takes over primary control of the litigation. If the government
declines to intervene in the case, the relator may nonetheless
elect to continue to pursue the litigation at his or her own
expense on behalf of the government. Any such litigation could be
costly and could divert management’s time and attention away
from the business, regardless of whether a claim has
merit.
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.
An
institution participating in Title IV programs must calculate the
amount of unearned Title IV program funds that it has disbursed to
students who withdraw from their educational programs before
completing such programs and must return those unearned funds to
the appropriate lender or the Department of Education in a timely
manner, generally within 45 days of the date the institution
determines that the student has withdrawn. If the unearned funds
are not properly calculated and timely returned for a sufficient
percentage of students, we may have to post a letter of credit in
favor of the Department of Education equal to 25% of Title IV
program funds that should have been returned for such students in
the prior fiscal year, and we could be fined or otherwise
sanctioned by the Department of Education. If we do not correctly
calculate and timely return unearned Title IV program funds, we may
have to post letters of credit in favor of the Department of
Education, may be liable for repayment of Title IV funds and
related interest and may otherwise be subject to adverse actions by
the Department of Education, including termination of our
participation in Title IV programs, any of which could increase our
cost of regulatory compliance and have a material effect on our
business, financial condition and results of
operations.
If any of our educational programs fail to qualify as programs that
lead to gainful employment in a recognized occupation, it could
reduce our enrollment and revenue, increase costs of operations,
and adversely affect our business.
Under
the Higher Education Act, proprietary schools generally are
eligible to participate in Title IV programs in respect of
educational programs that lead to “gainful employment in a
recognized occupation.” Historically, the concept of
“gainful employment” has not been defined in detail. On
October 31, 2014, the Department of Education published final
regulations to define “gainful employment” which became
effective on July 1, 2015. The gainful employment regulations
define this concept using ratios, one based on annual DTE and
another based on DTI ratio. Under the gainful employment
regulations, an educational program with a DTE ratio at or below 8%
or a DTI ratio at or below 20% is considered “passing.”
An educational program with a DTE ratio greater than 8% but less
than or equal to 12% or a DTI ratio greater than 20% but less than
or equal to 30% is considered to be “in the zone.” An
educational program with a DTE ratio greater than 12% and a DTI
ratio greater than 30% is considered “failing.” An
educational program will cease to be eligible for students to
receive Title IV program funds if its DTE and DTI ratios are
failing in to out of any three consecutive award years or if both
of these rates are failing or in the zone for four consecutive
award years. On January 9, 2017, the Department of Education issued
final debt-to-earnings rates to institutions for the first gainful
employment debt measurement year. For a discussion of the
performance of our current educational programs against the
required debt measures, see “Item 1. Business –
Regulatory Matters – Regulation of Federal Student Financial
Aid Programs.”
Additionally, the
gainful employment regulations require an institution to certify to
the Department of Education that its educational programs subject
to the regulations, which include all programs offered by us, meet
the applicable requirements for graduates to be professionally or
occupationally licensed or certified in the state in which the
institution is located. If we are unable to certify that our
programs meet the applicable state requirements for graduates to be
professionally or occupationally certified in that state, then we
may need to cease offering certain programs in certain states or to
students who are residents in certain states. The gainful
employment regulations further include requirements for the
reporting of student and program data by institutions to the
Department of Education and expand the disclosure requirements that
have been in effect since July 1, 2011.
On July
5, 2017, the Department of Education announced that it would allow
additional time, until July 1, 2018, for institutions to comply
with certain disclosure requirements in the gainful employment
regulations. On June 15,
2018, the Department of Education further announced that it would
allow additional time, until July 1, 2019, for institutions to
comply with those disclosure requirements.
On
August 14, 2018, the Department of Education published in the
Federal Register a proposed rule (the “Gainful Employment
Proposed Rule”) following a negotiated rulemaking process
that occurred from December 2017 through March 2018 and that failed
to achieve consensus. On July 1, 2019, following a public comment
period on the Gainful Employment Proposed Rule, the Department of
Education published final regulations (the “Gainful
Employment Final Rule”) rescinding the current gainful
employment regulations applicable to all of our educational
programs. Among other things, the Gainful Employment Final Rule
removes from the Department of Education’s regulations the
debt-to-earnings metric calculations for our programs, and
sanctions and alternate earnings appeals related to those
calculations, and related reporting, disclosure, and certification
requirements. Although the Gainful Employment Final Rule is not
effective until July 1, 2020, the Department of Education announced
on June 28, 2019 that it was exercising its discretion under the
Higher Education Act to permit postsecondary institutions to
implement the Gainful Employment Final Rule as early as July 1,
2019; however, institutions that do not early implement the Gainful
Employment Final Rule are expected to maintain compliance with the
current gainful employment regulations until July 1, 2020. NAU has
taken the steps described by the Department of Education’s
announcement of June 28, 2019 to implement the Gainful Employment
Final Rule as of July 1, 2019.
The
failure of any program or programs offered by NAU to satisfy any
gainful employment regulations could render that program or
programs ineligible for Title IV program funds. Additionally, any
gainful employment data released by the Department of Education
about our programs or warnings provided to students under the
regulations could influence current students not to continue their
studies, discourage prospective students from enrolling in our
programs or negatively impact our reputation. If a particular
educational program ceased to become eligible for Title IV program
funds, either because it fails to prepare students for gainful
employment in a recognized occupation or due to other factors, we
may choose to cease offering the program. We could also be required
to make changes to certain programs in the future in order to
comply with the regulations or to avoid the uncertainty associated
with such compliance. Any of these factors could materially affect
our business, financial condition and results of
operations.
We could be held liable for any misrepresentation regarding the
nature of our educational programs, financial charges and financial
assistance or the employability of our graduates.
An
institution participating in Title IV programs is prohibited from
making misrepresentations regarding the nature of its educational
programs, the nature of financial charges and availability of
financial assistance, or the employability of graduates. A
misrepresentation is defined in the regulations as any false,
erroneous or misleading statement to any student or prospective
student, any member of the public, an accrediting agency, a state
agency or the Department of Education. If we – or any entity,
organization, or person with whom we have an agreement to provide
educational programs or to provide marketing, advertising,
recruiting, or admissions services – commit a
misrepresentation for which a person could reasonably be expected
to rely, or has reasonably relied, to that person’s
detriment, the Department of Education could initiate proceedings
to revoke our Title IV eligibility, deny applications made by us,
impose fines, or initiate a limitation, suspension or termination
proceeding against us. Further, although the Department of
Education claims not to have created any private right of action,
the Department of Education’s recent modifications to its
misrepresentation regulations could increase risk of qui tam
actions under the False Claims Act.
If we fail to maintain adequate systems and processes to detect and
prevent fraudulent activity in student enrollment and financial
aid, our business could be materially adversely
affected.
Institutions of
higher education are susceptible to an increased risk of fraudulent
activity by outside parties with respect to student enrollment and
student financial aid programs. The Department of Education’s
regulations require institutions that participate in Title IV
programs to refer to the Office of Inspector General credible
information indicating that any applicant, employee, third-party
servicer or agent of the institution that acts in a capacity that
involves administration of the Title IV programs has been engaged
in any fraud or other illegal conduct involving Title IV programs.
We cannot be certain that our systems and processes will always be
adequate in the face of increasingly sophisticated and
ever-changing fraud schemes. The potential for outside parties to
perpetrate fraud in connection with the award and disbursement of
Title IV program funds, including as a result of identity theft,
may be heightened due to our offering various educational programs
via distance education. Any significant failure by NAU to
adequately detect fraudulent activity related to student enrollment
and financial aid could result in loss of accreditation, which
would result in the institution losing eligibility for Title IV
programs, or in direct action by the Department of Education to
limit or terminate NAU’s Title IV program participation. Any
of these outcomes could have a material adverse effect on our
business, financial condition and results of
operations.
If our students experience a loss or reduction of state financial
aid, we could be materially affected.
Some of
our students rely on state financial aid to fund a portion of their
education. Many states in which we operate have faced budget
constraints, which have caused or may cause them to reduce or
eliminate state appropriations, including with respect to the
amount of financial assistance provided to postsecondary students,
and additional states may reduce or eliminate such appropriations
in the future. In addition, state financial aid programs generally
are subject to annual appropriation by the state legislatures,
which may eliminate or significantly decrease the amount of state
financial aid available to students. We cannot predict whether
future reductions in state financial aid programs will occur or how
long such reductions will persist. For fiscal year ended May 31,
2019, we derived less than 1% of our total revenue from state
financial aid programs, although the percentage derived by each of
our campus locations may vary on an individual basis. The loss or
reduction of state financial aid could decrease our student
enrollment and could have a material effect on our
business.
A substantial decrease in private student financing options or a
significant increase in financing costs for our students could have
a material effect on us.
Some of
our eligible students have used private (i.e., non-Title IV) loan
programs to fund a portion of their education costs not covered by
Title IV program funds or state financial aid sources. Recent
adverse market conditions for consumer and federally guaranteed
student loans (including lenders’ increasing difficulties in
reselling or syndicating student loan portfolios) have resulted,
and could continue to result, in providers of private loans
reducing the availability of or increasing the costs associated
with providing private loans to postsecondary students. In
particular, loans to students with low credit scores who would not
otherwise be eligible for credit-based private loans have become
increasingly difficult to obtain. Prospective students may find
that these increased financing costs make borrowing prohibitively
expensive and abandon or delay enrollment in postsecondary
education programs. If our students are unable to finance their
education our student population could decrease, which would have a
material effect on our business, financial condition and results of
operations.
Government and regulatory agencies and third parties may conduct
compliance reviews, bring claims or initiate litigation against
us.
Because
we operate in a highly regulated industry, we may be subject to
compliance reviews and claims of non-compliance and lawsuits by
government agencies, regulatory agencies and third parties,
including claims brought by third parties on behalf of the federal
government. If the results of these reviews or proceedings are
unfavorable to us, or if we are unable to defend successfully
against lawsuits or claims, we may be required to pay money damages
or be subject to fines, limitations, loss of eligibility for Title
IV funding, injunctions or other penalties. Even if we adequately
address issues raised by an agency review or successfully defend a
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 to defend against those
lawsuits or claims. Additionally, we may experience adverse
collateral consequences as a result of any negative publicity
associated with such claims, including declines in student
enrollments and lessened willingness of third parties to do
business with us. Claims and lawsuits brought against us may damage
our reputation or cost us to incur expenses, even if such claims
and lawsuits are without merit.
Our regulatory environment and our reputation may be negatively
influenced by the actions of other postsecondary
institutions.
In
recent years, regulatory investigations and civil litigation have
been commenced against several postsecondary educational
institutions. These investigations and lawsuits have alleged, among
other things, deceptive trade practices and non-compliance with
Department of Education regulations. These allegations have
attracted adverse media coverage and have been the subject of
federal and state legislative hearings. Although the media,
regulatory and legislative focus has been primarily on the
allegations made against these specific companies, broader
allegations against the overall postsecondary sector may negatively
impact public perceptions of postsecondary educational
institutions, including us. Such allegations could result in
increased scrutiny and regulation by the Department of Education,
U.S. Congress, accrediting bodies, state legislatures or other
governmental authorities on all postsecondary
institutions.
If we close campus locations and affected students do not complete
their educational programs at another location or online, or
through transfer or teach-out with other postsecondary
institutions, we may be subject to repayment liabilities to the
U.S. Department of Education for discharged federal student
loans.
Department
of Education regulations provide that upon the closure of an
institution participating in the Title IV programs,
including
any
location thereof, certain students who had attended such an
institution or location may be eligible to obtain a “closed
school discharge” of their federal student loans related to
attendance at that institution or location, if they do not complete
their educational programs at another location or online, or
through transfer or teach-out with other postsecondary
institutions. In order to obtain a closed school discharge, a
student generally must have been enrolled or on an approved leave
of absence when the institution or location closed. Department of
Education regulations historically also provide that students who
withdraw from an institution or location within 120 days prior to
the closure may receive a closed school discharge; this time period
was expanded to 180 days under the 2016 Borrower Defense Final
Rule. Additionally, under the 2016 Borrower Defense Final Rule, the
Department of Education may grant automatic closed school
discharges to students who do not re-enroll in another Title
IV-participating institution within three years after becoming
unable to complete their educational program due to a closure of
their institution or institutional location. In the event that the
Department of Education grants closed school discharges to any
students affected by closures of our campus locations, it may
require NAU to repay those discharged amounts to it. We therefore
cannot predict the effect of such closures on our business,
financial condition, or results of operations.
Risks Related to Our Business
If we continue to decline in revenue and profitability, we may not
have adequate liquidity and capital resources to execute our
business plan.
The
Company has experienced a decrease in revenue since 2013 due to
enrollment declines at National American University, and this
long-term decline in revenue has resulted in increasing net losses
and decreases in our liquidity and capital resources. To counter
the decrease in net losses, the Company consolidated students at
most ground locations into online operations. The reduction of
overhead as the result of these campus closures, while maintaining
student services, has positively impacted operating cash flow and
cash balances relative to the prior fiscal year.
For the
year ended May 31, 2019, our cash used in operating activities was
$5.5 million. As of May 31, 2019, the Company had $1.3 million
of unrestricted cash and cash equivalents, $15.6 million of
restricted cash, and negative working capital of $11.0 million. The
negative working capital balance included $8.5 million related to a
long term note for which restricted cash is available to pay off
the debt. This cash position may not be sufficient to fund our
forecasted operating and cash requirements without additional
financing or other actions by management.
We operate in a highly competitive industry, and competitors with
greater resources could harm our business, decrease market share
and put downward pressure on our tuition rates.
The
postsecondary education market is highly fragmented and
competitive. We compete for students with traditional public and
private two-year and four- year colleges and universities, and
other for-profit schools, including those that offer online
learning programs, and alternatives to higher education, such as
employment and military service. Many public and private schools,
colleges and universities, including most major colleges and
universities, offer online programs. We expect to experience
additional competition in the future as more colleges, universities
and for-profit schools offer an increasing number of online
programs. Public institutions receive substantial government
subsidies, and public and private non-profit institutions have
access to government and foundation grants, tax-deductible
contributions and other financial resources generally not available
to for-profit schools. Accordingly, public and private nonprofit
institutions may have instructional and support resources superior
to those in the for-profit sector, and public institutions can
offer substantially lower tuition prices. Some of our competitors
in both the public and private sectors also have substantially
greater financial and other resources than us. We may not be able
to compete successfully against current or future competitors and
may face competitive pressures that could have a material effect on
our business, financial condition and results of
operations.
Our online and distance learning programs operate in a highly
competitive market with rapid technological changes.
Online
education is a highly fragmented and competitive market subject to
rapid technological change. Competitors vary in size and
organization from traditional colleges and universities, many of
which offer some form of online education programs, to for-profit
schools and software companies providing online education and
training software. We expect the online education and training
market to be subject to rapid changes in delivery, interaction and
other future innovation and advancement. Our success will depend,
in part, on our ability to adapt to changing technologies in online
and distance learning and offer an attractive online/distance
education option while maintaining competitive pricing.
Furthermore, the expansion of our online programs and the
development of new programs may not be accepted by the online
education market. In addition, a general decline in Internet use
for any reason, including due to security or privacy concerns, the
cost of Internet service or changes in government regulation of
Internet use, may result in less demand for online educational
services, in which case we may not be able to recruit and retain
students and grow our online programs as planned. Accordingly, if
we are unable to keep pace with changes in technology or maintain
technological relevance, or if the use of the Internet changes, our
business, financial condition and results of operations may be
adversely affected.
If our graduates are unable to obtain professional licenses or
certifications in their chosen field of study, we may face
declining enrollments and revenues or be subject to student
litigation.
Certain
students, particularly in the healthcare programs, require or
desire professional licenses or certifications after graduation to
obtain employment in their chosen fields. Their success in
obtaining such licensure depends on several factors, including the
individual merits of the student, whether the institution and the
program were approved by the state or by a professional
association, whether the program from which the student graduated
meets all state requirements and whether the institution is
accredited. If one or more states refuses to recognize our
graduates for professional licensure in the future based on factors
relating to us or our programs, the potential growth of our
programs would be negatively impacted, which could have a material
effect on our business, financial condition and results of
operations. In addition, we could be exposed to litigation that
would force us to incur legal and other expenses that could have a
material effect on our business, financial condition and results of
operations.
The payment and amount of future dividends is subject to Board of
Director discretion and to various risks and
uncertainties.
The
payment and amount of future quarterly dividends is within the
discretion of the Board of Directors and will depend on factors the
Board deems relevant at the time declaration of a dividend is
considered. These factors include, but are not limited to:
available cash; management’s expectations regarding future
performance and free cash flow; and the effect of various risks and
uncertainties described in this “Risk Factors”
section.
Our financial performance depends on our ability to continue to
develop awareness among, and attract and retain, new
students.
Building
awareness of NAU and the programs and services we offer is critical
to our ability to attract prospective students. If we are unable to
successfully market and advertise our educational programs, our
ability to attract and enroll students could be adversely affected,
and, consequently, our ability to increase revenue or generate
profitability could be impaired. It is also critical to our success
that we convert prospective students to enrolled students in a
cost-effective manner and that these enrolled students remain
active in our programs. Some of the factors that could prevent us
from successfully enrolling and retaining students
include:
●
the
reduced availability of, or higher interest rates and other costs
associated with, Title IV loan funds or other sources of financial
aid;
●
the
emergence of more successful competitors;
●
factors
related to our marketing, including the costs and effectiveness of
Internet advertising and broad-based branding campaigns and
recruiting efforts;
●
performance
problems with our online systems;
●
failure
to maintain institutional and specialized
accreditations;
●
failure
to obtain and maintain required state authorizations;
●
the
requirements of the education agencies that regulate us that
restrict the initiation of new locations, new programs and
modification of existing programs;
●
the
requirements of the education agencies that regulate us that
restrict the ways schools can compensate their recruitment
personnel;
●
increased
regulation of online education, including in states in which we do
not have a physical presence;
●
restrictions that
may be imposed on graduates of online programs that seek
certification or licensure in certain states;
●
student
dissatisfaction with our services and programs;
●
adverse
publicity regarding us, our competitors, or online or for-profit
education generally;
●
price
reductions by competitors that we are unwilling or unable to
match;
●
a
decline in the acceptance of online education;
●
an
adverse economic or other development that affects job prospects in
our core disciplines;
●
a
decrease in the perceived or actual economic benefits that students
derive from our programs;
●
litigation or
regulatory investigations that may damage our reputation;
and
●
changes
in the general economy, including employment.
If, for
any reason or reasons, including those presented above, we are
unable to maintain and increase our awareness among prospective
students, recruit students and convert prospective students into
enrolled students, our business, financial condition and results of
operations could be adversely affected.
Our growth may place a strain on our resources that could adversely
affect our systems, controls and operating efficiency.
We
believe that future growth will be based upon an expansion of our
current programs, the addition of new programs, an increase in our
online presence, affiliation agreements and increasing enrollments.
The growth and expansion of our domestic and international
operations may place a significant strain on our resources and
increase demands on our management information and reporting
systems, financial management controls and personnel. Any failure
to effectively manage or maintain growth could have a material
effect on our business, financial condition and results of
operations.
If we cannot maintain student enrollments, our results of
operations may be adversely affected.
Our
strategy for growth and profitability depends, in part, upon the
retention of our students. While we provide certain services to our
students (e.g., tutoring) in an effort to retain students and lower
attrition rates, many of our students face financial, personal or
family constraints that require them to withdraw within a term or
at the end of a given term. Additionally, some students may decide
to continue their education at a different institution. If for any
reason, we are unable to predict and manage student attrition, our
overall enrollment levels would likely decline, which could have a
material effect on our business, financial condition and results of
operations.
If the proportion of students who are enrolled in our Associate
degree programs increases, we may experience increased costs and
reduced margins.
If
increases in Associate degree programs take effect, we may
experience additional consequences, such as higher costs per start,
lower retention rates, higher student services costs, an increase
in the percentage of our revenue derived from Title IV programs
under the 90/10 Rule, more limited ability to implement tuition
price increases and other effects that could have a material effect
on our business, financial condition and results of
operations.
An increase in interest rates could adversely affect our ability to
attract and retain students.
For the
fiscal years ended May 31, 2019 and 2018, NAU derived cash receipts
equal to approximately 78.2% and 82.1%, respectively, of its net
revenue from tuition financed under Title IV programs, which
include student loans with interest rates subsidized by the federal
government. Additionally, some students finance their education
through private loans that are not subsidized. If our
students’ employment circumstances are adversely affected by
regional or national economic downturns, they may be more heavily
dependent on student loans. Interest rates have reached relatively
low levels in recent years, creating a favorable borrowing
environment for students. However, if interest rates increase or
Congress decreases the amount available for Title IV funding, our
students may have to pay higher interest rates on their loans. Any
future increase in interest rates will result in a corresponding
increase in educational costs to our existing and prospective
students, which could result in a significant reduction in our
student population and revenues. Higher interest rates could also
contribute to higher default rates with respect to our
students’ repayment of their education loans. Higher default
rates may in turn adversely impact our eligibility to participate
in some or all of the Title IV programs, which could result in a
material effect on our enrollments and future growth prospects and
our business, financial condition and results of
operations.
Our reputation and the value of our stock may be negatively
affected by the actions of other postsecondary educational
institutions.
In
recent years, regulatory proceedings and litigation have been
commenced against various postsecondary educational institutions
relating to, among other things, deceptive trade practices, false
claims against the government and non-compliance with Department of
Education requirements, state education laws and state consumer
protection laws. These proceedings have been brought by students,
the Department of Education, the United States Department of
Justice, the SEC and state governmental agencies, among others.
These allegations have attracted adverse media coverage and have
been the subject of legislative hearings and regulatory actions at
both the federal and state levels, focusing not only on the
individual schools but in some cases on the larger for-profit
postsecondary education sector as a whole. Adverse media coverage
regarding other for-profit education companies or other educational
institutions could damage our reputation, result in lower
enrollments, revenues and results of operations and have a negative
impact on the value of our stock. Such coverage could also result
in increased scrutiny and regulation by the Department of
Education, Congress, accrediting commissions, state legislatures,
state attorneys general, state education agencies or other
governmental authorities of all educational institutions, including
us.
Our expansion into new markets outside the United States will
subject us to risks inherent in international operations, are
subject to significant start- up costs and will place strain on our
management.
As part
of our growth strategy, we intend to continue to establish markets
outside the United States, subject to approvals from the HLC and
other appropriate accrediting or regulatory agencies. Our
operations in each of the foreign jurisdictions may subject us to
additional educational and other regulations of foreign
jurisdictions, which may differ materially from the regulations
applicable to our domestic operations. Such international expansion
is expected to require a significant amount of start-up costs.
Additionally, our management does not have significant experience
in operating a business at the international level. As a result, we
may be unsuccessful in carrying out our plans for international
expansion, obtaining the necessary licensing, permits or market
saturation, or in successfully navigating other challenges posed by
operating an international business.
If we do not maintain existing and develop additional relationships
with employers, our future growth may be impaired.
Currently,
we have relationships with certain employers to provide their
employees with an opportunity to enroll in classes and obtain
degrees through us while maintaining their employment. These
relationships are an important part of our strategy because they
provide us with a steady source of potential working adult students
for particular programs and increase our reputation among
employers. If we are unable to develop new relationships or
maintain our existing relationships, this source of potential
students may be impaired and enrollments and revenue may decrease,
any of which could have a material effect on our business,
financial condition and results of operations.
If students fail to pay their outstanding balances, our business
may be harmed.
From
time to time, students may carry balances on portions of their
education expense not covered by financial aid programs. These
balances are unsecured and not guaranteed. Furthermore, disruptive
economic events could adversely affect the ability or willingness
of our former students to repay student loans, which may increase
our student loan cohort default rate and require the devotion of
increased time, attention and resources to manage these defaults.
As a result, losses related to unpaid student balances in excess of
the amounts we have reserved for bad debts, or the failure of
students to repay their debt obligations, could have a material
effect on our business, financial condition and results of
operations.
Government regulations relating to the Internet could increase our
cost of doing business and affect our ability to grow.
The
increasing popularity and use of the Internet and other online
services has led and may lead to the adoption of new laws and
regulatory practices in the United States or foreign countries and
to new interpretations of existing laws and regulations. These new
laws and interpretations may relate to issues such as online
privacy, copyrights, trademarks and service marks, sales taxes,
fair business practices and the requirement that online education
institutions qualify to do business as foreign corporations or be
licensed in one or more jurisdictions where they have no physical
location. As the proportion of our students who take online courses
increases, new laws, regulations or interpretations related to
doing business over the Internet could increase our costs of
compliance or doing business and materially affect our ability to
offer online courses, which would have a material effect on our
business, financial condition and results of
operations.
Our financial performance depends, in part, on our ability to keep
pace with changing market needs.
Increasingly,
prospective employers of NAU students require their new employees
to possess appropriate technological skills and interpersonal
skills, such as communication, critical thinking and teamwork
skills. These skills evolve rapidly in a changing economic and
technological environment. Accordingly, it is important for our
programs to evolve in response to those economic and technological
changes. The expansion of existing programs and the development of
new programs may not be accepted by current or prospective students
or the employers of our graduates. Even if NAU is able to develop
acceptable new programs, we may not be able to begin offering those
new programs as quickly as required by prospective employers or as
quickly as our competitors offer similar programs. In addition, we
may be unable to obtain specialized accreditations or licensures
that may make certain programs desirable to students. To offer a
new academic program, NAU may be required to obtain appropriate
federal, state and accrediting agency approvals that may be
conditioned or delayed in a manner that could significantly affect
our growth plans. In addition, to be eligible for Title IV
programs, a new academic program may need to be approved by the
Department of Education, the HLC and state educational agencies. If
we are unable to adequately respond to changes in market
requirements due to regulatory or financial constraints, unusually
rapid technological changes or other factors, our ability to
attract and retain students could be impaired, the rates at which
our graduates obtain jobs involving their fields of study could
suffer and our reputation among students, prospective students and
employers may be impaired, which could have a material effect on
our business, financial condition and results of
operations.
Establishing
new academic programs or modifying existing programs requires us to
invest in management and business development, incur marketing
expenses and reallocate other resources. We may have limited
experience with any courses in new academic areas and may need to
modify our systems, strategy and delivery platform or enter into
arrangements with other educational institutions to provide such
programs effectively and profitably. If we are unable to offer new
courses and programs in a cost-effective manner, or are otherwise
unable to effectively manage the operations of newly established
academic programs, it could have a material effect on our business,
financial condition and results of operations.
Capacity constraints of our computer networks and changes to the
acceptance and regulation of online programs could have a material
effect on student retention and growth.
If we
are successful in increasing student enrollments, additional
resources in the forms of human, intellectual and financial
capital, as well as information technology resources, will be
necessary. We have invested and continue to invest significant
resources in information technology when such technology systems
and tools have become impaired or obsolete. In an attempt to
utilize recent technology, we could install new information
technology systems without accurately assessing its costs or
benefits or experience delayed or ineffective implementation of new
information technology systems. Similarly, we could fail to respond
in a timely or sufficiently competitive way to future technological
developments in our industry. As a result, this growth may place a
significant strain on our operational resources, including our
computer networks and information technology infrastructure,
thereby restricting our ability to enroll and retain students and
grow our online programs.
System disruptions and security threats to our computer networks
could have a material effect on our ability to attract and retain
students.
The
performance and reliability of our computer network infrastructure
is critical to our reputation and ability to attract and retain
students. Any computer system error or failure, or a sudden and
significant increase in traffic on our computer networks, including
those that host our online programs, may cause network outages and
disrupt our online and on-ground operations that may damage our
reputation.
Additionally,
we face a number of threats to our computer systems, including
unauthorized access, computer hackers, computer viruses and other
security problems and system disruptions. We have devoted and will
continue to devote significant resources to the security of our
computer systems, but they are still vulnerable to security
threats. A user or hacker who circumvents security measures could
misappropriate proprietary information or cause interruptions or
malfunctions in operations. As a result, we expend significant
resources to protect against the threat of these system disruptions
and security breaches and may have to spend more to alleviate
problems caused by these disruptions and breaches, which could have
a material effect on our reputation, ability to retain and store
data and our business, financial condition and results of
operations.
A failure of our information systems to store, process and report
relevant data may reduce management’s effectiveness,
interfere with regulatory compliance and increase operating
expenses.
We are
heavily dependent on the integrity of our data management systems.
If these systems do not effectively collect, store, process and
report relevant data for the operation of our business, whether due
to equipment malfunction or constraints, software deficiencies or
human error, our ability to plan, forecast and execute our business
plan and comply with applicable laws and regulations, including the
Higher Education Act, will be impaired. Any such impairment of our
information systems could materially affect our reputation and our
ability to provide student services or accurately budget or
forecast operating activity, thereby adversely affecting our
financial condition and results of operations.
The personal information that we collect may be vulnerable to
breach, theft or loss, and could subject us to liability or
adversely affect our reputation and operations.
Possession
and use of personal information in our operations subjects us to
risks and costs that could harm our business and reputation. We
collect, use and retain large amounts of personal information
regarding our students and their families, including social
security numbers, tax return information, personal and family
financial data and credit card numbers. We also collect and
maintain personal information of our employees in the ordinary
course of business. Some of this personal information is held and
managed by certain of our vendors. Although we use security and
business controls to limit access and use of personal information,
a third party may be able to circumvent those security and business
controls, which could result in a breach of student or employee
privacy. In addition, errors in the storage, use or transmission of
personal information could result in a breach of student or
employee privacy. Possession and use of personal information in our
operations also subjects us to U.S. federal and state legislative
and regulatory burdens that could require us to implement certain
policies and procedures, such as the procedures we adopted to
comply with the Red Flags Rule that was promulgated by the Federal
Trade Commission under the federal Fair Credit Reporting Act, which
requires the establishment of guidelines and policies regarding
identity theft related to student credit accounts, and could
require us to make certain notifications of data breaches and
restrict our use of personal information. The risk of hacking and
cyber-attacks has increased, as has the sophistication of such
attacks, including email phishing schemes targeting employees to
give up their credentials. We cannot provide any assurances that a
breach, loss, or theft of personal information will not occur. A
breach, theft, or loss of personal information regarding our
students and their families or our employees that is held by us or
our vendors could have a material adverse effect on our reputation
and results of operations and result in liability under U.S.
federal and state privacy statutes and legal actions by state
authorities and private litigants, any of which could have a
material adverse effect on our business. Moreover, certain of our
operations may involve the collection of personal information from
individuals outside the U.S., which may render us subject to global
privacy and data security laws. For example, the European Union
General Data Protection Regulation (“GDPR”), which
became enforceable May 25, 2018, contains a number of requirements
that are different from or exceed those in U.S. federal and state
privacy and data security laws. The GDPR may apply to certain of
our operations. Were it to apply and if we were out of compliance,
there is the potential for administrative, civil, or criminal
liability with significant monetary penalties as well as
reputational harm to us and our employees.
We may incur liability for the unauthorized duplication or
distribution of class materials posted online for class
discussions.
In some
instances, our faculty members or students may distribute to
students in class or post various articles or other third-party
content on class discussion boards. We may incur liability for the
unauthorized duplication or distribution of this material
distributed in class or posted online for class discussions. As a
for-profit organization, we may be subject to a greater risk of
liability for the unauthorized duplication of materials under the
Copyright Act than a non-profit institution of higher education.
Third parties may raise claims against us for the unauthorized
duplication of this material. Any such claims could subject us to
costly litigation and impose a significant strain on financial
resources and management personnel, regardless of whether the
claims have merit. Our general liability insurance may not cover
potential claims of this type adequately or at all, and we may be
required to alter the content of our courses or pay monetary
damages, which could have a material effect on our business,
financial condition and results of operations.
We rely on exclusive proprietary rights and intellectual property
that may not be adequately protected under current
laws.
Our
success depends, in part, on our ability to protect our proprietary
rights and intellectual property. We rely on a combination of
copyrights, trademarks, trade secrets, domain names and contractual
agreements to protect our proprietary rights. We rely on trademark
protection in both the United States and certain foreign
jurisdictions to protect our rights to various marks, as well as
distinctive logos and other marks associated with them. We also
rely on agreements under which we obtain intellectual property or
license rights to own or use content developed by faculty members,
content experts and other third-parties. We cannot assure that
these measures are adequate, that we have secured, or will be able
to secure, appropriate protections for all of our proprietary
rights in the United States or any foreign jurisdictions, or that
third parties will not terminate license rights or infringe upon or
otherwise violate our proprietary rights. Despite our efforts to
protect these rights, unauthorized third parties may attempt to
infringe our trademarks, use, duplicate or copy the proprietary
aspects of our student recruitment and educational delivery
methods, curricula, online resource material and other content. Our
management’s attention may be diverted by these attempts and
we have in the past, and may in the future, need to use funds in
litigation to protect our proprietary rights against any
infringement or violation, which could have a material effect on
our business, financial condition and results of
operations.
We may be involved in disputes from time to time relating to our
intellectual property and the intellectual property of third
parties.
We have
in the past, and may in the future, become parties to disputes from
time to time over rights and obligations concerning intellectual
property, and we may not always prevail in these disputes. Third
parties may allege that we have not obtained sufficient rights in
the content of a course or other intellectual property. Third
parties may also raise claims against us alleging infringement or
violation of the intellectual property of that third party. Some
third party intellectual property rights may be extremely broad,
and it may not be possible for us to conduct our operations in such
a way as to avoid violating those intellectual property rights. Any
such intellectual property claim could subject us to costly
litigation and impose a significant strain on our financial
resources and management personnel regardless of whether such claim
has merit. Our general liability and cyber liability insurance, if
any, may not cover potential claims of this type adequately or at
all, and we may be required to alter the content of our courses or
pay monetary damages or license fees to third parties, which could
have a material effect on our business, financial condition and
results of operations.
We may not be able to retain key personnel or hire and retain the
personnel we need to sustain and grow our business.
Our
success depends largely on the skills, efforts and motivations of
our executive officers, who have significant experience with our
business and within the education industry. Due to the nature of
the education industry, we face significant competition in
attracting and retaining personnel who possess the skills necessary
to sustain and grow our business. The loss of the services of any
of our key personnel, or failure to attract and retain other
qualified and experienced faculty members and staff members on
acceptable terms, could impair our ability to sustain and grow our
business.
Our business may be affected by changing economic
conditions.
The
United States economy and the economies of other key industrialized
countries currently have recessionary characteristics, including
reduced economic activity, increased unemployment and substantial
uncertainty about the financial markets. In addition, homeowners in
the United States have experienced an unprecedented reduction in
wealth due to the decline in residential real estate values across
much of the country. The reduction in wealth, unavailability of
credit and unwillingness of employers to sponsor non-traditional
educational opportunities for their employees could have a material
effect on our business, financial condition and results of
operations.
Terrorist attacks and other acts of violence or war, natural
disasters or breaches of security could have an adverse effect on
our operations.
Terrorist
attacks and other acts of violence or war, hurricanes, earthquakes,
floods, tornadoes and other natural disasters or breaches of
security at our educational sites could disrupt our operations.
Terrorist attacks and other acts of violence or war, natural
disasters or breaches of security that directly impact our physical
facilities, online offerings or ability to recruit and retain
students and employees could adversely affect our ability to
deliver our programs to our students and, thereby, adversely affect
our business, financial condition and results of operations.
Furthermore, terrorist attacks and other acts of violence or war,
natural disasters or breaches of security could adversely affect
the economy and demographics of the affected region, which could
cause significant declines in the number of our students in that
region and could have a material effect on our business, financial
condition and results of operations.
Risks Related to Ownership of our Common Stock
Our common stock has been delisted from Nasdaq Global Market and is
now traded on OTCQB.
The
Company’s common stock was listed as “NAUH” on
Nasdaq Global Market through January 17, 2019, at which time the
Company voluntarily delisted and transferred its listing to the
OTCQB Market. The delisting and transfer resulted from (i) the
market value of the Company’s publicly held shares no longer
meeting the requirement to maintain a minimum Market Value of
Publicly Held Shares of $5,000, as set forth in Nasdaq Listing Rule
5450(b)(1)(C), (ii) a consideration of the probability of the
Company regaining compliance, (iii) the common stock’s
current trading volume and price, and (iv) the costs of maintaining
eligibility to list the Company’s common stock on the Nasdaq
Global Market.
Our
common stock is now traded on the OTCQB Market and therefore may
have less liquidity and may experience more price volatility than
on Nasdaq. Stockholders may not be able to sell their shares of
common stock on the OTCQB Market in the quantities, at the times,
or at the prices that may be available on a more liquid trading
market. The delisting of our common stock from Nasdaq could also
adversely affect our ability to obtain financing for our operations
and/or result in a loss of confidence by investors or
employees.
Our common stock may be deemed to be a “penny stock”
and broker-dealers who make a market in our stock may be subject to
additional compliance requirements.
If our
common stock is deemed to be a “penny stock” as defined
in the Securities Exchange Act of 1934, broker-dealers who make a
market in our stock will be subject to additional sales practice
requirements for selling our common stock to persons other than
established customers and accredited investors. For instance, the
broker-dealer must make a special suitability determination for the
purchaser and receive the purchaser’s written agreement to
the transaction prior to the sale. Consequently, the penny stock
rules, if applicable, would affect the ability or willingness of
broker-dealers to sell our securities, and accordingly could affect
the ability of stockholders to sell their securities in the public
market. These additional procedures may also limit our ability to
raise additional capital in the future.
The trading price of our common stock has been volatile and is
likely to be volatile in the future.
The
trading price of our common stock has been highly volatile and may
be more volatile now that it trades on the OTCQB Market and not
Nasdaq Global Market. The market price for our common stock will be
affected by a number of factors, including:
●
Overall market
conditions
●
Cost elimination in
the discontinued operations and
●
Liquidity available
to achieve the business plan of the Company
Following
periods of volatility in the market price of a company’s
securities, securities class action litigation often has been
initiated against a company. If class action litigation is
initiated against us, we may incur substantial costs and our
management’s attention may be diverted from our operations,
which could significantly harm our business.
Since our securities are currently quoted on the OTCQB Market, our
stockholders may face significant restrictions on the resale of our
securities due to state “blue sky” laws.
Each
state has its own securities laws, often called “blue
sky” laws, which (i) limit sales of securities to a
state’s residents unless the securities are registered in
that state or qualify for an exemption from registration, and (ii)
govern the reporting requirements for broker-dealers doing business
directly or indirectly in the state. Before a security is sold in a
state, there must be a registration in place to cover the
transaction, or the transaction must be exempt from registration.
The applicable broker must be registered in that state. We do not
know whether our common stock will be registered or exempt from
registration under the laws of any state. Since our common stock is
currently quoted on the OTCQB, a determination regarding
registration will be made by those broker-dealers, if any, who
agree to serve as the market-makers for our common stock. There may
be significant state blue sky law restrictions on the ability of
investors to sell, and on purchasers to buy, our common stock.
Investors should therefore consider the resale market for our
common stock to be limited, as they may be unable to resell our
common stock without the significant expense of state registration
or qualification.
We do not expect to pay dividends in the future, and any return on
investment may be limited to the value of our common
stock.
Although
we have paid dividends on our common stock in the past, we do not
anticipate paying dividends on our common stock in the foreseeable
future. The payment of any dividends in the future will be at the
discretion of our board of directors and will depend upon our
financial condition, results of operations, earnings, capital
requirements, contractual restrictions, outstanding indebtedness
and other factors deemed relevant by our board of
directors.