Significant factors relating to Title IV Programs that could adversely affect us include the following:
On November 1, 2016,2022, the DOE published in the Federal Register the final version of these regulations on Borrower Defense to Repayment and other topics with a general effective date of July 1, 20172023. The final regulations are extensive and which, amonggenerally make it easier for borrowers to obtain discharges of student loans and for the DOE to assess liabilities and other sanctions on institutions based on the loan discharges. Among other things, include rules for:
| · | establishing new processes, and updating existing processes, for enabling borrowers to obtain from the DOE a discharge of some or all of their federal student loans based on circumstances such as certain acts or omissions of the institution and for the DOE to impose and collect liabilities against the institution following the loan discharges; |
| · | establishing expanded standards of financial responsibility (see “Regulatory Environment – Financial Responsibility Standards”); |
| · | requiring institutions to make disclosures to current and prospective students regarding the existence of certain of the circumstances identified in the expanded standards of financial responsibility; |
| · | calculating a loan repayment rate for each proprietary institution under standards established by the regulations and requiring institutions to provide warnings to current and prospective students if the institution has a loan repayment rate below specified thresholds; |
| · | prohibiting certain contractual provisions imposed by or on behalf of schools on students regarding arbitration, dispute resolution, and participation in class actions; and |
| · | expanding the existing definition of misrepresentations that could result in grounds for discharge of student loans and in liabilities and sanctions against the institution, including, without limitation, potential loss of Title IV eligibility. |
On January 19, 2017, the DOE issuedfinal regulations establish a new regulationsprocess and standard for evaluating borrower applications for loan discharges that updatewould apply to all claims submitted or pending as of the Department’s hearing procedures for actions to establish liability against an institution and to establish procedural rules governing recovery proceedings under the DOE’s borrower defense to repayment regulations.
The DOE delayed the effective date of a majority of these regulations untilanticipated July 1, 2019 to ensure that there is adequate time to conduct negotiated rulemaking and, as necessary, develop revised regulations. The DOE has not established a final schedule. Any regulations published in final form by November 1, 2018 typically would take effect on July 1, 2019, but we cannot provide any assurances as to the timing or content of any such regulations or whether and when the DOE might end the delay in the2023 effective date of the previously published regulations. The new process and standard differ from the prior regulations that established a separate process and standard for each of three categories of loans depending on the date the loans were disbursed to students (i.e., prior to July 1, 2017, between July 1, 2017 and June 30, 2020, and on or after July 1, 2020). As a result, the new process and standard will apply not only to loans disbursed on or after July 1, 2023, but also to older loans as long as the discharge requests are still pending as of July 1, 2023 or are submitted on or after July 1, 2023.
The final DOE regulations continue to permit the imposition of liabilities on institutions for the amount of discharged loans. For loans disbursed prior to July 1, 2023, the DOE indicated that it will not use the same standard for determining institutional liabilities under the new regulations as it will use for determining whether to discharge the loans. Instead, the DOE indicated that it will seek recoupment from an institution for such loans only if they would have been discharged under the standards used under current regulations based on the date the loans were disbursed to students. However, the new regulations will make it easier for the DOE to recover from the institution the liabilities that the DOE elects to impose.
The new regulations also expand the types of conduct that could result in a discharge of student loans including: 1) an expanded list of substantial misrepresentations; 2) a new section regarding substantial omissions of fact; 3) breaches of contract; 4) a new section regarding aggressive and deceptive recruitment; or 5) state or federal judgments or final DOE actions that could result in a borrower defense claim. Some of these forms of conduct also could result in other sanctions against the institutions. See Part I, Item 1. “Business – Regulatory Environment – Substantial Misrepresentation.” The new regulations also make it easier for borrowers to qualify for loan discharges by enabling the DOE to permit group consideration of borrower claims under certain circumstances either on its own initiative or at the request of state requestors or certain third-party legal assistance organizations (which could enable the DOE to evaluate and rule on a broad group of claims more quickly than evaluating the claims individually), establishing a rebuttable presumption that borrowers in a group claim reasonably relied on (and were impacted by) acts or omissions giving rise to a borrower defense, establishing a Borrower Defense to Repayment claim based on a separate state law standard if the DOE does not approve claims based on one of the other types of conduct for borrowers with loans first disbursed prior to July 1, 2017, and providing the DOE with the discretion to reopen its decisions at any time in accordance with regulatory requirements
The new regulations also reinstitute a general prohibition on institutions requiring borrowers to agree to mandatory pre-dispute arbitration agreements and requiring students to waive the ability to participate in a class-action lawsuit with respect to a borrower defense claim. The new regulations also require institutions to disclose publicly and notify the DOE of judicial and arbitration filings and awards pertaining to borrower defense claims. The new regulations also include provisions on other topics including public service loan forgiveness, eliminating capitalization on student loans in some cases, total and permanent disability discharges, and closed school loan discharges (see “Closed School Loan Discharges”), and false certification discharges (e.g., when an institution falsely certifies an ineligible student’s eligibility for loans).
We cannot predict howare in the process of evaluating the impact of these new and complex regulations on our business and the changes from the proposed regulations, butthe final regulations impose new requirements and processes that will make it easier for borrowers to obtain discharges of their loans and for the DOE to recover liabilities from institutions and impose other sanctions. See Part I, Item 1. “Business – Regulatory Environment – Negotiated Rulemaking.”
In April 2021, the Company received communication from the DOE indicating that the DOE was in receipt of a number of borrower defense applications containing allegations concerning our schools and requiring that the DOE undertake a fact-finding process pursuant to DOE regulations. Among other things, the communication outlines a process by which the DOE would interpretprovide to us the applications and enforceallow us the newopportunity to submit responses to them. Further, the communication outlines certain information requests, relating to the period between 2007 and 2013, in connection with the DOE’s preliminary review of the borrower defense applications. Based upon publicly available information, it appears that the DOE has undertaken similar reviews of other educational institutions which have also been the subject of various borrower defense applications. We have received the borrower application claims and have completed the process of thoroughly reviewing and responding to repayment rules if they take effect aftereach borrower application as well as providing information in response to the delay or how these rules, or any rules that may arise outDOE’s requests.
We are not able to predict the outcome of the negotiated rulemaking process,DOE’s review at this time. If the DOE disagrees with our legal and factual grounds for contesting the applications, the DOE may impact our schools’ participationimpose liabilities on the Company based on the discharge of the loans at issue in the Title IV Programs; however, the new rulespending applications, which could have a material adverse effect on our schools’ business and results of operations,operations. If the proposed Borrower Defense to Repayment regulations take effect on July 1, 2023, and if any or all of the Borrower Defense to Repayment applications remain pending, the DOE could attempt to apply the new regulations to the pending applications which could increase the likelihood of the DOE granting the application because the proposed regulations are more favorable to borrowers.
In August 2022, the Company received communication from the DOE regarding a single borrower defense application submitted on behalf of a group of students who were enrolled in a single educational program at two of our schools in Massachusetts between 2010 and 2013. The communication, which did not state who submitted the application or when it was submitted, asked us to submit a response within 60 calendar days. We timely responded to the DOE’s letter, notwithstanding the absence of a response to our request for additional information about the student claims. We are waiting for the DOE’s reply to our response and to our request for information about the student claims. Given the early stage of this matter, management is not able to predict the outcome of the DOE’s review at this time. If the DOE disagrees with our legal and factual grounds for contesting the application, the DOE may impose liabilities on the Company based on the discharge of the loans at issue in the pending application, which could have a material adverse effect on our business and results of operations.
On June 22, 2022, the DOE and the broad sweepplaintiffs in a lawsuit before a federal court in California submitted a proposed settlement agreement to the court. The plaintiffs contend, among other things, that the DOE failed to timely decide and resolve Borrower Defense to Repayment applications submitted to the DOE. If approved, the settlement would result in full discharge and refund payments to covered student borrowers who have asserted a Borrower Defense to Repayment to the DOE and whose borrower defense claims have not yet been granted or denied on the merits.
The lawsuit, Sweet v. Cardona, No. 3:19-cv-3674 (N.D. Cal.), is a class action filed on June 25, 2019 against the DOE in the U.S. District Court for the Northern District of California submitted by a group of students, none of whom attended any of our institutions. We were not a party to the lawsuit when it was filed. The plaintiffs requested that the court compel the DOE to start approving or denying the pending applications. The court granted class certification and defined the class of plaintiffs generally to include all people who borrowed a Title IV Direct loan or FFEL loan, who have asserted a Borrower Defense to Repayment claim to the DOE, and whose borrower defense claim has not been granted or denied on the merits. We have not received notice or confirmation directly from the DOE of the rulesnumber of student borrowers who have submitted Borrower Defense to Repayment claims related to our institutions.
The proposed settlement agreement includes a long list of institutions, including Lincoln Technical Institute and Lincoln College of Technology. Under the proposed settlement, the DOE would agree to discharge loans and refund all prior loan payments to each class member with loan debt associated with an institution on the list (which includes our institutions), including borrowers whose applications the DOE previously denied after October 30, 2019. The DOE and the plaintiffs stated in a court filing that this provision is intended to provide for automatic relief for students at the listed schools which the DOE estimates to total 200,000 class members. We anticipate that the DOE believes that the class includes the borrowers with claims to which we have submitted responses to the DOE although it is possible that the class also includes borrowers with claims for which we have not received notice from the DOE or an opportunity to respond. The parties also stated that the DOE has determined that attendance at one of the institutions on the list justifies presumptive relief based on strong indicia regarding substantial misconduct by the institutions, whether credibly alleged or in some instances proven, and the high rate of class members with applications related to the listed schools. The proposed settlement agreement provides a separate process for reviewing claims associated with schools that are not on the list. It is unclear whether the DOE would seek to impose liabilities on us or other schools or take other actions or impose other sanctions on us or other schools based on relief provided to students under the proposed settlement agreement (particularly if the DOE provides relief without evaluating or accounting for legal and factual information provided to the DOE by us and other schools or without providing us and other schools with notice and an opportunity to respond to some of the claims).
In July 2022, the Company and certain other school companies submitted motions to intervene in the lawsuit in order to protect our interests in the finalization and implementation of any settlement agreement that the court might approve. We noted in the motion that the proposed settlement agreement introduced, for the first time, the prospect that the DOE would “automatically” and fully discharge loans and refund payments to student borrowers without adjudication of the merits of the students’ borrower-defense applications in accordance with the DOE’s borrower-defense regulations and without ensuring that we and other institutions can defend against allegations asserted in individual borrower-defense applications. In addition, we also asserted that it would be unlawful and inappropriate if the DOE sought recoupment against us based on loans that were forgiven under the proposed settlement agreement without providing us with an opportunity to address the claims or accounting for our responses to the claims already submitted which we believe is required by the regulations. We also asserted that the lawsuit and the potential loan discharges could result in reputational harm to us and our institutions and could result in other actions against us by other federal and state agencies or by current and former students.
The court granted preliminary approval of the proposed settlement agreement on August 4, 2022, and also granted our motion for permissive intervention for the purpose of objecting to and opposing the class action settlement. On September 22, 2022, the DOE and the plaintiffs filed a joint motion for final approval of the settlement. In that joint motion, the DOE and the plaintiffs reported that approximately 179,000 new borrower defense applications had been submitted to the DOE as of September 20, 2022. We and the three other intervenor schools filed briefs opposing final approval.
In an Order dated November 16, 2022, District Court Judge William Alsup granted final approval of the settlement agreement. Subsequently, we, and two other school companies that intervened, filed notices of appeal and asked the district court to stay the settlement from taking effect until the appeals were decided and the district court did temporarily stay any loan discharges and refunds under the settlement pending the decision. Plaintiffs and the DOE thereafter filed oppositions to our stay request and, after a hearing, the district court denied our stay request, but extended the temporary stay of loan discharges and refunds associated with the three school companies for seven days to allow us to file a motion for a stay with the U.S. Court of Appeals for the Ninth Circuit. On February 27, 2023, we and the two other school companies that appealed filed a joint motion for a stay with the Ninth Circuit which we expect the plaintiffs and the DOE will oppose. We expect that the Ninth Circuit will decide our stay motion in the coming weeks.
Regardless of the outcome of our stay request, we intend to ask the Ninth Circuit to overturn the district court’s judgment approving the final settlement. If the settlement agreement is upheld on appeal, or if the courts deny our stay requests, the DOE is expected to automatically approve all of the pending borrower defense applications concerning us that were submitted to the DOE on or before June 22, 2022 and to provide such automatic approval without evaluating or accounting for any of the legal or factual grounds that we provided for contesting the applications that were provided to us. The DOE may or may not attempt to seek recoupment from applicable schools relating to approval of borrower defense applications. If the DOE approves borrower defense applications concerning us and attempts to recoup from us the loan amounts in the approved applications, we would consider our options for challenging the legal and factual bases for such actions. The settlement also requires the DOE to review borrower defense applications submitted after June 22, 2022 and before November 16, 2022 within 36 months of the final settlement date. If the DOE grants some or all of these applications, the DOE also could attempt to recoup from us the loan amounts relating to these applications as well. We cannot predict whether the settlement will be upheld on appeal, what actions the DOE might take if the settlement is upheld on appeal (including the ultimate timing or amount of borrower defense applications the DOE may grant in the future requireand the timing or amount of any possible liabilities that the DOE may seek to recover from the Company, if any), or what the outcome of our schoolschallenges to submitsuch actions will be, but such actions could have a lettermaterial adverse effect on our business and results of credit based on expanded standards of financial responsibility as indicated above.operations.
The "90/10 Rule." Under the HEA, a proprietary institution that derives more than 90% of its total revenue from Title IV Programs (its “90/10 Rule percentage”) for two consecutive fiscal years becomes immediately ineligible to participate in Title IV Programs and may not reapply for eligibility until the end of at least two fiscal years. An institution with revenues exceeding 90% for a single fiscal year will be placed on provisional certification and may be subject to other enforcement measures.measures, including a potential requirement to submit a letter of credit. See Part I, Item 1. “Business - Regulatory Environment – Financial Responsibility Standards.” If an institution violated the 90/10 Rule and became ineligible to participate in Title IV Programs but continued to disburse Title IV Program funds, the DOE would require the institution to repay all Title IV Program funds received by the institution after the effective date of the loss of eligibility.
We have calculated that, for our 2017 fiscal year, our institutions' 90/10 Rule percentages ranged from 76% to 84%. For 2016 and 2015, none of our existing institutions derived more than 90% of their revenues from Title IV Programs. Our calculations are subject to review by the DOE.
If Congress or the DOE were to amend the 90/10 Rule to treat other forms of federal financial aid as Title IV revenue for 90/10 Rule purposes, lower the 90% threshold, or otherwise change the calculation methodology (each of which has been proposed by some Congressional members in proposed legislation), or make other changes to the 90/10 Rule, those changes could make it more difficult for our institutions to comply with the 90/10 Rule. A loss of eligibility to participate in Title IV Programs for any of our institutions would have a significant impact on the rate at which our students enroll in our programs and on our business and results of operations.
We have calculated that for the fiscal year ended December 31, 2022 our institutions’ 90/10 Rule percentages ranged from 72% to 79%. For fiscal year 2022, none of our existing institutions derived more than 90% of its revenues from Title IV Programs. Our calculations are subject to review by the DOE.
In March 2021, the American Rescue Plan Act of 2021 (“ARPA”) was signed into law. Among other provisions, the ARPA includes a provision that amends the 90/10 Rule by treating other “federal funds that are disbursed or delivered to or on behalf of a student to be used to attend such institution” in the same way as Title IV Program funds are currently treated in the 90/10 Rule calculation. This means that our institutions will be required to limit the combined amount of Title IV Program funds and applicable “federal funds” revenue in a fiscal year to no more than 90% in a fiscal year as calculated under the rule. Consequently, the ARPA change to the 90/10 Rule is expected to increase the 90/10 Rule calculations at our institutions. The ARPA does not identify the specific federal funding programs that will be covered by this provision, but it is expected to include funding from federal student aid programs such as the veterans’ benefits programs, which include the Post-9/11 GI Bill and Veterans Readiness and Employment services, from which we derived approximately 74% of our revenues on a cash basis in fiscal year 2022.
The ARPA states that the amendments to the 90/10 Rule apply to institutional fiscal years beginning on or after January 1, 2023 and are subject to the HEA’s negotiated rulemaking process. Accordingly, the ARPA change to the 90/10 Rule is not expected to apply to our 90/10 Rule calculations until 2024 relating to our fiscal year ended 2023. Beginning in January 2022, the DOE convened negotiated rulemaking committee meetings on a variety of topics including the 90/10 Rule. The committee reached consensus on proposed 90/10 Rule regulations during meetings in March 2022. On July 28, 2022, the DOE published proposed regulations regarding the 90/10 Rule among other topics. The DOE published final regulations on October 28, 2022 with a general effective date of July 1, 2023.
The new 90/10 Rule regulations contain several new and amended provisions on a variety of topics including, among other things, confirming that the rules apply to fiscal years ending on or after January 1, 2023; noting that the DOE plans to identify the types of federal funds to be included in the 90/10 Rule in a notice in the Federal Register (which the DOE subsequently confirmed in a published notice on December 21, 2022 includes a wide range of Federal student aid programs including VA and DOD programs); requiring institutions to disburse funds that students are eligible to receive for a fiscal year before the end of the fiscal year rather than delaying disbursements until a subsequent fiscal year; updating requirements for counting revenues generated from certain educational activities associated with institutional programs, from certain non-Title IV eligible educational programs, and from institutional aid programs such as institutional loans, scholarships, and income share agreements; updating technical rules for the 90/10 Rule calculation; including rules for sanctions for noncompliance with the 90/10 Rule and for required notifications to students and the DOE by the institution of noncompliance with the 90/10 Rule. The new regulations under the 90/10 Rule could have a material adverse effect on us and other schools like ours.
We are in the process of evaluating the impact of the new 90/10 Rule regulations on our business. We anticipate making changes to our operations in order to address the provisions in the 90/10 Rule and in order to maintain the 90/10 Rule percentages at our institutions below the 90% threshold as calculated under DOE regulations. However, we do not have significant control over the amount of Title IV Program funds that our students may receive and borrow. Our institutions’ 90/10 Rule percentages can be increased by increases in Title IV Programs aid availability (including, for example, increases in Pell Grant funds) and can be decreased by decreases in the availability of state grant program funding and other sources of student aid that do not count as Title IV Programs funds in the 90/10 Rule calculation. Our institutions’ 90/10 Rule percentages also will increase when the ARPA amendments to the 90/10 Rule take effect to the extent that students eligible to receive military and veteran education assistance enroll and use their financial assistance at our institutions. We cannot be certain that the changes we make in the future will succeed in maintaining our institutions’ 90/10 Rule percentages below the required levels or that the changes will not materially impact our business operations, revenues, and operating costs. It also is possible that Congress or the DOE could amend the 90/10 Rule in the future to lower the 90% threshold, change the calculation methodology, or make other changes to the 90/10 Rule that could make it more difficult for our institutions to comply with the 90/10 Rule.
As noted above, if any of our institutions lose eligibility to participate in Title IV Programs, that loss would also adversely affect our students’ access to various government-sponsored student financial aid programs, and would have a significant impact on the rate at which our students enroll in our programs and on our business and results of operations.
Student Loan Defaults. The HEA limits participation in Title IV Programs by institutions whose former students defaulted on the repayment of federally guaranteed or funded student loans above a prescribed rate (the “cohort default rate”). The DOE calculates these rates based on the number of students who have defaulted, not the dollar amount of such defaults. The cohort default rate is calculated on a federal fiscal year basis and measures the percentage of students who enter repayment of a loan during the federal fiscal year and default on the loan on or before the end of the federal fiscal year or the subsequent two federal fiscal years.
Under the HEA, an institution whose Federal Family Education Loan, or FFEL, and Federal Direct Loan, or FDL, cohort default rate is 30% or greater for three consecutive federal fiscal years loses eligibility to participate in the FFEL, FDL, and Pell programs for the remainder of the federal fiscal year in which the DOE determines that such institution has lost its eligibility and for the two subsequent federal fiscal years. An institution whose FFEL and FDL cohort default rate for any single federal fiscal year exceeds 40% loses its eligibility to participate in the FFEL and FDL programs for the remainder of the federal fiscal year in which the DOE determines that such institution has lost its eligibility and for the two subsequent federal fiscal years. If an institution’s three-year cohort default rate equals or exceeds 30% in two of the three most recent federal fiscal years for which the DOE has issued cohort default rates, the institution may be placed on provisional certification status and under new regulations that were scheduled to take effect on July 1, 2017 but were subsequently delayed, could be required to submit a letter of credit to the DOE. See Part I, Item 1. “Business - Regulatory Environment – Financial Responsibility Standards.”
In September 2017,2022, the DOE released the final cohort default rates for the 20142019 federal fiscal year. These are the most recent final rates published by the DOE. The rates for our existing institutions for the 20142019 federal fiscal year range from 5.2%1.9% to 13.6%.2.9 %. None of our institutions had a cohort default rate equal to or greater than 30% for the 20142019 federal fiscal year.
In February 2018,2023, the DOE released draft three-year cohort default rates for the 20152020 federal fiscal year. The draft cohort default rates are subject to change pending receipt of the final cohort default rates, which the DOE is expected to publish in September 2018.2023. The draft rates for our institutions for the 20152020 federal fiscal year range from 7.6% to 13.2%were 0%. None of our institutions had draft cohort default rates of 30% or more.
Financial Responsibility Standards.
All institutions participating in Title IV Programs must satisfy specific standards of financial responsibility. The DOE evaluates institutions for compliance with these standards each year, based on the institution's annual audited financial statements, as well as following a change in ownership resulting in a change of control of the institution.
The most significant financial responsibility measurement is the institution's composite score, which is calculated by the DOE based on three ratios:
| · | The equity ratio, which measures the institution's capital resources, ability to borrow and financial viability; |
the equity ratio, which measures the institution's capital resources, ability to borrow and financial viability;
| · | Thethe primary reserve ratio, which measures the institution's ability to support current operations from expendable resources; and |
| · | Thethe net income ratio, which measures the institution's ability to operate at a profit. |
The DOE assigns a strength factor to the results of each of these ratios on a scale from negative 1.0 to positive 3.0, with negative 1.0 reflecting financial weakness and positive 3.0 reflecting financial strength. The DOE then assigns a weighting percentage to each ratio and adds the weighted scores for the three ratios together to produce a composite score for the institution. The composite score must be at least 1.5 for the institution to be deemed financially responsible without the need for further oversight.
If an institution's composite score is below 1.5, but is at least 1.0, it is in a category denominated by the DOE as "the zone." Under the DOE regulations, institutions that are in the zone typically may be permitted by the DOE to continue to participate in the Title IV Programs by choosing one of two alternatives: 1) the “Zone Alternative” under which an institution is required to make disbursements to students under the Heightened Cash Monitoring 1 (“HCM1”) payment method, or a different payment method other than the advance payment method, and to notify the DOE within 10 days after the occurrence of certain oversight and financial events or 2) submit a letter of credit to the DOE equal to 50 percent of the Title IV Program funds received by the institution during its most recent fiscal year. The DOE permits an institution to participate under the “Zone Alternative” for a period of up to three consecutive fiscal years. Under the HCM1 payment method, the institution is required to make Title IV Program disbursements to eligible students and parents before it requests or receives funds for the amount of those disbursements from the DOE. As long as the student accounts are credited before the funding requests are initiated, an institution is permitted to draw down funds through the DOE’s electronic system for grants management and payments for the amount of disbursements made to eligible students. Unlike the Heightened Cash Monitoring 2 (“HCM2”) and the reimbursement payment methods, the HCM1 payment method typically does not require schools to submit documentation to the DOE and wait for DOE approval before drawing down Title IV Program funds. Effective July 1, 2016, a school under HCM1, HCM2 or reimbursement payment methods must also pay any credit balances due to a student before drawing down funds for the amount of those disbursements from the DOE, even if the student or parent provides written authorization for the school to hold the credit balance.
If an institution's composite score is below 1.0, the institution is considered by the DOE to lack financial responsibility. If the DOE determines that an institution does not satisfy the DOE's financial responsibility standards, depending on its composite score and other factors, that institution may establish its financial responsibilityeligibility to participate in the Title IV Programs on an alternative basis by, among other things:
| · | Postingposting a letter of credit in an amount equal to at least 50% of the total Title IV Program funds received by the institution during the institution's most recently completed fiscal year; or |
posting a letter of credit in an amount equal to at least 10% of the Title IV Program funds received by the institution during its most recently completed fiscal year accepting provisional certification; complying with additional DOE monitoring requirements and agreeing to receive Title IV Program funds under an arrangement other than the DOE's standard advance funding arrangement.
| · | Posting a letter of credit in an amount equal to at least 10% of the Title IV Program funds received by the institution during its most recently completed fiscal year accepting provisional certification; complying with additional DOE monitoring requirements and agreeing to receive Title IV Program funds under an arrangement other than the DOE's standard advance funding arrangement |
The DOE has evaluated the financial responsibility of our institutions on a consolidated basis. We have submitted to the DOE our audited financial statements for the 2016 and 2015 fiscal year reflecting a composite score of 1.5 and 1.9, respectively, based upon our calculations. The DOE reviewed our 2016 composite score and concluded that we were no longer required to operate under the Zone Alternative requirements that we had operated under following the DOE’s review of our 2014 composite score.
For the 20172022, 2021, and 2020 fiscal year,years, we have calculated our composite score to be 1.1. This score is2.9, 3.0, and 2.7, respectively. These scores are subject to determination by the DOE once it receives and reviewsbased on its review of our consolidated audited financial statements for the 20172022, 2021, and 2020 fiscal year,years, but we believe it is likely that the DOE will determine that our institutions are “incomply with the zone” and that we will be required to operate under the Zone Alternative requirements as well as any other requirements that the DOE might impose in its discretion.composite score requirement.
On November 1, 2016,September 23, 2019, the DOE published new Borrower Defense to Repaymentfinal regulations with a general effective date of July 1, 2020, that, included expanded standardsamong other things, modified the list of financial responsibilitytriggering events that could result in a requirementthe DOE determining that wean institution lacks financial responsibility and must submit to the DOE a substantial letter of credit or other form of acceptable financial protection in an amountand accept other conditions on the institution’s Title IV Program eligibility. The regulations create lists of mandatory triggering events and discretionary triggering events. An institution is not able to meet its financial or administrative obligations if a mandatory triggering event occurs. The mandatory triggering events include:
the institution’s recalculated composite score is less than 1.0 as determined by the DOE and be subjectas a result of an institutional liability from a settlement, final judgment, or final determination in an administrative or judicial action or proceeding brought by a federal or state entity;
the institution’s recalculated composite score goes from less than 1.5 to other conditions and requirements, based on anyless than 1.0 as determined by the DOE as a result of a withdrawal of owner’s equity from the institution;
the SEC takes certain actions against the institution or the institution fails to comply with certain filing requirements; or
the occurrence of two or more discretionary triggering events (as described below) within a certain time period.
The DOE also may determine that an institution lacks financial responsibility if one of the following discretionary triggering events occurs and the event is likely to have a material adverse effect on the financial condition of the institution:
a show cause or similar order from the institution’s accrediting agency that could result in the withdrawal, revocation or suspension of institutional accreditation;
a notice from the institution’s state licensing agency of an extensive listintent to withdraw or terminate the institution’s state licensure if the institution does not take steps to comply with state requirements;
a default, delinquency, or other event occurs as a result of an institutional violation of a security or loan agreement that enables the creditor to require an increase in collateral, a change in contractual obligations, an increase in interest rates or payment, or other sanctions, penalties or fees;
a failure to comply with the 90/10 Rule during the institution’s most recently completed fiscal year;
high annual drop-out rates from the institution as determined by the DOE; or
official cohort default rates of at least 30 percent for the two most recent years unless a pending appeal could sufficiently reduce one of the rates.
The regulations require the institution to notify the DOE of the occurrence of a mandatory or discretionary triggering circumstances. Theevent and to provide certain information to the DOE has delayedto demonstrate why the effective dateevent does not establish the institution’s lack of these regulations until July 1, 2019. Iffinancial responsibility or require the regulations were not currently delayed, thesubmission of a letter of credit or imposition of other requirements.
The expanded financial responsibility regulations could result in the DOE recalculating and reducing our composite score to account for DOE estimates of potential losses under someone or more of the extensive list of triggering circumstances listed above and also could result in the imposition of conditions and requirements, including a requirement to provide financial protection in amounts that are difficult to predict, calculated by the DOE under potentially subjective standards and, in some cases, could be based solely on the existence of proceedings or circumstances that ultimately may lack merit or otherwise not result in liabilities or losses. For example, the currently delayed regulations state that thea letter of credit or other form of financial protection.
As noted above, the DOE previously initiated a negotiated rulemaking process in January 2022 that was considering new regulations on a variety of topics including financial responsibility. After announcing a delay in the process in June 2022, the DOE announced in January 2023 its intent to publish proposed rules on this subject in April 2023. The regulations typically would take effect on July 1, 2024 if the DOE publishes the final regulations by November 1, 2023. The DOE is considering proposals that, among other things, would expand the list and scope of triggering events and other circumstances that could result in the DOE determining that the institution lacks financial responsibility and must submit to the DOE a letter of credit or other form of acceptable financial protection required for an institution underand accept other conditions on the provisional certification alternative must equal 10 percent of the total amount ofinstitution’s Title IV Program funds received byeligibility. The implementation of new financial responsibility regulations could increase the institution during its most recently completed fiscal year plus any additional amount thatlikelihood of the DOE determines is necessary to fully cover any estimated losses unlessrequiring the institution demonstrates that the additional amount is unnecessary to protect, or is contrary to, the Federal interest.posting of a letter of credit and imposing other conditions upon our schools.
Return of Title IV Program Funds. An institution participating in Title IV Programs must calculate the amount of unearned Title IV Program funds that have been disbursed to students who withdraw from their educational programs before completing them, and must return those unearned funds to the DOE or the applicable lending institution in a timely manner, which is generally within 45 days from the date the institution determines that the student has withdrawn.
If an institution is cited in an audit or program review for returning Title IV Program funds late for 5% or more of the students in the audit or program review sample, or if the regulatory auditor identifies a material weakness in the institution’s report on internal controls relating to the return of unearned Title IV Program funds, the institution may be required to post a letter of credit in favor of the DOE in an amount equal to 25% of the total amount of Title IV Program funds that should have been returned for students who withdrew in the institution's prior fiscal year.
On January 11, 2018, the DOE sent letters to our then existing Columbia, Maryland and Iselin, New Jersey institutions requiring each institution to submit a letter of credit to the DOE based on findings of late returns of Title IV Program funds in the annual Title IV Program compliance audits submitted to the DOE for the fiscal year ended December 31, 2016. Our Iselin institution provided evidence demonstrating that only 3% of the Title IV Program funds returned were late. However, the DOE concluded that a letter of credit would nevertheless be required for each institution because the regulatory auditor included a finding that there was a material weakness in our report on internal controls relating to return of unearned Title IV Program funds. We disagree with the regulatory auditor’s conclusion that a material weakness could exist if the error rate in the expanded audit sample is only 3% or approximately $20,000 and we believe that the regulatory auditor’s conclusion is erroneous. We requested that the DOE reconsider the letter of credit requirement; however, by letter dated February 7, 2018, the DOE maintained that the refund letters of credit were necessary but agreed that the amount of each letter of credit could be based on the returns that were required to be made by each institution in the 2017 fiscal year rather than in the 2016 fiscal year. Accordingly, we submitted letters of credit in the amounts of $0.5 million and $0.1 million to the DOE by the February 23, 2018, deadline and expect that these letterswe continue to comply with the letter of credit will remainrequirement. By letter dated February 16, 2021, the DOE notified us that our Columbia and Iselin institutions failed to comply with the refund requirements based on their 2017, 2018, and 2019 audits. Consequently, the DOE has required us to maintain with the DOE a letter of credit in placethe amount of $600,020. The expiration date of this letter of credit has been extended until January 31, 2024.
More recently, as noted above, the DOE announced its intention to commence a negotiated rulemaking process in April 2023 on a number of topics including plans to amend the regulations on the requirements for institutions to return unearned Title IV funds to students who withdraw from their educational programs before completing them.
Negotiated Rulemaking. The DOE periodically issues new regulations and guidance that can have an adverse effect on our institutions. The negotiated rulemaking process typically begins with the DOE convening a minimumnegotiated rulemaking committee with various representatives of the higher education community to help develop and attempt to reach consensus on proposed regulations on the various topics. The DOE follows up by publishing proposed regulations in the Federal Register for notice and comment by the public. The DOE typically concludes the process by finalizing and publishing final regulations in the Federal Register. The DOE initiated two years.
additional negotiated rulemaking processes in 2021 and 2022, respectively. The first of the two negotiated rulemaking sessions led to final regulations published on November 1, 2022 regarding Borrower Defense to Repayment (including, among other things, potential expanded limitations on recruitment tactics and conduct that are deemed to be aggressive or deceptive), the return of prohibitions on pre-dispute arbitration agreements and class action waivers, closed school loan discharges (including the reinstatement of automatic closed school loan discharges), total and permanent disability discharges, public student loan forgiveness, income driven repayment, interest capitalization, false certification discharges, and prison exchange programs. See “Business – Regulatory Environment - Borrower Defense to Repayment Regulations.”
The DOE also published final regulations on October 28, 2022 on topics including amendments to the 90/10 Rule, amendments to the rules regarding changes in ownership and control, and amendments to the regulations for Federal Pell Grants for prison education programs. The regulations have a general effective date of July 1, 2023, with the new 90/10 Rule amendments designated to apply to fiscal years beginning on or after January 1, 2023. See “Business – Regulatory Environment – 90/10 Rule” and “Business- Regulatory Environment – Change of Control.”
The DOE initiated rulemaking on several other topics in January 2022 and, after delaying the process in June 2022, announced its intention in January 2023 to reinitiate the rulemaking process with the planned publication of proposed regulations in April 2023 on topics including, for example, gainful employment, financial responsibility, administrative capability, certification procedures, ability to benefit, and improving income driven repayment of loans. See “Business – Regulatory Environment – Gainful Employment.”
As previously noted above, the DOE also announced in January 2023 its intention to initiate a new negotiated rulemaking process in April 2023 on several topics including, for example, amending regulations on state authorization as a component of institutional eligibility, amending regulations on accreditation including standards for the DOE’s recognition of accrediting agencies and accreditation procedures as a component of institutional eligibility for Title IV Programs, amending regulations on the requirements for institutions to return unearned Title IV Program funds for students who withdraw without completing their educational programs, amending the cash management regulations to ensure that students have and maintain timely access to student aid disbursed by their institutions, amending regulations on third-party servicers, and amending the definition of distance education. See “Business – Regulatory Environment – State Authorization.” If the DOE publishes final regulations by November 1, 2023, the regulations typically would have a general effective date of July 1, 2024. If they are published after November 1, 2023, the regulations typically would have a general effective date of July 1, 2025 or a later date. We cannot predict the ultimate timing, content, and impact of the proposed and final regulations on all of these topics. Some of the new and proposed regulations are expected to impose a broad range of additional requirements on institutions and especially on for-profit institutions like our schools. In turn, the new and proposed regulations are likely to increase the possibility that our schools could be subject to additional reporting requirements, to potential liabilities and sanctions such as letter of credit amounts, and to potential loss of Title IV eligibility if our efforts to modify our operations to comply with the new regulations are unsuccessful.
Substantial Misrepresentation. The DOE’s regulations prohibit an institution that participates in Title IV Programs from engaging in substantial misrepresentation of the nature of its educational programs, financial charges, graduate employability or its relationship with the DOE. A “misrepresentation” includes any false, erroneous, or misleading statement (whether made in writing, visually, orally, or through other means) that is made by an eligible institution, by one of its representatives, or by a third party that provides to the institution educational programs, marketing, advertising, recruiting, or admissions services and that is made to a student, prospective student, any member of the public, an accrediting or state agency, or to DOE. The DOE defines a “substantial misrepresentation” to include any misrepresentation on which the person to whom it was made could reasonably be expected to rely, or has reasonably relied, to that person’s detriment. The definition of “substantial misrepresentation” is broad and, therefore, it is possible that a statement made by the institution or one of its service providers or representatives could be construed by the DOE to constitute a substantial misrepresentation. If the DOE determines that one of our institutions has engaged in substantial misrepresentation, the DOE may impose sanctions or other conditions upon the institution including, but not limited to, initiating an action to fine the institution or limit, suspend, or terminate its eligibility to participate in the Title IV Programs and may seek to discharge students’ loans and impose liabilities upon the institution. The DOE published final regulations on November 1, 2022 on a variety of topics including, amended and expanded regulations on substantial misrepresentations. Specifically, the new regulations expand the types of conduct that could result in a discharge of student loans including: 1) an expanded list of substantial misrepresentations; 2) a new section regarding substantial omissions of fact; 3) breaches of contract; 4) a new section regarding aggressive and deceptive recruitment; or 5) state or federal judgments or final DOE actions that could result in a borrower defense claim. Some of these forms of conduct also could result in further scrutiny of marketing and recruiting practices by institutions like our schools and could increase the chances of the DOE finding practices to be noncompliant and imposing sanctions based on the alleged noncompliance up to and including fines and potential loss of Title IV eligibility. See Part I, Item 1. “Business - Regulatory Environment – Borrower Defense to Repayment Regulations.”
In March 2022, the DOE published guidance about the enforcement of the requirements regarding substantial misrepresentations. The DOE indicated that it is monitoring complaints and Borrower Defense to Repayment applications from veterans, service members, and their family members who report that personnel and representatives of postsecondary schools suggested during the enrollment process that their military education benefits would cover all of the costs of their program but were told subsequently they would have to take out student loans to finish the program. The DOE stated that it would ensure that institutions engaging in misrepresentations are held accountable if they cause a student to incur extra costs unwittingly or without a full understanding of the implications of borrowing. The DOE also indicated that such students could be entitled to discharge of their student loans and that it would share information and complaints about military-connected students with the DOD and VA for potential agency action.
School Acquisitions.Acquisitions/Change of Control. When a company acquires a school that is eligible to participate in Title IV Programs, that school undergoes a change of ownership resulting in a change“change of controlcontrol” as defined by the DOE. Upon such a change of control, a school's eligibility to participate in Title IV Programs is generally suspended until it has applied for recertification by the DOE as an eligible school under its new ownership, which requires that the school also re-establish its state authorization and accreditation. The DOE may temporarily and provisionally certify an institution seeking approval of a change of control under certain circumstances while the DOE reviews the institution's application. The time required for the DOE to act on such an application may vary substantially. The DOE recertification of an institution following a change of control will be on a provisional basis.See Part I, Item 1. “Business – Regulatory Environment – School Acquisitions.” Thus, any plans to expand our business through acquisition of additional schools and have them certified by the DOE to participate in Title IV Programs must take into account the approval requirements of the DOE and the relevant state education agencies and accrediting commissions.The DOE has recently published final regulations with a general effective date of July 1, 2023 concerning change of control. We are in the process of evaluating the impact of these new regulations on our business, but the regulations, among other things, expand the requirements applicable to school acquisitions in ways that could make it more difficult to acquire additional schools. See Part I, Item 1. “Business – Regulatory Environment – Negotiated Rulemaking.”
Change of Control.In addition to school acquisitions, other types of transactions can also cause a change of control. The DOE, most state education agencies and our accrediting commissions have standards pertaining to the change of control of schools, but these standards are not uniform. DOE regulations describe some transactions that constitute a change of control, including the transfer of a controlling interest in the voting stock of an institution or the institution's parent corporation. For a publicly traded corporation, DOE regulations provide that a change of control occurs in one of two ways: (a) if a person acquires ownership and control of the corporation so that the corporation is required to file a Current Report on Form 8-K with the Securities and Exchange Commission disclosing the change of control or (b) if the corporation has a shareholder that owns at least 25% of the total outstanding voting stock of the corporation and is the largest shareholder of the corporation, and that shareholder ceases to own at least 25% of such stock or ceases to be the largest shareholder. These standards are subject to interpretation by the DOE. A significant purchase or disposition of our common stockCommon Stock could be determined by the DOE to be a change of control under this standard.
Most of the states and our accrediting commissions include the sale of a controlling interest of common stockCommon Stock in the definition of a change of control although some agencies could determine that the sale or disposition of a smaller interest would result in a change of control. A change of control under the definition of one of these agencies would require the affected school to reaffirm its state authorization or accreditation. Some agencies would require approval prior to a sale or disposition that would result in a change of control in order to maintain authorization or accreditation. The requirements to obtain such reaffirmation from the states and our accrediting commissions vary widely.
Most of the states and our accrediting commissions include the sale of a controlling interest of Common Stock in the definition of a change of control although some agencies could determine that the sale or disposition of a smaller interest would result in a change of control. A change of control under the definition of one of these agencies would require the affected school to reaffirm its state authorization or accreditation. Some agencies would require approval prior to a sale or disposition that would result in a change of control in order to maintain authorization or accreditation. The requirements to obtain such reaffirmation from the states and our accrediting commissions vary widely.
A change of control could occur as a result of future transactions in which the Company or our schools are involved. Some corporate reorganizations and some changes in the board of directors of the Company are examples of such transactions. Moreover, the potential adverse effects of a change of control could influence future decisions by us and our stockholdersshareholders regarding the sale, purchase, transfer, issuance or redemption of our stock. In addition, the adverse regulatory effect of a change of control also could discourage bids for shares of our common stockCommon Stock and could have an adverse effect on the market price of our shares. As noted above, the DOE published final regulations on October 28, 2022 relating to change of control with a general effective date of July 1, 2023. See Part I, Item 1. “Business – Regulatory Environment – Negotiated Rulemaking.”
Opening Additional Schools and Adding Educational Programs. For-profit educational institutions must be authorized by their state education agencies and be fully operational for two years before applying to the DOE to participate in Title IV Programs. However, an institution that is certified to participate in Title IV Programs may establish an additional location and apply to participate in Title IV
Programs at that location without reference to the two-year requirement, if such additional location satisfies all other applicable DOE eligibility requirements. Our strategic plans for future expansion plans are based, in part, on our ability to open new schools as additional locations of our existing institutions and take into account the DOE'sDOE’s approval requirements.
A student may use Title IV Program funds only to pay the costs associated with enrollment in an eligible educational program offered by an institution participating in Title IV Programs. Generally, unless otherwise required by the DOE or by DOE regulations, an institution that is eligible to participate in Title IV Programs may add a new educational program without DOE approval if that new program leads to an associate’s level or higher degree and the institution already offers programs at that level, or if that program prepares students for gainful employment in the same or a related occupation as an educational program that has previously been designated as an eligible program at that institution and meets minimum length requirements. Institutionsapproval. However, institutions that are provisionally certified may be required to obtain approval of certainnew educational programs. Two of ourOur Indianapolis, New Britain, and Columbia institutions (Iselin and Indianapolis) are provisionally certified and required to obtain prior DOE approval of new degree, non-degree,locations and short-term trainingof new educational programs. Our Iselin institution also is subject to prior approval requirements for substantive changes such as new campuses and educational programs as a result of its accrediting agency’s loss of DOE recognition, and the DOE has indicated that such changes only will be approved in limited circumstances. If an institution erroneously determines that an educational program is eligible for purposes of Title IV Programs, the institution would likely be liable for repayment of Title IV Program funds provided to students in that educational program. Our expansion plans are based, in part, on our ability to add new educational programs at our existing schools.
Some of the state education agencies and our accrediting commission also have requirements that may affect our schools' ability to open a new campus, establish an additional location of an existing institution or begin offering a new educational program. The DOE has initiated a negotiated rulemaking process that may result in new rules that, among other things, may further restrict the ability of some schools – such as schools that are provisionally certified – to add new locations or educational programs, which could impact our ability to make such changes if we are provisionally certified or subject to other criteria in the regulations that ultimately are adopted. The rulemaking process is ongoing. See Part I, Item 1. “Business – Regulatory Environment – Negotiated Rulemaking.”
Closed School Loan Discharges. The DOE may grant closed school loan discharges of federal student loans based upon applications by qualified students. TheDOE also may initiate discharges on its own for students who have not reenrolled in another Title IV Program eligible school within three years after the closure and who attended campuses that closed on or after November 1, 2013, as did some of our former campuses. If the DOE discharges some or all of these loans, the DOE may seek to recover the cost of the loan discharges from us. As noted above, the DOE published final regulations on November 1, 2022 with a general effective date of July 1, 2023 on a variety of topics, including closed school loan discharges (and, among other things, the reintroduction of automatic closed school loan discharges), which will make it easier for borrowers to obtain discharges of their loans and for the DOE to recover liabilities from institutions.
We cannot predict any additional closed school loan discharges that the DOE may approve or the liabilities that the DOE may seek from us for campuses that have closed in the past or any possible school closures in the future.
Administrative Capability. The DOE assesses the administrative capability of each institution that participates in Title IV Programs under a series of separate standards. Failure to satisfy any of the standards may lead the DOE to find the institution ineligible to participate in Title IV Programs or to place the institution on provisional certification as a condition of its participation. These criteria require, among other things, that the institution:
| · | Complycomply with all applicable federal student financial aid requirements; |
| · | Havehave capable and sufficient personnel to administer the federal student Title IV Programs; |
| · | Administer Title IV Programs with adequate checks and balances in its system of internal controls over financial reporting; |
18administer Title IV Programs with adequate checks and balances in its system of internal controls over financial reporting;
divide the function of authorizing and disbursing or delivering Title IV Program funds so that no office has the responsibility for both functions;
establish and maintain records required under the Title IV Program regulations;
develop and apply an adequate system to identify and resolve discrepancies in information from sources regarding a student’s application for financial aid under the Title IV Program;
have acceptable methods of defining and measuring the satisfactory academic progress of its students;
refer to the Office of the Inspector General any credible information indicating that any applicant, student, employee, third party servicer or other agent of the school has been engaged in any fraud or other illegal conduct involving Title IV Programs;
not be, and not have any principal or affiliate who is, debarred or suspended from federal contracting or engaging in activity that is cause for debarment or suspension;
provide adequate financial aid counseling to its students;
submit in a timely manner all reports and financial statements required by the Title IV Program regulations; and
not otherwise appear to lack administrative capability.
| · | Divide the function of authorizing and disbursing or delivering Title IV Program funds so that no office has the responsibility for both functions; |
| · | Establish and maintain records required under the Title IV Program regulations; |
| · | Develop and apply an adequate system to identify and resolve discrepancies in information from sources regarding a student’s application for financial aid under the Title IV Program; |
| · | Have acceptable methods of defining and measuring the satisfactory academic progress of its students; |
| · | Refer to the Office of the Inspector General any credible information indicating that any applicant, student, employee, third party servicer or other agent of the school has been engaged in any fraud or other illegal conduct involving Title IV Programs; |
| · | Not be, and not have any principal or affiliate who is, debarred or suspended from federal contracting or engaging in activity that is cause for debarment or suspension; |
| · | Provide adequate financial aid counseling to its students; |
| · | Submit in a timely manner all reports and financial statements required by the Title IV Program regulations; and |
| · | Not otherwise appear to lack administrative capability. |
The DOE has placed three of our institutions on provisional certification based on findings in recent audits of the institutions’ Title IV compliance that the DOE alleges identified deficiencies in regulations related to DOE regulations regarding an institution’s level of administrative capability. See Part I. Item 1. “Business - Regulatory Environment – Regulation of Federal Student Financial Aid Programs.” Failure by us to satisfy any of these or other administrative capability criteria could cause our institutions to be subject to sanctions or other actions by the DOE or to lose eligibility to participate in Title IV Programs, which would have a significant impact on our business and results of operations.
The DOE previously initiated a negotiated rulemaking process in January 2022 that was considering, among other issues, the expansion of the scope of the administrative capability regulations to include other requirements (such as, for example, providing adequate career services and refraining from misrepresentations and certain types of recruiting practices). After announcing a delay in this process in June 2022, the DOE announced in January 2023 its intention to publish proposed rules in April 2023 amending regulations on institution and program eligibility, including the administrative capability regulations.
Restrictions on Payment of Commissions, Bonuses and Other Incentive Payments. An institution participating in Title IV Programs may not provide any commission, bonus or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any person or entity engaged in any student recruiting or admission activities or in making decisions regarding the awarding of Title IV Program funds. The DOE’s regulations established twelve12 “safe harbors” identifying types of compensation that couldmay be paid without violating the incentive compensation rule. On October 29, 2010, the DOE adopted final rules that took effect on July 1, 2011 and amended the incentive compensation rule by, among other things, eliminating the twelve12 safe harbors (thereby reducing the scope of permissible compensatory payments under the rule) and expanding the scope of compensatory payments and employees subject to the rule. The DOE has stated that it does not intend to provide private guidance regarding particular compensation structures in the future and will enforce the regulations as written. We cannot predict how the DOE will interpret and enforce the revised incentive compensation rule.rule and the limited published guidance that the DOE has provided, nor how it will apply the rule and guidance to our past, present, and future compensation practices. The implementation of the final regulations required us to change our compensation practices and has had and will continue to have a significant impact on the rate at which students enroll inproductivity of our programs,employees, on the retention of our employees and on our business and results of operations.
Compliance with Regulatory Standards and Effect of Regulatory Violations.Our schools are subject to audits, program reviews, site visits, and other reviews by various federal and state regulatory agencies, including, but not limited to, the DOE, the DOE'sDOE’s Office of Inspector General (“OIG”), state education agencies and other state regulators, the U.S. Department of Veterans AffairsVA and other federal agencies (such as, for example, the FTC or the CFPB), and by our accrediting commissions. In addition, each of our institutions must retain an independent certified public accountant to conduct an annual compliance audit of the institution'sinstitution’s administration of Title IV Program funds. The institution must submit the resulting annual compliance audit report to the DOE for review.
On January 7, 2013, The annual compliance audit reports for our institutions contain findings on topics that were the subject of findings in prior audits although the amount of questioned funds in the reports are immaterial and have been repaid. The reoccurrence of findings in our compliance audit reports could result in the DOE notifiedinitiating an adverse action against one or more of our Columbia, Maryland campus that an on-site Program Review was scheduled to begin on March 4, 2013. The Program Review assessed the institution’s administrationinstitutions. Significant violations of Title IV Programs in whichProgram requirements by any of our institutions could become the campus participatedbasis for the 2011-2012 and 2012-2013 award years. On June 29, 2015,DOE to impose liabilities on us or initiate an adverse action to limit, suspend, terminate, revoke, or decline to renew the DOE issued a Program Review Report that required our Columbia campus to respond to information in the report. On August 2, 2017, the DOE issued its Final Program Review Determination (“FPRD”) letter to our Columbia, Maryland, school that included the DOE’s review of our initial response and corrective actions for the five findings originally noted in the June 29, 2015, program review report. The DOE concluded in its FPRD letter that the school had taken the corrective actions necessary to resolve and close the first four findings. However, with respect to the fifth finding, the DOE concluded that there were violationsparticipation of the Clery Act, but acceptedaffected institution in Title IV Programs or to seek civil or criminal penalties. Generally, a termination of Title IV Program eligibility extends for 18 months before the school’s response and stated that it now considers the finding closedinstitution may apply for program review purposes. However, the DOE reserved the right to impose an administrative action and/or require additional corrective actions by the school in connection with the Clery Act finding in the report. The DOE did not impose any financial liabilities in regard to anyreinstatement of its participation. Some of the five findings in the FPRD letter.
On April 26, 2013,annual Title IV Program compliance audits for some of our institutions resulted in the DOE notified our Union, New Jersey campus that an on-site Program Review was scheduled to beginplacing those institutions on May 20, 2013. The Program Review assessed the institution’s administrationprovisional certification. See Part I. Item 1. “Business - Regulatory Environment – Regulation of Title IV Programs in which the campus participated for the 2011-2012 and 2012-2013 award years. On September 30, 2016, the Union, New Jersey campus received a Program Review Report from the DOE. On September 29, 2017, the DOE issued its FPRD that closed the review and indicated that the DOE had determined the Company’s financial liability to the DOE resulting from the FPRD to be $175, which has been paid by the Company to the DOE.Federal Student Financial Aid Programs.”
On July 6, 2017, the DOE notified our Indianapolis, Indiana campus that an on-site Program Review was scheduled to begin on August 14, 2017. The Program Review assessed the institution’s administration of Title IV Programs in which the campus participated for the 2015-2016 and 2016-2017 award years. On February 21, 2018, the Indianapolis school received a Program Review Report from the DOE and the review was closed with no findings. The school continues to be provisionally certified due to this program review.
If one of our schools fails to comply with accrediting or state licensing requirements, such school and its main and/or branch campuses could be subject to the loss of state licensure or accreditation, which in turn could result in a loss of eligibility to participate in Title IV Programs. If the DOE or another agency determined that one of our institutions improperly disbursed Title IV Program funds or violated a provision of the HEA or DOE regulations, the institution could be required to repay such funds and related costs to the DOE and lenders, and could be assessed an administrative fine. The DOE could also place the institution on provisional certification status and/or transfer the institution to the reimbursement or cash monitoring system of receiving Title IV Program funds, under which an institution must disburse its own funds to students and document the students' eligibility for Title IV Program funds before receiving such funds from the DOE. See “RegulatoryPart I, Item 1. “Business - Regulatory Environment – Financial Responsibility Standards.”
Significant violationsConsumer Protection Laws and Scrutiny of Title IV Program requirementsthe For-Profit Postsecondary Education Sector. As a post-secondary educational institution, we are subject to a broad range of consumer protection and other laws, such as recruiting, marketing, the protection of personal information, student financing and payment servicing, enforced by federal agencies such as the Company orFTC and CFPB and various state agencies and state attorneys general. We devote significant effort to complying with state and federal consumer protection laws. In recent years, Congress, the DOE, state legislatures and regulatory agencies, accrediting agencies, the CFPB, the FTC, state attorneys general and the media have scrutinized the for-profit postsecondary education sector. Congressional hearings and other inquiries have occurred regarding various aspects of the education industry, including issues surrounding student debt as well as publicly reported student outcomes that may be used as part of an institution’s recruiting and admissions practices, and reports have been issued that are highly critical of for-profit colleges and universities.
On October 6, 2021, the FTC issued an announcement regarding its intentions to target false claims by for-profit colleges on topics such as promises about graduates’ job and earnings prospects and other outcomes, to impose “significant financial penalties” on violators, and to monitor the market carefully with federal and state partners. The FTC indicated in the announcement that it had put 70 for-profit higher education institutions on notice that the agency would be “cracking down” on any such false promises. All of our institutions were among the 70 institutions who received this notice. Although the FTC stated that a school’s presence on the list of 70 institutions does not reflect any assessment as to whether they have engaged in deceptive or unfair conduct, the FTC’s announcement and its issuance of notices to schools could lead to further scrutiny, investigations, and potential attempted enforcement actions by the FTC and other regulators against for-profit schools, including our schools.
On October 8, 2021, the DOE announced the establishment of an Office of Enforcement within the Federal Student Aid Office that oversees institutions participating in Title IV programs. The office will be comprised of four existing divisions, including the basisAdministrative Actions and Appeals Services Group (which, among other things, initiates adverse actions against institutions), the Borrower Defense Group (which analyzes Borrower Defense to Repayment claims), the Investigations Group (which evaluates and investigates potential institutional noncompliance and collaborates with other federal and state regulators), and the Resolution and Referral Management Group (which tracks and resolves referrals, allegations and complaints about institutions and other parties that participate in the Title IV programs). The establishment of the Office of Enforcement could result in an increase in enforcement actions and other activities against for-profit schools and school companies, including us.
In addition to Title IV Programs and other government-administered programs, all of our schools offer extended financing programs to their students. This extension of credit helps fill the gap between what the student receives from all financial aid sources and what the student may need to cover the full cost of his or her education. Students or their parents can apply to a number of different lenders for this funding at current market interest rates. In such regard, we are required to comply with applicable federal and state laws related to certain consumer and educational loans and credit extensions, which may be subject to the supervisory authority of the CFPB.
Coronavirus Aid, Relief, and Economic Security (“CARES”). On March 27, 2020, the CARES Act was signed into law, which includes a $2 trillion federal economic relief package providing financial assistance and other relief to individuals and businesses impacted by the spread of COVID-19. The CARES Act includes provisions for financial assistance and other regulatory relief benefitting students and their postsecondary institutions.
Among other things, the CARES Act includes $14 billion of HEERF funds for the DOE to limit, suspend or terminate the participationdistribute directly to institutions of higher education. Institutions are required to use at least half of the affected institutionHEERF funds for emergency grants to students for expenses related to disruptions in Title IV Programscampus operations (e.g., food, housing, etc.). Institutions are permitted to use the remainder of the funds for additional emergency grants to students or to seek civilcover institutional costs associated with significant changes to the delivery of instruction due to the COVID-19 emergency, provided that those costs do not include payments to contractors for the provision of pre-enrollment recruitment activities, endowments, or criminal penalties. Generally, suchcapital outlays associated with facilities related to athletics, sectarian instruction, or religious worship. The law requires institutions receiving funds to continue to the greatest extent practicable to pay their employees and contractors during the period of any disruptions or closures related to the COVID-19 emergency.
The DOE has allocated funds to each institution of higher education based on a terminationformula contained in the CARES Act. The formula is heavily weighted toward institutions with large numbers of Title IV Program eligibility extends for 18 months beforePell Grant recipients. The DOE allocated $27.4 million to our schools distributed in two equal installments and required them to be utilized by April 30, 2021 and May 14, 2021, respectively. The Company has distributed the institution may apply for reinstatementfull $13.7 million of its participation. There is no DOE proceeding pendingfirst installment as emergency grants to fine anystudents and has utilized the full $13.7 million of our institutionsits second installment. If the funds are not spent or to limit, suspend or terminate any of our institutions' participationaccounted for in Title IV Programs.
We and our schools are also subject to claims and lawsuits relating to regulatory compliance brought not only by federal and state regulatory agencies and our accrediting bodies, but also by third parties, such as present or former students or employees and other members of the public. Ifaccordance with applicable requirements, we are unable to successfully resolve or defend against any such claim or lawsuit, we maycould be required to pay money damagesreturn funds or be subject to fines, limitations, lossother sanctions. See Part I. Item 1. “Business - Regulatory Environment – Compliance with Regulatory Standards and Effect of federal funding, injunctionsRegulatory Violations.”
Coronavirus Response and Relief Supplemental Appropriations Act, 2021 (“CRRSAA”) and ARPA. On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law. This annual appropriations bill contained the CRRSAA. which provided an additional $81.9 billion to the Education Stabilization Fund including $22.7 billion for the HEERF, which were originally created by the CARES Act in March 2020. The higher education provisions of the CRRSAA are intended in part to provide additional financial assistance benefitting students and their postsecondary institutions in the wake of the spread of COVID-19 across the country and its impact on higher educational institutions. In March 2021, the $1.9 trillion American Rescue Plan Act of 2021 (“ARPA”) was signed into law. Among other things, theARPA provides $40 billion in relief funds that will go directly to colleges and universities with $395.8 million going to for-profit institutions. The DOE has allocated a total of $24.4 million to our schools from the funds made available under CRRSAA and ARPA. As of December 31, 2022, the Company has drawn down and distributed to our students $14.8 million of these allocated funds. The remainder of the funds are on hold by the DOE and we are not expecting to receive any of those funds. Failure to comply with requirements for the usage and reporting of these funds could result in requirements to repay some or all of the allocated funds and in other penalties. Moreover, even ifsanctions.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on our website at www.lincolntech.edu under the “Investor Relations - Financial Information - SEC Filings” captions, as soon as reasonably practicable after we successfully resolveelectronically file such materials with, or defend againstfurnish them to, the SEC. Reports of our executive officers, directors and any such claim or lawsuit, we may haveother persons required to devote significant financialfile securities ownership reports under Section 16(a) of the Exchange Act are also available through our website. Information contained on our website is not a part of this Annual Report on Form 10-K and management resources in order to reach such a result.is not incorporated herein by reference.
The risk factors described below and other information included elsewhere in this Annual Report on Form 10-K are among the numerous riskedrisks faced by our Company and should be carefully considered before deciding to invest in, sell or retain shares of our common stock. TheCommon Stock. These are factors that, individually or in the aggregate, could cause our actual results to differ materially from expected and historical results and the risks and uncertainties described below are not the only ones we face. Investors should understand that it is not possible to predict or identify all such risks and, as such, should not consider the following to be a complete discussion of all potential risks and uncertainties that may affect the Company. Investors should consider carefully the risks and uncertainties described below in addition to other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and related notes.
RISKS RELATED TO OUR INDUSTRY
Our failure to comply with the extensive regulatory requirements for participation in Title IV Programs and school operations could result in financial penalties, restrictions on our operations and loss of external financial aid funding, which could affect our revenues and impose significant operating restrictions onupon us.
Our industry is highly regulated by federal and state governmental agencies and by accrediting commissions. In particular, the HEA and DOE regulations specify extensive criteria and numerous standards that an institution must satisfy to establish to participate in the Title IV Programs. For a description of these criteria, see “Regulatory Environment.”
If we are found not to have satisfied the DOE's requirements for Title IV Programs funding, one or more of our institutions, including its additional locations, could be limited in its access to, or lose, Title IV Program funding, which could adversely affect our revenue, as we received approximately 78% of our revenue (calculated based on cash receipts) from Title IV Programs in 2017, and have a significant impact on our business and results of operations. Furthermore, if any of our schools fails to comply with applicable regulatory requirements, the school and its related main campus and/or additional locations could be subject to, among other things, the loss of state licensure or accreditation, the loss of eligibility to participate in and receive funds under the Title IV Programs, the loss of the ability to grant degrees, diplomas and certificates, provisional certification, or the imposition of liabilities or monetary penalties, any of which could adversely affect our revenues and impose significant operating restrictions upon us. In addition, the loss by any of our schools of its accreditation, its state authorization or license, or its eligibility to participate in Title IV Programs would constitute an event of default under our credit agreement with our lender, which could result in the acceleration of all amounts then outstanding with respect to our outstanding loan obligations. The various regulatory agencies applicable to our business periodically revise their requirements and modify their interpretations of existing requirements and restrictions. We cannot predict with certainty how any of these regulatory requirements will be applied or whether each of our schools will be able to comply with thesesuch revised requirements or any additional requirements instituted in the future.
If we fail Given the complex nature of the regulations and the fact that they are subject to demonstrate "administrative capability"interpretation, it is reasonable to conclude that in the DOE,conduct of our business, could suffer.
we may inadvertently violate such regulations. In particular, the HEA and DOE regulations specify extensive criteria and numerous standards that an institution must satisfy to establish that it has the requisite "administrative capability" to participate in the Title IV Programs. For a description of these federal, state, and accrediting agency criteria, see “Regulatory Environment – Administrative Capability.Part I, Item 1. “Business - Regulatory Environment.”
If we are found not to have not satisfied the HEA or the DOE's "administrative capability" requirements or otherwise failed to comply with one or more DOE requirements,for Title IV Programs funding, one or more of our institutions, including its additional locations, could be limited in its access to, or lose, Title IV Program funding. A loss or decrease in Title IV funding, which could adversely affect our revenue, as we received approximately 78%74% of our revenue (calculated based on cash receipts) from Title IV Programs during the fiscal year ended December 31, 2022, and have a significant impact on our business and results of operations. If any of our schools fail to comply with applicable HEA or regulatory requirements, our regulators could take a variety of adverse actions against us, and our schools could be subject to, among other things, a) the loss of, or placement of material restrictions or conditions on (i) state licensure or accreditation, (ii) eligibility to participate in and receive funds under the Title IV Programs or other federal or state financial assistance programs, or (iii) capacity to grant degrees, diplomas and certificates or b) the imposition of liabilities or monetary penalties, any of which could have a material adverse effect on academic or operational initiatives, revenues or financial condition, and impose significant operating restrictions upon us. See Part I, Item 1. “Business – Regulatory Environment – Compliance with Regulatory Standards and Effect of Regulatory Violations.”
If we fail to demonstrate “administrative capability” to the DOE, our business could suffer.
DOE regulations specify extensive criteria an institution must satisfy to establish that it has the requisite “administrative capability” to participate in Title IV Programs, and the DOE plans to reinitiate a rulemaking process that may expand the number and scope of these criteria. For a description of these criteria, see Part I, Item 1. “Business - Regulatory Environment – Administrative Capability.”
If we are found not to have satisfied the DOE’s “administrative capability” requirements, or to have otherwise failed to comply with one or more DOE requirements, one or more of our institutions and its additional locations could be limited in its access to, or lose, Title IV Program funding. This could adversely affect our revenue, as we received approximately 74% of our revenue (calculated based on cash receipts) from Title IV Programs in 2017,2022, which would have a significant impact on our business and results of operations.The DOE has placed all of our institutions on provisional certification based on findings in recent audits of the institutions’ Title IV compliance that the DOE alleges identified deficiencies in regulations related to DOE regulations regarding an institutions’ level of administrative capability. See Part I, Item 1. “Business - Regulatory Environment – Regulation of Federal Student Financial Aid Programs.”
Congress and the DOE may make changes to the laws and regulations applicable to, or reduce funding for, Title IV Programs, which could reduce our student population, revenues or profit margin.
Congress periodically revises the HEA and other laws governing Title IV Programs and annually determines the funding level for each Title IV Program. We cannot predict what, if any, legislative or other actions will be taken or proposed by Congress in connection with the reauthorization of the HEA or with other such activities of Congress.Congress, although Congress recently made a change to the 90/10 Rule that will make it harder for schools like ours that are subject to the rule to comply with the rule. See “RegulatoryPart I, Item 1. “Business - Regulatory Environment – Congressional Action.” Because a significant percentage of our revenues areis derived from the Title IV programs,Programs, any action by Congress or the DOE that significantly reduces funding for Title IV Programs or that limits or restricts the ability of our schools, programs, or students to receive funding through those Programssuch programs or that imposes new restrictions or constraints upon our business or operations could reduce our student enrollment and our revenues, and could increase our administrative costs, require us to arrange for alternative sources of financial aid for our students, and require us to modify our practices in order for our schools to comply fully with Title IV program requirements.comply. In addition, current requirements for student or school participation in Title IV ProgramsProgram participation may change or one or more of the present Title IV Programs could be replaced by other programs with materially different student or school eligibility requirements. The potential for changes that may be adverse to us and other for-profit schools like ours may increase as a result of changes in political leadership. The DOE is currently engaged in a process to establish new regulations that are expected to increase the number and scope of regulatory requirements applicable to our schools. See Part I, Item 1. “Business – Regulatory Environment – Negotiated Rulemaking.” If we cannot comply with the provisions of the HEA and the regulations of the DOE, as they may be revised, or if the cost of such compliance is excessive, or if funding is materially reduced, our revenues or profit margin could be materially adversely affected.
We could be subject to liabilities, letter of credit requirements, and other sanctions under the DOE’s Borrower Defense to Repayment regulations.
21The DOE’s current Borrower Defense to Repayment regulations establish processes for borrowers to receive from the DOE a discharge of the obligation to repay certain Title IV Program loans based on certain acts or omissions by the institution or a covered party. The current regulations also establish processes for the DOE to seek recovery from the institution of the amount of discharged loans. On November 1, 2022, the DOE published final regulations on Borrower Defense to Repayment and other topics with a general effective date of July 1, 2023. The final regulations regarding Borrower Defense to Repayment and regarding closed school loan discharges are extensive and generally make it easier for borrowers to obtain discharges of student loans and for the DOE to assess liabilities and other sanctions on institutions based on the loan discharges. The implementation of new Borrower Defense to Repayment regulations by the DOE and the enforcement of the existing Borrower Defense to Repayment regulations could have a material adverse effect on our business and results of operations. See Part I, Item 1. “Business - Regulatory Environment – Borrower Defense to Repayment Regulations” and “Business – Regulatory Environment – Closed School Loan Discharges.”
We have appealed a class action settlement approved by the U.S. District Court for the Northern District of California (Sweet v. Cardona, No. 3:19-cv-3674 (N.D. Cal.)) that could result in the automatic granting of all pending borrower defense applications submitted to the DOE on or before June 22, 2022 concerning our institutions and, potentially, could lead to the DOE seeking recoupment from us of all loan amounts in the granted applications.
On June 22, 2022, the DOE and the plaintiffs in a lawsuit before a federal court in California submitted a proposed settlement agreement to the court. The plaintiffs contend, among other things, that the DOE failed to timely decide and resolve Borrower Defense to Repayment applications submitted to the DOE. If approved, the settlement would result in full discharge and refund payments to covered student borrowers who have asserted a Borrower Defense to Repayment to the DOE and whose borrower defense claims have not yet been granted or denied on the merits.
The lawsuit, Sweet v. Cardona, No. 3:19-cv-3674 (N.D. Cal.), is a class action filed on June 25, 2019 against the DOE in the U.S. District Court for the Northern District of California submitted by a group of students, none of whom attended any of our institutions. We were not a party to the lawsuit when it was filed. The plaintiffs requested that the court compel the DOE to start approving or denying the pending applications. The court granted class certification and defined the class of plaintiffs generally to include all people who borrowed a Title IV Direct loan or FFEL loan, who have asserted a Borrower Defense to Repayment claim to the DOE, and whose borrower defense claim has not been granted or denied on the merits. We have not received notice or confirmation directly from the DOE of the number of student borrowers who have submitted Borrower Defense to Repayment claims related to our institutions.
The proposed settlement agreement includes a long list of institutions, including Lincoln Technical Institute and Lincoln College of Technology. Under the proposed settlement, the DOE would agree to discharge loans and refund all prior loan payments to each class member with loan debt associated with an institution on the list (which includes our institutions), including borrowers whose applications the DOE previously denied after October 30, 2019. The DOE and the plaintiffs stated in a court filing that this provision is intended to provide for automatic relief for students at the listed schools which the DOE estimates to total 200,000 class members. We anticipate that the DOE believes that the class includes the borrowers with claims to which we have submitted responses to the DOE although it is possible that the class also includes borrowers with claims for which we have not received notice from the DOE or an opportunity to respond. The parties also stated that the DOE has determined that attendance at one of the institutions on the list justifies presumptive relief based on strong indicia regarding substantial misconduct by the institutions, whether credibly alleged or in some instances proven, and the high rate of class members with applications related to the listed schools. The proposed settlement agreement provides a separate process for reviewing claims associated with schools that are not on the list. It is unclear whether the DOE would seek to impose liabilities on us or other schools or take other actions or impose other sanctions on us or other schools based on relief provided to students under the proposed settlement agreement (particularly if the DOE provides relief without evaluating or accounting for legal and factual information provided to the DOE by us and other schools or without providing us and other schools with notice and an opportunity to respond to some of the claims).
In July 2022, the Company and certain other school companies submitted motions to intervene in the lawsuit in order to protect our interests in the finalization and implementation of any settlement agreement that the court might approve. We noted in the motion that the proposed settlement agreement introduced, for the first time, the prospect that the DOE would “automatically” and fully discharge loans and refund payments to student borrowers without adjudication of the merits of the students’ borrower-defense applications in accordance with the DOE’s borrower-defense regulations and without ensuring that we and other institutions can defend against allegations asserted in individual borrower-defense applications. In addition, we also asserted that it would be unlawful and inappropriate if the DOE sought recoupment against us based on loans that were forgiven under the proposed settlement agreement without providing us with an opportunity to address the claims or accounting for our responses to the claims already submitted which we believe is required by the regulations. We also asserted that the lawsuit and the potential loan discharges could result in reputational harm to us and our institutions and could result in other actions against us by other federal and state agencies or by current and former students.
The court granted preliminary approval of the proposed settlement agreement on August 4, 2022, and also granted our motion for permissive intervention for the purpose of objecting to and opposing the class action settlement. On September 22, 2022, the DOE and the plaintiffs filed a joint motion for final approval of the settlement. In that joint motion, the DOE and the plaintiffs reported that approximately 179,000 new borrower defense applications had been submitted to the DOE as of September 20, 2022. We and the three other intervenor schools filed briefs opposing final approval.
In an Order dated November 16, 2022, District Court Judge William Alsup granted final approval of the settlement agreement. Subsequently, we, and two other school companies that intervened, filed notices of appeal and asked the district court to stay the settlement from taking effect until the appeals were decided and the district court did temporarily stay any loan discharges and refunds under the settlement pending the decision. Plaintiffs and the DOE thereafter filed oppositions to our stay request and, after a hearing, the district court denied our stay request, but extended the temporary stay of loan discharges and refunds associated with the three school companies for seven days to allow us to file a motion for a stay with the U.S. Court of Appeals for the Ninth Circuit. On February 27, 2023, we and the two other school companies that appealed filed a joint motion for a stay with the Ninth Circuit which we expect the plaintiffs and the DOE will oppose. We expect that the Ninth Circuit will decide our stay motion in the coming weeks.
Regardless of the outcome of our stay request, we intend to ask the Ninth Circuit to overturn the district court’s judgment approving the final settlement. If the settlement agreement is upheld on appeal, or if the courts deny our stay requests, the DOE is expected to automatically approve all of the pending borrower defense applications concerning us that were submitted to the DOE on or before June 22, 2022 and to provide such automatic approval without evaluating or accounting for any of the legal or factual grounds that we provided for contesting the applications that were provided to us. The DOE may or may not attempt to seek recoupment from applicable schools relating to approval of borrower defense applications. If the DOE approves borrower defense applications concerning us and attempts to recoup from us the loan amounts in the approved applications, we would consider our options for challenging the legal and factual bases for such actions. The settlement also requires the DOE to review borrower defense applications submitted after June 22, 2022 and before November 16, 2022 within 36 months of the final settlement date. If the DOE grants some or all of these applications, the DOE also could attempt to recoup from us the loan amounts relating to these applications as well. We cannot predict whether the settlement will be upheld on appeal, what actions the DOE might take if the settlement is upheld on appeal (including the ultimate timing or amount of borrower defense applications the DOE may grant in the future and the timing or amount of any possible liabilities that the DOE may seek to recover from the Company, if any), or what the outcome of our challenges to such actions will be, but such actions could have a material adverse effect on our business and results of operations.
The DOE has changed its regulations, and may make other changes in the future, in a manner which could require us to incur additional costs in connection with our administration of the Title IV Programs, affect our ability to remain eligible to participate in the Title IV Programs, impose restrictions on our participation in the Title IV Programs, affect the rate at which students enroll in our programs, or otherwise have a significant impact on our business and results of operations.
In October 2014, the DOE issued final regulations on gainful employment requiring each educational program to achieve threshold rates in two debt measure categories related to an annual debt to annual earnings ratio and an annual debt to discretionary income ratio. The regulations outline various scenarios under which programs could lose Title IV Program eligibility for failure to achieve threshold rates in one or more measures over certain periods of time ranging from two to four years. The regulations also require an institution to provide warnings to students in programs which may lose Title IV Program eligibility at the end of an award year. The final regulations also contain other provisions that, among other things, include disclosure, reporting, new program approval, and certification requirements. See “Regulatory Environment – Gainful Employment.”
The DOE announced its intent to convene a negotiated rulemaking committee to develop proposedperiodically issues new regulations to revise the gainful employment regulations. The DOE has not established a final schedule for publication of proposed or final regulations. Any regulations published in final form by November 1, 2018 typically would takeand guidance that can have an adverse effect in July 1, 2019, but weon our institutions. We cannot provide any assurances as topredict the timing orand content of any such regulations.
On June 30, 2017, the DOE announced the extension of the compliance date for certain gainful employment disclosure requirements from July 1, 2017 to July 1, 2018. The DOE stated that institutions are still required to comply with other gainful employment disclosure requirements by July 1, 2017. On August 18, 2017, the DOE announced in the Federal Register new deadlines for submitting notices of intent to file alternate earnings appeals of gainful employment rates and for submitting alternate earnings appeals of those rates. The deadline to file a notice of intent to file an appeal was October 6, 2017 and the deadline to file the alternate earnings appeal was February 1, 2018. The DOE has not announced a delayregulations or suspension in the enforcement of any other gainful employment regulations. However, on August 8, 2017, DOE officials announcedguidance that the DOE did not have a timetable for the issuance of completer listsmay seek to schools, which is the first step toward generating the data for calculating new gainful employment rates. Consequently, we cannot predict whenimpose or whether and to what extent the DOE will begin the processmay issue new regulations and guidance that could adversely impact for-profit schools including our institutions. The DOE recently published new regulations on a variety of calculatingtopics on October 28, 2022 and issuing new draft or final gainful employment rates in the future. We also cannot predict whether the announcement of the intent to initiate gainful employment rulemaking or the extension of certain gainful employment deadlines may result in the DOE delaying the issuance of new draft or final gainful employment rates in the future.
In January 2016, the DOE began negotiated rulemaking to develop proposed regulations regarding a borrower’s ability to allege acts or omissions by an institution as a defense to the repayment of certain Title IV loans and the consequences to the borrower, the DOE, and the institution. See “Regulatory Environment – Borrower Defense to Repayment Regulations.” Onon November 1, 2016, the DOE published in the Federal Register the final version of these regulations2022 with a general effective date of July 1, 20172023. The DOE is currently engaged in rulemaking processes and which, among other things, include rules for:
| · | establishing new processes, and updating existing processes, for enabling borrowersintends to initiate additional rulemaking processes in 2023 that are expected to obtain from the DOE a discharge of some or all of their federal student loans based on circumstances such as certain acts or omissions of the institution and for the DOE to impose and collect liabilities against the institution following the loan discharges; |
| · | establishing expanded standards of financial responsibility (see “Financial Responsibility Standards”); |
| · | requiring institutions to make disclosures to current and prospective students regarding the existence of certain of the circumstances identified in the expanded standards of financial responsibility; |
| · | calculating a loan repayment rate for each proprietary institution under standards established by the regulations and requiring institutions to provide warnings to current and prospective students if the institution has a loan repayment rate below specified thresholds; |
| · | prohibiting certain contractual provisions imposed by or on behalf of schools on students regarding arbitration, dispute resolution, and participation in class actions; and |
| · | expanding the existing definition of misrepresentations that could result in grounds for discharge of student loans and in liabilities and sanctions against the institution, including, without limitation, potential loss of Title IV eligibility. |
On January 19, 2017, the DOE issued new regulations on a broad range of topics that updatecould adversely impact institutions including our institutions. See Part I, Item 1. “Business – Regulatory Environment – Negotiated Rulemaking.”
If we cannot comply with the Department’s hearing procedures for actions to establish liability against an institution and to establish procedural rules governing recovery proceedings under the DOE’s borrower defense to repayment regulations.
The DOE has delayed the effective date of a majorityprovisions of these or other regulations, until July 1, 2019 to ensure that thereas they currently exist or may be revised, or if the cost of such compliance is adequate time to conduct negotiated rulemaking and, as necessary, develop revised regulations. The DOE intends to issue proposed regulations for public comment during the first half of 2018, but the DOE has not established a final schedule. Any regulations published in final form by November 1, 2018 typically would take effect on July 1, 2019, but we cannot provide any assurances as to the timingexcessive, or content of any such regulationsif funding is materially reduced, our revenues or whether and when the DOE might end the delay in the effective date of the previously published regulations.profit margin could be materially adversely affected.
We cannot predict how the DOE would interpret and enforce the new borrower defense to repayment rules if they take effect after the delaycurrent or future regulations or how these rules,regulations, or any rulesregulations that may arise out of thea negotiated rulemaking process or any other rulesregulations that DOE may promulgate, on this or other topics, may impact our schools’ participation in the Title IV programs;Programs; however, the new rulescurrent or future regulations could have a material adverse effect on our schools’ business and results of operations, and the broad sweep of the recent rules and the rules that the DOE is currently developing may, in the future, require our schools to submit a letter of credit based on expanded standards of financial responsibility as indicated above.responsibility.
If we or our eligible institutions do not meet the financial responsibility standards prescribed by the DOE, we may be required to post letters of credit or our eligibility to participate in Title IV Programs could be terminated or limited, which could significantly reduce our student population and revenues.
To participate in Title IV Programs, an eligible institution must satisfy specific measures of financial responsibility prescribed by the DOE or post a letter of credit in favor of the DOE and possibly accept other conditions on its participation in Title IV Programs. The DOE published new regulations currently delayed until July 1, 2019, that establishestablished expanded standards of financial responsibility, thatwhich could result in a requirement that we submit to the DOE a substantial letter of credit or other form of financial protection in an amount determined by the DOE, and be subject to other conditions and requirements, based on any one of an extensive list of triggering circumstances.circumstances. See “RegulatoryPart I, Item 1. “Business - Regulatory Environment – Financial Responsibility Standards.” The DOE plans to reinitiate a rulemaking process that is expected to result in new regulations that, among other things, may increase the number and scope of financial responsibility requirements and triggering circumstances that could lead to a letter of credit requirement or other sanctions. Any obligation to post one or more letters of credit would increase our costs of regulatory compliance. Our inability to obtain a required letter of credit or limitations on, or termination or revocation of, our participation in Title IV Programs could limit our students'students’ access to various government-sponsored student financial aid programs, which could significantly reduce our student population and revenues.
We are subject to fines and other sanctions if we pay impermissible commissions, bonuses or othermake incentive payments to individuals involved in certain recruiting, admissions or financial aid activities, which could increase our cost of regulatory compliance and adversely affect our results of operations.
An institution participating in Title IV Programs may not provide any commission, bonus or other incentive payment based directly or indirectly on success in enrolling students or securing financial aid to any person involved in any student recruiting or admission activities or in making decisions regarding the awarding of Title IV Program funds. See “RegulatoryPart I, Item 1. “Business - Regulatory Environment -- Restrictions on Payment of Commissions, Bonuses and Other Incentive Payments.” We cannot predict how the DOE will interpret and enforce the incentive compensation rule. The implementation of theserule and the limited published guidance that the DOE has provided, nor how it will apply the rule and guidance to our past, present, and future compensation practices. These regulations has required us to change our compensation practices and hashave had and may continue to have a significant impact on the rate at which students enroll in our programs and on our business and results of operations. If we are found to have violated this law, we could be fined or otherwise sanctioned by the DOE or we could face litigation filed under the qui tam provisions of the Federal False Claims Act.
If our schools do not maintain their state licensure and accreditation, they may not participate in Title IV Programs, which could adversely affect our student population and revenues.
An institution must be accredited by an accrediting commission recognized by the DOE and by applicable state educational agencies in order to participate in Title IV Programs. Our Iselin school and its branch campuses are accredited by an accrediting commission that is no longer recognized by the DOE, and therefore, must obtain accreditation from a new accrediting commission by June 12, 2018 in order to continue participating in Title IV Programs and is subject to additional conditions imposed by the DOE prior to that date. As discussed under the “RegulatorySee Part I, Item 1. “Business - Regulatory Environment – Accreditation,” we have applied to another accrediting agency, ACCSC, for accreditation of our Iselin schoolState Authorization” and its branch campuses. If our Iselin school and its campuses are unable to obtain initial accreditation from ACCSC by June 12, 2018, then our Iselin school and its branch campuses would lose Title IV Program eligibility as of that date.“Business – Regulatory Environment – Accreditation.” If any of our schools failsfail to comply with accrediting commission requirements, the institution and its main and/or branch campuses are subject to the loss of accreditation or may be placed on probation or a special monitoring or reporting status which, if the noncompliance with accrediting commission requirements is not resolved, could result in loss of accreditation. Loss of accreditation by any of our main campuses would result in the termination of eligibility of that schoolschool’s eligibility and all of its branch campuses to participate in Title IV Programs and could cause us to close the school and its branches, which could have a significant adverse impact on our business and operations.
On October 28, 2021, the DOE announced that it had notified ACCSC that the DOE’s decision regarding its recognition of ACCSC as an accrediting agency was being deferred pending the submission of additional information about ACCSC’s monitoring, evaluation, and actions related to high-risk institutions. See Part 1, Item 1. “Business – Regulatory Environment – Accreditation.” If the DOE declines to continue its recognition of ACCSC and if the subsequent period for obtaining accreditation from another DOE-recognized accrediting agency lapses before we obtain accreditation from another DOE-recognize accrediting agency (or if the DOE does not provide such a period for institutions to obtain other accreditation), our schools could lose their Title IV eligibility. We cannot predict the timing and outcome of the DOE’s decision on the continuation of its recognition of ACCSC, the timing and outcome of any appeal that ACCSC might pursue in the event of an adverse decision, or the duration and conditions of any period the DOE may elect to provide to institutions to obtain accreditation from another DOE-recognized accrediting agency. More recently, the DOE announced its intent to commence a negotiated rulemaking process in April 2023 on a number of topics including amendments to the regulations on accreditation, including regulations associated with the standards relating to the DOE’s recognition of accrediting agencies and accreditation procedures as a component of institutional eligibility for participation in the Title IV Program. We cannot predict the ultimate timing, content or impact of any regulations that DOE might publish on this topic.
Programmatic accreditation is the process through which specific programs are reviewed and approved by industry- and program-specific accrediting entities. Although programmatic accreditation is not generally necessary for Title IV Program eligibility, such accreditation may be required to allow students to sit for certain licensure exams or to work in a particular profession or career or to meet other requirements. Failure to obtain or maintain such programmatic accreditation may lead to a decline in enrollments in such programs. Moreover, under new gainful employment regulations issued by the DOE, institutions are required to certify that they have programmatic accreditation under certain circumstances. See “Regulatory Environment – Gainful Employment.” Failure to comply with these new requirements could impact the Title IV eligibility of educational programs that are required to maintain such programmatic accreditation.
Our institutions would lose eligibility to participate in Title IV Programs if the percentage of their revenues derived from those programs exceeds 90%, which could reduce our student population and revenues.
Under the HEA reauthorization, aA proprietary institution that derives more than 90% of its total revenue from Title IV Programs for two consecutive fiscal years becomes immediately ineligible to participate in Title IV Programs and may not reapply for eligibility until the end of at least two fiscal years. An institution with revenues exceeding 90% for a single fiscal year will be placed on provisional certification and may be subject to other enforcement measures.
In March 2021, the ARPA amended the 90/10 Rule by treating other “federal funds that are disbursed or delivered to or on behalf of a student to be used to attend such institution” in the same way as Title IV funds are currently treated in the 90/10 Rule calculation. See “RegulatoryPart I, Item 1. “Business – Regulatory Environment – 90/10 Rule.” The ARPA states that the amendments to the 90/10 Rule apply to institutional fiscal years beginning on or after January 1, 2023 and are subject to the HEA’s negotiated rulemaking process. The DOE published new final 90/10 Rule regulations on October 28, 2022 with a general effective date of July 1, 2023. The 90/10 Rule regulations could have a materially adverse effect on us and other schools like ours. See Part I, Item 1. “Business – Regulatory Environment – 90/10 Rule” and “Business – Regulatory Environment – Negotiated Rulemaking.” We cannot be certain that the changes we make to our operations in the future to address the new 90/10 Rule regulations will succeed in maintaining our institutions’ 90/10 Rule percentages below required levels or that the changes will not materially impact our business operations, revenues, and operating costs. It also is possible that Congress or the DOE could amend the 90/10 Rule in the future to lower the 90% threshold, change the calculation methodology, or make other changes to the 90/10 Rule that could make it more difficult for our institutions to comply with the 90/10 Rule. If any of our institutions loses eligibility to participate in Title IV Programs, that loss would cause an event of default under our credit agreement, would also adversely affect our students’ access to various government-sponsored student financial aid programs, and would have a significant impact on the rate at which our students enroll in our programs and on our business and results of operations.
Our institutions would lose eligibility to participate in Title IV Programs if their former students defaulted on repayment of their federal student loans in excess of specified levels, which could reduce our student population and revenues.
An institution may lose its eligibility to participate in some or all Title IV Programs if the rates at which the institution's current and former students default on their federal student loans exceed specified percentages. See “RegulatoryPart I, Item 1. “Business - Regulatory Environment – Student Loan Defaults.” If former students defaulted on repayment of their federal student loans in excess of specified levels, our institutions would lose eligibility to participate in Title IV Programs, would cause an event of default under our credit agreement, would also adversely affect our students’ access to various government-sponsored student financial aid programs, and would have a significant impact on the rate at which our students enroll in our programs and on our business and results of operations. .
We are subject to sanctions if we fail to correctly calculate and timely return Title IV Program funds for students who withdraw before completing their educational program,programs, which could increase our cost of regulatory compliance and decrease our profit margin.
An institution participating in Title IV Programs must correctly calculate the amount of unearned Title IV Program funds that have been credited to students who withdraw from their educational programs before completing them and must return those unearned funds in a timely manner, generally within 45 days of the date the institution determines that the student has withdrawn.such student’s withdrawal. If the unearned funds are not properly calculated and timely returned, we may have to post a letter of credit in favor of the DOE or may be otherwise sanctioned by the DOE, which could increase our cost of regulatory compliance and adversely affect our results of operations. Based upon the findings of an annual Title IV Program compliance audit of our Columbia Maryland and Iselin New Jersey institutions, the Company submitted letterswe are required to maintain a letter of credit in the amountsamount of $0.5 million and $0.1 million$600,020 to the DOE. More recently, the DOE announced its intent to commence a negotiated rulemaking process in April 2023 on a number of topics including plans to amend the regulations on the requirements for institutions to return unearned Title IV funds to students who withdraw from their educational programs before completing them. We are required to maintain those letterscannot predict the ultimate timing, content or impact of credit in place for a minimum of two years. any regulations that DOE might publish on this topic. See “RegulatoryPart I, Item 1. “Business - Regulatory Environment – Return of Title IV Program Funds.”
We are subject to sanctions if we fail to comply with the DOE’s regulations regarding prohibitions against substantial misrepresentations, which could increase our cost of regulatory compliance and decrease our profit margin.
The DOE’s regulations prohibit an institution that participates in the Title IV Programs from engaging in substantial misrepresentation of the nature of its educational programs, financial charges, graduate employability or its relationship with the DOE. The DOE published final regulations on November 1, 2022 that, among other things, expanded the categories of conduct deemed to be a misrepresentation or substantial omission of fact and that also established new prohibitions on certain types of recruiting tactics and conduct that the DOE deems to be aggressive or deceptive. See Part I, Item 1. “Business - Regulatory Environment – Substantial Misrepresentation” and “Business – Regulatory Environment – Negotiated Rulemaking.” If the DOE determines that one of our institutions has engaged in substantial misrepresentation or other prohibited conduct, the DOE may impose sanctions or other conditions upon the institution including, but not limited to, initiating an action to fine the institution or limit, suspend, or terminate its eligibility to participate in Title IV Programs and may seek to discharge students’ loans and impose liabilities upon the institution. The new regulations also could result in further scrutiny of marketing and recruiting practices by institutions like our schools and could increase the chances of the DOE finding practices to be noncompliant and imposing sanctions based on the alleged noncompliance.
All of our institutions are provisionally certified by the DOE, which may make them more vulnerable to unfavorable DOE action and place additional regulatory burdens on its operations.
All of our institutions are provisionally certified by the DOE. See Part I, Item 1. “Business - Regulatory Environment – Regulation of Federal Student Financial Aid Programs.” The DOE typically places an institution on provisional certification following a change in ownership resulting in a change of control, and may provisionally certify an institution for other reasons including, but not limited to, failure to comply with certain standards of administrative capability or financial responsibility. During the time when an institution is provisionally certified, it may be subject to adverse action with fewer due process rights than those afforded to other institutions. In addition, an institution that is provisionally certified must apply for and receive approval from the DOE for certain substantive changes including, but not limited to, the establishment of an additional location, an increase in the level of academic offerings or the addition of new programs. The DOE intends to reinitiate the rulemaking process that is considering, among other issues, establishing rules to authorize additional conditions and restrictions on provisionally certified institutions and expanding existing regulations regarding administrative capability and financial responsibility. See Part I, Item 1. “Business – Regulatory Environment – Negotiated Rulemaking.” Any adverse action by the DOE or increased regulatory burdens as a result of the provisional status of one of our institutions could have a material adverse effect on enrollments and our revenues, financial condition, cash flows and results of operations.
Regulatory agencies or third parties may conduct compliance reviews, bring claims or initiate litigation against us. If the results of these reviews or claims are unfavorable to us, our results of operations and financial condition could be adversely affected.
Because we operate in a highly regulated industry, we are subject to compliance reviews and claims of noncompliance and lawsuits by government agencies and third parties. We may be subject to further reviews related to, among other things, issues of noncompliance identified in recent audits and reviews related to our institutions’ compliance with Title IV Program requirements or related to liabilities for the discharge of loans to certain students who attended campuses of our institutions that are now closed. See Part I, Item 1. “Business - Regulatory Environment – Compliance with Regulatory Standards and Effect of Regulatory Violations.” If the results of these reviews or proceedings are unfavorable to us, or if we are unable to defend successfully against third-party lawsuits or claims, we may be required to pay money damages or be subject to fines, limitations on the operations of our business, loss of federal and state funding, injunctions or other penalties. Even if we adequately address issues raised by an agency review or successfully defend a third-party lawsuit or claim, we may have to divert significant financial and management resources from our ongoing business operations to address issues raised by those reviews or defend those lawsuits or claims. Certain of our institutions are subject to ongoing reviews and proceedings. See “RegulatoryPart I, Item 1. “Business – Regulatory Environment – State Authorization,Accreditation,” “Regulatory Environment – Accreditation,Other Financial Assistance Programs,” and“Regulatory Environment – Borrower Defense to Repayment,” “Regulatory Environment - Compliance with Regulatory Standards and Effect of Regulatory Violations.Violations,” and “Regulatory Environment - Scrutiny of the For-Profit Postsecondary Education Sector.”
A decline in the overall growth of enrollment in post-secondary institutions, or in our core disciplines, could cause us to experience lower enrollment at our schools, which could negatively impact our future growth.
Enrollment in post-secondary institutions over the next ten years is expected to be slower than in the prior ten years. In addition, the number of high school graduates eligible to enroll in post-secondary institutions is expected to fall before resuming a growth pattern for the foreseeable future. In order to increase our current growth rates in degree granting programs, we will need to attract a larger percentage of students in existing markets and expand our markets by creating new academic programs. In addition, if job growth in the fields related to our core disciplines is weaker than expected, as a result of any regional or national economic downturn or otherwise, fewer students may seek the types of diploma or degree granting programs that we offer or seek to offer. Our failure to attract new students, or the decisions by prospective students to seek diploma or degree programs in other disciplines, would have an adverse impact on our future growth.
Our business could be adversely impacted by additional legislation, regulations, or investigations regarding private student lending because students attending our schools rely on private student loans to pay tuition and other institutional charges.
The U.S. Consumer Financial Protection Bureau (“CFPB”), under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010,CFPB has exercised supervisory authority over private education loan providers. The CFPB has been active in conducting investigations into the private student loan market and issuing several reports with findings that are critical of the private student loan market. The CFPB has initiated investigations into the lending practices of other institutions in the for-profit education sector. The CFPB has issued procedures for further examination of private education loans and published requests for information regarding repayment plans and regarding arrangements between schools and financial institutions. On August 31, 2017, the DOE informed CFPB that it was terminating an information sharing Memorandum of Understanding between the two agencies, in part because the CFPB was acting on student complaints rather than referring them to the DOE for action. The DOE asserted full oversight responsibility for federal student loans, but not with respect to private loans. In late November 2017, new leadership at the CFPB began taking steps to end or pause certain investigations and to restrict or reconsider some its enforcement activities. However, it is unclear the extent to which the CFPB will continue to exercise oversight authority over private education loan providers.
We cannot predict whether any of this activity, or other activities, will result in Congress, the DOE, the CFPB or other regulators adopting new legislation or regulations, or conducting new investigations, into the private student loan market or into the loans received by our students to attend our institutions. Any new legislation, regulations, or investigations regarding private student lending could limit the availability of private student loans to our students, which could have a significant impact on our business and operations.
Changes in the executive branch of our federal government as a result of the outcome of elections or other events could result in further legislation, appropriations, regulations and enforcement actions that could materially or adversely affect our business.
Our industry is subject to an intensive ongoing federal and state regulatory environment that affects our industry. The composition of federal and state executive offices, executive agencies and legislatures that are subject to change based on the results of elections, appointments and other events, may adversely impact our industry through constant changes in that regulatory environment resulting from the disparate views towards the for-profit education industry. See Part I, Item 1. “Business – Regulatory Environment – Scrutiny of the For-Profit Postsecondary Education Sector.” Any laws that are adopted that limit our or our students’ participation in Title IV Programs or in programs to provide funds for active duty service members and veterans or the amount of student financial aid for which our students are eligible, or any decreases in enrollment related to the congressional activity concerning this sector, could have a material adverse effect on our academic or operational initiatives, cash flows, results of operations, or financial condition.
Adverse publicity arising from scrutiny of us or other for-profit postsecondary schools may negatively affect us or our schools.
In recent years, Congress, the DOE, state legislatures, accrediting agencies, the CFPB, the FTC, state attorneys general and the media have scrutinized the for-profit postsecondary education sector. See Part I, Item 1. “Business – Regulatory Environment – Scrutiny of the For-Profit Postsecondary Education Sector.” Adverse publicity regarding any past, pending, or future investigations, claims, settlements, and/or actions against us or other for-profit postsecondary schools could negatively affect our reputation, student enrollment levels, revenue, profit, and/or the market price of our Common Stock. Unresolved investigations, claims, and actions, or adverse resolutions or settlements thereof, could also result in additional inquiries, administrative actions or lawsuits, increased scrutiny, the loss or withholding of accreditation, state licensure, or eligibility to participate in the Title IV Programs or other financial assistance programs, and/or the imposition of other sanctions by federal, state, or accrediting agencies which, individually or in the aggregate, could have a material adverse effect on our business, financial condition, results of operations, and cash flows and result in the imposition of significant restrictions on us and our ability to operate.
Public health pandemics, epidemics or outbreaks, including the COVID-19 pandemic, could have a material adverse effect on our business and operations.
Public health pandemics, epidemics or outbreaks such as the COVID-19 pandemic and the resulting containment measures to be taken in response to such events have caused and may in the future cause economic and financial disruptions globally. The extent to which any rapidly spreading contagious illness may impact our business and operations will depend on a variety of factors beyond our control, including the actions of governments, businesses and other enterprises in response thereto, the effectiveness of those actions, and vaccine availability, distribution and adoption, all of which cannot be predicted with any level of certainty. We believe that the spread of such illnesses could adversely impact our business and operations, including as a result of workforce limitations and travel restrictions and related government actions. If a significant percentage of our workforce is unable to work, including because of illness or travel or government restrictions in connection with pandemics or disease outbreaks, our operations and enrollment may be negatively impacted. Finally, state and federal regulators, including the DOE, are augmenting existing regulatory processes, waiving others, and overseeing various emergency relief and aid programs. It is highly uncertain how long such regulatory accommodations will continue, or how long and in what amount emergency relief and aid funds will continue to be available. We also cannot predict the types of conditions that may be attached to participation in emergency relief and aid programs, and whether and to what extent compliance with such conditions will be monitored and enforced. If further outbreaks occur and students elect to take a leave of absence, withdraw, or do not make up the required in person labs on a timely basis, our future revenues could be impacted.
RISKS RELATED TO OUR BUSINESS
Our success depends in part on our ability to update and expand the content of existing programs and develop new programs in a cost-effective manner and on a timely basis.
Prospective employers of our graduates increasingly demand that their entry-level employees possess appropriate technological skills. These skills are becoming more sophisticated in line with technological advancements in the automotive, diesel, information technology, and skilled trades. Accordingly, educational programs at our schools must keep pace with those technological advancements. The expansion of our existing programs and the development of new programs may not be accepted by our students, prospective employers or the technical education market. Even if we are able to develop acceptable new programs, we may not be able to introduce these new programs as quickly as our competitorsstudents require or as quickly ascompetitors or employers demand. If we are unable to adequately respond to changes in market requirements due to financial or regulatory constraints, unusually rapid technological changes or other factors, our ability to attract and retain students could be impaired, our placement rates could suffer and our revenues could be adversely affected.
In addition, if we are unable to adequately anticipate the requirements of the employers we serve, we may offer programs that do not teach skills useful to prospective employers, or students seeking a technical or career-oriented education which could affect our placement rates and our ability to attract and retain students, causing our revenues to be adversely affected.
Competition could decrease our market share and cause us to lower our tuition rates.
The post-secondary education market is highly competitive. Our schoolsWe compete for students and faculty with traditional public and private two-year and four-year colleges and universities and other proprietary schools, many of which have greater financial resources than we do. Some traditional public and private colleges and universities, as well as other private career-oriented schools, offer programs that may be perceived by students to be similar to ours. Most public institutions are able to charge lower tuition than our schools, due in part to government subsidies and other financial resources not available to for-profit schools. Some of our competitors also have substantially greater financial and other resources than we have which may, among other things, allow our competitors to secure strategic relationships with some or all of our existing strategic partners or develop other high profile strategic relationships, or devote more resources to expanding their programs and their school network, or provide greater financing alternatives to their students, all of which could affect the success of our marketing programs. In addition, some of our competitors have a larger network of schools and campuses than we do, enabling them to recruit students more effectively from a wider geographic area. If we are unable to compete effectively with these institutions for students,This strong competition could adversely affect our student enrollment and revenues will be adversely affected.business.
We may be required to reduce tuition or increase spending in response to competition in order to retain or attract students or pursue new market opportunities. As a result, our market share, revenues and operating margin may be decreased. We cannot be sure that we will be able to compete successfully against current or future competitors or that the competitive pressures we face will not adversely affect our revenues and profitability.
Our financial performance depends in part on our ability to continue to develop awareness and acceptance of our programs among high school graduates and working adults looking to return to school.
The awareness of our programs among high school graduates and working adults looking to return to school is critical to the continued acceptance and growth of our programs. Our inability to continue to develop awareness of our programs could reduce our enrollments and impair our ability to increase our revenues or maintain profitability. The following are some of the factors that could prevent us from successfully marketing our programs:
| · | Studentstudent dissatisfaction with our programs and services; |
| · | Diminisheddiminished access to high school student populations; |
| · | Ourour failure to maintain or expand our brand or other factors related to our marketing or advertising practices; and |
| · | Ourour inability to maintain relationships with employers in the automotive, diesel, skilled trades and IT services industries. |
An increase in interest rates could adversely affect our ability to attract and retain students.
Our students and their families have benefitted from historic lows on student loan interest rates in recent years. Much of the financing our students receive is tied to floating interest rates. Recently, however, student loan interest rates have been edging higher, making borrowing for education more expensive. Increases in interest rates result in a corresponding increase in the cost to our existing and prospective students of financing their education, which could result in a reduction in the number of students attending our schools and could adversely affect our results of operations and revenues. Higher interest rates could also contribute to higher default rates with respect to our students' repayment of their educationeducational loans. Higher default rates may in turn adversely impact our eligibility for Title IV Program participation or the willingness of private lenders to make private loan programs available to students who attend our schools, which could result in a reduction in our student population.
A substantial decrease in student financing options, or a significant increase in financing costs for our students, could have a significant impact on our student population, revenues and financial results.
The consumer credit markets in the United States have recently suffered from increases in default rates and foreclosures on mortgages. Adverse market conditions for consumer and federally guaranteed student loans could result in providers of alternative loans reducing the attractiveness and/or decreasing the availability of alternative loans to post-secondary students, including students with low credit scores who would not otherwise be eligible for credit-based alternative loans. Prospective students may find that these increased financing costs make borrowing prohibitively expensive and abandon or delay enrollment in post-secondary education programs. Private lenders could also require that we pay them new or increased fees in order to provide alternative loans to prospective students. If any of these scenarios were to occur, our students’ ability to finance their education could be adversely affected and our student population could decrease, which could have a significant impact on our financial condition, results of operations and cash flows.
In addition, any actions by the U.S. Congress or by states that significantly reduce funding for Title IV Programs or other student financial assistance programs, or the ability of our students to participate in these programs, or establish different or more stringent requirements for our schools to participate in those programs, could have a significant impact on our student population, results of operations and cash flows.
Our total assets include substantial intangible assets. In the event that our schools do not achieve satisfactory operating results, we may be required to write-off a significant portion of unamortized intangible assets which would negatively affect our results of operations.
Our total assets reflect substantial intangible assets. At December 31, 2017, goodwill and identified intangibles, net, associated with our acquisitions increased to approximately 9.4% from 8.9% of total assets at December 31, 2016. On at least an annual basis, we assess whether there has been an impairment in the value of goodwill and other intangible assets with indefinite lives. If the carrying value of the tested asset exceeds its estimated fair value, impairment is deemed to have occurred. In this event, the amount is written down to fair value. Under current accounting rules, this would result in a charge to operating earnings. Any determination requiring the write-off of a significant portion of goodwill or unamortized identified intangible assets would negatively affect our results of operations and total capitalization, which could be material.
We cannot predict our future capital needs, and if we are unable to secure additional financing when needed, our operations and revenues would be adversely affected.
We may need to raise additional capital in the future to fund acquisitions, working capital requirements, expand our markets and program offerings or respond to competitive pressures or perceived opportunities. We cannot be sure that additional financing will be available to us on favorable terms, or at all. If adequate funds are not availableunavailable when required or on acceptable terms, we may be forced to forego attractive acquisition opportunities, cease our operations and, evenoperations. Even if we are able to continue our operations, our ability to increase student enrollment and revenues would be adversely affected.
We may not be able to retain our key personnel or hire and retain the personnel we need to sustain and grow our business.
Our success has depended, and will continue to depend, largely on the skills, efforts and motivation of our executive officers who generally have significant experience within the post-secondary education industry. Our success also depends in large part upon our ability to attract and retain highly qualified faculty, school directors, administrators and corporate management. Due to the nature of our business, we face significant competition in the attraction and retention of personnel who possess the skill sets that we seek. In addition, key personnel may leave us and subsequently compete against us. Furthermore, we do not currently carry "key man" life insurance on any of our employees. The loss of the services of any of our key personnel, or our failure to attract and retain other qualified and experienced personnel on acceptable terms, could have an adverse effect on our ability to operate our business efficiently and to execute our growth strategy.
Strikes by our employees may disrupt our ability to hold classes as well as our ability to attract and retain students, which could materially adversely affect our operations. In addition, we contribute to multiemployer benefit plans that could result in liabilities to us if these plans are terminated or we withdraw from them.
As of December 31, 2017,2022, the teaching professionals at six of our campuses are represented by unions and covered by collective bargaining agreements that expire between 20182023 and 2020.2025. Although we believe that we have good relationships with these unions and with our employees, any strikes or work stoppages by our employees could adversely impact our relationships with our students, hinder our ability to conduct business and increase costs.
We also contribute to multiemployer pension plans for some employees covered by collective bargaining agreements. These plans are not administered by us, and contributions are determined in accordance with provisions of negotiated labor contracts. The Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendments Act of 1980, imposes certain liabilities upon employers who are contributors to a multiemployer plan in the event of the employer’s withdrawal from, or upon termination of, such plan. We do not routinely review information on the net assets and actuarial present value of the multiemployer pension plans’ unfunded vested benefits allocable to us, if any, and we are not presently aware of any material amounts for which we may be contingently liable if we were to withdraw from any of these plans. In addition, if any of these multiemployer plans enters “critical status” under the Pension Protection Act of 2006, we could be required to make significant additional contributions to those plans.
Anti-takeover provisions in our amended and restated certificate of incorporation, our bylaws and New Jersey law could discourage a change of control that our stockholders may favor, which could negatively affect our stock price.
Provisions in our amended and restated certificate of incorporation and our bylaws and applicable provisions of the New Jersey Business Corporation Act may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our stockholders. These provisions could discourage potential takeover attempts and could adversely affect the market price of our common stock. For example, applicable provisions of the New Jersey Business Corporation Act may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of five years after the person becomes an interested stockholder. Furthermore, our amended and restated certificate of incorporation and bylaws:
| · | authorize the issuance of blank check preferred stock that could be issued by our board of directors to thwart a takeover attempt; |
| · | prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of stock to elect some directors; |
| · | require super-majority voting to effect amendments to certain provisions of our amended and restated certificate of incorporation; |
| · | limit who may call special meetings of both the board of directors and stockholders; |
| · | prohibit stockholder action by non-unanimous written consent and otherwise require all stockholder actions to be taken at a meeting of the stockholders; |
| · | establish advance notice requirements for nominating candidates for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholders' meetings; and |
| · | require that vacancies on the board of directors, including newly created directorships, be filled only by a majority vote of directors then in office. |
We can issue shares of preferred stock without stockholder approval, which could adversely affect the rights of common stockholders.
Our amended and restated certificate of incorporation permits us to establish the rights, privileges, preferences and restrictions, including voting rights, of future series of our preferred stock and to issue such stock without approval from our stockholders. The rights of holders of our common stock may suffer as a result of the rights granted to holders of preferred stock that may be issued in the future. In addition, we could issue preferred stock to prevent a change in control of our Company, depriving common stockholders of an opportunity to sell their stock at a price in excess of the prevailing market price.
The trading price of our common stock may continue to fluctuate substantially in the future.
Our stock price has declined substantially over the past five years and has and may fluctuate significantly as a result of a number of factors, some of which are not in our control. These factors include:
· | general economic conditions; |
· | general conditions in the for-profit, post-secondary education industry; |
· | negative media coverage of the for-profit, post-secondary education industry; |
· | failure of certain of our schools or programs to maintain compliance under the gainful employment regulation, 90-10 Rule or with financial responsibility standards; |
· | the impact of DOE rulemaking and other changes in the highly regulated environment in which we operate; |
· | the initiation, pendency or outcome of litigation, accreditation reviews and regulatory reviews, inquiries and investigations; |
· | quarterly variations in our operating results; |
· | our ability to meet or exceed, or changes in, expectations of investors and analysts, or the extent of analyst coverage of us; and |
· | decisions by any significant investors to reduce their investment in our common stock. |
In addition, the trading volume of our common stock is relatively low. This may cause our stock price to react more to these factors and various other factors and may impact an investor’s ability to sell our common stock at the desired time at a price considered satisfactory. Any of these factors may adversely affect the trading price of our common stock, regardless of our actual operating performance, and could prevent an investor from selling shares of our common stock at or above the price at which the investor purchased them.
System disruptions to our technology infrastructure could impact our ability to generate revenue and could damage the reputation of our institutions.
The performance and reliability of our technology infrastructure is critical to our reputation and to our ability to attract and retain students. We license the software and related hosting and maintenance services for our online platform and our student information system from third-party software providers. Any system error or failure, or a sudden and significant increase in bandwidth usage, could result in the unavailability of systems to us or our students or result in delays and/or errors in processing student financial aid and related disbursements. Any such system disruptions could impact our ability to generate revenue and affect our ability to access information about our students and could also damage the reputation of our institutions. Any of the cyber-attacks,cyberattacks, breaches or other disruptions or damage described above could interrupt our operations, result in theft of our and our students’ data or result in legal claims and proceedings, liability and penalties under privacy laws and increased cost for security and remediation, each of which could adversely affect our business and financial results. We may be required to expend significant resources to protect against system errors, failures or disruptions or to repair problems caused by any actual errors, disruptions or failures.
We are subject to privacy and information security laws and regulations due to our collection and use of personal information, and any violations of those laws or regulations, or any breach, theft or loss of that information, could adversely affect our reputation and operations.
Our efforts to attract and enroll students result in us collecting, using and storing substantial amounts of personal information regarding applicants, our students, their families and alumni, including social security numbers and financial data. We also maintain personal information about our employees in the ordinary course of our activities. Our services, the services of many of our health plan and benefit plan vendors, and other information can be accessed globally through the Internet. We rely extensively on our network of interconnected applications and databases for day to day operations as well as financial reporting and the processing of financial transactions. Our computer networks and those of our vendors that manage confidential information for us or provide services to our student may be vulnerable to cyber-attackscomputer hackers, organized cyberattacks and physical or electronic breaches or unauthorized access, acts of vandalism, ransomware, software viruses and other similar types of malicious activities.
Regular patching of our computer systems and frequent updates to our virus detection and prevention software with the latest virus and malware signatures may not catch newly introduced malware and viruses or “zero-day” viruses, prior to their infecting our systems and potentially disrupting our data integrity, taking sensitive information or affecting financial transactions. While we utilize security and business controls to limit access to and use of personal information, any breach of student or employee privacy or errors in storing, using or transmitting personal information could violate privacy laws and regulations resulting in fines or other penalties. A wide range of high profilehigh-profile data breaches in recent years has led to renewed interest in federal data and cybersecurity legislation that could increase our costs and/or require changes in our operating procedures or systems. A breach, theft or loss of personal information held by us or our vendors, or a violation of the laws and regulations governing privacy could have a material adverse effect on our reputation or result in lawsuits, additional regulation, remediation and compliance costs or investments in additional security systems to protect our computer networks, the costs of which may be substantial. We cannot assure you that a breach, loss, or theft of personal information will not occur.
Changes in U.S. tax laws or adverse outcomes from examination of our tax returns could have an adverse effect upon our financial results.
We are subject to income tax requirements in various jurisdictions in the United States. Legislation or other changes in the tax laws of the jurisdictions where we do business could increase our liability and adversely affect our after-tax profitability. In the United States, the Tax Cuts and Jobs Act, which was enacted on December 22, 2017, could have a significant impact on our effective tax rate, net deferred tax assets and cash tax expenses. The Tax Cuts and Jobs Act, among other things, reduces the U.S. corporate statutory tax rate, repeals the corporate alternative minimum tax, changes how existing corporate alternative minimum tax credits can be realized either to offset regular tax liability or to be refunded, and eliminates or limits deduction of several expenses which were previously deductible. We are currently evaluating the overall impact of the Tax Cuts and Jobs Act on our effective tax rate and balance sheet, but expect that the impact may be significant for our fiscal year 2018 and future periods.
In addition, we are subject to examination of our income tax returns by the Internal Revenue Service and the taxing authorities of various states. We regularly assess the likelihood of adverse outcomes resulting from tax examinations to determine the adequacy of our provision for income taxes and we have accrued tax and related interest for potential adjustments to tax liabilities for prior years. However, there can be no assurance that the outcomes from these tax examinations will not have a material effect, either positive or negative, on our business, financial conditions and results of operation.
The occurrence of natural or man-made catastrophes, including those caused by climate change and other climate-related causes, could materially and adversely affect our business, financial condition, results of operations and prospects.
Substantially all of our campuses are located at leased premises in various areas some of which can experience hurricanes, severe storms, floods, coastal storms, tornadoes, power outages and other severe weather events. If these events were to occur and cause damage to our campus facilities, or limit the ability of our students or faculty to participate in or contribute to our academic programs or our ability to comply with federal and state educational requirements, our business may be adversely affected. Disruptions of this kind may also result in increases in student attrition, voluntary or mandatory closure of some or all of our facilities, or our inability to procure essential supplies or travel during the pendency of mandated travel restrictions. We may not be able to effectively shift our operations due to disruptions arising from the occurrence of such events, and our business and results of operations could be affected adversely as a result. Moreover, damage to or total destruction of our campus facilities from various weather events may not be covered in whole or in part by any insurance we may have.
Our success depends, in part, on the effectiveness of our marketing and advertising programs in recruiting new students.
Maintaining our revenues and margins and further increasing them requires us to continue to develop our admissions programs and attract new students in a cost-effective manner. The scope and focus of our marketing and advertising efforts and the strategies used are determined by, among other factors, the specific geographic markets, regulatory compliance requirements and the nature of each institution and its students. If we are unable to advertise and market our institutions and programs successfully, our ability to attract and enroll new students could be materially adversely affected and, consequently, our financial performance could suffer. We use marketing tools such as the Internet, radio, television and print media advertising to promote our institutions and programs. Our representatives also make presentations at high schools and career fairs. Additionally, we rely on the general reputation of our institutions and referrals from current students, alumni and employers as a source of new enrollment. As part of our marketing and advertising, we also subscribe to lead-generating databases in certain markets, the cost of which may increase. Among the factors that could prevent us from marketing and advertising our institutions and programs successfully are the failure of our marketing tools and strategies to appeal to prospective students, regulatory constraints on marketing, current student and/or employer dissatisfaction with our program offerings or results and diminished access to high school campuses and military bases. In order to maintain our growth, we will need to attract a larger percentage of students in existing markets and increase our addressable market by adding locations in new markets and rolling out new academic programs. Any failure to accomplish this may have a material adverse effect on our future growth.
RISKS RELATED TO OUR CAPITAL STRUCTURE
Anti-takeover provisions in our Amended and Restated Certificate of Incorporation, our Bylaws and New Jersey law could discourage a change of control that our shareholders may favor, which could negatively affect our stock price.
Provisions in our Amended and Restated Certificate of Incorporation and our Bylaws and applicable provisions of the New Jersey Business Corporation Act may make it more difficult and expensive for a third party to acquire control of the Company even if a change of control would be beneficial to the interests of our shareholders. These provisions could discourage potential takeover attempts and could adversely affect the market price of our Common Stock. For example, applicable provisions of the New Jersey Business Corporation Act may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested shareholder for a period of five years after the person becomes an interested shareholder. Furthermore, our Amended and Restated Certificate of Incorporation and Bylaws:
authorize the issuance of blank check Preferred Stock that could be issued by our board of directors to thwart a takeover attempt;
prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of stock to elect some directors;
require super-majority voting to effect amendments to certain provisions of our amended and restated certificate of incorporation;
limit who may call special meetings of both the board of directors and shareholders;
prohibit shareholder action by non-unanimous written consent and otherwise require all shareholder actions to be taken at a meeting of the shareholders;
establish advance notice requirements for nominating candidates for election to the board of directors or for proposing matters that can be acted upon by shareholders at shareholders’ meetings; and
require that vacancies on the board of directors, including newly created directorships, be filled only by a majority vote of directors then in office.
We can issue shares of Preferred Stock without general shareholder approval, which could adversely affect the rights of common shareholders.
Our Amended and Restated Certificate of Incorporation permits us to establish the rights, privileges, preferences and restrictions, including voting rights, of future series of our Preferred Stock and to issue such stock without approval from our shareholders. The rights of holders of our Common Stock may suffer as a result of the rights granted to holders of Preferred Stock that may be issued in the future. In addition, we could issue Preferred Stock to prevent a change in control of our Company, depriving common shareholders of an opportunity to sell their stock at a price in excess of the prevailing market price.
The trading price of our Common Stock may continue to fluctuate substantially in the future.
Our stock price may fluctuate significantly as a result of a number of factors, some of which are not in our control. These factors include:
general economic conditions;
general conditions in the for-profit, post-secondary education industry;
negative media coverage of the for-profit, post-secondary education industry;
failure of certain of our schools or programs to maintain compliance under the gainful employment regulation, 90/10 Rule or with financial responsibility standards;
the impact of DOE rulemaking and other changes in the highly regulated environment in which we operate;
the initiation, pendency or outcome of litigation, accreditation reviews and regulatory reviews, inquiries and investigations;
quarterly variations in our operating results;
our ability to meet or exceed, or changes in, expectations of investors and analysts, or the extent of analyst coverage of us; and decisions by any significant investors to reduce their investment in our Common Stock.
In addition, the trading volume of our Common Stock is relatively low. This may cause our stock price to react more to these factors and various other factors and may impact an investor’s ability to sell our Common Stock at the desired time at a price considered satisfactory. Any of these factors may adversely affect the trading price of our Common Stock, regardless of our actual operating performance, and could prevent an investor from selling shares of our Common Stock at or above the price at which the investor purchased them.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
None.
As of December 31, 2017,2022, we leased all of our facilities, except for our campusescampus in Nashville, Tennessee, Grand Prairie, Texas, and Denver, Colorado, and former school properties in Mangonia Park, Palm Beach County, Florida and Suffield, Connecticut, all of which we own.Tennessee. We continue to re-evaluatereevaluate our facilities to maximize our facility utilization and efficiency and to allow us to introduce new programs and attract more students. As of December 31, 2017,2022, all of our existing leases expire between December 20182023 and May 2030.2041.
The following table provides information relating to our facilities as of December 31, 2017,2022, including our corporate office:
Location | | Brand | | Approximate Square Footage |
Henderson, Nevada | | Euphoria Institute | | 18,000 |
Las Vegas, Nevada | | Euphoria Institute | | 19,000 |
Southington, Connecticut | | Lincoln College of New England | | 113,00023,000 |
Columbia, Maryland | | Lincoln College of Technology | | 110,000111,000 |
Denver, Colorado | | Lincoln College of Technology | | 212,000213,000 |
Grand Prairie, Texas | | Lincoln College of Technology | | 146,000157,000 |
Indianapolis, Indiana | | Lincoln College of Technology | | 189,000126,000 |
Marietta, Georgia | | Lincoln College of Technology | | 30,000 |
Melrose Park, Illinois | | Lincoln College of Technology | | 88,000 |
West Palm Beach, Florida | | | | 27,000 |
Allentown, Pennsylvania | | Lincoln Technical Institute | | 26,00025,000 |
Atlant, Georgia* | | Lincoln Technical Institute | | 56,000 |
East Windsor, Connecticut | | Lincoln Technical Institute | | 289,000 |
Iselin, New Jersey | | Lincoln Technical Institute | | 32,000 |
Lincoln, Rhode Island | | Lincoln Technical Institute | | 39,000 |
Mahwah, New Jersey | | Lincoln Technical Institute | | 79,000 |
Moorestown, New Jersey | | Lincoln Technical Institute | | 35,000 |
New Britain, Connecticut | | Lincoln Technical Institute | | 35,00036,000 |
Paramus, New Jersey | | Lincoln Technical Institute | | 30,000 |
Philadelphia, Pennsylvania | | Lincoln Technical Institute | | 29,00030,000 |
Queens, New York | | Lincoln Technical Institute | | 48,000 |
Shelton, Connecticut | | Lincoln Technical Institute and Lincoln Culinary Institute | | 47,00057,000 |
Somerville, MassachusettsMassachusetts** | | Lincoln Technical Institute | | 33,000 |
South Plainfield, New Jersey | | Lincoln Technical Institute | | 60,000 |
Union, New Jersey | | Lincoln Technical Institute | | 56,000 |
Nashville, TennesseeTennessee*** | | Lincoln College of Technology | | 281,000350,000 |
West Orange,Parsippany, New Jersey | | Corporate Office | | 52,000 |
Plymouth Meeting, Pennsylvania | | Corporate Office | | 6,000 |
Suffield, Connecticut | | | | 132,00017,0 |
We believe that our facilities are suitable for their present intended purposes.
* | On June 30, 2022, the Company executed a lease for a 55,000 square foot facility to house a second Atlanta area campus. The build-out is progressing according to plan. For the year ended December 31, 2022, the Company incurred approximately $0.4 million in capital expenditures, mostly relating to architectural fees and approximately $0.3 million in rent. |
** | On November 3, 2022, the Board of Directors approved a plan to close the Somerville, Massachusetts campus by the end of 2023. Total costs to close the campus including the teach-out of the remaining students, are expected to be approximately $2.0 million. |
*** | The Nashville, Tennessee campus is currently subject to a property sale agreement. See Part II. Item 8. “Financial Statements and Supplemental Data - Notes to Consolidated Financial Statements – Note 7 Property Sale Agreements.” |
In April 2021, the Company received communication from the DOE indicating that the DOE was in receipt of a number of borrower defense applications containing allegations concerning our schools and requiring that the DOE undertake a fact-finding process pursuant to DOE regulations. Among other things, the communication outlines a process by which the DOE would provide to us the applications and provide us with the opportunity to submit responses to them. Further, the communication outlined certain information requests, relating to the period between 2007 and 2013, in connection with the DOE’s preliminary review of the borrower defense applications. Based upon publicly available information, it appears that the DOE has undertaken similar reviews of other educational institutions which have also been the subject of various borrower defense applications. We have received the borrower application claims and have completed the process of thoroughly reviewing and responding to each borrower application as well as providing information in response to the DOE’s requests.
30We are not able to predict the outcome of the DOE’s review at this time. If the DOE disagrees with our legal and factual grounds for contesting the applications, the DOE may impose liabilities on the Company based on the discharge of the loans at issue in the pending applications, which could have a material adverse effect on our business and results of operations. If the proposed Borrower Defense to Repayment regulations take effect on July 1, 2023, and if any or all of the Borrower Defense to Repayment applications remain pending, the DOE could attempt to apply the new regulations to the pending applications which could increase the likelihood of the DOE granting the application because the proposed regulations are more favorable to borrowers.
In August 2022, the Company received a communication from the DOE regarding a single borrower defense application submitted on behalf of a group of students who were enrolled in a single educational program at two of our schools in Massachusetts between 2010 and 2013. We have responded to the DOE’s letter, notwithstanding the absence of a response to our request for additional information about the student claims. We are waiting for the DOE’s reply to our response and to our request for information concerning the student claims. We are not able to predict the outcome of the DOE’s review at this time. If the DOE disagrees with our legal and factual grounds for contesting the application, the DOE may impose liabilities on the Company based on the discharge of the loans at issue in the pending application which could have a material adverse effect on our business and results of operations.
On June 22, 2022, the DOE and the plaintiffs in a lawsuit before a federal court in California submitted a proposed settlement agreement to the court. The plaintiffs contend, among other things, that the DOE failed to timely decide and resolve Borrower Defense to Repayment applications submitted to the DOE. If approved, the settlement would result in full discharge and refund payments to covered student borrowers who have asserted a Borrower Defense to Repayment to the DOE and whose borrower defense claims have not yet been granted or denied on the merits.
The lawsuit, Sweet v. Cardona, No. 3:19-cv-3674 (N.D. Cal.), is a class action filed on June 25, 2019 against the DOE in the U.S. District Court for the Northern District of California submitted by a group of students, none of whom attended any of our institutions. We were not a party to the lawsuit when it was filed. The plaintiffs requested that the court compel the DOE to start approving or denying the pending applications. The court granted class certification and defined the class of plaintiffs generally to include all people who borrowed a Title IV Direct loan or FFEL loan, who have asserted a Borrower Defense to Repayment claim to the DOE, and whose borrower defense claim has not been granted or denied on the merits. We have not received notice or confirmation directly from the DOE of the number of student borrowers who have submitted Borrower Defense to Repayment claims related to our institutions.
The proposed settlement agreement includes a long list of institutions, including Lincoln Technical Institute and Lincoln College of Technology. Under the proposed settlement, the DOE would agree to discharge loans and refund all prior loan payments to each class member with loan debt associated with an institution on the list (which includes our institutions), including borrowers whose applications the DOE previously denied after October 30, 2019. The DOE and the plaintiffs stated in a court filing that this provision is intended to provide for automatic relief for students at the listed schools which the DOE estimates to total 200,000 class members. We anticipate that the DOE believes that the class includes the borrowers with claims to which we have submitted responses to the DOE although it is possible that the class also includes borrowers with claims for which we have not received notice from the DOE or an opportunity to respond. The parties also stated that the DOE has determined that attendance at one of the institutions on the list justifies presumptive relief based on strong indicia regarding substantial misconduct by the institutions, whether credibly alleged or in some instances proven, and the high rate of class members with applications related to the listed schools. The proposed settlement agreement provides a separate process for reviewing claims associated with schools that are not on the list. It is unclear whether the DOE would seek to impose liabilities on us or other schools or take other actions or impose other sanctions on us or other schools based on relief provided to students under the proposed settlement agreement (particularly if the DOE provides relief without evaluating or accounting for legal and factual information provided to the DOE by us and other schools or without providing us and other schools with notice and an opportunity to respond to some of the claims).
In July 2022, the Company and certain other school companies submitted motions to intervene in the lawsuit in order to protect our interests in the finalization and implementation of any settlement agreement that the court might approve. We noted in the motion that the proposed settlement agreement introduced, for the first time, the prospect that the DOE would “automatically” and fully discharge loans and refund payments to student borrowers without adjudication of the merits of the students’ borrower-defense applications in accordance with the DOE’s borrower-defense regulations and without ensuring that we and other institutions can defend against allegations asserted in individual borrower-defense applications. In addition, we also asserted that it would be unlawful and inappropriate if the DOE sought recoupment against us based on loans that were forgiven under the proposed settlement agreement without providing us with an opportunity to address the claims or accounting for our responses to the claims already submitted which we believe is required by the regulations. We also asserted that the lawsuit and the potential loan discharges could result in reputational harm to us and our institutions and could result in other actions against us by other federal and state agencies or by current and former students.
The court granted preliminary approval of the proposed settlement agreement on August 4, 2022, and also granted our motion for permissive intervention for the purpose of objecting to and opposing the class action settlement. On September 22, 2022, the DOE and the plaintiffs filed a joint motion for final approval of the settlement. In that joint motion, the DOE and the plaintiffs reported that approximately 179,000 new borrower defense applications had been submitted to the DOE as of September 20, 2022. We and the three other intervenor schools filed briefs opposing final approval.
In an Order dated November 16, 2022, District Court Judge William Alsup granted final approval of the settlement agreement. Subsequently, we, and two other school companies that intervened, filed notices of appeal and asked the district court to stay the settlement from taking effect until the appeals were decided and the district court did temporarily stay any loan discharges and refunds under the settlement pending the decision. Plaintiffs and the DOE thereafter filed oppositions to our stay request and, after a hearing, the district court denied our stay request, but extended the temporary stay of loan discharges and refunds associated with the three school companies for seven days to allow us to file a motion for a stay with the U.S. Court of Appeals for the Ninth Circuit. On February 27, 2023, we and the two other school companies that appealed filed a joint motion for a stay with the Ninth Circuit which we expect the plaintiffs and the DOE will oppose. We expect that the Ninth Circuit will decide our stay motion in the coming weeks.
Regardless of the outcome of our stay request, we intend to ask the Ninth Circuit to overturn the district court’s judgment approving the final settlement. If the settlement agreement is upheld on appeal, or if the courts deny our stay requests, the DOE is expected to automatically approve all of the pending borrower defense applications concerning us that were submitted to the DOE on or before June 22, 2022 and to provide such automatic approval without evaluating or accounting for any of the legal or factual grounds that we provided for contesting the applications that were provided to us. The DOE may or may not attempt to seek recoupment from applicable schools relating to approval of borrower defense applications. If the DOE approves borrower defense applications concerning us and attempts to recoup from us the loan amounts in the approved applications, we would consider our options for challenging the legal and factual bases for such actions. The settlement also requires the DOE to review borrower defense applications submitted after June 22, 2022 and before November 16, 2022 within 36 months of the final settlement date. If the DOE grants some or all of these applications, the DOE also could attempt to recoup from us the loan amounts relating to these applications as well. We cannot predict whether the settlement will be upheld on appeal, what actions the DOE might take if the settlement is upheld on appeal (including the ultimate timing or amount of borrower defense applications the DOE may grant in the future and the timing or amount of any possible liabilities that the DOE may seek to recover from the Company, if any), or what the outcome of our challenges to such actions will be, but such actions could have a material adverse effect on our business and results of operations.
On June 7, 2022, the Massachusetts Attorney General’s Office (“AGO”) issued a civil investigative demand (“CID”) indicating its intention to investigate possible unfair or deceptive methods, acts, or practices in violation of state law relating to allegations against our Massachusetts school to such effect in connection with that school’s policies regarding fee refunds and associated disclosures to students and prospective students. The CID has requested that we provide to the AGO certain documentation generally from the period from January 1, 2020 to the present. We have provided the documents requested and are cooperating with the investigation.
We are not able to predict the outcome or materiality of the foregoing matters at this time. In addition to these matters, in the ordinary conduct of our business, we are subject to additional periodic lawsuits, investigations, regulatory proceedings and other claims, including, but not limited to, claims involving students or graduates, and routine employment matters. Although wematters and business disputes. We cannot predict with certainty the ultimate resolution of these lawsuits, investigations, regulatory proceedings and other claims asserted against us, but we do not believe that any currently pending legal proceeding to which we are a partyof these matters will have a material adverse effect on our business, financial condition, results of operations or cash flows.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market for our Common Stock
Our common stock,Common Stock, no par value per share, is quoted on the Nasdaq Global Select Market under the symbol “LINC”.
The following table sets forth the range of high and low sales prices per share for our common stock, as reported by the Nasdaq Global Select Market, for the periods indicated
| | Price Range of Common Stock | | | | |
| | High | | | Low | | | Dividend | |
Fiscal Year Ended December 31, 2017 | | | | | | | | | |
First Quarter | | $ | 2.92 | | | $ | 1.86 | | | $ | - | |
Second Quarter | | $ | 3.53 | | | $ | 2.74 | | | $ | - | |
Third Quarter | | $ | 3.36 | | | $ | 2.50 | | | $ | - | |
Fourth Quarter | | $ | 2.56 | | | $ | 2.00 | | | $ | - | |
| | | | | | | | | | | | |
| | Price Range of Common Stock | | | | | |
| | High | | | Low | | | Dividend | |
Fiscal Year Ended December 31, 2016 | | | | | | | | | | | | |
First Quarter | | $ | 3.05 | | | $ | 1.92 | | | $ | - | |
Second Quarter | | $ | 2.49 | | | $ | 1.37 | | | $ | - | |
Third Quarter | | $ | 2.58 | | | $ | 1.37 | | | $ | - | |
Fourth Quarter | | $ | 2.20 | | | $ | 1.58 | | | $ | - | |
On March 5, 2018,3, 2023, the last reported sale price of our common stockCommon Stock on the Nasdaq Global Select Market was $1.83$6.19 per share. As of March 5, 2018,3, 2023, based on the information provided by Continental Stock Transfer & Trust Company, there were 32 stockholders36 shareholders of record of our common stock.Common Stock.
Dividend Policy
On February 27, 2015, ourThe Company has not declared or paid any cash dividends on its Common Stock since the Company’s Board of Directors discontinued theour quarterly cash dividend.dividend program in February 2015. The Company has no current intentions to resume the payment of cash dividends on its Common Stock in the foreseeable future.
During the fiscal year ended December 31, 2022, the Company paid a total of $1.1 million in cash dividends to holders of its Series A Convertible Preferred Stock (the “Series A Preferred Stock”) pursuant to the Securities Purchase Agreement entered into on November 14, 2019 and the Company’s Amended and Restated Certificate of Incorporation.
On November 30, 2022, the Company exercised in full its right of mandatory conversion of the Company’s Series A Preferred Stock. In connection with the conversion, each share of Series A Preferred Stock has been cancelled and converted into 423.729 shares of the Company’s Common Stock, no par value per share. Shares of the Series A Preferred Stock are no longer outstanding and all rights of the holders to receive future dividends have terminated. As a result of the conversion, the aggregate 12,700 shares of Series A Preferred Stock were converted into 5,381,356 shares of Common Stock.
Share Repurchases
On May 24, 2022, the Company announced that the Board of Directors had approved a share repurchase program for 12 months authorizing purchases of up to $30.0 million. Subsequently, on February 27, 2023, the Board of Directors extended the share repurchase program for an additional 12 months and authorized the repurchase of an additional $10 million of the Company’s Common Stock, for an aggregate of up to $30.6 million in additional repurchases.
The Company did not repurchase anyfollowing table presents the number and average price of shares of our common stockpurchased during the fourth quarter of the fiscal yearthree months ended December 31, 2017.2022. The remaining authorized amount for share repurchases under the program at December 31, 2022 was approximately $20.6 million.
Period | | Total Number of Shares Purchased | | | Average Price Paid per Share | | | Total Number of Shares Purchased as Part of Publically Announced Plan | | | Maximum Dollar Value of Shares Remaining to be Purchased Under the Plan | |
October 1, 2022 to October 31, 2022 | | | 342,808 | | | $ | 5.29 | | | | 342,808 | | | $ | 21,451,492 | |
November 1, 2022 to November 30, 2022 | | | 123,689 | | | | 6.25 | | | | 123,689 | | | | 20,678,160 | |
December 1, 2022 to December 31, 2022 | | | 22,514 | | | | 5.48 | | | | 22,514 | | | | 20,554,775 | |
Total | | | 489,011 | | | | 5.55 | | | | 489,011 | | | | | |
For more information on the share repurchase program, See Part II. Item 8. “Financial Statements and Supplemental Data - Notes to Consolidated Financial Statements – Note 11 Stockholders Equity.”
Stock Performance Graph
This stock performance graph compares our total cumulative stockholder return on our common stock for the five years ended December 31, 2017 with the cumulative return on the Russell 2000 Index and a Peer Issuer Group Index. The peer issuer group consists of the companies identified below, which were selected on the basis of the similar nature of their business. The graph assumes that $100 was invested on December 31, 2012 and any dividends were reinvested on the date on which they were paid.
The information provided under the heading "Stock Performance Graph" shall not be considered "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate it by reference into a filing.
Companies in the Peer Group include Career Education Corp., Adtalem Global Education Inc., ITT Educational Services, Inc., Strayer Education, Inc., Bridgepoint Education, Inc., Apollo Education Group, Inc., Grand Canyon University, Inc. and Universal Technical Institute, Inc.
Equity Compensation Plan Information
We have various equity compensation plans under which equity securities are authorized for issuance. Information regarding these securities as of December 31, 2017 is2022, are as follows:
Plan Category | | Number of Securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted- average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
| | (a) | | | | | | | |
Equity compensation plans approved by security holders | | | 167,667 | | | $ | 12.11 | | | | 2,186,206 | |
Equity compensation plans not approved by security holders | | | - | | | | - | | | | - | |
Total | | | 167,667 | | | $ | 12.11 | | | | 2,186,206 | |
Plan Category | | Number of Securities to be issued upon exercise of outstanding
options, warrants and rights | | | Weighted- average exercise price of
outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
| | (a) | | | | | | | |
Equity compensation plans approved by security holders | | | - | | | $ | - | | | | 840,807 | |
Equity compensation plans not approved by security holders | | | - | | | | - | | | | - | |
Total | | | - | | | $ | - | | | | 840,807 | |
3338
ITEM 6. | SELECTED FINANCIAL DATA
|
The following table sets forth our selected historical consolidated financial and operating data as of the dates and for the periods indicated. You should read these data together with Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. The selected historical consolidated statement of operations data for each of the years in the three-year period ended December 31, 2017 and historical consolidated balance sheet data at December 31, 2017 and 2016 have been derived from our audited consolidated financial statements which are included elsewhere in this Annual Report on Form 10-K. The selected historical consolidated statements of operations data for the fiscal years ended December 31, 2014 and 2013 and historical consolidated balance sheet data as of December 31, 2015, 2014 and 2013 have been derived from our consolidated financial information not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of our future results.
| | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
| | (In thousands, except per share amounts) | |
Statement of Operations Data, Year Ended December 31: | | | | | | | | | | | | | | | |
Revenue | | $ | 261,853 | | | $ | 285,559 | | | $ | 306,102 | | | $ | 325,022 | | | $ | 341,512 | |
Cost and expenses: | | | | | | | | | | | | | | | | | | | | |
Educational services and facilities | | | 129,413 | | | | 144,426 | | | | 151,647 | | | | 164,352 | | | | 169,049 | |
Selling, general and administrative | | | 138,779 | | | | 148,447 | | | | 151,797 | | | | 168,441 | | | | 175,978 | |
(Gain) loss on sale of assets | | | (1,623 | ) | | | 233 | | | | 1,738 | | | | (58 | ) | | | (501 | ) |
Impairment of goodwill and long-lived assets | | | - | | | | 21,367 | | | | 216 | | | | 40,836 | | | | 3,908 | |
Total costs and expenses | | | 266,569 | | | | 314,473 | | | | 305,398 | | | | 373,571 | | | | 348,434 | |
Operating (loss) income | | | (4,716 | ) | | | (28,914 | ) | | | 704 | | | | (48,549 | ) | | | (6,922 | ) |
Other: | | | | | | | | | | | | | | | | | | | | |
Interest income | | | 56 | | | | 155 | | | | 52 | | | | 153 | | | | 37 | |
Interest expense | | | (7,098 | ) | | | (6,131 | ) | | | (8,015 | ) | | | (5,613 | ) | | | (4,667 | ) |
Other income | | | - | | | | 6,786 | | | | 4,151 | | | | 297 | | | | 18 | |
Loss from continuing operations before income taxes | | | (11,758 | ) | | | (28,104 | ) | | | (3,108 | ) | | | (53,712 | ) | | | (11,534 | ) |
(Benefit) provision for income taxes | | | (274 | ) | | | 200 | | | | 242 | | | | (4,225 | ) | | | 19,591 | |
Loss from continuing operations | | | (11,484 | ) | | | (28,304 | ) | | | (3,350 | ) | | | (49,487 | ) | | | (31,125 | ) |
Loss from discontinued operations, net of income taxes | | | - | | | | - | | | | - | | | | (6,646 | ) | | | (20,161 | ) |
Net loss | | $ | (11,484 | ) | | $ | (28,304 | ) | | $ | (3,350 | ) | | $ | (56,133 | ) | | $ | (51,286 | ) |
Basic | | | | | | | | | | | | | | | | | | | | |
Loss per share from continuing operations | | $ | (0.48 | ) | | $ | (1.21 | ) | | $ | (0.14 | ) | | $ | (2.17 | ) | | $ | (1.38 | ) |
Loss per share from discontinued operations | | | - | | | | - | | | | - | | | | (0.29 | ) | | | (0.90 | ) |
Net loss per share | | $ | (0.48 | ) | | $ | (1.21 | ) | | $ | (0.14 | ) | | $ | (2.46 | ) | | $ | (2.28 | ) |
Diluted | | | | | | | | | | | | | | | | | | | | |
Loss per share from continuing operations | | $ | (0.48 | ) | | $ | (1.21 | ) | | $ | (0.14 | ) | | $ | (2.17 | ) | | $ | (1.38 | ) |
Loss per share from discontinued operations | | | - | | | | - | | | | - | | | | (0.29 | ) | | | (0.90 | ) |
Net loss per share | | $ | (0.48 | ) | | $ | (1.21 | ) | | $ | (0.14 | ) | | $ | (2.46 | ) | | $ | (2.28 | ) |
Weighted average number of common shares outstanding: | | | | | | | | | | | | | | | | | | | | |
Basic | | | 23,906 | | | | 23,453 | | | | 23,167 | | | | 22,814 | | | | 22,513 | |
Diluted | | | 23,906 | | | | 23,453 | | | | 23,167 | | | | 22,814 | | | | 22,513 | |
Other Data: | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | $ | 4,755 | | | $ | 3,596 | | | $ | 2,218 | | | $ | 7,472 | | | $ | 6,538 | |
Depreciation and amortization from continuing operations | | | 8,702 | | | | 11,066 | | | | 14,506 | | | | 19,201 | | | | 21,808 | |
Number of campuses | | | 23 | | | | 28 | | | | 31 | | | | 31 | | | | 33 | |
Average student population from continuing operations | | | 10,772 | | | | 11,864 | | | | 12,981 | | | | 14,010 | | | | 14,804 | |
Cash dividend declared per common share | | $ | - | | | $ | - | | | $ | - | | | $ | 0.18 | | | $ | 0.28 | |
Balance Sheet Data, At December 31: | | | | | | | | | | | | | | | | | | | | |
Cash, cash equivalents and restricted cash | | $ | 54,554 | | | $ | 47,715 | | | $ | 61,041 | | | $ | 42,299 | | | $ | 67,386 | |
Working (deficit) capital (1) | | | (2,766 | ) | | | (1,733 | ) | | | 33,818 | | | | 29,585 | | | | 47,041 | |
Total assets | | | 155,213 | | | | 163,207 | | | | 210,279 | | | | 213,707 | | | | 305,949 | |
Total debt (2) | | | 52,593 | | | | 41,957 | | | | 58,224 | | | | 65,181 | | | | 90,116 | |
Total stockholders' equity | | | 45,813 | | | | 54,926 | | | | 80,997 | | | | 83,010 | | | | 145,196 | |
All amounts have been restated to give effect to the HOPS segments which has been reclassified to continuing operations in 2016, 2015, 2014 and 2013.
(1)Working (deficit) capital is defined as current assets less current liabilities.
(2)Total debt consists of long-term debt including current portion, capital leases, auto loans and a finance obligation of $9.7 million for each of the years in the three-year period ended December 31, 2015 incurred in connection with a sale-leaseback transaction.
ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
You should read the following discussion together with the “Selected Financial Data,” “Forward-Looking Statements” and the consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under “Risk Factors” and “Forward-Looking Statements” and elsewhere in this Annual Report on Form 10-K.
GENERAL
Lincoln Educational Services Corporation and its subsidiaries (collectively, the “Company”, “we”, “our”, and “us”, as applicable) provide diversified career-oriented post-secondary education to recent high school graduates and working adults. The Company, which currently operates 2322 schools in 14 states, offers programs in automotive technology, skilled trades (which include HVAC, welding and computerized numerical control and electrical and electronic systems technology, among other programs), automotive technology, healthcare services (which include nursing, dental assistant and medical administrative assistant, and pharmacy technician, among other programs), hospitality services (which include culinary, therapeutic massage, cosmetology and aesthetics) and business and information technology (which includes information technology and criminal justice programs)technology). The schools operate under Lincoln Technical Institute, Lincoln College of Technology, Lincoln College of New England, Lincoln Culinary Institute, and Euphoria Institute of Beauty Arts and Sciences and associated brand names. Most of the campuses serve major metropolitan markets and each typically offers courses in multiple areas of study. Five of the campuses are destination schools, which attract students from across the United States and, in some cases, from abroad. The Company’s other campuses primarily attract students from their local communities and surrounding areas. All of the campuses are nationally or regionally accredited and are eligible to participate in federal financial aid programs administered by the U.S. Department of Education (the “DOE”)DOE and applicable state education agencies and accrediting commissions which allow students to apply for and access federal student loans as well as other forms of financial aid.
Our business is organized into three reportable business segments: (a) Transportation and Skilled Trades, (b) Healthcare and Other Professions (“HOPS”),Professions; and (c) Transitional, which refers to businessescampuses that have been ormarked for closure and are currently being taught out. InOn November 2015,3, 2022, the Board of Directors of the Company approved a plan forto close the Company to divest the 18 campuses then comprising the HOPS segment due to a strategic shift in the Company’s business strategy. The Company underwent an exhaustive process to divest the HOPS schools which proved successful in attracting various purchasers but, ultimately, did not result in a transaction that our Board believed would enhance shareholder value. BySomerville, Massachusetts campus by the end of 2017, we had strategically closed seven underperforming campuses leaving a total2023. As of 11 campuses remaining underDecember 31, 2022, the HOPS segment. The Company believes thatSomerville campus is the closures of the aforementioned campuses has positioned the HOPS segment and the Company to be more profitable going forward as well as maximizing returns for the Company’s shareholders.
The combination of several factors, including the inability of a prospective buyer of the HOPS segment to close on the purchase, the improvements the Company has implemented in the HOPS segment operations, the closure of seven underperforming campuses and the change in the United States government administration, resulted in the Board reevaluating its divestiture plan and the determination that shareholder value would more likely be enhanced by continuing to operate our HOPS segment as revitalized. Consequently, the Board of Directors has abandoned the plan to divest the HOPS segment and the Company now intends to retain and continue to operate the remaining campuses in the HOPS segment. The results of operations of the campuses included in the HOPS segment are reflected as continuing operations in the consolidated financial statements.
In 2016, the Company completed the teach-out of its Hartford, Connecticut, Fern Park, Florida and Henderson (Green Valley), Nevada campuses, which originally operated in the HOPS segment. In 2017, the Company completed the teach-out of its Northeast Philadelphia, Pennsylvania; Center City Philadelphia, Pennsylvania; West Palm Beach, Florida; Brockton, Massachusetts; and Lowell, Massachusetts schools, which also were originally in our HOPS segment and all of which were taught out and closed by December 2017 and are includedonly campus classified in the Transitional segment as ofSegment.
On June 30, 2022, the Company executed a lease for a 55,000 square foot facility to house a second Atlanta, Georgia area campus. The build-out is progressing according to plan. For the year ended December 31, 2017.
On August 14, 2017, New England Institute of Technology at Palm Beach, Inc., a wholly-owned subsidiary of2022, the Company consummated the sale of the real property located at 2400incurred approximately $0.4 million in capital expenditures, mostly relating to architectural fees and 2410 Metrocentre Boulevard East, West Palm Beach, Florida, including the improvements and other personal property located thereon (the “West Palm Beach Property”) to Tambone Companies, LLC (“Tambone”), pursuant to a previously disclosed purchase and sale agreement (the “West Palm Sale Agreement”) entered into on March 14, 2017. Pursuant to the terms of the West Palm Sale Agreement, as subsequently amended, the purchase price for the West Palm Beach Property was $15.8 million. As a result, the Company recorded a gain on the saleapproximately $0.3 million in the amount of $1.5 million. As previously disclosed, the West Palm Beach Property served as collateral for a short term loan in the principal amount of $8.0 million obtained by the Company from its lender, Sterling National Bank, on April 28, 2017, which loan matured upon the earlier of the sale of the West Palm Beach Property or October 1, 2017. Accordingly, on August 14, 2017, concurrently with the consummation of the sale of the West Palm Beach Property, the Company repaid the term loan in an aggregate amount of $8.0 million, consisting of principal and accrued interest.rent.
On March 31, 2017, the Company entered into a new revolving credit facility with Sterling National Bank in the aggregate principal amount of up to $55 million, which consists of up to $50 million of revolving loans, including a $10 million sublimit for letters of credit, and an additional $5 million non-revolving loan. The proceeds of the $5 million non-revolving loan were held in a pledged account at Sterling National Bank as required by the terms of the new credit facility pending the completion of environmental studies undertaken at certain properties owned by the Company and mortgaged to Sterling National Bank. Upon the completion of environmental studies that revealed that no environmental issues existed at the properties, during the quarter ended June 30, 2017, the $5 million held in the pledged account at Sterling National Bank was released and used to repay the $5 million non-revolving loan. The credit facility was amended on November 29, 2017, to provide the Company with an additional $15 million revolving credit loan, resulting in an increase in the aggregate availability under the credit facility to $65 million. The credit facility was again amended on February 23, 2018, to, among other things, effect certain modifications to the financial covenants and other provisions of the credit facility and to allow the Company to pursue the sale of certain real property assets. The new credit facility requires that revolving loans in excess of $25 million and all letters of credit issued thereunder be cash collateralized dollar for dollar. The new revolving credit facility replaces a term loan facility which was repaid and terminated concurrently with the effectiveness of the new revolving credit facility. The final maturity date for the new revolving credit facility is May 31, 2020. The new revolving credit facility is discussed in further detail under the heading “Liquidity and Capital Resources” below and in Note 7 to the consolidated financial statements included in this report.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act, among other things, made broad and complex changes to the U.S. tax code which impacted 2017, including, but not limited to, reducing the U.S. federal corporate tax rate, eliminating the corporate alternative minimum tax and changing how existing corporate alternative minimum tax credits can be realized either to offset regular tax liability or to be refunded. See additional information regarding the impact of the Tax Cuts and Jobs Act in “Management's Discussion and Analysis of Financial Condition and Results of Operations” and Note 10 to our consolidated financial statements included in this Annual Report on Form 10-K.
As of December 31, 2017,2022, we had 10,15912,388 students enrolled at 2322 campuses.
Our campuses, a majority of which serve major metropolitan markets, are located throughout the United States. Five of our campuses are destination schools, which attract students from across the United States and, in some cases, from abroad. Our other campuses primarily attract students from their local communities and surrounding areas. All of our schools are either nationally or regionally accredited and are eligible to participate in federal financial aid programs.
Our revenues consist primarily of student tuition and fees derived from the programs we offer. Our revenues are reduced by scholarships granted by us to some of our students. We recognize revenues from tuition and one-time fees, such as application fees, ratably over the length of a program, including internships or externships that take place prior to graduation. We also earn revenues from our bookstores, dormitories, cafeterias and contract training services. These non-tuition revenues are recognized upon delivery of goods or as services are performed and represent less than 10% of our revenues.
Our revenues are directly dependent on the average number of students enrolled in our schools and the courses in which they are enrolled. Our average enrollment is impacted by the number of new students starting, re-entering, graduating and withdrawing from our schools. In addition, ourOur diploma/certificate programs range in duration from 2819 to 136 weeks, our associate’s degree programs range in duration from 5873 to 156 weeks, and our bachelor’s degree programs range from 104 to 20892 weeks, and students attend classes for different amounts of time per week depending on the school and program in which they are enrolled. Because we start new students every month, our total student population changes monthly. The number of students enrolling or re-entering our programs each month is driven by the demand for our programs, the effectiveness of our marketing and advertising, the availability of financial aid and other sources of funding, the number of recent high school graduates, the job market and seasonality. Our retention and graduation rates are influenced by the quality and commitment of our teachers and student services personnel, the effectiveness of our programs, the placement rate and success of our graduates and the availability of financial aid.aid and other sources of funding. Although similar courses have comparable tuition rates, the tuition rates vary among our numerous programs.
The majority of students enrolled at our schools rely on funds received under various government-sponsored student financial aid programs to pay a substantial portion of their tuition and other education-related expenses. The largest of these programs are Title IV Programs which represented approximately 78%74% and 79%75% of our revenue on a cash basis while the remainder is primarily derived from state grants and cash payments made by students during 2017fiscal years 2022 and 2016,2021, respectively. The Higher Education Act of 1965, as amended (the “HEA”)HEA requires institutions to use the cash basis of accounting when determining its compliance with the 90/10 rule.Rule. See Part I, Item 1. “Business - Regulatory Environment.”
We extend credit for tuition and fees to many of our students that attend our campuses. Our credit risk is mitigated throughby the students’ participation in federally funded financial aid programs unless students withdraw prior to the receipt by us of Title IV Program funds for those students. Under Title IV Programs, the government funds a certain portion of a student’s tuition, with the remainder, referred to as “the gap,” financed by the students themselves under private party loans including creditand extended financing agreements offered by us. The gap amount has continued to increase over the last several years as we have raised tuition on average for the last several years by 2-3% per year and restructured certain programs to reduce the amount of financial aid available to students, while funds received from Title IV Programs increased at lower rates.year.
The additional financing that we are providing to students may expose us to greater credit risk and can impact our liquidity. However, we believe that these risks are somewhat mitigated due toby the following:
| · | Our internal financing is provided to students only after all other funding resources have been exhausted; thus, by the time this funding is available, students have completed approximately two-thirds of their curriculum and are more likely to graduate; |
our internal financing is provided to students only after all other funding resources have been exhausted; thus, by the time this funding is available, students have completed approximately two-thirds of their curriculum and are more likely to graduate and, as a consequence, more likely to pay outstanding tuition amounts;
| · | Funding for students who interrupt their education is typically covered by Title IV funds as long as they have been properly packaged for financial aid; and |
funding for students who interrupt their education is typically covered by Title IV Program funds as long as they have been properly packaged for financial aid; and
| · | Creditworthy criteria to demonstrate a student’s ability to pay. |
the requirement that students meet creditworthiness criteria to demonstrate a student’s ability to pay.
The operating expenses associated with an existing school do not increase or decrease proportionally as the number of students enrolled at the school increases or decreases. We categorize our operating expenses as:
| ·• | Educational services and facilities. Major components of educational services and facilities expenses include faculty compensation and benefits, expenses of books and tools, facility rent, maintenance, utilities, depreciation and amortization of property and equipment used in the provision of education services and other costs directly associated with teaching our programs excluding student services which is included in selling, general and administrative expenses. |
| ·• | Selling, general and administrative. Selling, general and administrative expenses include compensation and benefits of employees who are not directly associated with the provision of educational services (such as executive management and school management, finance and central accounting, legal, human resources and business development), marketing and student enrollment expenses (including compensation and benefits of personnel employed in sales and marketing and student admissions), costs to develop curriculum, costs of professional services, bad debt expense, rent for our corporate headquarters, depreciation and amortization of property and equipment that is not used in the provision of educational services and other costs that are incidental to our operations. Selling, general and administrative expenses also includes the cost of all student services including financial aid and career services. All marketing and student enrollment expenses are recognized in the period incurred. |
Property Sale Agreements
Property Sale Agreement - Nashville, Tennessee Campus
On September 24, 2021, Nashville Acquisition, LLC, a subsidiary of the Company (“Nashville Acquisition”), entered into a Contract for the Purchase of Real Estate (the “Nashville Contract”) to sell the property located at 524 Gallatin Avenue, Nashville, Tennessee 37206, at which the Company operates its Nashville campus, to SLC Development, LLC, a subsidiary of Southern Land Company (“SLC”), for an aggregate sale price of $34.5 million, subject to customary adjustments at closing. The Company intends to relocate its Nashville campus to a more efficient and technologically advanced facility in the Nashville metropolitan area but has not yet identified a location.
The Company and SLC have agreed to an extension of the due diligence period under the Nashville Contract. Consequently, subject to satisfactory completion of the due diligence, this transaction is expected to close during the second quarter of 2023. During the extension of the diligence period, non-refundable payments have been and continue to be made to the Company by SLC which are expected to total approximately $1.1 million in the aggregate through March 1, 2023. The payments will be applied towards the purchase price, assuming that a closing occurs. As of December 31, 2022, the Company had received approximately $0.5 million in non-refundable payments from SLC. The Nashville, Tennessee property is currently classified as assets held for sale in the consolidated balance sheet for the fiscal years ended December 31, 2022 and 2021, respectively
Sale-Leaseback Transaction - Denver, Colorado and Grand Prairie, Texas Campuses
On September 24, 2021, Lincoln Technical Institute, Inc. and LTI Holdings, LLC, each a wholly-owned subsidiary of the Company (collectively, “Lincoln”), entered into an Agreement for Purchase and Sale of Property for the sale of the properties located at 11194 E. 45th Avenue, Denver, Colorado 80239 and 2915 Alouette Drive, Grand Prairie, Texas 75052, at which the Company operates its Denver and Grand Prairie campuses, respectively, to LNT Denver (Multi) LLC, a subsidiary of LCN Capital Partners (“LNT”), for an aggregate sale price of $46.5 million, subject to customary adjustments at closing. Closing of the sale occurred on October 29, 2021. Concurrently with consummation of the sale, the parties entered into a triple-net lease agreement for each of the properties pursuant to which the properties are being leased back to Lincoln Technical Institute, Inc., for a 20-year term at an initial annual base rent, payable quarterly in advance, of approximately $2.6 million for the first year with annual 2.00% increases thereafter and includes four subsequent five-year renewal options in which the base rent is reset at the commencement of each renewal term at then current fair market rent for the first year of each renewal term with annual 2.00% increases thereafter in each such renewal term. The lease, in each case, provides Lincoln with a right of first offer should LNT wish to sell the property. The Company has provided a guaranty of the financial and other obligations of Lincoln Technical Institute, Inc, its subsidiary under each lease. The Company evaluated factors in ASC Topic 606, “Revenue from Contracts with Customers”, to conclude that the transaction qualified as a sale. This included analyzing the right of first offer clause to determine whether it represents a repurchase agreement that would preclude the transaction from being accounted for as a successful sale. At the consummation of the sale, the Company recognized a gain on sale of assets of $22.5 million. Additionally, the Company evaluated factors in ASC Topic 842, “Leases”, and concluded that the newly created leases met the definition of an operating lease. The Company also recorded ROU Asset and lease liabilities of $40.1 million. The sale leaseback transaction consummated in 2021, provided the Company with net proceeds of approximately $45.4 million, with the proceeds partially used for the repayment of the Company’s outstanding term loan of $16.2 million and swap termination fee of $0.5 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussions of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, bad debts, fixed assets, goodwill and other intangibleimpairment of long-lived assets and income taxes and certain accruals.taxes. Actual results could differ from those estimates. The critical accounting policies discussed herein are not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not result in significant management judgment in the application of such principles. We believe that the following accounting policies are most critical to us in that they represent the primary areas where financial information is subject to the application of management's estimates, assumptions and judgment in the preparation of our consolidated financial statements.
Revenue recognition. Revenues are derived primarily from programs taught at Substantially all of our schools. Tuition revenues, textbook sales and one-time fees, such as nonrefundable application fees and course material fees, are recognized on a straight-line basis over the length of the applicable program as the student proceeds through the program, which is the period of time from a student’s start date through his or her graduation date, including internships or externships that take place prior to graduation, and we complete the performance of teaching the student which entitles us to the revenue. Other revenues, such as tool sales and contract training revenues are recognized as services are performed or goods are delivered. On an individual student basis, tuition earned in excess of cash received is recorded asconsidered to be revenues from contracts with students. The related accounts receivable and cash receivedbalances are recorded in excess of tuition earned is recorded as unearned tuition.
We evaluate whether collectability of revenue is reasonably assured prior to the student attending class and reassess collectability of tuition and fees when a student withdraws from a course. We calculate the amount to be returned under Title IV and its stated refund policy to determine eligible charges and, if there is a balance due from the student after this calculation, we expect payment from the student and we have a process to pursue uncollected accounts whereby, based upon the student’s financial means and ability to pay, a payment plan is established with the student to ensure that collectability is reasonable. We continuously monitor our historical collections to identify potential trends that may impact our determination that collectability of receivables for withdrawn students is realizable. If a student withdraws from a program prior to a specified date, any paid but unearned tuition is refunded. Refunds are calculated and paid in accordance with federal, state and accrediting agency standards. Generally, the amount to be refunded to a student is calculated based upon the period of time the student has attended classes and the amount of tuition and fees paid by the student as of his or her withdrawal date. These refunds typically reduce deferred tuition revenue and cash on our consolidated balance sheets as we generallystudent accounts receivable. We do not recognize tuitionhave significant revenue recognized from performance obligations that were satisfied in prior periods, and we do not have any transaction price allocated to unsatisfied performance obligations other than in our consolidated statements of income (loss) until the related refund provisions have lapsed. Based on the application of our refund policies, we may be entitled to incremental revenue on the day the student withdraws from one of our schools.unearned tuition. We record revenue for students who withdraw from one of our schools when paymentonly to the extent that it is received because collectability on an individual student basis isprobable that a significant reversal in the amount of cumulative revenue recognized will not reasonably assured. On January 1, 2018, we were requiredoccur. Unearned tuition represents contract liabilities primarily related to adopt Accounting Standards Codification Topic 606. The new guidance requires enhanced disclosures, including revenue recognition policiesour tuition revenue. We have elected not to identifyprovide disclosure about transaction prices allocated to unsatisfied performance obligations if original contract durations are less than one-year, or if we have the right to customersconsideration from a student in an amount that corresponds directly with the value provided to the student for performance obligations completed to date in accordance with ASC Topic 606, Revenue from Contract with Customers. We have assessed the costs incurred to obtain a contract with a student and significant judgements in measurement and recognition. See Note 1determined them to our consolidated financial statements included in this Annual Report on Form 10-K for further discussion.be immaterial.
Allowance for uncollectible accounts. Based upon experience and judgment, we establish an allowance for uncollectible accounts with respect to tuition receivables. We use an internal group of collectors in our collection efforts. In establishing our allowance for uncollectible accounts, we consider, among other things, current and expected economic conditions, a student's status (in-school or out-of-school), whether or not a student is currently making payments, and overall collection history. Changes in trends in any of these areas may impact the allowance for uncollectible accounts. The receivables balances of withdrawn students with delinquent obligations are reserved for based on our collection history. Although we believe that our reserves are adequate, if the financial condition of our students deteriorates, resulting in an impairment of their ability to make payments, additional allowances may be necessary, which will result in increased selling, general and administrative expenses in the period such determination is made.
Our bad debt expense as a percentage of revenues for the fiscal years ended December 31, 2017, 20162022 and 20152021 was 5.2%, 5.1%10.0% and 4.4%8.0%, respectively. Our exposure to changes in our bad debt expense could impact our operations. A 1% increase in our bad debt expense as a percentage of revenues for the fiscal years ended December 31, 2017, 20162022 and 20152021 would have resulted in an increase in bad debt expense of $2.6 million, $2.9$3.5 million and $3.1$3.4 million, respectively.
We do not believe that there is any direct correlation between tuition increases, the credit we extend to students and our loanfinancing commitments. Our loan commitmentsThe extended financing plans we offer to our students are made on a student-by-student basis and are predominantly a function of the specific student’s financial condition. We only extend credit to the extent there is a financing gap between the tuition and fees charged for the program and the amount of grants, loans and parental loans each student receives. Each student’s funding requirements are unique. Factors that determine the amount of aid available to a student include whether they are dependent or independent students, Pell grantsGrants awarded, Federalfederal Direct loansLoans awarded, PlusPLUS loans awarded to parents and the student’s personal resources and family contributions. As a result, it is extremely difficult to predict the number of students that will need us to extend credit to them. Our tuition increases have averaged 2-3% annually and have not meaningfully impacted overall funding requirements, since the amount of financial aid funding available to students in recent years has increased at greater rates than our tuition increases.
Because a substantial portion of our revenues areis derived from Title IV Programs, any legislative or regulatory action that significantly reduces the funding available under Title IV Programs or the ability of our students or schools to participate in Title IV Programs could have a material effect on the realizability of our receivables.
Goodwill. We test our Goodwill represents the excess of purchase price over the fair value of tangible net assets and identifiable intangible assets of the businesses acquired. Lincoln tests goodwill for impairment annually, or wheneverin the fourth quarter of each year, unless there are events or changes in circumstances that indicate an impairment may have occurred, by comparing its fair value to its carrying value.occurred. Impairment may result from among other things, deterioration in the performance, of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the restriction of activities ofassociated with the acquired business, andand/or a variety of other circumstances. If we determine that impairment has occurred, we are required to record a write-down of the carrying value and charge the impairment as an operating expense in the period the determination is made. In evaluating the recoverability of the carrying value of goodwill and other indefinite-lived intangible assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the acquired assets. Changes in strategy or market conditions could significantly impact these judgments in the future and require an adjustment to the recorded balances.
Goodwill represents a significant portion of our total assets. As of December 31, 2017,2022, goodwill was approximately $14.5 million, or 9.4%5.0%, of our total assets, which was flat from approximately $14.5 million, or 8.9%, of our total assets at December 31, 2016.assets. The goodwill is allocated among nine reporting units within the Transportation and Skilled Trades Segment.
When we testperform our annual goodwill balances for impairment assessment we estimatehave the option to perform a qualitative assessment based on a number of factors impacting our reporting units (step 0). When a qualitative assessment is performed, a number of factors are evaluated to determine whether it is more likely than not that the fair value of eacha reporting unit is less than its carrying value. Our qualitative assessment is subjective. It includes a review of ourmacroeconomic and industry factors, review of financial and non-financial performance measures, including projected student starts and assessment of adverse events that may negatively impact a reporting units carrying value. Adverse events would include, but are not limited to, difficulty in accessing capital, a greater competitive environment, decline in market-dependent multiples or metrics, regulatory or political developments, change in key personnel, strategy, or customers, or litigation. If we conclude based on projected future operating results and cash flows, market assumptions and/or comparative market multiple methods. Determining fair value requires significant estimates and assumptions based on an evaluation of a number of factors, such as marketplace participants, relative market share, new student interest, student retention, future expansion or contraction expectations, amount and timing of future cash flows andour qualitative review that it is more likely than not that the discount rate applied to the cash flows. Projected future operating results and cash flows used for valuation purposes do reflect improvements relative to recent historical periods with respect to, among other things, modest revenue growth and operating margins. Although we believe our projected future operating results and cash flows and related estimates regarding fair values are based on reasonable assumptions, historically projected operating results and cash flows have not always been achieved. The failure of one of our reporting units to achieve projected operating results and cash flows in the near term or long term may reduce the estimated fair value of the reporting unit below itsis less than the carrying value, and resultwe proceed with a quantitative impairment test. However, in the recognition of2022 it was deemed more appropriate to perform a quantitative goodwill impairment charge. Significant managementtest as a number of factors changed in an unfavorable direction.
When we perform our quantitative impairment test we believe the most critical assumptions and estimates in determining the estimated fair value of our reporting units include, but are not limited to, future tuition revenues, operating costs, working capital changes, capital expenditures and a discount rate. The assumptions used in determining our expected future cash flows consider various factors such as historical operating trends particularly in student enrollment and pricing and long-term operating strategies and initiatives.
If we determine that quantitative tests are necessary, we determine the fair value of each reporting unit using an equal weighting of the discounted cash flow model and the market approach, or if required, we will evaluate other asset value-based approaches. Our judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimatein forecasting future cash flows. Assumptions used in our impairment evaluations, such as forecastedflows and operating results, critical assumptions include growth rates, and our costchanges in operating costs, capital expenditures, changes in weighted average costs of capital, areand the fair value of an asset based on the best availableprice that would be received in a current transaction to sell the asset. Additionally, we obtain independent market informationmetrics for the industry and areour peers to assist in the development of these key assumptions. This process is consistent with our internal forecasts and operating plans. In addition to cash flow estimates, our valuations are sensitive to the rate used to discount cash flows and future growth assumptions.
AtOn December 31, 2017 and December 31, 2015,2022, we conducted our annual test for goodwill impairment and determined we did not have an impairment. At December 31, 2016, we conducted our annual test
Impairment of Long-Lived Assets. The Company reviews the carrying value of its long-lived assets and identifiable intangibles for goodwillpossible impairment and determined we hadwhenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. For other long-lived assets, including right-of-use lease assets, the Company evaluates assets for recoverability when there is an indication of potential impairment. Factors the Company considers important, which could trigger an impairment of $9.9 million. We concluded that as of September 30, 2015 there was an indicator of potential impairment as a result of a decreasereview, include significant changes in market capitalization and, accordingly, we tested goodwill for impairment. The test indicated that one of our reporting units was impaired, which resulted in a pre-tax non-cash charge of $0.2 million for the three months ended September 30, 2015.
Stock-based compensation. We currently account for stock-based employee compensation arrangements by using the Black-Scholes valuation model and utilize straight-line amortization of compensation expense over the requisite service periodmanner of the grant. We make an estimateuse of expected forfeitures at the time options are granted.
We measureasset, significant changes in historical trends in operating performance, significant changes in projected operating performance, and significant negative economic trends. If the undiscounted cash flows from a group of assets being evaluated is less than the carrying value of service and performance-based restricted stock on the fair valuethat group of a share of common stock on the date of the grant. We amortize the fair value of service-based restricted stock utilizing straight-line amortization of compensation expense over the requisite service period of the grant.
We amortizeassets, the fair value of the performance-based restricted stock based on determination ofasset group is determined and the probable outcome of the performance condition. If the performance condition is expected to be met, then we amortize the faircarrying value of the numberasset group is written down to fair value.
When we perform the quantitative impairment test for long-lived assets, we examine estimated future cash flows using Level 3 inputs. These cash flows are evaluated by using weighted probability techniques as well as comparisons of shares expected to vest utilizingpast performance against projections. Assets may also be evaluated by identifying independent market values. If the straight-line basis over the requisite performance periodCompany determines that an asset’s carrying value is impaired, it will record a write-down of the grant. However, ifcarrying value of the associated performance condition is not expected to be met, then we do not recognize the stock-based compensation expense.
Income taxes. We account for income taxes in accordance with ASC Topic 740, “Income Taxes” (“ASC 740”). This statement requires an asset and a liability approach for measuring deferred taxes based on temporary differences betweencharge the financial statement and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for yearsimpairment as an operating expense in the period in which taxes are expectedthe determination is made.
On December 31, 2022, as a result of impairment testing it was determined that there was a long-lived asset impairment of $1.0 million. The impairment was the result of an assessment of the current market value, as compared to be paid or recovered.the current carrying value of the assets.
In accordance with ASC 740, we42
Further, on December 31, 2021, as a result of impairment testing it was determined that there was an impairment of our property in Suffield, Connecticut of $0.7 million. The impairment was the result of an assessment of the current market value, obtained via third-party, as compared to the current carrying value of the assets. The carrying value for the Suffield, Connecticut property was approximately $2.9 million. The fair value estimate provided indicated that the current value of the property was approximately $2.2 million. As such, the aforementioned $0.7 million impairment was recorded and the assets carrying value was reduced. This property was sold during the second quarter of 2022, generating net proceeds of approximately $2.4 million and resulting in a gain on sale of asset of $0.2 million. There were no other long-lived asset impairments for the fiscal year ended December 31, 2021.
Income taxes. We assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable. A valuation allowance is required to be established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. In accordance with ASC 740, our assessment considers whether there has been sufficient income in recent years and whether sufficient income is expected in future years in order to utilize the deferred tax asset. In evaluating the realizability of deferred income tax assets we considered, among other things, historical levels of income, expected future income, the expected timing of the reversals of existing temporary reporting differences, and the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future income tax benefits. Significant judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financial position or results of operations. Changes in, among other things, income tax legislation, statutory income tax rates, or future income levels could materially impact our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods.
On August 16, 2022, the Inflation Reduction Act (the “Inflation Act”) was enacted and signed into law. The Inflation Act is a budget reconciliation package that includes significant changes relating to tax, climate change, energy, and health care. The tax provisions include, among other items, a corporate alternative minimum tax of 15%, an excise tax of 1% on corporate stock buy-backs, energy-related tax credits, and additional IRS funding. The Company does not expect the tax provisions of the Inflation Act to have a material impact to our consolidated financial statements
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the fiscal years ended December 31, 20172022 and 2016,2021, we did not record any interest and penalties expense associated with uncertain tax positions.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation knownpositions, as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act establishes new tax laws that will take effect in 2018, including, but not limited to (1) reduction of the U.S. federal corporate tax rate from a maximum of 35% to 21%; (2) elimination of the corporate alternative minimum tax (AMT); (3) a new limitation on deductible interest expense; (4) the repeal of the domestic production activity deduction; (5) limitations on the deductibility of certain executive compensation; and (6) limitations on net operating losses (NOLs) generated after December 31, 2017, to 80% of taxable income. In addition, certain changes were made to the bonus depreciation rules that will impact fiscal year 2017.
ASC 740 requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the Tax Act's provisions, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
At December 31, 2017, we have not completed our analysis of the tax effects of enactment of the Tax Act; however, we have made a reasonable estimate of the effects of the Tax Act’s change in the federal rate and revalued our deferred tax assets based on the rates at which they are expected to reverse in the future, which is generally the new 21% federal corporate tax rate plus applicable state tax rate. Based on our initial analysis of the impact, we consequently recorded a decrease related to deferred tax assets of $17.7 million. The expense is offset with a corresponding release of valuation allowance.
In addition, we released the valuation allowance against AMT credits deferred tax asset and recorded a deferred tax provision benefit of $0.4 million.
The Tax Act did not have a material impact on our financial statements because we are under a full valuation allowance and we do not have any significant offshore earnings from which to record the mandatory transition tax.
The Tax Act requires the Company to assess whether its valuation allowance analyses are affected by various aspects of the Tax Act. Since, as discussed herein, we have recorded provisional amounts related to certain portions of the Tax Act, any corresponding determination of the need for or change in a valuation allowance is also provisional. The Company’s valuation allowance position did not change as a result ofuncertain tax reform except for AMT credits which is discussed above and a reduction related to a change in the deferred tax rate.positions.
Results of Continuing Operations for the ThreeTwo Years Ended December 31, 20172022 and December 31, 2021
The following table sets forth selected consolidated statements of continuing operations data as a percentage of revenues for each of the periods indicated:
| | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
Revenue | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Costs and expenses: | | | | | | | | | | | | |
Educational services and facilities | | | 49.4 | % | | | 50.6 | % | | | 49.5 | % |
Selling, general and administrative | | | 53.0 | % | | | 52.0 | % | | | 49.6 | % |
(Gain) loss on sale of assets | | | -0.6 | % | | | 0.1 | % | | | 0.6 | % |
Impairment of goodwill and long-lived assets | | | 0.0 | % | | | 7.5 | % | | | 0.1 | % |
Total costs and expenses | | | 101.8 | % | | | 110.2 | % | | | 99.8 | % |
Operating (loss) income | | | -1.8 | % | | | -10.2 | % | | | 0.2 | % |
Interest expense, net | | | -2.7 | % | | | -2.0 | % | | | -2.6 | % |
Other income | | | 0.0 | % | | | 2.4 | % | | | 1.4 | % |
Loss from operations before income taxes | | | -4.5 | % | | | -9.8 | % | | | -1.0 | % |
(Benefit) provision for income taxes | | | -0.1 | % | | | 0.1 | % | | | 0.1 | % |
Net loss | | | -4.4 | % | | | -9.9 | % | | | -1.1 | % |
| | Year Ended Dec 31, | |
| | 2022 | | | 2021 | |
Revenue | | | 100.0 | % | | | 100.0 | % |
Costs and expenses: | | | | | | | | |
Educational services and facilities | | | 42.7 | % | | | 41.4 | % |
Selling, general and administrative | | | 52.4 | % | | | 50.4 | % |
Gain on sale of assets | | | -0.1 | % | | | -6.7 | % |
Impairment of long-lived assets | | | 0.3 | % | | | 0.2 | % |
Total costs and expenses | | | 95.3 | % | | | 85.3 | % |
Operating income | | | 4.7 | % | | | 14.7 | % |
Interest expense, net | | | 0.0 | % | | | -0.6 | % |
Income from operations before income taxes | | | 4.7 | % | | | 14.1 | % |
Provision for income taxes | | | 1.1 | % | | | 3.7 | % |
Net income | | | 3.6 | % | | | 10.4 | % |
Year Ended December 31, 20172022 Compared to Year Ended December 31, 20162021
Consolidated Results of Operations
Revenue.Revenue decreased by $23.7increased $13.0 million, or 8.3%,3.9% to $261.9$348.3 million for the fiscal year ended December 31, 2022 from $335.3 million in the prior year. Excluding Transitional segment revenue, which remained essentially flat at $6.8 million for each year ended December 31, 2022 and 2021, respectively, our revenue would have increased $12.9 million. The increase was primarily driven by two factors including beginning the year with approximately 700 more students than in the prior year and a 3.6% increase in average revenue per student, more than offsetting average student population, which was flat year-over-year. The increase in average revenue per student was driven by tuition increases combined with more efficient program delivery through the rollout of the Company’s new hybrid teaching model. The hybrid teaching model delivers higher daily revenue rates in certain programs as the overall duration of the programs can be shortened.
Educational services and facilities expense. Our educational services and facilities expense increased $9.8 million, or 7.1% to $148.7 million for the fiscal year ended December 31, 2022 from $138.9 million in the prior year. Excluding Transitional segment educational services and facilities expense of $3.2 million and $3.1 million for each year ended December 31, 2022 and 2021, respectively, our educational services and facilities expense would have increased $9.7 million. Increased costs were primarily concentrated in instructional expense and facilities expense.
Instructional salaries increased approximately $5.0 million mainly due to higher staffing levels in addition to expenses incurred in connection with the transition to our new hybrid teaching model. Further contributing to the increase were current market conditions, program expansion and the return to normalized levels of in-person instruction post-COVID-19 restrictions. In addition, consumables prices rose sharply driven by ongoing inflation and supply chain shortages.
Facility expenses increased as a result of approximately $2.6 million of additional rent expense relating to our Denver and Grand Prairie campuses which are now leased subsequent to the consummation of the sale leaseback transaction relating to those campuses in the fourth quarter of 2021.
Educational services and facilities expense, as a percentage of revenue, increased to 42.7% from 41.4% for the fiscal years ended December 31, 2022 and 2021, respectively.
Selling, general and administrative expense. Our selling, general and administrative expense increased $13.5 million, or 8.0% to $182.4 million for the year ended December 31, 20172022 from $285.6$168.9 million in the prior year. Excluding our Transitional segment, which had selling, general and administrative expense of $4.1 million and $3.6 million for each of the fiscal years ended December 31, 2022 and 2021, respectively, our selling, general and administrative expense would have increased $13.0 million. The change year-over-year was driven by:
Administrativeexpenseincreased as a result of $7.8 million of bad debt expense, $1.0 million of additional medical costs due to increased claims, $1.3 million in severance and stock compensation related to severance, $2.4 million of increased salary and benefits expense, $0.4 million in costs incurred resulting from the new Atlanta, Georgia campus and $0.4 million in one-time costs incurred in connection with the teach-out of our Somerville, Massachusetts campus. Partially offsetting the cost increases was a $5.8 million decrease in incentive compensation.
Bad debt expense for the year ended December 31, 2016. 2021 was lower than historical amounts due to an adjustment made in the first quarter of 2021 to qualifying student accounts receivables as permitted by the HEERF. In accordance with the applicable guidance, the Company combined HEERF funding with Company funds to provide financial relief to students who dropped out of school due to COVID-19 related circumstances with unpaid accounts receivable balances during the period from March 15, 2020 to March 31, 2021. The decreaserelief resulted in revenue is primarily attributablea net benefit to the campuses in our Transitional segment, which have closed during 2017. This segment accounted forbad debt expense of approximately $22.1 million, or 93.1% of the revenue decline.
Total student starts decreased by 10.8% to approximately 11,800 from 13,200$3.0 million. Without this adjustment bad debt expense for the fiscal year ended December 31, 2017 as compared to the prior year comparable period. The suspension of new student starts for the Transitional segment accounted for approximately 92.5% of the decline. The Transportation and Skilled Trades segment starts were slightly down 1.5% and the HOPS segment starts remained essentially flat at 4,200 for the year ended December 31, 2017 as compared to the 2016 fiscal year.
For a general discussion of trends in our student enrollment, see “Seasonality and Outlook” below.
Educational services and facilities expense. Our educational services and facilities expense decreased by $15.0 million, or 10.4%, to $129.4 million for the year ended December 31, 2017 from $144.4 million in the prior year comparable period. The decrease is mainly due to the Transitional segment, which accounted for approximately $13.9 million, or 92.4% of the decrease. The remainder of the $1.2 million decrease was primarily due to a decrease in facilities expenses slightly offset by increased instructional expenses. Facilities expense decreased due to a decline in depreciation expense of approximately $1.6 million due to fully depreciated assets. Partially, offsetting the decreases are $0.6 million in increased books and tools costs resulting from the addition of laptops for an increasing number of program offerings in the HOPS segment. Educational services and facilities expenses,2022 as a percentage of total revenue, decreasedwould have been comparable to 49.4% for the year ended December 31, 2017 from 50.6%that reported in the prior year comparable period.
Marketing investments increased $1.9 million when compared to the prior year. The increase is a result of a shift in our marketing strategy to include additional expenditures in paid search and paid social media channels while reducing our spend in pay-per-lead affiliate channels. Paid search and paid social media leads convert to enrollments at significantly higher rates compared to affiliate leads that are anywhere from two to three times more expensive on a cost-per-lead basis. Marketing investments implemented during the year yielded positive results as measured by increased lead generation and enrollments. However, these prospective students did not always translate into a start due to several factors including low unemployment and inflation, which is causing students to avoid incurring additional debt. The Company is anticipating that the increased interest in our programs will come to fruition during fiscal year 2023, provided economic conditions become more favorable.
Sales expenses were up $1.6 million, driven by several factors including $0.8 million of additional salary expense and $0.1 million in sales promotions relating to sales aimed at continuing to grow our post-high school population. Further contributing to the increase was $0.2 million in additional travel expense incurred now that COVID-19 travel restrictions have been lifted.
Student services expenses increased $2.0 million driven by $0.8 million of additional costs relating to the centralization of our financial aid department, $0.7 million of additional transportation costs for our students resulting from the removal of previously-imposed COVID-19 restrictions and a $0.5 million increase in career services as staffing levels were increased to accommodate a growing number of students graduating and to assist with placements of graduates.
Selling, general and administrative expense. Our selling, general and administrative expense decreased by $9.7 million, or 6.5%, to $138.8 million for the year ended December 31, 2017 from $148.5 million in the prior year comparable period. The decrease was primarily due to the Transitional segment, which accounted for approximately $13.6 million in cost reductions. Partially offsetting the cost reductions are $2.8 million in additional sales and marketing expense and $1.2 million in increased administrative expense.
The $2.8 million increase in sales and marketing expense was the result of strategic marketing spending in an effort to expand our reach in the adult market. The additional spending resulted in an increase in adult starts year over year.
Administrative expense increased primarily due to a $1.2 million increase in bad debt expense and $1.6 million in closed school expenses, offset by $1.3 million in reduced salaries and benefits expense.
The increase in closed school expenses related to the Hartford, Connecticut campus, which closed on December 31, 2016 and was included in the Transitional segment in 2016, but has an apartment lease for student dorms which ends in September 2019.
Bad debt expense, as a percentage of revenue, was 5.2%increased to 52.4% from 50.4% for the yearfiscal years ended December 31, 2017, compared2022 and 2021, respectively.
Gain on sale of assets. Gain on the sale of assets was $0.2 million and $22.5 million for each of the fiscal years ended December 31, 2022 and 2021, respectively.
During the second quarter of 2022, the Company sold its Suffield, Connecticut campus, for net proceeds of $2.4 million, resulting in a gain of $0.2 million in the current year.
In the fourth quarter of 2021, the Company consummated a sale leaseback transaction of its Denver, Colorado and Grand Prairie, Texas campuses resulting in a $22.5 million gain. See Part II. Item 8. “Financial Statements and Supplemental Data - Notes to 5.1% for the same period in 2016. The increase in bad debt expense was the resultConsolidated Financial Statements - Note 7 Property Sale Agreements.”
Impairment of higher student receivable accounts, primarily driven by lower scholarship recognition and a higher number of institutional loans. During 2017, we made modifications to the institutional loan program which expanded the program’s eligibility base and lessened the student’s affordability challenge. In addition, we experienced higher account write-offs and timing of Title IV funds receipts, which contributed to the increase in bad debt expense.
long-lived assets. As of December 31, 2017, we had total outstanding loan commitments to our students2022, the Company performed its annual test of $51.9 million, as compared to $40.0 million at December 31, 2016. The increase was due to a higher number of students packaged with institutional loans as a result of 2017 modifications to the program, which expanded the eligibility base and lessened the affordability obstacle.
Gain on sale of fixed assets. Gain on sale of fixed assets increased by $1.8 million primarily due to the sale of two real properties located in West Palm Beach, Florida. The sale occurred on August 14, 2017 and resulted in a gain of $1.5 million.
Impairment of goodwill and long-lived assets. We tested our goodwill and long-lived assets and determined that as of December 31, 2017 no impairments existed. The fair value of the Company’s reporting units were determined using Level 3 inputs included in its multiple of earnings and discounted cash flow approach. At December 31, 2016, we tested our goodwill and long-lived assets and determined that there was sufficient evidence to conclude that a $1.0 million impairment existed. The impairment was the result of an impairment existed, which resulted in a pre-tax, non-cash chargeassessment of $21.4 million.
Net interest expense. For the year ended December 31, 2017, our net interest expense increased by $1.1 million. The increase was mainly attributable to a $2.2 million non-cash write-off of previously capitalized deferred financing fees; and a $1.8 million early termination fee. These costs were incurred at March 31, 2017 when the Company entered into a new revolving credit facility with Sterling National Bank. Partially offsetting these increases were reductions in interest expense resulting from lower debt outstanding in combination with more favorable terms under the current credit facilitymarket value, as compared to the termscurrent carrying value of a prior term loan facility provided to the Company by a former lender.
Income taxes. Our benefit for income taxes was $0.3 million, or 2.3%assets. As of pretax loss, for the year ended December 31, 2017, compared2021, there was an impairment of $0.7 million, resulting from a one-time non-cash impairment charge triggered by an adjustment to fair market value for a provision for income taxescampus sold during the second quarter of $0.2 million, or 0.7% of pretax loss, in the prior year comparable period.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Cuts and Jobs Act, among other things, eliminates the corporate alternative minimum tax (the “AMT”) and changes how existing AMT credits can be realized either to offset regular tax liability or to be refunded. As a result of this change, the Company released the valuation allowance against AMT credits deferred tax asset and recorded a deferred tax provision benefit of $0.4 million. Offsetting this benefit was $0.1 million of income tax expense from various minimal state tax expenses.
2022.
At December 31, 2017, we have not completed our analysis of the tax effects of enactment of the Tax Act; however, we have made a reasonable estimate of the effects of the Tax Act’s change in the federal rate and revalued our deferred tax assets based on the rates at which they are expected to reverse in the future, which is generally the new 21% federal corporate tax rate plus applicable state tax rate. Based on our initial analysis of the impact, we recorded a decrease related to deferred tax assets of $17.7 million. The expense is offset with a corresponding release of valuation allowance.
No other federal or stateNet interest income tax benefit/ expense. Net interest income was recognized for the current period loss due to the recognition of a full valuation allowance.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Consolidated Results of Operations
Revenue. Revenue decreased by $20.5 million, or 6.7%, to $285.6$0.2 million for the year ended December 31, 2016 from $306.12022 compared to net interest expense of $2.0 million in the prior year. The increase to net interest income year-over-year was driven by two factors including 1) the Company’s acquisition of short-term investments and 2) the payoff of all outstanding debt during the fourth quarter of prior year in connection with the sale leaseback transaction involving the Denver, Colorado and Grand Prairie, Texas campuses. See Part II. Item 8. “Financial Statements and Supplemental Data - Notes to Consolidated Financial Statements - Note 7 Property Sale Agreements.”
Income taxes.Our income tax provision for the year ended December 31, 2015. The decrease in revenue can mainly be attributed to the closure of campuses in our Transitional segment during 2016, which accounted for $11.82022 was $3.8 million, or 57.3%23.1% of the total revenue decline, and a lower carry in population, which has been one of the main contributing factors to the declines in revenue over the past several years. We started 2016 with approximately 1,400 fewer students than we had on January 1, 2015, which led to an 8.6% decline in average student population to approximately 11,900 as of December 31, 2016 from 13,000 in the comparable period of 2015. Partially offsetting the revenue decline from lower student population was a 2.0% increase in average revenue per student mainly attributable to shifts in our program mix.
Student start results decreased by 6.0% to approximately 13,200 from 14,100 for the year ended December 31, 2016 aspre-tax income compared to the prior year comparable period. Excluding the Transitional segment, student starts were down 1.8%. The decline in student starts was mainly a result of the underperformance of one campus. Excluding this one campus and the Transitional segment, our starts for the year ended December 31, 2016 would have remained essentially flat as compared to 2015.
For a general discussion of trends in our student enrollment, see “Seasonality and Outlook” below.
Educational services and facilities expense. Our educational services and facilities expense decreased by $7.2$12.5 million, or 4.8%, to $144.4 million for the year ended December 31, 2016 when compared to $151.6 million in the prior year comparable period. The decrease is mainly due to the Transitional Segment which accounted for approximately $6.6 million, or 90.8%26.5% of the decrease year over year. Instructional expense decreased by $2.4 million or 3.8%, primarily resulting from a reduction in salaries and benefits expense of $1.9 million due to historically lower medical claims in 2016 and reductions in salaries expense resulting from the HOPS segment, which was classified as held for sale as of December 31, 2016. Partially offsetting the decrease in instructional expense were increases in books and tools and facilities expense. Books and tools increased by $1.6 million, or 12.1%, due to the purchase of laptops provided to newly enrolled students in certain programs to enhance and expand the students overall learning experience. Facilities expense increased by $0.2 million, primarily resulting from two main factors: a) decreased depreciation expense of $1.8 million resulting from the suspension of depreciations expense for the HOPS segment, which was classified as held for sale for the year ended December 31, 2016; and b) increased rent expense of $1.6 million was the result of the transition of our finance obligation at four of our campuses to operating leases which were previously included in interest expense.
Our educational expenses contain a high fixed cost component and are not as scalable as some of our other expenses. As our student population decreases, we typically experience a reduction in average class size and, therefore, are not always able to align these expenses with the corresponding decrease in population. Educational services and facilities expenses, as a percentage of revenue, increased to 50.6% from 49.5% in the prior year comparable period.
Selling, general and administrative expense. Our selling, general and administrative expense decreased by $3.4 million, or 2.2%, to $148.4 million for the year ended December 31, 2016 from $151.8 millionpre-tax income in the prior year. The decrease was primarily due to our Transitional segment which accounted for approximately $2.0 million, or 60.8% of the decrease year over year.
Administrative expenses decreased by $1.2 primarily resulting from reduced salaries and benefits expense, partially offset by increases in bad debt expense. Student services expense decreased by $0.8 million primarily as a result of reduced salaries and benefits expense. Partially offsetting the cost reductions was an increase in marketing expense of $0.9 million. The increase in marketing expense was the result of additional spending made in an effort to reach more potential students, expand brand awareness, and increase enrollments.
Bad debt expense as a percentage of revenue was 5.1% forDuring the year ended, December 31, 2016, compared to 4.4% for the same perioddecrease in 2015. This increaseeffective tax rate was mainly the result of incurring additional bad debt expensedue to a higher tax benefit derived from increased reserves placed on our newly reclassified Transitional segment campuses.
As a percentage of revenues, selling, general and administrative expense increased to 52.0% for the year ended December 31, 2016 from 49.6% in the comparable prior year period.
As of December 31, 2016, we had total outstanding loan commitments to our students of $40.0 million, as compared to $33.4 million at December 31, 2015. Loan commitments, net of interest that would be due on the loans through maturity, were $30.0 million at December 31, 2016, as compared to $24.8 million at December 31, 2015.
Loss on sale of fixed assets. Loss on sale of assets decreased by $1.5 million primarily as a result of a non-cash charge in relation to two of our campuses that were previously classified as held for sale in 2014. During 2015, the Company re-classed these campuses out of held for sale and booked catch-up depreciation in the amount of $2.0 million. This was partially offset by a non-cash charge in relation to three of our campuses that were previously classified as held for sale in 2015. During 2016, the Company re-classed these campuses out of held for sale and booked catch-up depreciation in the amount of approximately $0.4 million.
Impairment of goodwill and long-lived assets. At December 31, 2016, we tested long-lived assets and determined that there was sufficient evidence to conclude that an impairment existed, which resulted in a pre-tax, non-cash charge of $21.4 million. As of September 30, 2015, we tested goodwill and long-lived assets for impairment and determined that one of the Company’s reporting units relating to goodwill was impaired, which resulted in a pre-tax, non-cash charge of $0.2 million.restricted stock vesting.
Net interest expense. For the year ended December 31, 2016, our net interest expense decreased by $2.0 million. The decrease in interest expense was primarily the result of the transition of our finance obligation at four of our campuses to operating leases coupled with the termination of the lease termination for our Fern Park, Florida facility, which was previously accounted for as a capital lease. Partially offsetting the reduction in interest expense was interest paid under the Company’s term loan facility entered into on July 31, 2015.
Income taxes. Our provision for income taxes was $0.2 million, or 0.7% of pretax loss, for the year ended December 31, 2016, compared to $0.2 million, or 7.8% of pretax loss, in the prior year comparable period. No federal or state income tax benefit was recognized for the current period loss due to the recognition of a full valuation allowance. Income tax expense resulted from various minimal state tax expenses.
Segment Results of Operations
The for-profit education industry has been impacted by numerous regulatory changes, the changing economy and an onslaught of negative media attention. As a result of these challenges, student populations have declined and operating costs have increased. Over the past few years, the Company has closed over ten locations and exited its online business. In 2016, the Company ceased operations in Hartford, Connecticut; Fern Park, Florida; and Henderson (Green Valley), Nevada. In 2017, the Company completed the teach-out of its Center City Philadelphia, Pennsylvania; Northeast Philadelphia, Pennsylvania; West Palm Beach, Florida, Brockton, Massachusetts and Lowell, Massachusetts schools. All of these schools were previously included in our HOPS segment and are included in the Transitional segment as of December 31, 2017.
In the past, we offered any combination of programs at any campus. We have shifted our focus to program offerings that create greater differentiation among campuses and promote attainment of excellence to attract more students and gain market share. Also, strategically, we began offering continuing education training to select employers who hire our graduates and this is best achieved at campuses focused on the applicable profession.
As a result of the regulatory environment, market forces and our strategic decisions, we now operate our business in three reportable operating segments: (a) the Transportation and Skilled Trades segment;segment, (b) the Healthcare and Other Professions segment; (“HOPS”) segment and (c) the Transitional segment. As of December 31, 2022, the only campus classified in Transitional is the Somerville, Massachusetts campus, which has been marked for closure and is expected to be fully taught-out as of December 31, 2023.
Our reportable operating segments have been determined based on a method by which we now evaluate performance and allocate resources. Each reportable operating segment represents a group of post-secondary education providers that offer a variety of degree and non-degree academic programs. These segments are organized by key market segments to enhance operational alignment within each segment to more effectively execute our strategic plan. Each of the Company’s schools is a reporting unit and an operating segment. Our operating segments are described below.
Transportation and Skilled Trades – The Transportation and Skilled Trades segment offers academic programs mainly in the career-oriented disciplines of transportation and skilled trades (e.g. automotive, diesel, HVAC, welding and manufacturing).
Healthcare and Other Professions – The Healthcare and Other Professions segment offers academic programs in the career-oriented disciplines of health sciences, hospitality and business and information technology (e.g. dental assistant, medical assistant, practical nursing, culinary arts and cosmetology).
Transitional– The Transitional segment refers to campuses that are being taught-out and closed and operations that are being phased out. The schools in the Transitional segment employ a gradual teach-out process that enables the schools to continue to operate to allow their current students to complete their course of study. These schools are no longer enrolling new students.
The Company continually evaluates each campus for profitability, earning potential, and customer satisfaction. This evaluation takes several factors into consideration, including the campus’s geographic location and program offerings, as well as skillsets required of our students by their potential employers. The purpose of this evaluation is to ensure that our programs provide our students with the best possible opportunity to succeed in the marketplace with the goals of attracting more students to our programs and, ultimately, to provide our shareholders with the maximum return on their investment. Campuses in the Transitional segment have been subject to this process and have been strategically identified for closure.
We evaluate segment performance based on operating results. Adjustments to reconcile segment results to consolidated results are included under the caption “Corporate,” which primarily includes unallocated corporate activity.
The following table presentpresents results for the activity for our three reportable operating segments for the fiscal years ended December 31, 20172022 and 2016:2021:
| | Twelve Months Ended December 31, | | | Year Ended December 31, | |
| | 2017 | | | 2016 | | | % Change | | | 2022 | | 2021 | | % Change | |
Revenue: | | | | | | | | | | | | | | | | |
Transportation and Skilled Trades | | $ | 177,099 | | | $ | 177,883 | | | | -0.4 | % | | $ | 249,905 | | $ | 240,531 | | 3.9 | % |
Healthcare and Other Professions | | | 76,310 | | | | 77,152 | | | | -1.1 | % | | 91,535 | | 87,998 | | 4.0 | % |
Transitional | | | 8,444 | | | | 30,524 | | | | -72.3 | % | | | 6,847 | | | 6,807 | | | 0.6 | % |
Total | | $ | 261,853 | | | $ | 285,559 | | | | -8.3 | % | | $ | 348,287 | | $ | 335,336 | | | 3.9 | % |
| | | | | | | | | | | | | | | | | | | |
Operating Income (Loss): | | | | | | | | | | | | | | | | | | | |
Transportation and Skilled Trades | | $ | 17,861 | | | $ | 21,278 | | | | -16.1 | % | | $ | 42,335 | | $ | 52,055 | | -18.7 | % |
Healthcare and Other Professions | | | 2,318 | | | | (10,917 | ) | | | 121.2 | % | | 7,189 | | 11,740 | | -38.8 | % |
Transitional | | | (5,379 | ) | | | (15,170 | ) | | | 64.5 | % | | (430 | ) | | 105 | | -509.5 | % |
Corporate | | | (19,516 | ) | | | (24,105 | ) | | | 19.0 | % | | | (32,816 | ) | | | (14,639 | ) | | | -124.2 | % |
Total | | $ | (4,716 | ) | | $ | (28,914 | ) | | | 83.7 | % | | $ | 16,278 | | $ | 49,261 | | | -67.0 | % |
| | | | | | | | | | | | | | | | | | | |
Starts: | | | | | | | | | | | | | | | | | | | |
Transportation and Skilled Trades | | | 7,510 | | | | 7,626 | | | | -1.5 | % | | 9,831 | | 10,291 | | -4.5 | % |
Healthcare and Other Professions | | | 4,157 | | | | 4,148 | | | | 0.2 | % | | 4,710 | | 4,666 | | 0.9 | % |
Transitional | | | 132 | | | | 1,452 | | | | -90.9 | % | | | 379 | | | 445 | | | -14.8 | % |
Total | | | 11,799 | | | | 13,226 | | | | -10.8 | % | | | 14,920 | | | 15,402 | | | -3.1 | % |
| | | | | | | | | | | | | | | | | | | |
Average Population: | | | | | | | | | | | | | | | | | | | |
Transportation and Skilled Trades | | | 6,752 | | | | 6,852 | | | | -1.5 | % | | 8,629 | | 8,505 | | 1.5 | % |
Leave of Absence - COVID-19 | | | | - | | | (12 | ) | | | 100.0 | % |
Transportation and Skilled Trades Excluding Leave of Absence - COVID-19 | | | | 8,629 | | | 8,493 | | | 1.6 | % |
| | | | | | | | |
Healthcare and Other Professions | | | 3,569 | | | | 3,560 | | | | 0.3 | % | | 3,973 | | 4,123 | | -3.6 | % |
Leave of Absence - COVID-19 | | | | - | | | (33 | ) | | | 100.0 | % |
Healthcare and Other Professions Excluding Leave of Absence - COVID-19 | | | | 3,973 | | | 4,090 | | | -2.9 | % |
| | | | | | | | |
Transitional | | | 451 | | | | 1,452 | | | | -68.9 | % | | 292 | | 316 | | -7.6 | % |
Leave of Absence - COVID-19 | | | | - | | | - | | | 0.0 | % |
Transitional Excluding Leave of Absence - COVID-19 | | | | 292 | | | 316 | | | -7.6 | % |
| | | | | | | | | | | |
Total | | | 10,772 | | | | 11,864 | | | | -9.2 | % | | | 12,894 | | | 12,944 | | | -0.4 | % |
Total Excluding Leave of Absense - COVID-19 | | | | 12,894 | | | 12,899 | | | 0.0 | % |
| | | | | | | | | | | | | | | | | | | |
End of Period Population: | | | | | | | | | | | | | | | | | | | |
Transportation and Skilled Trades | | | 6,413 | | | | 6,700 | | | | -4.3 | % | | 8,237 | | 8,648 | | -4.8 | % |
Healthcare and Other Professions | | | 3,746 | | | | 3,587 | | | | 4.4 | % | | 3,959 | | 4,093 | | -3.3 | % |
Transitional | | | - | | | | 948 | | | | -100.0 | % | | | 192 | | | 318 | | | -39.6 | % |
Total | | | 10,159 | | | | 11,235 | | | | -9.6 | % | | | 12,388 | | | 13,059 | | | -5.1 | % |
Year Ended December 31, 20172022 Compared to Year Ended December 31, 20162021
Transportation and Skilled Trades
Student start results decreased by 1.5% to 7,510Operating income was $42.3 million and $52.1 million for the yearfiscal years ended December 31, 2017 from 7,626 in the prior year comparable period.
Increased marketing spend targeted at the adult demographic has resulted in slightly higher adult start rates for the year ended December 31, 2017 when compared to the prior year comparable period. However, as previously reported for the second quarter of 2017, there was a decline in starts as a result of a lower than expected high school start rate. Graduating high school students make up approximately 31% of the segment’s starts. In an effort to increase high school enrollments, the Company has made various changes to its processes2022 and organizational structure. These shortfalls in the high school start rate have offset the favorable start rates for the adult start demographic.
Operating income decreased by $3.4 million, or 16.1%, to $17.9 million from $21.3 million mainly driven by the following factors:
| · | Revenue decreased to $177.1 million for the year ended December 31, 2017, as compared to $177.9 million in the comparable prior year period. The slight decrease in revenue was primarily driven by a 1.5% decrease in average student population, partially offset by a 1.0% increase in average revenue per student. |
| · | Educational services and facilities expense decreased by $1.3 million, or 1.6%, mainly due to reductions in depreciation expense attributable to assets that have fully depreciated. |
| · | Selling, general and administrative expense increased by $4.0 million, primarily resulting from $1.4 million of additional bad debt expense resulting from higher student accounts, higher account write-off’s, and timing of Title IV Program receipts and a $1.4 million increase in marketing expense. The increase in marketing expense is part of a strategic effort to increase student population and increase brand awareness. As mentioned previously, the increased marketing spend targeted at the adult demographic has resulted in slightly higher starts year over year. This progress has been offset by lower than expected high school starts. |
Healthcare and Other Professions
Student start results had increased slightly by 0.2% to 4,157 for the year ended December 31, 2017 from 4,148 in the prior year comparable period. This increase represents the first time in approximately three years where student starts have yielded positive results. We believe this achievement is the result of additional marketing spend aimed at increasing student population.
Operating income for the year ended December 31, 2017 was $2.3 million compared to an operating loss of $10.9 million in the prior year comparable period.2021, respectively. The $13.2 million change year-over-year was mainly driven by the following factors:
| · | Revenue decreased to $76.3Revenue increased $9.4 million, or 3.9% to $249.9 million for the fiscal year ended December 31, 2022 from $240.5 million for the year ended December 31, 2017, as compared to $77.2 million in the comparable prior year period. The decrease in revenue is mainly attributable to a lower carry in population year over year of approximately 90 students and a 1.4% decline in average revenue per student due to tuition decreases at certain campuses. |
| · | Educational services and facilities expense increased by $0.2 million to $39.9 million for the year ended December 31, 2017 from $39.7 million in the prior year comparable period. The increase was attributable to a $0.3 million increase in books and tools expense resulting from the introduction of student laptops for an increasing number of program offerings. |
| · | Selling, general and administrative expenses increased by $1.9 million, or 5.8%, mainly due to a $1.3 million increase in sales and marketing expense as a result of increased spending in an effort to increase student population and brand awareness and a $0.4 million increase in administrative expense as a result of increased salaries and benefits. Increased salaries and benefits resulted from the addition of administrative staff to accommodate newly transferred students from our Northeast Philadelphia, Pennsylvania and Center City Philadelphia, Pennsylvania campuses, which were closed in August 2017. |
| · | Impairment of goodwill and long lived asset decreased by $16.1 million as a result of non-cash, pre-tax charges during the year ended December 31, 2016. |
Transitional
The following table lists the schools that are categorized in the Transitional segment which are all closedprior year. Revenue increased due to a 2.2% increase in average revenue per student, driven by tuition increases and greater efficiencies realized through the Company’s new hybrid delivery model, as detailed in the consolidated results of operations. Further contributing to the additional revenue is a 1.6% increase in average population, mainly due to a higher beginning of period population in the current year of approximately 730 students.
Educational services and facilities expense increased $6.6 million, or 6.9% to $101.3 million for the fiscal year ended December 31, 2017:
Campus | Date Closed |
Northeast Philadelphia, Pennsylvania | September 30, 2017 |
Center City Philadelphia, Pennsylvania | August 31, 2017 |
West Palm Beach, Florida | September 30, 2017 |
Brockton, Massachusetts | December 31, 2017 |
Lowell, Massachusetts | December 31, 2017 |
Fern Park, Florida | March 31, 2016 |
Hartford, Connecticut | December 31, 2016 |
Henderson (Green Valley), Nevada | December 31, 2016 |
Revenue for2022 from $94.7 million in the prior year. Increased costs were primarily concentrated in instructional expense and facilities expense. Instructional salaries increased mainly due to higher staffing levels in addition to expenses incurred in connection with the transition to our new hybrid teaching model. Further contributing to the increase were current market conditions, program expansion and the return to normalized levels of in-person instruction following COVID-19 restrictions. In addition, consumable expense has risen as a result of inflation and supply chain shortages. Facility expense increases were the result of approximately $2.6 million of additional rent expense relating to our Denver and Grand Prairie campuses following the consummation of the sale leaseback transaction of these campuses in the fourth quarter of 2021. Also contributing to the increase is $0.4 million of additional cleaning services. Partially offsetting the additional facility costs are reductions in depreciation expense.
Selling, general and administrative expense increased $12.5 million, or 13.3% to $106.2 million for the fiscal year ended December 31, 2022, from $93.7 million in the prior year. The increase was primarily driven by additional bad debt expense, marketing investments, sales expense and student services expenses discussed in the consolidated results of operations above.
Healthcare and Other Professions
Operating income was $7.2 million and $11.7 million for the fiscal years ended December 31, 2022 and 2021, respectively. The change year-over-year was mainly driven by the following factors:
Revenue increased $3.5 million, or 4.0% to $91.5 million for the fiscal year ended December 31, 2022 from $88.0 million in the prior year. Additional revenue was driven by a 6.6% increase in average revenue per student, which more than offset a 2.9% decline in average student population for the year. The higher revenue per student was driven by tuition increases and greater efficiencies realized through the Company’s new hybrid delivery model as detailed in the consolidated results of operations.
Educational services and facilities expense increased $3.1 million, or 7.6% to $44.3 million for the fiscal year ended December 31, 2022 from $41.2 million in the prior year. Increased costs were primarily concentrated in instructional expense and facilities expense. Instructional salaries increased mainly due to higher staffing levels in addition to expenses incurred in connection with the transition to our new hybrid teaching model. Further contributing to the increase were current market conditions, program expansion and the return to normalized levels of in-person instruction following COVID-19 restrictions. Facility expense increases were primarily due to increased spending for common area maintenance and additional rent expense.
Selling, general and administrative expense increased $3.9 million, or 11.1% to $39.0 million for the fiscal year ended December 31, 2022 from $35.1 million in the prior year. The increase was primarily driven by additional bad debt expense, marketing investments, sales expense and student services expenses discussed in the consolidated results of operations above, table
Impairment was $1.0 million and zero for the years ended December 31, 2022 and 2021, respectively as discussed in the consolidated results above.
Transitional
On November 3, 2022, the Board of Directors approved a plan to close the Somerville, Massachusetts campus. The owner of the Somerville property has exercised an option to terminate the lease on December 8, 2023 and the Company has since determined not to pursue relocating the campus in this geographic region. The Company has also developed a plan to deliver instruction for the remaining students prior to the closing. Total costs to close the campus including the teach-out will be approximately $2.0 million. The closure should be completed by the end of 2023. Revenue and related expenses for the Somerville campus have been classified in the Transitional segment for comparability for the fiscal years ended December 31, 20172022 and 2016.2021.
Revenue remained essentially flat at $6.8 million for each of the fiscal years ended December 31, 2022 and 2021, respectively.
Operating loss was $8.4$0.4 million for the fiscal year ended December 31, 2017 as2022 compared to $30.5operating income of $0.1 million in the prior year comparable period mainly due to the campus closures.
Operating loss decreased by $9.8 million to $5.4 million for the year ended December 31, 2017 from $15.2 million in the prior year comparable period. The decrease was due to campus closures.year.
Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses decreased by $4.6were $32.8 million or 19.0%, to $19.5and $14.6 million for each of the fiscal years ended December 31, 2022 and 2021, respectively. Included in the current year is a gain of $0.2 million resulting from $24.1 millionthe sale of our Suffield, Connecticut property during the second quarter of 2022. Included in the prior year comparable period.is a $22.5 million gain realized as a result of entering into a sale leaseback transaction involving our Grand Prairie, Texas and Denver, Colorado campuses, partially offset by a one-time non-cash impairment charge of $0.7 million. Excluding the gain on sale of assets from both years in addition to the impairment charge in prior year, corporate and other expenses would have been $33.0 million and $36.4 million for each of the fiscal years ended December 31, 2022 and 2021, respectively. The decrease in expense year-over-year was primarily driven by a $1.5 million gain resulting from the sale of two properties locatedreduction in West Palm Beach, Florida on August 14, 2017; a reductionincentive compensation, partially offset by additional medical costs due to increased claims, severance and stock compensation related to severance and an increase in salaries and benefits expense of approximately $2.5 million; and a $1.4 million non-cash impairment charge in relation to one of our corporate properties that occurred in December 31, 2016. Partially offsetting these reductions were $1.6 million in additional closed school costs. The additional closed school costs related to the closure of the Hartford, Connecticut campus on December 31, 2016. The additional expenses relating to the Hartford, Connecticut campus were due to an apartment lease for student dorms, which will end in September 2019.benefits.
The following table present results for our two reportable segments for the years ended December 31, 2016 and 2015.
| | Twelve Months Ended December 31, | |
| | 2016 | | | 2015 | | | % Change | |
Revenue: | | | | | | | | | |
Transportation and Skilled Trades | | $ | 177,883 | | | $ | 183,822 | | | | -3.2 | % |
Healthcare and Other Professions | | $ | 77,152 | | | $ | 79,978 | | | | -3.5 | % |
Transitional | | | 30,524 | | | | 42,302 | | | | -27.8 | % |
Total | | $ | 285,559 | | | $ | 306,102 | | | | -6.7 | % |
| | | | | | | | | | | | |
Operating Income (Loss): | | | | | | | | | | | | |
Transportation and Skilled Trades | | $ | 21,278 | | | $ | 26,777 | | | | -20.5 | % |
Healthcare and Other Professions | | $ | (10,917 | ) | | $ | 5,386 | | | | -302.7 | % |
Transitional | | | (15,170 | ) | | | (7,543 | ) | | | -101.1 | % |
Corporate | | | (24,105 | ) | | | (23,916 | ) | | | -0.8 | % |
Total | | $ | (28,914 | ) | | $ | 704 | | | | 4207.1 | % |
| | | | | | | | | | | | |
Starts: | | | | | | | | | | | | |
Transportation and Skilled Trades | | | 7,626 | | | | 7,794 | | | | -2.2 | % |
Healthcare and Other Professions | | | 4,148 | | | | 4,195 | | | | -1.1 | % |
Transitional | | | 1,452 | | | | 2,080 | | | | -30.2 | % |
Total | | | 13,226 | | | | 14,069 | | | | -6.0 | % |
| | | | | | | | | | | | |
Average Population: | | | | | | | | | | | | |
Transportation and Skilled Trades | | | 6,852 | | | | 7,238 | | | | -5.3 | % |
Healthcare and Other Professions | | | 3,560 | | | | 3,827 | | | | -7.0 | % |
Transitional | | | 1,452 | | | | 1,916 | | | | -24.2 | % |
Total | | | 11,864 | | | | 12,981 | | | | -8.6 | % |
| | | | | | | | | | | | |
End of Period Population: | | | | | | | | | | | | |
Transportation and Skilled Trades | | | 6,700 | | | | 6,617 | | | | 1.3 | % |
Healthcare and Other Professions | | | 3,587 | | | | 3,677 | | | | -2.4 | % |
Transitional | | | 948 | | | | 1,587 | | | | -40.3 | % |
Total | | | 11,235 | | | | 11,881 | | | | -5.4 | % |
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Transportation and Skilled Trades
Student start results decreased by 2.2% to 7,626 from 7,794 for the year ended December 31, 2016 as compared to the prior year comparable period. The decline in student starts was mainly the result of the underperformance of one campus. Excluding this campus, student starts for the year would have grown 1.3% year over year.
Operating income decreased by $5.5 million, or 20.5%, to $21.3 million from $26.8 million in the prior year mainly driven by the following factors:
| · | Revenue decreased to $177.9 million for the year ended December 31, 2016, as compared to $183.8 million for the year ended December 31, 2015, primarily driven by a 5.3% decrease in average student population, which decreased to approximately 6,900 from 7,200 in the prior year. The decrease in average population was a result of starting 2016 with approximately 600 fewer students than we had on January 1, 2015. The revenue decline from a lower population was slightly offset by a 2.2% increase in average revenue per student due to a shift in program mix. |
| · | Educational services and facilities expense increased by $1.9 million mainly due to a $2.0 million, or 5.9%, increase in facilities expense primarily due to (a) increased rent expense of $1.3 million as a result of a modification of leases for three of our campuses, which were previously accounted for as finance obligations under which rent payments were previously included in interest expense; (b) $0.6 million in additional depreciation expense resulting from the reclassification of one of our facilities out of held for sale as of December 31, 2015; and (c) a $1.5 million, or 17.4%, increase in books and tools expenses resulting from the purchase of laptops provided to newly enrolled students in certain programs to enhance and expand their overall learning experience. Partially offsetting the above increases was a $1.6 million, or 4.1%, decrease in instructional expense as a result of realigning our cost structure to meet our population.
|
| · | Selling, general and administrative expenses decreased by $0.5 million primarily as a result of a $1.6 million decrease in administrative and student services expense due to reduced salary and benefits. Partially offsetting the decrease was a $1.1 million increase in marketing expense, which was largely the result of additional spending in a strategic effort to reach more potential students, expand brand awareness and increase enrollments.
|
| · | Loss on sale of asset decreased by $1.6 million as a result of a one-time charge in relation to one of our campuses that was previously classified as held for sale. During 2015, the company had reclassified this campus out of held for sale and recorded catch-up depreciation in the amount of $1.6 million. |
| · | Impairment of goodwill and long lived asset decreased by $0.2 million as a result of one-time charges in relation to one of our campuses during the year ended December 31, 2015. |
Healthcare and Other Professions
Student starts decreased by 1.1% to 4,148 from 4,195 for the year ended December 31, 2016 as compared to the prior year.
Operating loss increased to $10.9 million for the year ended December 31, 2016 from operating income of $5.4 million in the prior year comparable period mainly driven by the following factors:
| · | Revenue decreased to $77.2 million for the year ended December 31, 2016, as compared to $80.0 million in the comparable prior year period, primarily driven by a 7.0% decrease in average student population, which decreased to approximately 3,600 from 3,800 in the prior year. The decrease in average population was a result of starting 2016 with approximately 350 fewer students than we had on January 1, 2015. The revenue decline from a lower population was slightly offset by a 3.6% increase in average revenue per student due to a shift in program mix. |
| · | Educational services and facilities expense decreased by $2.6 million mainly due to a $1.9 million, or 13.0%, decrease in facilities expense primarily due to the suspension of depreciation expense during the year ended December 31, 2016 as this segment was classified as held for sale. |
| · | Selling, general and administrative expenses remained essentially flat at $32.3 million for the year ended December 31, 2016 and 2015. |
| · | Impairment of goodwill and long lived assets of $16.1 million at December 31, 2016. |
Transitional
The following table lists the schools that are categorized in the Transitional segment and their status as of December 31, 2016:
Campus | Date Closed |
Northeast Philadelphia, Pennsylvania | September 30, 2017 |
Center City Philadelphia, Pennsylvania | August 31, 2017 |
West Palm Beach, Florida | September 30, 2017 |
Brockton, Massachusetts | December 31, 2017 |
Lowell, Massachusetts | December 31, 2017 |
Fern Park, Florida | March 31, 2016 |
Hartford, Connecticut | December 31, 2016 |
Henderson (Green Valley), Nevada | December 31, 2016 |
Revenue for the campuses in the above table have been classified in the Transitional segment for comparability for the year ended December 31, 2016 and 2015.
Revenue was $30.5 million for the year ended December 31, 2016 as compared to $42.3 million in the prior year comparable period mainly due to the campus closures.
Operating loss increased by $7.6 million to $15.2 million for the year ended December 31, 2016 from $7.5 million in the prior year comparable period. The decrease was due to campus closures.
Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other costs increased by $0.2 million, or 0.8%, to $24.1 million for the year ended December 31, 2016 from $23.9 million in the prior year comparable period. This increase was primarily the result of a $1.4 million non-cash impairment charge in relation to one of our corporate properties. Partially offsetting the increase is a $0.6 million decrease in administrative costs resulting from a reduction in salaries and benefits expense and a $0.6 million gain resulting from the sale of certain Company assets for the year ended December 31, 2016.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are for facilitiesmaintenance and expansion and maintenance,of our facilities and the development of new programs. Our principal sources of liquidity have been cash provided by operating activities, andprior to the termination thereof (described below), borrowings under our credit facility. The following chart summarizes the principal elements of our cash flow for each of the threetwo fiscal years in the period ended December 31, 2017:2022:
| | Cash Flow Summary Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
| | (In thousands) | |
Net cash (used in) provided by operating activities | | $ | (11,321 | ) | | $ | (6,107 | ) | | $ | 14,337 | |
Net cash provided by (used in) investing activities | | $ | 9,917 | | | $ | (2,182 | ) | | $ | (1,767 | ) |
Net cash (used in) provided by financing activities | | $ | (5,097 | ) | | $ | (9,067 | ) | | $ | 13,551 | |
| | Cash Flow Summary | |
| | Year Ended December 31, | |
| | 2022 | | | 2021 | |
| | (In thousands) | |
Net cash provided by operating activities | | $ | 882 | | | $ | 27,447 | |
Net cash (used in) provided by investing activities | | $ | (21,354 | ) | | $ | 37,848 | |
Net cash used in financing activities | | $ | (12,548 | ) | | $ | (20,014 | ) |
TheAs of December 31, 2022, the Company had $54.6$50.3 million ofin cash and cash equivalents and restricted cash, at December 31, 2017 ($40.0in addition to $14.7 million of restricted cash at December 31, 2017) asin short-term investments, compared to $47.7$83.3 million of cash and cash equivalents and restrictedin the prior year. The decrease in cash as of December 31, 2016 ($26.7 million of restricted cash at December 31, 2016). This increase is primarilyposition from the prior year was the result of borrowingsseveral factors, including incentive compensation payments, share repurchases made under our line of credit facility partially offset by repayment under our previous term loan facility, a net loss during the year ended December 31, 2017share repurchase program and seasonality of the business.
For the last several years, the Company and the proprietary school sector generally have faced deteriorating earnings growth. Government regulations have negatively impacted earnings by making it more difficult for prospective students to obtain loans, which when coupledone-time costs incurred in connection with the overall economic environment have hindered prospective students from enrollingteach-out of our Somerville, Massachusetts campus. Partially offsetting the decrease in our schools. In light of these factors, we have incurred significant operating lossescash and cash equivalents was $2.4 million in net proceeds received as a result of lower student population. Despite these events, we believethe sale of a former campus located in Suffield, Connecticut consummated during the second quarter of 2022. Further, the Company’s cash position in the prior year benefited from the consummation of a sale leaseback transaction entered into during the fourth quarter of 2021 of the Company’s Denver, Colorado and Grand Prairie, Texas campuses generating net proceeds of approximately $45.4 million.
On May 24, 2022, the Company announced that our likely sourcesits Board of cash should be sufficientDirectors had authorized a share repurchase program of up to fund operations$30.0 million of the Company’s outstanding Common Stock. The repurchase program was authorized for 12 months. As of December 31, 2022, the next twelveCompany had repurchased 1,572,414 shares at a cost of approximately $9.4 million. On February 27, 2023, the Board of Directors extended the share repurchase program for an additional 12 months and thereafterauthorized the repurchase of an additional $10 million of the Company’s Common Stock, for the foreseeable future.an aggregate of up to $30.6 million in additional repurchases.
To fund our business plans, including any anticipated future losses, purchase commitments, capital expenditures and principal and interest payments on borrowings, we leveraged our owned real estate. We are also continuing to take actions to improve cash flow by aligning our cost structure to our student population. In addition to our current sources of capital that provide short term liquidity, the Company has been making efforts to sell its Mangonia Park, Palm Beach County, Florida property and associated assets originally operated in the HOPS segment, which has been classified as held for sale.
Our primary source of cash is tuition collected from our students. The majority of students enrolled at our schools rely on funds received under various government-sponsored student financial aid programs to pay a substantial portion of their tuition and other education-related expenses. The most significant source of student financing is Title IV Programs, which represented approximately 78%74% of our cash receipts relating to revenues in 2017.2022. Pursuant to applicable regulations, students must apply for a new loan for each academic period. Federal regulations dictate the timing of disbursements of funds under Title IV Programs and loan funds are generally provided by lenders in two disbursements for each academic year. The first disbursement is usually received approximately 31 days after the start of a student’s academic year and the second disbursement is typically received at the beginning of the sixteenth week from the start of the student's academic year. Certain types of grants and other funding are not subject to a 31-day delay. In certain instances, if a student withdraws from a program prior to a specified date, any paid but unearned tuition or prorated Title IV Program financial aid is refunded according to federal, state and accrediting agency standards.
As a result of the significant amount of Title IV Program funds received by our students, we are highly dependent on these funds to operate our business. Any reduction in the level of Title IV Program funds that our students are eligible to receive for tuition payment to us or any restriction on our eligibility to receive Title IV Program funds would have a significant impact on our operations and our financial condition. For more information, See Part I, Item 1A. “Risk Factors” in Item 1A of this Annual Report on Form 10-K for the year ended December 31, 2017.Factors - Risks Related to Our Industry”.
On January 11, 2018, the DOE sent letters to our Columbia, Maryland and Iselin, New Jersey institutions requiring each institution to submit a letter of credit to the DOE based on findings of late returns of Title IV funds in the annual Title IV compliance audits submitted to the DOE for the fiscal year ended December 31, 2016. Our Iselin institution provided evidence demonstrating that only 3% of the Title IV Program funds returned were late. However, the DOE concluded that a letter of credit would nevertheless be required for each institution because the regulatory auditor included a finding that there was a material weakness in our report on internal controls relating to return of unearned Title IV Program funds. We disagree with the regulatory auditor’s conclusion that a material weakness could exist if the error rate in the expanded audit sample is only 3% or approximately $20,000 and we believe that the regulatory auditor’s conclusion is erroneous. We requested the DOE to reconsider the letter of credit requirement. By letter dated February 7, 2018, DOE maintained that the refund letters of credit were necessary but agreed that the amount of each letter of credit could be based on the returns that were required to be made by each institution in the 2017 fiscal year rather than the 2016 fiscal year. Accordingly, we submitted letters of credit in the amounts of $0.5 million and $0.1 million by the February 23, 2018 deadline and expect that these letters of credit will remain in place for a minimum of two years.
Operating Activities
Operating cash flow results primarily from cash received from our students, offset by changes in working capital demands. Working capital can vary at any point in time based on several factors including seasonality, timing of cash receipts and payments and vendor payment terms.
Net cash provided by operating activities was $0.9 million and $27.4 million for each of the fiscal years ended December 31, 2022 and 2021, respectively. The main driver for the decrease was due to a delay of approximately $8.0 million in Title IV funds resulting from a system upgrade during the fourth quarter. The funds were subsequently received in January 2023.
Investing Activities
Net cash used in operatinginvesting activities was $11.3$21.4 million for the year ended December 31, 20172022 compared to $6.1 million for the comparable period of 2016. The increase in cash used in operating activities in the year ended December 31, 2017 as compared to the year ended December 31, 2016 is primarily due to an increased net loss as well as changes in other working capital such as accounts receivable, accounts payable, accrued expenses and unearned tuition.
Investing Activities
Net cash provided by investing activities was $9.9 million for the year ended December 31, 2017 compared to net cash used of $2.2$37.8 million in the prior year comparable period. The increasedecrease of $12.1$59.2 million was primarilydriven by the resultpurchase of short-term investments totaling $14.8 million in the current year in combination with net proceeds of approximately $45.4 million received in the fourth quarter of the prior year resulting from the consummation of a sale of two of our three properties located in West Palm Beach, Florida resulting in cash inflows of $15.5 million. The sale of the two properties occurred on August 14, 2017.leaseback transaction.
One of our primary uses of cash in investing activities was capital expenditures associated with investments in training technology, classroom furniture, and new program buildouts.
We currently lease a majority of our campuses. We own our schoolscampus in Grand Prairie, Texas; Nashville, Tennessee; and Denver, Colorado and our former school propertiesTennessee, which currently is subject to a sale leaseback agreement (described elsewhere in Mangonia Park, Palm Beach County, Florida and Suffield, Connecticut.this Form 10-K) for the sale of the property, which is currently expected to be consummated in the second quarter of 2023.
Capital expenditures were 3% of revenues in 2022 and are expected to approximate 2%11% of revenues in 2018.2023. The significant increase in capital expenditures over the prior year will be driven by the build-out of our new Atlanta, Georgia area campus. We expect to fund future capital expenditures with cash generated from operating activities borrowings under our revolving credit facility, and cash from our real estate monetization.on hand.
Financing Activities
Net cash used in financing activities was $5.1 million as compared to net cash used of $9.1$12.5 million for the yearsfiscal year ended December 31, 2017 and 2016, respectively.
2022 compared to $20.0 million in the prior year. The decrease of $4.0$7.5 million was primarily due to two main factors: (a) net$9.4 million in shares repurchased in the current year in combination with payments on borrowings of $3.4 million; and (b) $2.9 million in lease termination fees paid in the prior year.year of $17.8 million.
Net borrowings consisted of: (a) total borrowing to date under our secured revolving credit facility of $75.9 million; (b) reclassification of payments of borrowing from restricted cash of $20.3 million; (c) reclassification of proceeds from borrowings to restricted cash of $32.8 million; and (d) $66.8 million in total repayments made by the Company. The noncurrent restricted cash balance of $32.8 million has been repaid in 2018.
Credit AgreementFacility
On March 31, 2017,November 14, 2019, the Company entered into a senior secured revolving credit agreement (the “Credit Agreement”) with its lender, Sterling National Bank (the “Bank”“Lender”) pursuant to which the Company obtained a credit facility, providing for borrowing in the aggregate principal amount of up to $55$60 million (the “Credit Facility”). TheInitially, the Credit Facility consists of (a) a $30 million loan facility (“Facility 1”), which iswas comprised of four facilities: (1) a $25$20 million revolvingsenior secured term loan designated as “Tranche A” and a $5 million non-revolving loan designated as “Tranche B,” which Tranche B was repaid during the quarter ended June 30, 2017 and (b) a $25 million revolving loan facility (“Facility 2”maturing on December 1, 2024 (the “Term Loan”), which includeswith monthly interest and principal payments based on a 120-month amortization with the outstanding balance due on the maturity date; (2) a $10 million senior secured delayed draw term loan maturing on December 1, 2024 (the “Delayed Draw Term Loan”), with monthly interest payments for the first 18 months and thereafter monthly payments of interest and principal based on a 120-month amortization and all balances due on the maturity date; (3) a $15 million senior secured committed revolving line of credit providing a sublimit amountof up to $10 million for standby letters of credit of $10 million. The Credit Agreement was subsequently amended,maturing on November 29, 2017, to provide the Company13, 2022 (the “Revolving Loan”), with an additionalmonthly payments of interest only; and (4) a $15 million revolvingsenior secured non-restoring line of credit loan (“Facility 3”maturing on January 31, 2021 (the “Line of Credit Loan”), resulting in an increase in.
At the aggregate availability underclosing of the Credit Facility, to $65 million. The Credit Agreement was again amendedthe Company entered into a swap transaction with the Lender for 100% of the principal balance of the Term Loan maturing on February 23, 2018, to, among other things, effect certain modifications to the financial covenants and other provisionssame date as the Term Loan. Under the terms of the Credit AgreementFacility accrued interest on each loan was payable monthly in arrears with the Term Loan and to allow the Company to pursue the sale of certain real property assets. The February 23, 2018 amendment increased theDelayed Draw Term Loan bearing interest at a floating interest rate for borrowings under Tranche A of Facility 1based on the then one-month London Interbank Offered Rate (“LIBOR”) plus 3.50% and subject to a LIBOR interest rate per annum equal to the greaterfloor of (x) the Bank’s prime rate plus 2.85% and (y) 6.00%. Prior to the most recent amendment of the Credit Agreement, revolving loans outstanding under Tranche A of Facility 10.25% if there was no swap agreement. Revolving Loans bore interest at a floating interest rate per annum equalbased on the then LIBOR plus an indicative spread determined by the Company’s leverage as defined in the Credit Agreement or, if the borrowing of a Revolving Loan was to be repaid within 30 days of such borrowing, the greater of (x)Revolving Loan accrued interest at the Bank’sLender’s prime rate plus 2.50%0.50% with a floor of 4.0%. Line of Credit Loans bore interest at a floating interest rate based on the Lender’s prime rate of interest. Letters of credit issued under the Revolving Loan reduced, on a dollar-for-dollar basis, the availability of borrowings under the Revolving Loan. Letters of credit were charged an annual fee equal to (i) an applicable margin determined by the leverage ratio of the Company less (ii) 0.25%, paid quarterly in arrears, in addition to the Lender’s customary fees for issuance, amendment and (y) 6.00%.other standard fees. Borrowings under the Line of Credit Loan were secured by cash collateral. The Lender received an unused facility fee of 0.50% per annum payable quarterly in arrears on the unused portions of the Revolving Loan and the Line of Credit Loan.
In addition to the foregoing, the Credit Agreement contained customary representations, warranties, and affirmative and negative covenants (including financial covenants that (i) restricted capital expenditures, (ii) restricted leverage, (iii) required maintaining minimum tangible net worth, (iv) required maintaining a minimum fixed charge coverage ratio and (v) required the maintenance of a minimum of $5 million in quarterly average aggregate balances on deposit with the Lender, which, if not maintained, would result in the assessment of a quarterly fee of $12,500), as well as events of default customary for facilities of this type. The Credit
Facility replaces a term loan facility (the “Prior Credit Facility”) which was repaid and terminated concurrently withAgreement also limited the
effectivenesspayment of cash dividends during the first 24months of the
agreement to $1.7 million but an amendment to the Credit
Facility. The termAgreement entered into on November 10, 2020 raised the cash dividend limit to $2.3 million in such 24month period to increase the amount of
permitted cash dividends that the Company could pay on its Series A Preferred Stock.
As further discussed below, the Credit Facility is 38 months, maturing on May 31, 2020, except that the term of Facility 3 will mature one year earlier, on May 31, 2019.
The Credit Facility iswas secured by a first priority lien in favor of the BankLender on substantially all of the personal property owned by the Company, as well as a pledge of the stock and other equity in the Company’s subsidiaries and mortgages on four parcels of real property owned by the Company in Colorado, Tennessee and Texas, at which three of the Company’s schools are located, as well as a former school property owned by the Company located in Connecticut.
On September 23, 2021, in connection with entering into the closing ofagreements relating to the Credit Facility,sale leaseback transaction for the Company’s Denver, Grand Prairie and Nashville campuses (collectively, the “Property Transactions”), the Company drew $25 million under Tranche Aand certain of Facility 1, which, pursuantits subsidiaries entered into a Consent and Waiver Letter Agreement (the “Consent Agreement”) to the terms ofCompany’s Credit Agreement with its Lender. The Consent Agreement provides the Lender’s consent to the Property Transactions and waives certain covenants in the Credit Agreement, was usedsubject to repay the Prior Credit Facility and to pay transaction costs associated with closing the Credit Facility. After the disbursements of such amounts, the Company retained approximately $1.8 million of the borrowed amount for working capital purposes.
Also, at closing, $5 million was drawn under Tranche B and, pursuant to the terms of the Credit Agreement, was deposited into an interest-bearing pledged account (the “Pledged Account”) in the name of the Company maintained at the Bank in order to secure payment obligations of the Company with respect to the costs of remediation of any environmental contamination discovered at certain of the mortgaged properties based upon environmental studies undertaken at such properties. During the quarter ended June 30, 2017, the environmental studies were completed and revealed no environmental issues existing at the properties. Accordingly, pursuant to the terms of the Credit Agreement, the $5 million in the Pledged Account was released and used to repay the non-revolving loan outstanding under Tranche B. Upon the repayment of Tranche B, the maximum principal amount of Facility 1 was permanently reduced to $25 million.
Pursuant to the terms of the Credit Agreement, all draws under Facility 2 for letters of credit or revolving loans and all draws under Facility 3 must be secured by cash collateral in an amount equal to 100% of the aggregate stated amount of the letters of credit issued and revolving loans outstanding through draws from Facility 1 or other available cash of the Company.
Accrued interest on each revolving loan will be payable monthly in arrears. Revolving loans under Tranche A of Facility 1 bear interest at a rate per annum equal to the greater of (x) the Bank’s prime rate plus 2.85% and (y) 6.00%. Prior to the February 23, 2018 amendment of the Credit Agreement, the interest rate for revolving loans under Tranche A of Facility 1 was equal to the greater of (x) the Bank’s prime rate plus 2.50% and (y) 6.00%. The amount borrowed under Tranche B of Facility 1 and revolving loans under Facility 2 and Facility 3 will bear interest at a rate per annum equal to the greater of (x) the Bank’s prime rate and (y) 3.50%.
Each issuance of a letter of credit under Facility 2 will require the payment of a letter of credit fee to the Bank equal to a rate per annum of 1.75% on the daily amount available to be drawn under the letter of credit, which fee shall be payable in quarterly installments in arrears. Letters of credit totaling $6.2 million that were outstanding under a $9.5 million letter of credit facility previously provided to the Company by the Bank, which letter of credit facility was set to mature on April 1, 2017, are treated as letters of credit under Facility 2.
The terms of the Credit Agreement provide that the Bank be paid an unused facility fee on the average daily unused balance of Facility 1 at a rate per annum equal to 0.50%, which fee is payable quarterly in arrears.specified conditions. In addition, the Company is required to maintain, on deposit in one or more non-interest bearing accounts, a minimum of $5 million in quarterly average aggregate balances. If in any quarter the required average aggregate account balance is not maintained, the Company is required to pay the Bank a fee of $12,500 for that quarter and, in the event that the Company terminates the Credit Facility or refinances with another lender within 18 months of closing, the Company is required to pay the Bank a breakage fee of $500,000.
In addition to the foregoing, the Credit Agreement contains customary representations, warranties and affirmative and negative covenants, including financial covenants that restrict capital expenditures, prohibit the incurrence of a net loss commencing on December 31, 2018 and require a minimum adjusted EBITDA and a minimum tangible net worth, which is an annual covenant, as well as events of default customary for facilities of this type. As of December 31, 2017, the Company is in compliance with all covenants.
In connection with the Credit Agreement,consummation of the Property Transactions, the Lender released its mortgages and other liens on the subject-properties upon the Company’s payment in full of the outstanding principal and accrued interest on the Term Loan and any swap obligations arising from any swap transaction. Upon the consummation of the Property Transaction on October 29, 2021 the Company paid the Bank an originationLender approximately $16.7 million in repayment of the Term Loan and the swap termination fee and no further borrowings may be made under the Term Loan or the Delayed Draw Term Loan. Further, during the second quarter of 2022, the Company sold a property located in Suffield, Connecticut for net proceeds of approximately $2.4 million. Prior to the amountconsummation of $250,000the transaction, Lincoln obtained consent from the Lender to enter into the sale of this property.
Pursuant to certain amendments and modifications to the Credit Agreement and other feesloan documents, the Term Loan and reimbursements that are customary for facilitiesthe Delayed Draw Term Loan were paid off in full and on January 21, 2021, the Line of this type. In connection withCredit expired by the second amendmentterms, conditions and provisions of the Credit Agreement,Agreement.
On November 4, 2022, the Company paidagreed with its Lender to terminate the Bank a modification fee in the amount of $50,000.
The Company incurred an early termination premium of approximately $1.8 million in connection with the termination of the Prior Credit Facility.
On April 28, 2017, the Company entered into an additional secured credit agreement with the Bank, pursuant to which the Company obtained a short term loan in the principal amount of $8 million, the proceeds of which were used for working capital and general corporate purposes. The loan, which had an interest rate equal to the greater of the Bank’s prime rate plus 2.50% or 6.00%, was secured by two real property assets located in West Palm Beach, Florida at which schools operated by the Company were located and matured upon the earlier of October 1, 2017Agreement and the dateremaining Revolving Loan. The Lender agreed to allow the Company’s existing letters of the sale of the West Palm Beach, Florida property. The Company sold the two properties located in West Palm Beach, Floridacredit to Tambone Companies, LLC in the third quarter of 2017remain outstanding provided that they are cash collateralized and, subsequently repaid the $8 million.
Asas of December 31, 2017,2022, the Company had $53.4 million outstanding under the Credit Facility; offset by $0.8 million of deferred finance fees. As of December 31, 2016, the Company had $44.3 million outstanding under the Prior Credit Facility; offset by $2.3 million of deferred finance fees, which were written-off. As of December 31, 2017 and December 31, 2016, there were letters of credit in the aggregate outstanding principal amount of $7.2$4.0 million remained outstanding, were cash collateralized and $6.2 million, respectively.
Long-term debt and lease obligations consist ofclassified as restricted cash on the following:
| | As of December 31, | |
| | 2017 | | | 2016 | |
Credit agreement | | $ | 53,400 | | | $ | - | |
Term loan | | | - | | | | 44,267 | |
Deferred financing fees | | | (807 | ) | | | (2,310 | ) |
Subtotal | | | 52,593 | | | | 41,957 | |
Less current maturities | | | - | | | | (11,713 | ) |
Total long-term debt | | $ | 52,593 | | | $ | 30,244 | |
consolidated balance sheet. As of December 31, 2017, we had outstanding loan commitments2022, the Company did not have a credit facility and did not have any debt outstanding. The Company expects to our studentsnegotiate a new credit facility in the second quarter of $51.9 million, as compared to $40.0 million at December 31, 2016. Loan commitments, net of interest that would be due on the loans through maturity, were $38.5 million at December 31, 2017, as compared to $30.0 million at December 31, 2016.2023.
Climate Change
Climate change has not had and is not expected to have a significant impact on our operations.
Contractual Obligations
Current portion of Long-Term Debt, Long-Term Debt and Lease Commitments. As of December 31, 2017, our current portion of long-term2022, we have no debt and long-term debt consisted of borrowings under our Credit Facility.outstanding. We lease offices, educational facilities and various items of equipment for varying periods through the year 2030 at2041 under basic annual rentals (excluding taxes, insurance, and other expenses under certain leases).rentals.
The following table contains supplemental information regarding our total contractual obligations asAs of December 31,
2017:2022, there were four new leases and one lease modification that resulted in noncash re-measurements of the related right-of-use asset and operating lease liability of $13.8 million. This re-measurement includes the new Atlanta, Georgia area campus, the lease of which commenced in August 2022.
| | Payments Due by Period | |
| | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | |
Credit facility | | $ | 53,400 | | | $ | - | | | $ | 53,400 | | | $ | - | | | $ | - | |
Operating leases | | | 78,408 | | | | 19,347 | | | | 28,994 | | | | 14,207 | | | | 15,860 | |
Total contractual cash obligations | | $ | 131,808 | | | $ | 19,347 | | | $ | 82,394 | | | $ | 14,207 | | | $ | 15,860 | |
OFF-BALANCE SHEET ARRANGEMENTS
We had no off-balance sheet arrangements as of December 31, 2017,2022, except for existing surety bonds. At December 31, 2017, we posted surety bonds in the total amount of approximately $12.7 million. Cash collateralized letters of credit of $6.5 million are primarily comprised of letters of credit for DOE matters and security deposits in connection with certain of our real estate leases. We are required to post surety bonds on behalf of our campuses and education representatives with multiple states to maintain authorization to conduct our business. At December 31, 2022, we posted surety bonds in the aggregate amount of approximately $15.3 million. These off-balance sheet arrangements do not adversely impact our liquidity or capital resources.
As of the fiscal year ended December 31, 2022 and 2021, we had outstanding loan principal commitments to our active students of $30.5 million and $30.0 million, respectively. These are institutional loans and no cash is advanced to students. The full loan amount is not guaranteed unless the student completes the program. The institutional loans are considered commitments because the students are required to fund their education using these funds and they are not reported in our consolidated financial statements.
SEASONALITY AND OUTLOOK
Seasonality
Our revenue and operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in total student population. Student population varies as a result ofdue to new student enrollments, graduations and student attrition. Historically, our schools have had lower student populations in our first and second quarters and we have experienced larger class starts in the third quarter and higher student attrition in the first half of the year. OurThe growth that we generally experience in the second half growthof the year is largely dependent on a successful high school recruiting season. We recruit our high school students several months ahead of their scheduled start dates and, thus,as a consequence, while we have visibility on the number of students who have expressed interest in attending our schools, we cannot predict with certainty the actual number of new student enrollments in any given year and the related impact on revenue. Our expenses, however, typically do not vary significantly over the course of the year with changes in our student population and revenue. During the first half of the year, we make significant investments in marketing, staff, programs and facilities to meet our second half of the year targets and, as a result, such expenses do not fluctuate significantly on a quarterly basis. To the extent new student enrollments, and related revenue, in the second half of the year fall short of our estimates, our operating results could be negatively impacted. We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns. Such patterns may change as a result of new school openings, new program introductions, and increased enrollments of adult students and/or acquisitions.
Outlook
Similar to many companies in the proprietary education sector, we have experienced significant deterioration in student enrollments over the last several years. This can be attributed to many factors including the economic environment and numerous regulatory changes such as changes to admissions advisor compensation policies, elimination of “ability-to-benefit,” changes to the 90/10 Rule and cohort default rates, gainful employment and modifications to Title IV Program amounts and eligibility. While the industry has not returned to growth, the trends are far more stable as declines have slowed.
As the economy continues to improve and the unemployment rate continues to decline our student enrollment is negatively impacted due to a portion of our potential student base entering the workforce earlier without obtaining any post-secondary training. Offsetting this short term decline in available students is the fact that an increasing number of individuals in the “baby boom” generation are retiring from the workforce. The retirement of baby boomers coupled with a growing economy has resulted in additional employers looking to us to help solve their workforce needs. With schools in 14 states, we are a very attractive employment solution for large regional and national employers.
To fund our business plans, including any anticipated future losses, purchase commitments, capital expenditures, principal and interest payments on borrowings and to satisfy the DOE financial responsibility standards, we have entered into a new credit facility as described above and continue to have the ability to sell our assets that are classified as held for sale. We are also continuing to take actions to improve cash flow by aligning our cost structure to our student population.
5250
Effect of Inflation
Inflation has not had and is not expected to have a significant impactmaterial effect on our operations.operations except for some inflationary pressures on certain instructional expenses including consumables and in instances where potential students have not wanted to incur additional debt or increased travel expense.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposeda smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to certain market risks as part of our on-going business operations. On March 31, 2017,provide the Company repaid in full and terminated a previously existing term loan with the proceeds of a new revolving credit facility (the “Credit Facility”) provided by Sterling National Bank, which currently provides the Company with aggregate availability of $65 million. The Credit Facility is discussed in further detailinformation otherwise required under the heading “Liquidity and Capital Resources” in Item 7 of this report and in Note 7 to the consolidated financial statements included in this report. Our obligations under the Credit Facility are secured by a lien on substantially all of our assets and any assets that we or our subsidiaries may acquire in the future. Outstanding borrowings under the Credit Facility bear interest at the rate of 7.00% as of December 31, 2017. As of December 31, 2017, we had $53.4 million outstanding under the Credit Facility.item.
Based on our outstanding debt balance as of December 31, 2017, a change of one percent in the interest rate would have caused a change in our interest expense of approximately $0.5 million, or $0.02 per basic share, on an annual basis. Changes in interest rates could have an impact on our operations, which are greatly dependent on our students’ ability to obtain financing and, as such, any increase in interest rates could greatly impact our ability to attract students and have an adverse impact on the results of our operations. The remainder of our interest rate risk is associated with miscellaneous capital equipment leases, which is not significant.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
See “Index to Consolidated Financial Statements” on page F-1 of this Annual Report on Form 10-K.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of disclosure controlsDisclosure Controls and proceduresProcedures
Our Chief Executive Officer and Chief Financial Officer, after evaluating, together with management, the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)) as of December 31, 20172022 have concluded that our disclosure controls and procedures are effective to reasonably ensure that material information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by Securities and Exchange Commissions’Commission’s Rules and Forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
During the quarter ended December 31, 2017,2022, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting and Attestation Report of Independent Registered Public Accounting Firm
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017,2022, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on its assessment, management believes that, as of December 31, 2017,2022, the Company’s internal control over financial reporting is effective.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s independent auditors, Deloitte & Touche LLP, an independent registered public accounting firm, audited the Company’s internal control over financial reporting as of December 31, 2017,2022, as stated in their report included in this Form 10-K that follows.
ITEM 9B. | OTHER INFORMATION |
None.
ITEM 9C. | DISCLOSURES REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS |
None.
Certain information required by this item will be included in a definitive proxy statement for the Company’s annual meeting of shareholders or an amendment to this Annual Report on Form 10-K, in either case filed with the Securities and Exchange Commission within 120 days after December 31, 2022, and is incorporated by reference herein.
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Directors and Executive Officers
TheCertain information required by this itemItem 10 of Part III is incorporated herein by reference from a definitive proxy statement or an amendment to our definitive Proxy Statement tothis Annual Report on Form 10-K that will be filed in connection with our 2018 Annual Meeting of Shareholders.the Securities and Exchange Commission within 120 days after December 31, 2022.
Code of Ethics
We have adopted a Code of ConductBusiness Ethics and EthicsConduct applicable to our directors, officers and employees and certain other persons, including our Chief Executive Officer and Chief Financial Officer. A copy of our Code of Business Ethics and Conduct is available on our website at www.lincolnedu.comwww.lincolntech.edu. If any amendments to or waivers from the Code of Business Ethics and Conduct are made, we will disclose such amendments or waivers on our website.
ITEM 11. | EXECUTIVE COMPENSATION |
InformationThe information required by this Item 11 of Part III is incorporated by reference from a definitive proxy statement or an amendment to our definitive Proxy Statement tothis Annual Report on Form 10-K that will be filed in connection with our 2018 Annual Meeting of Shareholders.the Securities and Exchange Commission within 120 days after December 31, 2022.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
InformationThe information required by this Item 12 of Part III is incorporated by reference from a definitive proxy statement or an amendment to our definitive Proxy Statement tothis Annual Report on Form 10-K that will be filed in connection with our 2018 Annual Meeting of Shareholders.the Securities and Exchange Commission within 120 days after December 31, 2022.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
InformationThe information required by this Item 13 of Part III is incorporated by reference from a definitive proxy statement or an amendment to our definitive Proxy Statement tothis Annual Report on Form 10-K that will be filed in connection with our 2018 Annual Meeting of Shareholders.the Securities and Exchange Commission within 120 days after December 31, 2022.
ITEM 14. | PRINCIPAL ACCOUNTINGACCOUNTANT FEES AND SERVICES |
InformationThe information required by this Item 14 of Part III is incorporated by reference from a definitive proxy statement or an amendment to our definitive Proxy Statement tothis Annual Report on Form 10-K that will be filed in connection with our 2018 Annual Meeting of Shareholders.the Securities and Exchange Commission within 120 days after December 31, 2022.
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULE SCHEDULES |
See “Index to Consolidated Financial Statements” on page F-1 of this Annual Report on Form 10-K.
2. | Financial Statement ScheduleSchedules |
See “Index to Consolidated Financial Statements” on page F-1 of this Annual Report on Form 10-K.
3. | Exhibits Required by Securities and Exchange Commission Regulation S-K |
Exhibit Number | Description |
| |
2.1 | Purchase and Sale Agreement, dated March 14, 2017, between New England Institute of Technology at Palm Beach, Inc. and Tambone Companies, LLC, as amended by First Amendment to Purchase and Sale Agreement dated as of April 18, 2017, and as further amended by Second Amendment to Purchase and Sale Agreement dated as of May 12, 2017 (1). |
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| Amended and Restated Certificate of Incorporation of the Company (2)(incorporated by reference to the Company’s Registration Statement on Form S-1/A (Registration No. 333-123644) filed June 7, 2005. |
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| Certificate of Amendment, dated November 14, 2019, to the Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-3 filed October 6, 2020). |
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3.2 | By-lawsBylaws of the Company, (3)as amended on March 8, 2019 (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed April 30, 2020). |
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| Management Stockholders Agreement, dated asSpecimen Stock Certificate evidencing shares of January 1, 2002,Common Stock (incorporated by and among Lincoln Technical Institute, Inc., Backreference to School Acquisition, L.L.C. and the Stockholders and other holders of options under the Management Stock Option Plan listed therein (4)Company’s Registration Statement on Form S-1/A (Registration No. 333-123644) filed June 21, 2005). |
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| Assumption Agreement and First Amendment to Management Stockholders Agreement, dated as of December 20, 2007, by and among Lincoln Educational Services Corporation, Lincoln Technical Institute, Inc., Back to School Acquisition, L.L.C. and the Management Investors parties therein (5). |
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4.3 | Registration Rights Agreement, dated as of June 27, 2005,November 14, 2019, between the Company and Backthe investors parties thereto (incorporated by reference to School Acquisition, L.L.C. (3)the Company’s Quarterly Report on Form 10-Q filed November 14, 2019). |
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4.4 | Specimen Stock Certificate evidencing sharesDescription of common stock (6)Securities of the Company (incorporated by reference to Exhibit 4.3 of the Company’s Annual Report on Form 10-K filed March 9, 2021) |
| |
| Employment Agreement, dated as of December 13, 2022, between the Company and Scott M. Shaw (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed December 16, 2022). |
| |
10.1 | CreditEmployment Agreement, dated as of July 31, 2015, among Lincoln Educational Services CorporationDecember 13, 2022, between the Company and its wholly-owned subsidiaries,Brian K. Meyers (incorporated by reference to Exhibit 10.2 of the Lenders and Collateral Agents party thereto, and HPF Service, LLC, as Administrative Agent (7)Company’s Current Report on Form 8-K filed December 16, 2022). |
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10.2 | First Amendment to CreditEmployment Agreement dated as of December 31, 2015, among 13, 2022 between the Company and Stephen M. Buchenot (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed December 16, 2022). |
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| Employment Agreement dated as of December 13, 2022 between the Company and Chad D Nyce (incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed December 16, 2022). |
|
|
| Lincoln Educational Services Corporation and its wholly-owned subsidiaries,2020 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.16 of the Lenders and Collateral Agents party thereto, and HPF Service, LLC, as Administrative Agent (8)Company’s Current Report on Form 8-K filed June 5, 2020). |
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10.3 | Second AmendmentLincoln Educational Services Corporation Severance and Retention Policy (incorporated by reference to CreditExhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed November 7, 2022). |
| Securities Purchase Agreement, dated as of February 29, 2016, among Lincoln Educational Services CorporationNovember 14, 2019, between the Company and its wholly-owned subsidiaries, the Lenders partyinvestor parties thereto and HPF Service, LLC, as Administrative Agent and Tranche A Collateral Agent (9)(incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed November 14, 2019). |
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10.4 | Credit Agreement, dated as of April 12, 2016,November 14, 2019, among the Company, Lincoln Technical Institute, Inc. and its subsidiaries, and Sterling National Bank (10)(incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q filed November 14, 2019). |
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10.5 | First Amendment to Credit Agreement, dated as of March 31, 2017,November 10, 2020, among the Company, Lincoln Technical Institute, Inc. and its subsidiaries, and Sterling National Bank (11)(incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed November 12, 2020). |
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10.6 | Second Amendment to Credit Agreement, dated as of April 28, 2017,May 23, 2022, among the Company, Lincoln Technical Institute, Inc. and its subsidiaries, and SterlingWebster Bank, National Bank (12)(incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed May 24, 2022). |
10.7 | First |
| Third Amendment to the Credit Agreement, dated as of November 29, 2017,August 5, 2022, among the Company, Lincoln Technical Institute, Inc. and its subsidiaries, and SterlingWebster Bank, National Bank (13) |
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10.8 | Second Amendment(incorporated by reference to Credit Agreement, dated asExhibit 10.2 of February 23, 2018, among the Company, Lincoln Technical Institute, Inc. and its subsidiaries, and Sterling National Bank (26) |
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10.9 | Purchase and Sale Agreement, dated as of July 1, 2016, between New England Institute of Technology at Palm Beach, Inc. and School Property Development Metrocentre, LLC (14)Company’s Quarterly Report on Form 10-Q filed August 8, 2022). |
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10.10 | EmploymentConsent and Waiver Letter Agreement, dated as of AugustSeptember 23, 2016, between2021, by and among the Company and Scott M. Shaw (15) |
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10.11 | Employment Agreement, dated ascertain of November 8, 2017, betweenits subsidiaries and Sterling National Bank (incorporated by reference to Exhibit 10.3 of the Company and Scott M. Shaw (16)Company’s Current Report on Form 8-K filed September 28, 2021). |
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10.12 | Separation and Release Agreement,Contract for the Purchase of Real Estate, dated as of January 15, 2016,September 24, 2021, by and between Nashville Acquisition, LLC and SLC Development, LLC (incorporated by reference to Exhibit 10.1 of the Company and Kenneth M. Swisstack (17)Company’s Current Report on Form 8-K filed September 28, 2021). |
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10.13 | Employment Agreement for Purchase and Sale of Property, dated as of August 23, 2016,September 24, 2021 by and between Lincoln Technical Institute, Inc. and LNT Denver (Multi) LLC (incorporated by reference to Exhibit 10.2 of the Company and Brian K. Meyers (15)Company’s Current Report on Form 8-K filed September 28, 2021). |
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10.14 | EmploymentForm of Indemnification Agreement dated as of November 8, 2017, between the Company and Brian K. Meyers (16)each director of the Company (incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q filed November 14, 2019). |
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10.15 | Change in ControlIndemnification Agreement dated August 31, 2016, between the Company and Deborah Ramentol (18)John A. Bartholdson (incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q filed November 14, 2019). |
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10.16 | Separation and Release Agreement, dated as of January 24, 2018, between the Company and Deborah Ramentol (19). |
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10.17 | Change in Control Agreement, dated as of November 8, 2017, between the Company and Deborah Ramentol (20). |
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10.18 | Lincoln Educational Services Corporation Amended and Restated 2005 Long-Term Incentive Plan (21). |
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10.19 | Lincoln Educational Services Corporation Amended and Restated 2005 Non-Employee Directors Restricted Stock Plan (22). |
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10.20 | Lincoln Educational Services Corporation 2005 Deferred Compensation Plan (4). |
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10.21 | Lincoln Technical Institute Management Stock Option Plan, effective January 1, 2002 (4). |
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10.22 | Form of Stock Option Agreement, dated January 1, 2002, between Lincoln Technical Institute, Inc. and certain participants (4). |
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10.23 | Form of Stock Option Agreement under our 2005 Long-Term Incentive Plan (23). |
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10.24 | Form of Restricted Stock Agreement under our 2005 Long-Term Incentive Plan (24). |
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10.25 | Form of Performance-Based Restricted Stock Award Agreement under our Amended & Restated 2005 Long-Term Incentive Plan (25). |
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10.26 | Management Stock Subscription Agreement, dated January 1, 2002, among Lincoln Technical Institute, Inc. and certain management investors (4). |
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| Subsidiaries of the Company. |
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| Consent of Independent Registered Public Accounting Firm. |
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| Power of Attorney (included on the SignaturesSignature page of this Annual Report on Form 10-K). |
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| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |