The fair value of the stock options used to compute stock-based compensation is the estimated present value at the date of grant using the Black-Scholes option pricing model. The following is a summary of transactions pertaining to stock options:
The Company assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to userecover the existing deferred tax assets. A significant piece of objective negative evidence was the cumulative losses incurred by the Company in recent years. On the basis of this evaluation the realization of the Company’s deferred tax assets was not deemed to be more likely than not and thus the Company maintained a full valuation allowance on its net deferred tax assets as of June 30, 2016.2017.
The for-profit education industry has been impacted by numerous regulatory changes, the changing economy and an onslaught of negative articles in the press.media attention. As a result of these actions, student populations have declined and operating costs have increased. Over the past few years, the Company has closed over 10ten locations and exited its online business. The Company reviewed how it has been structured and decided to change its organization to enableIn 2016, the Company ceased operations in Hartford, Connecticut; Fern Park, Florida; and Henderson (Green Valley), Nevada. In the fourth quarter of 2016, the Board of Directors approved plans to better allocate financialcease operations at our schools in Center City Philadelphia, Pennsylvania; Northeast Philadelphia, Pennsylvania; and human resourcesWest Palm Beach, Florida. Each of these schools is expected to respondclose in 2017. In addition, in March 2017, the Board of Directors approved plans to its marketscease operations at our schools in Brockton, Massachusetts and withLowell, Massachusetts which are expected to close in the goalfourth quarter of improving its profitability2017. These schools, which were previously included in the Healthcare and competitive advantage. Other Professions segment, are now included in the Transitional segment.
The carrying amount and estimated fair value of the Company’s financial instrument assets and liabilities, which are not measured at fair value on the Condensed Consolidated Balance Sheet, are listed in the table below:
The following discussion may contain forward-looking statements regarding the Company, our business, prospects and our results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2015,2016, as filed with the Securities and Exchange Commission (the “SEC”) and in our other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that advise interested parties of the risks and factors that may affect our business.
The interim financial statements and related notes thereto filed in this Form 10-Q and the discussions contained herein should be read in conjunction with the annual financial statements and notes included in our Form 10-K for the year ended December 31, 2015,2016, as filed with the SEC, which includes audited consolidated financial statements for our three fiscal years ended December 31, 2015.2016.
Our discussions of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“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 condensed 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, impairments, income taxes, benefit plans and certain accruals. 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 condensed consolidated financial statements.
Allowance for uncollectible accounts. Based upon our experience and judgment, we establish an allowance for uncollectible accounts with respect to tuition receivables. We use an internal group of collectors, augmented by third-party collectors as deemed appropriate, 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 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 revenue for the three months ended June 30, 2017 and 2016 was 6.6% and 2015 was 5.2% and 6.3%4.8%, respectively. Our bad debt expense as a percentage of revenue for the six months ended June 30, 2017 and 2016 was 5.7% and 2015 was 5.1% and 5.6%4.7%, respectively. The improvement in our bad debt was mainly the result of improved historical collection rates and shift in student mix. 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 each of the three months ended June 201630, 2017 and 20152016 would have resulted in an increase in bad debt expense of $0.4$0.6 million and $0.4$0.7 million, respectively. A 1% increase in our bad debt expense as a percentage of revenues for each of the six months ended June 201630, 2017 and 20152016 would have resulted in an increase in bad debt expense of $0.9$1.3 million and $0.9$1.4 million, respectively.
We do not believe that there is any direct correlation between tuition increases, the credit we extend to students, and our loan commitments. Our loan commitments 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 charged for the program and the amount of grants, cash,student loans and parental loans that each student receives.receives and the availability of family contributions. Each student’s funding requirements are unique. Factors that determine the amount of aid available to a student are student status (whether they are dependent or independent students), Pell Grants awarded, Plus Loans awarded or denied to parents, 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 ranged historically from 2% to 5% annually and have not meaningfully impacted overall funding requirements.
Because a substantial portion of our revenue is 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 for impairment annually, or whenever events or changes in circumstances indicate an impairment may have occurred, by comparing its fair value to its carrying value. 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 activities of the acquired business, and 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.
There was no goodwill impairment duringfor the three and six months ended June 30, 20162017 and 2015.2016.
Long-lived assets. We review the carrying value of our long-lived assets and identifiable intangibles for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. We evaluate long-lived assets for impairment by examining estimated future cash flows. These cash flows are evaluated by using weighted probability techniques as well as comparisons of past performance against projections. Assets may also be evaluated by identifying independent market values. If we determine that an asset’s carrying value is impaired, we will record a write-down of the carrying value of the asset and charge the impairment as an operating expense in the period in which the determination is made.
There was no long-lived asset impairment during the three and six months ended June 30 20162017 and 2015.2016.
Bonus costs. We accrue the estimated cost of our bonus programs using current financial information as compared to target financial achievements and key performance objectives. Although our recorded liability for bonuses is based on our best estimate of the obligation, actual results could differ and require adjustment of the recorded balance.
Income taxes. We account for income taxes in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Code (“ASC”) Topic 740, “Income Taxes” (“ASC 740”). This statement requires an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statement and tax basis of assets and liabilities existing at each balance sheet date using enacted tax rates for years in which taxes are expected to be paid or recovered.
In accordance with ASC 740, 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 the basis of this evaluation the realization of our deferred tax assets was not deemed to be more likely than not and thus we have provided a valuation allowance on our net deferred tax assets.
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the three and six months ended June 30, 20162017 and 2015,2016, there were no interest and penalties expense associated with uncertain tax positions.
Effect of Inflation
Inflation has not had a material effect on our operations.
Results of Continuing Operations
Certain reported amounts in our analysis have been rounded for presentation purposes. The following table sets forth selected consolidated statements of continuing operations data as a percentage of revenues for each of the periods indicated:
| | | Three Months Ended June 30, | | | | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
| Revenue | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Educational services and facilities | | | 51.7 | % | | | 50.3 | % | | | 52.5 | % | | | 49.2 | % | | | 52.4 | % | | | 52.2 | % | | | 51.2 | % | | | 52.4 | % |
| Selling, general and administrative | | | 55.1 | % | | | 59.4 | % | | | 58.7 | % | | | 60.9 | % | | | 57.5 | % | | | 52.5 | % | | | 58.1 | % | | | 54.7 | % |
| Gain on sale of assets | | | 0.0 | % | | | 0.0 | % | | | -0.5 | % | | | 0.0 | % | | | -0.1 | % | | | 0.0 | % | | | -0.1 | % | | | -0.3 | % |
| Total costs and expenses | | | 106.8 | % | | | 109.8 | % | | | 110.7 | % | | | 110.0 | % | | | 109.8 | % | | | 104.7 | % | | | 109.2 | % | | | 106.8 | % |
| Operating loss | | | -6.8 | % | | | -9.8 | % | | | -10.7 | % | | | -10.0 | % | | | -9.8 | % | | | -4.7 | % | | | -9.2 | % | | | -6.8 | % |
| Interest expense, net | | | -3.6 | % | | | -3.4 | % | | | -3.6 | % | | | -3.2 | % | | | -1.0 | % | | | -2.3 | % | | | -4.6 | % | | | -2.2 | % |
| Other income | | | 4.0 | % | | | 0.8 | % | | | 4.0 | % | | | 0.6 | % | | | 0.0 | % | | | 2.5 | % | | | 0.0 | % | | | 2.5 | % |
| Loss from continuing operations before income taxes | | | -6.4 | % | | | -12.4 | % | | | -10.3 | % | | | -12.6 | % | |
| Loss from operations before income taxes | | | | -10.8 | % | | | -4.5 | % | | | -13.8 | % | | | -6.5 | % |
| Provision for income taxes | | | 0.1 | % | | | 0.1 | % | | | 0.1 | % | | | 0.1 | % | | | 0.1 | % | | | 0.1 | % | | | 0.1 | % | | | 0.1 | % |
| Loss from continuing operations | | | -6.5 | % | | | -12.5 | % | | | -10.4 | % | | | -12.7 | % | |
| Net Loss | | | | -10.9 | % | | | -4.6 | % | | | -13.9 | % | | | -6.6 | % |
Three Months Ended June 30, 20162017 Compared to Three Months Ended June 30, 20152016
Consolidated Results of Operations
Revenue. Revenue decreased by $2.8$6.2 million, or 6.4%9.1%, to $41.9$61.9 million for the three months ended June 30, 20162017 from $44.7$68.1 million in the prior comparable period of 2015. The decrease was a result of starting 2016 with approximately 800 fewer students than we had on January 1, 2015 which led to a 9.6% decline in average student population to approximately 6,600 as of June 30, 2016 from 7,300 as of June 30 offor the prior year comparable quarter. Student start results for the quarter stabilized compared to the comparable quarter in the prior year. For the three months ended June 30, 2016, starts decreased by 0.5% compared to the same period in 2015. This was an improvement in comparison to the decline of approximately 10% during the same period in 2015 compared to the comparable quarter in 2014. Excluding the Transitional segment, the Company experienced a slight growth in starts to 1,936 for the quarter ended June 30, 2016 compared to 1,930 for the second quarter of 2015.
Partially offsetting theperiod. The decrease in revenue was an increaseis mainly attributable to the suspension of 3.5%new student starts at campuses in our Transitional segment, which accounted for approximately 93% of the total revenue decline; and a 3.4% decline in average revenue per student in the Healthcare and Other Professions segment due to shifts in program mix combined with tuition rate decreases in various programs.
Total student starts decreased by 16.1% to approximately 2,600 from 3,100 for the three months ended June 30, 20162017 as compared to the prior year comparable period. The decrease was largely due to a shift in program mix.
We continuethe suspension of new student starts for the Transitional segment which is down 100% as compared to face certain challenges in growing our student population levels including the impact Department of Education (“DOE”) incentive compensation regulations have on compensation practices for our admissions representatives, a low national unemployment rateprior year comparable quarter. The Transportation and increased competition from peersSkilled Trades segment starts were down 9.0% and community colleges. We remain focused on our strategy to fully divest ourthe Healthcare and Other Professions segment starts were up 2.7% for the three months ended June 30, 2017 as compared to the prior year comparable period.
Starts in the Transportation and continueSkilled Trades segment were down for the three months ended June 30, 2017 as a result of lower than expected high school start rates. The shortfall occurred primarily at three campuses and was directly attributable to form partnership relationshipsaffordability and sustainability of student engagement between enrollment and start date. Sustaining student engagement following enrollment, especially when the enrollment occurs months in advance, requires constant contact. In addition, in striving to find the optimum affordability balance, the Company experienced a start decline in markets where scholarships were scaled back. Certain external factors that are also driving the softer than expected start rate include low unemployment rates and increased wages for both skilled and unskilled labor. The Company believes such external factors have caused many potential students to postpone training and enter the workforce directly upon graduation from high school. Further, contributing to the decline in high school student starts is the lead time between the initial recruitment efforts and the actual start date, which could be up to one year. High school students comprise approximately 30% of the segment’s population. In an effort to increase high school enrollments, the Company has made various changes to processes and organizational structure. As a result, enrollments for the quarter remained essentially flat; however, as noted above starts declined.
For a general discussion of trends in our student population.enrollment, see “Seasonality and Outlook” below.
Educational services and facilities expense. Our educational services and facilities expense decreased by $0.8$3.2 million, or 3.7%8.9%, to $21.7$32.4 million for the three months endingended June 30, 20162017 from $22.5$35.6 million in the prior year comparable period.
The expense reductions were primarily duequarter. This decrease is mainly attributable to a decrease of $0.6 million in instructional, books and tools expense driven by lower instructional expenses of $0.8 million, or 7.8%, as a result of a reduction in the number of instructors and other related costs resulting from lower average student population, partially offset by a $0.2 million, or 13.1% increase in books and tools expense incurred from the purchase of laptops which were provided to newly enrolled students in certain programs to enhance and expand the student overall learning experience.
Our facilities expense decreased by $0.3 million, or 2.8%, resulting from two main factors. The first factor is a general reduction in facilities costs due to (a) the closure of the Fern Park, Florida campus during the first quarter of 2016; (b) the over 300,000 square foot reduction at the Hartford, Connecticut campus, which is scheduled to be taught-out by year-end; and (c) lower rent expense as a result of certain lease renegotiations. These savings were largely offset by increased rent expense resulting from the modification of a lease at three of our campuses which were previously accounted for as finance obligations under which rent payments were previously included in interest expense and the conversion of the lease for our Hartford, Connecticut campus from a capital lease to an operating lease during the first quarter of 2016. The second factor is a decrease in depreciation expense of approximately $0.2 million, or 7.8%, as a result of accelerated depreciation expense in 2015 in connection with the Transitional segment which accounted for $3.1 million in cost reductions as campuses partially offset by additional depreciation expense in 2016 as a result of the reclassification of two facilities out of held for sale as of December 31, 2015.segment prepare to close during this fiscal year.
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 51.7%remained essentially flat at 52.4% for the three months ended June 30, 2017 from 50.3%52.2% in the prior year comparable period.
Selling, general and administrative expense. Our selling, general and administrative expense decreased by $3.5$0.2 million, or 13.2%0.6%, to $23.1$35.6 million for the three months ended June 30, 20162017 from $26.6$35.8 million in the prior comparable periodquarter of 2015.2016. The decrease was primarily due to the Transitional segment, which accounted for approximately $3.2 million in cost reductions as campuses in the segment prepare to close during this fiscal year. Partially offsetting the cost reductions are $2.0 million in increased administrative costs and $1.3 million in additional sales and marketing expense.
Administrative expense was lower by $2.8increased primarily due to a $0.9 million or 18.6%,increase in bad debt expense as a result of approximately $1.3 million in reduced salarieshigher student accounts receivable, higher account write-offs, and benefit costs mainly due to lower healthcare claims, cost savingstiming of $0.4 million in connection with the closure of the Fern Park, Florida facility during the first quarter of 2016,Title IV funds receipts; and a $0.6 decrease$1.0 million increase in bad debt expense whichmedical costs as a percentage of revenue was 5.2%. The improvementcompared to the prior year. In 2016, the Company had historically low medical claims as compared to medical claims in bad debt expense was mainly the result of improved historical collection rates and shiftcurrent year, resulting in student mix.the significant increase quarter over quarter.
Sales and marketing expense decreasedincreased by $0.4$1.3 million, or 4.9%10.8%, asfrom strategic marketing initiatives intended to reach more students. These initiatives resulted in a result of a reduction of $0.5 millionslight improvement in sales expense partially offset by an increase in marketing spending of $0.1 million. The reduction in sales expense was mainly attributable to a reductionstarts in the number of admissions representatives dedicated to the destination schools as a result of our implementation of a centralized call center which also reduced travel expense.
Student services expense decreased by $0.2 million, or 10.4%, as a result of aligning support services with lower levels of population.adult demographic quarter over quarter.
As a percentage of revenues, selling, general and administrative expense decreasedincreased to 55.1%57.5% for the quarterthree months ended June 30, 20162017 from 59.4% for52.5% in the quarter ended June 30, 2015.comparable prior year period.
Net interest expense. For the three months ended June 30, 2016, our2017 net interest expense remained essentially flat atdecreased by $0.8 million, or 55% to $0.7 million from $1.5 million. There was an increasemillion in our interest expense of $1 million primarily resultingthe prior year comparable period. The cost reductions resulted from favorable terms under our new Credit Agreement, which was offsetFacility with Sterling National Bank effective on March 31, 2017.
Other Income. For the three months ended June 30, 2017 other income decreased by $1.7 million from the transitionprior year comparable period. The $1.7 million of our finance obligationother income in 2016 reflected the amortization of a one-time gain from the modification of a lease at three of ourthe Company’s campuses to operating leases coupled with the lease termination agreements for our Fern Park, Florida and Hartford, Connecticut facilities which were previously accounted for as capital leases.finance obligations in the prior year.
Income taxes. Our provision for income taxes was $0.1 million, or 1.9%0.7% of pretax loss, infor the second quarter of 2016,three months ended June 30, 2017, compared to $0.1 million, or 0.9%1.6% 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.
Six Months Ended June 30, 20162017 Compared to Six Months Ended June 30, 20152016
Consolidated Results of Operations
Revenue. Revenue decreased by $7.1$11.6 million, or 7.7%8.3%, to $85.3$127.1 million for the six months ended June 30, 20162017 from $92.4$138.7 million infor the prior year comparable period of 2015.period. The decrease wasin revenue is mainly attributable to the suspension of new student enrollments at campuses in our Transitional segment, which accounted for approximately 87% of the total revenue decline; and a result of starting 2016 with approximately 800 fewer students than we had on January 1, 2015. This led to a 10.8%2.7% decline in average revenue per student populationin the Healthcare and Other Professions segment due to shifts in program mix combined with tuition rate decreases in various programs.
Total student starts decreased by 13.8% to approximately 6,700 as of June 30, 20165,500 from 7,500 as of June 30 in the prior year. Excluding the Transitional segment, starts were lower by 3.3% during the first half of 2016 compared to the first half of 2015.
Although 2016 average student population continues to be negatively impacted by the beginning of year population, start declines have slowed down as evidenced by the results6,300 for the six months ended June 30, 20162017 as compared to the prior year comparable periods. Starts forperiod. The decrease was largely due to the first six months in 2016 were lower by 5.7% when compared to 2015, whilesuspension of new student starts for the first half of 2015 declined 8.5% as compared to the comparable period in 2014.
Partially offsetting the decrease in revenue was an increase of 3.4% in average revenue per studentTransitional segment which had 132 students for the six months ended June 30, 2016 due2017 as compared to a shift806 students in program mix.
We continue to face certain challenges in growing our student population levels, including the impact that DOE incentive compensation regulations have on compensation practices for our admissions representatives, a low national unemployment rateprior year comparable period. The Transportation and increased competition from peersSkilled Trades segment starts were down 3.1% and community colleges. We remain focused on our strategy to fully divest ourthe Healthcare and Other Professions segment starts were down 4.7% for the six months ended June 30, 2017 as compared to the prior year comparable period.
Starts in the Transportation and continueSkilled Trades segment were down for the six months ended June 30, 2017 as a result of lower than expected high school start rates. The shortfall occurred mainly at three campuses and was directly attributable to form partnership relationshipsaffordability and sustainability of student engagement between enrollment and start date. Sustaining student engagement following enrollment, especially when enrollment occurs months in advance, requires constant contact. In addition, in striving to find the optimum affordability balance the Company experienced a start decline in markets where scholarships were scaled back. Certain external factors that are also driving the softer than expected start rate include low unemployment rates and increased wages for both skilled and unskilled labor. The Company believes such external factors have caused many potential students to postpone training and enter the workforce directly upon graduation from high school. Further, contributing to the decline in high school student starts is the lead time between the initial recruitment efforts and the actual start date, which could be up to one year. High school students comprise approximately 30% of the segment’s population. In an effort to increase high school enrollments, the Company has made various changes to processes and organizational structure. As a result, enrollments for the quarter remained essentially flat; however, as noted above, starts declined.
For a general discussion of trends in our student population.enrollment, see “Seasonality and Outlook” below.
Educational services and facilities expense. Our educational services and facilities expense decreased by $0.6$7.6 million, or 1.3%10.4%, to $44.8$65.1 million for the six months endingended June 30, 20162017 from $45.4$72.7 million in the prior year comparable period.
The This decrease is mainly attributable to the Transitional segment which accounted for $7.1 million in expense was primarily due to a $1.7 million, or 7.9%, reduction in our instructional expensescost reductions as a result of a reductioncampuses in the number of instructors and other related costs resulting from lower average student population, partially offset by an increase of $0.3 million in books and tools expense resulting from the purchase of laptops which were providedsegment prepare to newly enrolled students in certain programs to enhance and expand their overall learning experience.close during this fiscal year.
Our facilities expense increased by $0.7 million, or 3.6% resulting from a) additional depreciation expense as a result of the reclassification of two campus out of held for sale as of December 31, 2015; b) increased rent expense resulting from the modification of a lease at three of our campuses which were previously accounted for as finance obligations under which rent payments were previously included in interest expense; and c) the conversion of the lease for our Hartford, Connecticut campus from a capital lease to an operating lease during the quarter ended March 31, 2016.
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 increaseddecreased to 52.5%51.2% for the six months ended June 30, 2017 from 49.2%.52.4% in the prior year comparable period.
Selling, general and administrative expense. Our selling, general and administrative expense decreased by $6.1$2.0 million, or 10.9%2.7%, to $50.1$73.9 million for the six months ended June 30, 20162017 from $56.2$75.9 million in the prior year comparable period.period of 2016. The decrease was primarily due to the Transitional segment, which accounted for approximately $6.6 million in cost reductions as campuses in the segment prepare to close during this fiscal year. Partially offsetting these costs reductions are $2.3 million in increased administrative expense; and $2.6 million in additional sales and marketing expense.
Administrative expense was lower by $4.4increased primarily due to a $1.5 million or 13.6%,increase in bad debt expense as a result of (a)higher student accounts receivable, higher account write-offs, and timing of Title IV funds receipts; and a $2.6$1.0 million reductionincrease in salaries and benefitmedical costs mainly due to lower healthcare claims, which was partially offset by approximately $0.7 million in severance paid during the first quarter of 2016; (b) cost savings of $0.7 million in relationas compared to the completion ofprior year. In 2016, the teach-out at our Fern Park, Florida campus; and (c) a $0.8 decreaseCompany had historically low medical claims as compared to this year resulting in bad debt expense which as a percentage of revenue was 5.1%the significant increase for the six months ended June 30, 2016,2017 as compared to 5.6% for the same period in 2015. The improvement in bad debt expense was mainly the result of improved historical collection rates and shift in student mix.prior comparable period.
Sales and marketing expenses decreasedexpense increased by $1.4$2.6 million, or 7.0%10.4%, primarily as a result of a reduction of $1$2.0 million in salesincreased marketing expense, in combination with a decrease in marketing expense of $0.4 million. The reductionan increase in sales expensespending of $0.6 million. Increased marketing spend was mainly attributablepart of a strategic marketing initiatives intended to reach more students. These initiatives resulted in a reductionslight improvement in starts in the number of admissions representatives dedicatedadult demographic for the six months ended June 30, 2017 as compared to the destination schools as a result of our implementation of a centralized call center reducing travel and salary expense. The decrease in marketing expense is largely the result of suspended marketing efforts at the Fern Park, Florida and Hartford, Connecticut campuses. The Fern Park, Florida campus completed its teach out process as of March 31, 2016 and the Hartford, Connecticut campus is still on schedule to be fully taught out by December 31, 2016.prior comparable period.
Student services expense decreased by $0.4 million, or 8.4%, as a result of aligning support services with lower levels of population.
As a percentage of revenues, selling, general and administrative expense decreasedincreased to 58.7%58.1% for the six months ended June 30, 20162017 from 60.8%54.7% in the comparable prior year period.
As of June 30, 2017, we had total outstanding loan commitments to our students of $42.2 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 $31.4 million at June 30, 2017, as compared to $30.0 million at December 31, 2016. The increase in loan commitments was due in part to the seasonality of the Company’s operations. Students that miss the fall enrollments in the third and fourth quarter typically start in the first and second quarter of the new year. Students requiring additional subsidy for tuition increased 6.1% to approximately 6,200 for the priorsix months ended June 30, 2017 as compared to approximately 5,900 for the year comparable period.ended December 31, 2016.
Gain on sale of assets. Gain on sale of fixed assets decreased by $0.3 million for the six months ended June 30, 2017 primarily as a result of the sale of certain of the Company’s assets during the six months ended June 30, 2016.
Net interest expense. For the six months ended June 30, 2016 our2017 net interest expense remained essentially flat at $3 million. Thereincreased by 2.8 million, or 91% to $5.8 million from $3.1 million in the prior year comparable period. The increase was an increase in our interest expensemainly attributable to a $2.2 million non-cash write-off of $1.8 primarily resulting from our new Term Loan, which was offset bypreviously capitalized deferred financing fees; and $1.7 million of additional costs relating to the transitionearly retirement of our finance obligationprevious term loan. These costs were incurred at March 31, 2017 when the Company entered into a new revolving credit facility with Sterling National Bank.
Other Income. For the six months ended June 30, 2017 other income decreased by $3.4 million from the prior year comparable period. The $3.4 million in 2016 reflected the amortization of a one-time gain from the modification of a lease at three of ourthe Company’s campuses to operating leases coupled with the lease termination agreements for the Fern Park, Florida and Hartford, Connecticut facilities which were previously accounted for as capital leases.finance obligations in the prior year.
Income taxes. Our provision for income taxes was $0.1 million, or 1.1%0.6% of pretax loss, for the sixthree months ended June 30, 2016,2017, compared to $0.1 million, or 0.9%1.1% 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 actions, 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. On November 3, 2015,In 2016, the Company’sCompany ceased operations in Hartford, Connecticut; Fern Park, Florida; and Henderson (Green Valley), Nevada. In the fourth quarter of 2016, the Board of Directors approved a planplans to divest 17cease operations at our schools in Center City Philadelphia, Pennsylvania; Northeast Philadelphia, Pennsylvania; and West Palm Beach, Florida. Each of the 18these schools includedis expected to close in the Company’s Healthcare and Other Professions business segment. The 17 campuses associated with this decision are reported2017. In addition, in discontinued operations onMarch 2017, the condensed consolidated statements of operations. On December 3, 2015, our Board of Directors approved a planplans to cease operations at the remaining schoolour schools in this segment, located in Hartford, Connecticut,Brockton, Massachusetts and Lowell, Massachusetts, which is scheduledare expected to be taught outclose in the fourth quarter of 2016. The Company reviewed how it is structured2017. These schools, which were previously included in the Healthcare and changed its organization, including reorganizing its Group Presidents to oversee each ofOther Professions segment, are now included in the reporting segments. By aggregating the remaining 14 operating segments (Fern Park, Florida campus was fully taught out as of March 31, 2016) into two reporting segments, the Company is better able to allocate financial and human resources to respond to its markets with the goal of improving its profitability and competitive advantage.Transitional segment.
In the past, we offered any combination of programs at any campus. We have changedshifted our focus to program offerings that create greater differentiation among campuses and attain excellence to attract more students and gain market share. Also, strategically, we began offering continuing education training to select employers who hire our students and this is best achieved at campuses focused on their profession.
As a result of these environmental,the regulatory environment, market forces and strategic decisions, we now operate our business in twothree reportable segments: a) Transportation and Skilled TradesTrades; b) Healthcare and b)Other Professions; and c) Transitional.
Our reportable segments have been determined based on a method by which we now evaluate performance and allocate resources. Each reportable 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 have been aggregated into twothe three reportable segments because, in our judgment, the reporting units have similar services, types of customers, regulatory environment and economic characteristics. Our reporting segments are described below.
Transportation and Skilled Trades – Transportation and Skilled Trades 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 – Healthcare and Other Professions 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 – Transitional refers to operations that are being phased out or closed and consists of our campuses that are currently being taught out. These schools are employing a gradual teach-out process that enables the schools to continue to operate while current students complete their course of study. These schools are no longer enrolling new students. In addition, in March 2017, the Board of Directors of the Company approved a plan to cease operations at our schools in Brockton, Massachusetts and Lowell, Massachusetts. These schools are being taught out and expected to be closed in December 2017. During the year ended December 31, 2016, the Company announced the closing of our Northeast Philadelphia, Pennsylvania, Center City Philadelphia, Pennsylvania and West Palm Beach, Florida facilities. These schools are expected to be fully taught out on August 31, 2017, August 31, 2017, and September 30, 2017, respectively. In the first quarter of 2015,2016, we announced that we are teaching out our campus in Fern Park, Florida and in December 2015, we announced that we are teaching out our campus in Hartford Connecticut. Thecompleted the teach-out atof our Fern Park, Florida campus has beencampus. In addition, in the fourth quarter of 2016, we completed as of March 31, 2016 and the teach-out of our Hartford, Connecticut and Henderson (Green Valley), Nevada campuses.
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 expected to be completedensure that our programs provide our students with the best possible opportunity to succeed in December 2016.the marketplace with the goals of attracting more students to our programs and, ultimately, to provide the 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 present results for our three reportable segments for the three months ended June 30, 2017 and 2016:
| | | Three Months Months Ended June 30, 2017 | |
| | | 2017 | | | 2016 | | | % Change | |
Revenue: | | | | | | | | | |
| Transportation and Skilled Trades | | $ | 41,310 | | | $ | 41,032 | | | | 0.7 | % |
| Healthcare and Other Professions | | | 17,932 | | | | 18,661 | | | | -3.9 | % |
| Transitional | | | 2,623 | | | | 8,387 | | | | -68.7 | % |
| Total | | $ | 61,865 | | | $ | 68,080 | | | | -9.1 | % |
| | | | | | | | | | | | | |
Operating Income (Loss): | | | | | | | | | | | | |
| Transportation and Skilled Trades | | $ | 850 | | | $ | 2,430 | | | | -65.0 | % |
| Healthcare and Other Professions | | | (634 | ) | | | 918 | | | | -169.1 | % |
| Transitional | | | (833 | ) | | | (1,458 | ) | | | 42.9 | % |
| Corporate | | | (5,414 | ) | | | (5,123 | ) | | | -5.7 | % |
| Total | | $ | (6,031 | ) | | $ | (3,233 | ) | | | -86.5 | % |
| | | | | | | | | | | | | |
Starts: | | | | | | | | | | | | |
| Transportation and Skilled Trades | | | 1,762 | | | | 1,936 | | | | -9.0 | % |
| Healthcare and Other Professions | | | 842 | | | | 820 | | | | 2.7 | % |
| Transitional | | | - | | | | 348 | | | | -100.0 | % |
| Total | | | 2,604 | | | | 3,104 | | | | -16.1 | % |
| | | | | | | | | | | | | |
Average Population: | | | | | | | | | | | | |
| Transportation and Skilled Trades | | | 6,532 | | | | 6,490 | | | | 0.6 | % |
| Healthcare and Other Professions | | | 3,471 | | | | 3,492 | | | | -0.6 | % |
| Transitional | | | 579 | | | | 1,535 | | | | -62.3 | % |
| Total | | | 10,582 | | | | 11,517 | | | | -8.1 | % |
Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
Transportation and Skilled Trades
Student start results decreased by 9.0% to 1,762 from 1,936 for the three months ended June 30, 2017 as compared to the prior year comparable period. This decrease was a result of lower than expected start rates for high school students. The majority of the decline occurred at three campuses and was directly attributable to affordability and sustainability of student engagement between enrollment and start date. In addition, in striving to find the optimum affordability balance the Company experienced a start decline in markets where scholarships were scaled back. External factors including low unemployment rates and increased wages for both skilled and unskilled labor also contributed to the decline in student starts.
The following table present results for our two reportable segments:
| | | Three Months Ended June 30, | |
| | | 2016 | | | 2015 | | | % Change | |
Revenue: | | | | | | | | | |
| Transportation and Skilled Trades | | $ | 41,032 | | | $ | 42,447 | | | | -3.3 | % |
| Transitional | | | 862 | | | | 2,292 | | | | -62.4 | % |
| Total | | $ | 41,894 | | | $ | 44,739 | | | | -6.4 | % |
| | | | | | | | | | | | | |
Operating Income (Loss): | | | | | | | | | | | | |
| Transportation and Skilled Trades | | $ | 2,431 | | | $ | 2,770 | | | | -12.2 | % |
| Transitional | | | (1,147 | ) | | | (1,926 | ) | | | 40.4 | % |
| Corporate | | | (4,123 | ) | | | (5,219 | ) | | | 21.0 | % |
| Total | | $ | (2,839 | ) | | $ | (4,375 | ) | | | 35.1 | % |
| | | | | | | | | | | | | |
Starts: | | | | | | | | | | | | |
| Transportation and Skilled Trades | | | 1,936 | | | | 1,930 | | | | 0.3 | % |
| Transitional | | | - | | | | 16 | | | | -100.0 | % |
| Total | | | 1,936 | | | | 1,946 | | | | -0.5 | % |
| | | | | | | | | | | | | |
Average Population: | | | | | | | | | | | | |
| Transportation and Skilled Trades | | | 6,489 | | | | 6,978 | | | | -7.0 | % |
| Transitional | | | 109 | | | | 321 | | | | -66.0 | % |
| Total | | | 6,598 | | | | 7,299 | | | | -9.6 | % |
| | | | | | | | | | | | | |
End of Period Population: | | | | | | | | | | | | |
| Transportation and Skilled Trades | | | 6,950 | | | | 7,321 | | | | -5.1 | % |
| Transitional | | | 91 | | | | 293 | | | | -68.9 | % |
| Total | | | 7,041 | | | | 7,614 | | | | -7.5 | % |
Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015
Transportation and Skilled Trades
Revenue was lowerOperating income decreased by $1.4$1.6 million, or 3.3%65.0%, to $41$0.9 million in the three months ended June 30, 2016, as compared to $42.4from $2.4 million in the prior year comparable period primarilymainly driven by a 7.0% decline in average population which decreased to approximately 6,500 from 7,000 in the prior year comparable period, however, student starts grew slightly for the quarter ended June 30, 2016 compared to prior year comparable period. The decrease in average population was a result of starting 2016 with approximately 600 fewer students than we had on January 1, 2015.following factors:
The revenue decline from a lower population was slightly offset by a 3.8% increase in average revenue per student due to a shift in program mix.
Operating income was $2.4 million compared to $2.8 million, a decrease of $0.3 million, or 12.2%, due to several factors:
| · | Revenue increased by $0.3 million, or 0.7% to $41.3 million for the three months ended June 30, 2017 from $41.0 million in the prior year comparable period. The increase in revenue was primarily driven by higher carry in population compared to the prior year comparable period. |
| · | Educational services and facilities expense increasedremained essentially flat only increasing by $0.5$0.1 million comprised of: a $0.4 million, or 5.0%,quarter over quarter. This increase in facilities expense,is primarily dueattributable to increased depreciation expense as a result of the reclassification of one campus out of heldcosts associated with materials used for sale as of December 31, 2015; increased rent expense resulting from the modification of a lease at three of our campuses which were previously accounted for as finance obligations under which rent payments were previously included in interest expense; and increased books and tools expenses resulting from the purchase of laptops which were provided to newly enrolled students in certain programs to enhance and expand their overall learning experience. These additional expenses were partially offset by $0.3 million, or 3.1%, decrease in instructional expense as a result of realigning our cost structure to meet our student population.purposes. |
| · | Selling, general and administrative expenses increased by $1.8 million due to $0.9 million of additional bad debt expense primarily the result of higher student accounts receivable, higher account write-offs, and timing of Title IV fund receipts. In addition, sales and marketing expense increased by $0.7 million resulting from strategic marketing initiatives intended to reach more students. These initiatives resulted in a slight improvement in starts in the adult demographic quarter over quarter. |
Healthcare and Other Professions
Student start results increased by 2.7% to 842 from 820 for the three months ended June 30, 2017 as compared to the prior year comparable period.
Operating loss for the three months ended June 30, 2017 was $0.6 million compared to operating income of $0.9 million in the prior year comparable period. The $1.6 million change was mainly driven by the following factors:
| · | Revenue decreased to $17.9 million for the three months ended June 30, 2017, as compared to $18.7 million in the prior year comparable quarter. The decrease in revenue is mainly attributable to a 3.4% decline in average revenue per student due to shifts in our program mix combined with tuition rate decreases in various programs. Slightly offsetting the decline in revenue was a 2.7% increase in student starts for the quarter compared to the prior year comparable period. |
| · | Educational services and facilities expense remained essentially flat for the three months ended June 30, 2017 as compared to the prior year comparable period. |
| · | Selling general and administrative expenses decreasedincreased by $1.5$1.0 million primarily comprised ofresulting from a $1.3$0.6 million decreaseincrease in sales and marketing expense, which has driven student starts up 2.7% quarter over quarter and a $0.3 million increase in administrative expense primarily the result of a decrease in salaries and benefits, lower bad debt expense and reduced legal expenses. The improvement in bad debt expense wasexpenses mainly the result of an improved historical collection ratesincreased bad debt primarily due to higher student accounts receivable, higher account write-offs, and shift in student mix.timing of Title IV fund receipts. |
Transitional
The following table lists the schools that are categorized in the Transitional segment and their status as of June 30, 2017:
| Campus | Date Closed | Date Scheduled to Close |
| Northeast Philadelphia, Pennsylvania | N/A | August 31, 2017 |
| Center City Philadelphia, Pennsylvania | N/A | August 31, 2017 |
| West Palm Beach, Florida | N/A | September 30, 2017 |
| Brockton, Massachusetts | N/A | December 31, 2017 |
| Lowell, Massachusetts | N/A | December 31, 2017 |
| Fern Park, Florida | March 31, 2016 | N/A |
| Hartford, Connecticut | December 31, 2016 | N/A |
| Henderson (Green Valley), Nevada | December 31, 2016 | N/A |
**Revenue for the campuses in the above table have been classified in the Transitional segment for comparability for the three months ended June 30, 2017 and 2016.
Revenue was $2.6 million for the three months ended June 30, 2017 as compared to $8.4 million in the prior year comparable period mainly attributable to the closing of campuses within this segment.
Operating loss decreased by $0.6 million to $0.8 million for the three months ended June 30, 2017 from $1.5 million in the prior year comparable period. The decrease is primarily attributable to a decrease in salaries and benefits as a result of the suspension of new student enrollments and a declining student population.
Despite the revenue decrease of $1.4 million, operating income declined only by $0.3 million as a result of cost management efforts.
Transitional
This segment consists of the Fern Park, Florida and Hartford, Connecticut campuses. The Fern Park, Florida campus has fully taught out all of its existing students and was officially closed as of March 31, 2016. The Hartford, Connecticut campus has ceased student enrollment and is currently still teaching out the remaining students through December 2016.
Revenue decreased by $1.4 million, or 62.4%, to $0.9 million for the three months ended June 30, 2016 from $2.3 million, in the prior year comparable period. This decrease is mainly attributable to the closure of the Fern Park, Florida campus and the suspension of new student enrollment at our Hartford, Connecticut location which took effect in the fourth quarter of 2015.
Operating loss decreased by $0.8 million, or 40.4%, to $1.1 million from $1.9 million.
Corporate and Other
This category includes unallocated expenses incurred on behalf of the Company. Corporate and Other costs decreased by $1.1 million, or 21.0%, to $4.1 for the three months ended June 30, 2016 from $5.2 million for the comparable prior year quarter. This decrease was primarily a result of cost management efforts by the Company to meet its long term strategic goals and objectives.
The following table present results for our two reportable segments:
| | | Six Months Ended June 30, | |
| | | 2016 | | | 2015 | | | % Change | |
| Revenue: | | | | | | | | | |
| Transportation and Skilled Trades | | $ | 83,303 | | | $ | 87,291 | | | | -4.6 | % |
| Transitional | | | 2,034 | | | | 5,122 | | | | -60.3 | % |
| Total | | $ | 85,337 | | | $ | 92,413 | | | | -7.7 | % |
| | | | | | | | | | | | | |
| Operating Income (Loss): | | | | | | | | | | | | |
| Transportation and Skilled Trades | | $ | 5,796 | | | $ | 7,745 | | | | -25.2 | % |
| Transitional | | | (4,113 | ) | | | (3,748 | ) | | | -9.7 | % |
| Corporate | | | (10,846 | ) | | | (13,208 | ) | | | 17.9 | % |
| Total | | $ | (9,163 | ) | | $ | (9,211 | ) | | | 0.5 | % |
| | | | | | | | | | | | | |
| Starts: | | | | | | | | | | | | |
| Transportation and Skilled Trades | | | 3,596 | | | | 3,717 | | | | -3.3 | % |
| Transitional | | | - | | | | 98 | | | | -100.0 | % |
| Total | | | 3,596 | | | | 3,815 | | | | -5.7 | % |
| | | | | | | | | | | | | |
| Average Population: | | | | | | | | | | | | |
| Transportation and Skilled Trades | | | 6,521 | | | | 7,101 | | | | -8.2 | % |
| Transitional | | | 135 | | | | 364 | | | | -62.9 | % |
| Total | | | 6,656 | | | | 7,465 | | | | -10.8 | % |
| | | | | | | | | | | | | |
| End of Period Population: | | | | | | | | | | | | |
| Transportation and Skilled Trades | | | 6,950 | | | | 7,321 | | | | -5.1 | % |
| Transitional | | | 91 | | | | 293 | | | | -68.9 | % |
| Total | | | 7,041 | | | | 7,614 | | | | -7.5 | % |
Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015
Transportation and Skilled Trades
Revenue decreased by $4 million, or 4.6%, to $83.3 million in the six months ending June 30, 2016, as compared to $87.3 million in the prior year comparable period, primarily driven by an 8.2% decline in average population which decreased to approximately 6,500 from 7,100 in the prior year comparable period. The decrease in average population was a result of starting 2016 with approximately 600 fewer students than we had on January 1, 2015.
The overall starts number is lower by 3.3% compared to 2015; however, it is an improvement compared to the 5.3% decline for the same period in 2015 compared to the second quarter of 2014.
The revenue decline from a lower population was slightly offset by a 3.8% increase in average revenue per student due to a shift in program mix.
Operating income was $5.8 million compared to $7.7 million, a decrease of $2 million, or 25.2%, driven by the following main factors:
| · | Educational services and facilities expense increased by $0.6 million, comprised of a $0.9 million, or 5.3%, increase in facilities expense, primarily due to increased depreciation expense as a result of the reclassification of one campus out of held for sale as of December 31, 2015; increased rent expense resulting from the modification of a lease at three of our campuses which were previously accounted for as finance obligations under which rent payments were previously included in interest expense; and increased books and tools expenses resulting from the purchase of laptops which were provided to newly enrolled students in certain programs to enhance and expand their overall learning experience. Partially offsetting the above increases was a $0.8 million, or 4.2%, decrease in instructional expense as a result of realigning our cost structure to meet our population. |
| · | Selling, general and administrative expenses decreased by $2.6 million primarily comprised of a $1.9 million decrease in administrative expenses which was primarily the result of a decrease in salaries and benefits, lower bad debt expense and reduced legal expenses. The improvement in bad debt expense was mainly the result of an improved historical collection rates and shift in student mix. |
Despite the revenue decrease of $4 million, operating income declined only by $2 million, as a result of cost management measures implemented which will continue in order to further improve operating efficiencies.
Transitional
This segment consists of our Fern Park, Florida and Hartford, Connecticut campuses where we have ceased student enrollment. Our Fern Park, Florida campus has fully taught out all of its existing students and is officially closed as of March 31, 2016, while our Hartford, Connecticut campus is currently still teaching out the remaining students through December 2016.
Revenue decreased by $3.1 million, or 60.3%, to $2 million for the six months ended June 30, 2016 from $5.1 million, in the prior year comparable period. This decrease is mainly attributable to the closing of our Fern Park, Florida campus and the suspension of new student enrollment at our Hartford, Connecticut location which took effect in the fourth quarter of 2015.
Operating loss increased by $0.4 million, or 9.7%, to $4.1 million from $3.7 million.
Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and Other costs decreasedincreased by $2.4$0.3 million, or 17.9%5.7%, to $10.8$5.4 million from $5.1 million, for the prior year comparable period.
The increase in Corporate expenses was driven in part by a $1.0 million increase in medical expenses resulting from historically low claims in 2016 as compared to the three months ended June 30, 2017. Partially offsetting this expense is a reduction in salaries and benefits of $0.7 million.
Included in Corporate and Other costs for the three months ended June 30, 2017 are approximately $0.3 million of additional dormitory costs directly relating to the closure of the Hartford, Connecticut campus on December 31, 2016.
The following table present results for our three reportable segments for the six months ended June 30, 2017 and 2016:
| | | Six Months Ended June 30, 2017 | |
| | | 2017 | | | 2016 | | | % Change | |
Revenue: | | | | | | | | | |
| Transportation and Skilled Trades | | $ | 83,477 | | | $ | 83,304 | | | | 0.2 | % |
| Healthcare and Other Professions | | | 36,769 | | | | 38,470 | | | | -4.4 | % |
| Transitional | | | 6,898 | | | | 16,950 | | | | -59.3 | % |
| Total | | $ | 127,144 | | | $ | 138,724 | | | | -8.3 | % |
| | | | | | | | | | | | | |
Operating Income (Loss): | | | | | | | | | | | | |
| Transportation and Skilled Trades | | $ | 2,898 | | | $ | 5,796 | | | | -50.0 | % |
| Healthcare and Other Professions | | | (474 | ) | | | 2,673 | | | | -117.7 | % |
| Transitional | | | (1,401 | ) | | | (5,101 | ) | | | 72.5 | % |
| Corporate | | | (12,782 | ) | | | (12,845 | ) | | | 0.5 | % |
| Total | | $ | (11,759 | ) | | $ | (9,477 | ) | | | -24.1 | % |
| | | | | | | | | | | | | |
Starts: | | | | | | | | | | | | |
| Transportation and Skilled Trades | | | 3,486 | | | | 3,596 | | | | -3.1 | % |
| Healthcare and Other Professions | | | 1,843 | | | | 1,933 | | | | -4.7 | % |
| Transitional | | | 132 | | | | 806 | | | | -83.6 | % |
| Total | | | 5,461 | | | | 6,335 | | | | -13.8 | % |
| | | | | | | | | | | | | |
Average Population: | | | | | | | | | | | | |
| Transportation and Skilled Trades | | | 6,553 | | | | 6,521 | | | | 0.5 | % |
| Healthcare and Other Professions | | | 3,552 | | | | 3,618 | | | | -1.8 | % |
| Transitional | | | 731 | | | | 1,564 | | | | -53.3 | % |
| Total | | | 10,836 | | | | 11,703 | | | | -7.4 | % |
| | | | | | | | | | | | | |
End of Period Population: | | | | | | | | | | | | |
| Transportation and Skilled Trades | | | 6,809 | | | | 6,950 | | | | -2.0 | % |
| Healthcare and Other Professions | | | 3,219 | | | | 3,160 | | | | 1.9 | % |
| Transitional | | | 372 | | | | 1,398 | | | | -73.4 | % |
| Total | | | 10,400 | | | | 11,508 | | | | -9.6 | % |
Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016
Transportation and Skilled Trades
Student start results decreased by 3.1% to 3,486 from $13.23,596 for the six months ended June 30, 2017 as compared to the prior year comparable period. This decrease was a result of lower than expected start rates for high school students. The decline occurred primarily at three campuses and was directly attributable to affordability and sustainability of student engagement between enrollment and start date. In addition, in striving to find the optimum affordability balance the Company experienced a start decline in markets where scholarships were scaled back. External factors including low unemployment rates and increased wages for both skilled and unskilled labor also contributed to the decline in student starts.
Operating income decreased by $2.9 million, or 50.0%, to $2.9 million for the six months ended June 30, 2015.2017 from $5.8 million in the prior year comparable period mainly driven by the following factors:
| · | Revenue increased by $0.2 million, or 0.2% to $83.5 million for the six months ended June 30, 2017 from $83.3 million in the prior year comparable period. The increase in revenue was primarily driven by higher carry in population compared to the prior year comparable period. |
| · | Educational services and facilities expense remained essentially flat only decreasing by $0.2 million. The decrease was mainly due to decreased depreciation expense partially offset by an increase in instructional expense and an increase in books and tools expense. |
| · | Selling, general and administrative expense increased by $3.3 million due to $1.1 million of additional bad debt expense resulting from higher accounts receivable balances, higher account write-offs, and timing of Title IV fund receipts , as well as a $1.6 million increase in spending for sales and marketing. The increased spending in sales and marketing was part of a strategic effort to attract student enrollments and increase brand awareness. This initiative has yielded positive results in our adult demographic which was up slightly for the for the six months ended June 30, 2017 over the prior year comparable period; however, the high school demographic produced lower than expected starts in the current period. Partially offsetting these expenses is a $0.4 million decrease in student services which can be attributed to reduced salaries and benefits. |
Healthcare and Other Professions
Student start results decreased by 4.7% to 1,843 from 1,933 for the six months ended June 30, 2017 as compared to the prior year comparable period.
Operating loss for the six months ended June 30, 2017 was $0.5 million compared to operating income of $2.7 million in the prior year comparable period. The $3.1 million change was mainly driven by the following factors:
| · | Revenue decreased to $36.8 million for the six months ended June 30, 2017, as compared to $38.5 million in the prior year comparable quarter. The decrease in revenue is mainly attributable to a 2.7% decline in average revenue per student due to shifts in our program mix combined with tuition rate decreases in various programs |
| · | Educational services and facilities expense decreased by $0.3 million, or 1.3% to $19.7 million for the six months ended June 30, 2017, from $19.9 million in the prior year comparable period. The decrease was primarily the result of $0.4 million of costs reductions in facilities expense as a result of reduced rent expense and real estate taxes resulting from the relocation of one of our campuses in the second quarter of 2016. Partially offsetting the costs reduction is an increase of $0.2 million in books and tools expense as a result of increased purchasing of new laptops for students attending certain programs in combination with increases in salaries and benefits. |
| · | Selling general and administrative expenses increased by $1.7 million primarily resulting from a $1.0 million increase in sales and marketing expense; and a $0.6 million increase in administrative expenses mainly the result of bad debt expense which increased due to higher student accounts receivable, higher account write-offs, and timing of Title IV fund receipts. |
Transitional
Revenue was $6.9 million for the six months ended June 30, 2017 as compared to $17.0 million in the prior year comparable period mainly attributable to the closing of campuses within this segment.
Operating loss decreased by $3.7 million to $1.4 million for the six months ended June 30, 2017 from $5.1 million in the prior year comparable period. The decrease is primarily attributable to a decrease in salaries and benefits as a result of cost management effortsthe suspension of new student enrollments and a declining student population.
Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and Other costs remained essentially flat for the six months ended June 30, 2017 when compared to the prior year comparable period. Included in the expenses for the six months ended June 30, 2017 are approximately $1.0 million in increased medical expenses resulting from historically low medical claims in 2016 as compared to the six months ended June 30, 2017, partially offset by a reduction in salaries and benefits of $0.5 million in the Companycurrent period.
Included in Corporate and Other costs for the six months ended June 30, 2017 are approximately $0.6 million of additional dormitory costs directly relating to meet its long term strategic goals and objectives.the closure of the Hartford, Connecticut campus on December 31, 2016.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are for facilities expansion and maintenance, and the development of new programs. Our principal sources of liquidity have been cash provided by operating activities and borrowings under our term loan facility.credit facilities. The following chart summarizes the principal elements of our cash flow:
| | | Six Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2016 | | | 2015 | | | 2017 | | | 2016 | |
| Net cash used in operating activities | | $ | (18,138 | ) | | $ | (11,646 | ) | | $ | (19,511 | ) | | $ | (18,138 | ) |
| Net cash used in investing activities | | | (307 | ) | | | (1,218 | ) | | | (1,766 | ) | | | (307 | ) |
| Net cash (used in) provided by financing activities | | | (9,025 | ) | | | 5,415 | | |
| Net cash provided by (used in) financing activities | | | | 7,423 | | | | (9,025 | ) |
As ofAt June 30, 2016, we2017, the Company had cash and cash equivalents of $37.8 million, including restricted cash of $26.8 million representing a decrease of approximately $23.2 as compared to $61$13.4 million of cash, cash equivalents and restricted cash (which includes $6.2 million of restricted cash) as compared to $47.7 million of cash, cash equivalents and restricted cash (which includes $26.7 million of restricted cash) as of December 31, 2015. 2016. This decrease is primarily the result of a net loss during the year of approximately $9.2 million; a $2.9 million lease termination fee paid in connection with the termination of the lease for our Fern Park, Florida campus; $0.7 million loan modification fee paid to our lender in relation to an amendment of our Term Loan; and $0.7 million in severance paid during the six months ended June 30, 2016. In addition, the decrease in2017; repayment of $44.3 million under our cash position is reflective of theprevious term loan facility; and seasonality of the industry, the reduction in revenue, and the timing of Title IV funds received.business.
For the last several years, wethe Company and the proprietary school sector generally have faced deteriorating earnings growth. Government regulations have negatively impacted earnings by making it more difficult for potentialprospective students to obtain loans, which when coupled with the overall economic environment have discouraged potentialhindered prospective students from enrolling in our schools. In light of these factors, we have incurred significant operating losses as a result of lower student population. Despite these events, we believe that our likely sources of cash should be sufficient to fund operations for the next twelve months. As of June 30, 2016, our available sources of cash primarily include cash from operationsmonths and cash and cash equivalents of $10.9.thereafter for the foreseeable future.
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 that is not classified as held for sale.estate. We are also continuing to take actions to improve cash flow by aligning our cost structure to our student population.
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 largest of these programs are Title IV Programsprograms which represented approximately 80%79% of our cash receipts relating to revenues in 2015.2016. Students must apply for a new loan for each academic period. Federal regulations dictate the timing of disbursements of funds under Title IV Programsprograms 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'sstudent’s academic year and the second disbursement is typically received at the beginning of the sixteenth week from the start of the student'sstudent’s academic year. Certain types of grants and other funding are not subject to a 30-day31-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 financial aid is refunded according to federal, state and accrediting agency standards.
As a result of the significance of the Title IV funds received by our students, we are highly dependent on these funds to operate our business. Any reduction in the level of Title IV funds that our students are eligible to receive or any impactrestriction on our ability to be ableeligibility to receive Title IV funds would have a significant impact on our operations and our financial condition. See “Risk Factors” in Item 1A included inof our Annual Report on Form 10-K for the year ended December 31, 2015.2016.
Operating Activities
Net cash used in operating activities was $18.1$19.5 million for the six months ended June 30, 20162017 compared to $11.6$18.1 million for the comparable period of 2015.2016. For the six months ended June 30, 2017, changes in our operating assets and liabilities resulted in cash outflows of $15.3 million primarily attributable to decreases in deferred revenue, accounts receivable, accounts payable and accrued expenses. The $6.5 million decrease in netdeferred revenue resulted in a cash outflow of $4.3 million primarily resulted from aattributable to the timing of student starts, the number of students in school and the status of students in relation to the completion of their program at June 30, 2017 when compared to June 30, 2016. The decrease in collectionsaccounts receivable resulted in a cash outflow of $9.3 million primarily due to lower populationthe timing of Title IV disbursements and other working capital items.cash receipts on behalf of our students. The net decrease in accounts payable and accrued expenses resulted in a cash outflow of $1.8 million and was attributable to the timing of invoices received during the quarter.
Investing Activities
Net cash used in investing activities was $0.3 million compared to $1.2$1.8 million for the six months ended June 30, 2016 and 2015, respectively.2017 compared to $0.3 million for the prior year comparable period. Our primary use of cash in investing activities was capital expenditures associated with investments in training technology, classroom furniture, and new program build outs.buildouts.
We currently lease a majority of our campuses. We own our campuses in Grand Prairie, Texas; Nashville, Tennessee; West Palm Beach, Florida; Nashville, Tennessee;Florida, Suffield, Connecticut; and Denver, Colorado. The sale of two of our three properties in West Palm Beach, Florida, is pending for a cash purchase price of $15.7 million. We have 17 schools that are held for sale.expect to close on the sale of the West Palm Beach, Florida property in the third quarter of 2017.
Capital expenditures are expected to approximate 2% of revenues in 2016.2017. We expect to fund future capital expenditures with cash generated from operating activities, borrowings under our revolving credit facility, and cash borrowed underfrom our term loan.real estate monetization, including the pending sale of the Company’s West Palm Beach, Florida property. On April 28, 2017, the Company obtained from its lender, Sterling National Bank, an $8 million short-term loan secured by the West Palm Beach, Florida property. This loan must be repaid upon the earlier of the sale of the West Palm Beach, Florida property or October 1, 2017.
Financing Activities
Net cash used inprovided by financing activities was $9.0$7.4 million as compared to net cash provided from financing activitiesused of $5.4$9.0 million for the six months ended June 30, 20162017 and 2015,2016, respectively. The decreaseincrease of $13.6$16.4 million was primarily due to three main factors: (a) net borrowing of $9.0 million; (b) $2.9 million in lease termination payments resulting fromfees paid in the termination of our lease agreement for our Fern Park, Florida campus; a decrease in net borrowing of $6 million for the six months ended June 30, 2016 as compared to the six months June 30, 2015;prior year; and (c) the reclassification of $5.0$5 million in restricted cash in the prior year.
Net borrowings consisted of: (a) total borrowing to date under our new secured revolving credit facility of $38.0 million; (b) reclassification of payments of borrowing from restricted cash.cash of $20.3 million; and (c) $49.3 million in total repayments made by the Company.
Credit Agreement
On JulyMarch 31, 2015,2017, the Company entered into a secured revolving credit agreement (the “Credit Agreement”) with three lenders, AlostarSterling National Bank (the “Bank”) pursuant to which the Company obtained a credit facility in the aggregate principal amount of Commerceup to $55 million (the “Credit Facility”). The Credit Facility consists of (a) a $30 million loan facility (“Alostar”Facility 1”), HPF Holdco, LLCwhich is comprised of a $25 million revolving loan designated as “Tranche A” and Rushing Creek 4, LLC,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”), which includes a sublimit amount for letters of credit of $10 million. The Credit Facility replaces a term loan facility (the “Prior Credit Facility”) from a lender group led by HPF Service, LLC, as administrative agentwhich was repaid and collateral agent (the “Agent”), for an aggregate principal amount of $45 million (the “Term Loan”). The July 31, 2015 credit agreement, alongterminated concurrently with subsequent amendments to the Credit Agreement dated December 31, 2015 and February 29, 2016, are collectively referred to as the “Credit Agreement.” As of December 31, 2015 and prior to the effectiveness of a second amendment to the Credit AgreementFacility. The term of the Credit Facility is 38 months, maturing on February 29, 2016 (the “Second Amendment”), the Term Loan consisted of a $30 million term loan (the “Term Loan A”) from HPF Holdco, LLC, Rushing Creek 4, LLC and Tiger Capital Group, LLC,May 31, 2020.
The Credit Facility is secured by a first priority lien in favor of the AgentBank on substantially all of the real and personal property owned by the Company and a $15 million term loan (the “Term Loan B”) from Alostar securedas well as mortgages on four parcels of real property owned by a $15.3 million cash collateral account. Pursuant to the Second Amendment, the Company received an additional $5 million term loan from Alostar within Connecticut, Colorado, Tennessee and Texas at which four of the Company’s schools are located.
At the closing, the Company repaid $5 million of the principal amount of the Term Loan A. Accordingly, upon the effectiveness of the Second Amendment, the aggregate term loans outstanding under the Credit Agreement were approximately $45 million, consisting of an approximatedrew $25 million Term Loanunder Tranche A and a $20 million Term Loan B. In addition,of Facility 1, which, pursuant to the Second Amendment, the amount of cash collateral securing the Term Loan B was increased to $20.3 million. At the Company’s request, a percentage of the cash collateral may be released to the Company at the Agent’s sole discretion and with the consent of Alostar upon the satisfaction of certain criteria as outlined in the Credit Agreement. The Term Loan, which matures on July 31, 2019, replaced a previously existing $20 million revolving credit facility with Bank of America, N.A. and other lenders, which was due to expire on April 5, 2016. The previously existing revolving credit facility was terminated concurrently with the effective dateterms of the Credit Agreement, on July 31, 2015 (the “Closing Date”).was used 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 upon completion of environmental studies undertaken at such properties. Pursuant to the terms of the Credit Agreement, funds will be released from the Pledged Account upon request by the Company to reimburse the Company for costs incurred for environmental remediation, if required. Upon the completion of any such environmental remediation or upon determination that no environmental remediation is necessary, funds remaining in the Pledged Account will be released from the Pledged Account and applied to the outstanding principal balance of Tranche B and availability under Tranche B will be permanently reduced to zero and, accordingly, the maximum principal amount of Facility 1 will be permanently reduced to $25 million. 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 on deposit 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.
A portionPursuant to the terms of the proceedsCredit Agreement, all draws under Facility 2 for letters of credit or revolving loans must be secured by cash collateral in an amount equal to 100% of the Term Loan was used by the Company to (i) repay approximately $6.3 million in outstanding principal, accrued interest and fees due under the previously existing revolving credit facility, (ii) fund the $20.3 million cash collateral account securing the portionaggregate stated amount of the Term Loan provided by Alostar, (iii) fund approximately $7.4 million in a cash collateral account securing the letters of credit issued under the previously existingand revolving credit facility that remainloans outstanding after the termination of that facility and (iv) pay transaction expenses in connection with the Term Loan and the terminationthrough draws from Facility 1 or other available cash of the previously existing revolving credit facility. The remaining proceeds of the Term Loan of approximately $11.0 million may be used by the Company to finance capital expenditures and for general corporate purposes consistent with the terms of the Credit Agreement.Company.
Interest will accrueAccrued interest on the Term Loan at a per annum rate equal to the greater of (i) 11% or (ii) 90-day LIBOR plus 9% determined monthly by the Agent andeach revolving loan will be payable monthly in arrears. Revolving loans under Tranche A of Facility 1 will bear interest at a rate per annum equal to the greater of (x) the Bank’s prime rate plus 2.50% and (y) 6.00%. The principal balanceamount borrowed under Tranche B of Facility 1 and revolving loans under Facility 2 will bear interest at a rate per annum equal to the Term Loan will be repaid in equal monthly installments, commencing on August 1, 2017, determined asgreater of (x) the quotient of (i) 10% of the outstanding principal balance of the Term Loan as of July 2, 2017 divided by (ii) 12. A final installment of principalBank’s prime rate and all accrued and unpaid interest will be due on the maturity date of the Term Loan.(y) 3.50%.
The Term Loan may be prepaid, in whole or in part, at any time, subject toEach issuance of a letter of credit under Facility 2 will require the payment of a prepayment premium equal to (i) 5% of the principal amount prepaid at any time up to but not including the second anniversary of the Closing Date and (ii) 3% of the principal amount prepaid at any time commencing on the second anniversary of the Closing Date up to but not including the third anniversary of the Closing Date. In the event of any sale or other disposition of a school or real property by the Company permitted under the Term Loan, the net proceeds of such sale or disposition must be used to prepay the Loan in an amount determined pursuant to the Credit Agreement, subject to the applicable prepayment premium; provided, however, that no prepayment premium will be due with respect to up to $15 million of aggregate repayments of the Term Loan made during the first year that the Term Loan is outstanding. A portion of the net cash proceeds of any disposition of a school in an amount determined pursuant to the terms of the Term Loan, must be deposited and held as cash collateral in a deposit account controlled by the Agent until the conditions for release set forth in the Term Loan are satisfied. In connection with the assets which are currently classified as held for sale and are expected to be sold within one year, the Company is required to classify $10 million as short term debt due to the Term Loan prepayment minimum required with respect to any such disposition.
The Term Loan contains customary representations, warranties and covenants such as minimum financial responsibility composite score, cohort default rate, and other financial covenants, including minimum liquidity, maximum capital expenditures, maximum 90/10 ratio and minimum EBITDA (as defined in the Term Loan), as well as affirmative and negative covenants and events of default customary for facilities of this type. Pursuant to the Second Amendment, the financial covenants were adjusted and, at the Company’s election, will be adjusted for fiscal year 2017 and for each subsequent fiscal year until the maturity of the Term Loan at either the levels applicable to fiscal year 2016 (and each fiscal quarter thereof) contained in the Credit Agreement as of the Closing Date or the levels applicable to fiscal year 2016 (and each fiscal quarter thereof) contained in the Second Amendment. In the event that the Company elects to re-set the financial covenants at the 2016 covenant levels contained in the Second Amendment, the Company will be required to prepay on or before January 15, 2017, without prepayment penalty, amounts outstanding under the Term Loan up to $4 million. The Company was in compliance with all financial covenants as of June 30, 2016.
The Credit Agreement contains events of default, the occurrence and continuation of which provide the Company’s lenders with the right to exercise remedies against the Company and the collateral securing the Term Loan, including the Company’s cash. These events of default include, among other things, the Company’s failure to pay any amounts due under the Term Loan, a breach of covenants under the Credit Agreement, the Company’s insolvency and the insolvency of its subsidiaries, the occurrence of a material adverse event, the occurrence of any default under certain other indebtedness, and a final judgment against the Company in an amount greater than $1 million.
Also, in connection with the Term Loan, the Company paid to the Agent a commitment fee of $1 million on the Closing Date and is required to pay to the Agent other customary fees for facilities of this type. Total fees for the Term Loan were $2.8 million during the fiscal year 2015, which are included in deferred finance charges on the condensed consolidated balance sheet. During the first quarter of 2016, in connection with the effectiveness of the Second Amendment, the Company paid to the Agent a loan modification fee of $0.5 million.
L/C Credit Agreement
On April 12, 2016, the Company entered into a credit agreement (the “L/C Agreement”) with Sterling National Bank (“Sterling” under which Sterling has agreed to issue letters of credit from time to time at 100% margin against available funds in a cash collateral account maintained by the Company at Sterling. The maximum availability under the L/C Agreement is $9.5 million. The Company will pay Sterling 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 each outstandingthe letter of credit, which fee isshall be payable in quarterly installments in arrears. The L/C Agreement maturesLetters 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, and replaces a letterare treated as letters of credit under Facility 2.
Under the terms of the Credit Agreement, the Bank receives 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. In addition, the Company is required to maintain, on deposit with the Bank in one or more non-interest bearing accounts, a prior lender. The L/Cminimum 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. Under the terms of the Credit Agreement, in the event that the Company terminates the Credit Facility or refinances with another lender within 18 months of closing, the Company shall be 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 June 30, 2017, the Company is in compliance with all covenants.
In connection with the Credit Agreement, the Company paid the Bank an origination fee in the amount of $250,000 and other fees and reimbursements that are customary for facilities of this type.
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 its existing lender, Sterling National Bank, pursuant to which the Company has obtained a short term loan in the principal amount of $8 million, the proceeds of which are to be used for working capital and general corporate purposes. The loan bears interest at a rate per annum equal to the greater of the Bank’s prime rate plus 2.50% or 6.00%.
The loan is secured by property located in West Palm Beach, Florida at which schools operated by the Company are currently located. The loan is payable interest only until its maturity, which will occur upon the earlier of October 1, 2017 and the date of the sale of the West Palm Beach, Florida property. The Company has entered into a contract to sell two of three properties located in West Palm Beach, Florida to Tambone Companies, LLC for a cash purchase price of $15.7 million. The Company expects this sale to be completed in the third quarter of 2017.
As of June 30, 2017, the Company had $33 million outstanding under the Credit Facility (which includes the short term loan of $8 million); offset by $1.0 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 June 30, 2017 and December 31, 2016 there were no letters of credit in the aggregate principal amount of $6.2 million outstanding, respectively. As of June 30, 2017, there are no revolving loans outstanding under the L/C Agreement.Facility 2.
The following table sets forth our long-term debt (in thousands):
| | | June 30, 2016 | | | December 31, 2015 | | | June 30, 2017 | | | December 31, 2016 | |
| Credit agreement | | | $ | 32,023 | | | $ | - | |
| Term loan | | $ | 41,510 | | | $ | 42,124 | | | | - | | | | 44,267 | |
| Finance obligation | | | 3,355 | | | | 9,672 | | |
| Capital lease-property (with a rate of 8.0%) | | | - | | | | 3,899 | | |
| | | | 44,865 | | | | 55,695 | | | | 32,023 | | | | 44,267 | |
| Less current maturities | | | (13,355 | ) | | | (10,114 | ) | | | (8,000 | ) | | | (11,713 | ) |
| | | $ | 31,510 | | | $ | 45,581 | | | $ | 24,023 | | | $ | 32,554 | |
As of June 30, 2016,2017, we had outstanding loan commitments to our students of $31.7$42.2 million, as compared to $33.4$40.0 million at December 31, 2015.2016. Loan commitments, net of interest that would be due on the loans through maturity, were $23.6$31.4 million at June 30, 2016,2017, as compared to $24.8$30.0 million at December 31, 2015. Loan commitments decreased as a result of lower population and fewer campuses.2016.
Contractual Obligations
Long-term Debt. As of June 30, 2016,2017, our current portion of long-term debt and our long-term debt consisted of borrowings under our Term Loan.Credit Facility.
Lease Commitments. We lease offices, educational facilities and equipment for varying periods through the year 2030 at base annual rentals (excluding taxes, insurance, and other expenses under certain leases).
The following table contains supplemental information regarding our total contractual obligations as of June 30, 20162017 (in thousands):
| | | Payments Due by Period | | | Payments Due by Period | |
| | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | |
| Term Loan (including interest) | | $ | 55,879 | | | $ | 14,384 | | | $ | 13,601 | | | $ | 27,894 | | | $ | - | | |
| Credit facility | | | $ | 33,000 | | | $ | 8,000 | | | $ | - | | | $ | 25,000 | | | $ | - | |
| Operating leases | | | 106,644 | | | | 21,200 | | | | 37,706 | | | | 24,520 | | | | 23,218 | | | | 90,930 | | | | 20,446 | | | | 34,008 | | | | 18,268 | | | | 18,208 | |
| Total contractual cash obligations | | $ | 162,523 | | | $ | 35,584 | | | $ | 51,307 | | | $ | 52,414 | | | $ | 23,218 | | | $ | 123,930 | | | $ | 28,446 | | | $ | 34,008 | | | $ | 43,268 | | | $ | 18,208 | |
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of June 30, 2016,2017, except for surety bonds. As of June 30, 2016,2017, we posted surety bonds in the total amount of approximately $14.9$14.3 million. Cash collateralized letters of credit of $6.6$6.2 million are primarily comprised of letters of credit for the DOE and security deposits in connection with certain of our real estate leases. These off-balance sheet arrangements do not adversely impact our liquidity or capital resources.
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 of 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. Our second half growth 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, 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 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 the ability-to-benefit (“ATB”),“ability-to-benefit,” changes to the 90/10 Rule and cohort default rates, gainful employment and modifications to Title IV 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 prematurely without obtaining any post-secondary training. Offsetting this short term decline in available students is the fact that an increasing number of 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 15 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 Agreementcredit facilities 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.
Regulatory Update
On November 3,July 6, 2017, the DOE notified our Indianapolis, Indiana campus that an on-site Program Review is scheduled to begin on August 14, 2017. The Program Review will assess the institution’s administration of Title IV Programs in which the campus participated for the 2015-2016 and 2016-2017 award years.
On August 2, 2017, the DOE issued its Final Program Review Determination (“FPRD”) letter to the Columbia, MD, 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, our Board of Directors approved a plan for usprogram review report. The DOE concluded in its FPRD letter that the school had taken the corrective actions necessary to divest our Healthcareresolve and Other Professions business segment. Implementationclose the first four findings. The DOE concluded in the fifth finding that there were violations of the plan resultsClery Act, but accepted the school’s response and stated that it now considers the finding closed 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 our operations focused solely onconnection with the Transportation and Skilled Trades business segment. Due toClery Act finding in the Board’s decision to divestreport. The DOE did not impose any financial liabilities in any of the Healthcare and Other Professions business segment, this segment was classified as discontinued operations and asset and liabilities classified as held for sale.
five findings in the FPRD letter.
| Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to certain market risks as part of our on-going business operations. On JulyMarch 31, 2015,2017, the Company repaid in full and terminated a previously existing revolving line of creditterm loan with the proceeds of a new $45revolving credit facility provided by Sterling National Bank in an aggregate principal amount of up to $50 million, Term Loan.which revolving credit facility is referred to in this report as the “Credit Facility.” Our obligations under the Term LoanCredit Facility are secured by a lien on substantially all of our assets and our subsidiaries 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 11.0%6.75% as of June 30, 2016.2017. As of June 30, 2016,2017, we had $44.3$33 million outstanding under the Term Loan.Credit Facility (which includes the short term loan of $8 million).
Based on our outstanding debt balance as of June 30, 2016,2017, a change of one percent in the interest rate would have caused a change in our interest expense of approximately $0.4$0.3 million, or $0.02$0.01 per basic share, on an annual basis. Changes in interest rates could have an impact however on our operations, which are greatly dependent on our students’ ability to obtain financing. 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.
(a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)) as of the end of the quarterly period covered by this report, have concluded that our disclosure controls and procedures are adequate and effective to reasonably ensure that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange 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.
(b) Changes in Internal Control Over Financial Reporting. There were no changes made during our most recently completed fiscal quarter in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Information regarding certain specific legal proceedings in which the Company is involved is contained in Part I, Item 3 and in Note 14 to the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Unless otherwise indicated in this report, all proceedings discussed in the earlier report which are not indicated therein as having been concluded, remain outstanding as of June 30, 2017.
In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations and claims, including, but not limited to, claims involving students or graduates and routine employment matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, financial condition, results of operations or cash flows.
On December 15, 2015, the Company received an administrative subpoena from the Attorney General of the State of Maryland. Pursuant to the subpoena, Maryland’s Attorney General has requested from the Company documents and detailed information relating to its Columbia, Maryland campus. The Company has responded to this request and intends to continue cooperating with the Maryland Attorney General’s Office.
On July 1, 2016, New England Institute of Technology at Palm Beach, Inc. (“NEIT”), a wholly-owned subsidiary of the Company, entered into a purchase and sale agreement (the “WPB Sale Agreement”) with School Property Development Metrocentre, LLC (“SPD”), pursuant to which NEIT has agreed to sell to SPD the real property owned by NEIT located at 2400 and 2410 Metrocentre Boulevard East, West Palm Beach, Florida, including the improvements and other personal property located thereon (the “WPB Property”) for a cash purchase price of approximately $15.9 million. The WPB Sale Agreement contains customary representations, warranties, covenants and conditions to closing for agreements of this type.
Concurrently with the closing of the sale of the WPB Property and pursuant to the WPB Sale Agreement, NEIT will enter into a short-term lease agreement (the “WPB Lease”) with SPD under which NEIT will lease back the WPB Property for continued use as a school in order to allow the teach-out of currently enrolled students. The monthly rental obligation under the WPB Lease is $100,000 plus the direct payment by NEIT of all real estate and other taxes and utility charges assessed against the WPB Property. The term of the WPB Lease will run from the closing date through March 31, 2017, subject to extension at the option of NEIT for three additional months through June 30, 2017. Upon the closing, as required by the Company’s credit agreement with its lender, the Company will repay, from the net cash proceeds of the sale, $10 million of the principal amount of its term loan, plus a $.5 million prepayment premium and accrued interest on the amount repaid. The Company expects that, assuming all conditions to closing are met, it will close on the sale in the third quarter of 2016.
The foregoing description does not purport to be complete and is qualified in its entirety by reference to the full text of the WPB Sale Agreement filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
On August 3, 2016, the Company issued a press release reporting its financial results for the fiscal quarter ended June 30, 2016, a copy of which is attached as Exhibit 99.1 to this Quarterly Report on Form 10Q.
Exhibit Number | | Description |
| | |
10.1 * | Purchase and Sale Agreement dated July 1, 2016 between New England Institute of Technology at Palm Beach, Inc. and School Property Development Metrocentre, LLC |
| |
10.2(1)10.1(1) | | Credit Agreement dated as of April 12, 201628, 2017 among Lincoln Educational Services Corporation, and Lincoln Technical Institute, Inc. and its subsidiaries, and Sterling National Bank |
| | | |
31.1 *31.1* | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 31.2 * | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 32 * | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 101** | | The following financial statements from Lincoln Educational Services Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016,2017, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (ii)(iii) Condensed Consolidated Balance Sheets, (iii)Statements of Comprehensive (Loss) Income, (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows (iv) Condensed Consolidated Statement of Changes in Stockholders’ Equity, and (v)(vi) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and in detail. |
| (1) | Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on April 18, 2016.May 4, 2017. |
| ** | As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| | | LINCOLN EDUCATIONAL SERVICES CORPORATION |
| | | |
| Date: | August 9, 201610, 2017 | By: | /s/ Brian Meyers | |
| | | Brian Meyers |
| | | Executive Vice President, Chief Financial Officer and Treasurer |
Exhibit Index
| Purchase and Sale Agreement dated July 1, 2016 between New England Institute of Technology at Palm Beach, Inc. and School Property Development Metrocentre, LLC |
| 10.1(1) | |
10.2(1)
| Credit Agreement dated as of April 12, 201628, 2017 among Lincoln Educational Services Corporation, and Lincoln Technical Institute, Inc. and its subsidiaries, and Sterling National Bank |
| | | |
| | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 101** | | The following financial statements from Lincoln Educational Services Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016,2017, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (ii)(iii) Condensed Consolidated Balance Sheets, (iii)Statements of Comprehensive (Loss) Income, (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows (iv) Condensed Consolidated Statement of Changes in Stockholders’ Equity, and (v)(vi) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and in detail. |
| (1) | Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on April 18, 2016.May 4, 2017. |
| ** | As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |