Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

As of November 8, 2017,May 11, 2018, there were 24,719,05524,681,180 shares of the registrant’s common stock outstanding.

 

 

 

 

Business Activities— Lincoln Educational Services Corporation and its subsidiaries (collectively, the “Company”, “we”, “our” and “us”, as applicable) provide diversified career-oriented post-secondary education to recent high school graduates and working adults.  The Company, which currently operates 2523 schools in 1514 states, offers programs in automotive technology, skilled trades (which among other programs include HVAC, welding and computerized numerical control and electronic systems technology, among other programs)technology), healthcare services (which among other programs include nursing, dental assistant, medical administrative assistant and pharmacy technician, among other programs)technician), hospitality services (which include culinary, therapeutic massage, cosmetology and aesthetics) and business and information technology (which includes information technology and criminal justice programs).  The schools operate under Lincoln Technical Institute, Lincoln College of Technology, Lincoln College of New England, Lincoln Culinary Institute, and Euphoria Institute of Beauty Arts and Sciences and associated brand names.  Most of the campuses serve major metropolitan markets and each typically offers courses in multiple areas of study.  Five of the campuses are destination schools, which attract students from across the United States and, in some cases, from abroad. The Company’s other campuses primarily attract students from their local communities and surrounding areas.  All of the campuses are nationally or regionally accredited and are eligible to participate in federal financial aid programs offered by the U.S. Department of Education (the “DOE”) and applicable state education agencies which allow students to apply for and access federal student loans as well as other forms of financial aid.

We operate in three reportable business segments:  (a) Transportation and Skilled Trades segment, (b) Healthcare and Other Professions (“HOPS”) segment, and (c) Transitional segment which refers to businessesschools that have been or are currently being taught out.  In November 2015, the Board of Directors approved a plan for the Company to divest the schools included in the HOPS segment due to a strategic shift in the Company’s business strategy.  The Company underwent an exhaustive process to divest the HOPS schools which proved successful in attracting various purchasers but, ultimately, did not result in a transaction that our Board believed would enhance shareholder value. When the decision was first made by the Board of Directors to divest HOPS, 18 campuses were operating in this segment.  By the end of 2017, we will have strategicallyhad closed seven underperforming campuses leaving a total of eleven campuses remaining under the HOPS segment.   The Company believes that the closures and planned closures of the aforementioned campuses hashave positioned thisthe HOPS segment and the Company to be more profitable going forward as well as maximizing returns for the Company’s shareholders.

The combination of several factors, including, among other things, the inability of a prospective buyer of the HOPS segment to close on the purchase, the improvements the Company has implemented in the operations of the HOPS segment operations and the closure of seven underperforming campuses, and the change in federal government administration, resulted in the Board reevaluating its divestiture plan and the determination that shareholder value would more likely be enhanced by continuing to operate our HOPS segment as revitalized.  Consequently, in the first quarter of 2017, the Board of Directors has abandoned the plan to divest the HOPS segment and the Company intends to retain and continue to operate the remaining campuses in the HOPS segment.  The results of operations of the campuses included in the HOPS segment are reflected as continuing operations in the condensed consolidated financial statements.

In the fourth quarter of 2016, the Company completed the teach-out of its Hartford, ConnecticutConnecticut; Fern Park, Florida and Henderson (Green Valley), Nevada campuses, which originally operated in the HOPS segment.  Also inIn 2017, the Company completed the teach-out of its Northeast Philadelphia, Pennsylvania; Center City Philadelphia, Pennsylvania; and West Palm Beach, Florida facilities which also originally operated in the HOPS segment.  In addition, in March 2017, the Board of Directors approved a plan to not renew the leases at our schools inFlorida; Brockton, MassachusettsMassachusetts; and Lowell, Massachusetts schools, which also were originally in ourthe HOPS segment and all of which are being were taught out and expected to be closed inby December 2017 and are now are included in the Transitional segment as of September 30,December 31, 2017.  In October 2017, the Company agreed to a $1.5 million lease termination with University City Science Center to terminate the lease for our recently closed school located in Center City Philadelphia, Pennsylvania which is included in our Transitional segment.

On August 14, 2017, New England Institute of Technology at Palm Beach, Inc., a wholly-owned subsidiary of the Company, consummated the anticipated sale of the real property located at 2400 and 2410 Metrocentre Boulevard East, West Palm Beach, Florida, including the improvements and other personal property located thereon (the “West Palm Beach Property”) to Tambone Companies, LLC, (“Tambone”), pursuant to a previously disclosed purchase and sale agreement (the “West Palm Sale Agreement”) entered into on March 14, 2017. Pursuant to the terms of the West Palm Sale Agreement,sale agreement, as subsequently amended, the purchase price for the West Palm Beach Property was $15.8 million. As a result, the Company recorded a gain on the sale in the amount of $1.5 million. As previously disclosed, the West Palm Beach Property served as collateral for a short term loan in the principal amount of $8.0 million obtained by the Company from its lender, Sterling National Bank, on April 28, 2017, which loan matured upon the earlier of the sale of the West Palm Beach Property or October 1, 2017. Accordingly, on August 14, 2017, concurrently with the consummation of the sale of the West Palm Beach Property, the Company repaid the term loan in an aggregate amount of $8.0 million, consisting of principal and accrued interest.

 

Liquidity—For the last several years, the Company and the proprietary school sector have faced deteriorating earnings. Government regulations have negatively impacted earnings by making it more difficult for potential students to obtain loans, which, when coupled with the overall economic environment, have discouraged potential students from enrolling in post-secondary schools. In light of these factors, the Company has incurred significant operating losses as a result of lower student population.  Despite these challenges, the Company believes that its likely sources of cash should be sufficient to fund operations for the next twelve months and thereafter for the foreseeable future.  At September 30, 2017,March 31, 2018, the Company’s sources of cash primarily included cash and cash equivalents of $14.5$13.4 million (of which $7.2$8.5 million is restricted) and $7.5$1.9 million of availability under the Company’s revolving loan facility discussed below. Refer to Note 5 for more information on the Company’s revolving loan facility.  The Company is also continuing to take actions to improve cash flow by aligning its cost structure to its student population.

Basis of Presentation – The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements.  Certain information and footnote disclosures normally included in annual financial statements have been omitted or condensed pursuant to such regulations.  These statements, which should be read in conjunction with the December 31, 20162017 consolidated financial statements and related disclosures of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2017, reflect all adjustments, consisting of normal recurring adjustments and impairments necessary to present fairly the consolidated financial position, results of operations and cash flows for such periods.  The results of operations for the ninethree months ended September 30, 2017March 31, 2018 are not necessarily indicative of the results that may be expected for the full fiscal year ending December 31, 2017.2018.

The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated.

Use of Estimates in the Preparation of Financial Statements – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period.  On an ongoing basis, the Company evaluates the estimates and assumptions including those related to revenue recognition, bad debts, impairments, fixed assets, income taxes, benefit plans and certain accruals.  Actual results could materially differ from those estimates.

 

New Accounting Pronouncements – The Financial Accounting Standards Board (the “FASB”) has issued Accounting Standards Update (“ASU”) 2017-09, “Compensation—“Compensation—Stock Compensation (Topic 718) — Scope of Modification Accounting.” ASU 2017-09 applies to entities that change the terms or conditions of a share-based payment award. The FASB adopted ASU 2017-09 to provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to the modification of the terms and conditions of a share-based payment award. The amendments provide guidance on determining which changes to the terms and conditions of share-based payment award require an entity to apply modification accounting under Topic 718. ASU 2017-09 is effective for all entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued. The Company does not expect the adoption of ASU 2017-09 will have a materialhad no impact on itsthe Company’s condensed consolidated financial statements.

 

In March 2017,February 2018, the FASB issued ASU 2017-07, "Compensation—Retirement Benefits2018-02, “Income Statement-Reporting Comprehensive Income (Topic 715): Improving220)”. The updated guidance allows entities to reclassify stranded income tax effects resulting from the Presentation of Net Periodic Pension CostTax Cuts and Net Periodic Postretirement Benefit Cost." ASU 2017-07 requires that an employer report the service cost component in the same line item or items asJobs Act (the “Tax Act”) from accumulated other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the statement of comprehensive income separately fromto retained earnings in their consolidated financial statements. Under the service cost component and outside a subtotalTax Act, deferred taxes were adjusted to reflect the reduction of operating income.the historical corporate income tax rate to the newly enacted corporate income tax rate, which left the tax effects on items within accumulated other comprehensive income stranded at an inappropriate tax rate. The ASUupdated guidance is effective for annual periodsfiscal years beginning after December 15, 2017.2018, including interim periods within those years. Early adoption is permitted. The Company does not expect the adoption of ASU 2017-07 will have a material impact on its condensed consolidated financial statements.

 

In November 2016, the FASB issued ASU 2016-18: “Statement“Statement of Cash Flows (Topic 230): Restricted Cash.Cash.” This guidance was issued to address the disparity that exists in the classification and presentation of changes in restricted cash on the statement of cash flows. The amendments will require that the statement of cash flows explain the change during the period in total cash, cash equivalents and restricted cash. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We adopted the new standard effective January 1, 2018.  The amendments will bewere applied using a retrospective transition method to each period presented. The Company anticipates thatincludes in its cash and cash-equivalent balances in the adoption will not have a material impact on the Company’s condensed consolidated financial statements.statements of cash flows those amounts that have been classified as restricted cash and restricted cash equivalents for each of the periods presented.

In August 2016, the FASB issued ASU 2016-15, “Statement“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”Payments” to address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We adopted the new standard effective January 1, 2018.  The Company anticipates that the adoption will not have a materialof ASU 2016-15 had no impact on the Company’s condensed consolidated financial statements.

In May 2014, the FASB issued a comprehensive new revenue recognition standard, ASU 2014-09, “Revenue from Contracts with Customers.”  The Company prospectively appliedamendments include ASU 2016-09, “Improvements2016-08, “Revenue from Contracts with Customers (Topic 606)—Principal versus Agent Considerations,” issued in March 2016, which clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09, and ASU 2016-10, “Revenue from Contracts with Customers (Topic 606)—Identifying Performance Obligations and Licensing,” issued in April 2016, which amends the guidance in ASU No. 2014-09 related to Employee Share Based Payment Accounting,”identifying performance obligations.  The new standard, which supersedes previously existing revenue recognition guidance, creates a five-step model for revenue recognition requiring companies to exercise judgment when considering contract terms and relevant facts and circumstances. The five-step model requires (1) identifying the contract, (2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the condensed consolidated statementseparate performance obligations and (5) recognizing revenue at the time that each performance obligation is satisfied. The standard also requires expanded disclosures surrounding revenue recognition. The standard is effective for fiscal periods beginning after December 15, 2017 and allows for either full retrospective or modified retrospective adoption.

We adopted the new standard effective January 1, 2018 using the modified retrospective approach.  The Company’s revenue streams primarily consist of operationstuition and related services provided to students over the course of the program as well as other transactional revenue such as tools.  Based on the Company’s assessment, the analysis of the contract portfolio under ASU 2016-10 results in the revenue for the recognition of tax benefits within the provision for taxes, which previously would have been recorded to additional paid-in capital. The impact for the nine months ended September 30, 2017 was $0. In addition, the Company retrospectively recognized no tax benefits within operating activities within the condensed consolidated statements of cash flow for the nine months ended September 30, 2017 and 2016. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to anymajority of the periods presented inCompany’s student contracts being recognized over time which is consistent with the condensed consolidated statementsCompany’s previous revenue recognition model. For all student contracts, there is continuous transfer of cash flows, since such cash flows have historically been presented in financing activities. The treatment of forfeitures has not changed ascontrol to the Company is electing to continue the current process of estimatingstudent and the number of forfeitures. There was no cumulative effect adjustment required to retained earningsperformance obligations under ASU 2016-10 is consistent with those identified under the prospective method as of the beginning of the year because all tax benefits had been previously recognized when the tax deductions related to stock compensation were utilized to reduce tax payable.existing standard. The Company is not recording deferred tax assets or tax losses as a resultdetermined the impact of the adoption of ASU 2016-09.the new standard on revenue recognition for student contracts to be immaterial on its condensed consolidated financial statements and disclosures. See additional information in Note 3.

In February 2016, the FASB issued guidance requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for substantially all leases, with the exception of short-term leases. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the statements of income. The guidance is effective for annual periods, including interim periods within those periods, beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact that the update will have on our results of operations,the Company’s condensed consolidated financial condition and financial statement disclosures.statements.

Stock-Based Compensation – The Company measures the value of stock options on the grant date at fair value, using the Black-Scholes option valuation model.  The Company amortizes the fair value of stock options, net of estimated forfeitures, utilizing straight-line amortization of compensation expense over the requisite service period of the grant.

The Company measures the value of service and performance-based restricted stock on the fair value of a share of common stock on the date of the grant. The Company amortizes the fair value of service-based restricted stock utilizing straight-line amortization of compensation expense over the requisite service period of the grant.

The Company amortizes the fair value of the performance-based restricted stock based on the determination of the probable outcome of the performance condition.  If the performance condition is expected to be met, then the Company amortizes the fair value of the number of shares expected to vest utilizing straight-line basis over the requisite performance period of the grant.  However, if the associated performance condition is not expected to be met, then the Company does not recognize the stock-based compensation expense.

Income Taxes – The Company accounts for income taxes in accordance with FASB ASC Topic 740, “Income Taxes” (“ASC 740”). This statement requires an asset and a liability approach for measuring deferred taxes based on temporary differences between the financial statement and tax basisbases 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, the Company assesses itsour 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, the Company’sour 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, the Company 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 the Company’sour consolidated financial statements and/or tax returns.  Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on the Company’s 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 the Company’s valuation of income tax assets and liabilities and could cause the Company’sour income tax provision to vary significantly among financial reporting periods.  See information regarding the impact of the Tax Cuts and Jobs Act in Note 7.

 

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense.  During the three and nine months ended September 30,March 31, 2018 and 2017, and 2016, the Company did not recognize any interest and penalties expense associated with uncertain tax positions.

 

The weighted average number of common shares used to compute basic and diluted loss per share for the three and nine months ended September 30,March 31, 2018 and 2017 and 2016 was as follows:

For the three months ended September 30,March 31, 2018 and 2017, and 2016, options to acquire 552,189127,973 and 1,181,073631,927 shares were excluded from the above table because the Company reported a net loss for each period and, therefore, their impact on reported loss per share would have been antidilutive.  For the ninethree months ended September 30, 2017March 31, 2018 and 2016, options to acquire 572,428 and 668,307 shares were excluded from the above table because the Company reported a net loss for each quarter and, therefore, their impact on reported loss per share would have been antidilutive.  For the three and nine months ended September 30, 2017, options to acquire 170,667147,667 and 180,667 shares, respectively, were excluded from the above table because they have an exercise price that is greater than the average market price of the Company’s common stock and, therefore, their impact on reported income (loss)loss per share would have been antidilutive.

The Company reviews long-lived assets for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.  There were no long-lived asset impairments during the ninethree months ended September 30, 2017March 31, 2018 and 2016.2017.

The Company reviews goodwill and intangible assets for impairment when indicators of impairment exist.  Annually, or more frequently if necessary, the Company evaluates goodwill and intangible assets with indefinite lives for impairment, with any resulting impairment reflected as an operating expense.  The Company concluded that, as of September 30,March 31, 2018 and 2017, and 2016, there was no indicator of potential impairment and, accordingly, the Company did not test goodwill for impairment.

The carrying amount of goodwill at September 30,March 31, 2018 and 2017 and 2016 is as follows:

As of September 30,March 31, 2018 and 2017, the goodwill balance is related to the Transportation and Skilled Trades segment.  As of September 30, 2016, the goodwill balance consists of $14.5 million related to the Transportation and Skilled Trades segment and $8.8 million related to our HOPS segment.

 

Intangible assets, which are included in other assets in the accompanying condensed consolidated balance sheets, consist of the following:

Amortization of intangible assets was less than $0.1 million for each of the three and nine months ended September 30, 2017March 31, 2018 and 2016.2017.

The following table summarizes the estimated future amortization expense:

Long-term debt consist of the following:

The Credit Facility replaces a term loan facility (the “Prior Credit Facility”) which was repaid and terminated concurrently with the effectiveness of the Credit Facility.  The term of the Credit Facility is 38 months, maturing on May 31, 2020.2020, except that the Facility 3 will mature one year earlier, on May 31, 2019.

The Credit Facility is secured by a first priority lien in favor of the Bank on substantially all of the personal property owned by the Company as well as mortgages on four parcels of real property owned by the Company in Connecticut, Colorado, Tennessee and Texas at which fourthree of the Company’s schools are located.located, as well as a former school property owned by the Company located in Connecticut.

At the closing of the Credit Facility, the Company drew $25 million under Tranche A, of Facility 1, which, pursuant to the terms of the Credit Agreement, was used to repay the Prior Credit Facility and to pay transaction costs associated with closing the Credit Facility.  After the disbursementdisbursements of such amounts, the Company retained approximately $1.8 million of the borrowed amount for working capital purposes.

 

Pursuant to the terms of the Credit Agreement, all draws under Facility 2 for letters of credit or revolving loans areand all draws under Facility 3 must be secured by cash collateral in an amount equal to 100% of the aggregate stated amount of the letters of credit issued and revolving loans outstanding through draws from Facility 1 or other available cash of the Company.

Each issuance of a letter of credit under Facility 2 requireswill require the payment of a letter of credit fee to the Bank equal to a rate per annum of 1.75% on the daily amount available to be drawn under the letter of credit, which fee isshall be payable in quarterly installments in arrears.  Letters of credit totaling $7.2$6.2 million that were outstanding under a $9.5 million letter of credit facility previously provided to the Company by the Bank, which letter of credit facility was set to mature on April 1, 2017, are treated as letters of credit under Facility 2.

The terms of the Credit Agreement provide that the Bank be paid an unused facility fee on the average daily unused balance of Facility 1 at a rate per annum equal to 0.50%, which fee is payable quarterly in arrears.  In addition, the Company is required to maintain, on deposit in one or more non-interest bearing accounts, a minimum of $5 million in quarterly average aggregate balances.  If in any quarter the required average aggregate account balance is not maintained, the Company is required to pay the Bank a fee of $12,500 for that quarter and, in the event that the Company terminates the Credit Facility or refinances with another lender within 18 months of closing, the Company is required to pay the Bank a breakage fee of $500,000.

The Company incurred an early termination premium of approximately $1.8 million in connection with the termination of the Prior Credit Facility.

On April 28, 2017, the Company entered into an additional secured credit agreement with the Bank, pursuant to which the Company obtained a short term loan in the principal amount of $8 million, the proceeds of which were used for working capital and general corporate purposes.  The loan, which had an interest rate per annum equal to the greater of (x) the Bank’s prime rate plus 2.50% orand (y) 6.00%, was secured by two real property assets located in West Palm Beach, Florida at which schools operated by the Company were located and matured upon the earlier of October 1, 2017 and the date of the sale of the West Palm Beach, Florida property.  The Company sold the two of three properties located in West Palm Beach, Florida to Tambone Companies, LLC in the third quarter of 2017 and concurrently repaid the $8 million.million using the proceeds of such sale.

 

As of September 30, 2017,March 31, 2018, the Company had $17.5$23.1 million outstanding under the Credit Facility which wasFacility; offset by $0.8 million of deferred finance fees.  As of December 31, 2016,2017, the Company had $44.3$53.4 million outstanding under the Prior Credit Facility which wasFacility; offset by $2.3$0.8 million of deferred finance fees, which were written-off.fees.  As of September 30, 2017March 31, 2018 and December 31, 2016,2017, there were letters of credit in the aggregate outstanding principal amount of $8.5 million and $7.2 million, respectively.  During the three months ended March 31, 2018, the Company repaid all outstanding amounts as of December 31, 2017 on Facility 2 of $17.8 million and $6.2 million outstanding, respectively.  AsFacility 3 of September 30, 2017, there are no revolving loans outstanding under Facility 2.$15 million.

Scheduled maturities of long-term debt at September 30, 2017March 31, 2018 are as follows:

The Company has two stock incentive plans:  a Long-Term Incentive Plan (the “LTIP”) and a Non-Employee Directors Restricted Stock Plan (the “Non-Employee Directors Plan”).

Under the LTIP, certain employees receive awards of restricted shares of common stock based on service and performance.  The number of shares granted to each employee is based on the fair market value of a share of common stock on the date of grant.

On February 23, 2018, restricted shares were granted to certain employees of the Company, which shares vested immediately.  There is no restriction on the right to vote or the right to receive dividends with respect to any of such restricted shares, however, the recipient can only sell or other transfer the shares after the expiration of specified period of time from 120 to 240 days following the date of grant.

On May 13, 2016 and January 16, 2017, performance-based restricted shares were granted to certain employees of the Company, which vest on March 15, 2017 and March 15, 2018 based upon the attainment of a financial responsibility ratiometric during each fiscal year ending December 31, 2016 and 2017.  There is no restriction on the right to vote or the right to receive dividends with respect to anyThese shares vested as of these restricted shares.March 31, 2018 and are held without restriction.

On June 2, 2014 and December 18, 2014, performance-based restricted shares were granted to certain employees of the Company, which vest over three years based upon the attainment of (i) a specified operating income margin during any one or more of the fiscal years in the period beginning January 1, 2015 and ending December 31, 2017 and (ii) the attainment of earnings before interest, taxes, depreciation and amortization targets during each of the fiscal years ended December 31, 2015 through 2017.  There is no restriction on the right to vote or the right to receive dividends with respect to any of these restricted shares.

Pursuant to the Non-Employee Directors Plan, each non-employee director of the Company receives an annual award of restricted shares of common stock on the date of the Company’s annual meeting of shareholders.  The number of shares granted to each non-employee director is based on the fair market value of a share of common stock on that date.  The restricted shares vest on the first anniversary of the grant date.  There is no restriction on the right to vote or the right to receive dividends with respect to any of thesesuch restricted shares.

For the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, the Company completed a net share settlement for 184,231168,254 and 38,389184,231 restricted shares, respectively, on behalf of certain employees that participate in the LTIP upon the vesting of the restricted shares pursuant to the terms of the LTIP.  The net share settlement was in connection with income taxes incurred on restricted shares that vested and were transferred to the employees during 20172018 and/or 2016,2017, creating taxable income for the employees.   At the employees’ request, the Company will pay these taxes on behalf of the employees in exchange for the employees returning an equivalent value of restricted shares to the Company.  These transactions resulted in a decrease of $0.4$0.3 million and $0.1$0.4 million for each of the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, respectively, to equity on the condensed consolidated balance sheets as the cash payment of the taxes effectively was a repurchase of the restricted shares granted in previous years.

 

The following is a summary of transactions pertaining to restricted stock:

The restricted stock expense for each of the three months ended September 30,March 31, 2018 and 2017 and 2016 was $0.3 million and $0.4 million, respectively.  The restricted stock expense for the nine months ended September 30, 2017 and 2016 was $0.9 million and $1.1 million, respectively.million.  The unrecognized restricted stock expense as of September 30, 2017March 31, 2018 and December 31, 20162017 was $0.6$0.1 million and $1.5$0.3 million, respectively.  As of September 30, 2017,March 31, 2018, outstanding restricted shares under the LTIP had aggregate intrinsic value of $1.6$0.3 million.

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:

As of September 30, 2017,March 31, 2018, there was no unrecognized pre-tax compensation expense.

The following table presents a summary of stock options outstanding:

The Company assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to recover the existing deferred tax assets.  In this regard, a significant 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 September 30,March 31, 2018.

As of March 31, 2018 and December 31, 2017, the Company had not completed its accounting for the tax effects of enactment of the Tax Act; however, the Company has made a reasonable estimate of the effects of the Tax Act’s change in the federal rate and revalued its deferred tax assets based on the rates at which they are expected to reverse in the future, which is generally the new 21% federal corporate tax rate plus applicable state tax rate. Based on the Company’s initial analysis of the impact, it consequently recorded a decrease related to deferred tax assets of $17.7 million as of December 31, 2017. The expense is offset with a corresponding release of valuation allowance.  As of March 31, 2018, the Company is continuing to gather additional information to complete its accounting for these items and expect to complete its accounting within the prescribed measurement period.

In the ordinary conduct of its business, the Company is subject to certain lawsuits, investigations and claims, including, but not limited to, claims involving students or graduates and routine employment matters. Although the Company cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against it, the Company does not believe that any currently pending legal proceedings to which it is a party will have a material adverse effect on the Company’s business, financial condition, and results of operations or cash flows.

In the past, we offered any combination of programs at any campus.  We currentlyhave shifted our focus to program offerings that create greater differentiation among campuses and promote attainment of excellence to attract more students and gain market share.  Also, strategically, we began offering continuing education training to select employers who hire our graduates and this is best achieved at campuses focused on the applicable profession.

As a result of the regulatory environment, market forces and our strategic decisions, we now operate our business in three reportable segments: (a) the Transportation and Skilled Trades segmentsegment; (b) the Healthcare and Other Professions segmentsegment; and (c) the Transitional segment.

Our reportable segments representhave 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 which have been determined based on a method by which we evaluate performance and allocate resources.segment.  Our operating segments have been aggregated into three reportable segments because, in our judgment, the operating segments have similar services, types of customers, regulatory environment and economic characteristics.  Our reportable segments are described below.

Transportation and Skilled Trades – The Transportation and Skilled Trades segment offers academic programs mainly in the career-oriented disciplines of transportation and skilled trades (e.g. automotive, diesel, HVAC, welding and manufacturing).

Healthcare and Other Professions – HOPSThe Healthcare and Other Professions segment offers academic programs in the career-oriented disciplines of health sciences, hospitality and business and information technology (e.g. dental assistant, medical assistant, practical nursing, culinary arts and cosmetology).

Transitional – The Transitional segment refers to campuses that are being taught-out and closed and operations that are being phased out or closed and our campuses that are currently being taught out.  TheseThe schools are employingin the Transitional segment employ a gradual teach-out process that enables the schools to continue to operate whileto allow their current students to complete their course of study.  These schools are no longer enrolling new students.  During the year ended December 31, 2016, the Company announced the closings of our Northeast Philadelphia, Pennsylvania; Center City Philadelphia, Pennsylvania; and West Palm Beach, Florida facilities which were fully taught out in 2017.  In the first quarter of 2016 we completed the teach-out of our Fern Park, Florida campus.  Also, in the fourth quarter of 2016, we completed the teach-out of our Hartford, Connecticut and Henderson (Green Valley), Nevada campuses.  In addition, in March 2017, the Board of Directors 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.

The Company continually evaluates all campuseseach campus for profitability, earning potential, and customer satisfaction.  This evaluation takes several factors into consideration, including the campus’s geographic location the programs offered at the campus,and program offerings, as well as skillsets required of our students by their potential employers.  The purpose of this evaluation is to ensure that our programs provide our students with the best possible opportunity to succeed in the marketplace with the goals of attracting more students to our programs and, ultimately, to provide theour 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.

 

Summary financial information by reporting segment is as follows:

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 carrying amounts reported on the Consolidated Balance Sheets for Cash and cash equivalents, Restricted cash and Noncurrent restricted cash approximate fair value because they are highly liquid.

The carrying amounts reported on the Consolidated Balance Sheets for Prepaid expenses and other current assets, Accrued expenses and Other short term liabilities approximate fair value due to the short-term nature of these items.