| Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
All references in this Quarterly Report on Form 10-Q (“Form 10Q”) to “we,” “our,” “us” and the “Company,” refer to Lincoln Educational Services Corporation and its subsidiaries unless the context indicates otherwise.
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. Such statements may be identified by the use of words such as “expect,” “estimate,” “assume,” “believe,” “anticipate,” “may,”"may," “will,” “forecast,” “outlook,” “plan,” “project,” or similar words, and include, without limitation, statements relating to future enrollment, revenues, revenues per student, earnings growth, operating expenses, capital expenditures and effect of pandemics such as the COVID-19 pandemic and its ultimate effect on the Company’s business and results. These statements are based on the Company’s current expectations and are subject to a number of assumptions, risks and uncertainties. Additional factors that could cause or contribute to differences between our actual results and those anticipated include, but are not limited to, those described in the “Risk Factors” section of our Form 10-K 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 Quarterly 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 appearing elsewhere in this Quarterly Report on Form 10-Q and the discussions contained herein should be read in conjunction with the annual financial statements and notes thereto included in our Form 10-K which includes audited consolidated financial statements for our two fiscal years ended December 31, 2020.2021.
General
The Company provides diversified career-oriented post-secondary education to recent high school graduates and working adults. The Company offers programs in automotive technology, skilled trades (which include HVAC, welding and computerized numerical control and electrical and electronic systems technology, among other programs), healthcare services (which include nursing, dental assistant and medical administrative assistant, among other programs), hospitality services (which include culinary, therapeutic massage, cosmetology and aesthetics) and information technology programs. The schools, currently consisting of 22 schools in 14 states, operate under Lincoln Technical Institute, Lincoln College of Technology, 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 by the DOE and applicable state education agencies and accrediting commissions, which allow students to apply for and access federal student loans as well as other forms of financial aid.
Our business is organized into two reportable business segments: (a) Transportation and Skilled Trades, and (b) Healthcare and Other Professions or “HOPS”.
Impact of COVID-19 on the Company
During the first quarter of 2020, COVID-19 began to spread worldwide and has caused significant disruptions to the U.S. and world economies. In early March 2020, the Company began seeing the impact of the COVID-19 pandemic on our business. The circumstances related to COVID-19 are unprecedented, dynamic and evolving and currently, with variants of the virus arising, remain unpredictable. As the economic impact of the COVID-19 pandemic continues to evolve, we could see significant changes to our operations.
To date, the impact of COVID-19 has primarily related to transitioning classes from in-person, hands-on instruction to online, remote learning and back. As part of this transition, the Company has incurred additional expenses. Related to this transition, 102 students were placed on leave of absence as they could not complete their externships and certain programs were extended due to restricted access to externship sites and classroom labs. In response to COVID-19, we implemented initiatives to safeguard our students and our employees. Due to phased re-opening on a state-by-state basis, our schools have been reopening since May 2020. Currently, all of our schools are open and following applicable guidelines.
Critical Accounting Policies and Estimates
For a description of our critical accounting policies and estimates, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” and Note 1 to the Condensed Consolidated Financial Statements included in our Form 10-K and Note 1 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2021.2022.
In addition, due to the impact of the COVID-19 pandemic, we have reassessed those of our accounting policies whose application places the most significant demands on management’s judgment, for instance, revenue recognition, allowance for doubtful account,accounts, goodwill, and long-lived assets, stock-based compensation, derivative instruments and hedging activity, borrowings, assumptions related to ROU assets, lease cost, income taxes and assets and obligations related to employee benefit plans. Such reassessments did not have a significant impact on our results of operations and cash flows for the periods presented.
Effect of Inflation
Inflation has not had a material effect on our operations except for some inflationary pressures on certain instructor salaries.instructional expenses and in instances where potential students have not wanted to incur additional debt or increased travel expense.
Results of Continuing Operations for the Three and NineSix Months Ended SeptemberJune 30, 20212022
The following table sets forth selected condensed consolidated statements of operations data as a percentage of revenues for each of the periods indicated:
| | | Three Months Ended Sept 30, | | | Nine Months Ended Sept 30, | |
| Three Months Ended June 30, |
| Six Months Ended June 30, | |
| | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2022 | | 2021 | | 2022 | | 2021 | |
| Revenue | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | | |
| Educational services and facilities | | 42.8 | % | | 43.5 | % | | 42.1 | % | | 42.9 | % | | 44.0 | % | | 41.9 | % | | 43.9 | % | | 41.7 | % |
| Selling, general and administrative | | | 50.8 | % | | | 51.7 | % | | | 51.8 | % | | | 55.4 | % | | 55.8 | % | | 53.8 | % | | 56.2 | % | | 52.3 | % |
| (Gain) loss on sale of assets | | | | -0.2 | % | | | 0.0 | % | | | -0.1 | % | | | 0.0 | % |
| Total costs and expenses | | | 93.6 | % | | | 95.2 | % | | | 93.9 | % | | | 98.3 | % | | | 99.5 | % | | | 95.7 | % | | | 100.0 | % | | | 94.0 | % |
| Operating income | | 6.4 | % | | 4.8 | % | | 6.1 | % | | 1.7 | % | | 0.5 | % | | 4.3 | % | | 0.0 | % | | 6.0 | % |
| Interest expense, net | | | -0.3 | % | | | -0.4 | % | | | -0.4 | % | | | -0.5 | % | | | 0.0 | % | | | -0.4 | % | | | 0.0 | % | | | -0.4 | % |
| Income before income taxes | | 6.1 | % | | 4.4 | % | | 5.8 | % | | 1.2 | % | |
| Provision for income taxes | | | 1.8 | % | | | 0.1 | % | | | 1.4 | % | | | 0.1 | % | |
| Net Income | | | 4.3 | % | | | 4.3 | % | | | 4.3 | % | | | 1.1 | % | |
| Income (loss) from operations before income taxes | | | 0.4 | % | | 3.9 | % | | 0.0 | % | | 5.6 | % |
| Provision (benefit) for income taxes | | | | 0.1 | % | | | 0.9 | % | | | -0.3 | % | | | 1.2 | % |
| Net income | | | | 0.3 | % | | | 3.0 | % | | | 0.3 | % | | | 4.4 | % |
Three Months Ended SeptemberJune 30, 20212022 Compared to Three Months Ended SeptemberJune 30, 20202021
Consolidated Results of Operations
Revenue. Revenue increased $10.3$1.6 million,, or 13.0%2.1% to $89.1$82.1 million for the three months ended SeptemberJune 30, 20212022 from $78.8$80.5 million in the prior year comparable period. The increase in revenue was the result of an 8.3% increase in average populationmainly driven by a higher beginning of period population of approximately 230 more students at the nine month start growth of 8.8%2022 than in 2021 in addition to a 4.3%1.2% increase in average revenue per student inpopulation over the current quarter.prior year comparable period.
For a general discussion of trends in our student enrollment, see “Seasonality and Outlook” below.
Educational services and facilities expense. Our educational services and facilities expense increased $3.9$2.4 million, or 11.3%7.2% to $38.1$36.1 million for the three months ended SeptemberJune 30, 20212022 from $34.2$33.7 million in the prior year comparable period. AdditionalIncreased costs were primarily concentrated in instruction expense, books and toolsinstructional expense and facilities expense.
Instructional increases were driven in part by inflationary pressures on instructor salaries increased mainly due to widespread instructor shortages incurrent market conditions and higher staffing levels, as a result of population growth and program expansion. In addition, toconsumables prices rose sharply driven by on-going inflation and supply-chain shortages.
Facility expenses increased as a larger student population, which also droveresult of approximately $0.8 million of additional books and tools expense. Facilitiesrent expense increased from the normalizationsale leaseback transaction relating to our Denver and Grand Prairie campuses consummated in the fourth quarter of housing expenses for students during the quarter.2021. Partially offsetting these costs were cost savings in utilities expense.
Educational services and facilities expense, as a percentage of revenue, decreased slightlyincreased to 42.8%44.0% from 43.5%41.9% for the three months ended SeptemberJune 30, 20212022 and 2020,2021, respectively.
Selling, general and administrative expense.Our selling, general and administrative expense increased $4.5$2.5 million, or 11.1%5.8% to $45.2$45.8 million for the three months ended SeptemberJune 30, 20212022 from $40.7$43.3 million in the prior year comparable period. The increase quarter over quarter was primarily driven primarily by incentive and stock based compensationadditional bad debt expense driven by a decrease in our historical repayment rates, an increase in medical expenses due to our improved financial performanceadditional claims and one-time expenses in addition to increased marketing investments.
Marketing investments increased as we continue to test, evaluate and adjust spending to optimize our results in an effort to increase both lead generation and brand awareness. The majorityconnection with growth initiatives of our marketing spend today is invested in digital channels driven primarily by search engine marketing which is focused on our core student demographics and the geographic areas surrounding our campuses. We have gradually, but steadily, expanded our presence in various paid social media channels as well as both digital display and video advertising. While we continue to maintain a presence in traditional media such as television and radio, we are now utilizing a mix of broadcast, cable and streaming media to effectively reach prospective students.approximately $0.2 million.
Selling, general and administrative expense, as a percentage of revenue, decreasedincreased to 50.8%55.8% from 51.7%53.8% for the three months ended SeptemberJune 30, 2022 and 2021, and 2020, respectively.
Gain on sale of asset. Gain on sale of assets was $0.2 million for the three months ended June 30, 2022 as a result of the sale of our Suffield, Connecticut property, which was previously a former campus. Net proceeds received from the sale were approximately $2.4 million resulting in a $0.2 million gain in the current year.
Net interest expense. Net interest expense remained essentially flat atdecreased by approximately $0.3 million, or 88.2% to less than $0.1 million for the three months ended SeptemberJune 30, 2021 and 2020, respectively.2022 from $0.3 million in the prior year comparable period. The decrease in expense was due to the payoff of all outstanding debt during the fourth quarter of prior year in connection with the sale leaseback transaction.
Income taxes. Our provision for income taxes was $1.6 million compared to approximately $0.1 million for the three months ended SeptemberJune 30, 2021 and 2020, respectively. The higher2022 compared to a provision for the third quarterincome taxes of 2021 compared to$0.7 million in the prior year comparable period. The decrease in income tax provision quarter over quarter was mainly due to the release of the valuation allowance as of December 31, 2020. The effective tax rate for the three months ending September 30, 2021 was 29.6%.reduced pre-tax income.
NineSix Months Ended SeptemberJune 30, 20212022 Compared to NineSix Months Ended SeptemberJune 30, 20202021
Consolidated Results of Operations
Revenue. Revenue increased $36.2$6.2 million,, or 17.1%3.9% to $247.5$164.7 million for the ninesix months ended SeptemberJune 30, 20212022 from $211.3$158.5 million in the prior year comparable period. The increase in revenue was the result of an 11.3%mainly due to a 2.8% increase in average student population driven by continued student start growth, up 8.8% in combination with starting the year witha higher beginning of period population of approximately 1,000740 more students at the start of 2022 than in the prior year comparable period. Further contributing to the increase was average revenue per student, up 5.2% and the normalization of our revenue stream driven by the return to in-person instruction at all of our campuses.
The prior year financial results reflect the unprecedented impact from the COVID-19 pandemic which started in March of 2020. As a result, certain financial and operational comparisons year over year may be distorted as a result of the impact of COVID-19.2021.
For a general discussion of trends in our student enrollment, see “Seasonality and Outlook” below.
Educational services and facilities expense. Our educational services and facilities expense increased $13.4$6.3 million, or 14.8%9.5% to $104.1$72.3 million for the ninesix months ended SeptemberJune 30, 20212022 from $90.7$66.0 million in the prior year comparable period. The higherIncreased costs were mainlyprimarily concentrated in instructional books and toolsexpense and facilities expenses. expense.
Instructional increases were driven in part by inflationary pressures on instructor salaries increased mainly due to widespread instructor shortages in addition to a larger student population, which also drove additional bookscurrent market conditions and tools expense. Further contributing to the increase was operating with a hybrid remote and in-person instruction in the current year compared to remote learning in the prior year. Additional facilities costs were driven by one-time rent reductions in the prior year coupled with overall facilities savings during campus closureshigher staffing levels as a result of COVID-19.population growth, program expansion and the return to normalized levels of in-person instruction post COVID-19 restrictions. In addition, consumables prices rose sharply driven by on-going inflation and supply-chain shortages.
Facility expenses increased as a result of approximately $1.6 million of additional rent expense from the sale leaseback transaction relating to our Denver and Grand Prairie campuses consummated in the fourth quarter of 2021 and higher maintenance costs.
Educational services and facilities expense, as a percentage of revenue, decreasedincreased to 42.1%43.9% from 42.9%41.7% for the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, respectively.
Selling, general and administrative expense.Our selling, general and administrative expense increased $11.2$9.6 million, or 9.5%11.5% to $128.2$92.5 million for the ninesix months ended SeptemberJune 30, 2022 from $82.9 million in the prior year comparable period. The increase was primarily driven by additional bad debt expense, an increase in medical expenses due to additional claims, $0.9 million of additional stock compensation expense and severance and one-time expenses in connection with growth initiatives of approximately $1.0 million.
Bad debt expense for the six months ended June 30, 2021 was lower than historical amounts due to an adjustment made in the first quarter of 2021 to qualifying student accounts receivables as permitted by the Higher Education Emergency Relieve Funds (“HEERF”). In accordance with the applicable guidance, the Company combined HEERF funding with Company funds to provide financial relief to students who dropped from $117.0school due to COVID-19 related circumstances with unpaid accounts receivable balances during the period from March 15, 2020 to March 31, 2021. The relief resulted in a net benefit to bad debt expense of approximately $3.0 million. Without this adjustment bad debt expense for the six months ended June 30, 2022 as a percentage of total revenue, would have been comparable to that reported in the prior year comparable period.
Selling, general and administrative expense, as a percentage of revenue, increased to 56.2% from 52.3% for the six months ended June 30, 2022 and 2021, respectively.
Gain on sale of asset. Gain on sale of assets increased to $0.2 million for the six months ended June 30, 2022 from less than $0.1 million in the prior year comparable period. The increase year over year was driven by several factors includingthe result of the sale of our Suffield, Connecticut property, which was previously a $3.1former campus. Net proceeds received from the sale were approximately $2.4 million increaseresulting in incentive and stock based compensation tied in part to a larger student population and improved financial performance, the normalization of operating expenses$0.2 million gain in the current year resulting from the return to in-person instruction at all of our campuses, an improved business climate as the country reopens and lastly, increased marketing investments year over year.
Marketing investments increased as we continue to test, evaluate and adjust spending to optimize our results in an effort to increase both lead generation and brand awareness. The majority of our marketing spend today is invested in digital channels driven primarily by search engine marketing which is focused on our core student demographics and the geographic areas surrounding our campuses. We have gradually, but steadily, expanded our presence in various paid social media channels as well as both digital display and video advertising. While we continue to maintain a presence in traditional media such as television and radio, we are now utilizing a mix of broadcast, cable and streaming media to effectively reach prospective students
Selling, general and administrative expense, as a percentage of revenue, decreased to 51.8% from 55.4% for the nine months ended September 30, 2021 and 2020, respectively.
Net interest expense. Net interest expense remained essentially flat at $0.9decreased by approximately $0.5 million, or 86.8% to less than $0.1 million for the ninesix months ended SeptemberJune 30, 2021 and 2020, respectively.2022 from $0.6 million in the prior year comparable period. The decrease in expense was due to the payoff of all outstanding debt during the fourth quarter of last year in connection with the sale leaseback transaction.
Income taxes. Our benefit for income taxes was $0.5 million for the six months ended June 30, 2022 compared to a provision for income taxes was $3.6of $2.0 million compared to $0.2 millionin the prior year comparable period. The benefit for the ninesix months ended SeptemberJune 30, 20212022 was due primarily to a pre-tax book loss and 2020, respectively. The highera discrete item relating to restricted stock vesting, while the provision forin the nine months ended September 30, 2021 compared to prior year was due primarily to the release of the valuation allowance as of December 31, 2020. The effective tax rate for the nine months ending September 30, 2021 was 25.0%.pre-tax income position.
Segment Results of Operations
We operate our business in two reportable segments: (a) the Transportation and Skilled Trades segment; and (b) the Healthcare and Other Professions (“HOPS”) segment. The Company also utilizes the Transitional segment solely when and if it closes a school. 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 are described below.
Transportation and Skilled Trades – The Transportation and Skilled Trades segment offers academic programs mainly in the career-oriented disciplines of transportation and skilled trades (e.g. automotive, diesel, HVAC, welding and manufacturing).
Healthcare and Other Professions – The Healthcare and Other Professions segment offers academic programs in the career-oriented disciplines of health sciences, hospitality and business and information technology (e.g. dental assistant, medical assistant, practical nursing, culinary arts and cosmetology).
The Company also utilizes the Transitional segment solely when and if it closes a school.
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 presents results for our two reportable segments for the three months ended SeptemberJune 30, 20212022 and 2020:2021:
| | | Three Months Ended September 30, | | | Three Months Ended June 30, | |
| | | 2021 | | | 2020 | | | % Change | | | 2022 | | 2021 | | % Change | |
| Revenue: | | | | | | | | | | | | | | | | |
| Transportation and Skilled Trades | | $ | 64,950 | | | $ | 56,828 | | | 14.3 | % | | $ | 57,973 | | | $ | 56,965 | | | | 1.8 | % |
| HOPS | | | 24,109 | | | | 21,964 | | | | 9.8 | % | |
| Healthcare and Other Professions | | | | 24,169 | | | | 23,499 | | | | 2.9 | % |
| Total | | $ | 89,059 | | | $ | 78,792 | | | | 13.0 | % | | $ | 82,142 | | | $ | 80,464 | | | | 2.1 | % |
| | | | | | | | | | | | | | | | | | | | | | |
| Operating Income (Loss): | | | | | | | | | | |
| Operating Income (loss): | | | | | | | | | | | | | |
| Transportation and Skilled Trades | | $ | 11,842 | | | $ | 9,138 | | | 29.6 | % | | $ | 7,094 | | | $ | 11,256 | | | | -37.0 | % |
| Healthcare and Other Professions | | 1,833 | | | 1,654 | | | 10.8 | % | | | 1,609 | | | | 2,962 | | | | -45.7 | % |
| Corporate | | | (7,930 | ) | | | (6,952 | ) | | | -14.1 | % | | | (8,307 | ) | | | (10,766 | ) | | | 22.8 | % |
| Total | | $ | 5,745 | | | $ | 3,840 | | | | 49.6 | % | | $ | 396 | | | $ | 3,452 | | | | -88.5 | % |
| | | | | | | | | | | | | | | | | | | | | | |
| Starts: | | | | | | | | | | | | | | | | | | | | | |
| Transportation and Skilled Trades | | 3,976 | | | 3,982 | | | -0.2 | % | | | 2,583 | | | | 2,509 | | | | 2.9 | % |
| Healthcare and Other Professions | | | 1,454 | | | | 1,528 | | | | -4.8 | % | | | 1,269 | | | | 1,194 | | | | 6.3 | % |
| Total | | | 5,430 | | | | 5,510 | | | | -1.5 | % | | | 3,852 | | | | 3,703 | | | | 4.0 | % |
| | | | | | | | | | | | | | | | | | | | | | |
| Average Population: | | | | | | | | | | | | | | | | | | | | | |
| Transportation and Skilled Trades | | 8,863 | | | 8,349 | | | 6.2 | % | | | 8,315 | | | | 8,039 | | | | 3.4 | % |
| Leave of Absence - COVID-19 | | | (9 | ) | | | (333 | ) | | | 97.3 | % | | | - | | | | (25 | ) | | | 100.0 | % |
| Transportation and Skilled Trades Excluding Leave of Absence - COVID-19 | | | 8,854 | | | | 8,016 | | | | 10.5 | % | | | 8,315 | | | | 8,014 | | | | 3.8 | % |
| | | | | | | | | | | | | | | | | | | | | | |
| Healthcare and Other Professions | | 4,326 | | | 4,286 | | | 0.9 | % | | | 4,322 | | | | 4,508 | | | | -4.1 | % |
| Leave of Absence - COVID-19 | | | (2 | ) | | | (137 | ) | | | 98.5 | % | | | - | | | | (40 | ) | | | 100.0 | % |
| Healthcare and Other Professions Excluding Leave of Absence - COVID-19 | | | 4,324 | | | | 4,149 | | | | 4.2 | % | | | 4,322 | | | | 4,468 | | | | -3.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | 13,189 | | | | 12,635 | | | | 4.4 | % | | | 12,637 | | | | 12,547 | | | | 0.7 | % |
| Total Excluding Leave of Absence - COVID-19 | | | 13,178 | | | | 12,165 | | | | 8.3 | % | | | 12,637 | | | | 12,482 | | | | 1.2 | % |
| | | | | | | | | | | | | | | | | | | | | | |
| End of Period Population: | | | | | | | | | | | | | | | | | | | | | |
| Transportation and Skilled Trades | | 9,473 | | | 8,811 | | | 7.5 | % | | | 8,765 | | | | 8,467 | | | | 3.5 | % |
| Leave of Absence - COVID-19 | | | - | | | | (67 | ) | | | 100.0 | % | | | - | | | | (7 | ) | | | 100.0 | % |
| Transportation and Skilled Trades Excluding Leave of Absence - COVID-19 | | | 9,473 | | | | 8,744 | | | | 8.3 | % | | | 8,765 | | | | 8,460 | | | | 3.6 | % |
| | | | | | | | | | | | | | | | | | | | | | |
| Healthcare and Other Professions | | 4,533 | | | 4,462 | | | 1.6 | % | | | 4,237 | | | | 4,410 | | | | -3.9 | % |
| Leave of Absence - COVID-19 | | | - | | | | (37 | ) | | | 100.0 | % | | | - | | | | (10 | ) | | | 100.0 | % |
| Healthcare and Other Professions Excluding Leave of Absence - COVID-19 | | | 4,533 | | | | 4,425 | | | | 2.4 | % | | | 4,237 | | | | 4,400 | | | | -3.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | 14,006 | | | | 13,273 | | | | 5.5 | % | | | 13,002 | | | | 12,877 | | | | 1.0 | % |
| Total Excluding Leave of Absence - COVID-19 | | | 14,006 | | | | 13,169 | | | | 6.4 | % | | | 13,002 | | | | 12,860 | | | | 1.1 | % |
Three Months Ended SeptemberJune 30, 20212022 Compared to the Three Months Ended SeptemberJune 30, 20202021
Transportation and Skilled Trades
Student starts remained essentially flat at approximately 4,000 for the three months ended September 30, 2021 and 2020, respectively.
Operating income increased $2.7 million to $11.8was $7.1 million for the three months ended SeptemberJune 30, 2021 from $9.12022 compared to $11.3 million in the prior year comparable period. The increasechange quarter over quarter was mainly driven by the following factors:
Revenue increased $8.1$1.0 million, or 14.3%1.8% to $64.9$58.0 million for the three months ended SeptemberJune 30, 20212022 from $56.8$57.0 million in the prior year comparable period. The increase in revenue was the result ofprimarily due to a 3.8% increase in average student population up 10.5%, driven by a 10.2% increase in student starts for the nine months in addition to a 3.5% increase in average revenue per studenthigher beginning of period population in the current quarter.quarter of approximately 350 students.
Educational services and facilities expense increased $2.9$1.6 million, or 12.1%6.8% to $26.8$24.3 million for the three months ended SeptemberJune 30, 20212022 from $23.9$22.7 million in the prior year comparable period. Increased costs were primarily concentrated in instructional expense and facilities expense. Instructional increases were primarily driven by salary increases mainly due to market adjustments and larger staffing levels as a result of population growth and program expansion. Facility expense increases were the result of approximately $0.8 million of additional rent expense from the sale leaseback transaction relating to our Denver and Grand Prairie campuses consummated in the fourth quarter of 2021. Partially offsetting the additional facility costs are reductions in depreciation expense.
Selling, general and administrative expense increased $3.6 million, or 15.7% to $26.6 million for the three months ended June 30, 2022 from $23.0 million in the prior year comparable period. The increase was primarily driven additional bad debt expense driven by additional instructional expense, booksa decrease in our historical repayment rates.
Healthcare and tools expense and facilities expense. Instructional increases were driven in part by inflationary pressures on instructor salaries due to widespread instructor shortages in addition to a larger student population, which also drove books and tools expense. Facilities expense increased from the normalization of housing expenses for students during the quarter.Other Professions
Selling, general and administrative expense increased $2.5 million, or 10.6% to $26.4Operating income was $1.6 million for the three months ended SeptemberJune 30, 2021 from $23.82022 compared to $2.9 million in the prior year comparable period. The increase in costs were the result of a larger student population in combination with additional investments in marketing initiatives during the quarter.
Healthcare and Other Professions
Student starts remained essentially flat at approximately 1,500 for the three month ended September 30, 2021 and 2020, respectively.
Operating income increased $0.1 million to $1.8 million for the three months ended September 30, 2021 from $1.7 million in the prior year comparable period. The increasechange quarter over quarter was mainly driven by the following factors:
Revenue increased $2.1by $0.7 million, or 9.8%2.9% to $24.1 million for the three months ended SeptemberJune 30, 20212022 from $22.0$23.4 million in the prior year comparable period. The increase in revenue was primarily the result of average student population, up 4.2%, driven by a 5.6% increase in student starts for the nine months in addition to a 5.3%6.3% increase in average revenue per student in the current quarter.student.
Educational services and facilities expense increased $0.9 million, or 9.2%7.8% to $11.3$11.8 million for the three months ended SeptemberJune 30, 20212022 from $10.411.0 million in the prior year comparable period. Increased costs were primarily concentrated in instructional expense and facilities expense. Additional instructional expenses were primarily driven by salary increases due to market adjustments and larger staffing levels. Facility expense increases were primarily due to additional spending for common area maintenance quarter over quarter.
Selling, general and administrative expenses increased $1.2 million, or 12.2% to $10.7 million for the three months ended June 30, 2022 from $9.5 million in the prior year comparable period. The increase was primarily driven by additional instructionalbad debt expense and books and tools expense Instructional increases were driven by a decrease in part by inflationary pressures on instructor salaries due to widespread instructor shortages, especially in the nursing field in addition to a larger student population, which also drove books and tools expense.our historical repayment rates.
Selling, general and administrative expense increased $1.0 million, or 10.2% to $10.9 million for the three months ended September 30, 2021 from $9.9 million in the prior year comparable period. Additional costs were the result of an increased student population in combination with a slight increase in bad debt.
Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses were $7.9$8.3 million and $6.9$10.8 million for each of the three months ended SeptemberJune 30, 20212022 and 2020,2021, respectively. The additionaldecrease in expense quarter over quarter was primarily due todriven by a reduction in incentive compensation and stock based compensation tieda gain resulting from the sale of our Suffield, Connecticut property, which was previously a former campus. Net proceeds received from the sale were approximately $2.4 million resulting in part to improved financial performance.a $0.2 million gain in the current quarter.
The following table presentpresents results for our two reportable segments for the ninesix months ended SeptemberJune 30, 20212022 and 2020:2021:
| | | Nine Months Ended September 30, | | | Six Months Ended June 30, | |
| | | 2021 | | | 2020 | | | % Change | | | 2022 | | 2021 | | % Change | |
| Revenue: | | | | | | | | | | | | | | | | |
| Transportation and Skilled Trades | | $ | 177,586 | | | $ | 148,799 | | | 19.3 | % | | $ | 116,758 | | $ | 112,636 | | 3.7 | % |
| HOPS | | | 69,934 | | | | 62,504 | | | | 11.9 | % | |
| Healthcare and Other Professions | | | | 47,939 | | | 45,825 | | | 4.6 | % |
| Total | | $ | 247,520 | | | $ | 211,303 | | | | 17.1 | % | | $ | 164,697 | | $ | 158,461 | | | 3.9 | % |
| | | | | | | | | | | | | | | | | |
| Operating Income (Loss): | | | | | | | | | | |
| Operating Income (loss): | | | | | | | | |
| Transportation and Skilled Trades | | $ | 35,423 | | | $ | 18,848 | | | 87.9 | % | | $ | 14,340 | | $ | 23,581 | | -39.2 | % |
| Healthcare and Other Professions | | 7,743 | | | 6,388 | | | 21.2 | % | | 2,916 | | 5,911 | | -50.7 | % |
| Corporate | | | (27,949 | ) | | | (21,581 | ) | | | -29.5 | % | | | (17,186 | ) | | | (20,020 | ) | | | 14.2 | % |
| Total | | $ | 15,217 | | | $ | 3,655 | | | | 316.3 | % | | $ | 70 | | $ | 9,472 | | | -99.3 | % |
| | | | | | | | | | | | | | | | | |
| Starts: | | | | | | | | | | | | | | | | |
| Transportation and Skilled Trades | | 8,824 | | | 8,004 | | | 10.2 | % | | 4,761 | | 4,848 | | -1.8 | % |
| Healthcare and Other Professions | | | 3,857 | | | | 3,651 | | | | 5.6 | % | | | 2,444 | | | 2,403 | | | 1.7 | % |
| Total | | | 12,681 | | | | 11,655 | | | | 8.8 | % | | | 7,205 | | | 7,251 | | | -0.6 | % |
| | | | | | | | | | | | | | | | | |
| Average Population: | | | | | | | | | | | | | | | | |
| Transportation and Skilled Trades | | 8,312 | | | 7,651 | | | 8.6 | % | | 8,417 | | 8,036 | | 4.7 | % |
| Leave of Absence - COVID-19 | | | (16 | ) | | | (260 | ) | | 93.8 | % | | | - | | | (20 | ) | | | 100.0 | % |
| Transportation and Skilled Trades Excluding Leave of Absence - COVID-19 | | | 8,296 | | | | 7,391 | | | | 12.2 | % | | | 8,417 | | | 8,016 | | | 5.0 | % |
| | | | | | | | | | | | | | | | | |
| Healthcare and Other Professions | | 4,414 | | | 4,176 | | | 5.7 | % | | 4,344 | | 4,459 | | -2.6 | % |
| Leave of Absence - COVID-19 | | | (44 | ) | | | (188 | ) | | 76.6 | % | | | - | | | (65 | ) | | | 100.0 | % |
| Healthcare and Other Professions Excluding Leave of Absence - COVID-19 | | | 4,370 | | | | 3,988 | | | | 9.6 | % | | | 4,344 | | | 4,394 | | | -1.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | 12,726 | | | | 11,827 | | | | 7.6 | % | | | 12,761 | | | 12,495 | | | 2.1 | % |
| Total Excluding Leave of Absence - COVID-19 | | | 12,666 | | | | 11,379 | | | | 11.3 | % | | | 12,761 | | | 12,410 | | | 2.8 | % |
| | | | | | | | | | | | | | | | | |
| End of Period Population: | | | | | | | | | | | | | | | | |
| Transportation and Skilled Trades | | 9,473 | | | 8,811 | | | 7.5 | % | | 8,765 | | 8,467 | | 3.5 | % |
| Leave of Absence - COVID-19 | | | - | | | | (67 | ) | | 100.0 | % | | | - | | | (7 | ) | | | 100.0 | % |
| Transportation and Skilled Trades Excluding Leave of Absence - COVID-19 | | | 9,473 | | | | 8,744 | | | | 8.3 | % | | | 8,765 | | | 8,460 | | | 3.6 | % |
| | | | | | | | | | | | | | | | | |
| Healthcare and Other Professions | | 4,533 | | | 4,462 | | | 1.6 | % | | 4,237 | | 4,410 | | -3.9 | % |
| Leave of Absence - COVID-19 | | | - | | | | (37 | ) | | 100.0 | % | | | - | | | (10 | ) | | | 100.0 | % |
| Healthcare and Other Professions Excluding Leave of Absence - COVID-19 | | | 4,533 | | | | 4,425 | | | | 2.4 | % | | | 4,237 | | | 4,400 | | | -3.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | 14,006 | | | | 13,273 | | | | 5.5 | % | | | 13,002 | | | 12,877 | | | 1.0 | % |
| Total Excluding Leave of Absence - COVID-19 | | | 14,006 | | | | 13,169 | | | | 6.4 | % | | | 13,002 | | | 12,860 | | | 1.1 | % |
Six Months Ended SeptemberJune 30, 20212022 Compared to the NineSix Months Ended SeptemberJune 30, 20202021
Transportation and Skilled Trades
Student starts increased 10.2%, to approximately 8,800 for the nine months ended September 30, 2021 from approximately 8,000 in the prior year comparable period.
Operating income increased $16.6 million to $35.4was $14.3 million for the ninesix months ended SeptemberJune 30, 2021 from $18.82022 compared to $23.6 million in the prior year comparable period. The increasechange year over year was mainly driven by the following factors:
| • | Revenue increased $28.8 million, or 19.3% to $177.6 million for the nine months ended September 30, 2021 from $148.8 million in the prior year comparable period. The increase in revenue was driven by several factors including average student population, up 12.2%, driven by a 10.2% increase in student starts, a 6.3% increase in average revenue per student and the normalization of our revenue stream with the return to in-person instruction at all of our campuses. |
Educational services and facilities expense increased $9.4$4.1 million, or 15.1%3.7% to $71.4$116.7 million for the ninesix months ended SeptemberJune 30, 20212022 from $62.0 million in the prior year comparable period. The higher costs were mainly concentrated in instructional, books and tools and facilities expenses. Instructional increases were driven in part by inflationary pressures on instructor salaries due to widespread instructor shortages in addition to a larger student population, which also drove books and tools expense. Additional facilities costs were driven by one-time rent reductions in the prior year coupled with overall facilities savings during campus closures as a result of COVID-19.
Selling, general and administrative expense increased $2.7 million, or 4.0% to $70.7 million for the nine months ended September 30, 2021 from $68.0$112.6 million in the prior year comparable period. The increase in costs were the result of several factors includingrevenue was primarily driven by a larger5.0% increase in average student population additional investmentsmainly driven by a higher beginning of period population in marketing initiatives during the quartercurrent year of approximately 730 students.
Educational services and the returnfacilities expense increased $4.2 million, or 9.4% to in-person instruction at all of our campuses.
Healthcare and Other Professions
Student starts increased 5.6%, to approximately 3,900$48.8 million for the ninesix months ended SeptemberJune 30, 20212022 from approximately 3,700$44.6 million in the prior year comparable period. Increased costs were primarily concentrated in instructional expense and facilities expense. Instructional increases were primarily driven by salary increases mainly due to market adjustments and larger staffing levels as a result of population growth, program expansion and the return to normalized levels of in-person instruction post COVID-19 restrictions. In addition, consumable costs increased year over year, driven by on-going inflation in addition to supply chain shortages. Facility expense increases were the result of approximately $1.6 million of additional rent expense from the sale leaseback transaction relating to our Denver and Grand Prairie campuses consummated in the fourth quarter of 2021. Partially offsetting the additional facility costs are reductions in depreciation expense.
Operating incomeSelling, general and administrative expense increased $1.4$9.2 million, or 20.6% to $7.7$53.6 million for the ninesix months ended SeptemberJune 30, 20212022 from $6.4$44.4 million in the prior year comparable period. The increase year over year was mainlyprimarily driven by the following factors:additional bad debt expense driven by a decrease in our historical repayment rates.
| • | Revenue increased $7.4 million, or 11.9% to $69.9 million for the nine months ended September 30, 2021 from $62.5 million in the prior year comparable period. The increase in revenue was driven by several factors including average student population, up 9.6%, driven by a 5.6% increase in student starts, a 2.1% increase in average revenue per student and the normalization of our revenue stream with the return to in-person instruction at all of our campuses.
|
Educational servicesHealthcare and facilities expense increased $4.0 million, or 14.0% to $32.7Other Professions
Operating income was $2.9 million for the ninesix months ended SeptemberJune 30, 2021 from $28.72022 compared to $5.9 million in the prior year comparable period. The higher costs were mainly concentrated in instructional, books and tools and facilities expenses. Instructional increases were driven in part by inflationary pressures on instructor salaries due to widespread instructor shortages, especially in the nursing field in addition to a larger student population, which also drove books and tools expense. Additional facilities costs werechange quarter over quarter was driven by one-time rent reductions in the prior year coupled with overall facilities savings during campus closures as a result of COVID-19. following factors:
Selling, general and administrative expense
Revenue increased $2.0$2.1 million, or 7.5%4.6% to $29.4$47.9 million for the ninesix months ended SeptemberJune 30, 20212022 from $27.4$45.8 million in the prior year comparable period. The increase in costsrevenue was primarily the result of several factors including a 5.8% increase in average revenue per student.
Educational services and facilities expense increased $2.1 million, or 9.7% to $23.5 million for the six months ended June 30, 2022 from $21.4 million in the prior year comparable period. Increased costs were primarily concentrated in instructional expense and facilities expense. Additional instructional expenses were primarily driven by salary increases mainly due to market adjustments and larger student population, additional investmentsstaffing levels in marketing initiatives during the quarter andaddition to the return to normalized levels of in-person instruction at all ofpost COVID-19 restrictions. Facility expense increases were primarily due to additional spending for common area maintenance year over year.
Selling, general and administrative expense increased $3.0 million, or 16.3% to 21.5 million for the six months ended June 30, 2022 from $18.5 million in the prior year comparable period. The increase was primarily driven by additional bad debt expense driven by a decrease in our campuses. historical repayment rates.
Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses were $27.9$17.2 million and $21.6$20.0 million for each of the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, respectively. The additional expenses quarterdecrease in expense year over quarter wereyear was primarily driven by several factors includinga reduction in incentive compensation and a gain resulting from the normalizationsale of operating expensesour Suffield, Connecticut property, which was previously a former campus. Net proceeds received from the sale were approximately $2.4 million resulting in a $0.2 million gain in the current year;year. Partially offsetting these cost savings is an improved business climate as the country begins to reopen and a $3.1 million increase in to incentivestock-based compensation and stock based compensation tied in part to improved financial performance.severance.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are for maintenance and expansion of our facilities and the development of new programs. Our principal sources of liquidity have been cash provided by operating activities and borrowings under our Credit Facility. The following chart summarizes the principal elements of our cash flow for each of the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, respectively:
| | | Nine Months Ended September 30, | | | Six Months Ended June 30, 2022 | |
| | | 2021 | | | 2020 | | | 2022 | | 2021 | |
| Net cash provided by operating activities | | $ | 17,750 | | | $ | 10,222 | | |
Net cash (used in) provided by operating activities | | | $ | (9,992 | ) | | $ | 1,067 | |
| Net cash used in investing activities | | (5,252 | ) | | (3,457 | ) | | (1,192 | ) | | (3,516 | ) |
| Net cash used in financing activities | | (3,374 | ) | | (17,816 | ) | | (5,138 | ) | | (2,570 | ) |
As of SeptemberJune 30, 2021,2022, the Company had a net cash balanceand cash equivalents of $31.3$67.0 million compared to a net cash balance of $20.8$83.3 million at December 31, 2020. 2021.
The decrease in cash position from year end was the result of several factors including the seasonality of our business, incentive compensation payments, share repurchases made under the share repurchase plan and a decrease in net cash balance is calculated as ourincome. Partially offsetting the decrease in cash and cash equivalents less both short and long-term portionwas $2.4 million in net proceeds received as a result of the credit agreement.sale of a former campus located in Suffield, Connecticut.
On May 24, 2022, the Company announced that its Board of Directors has authorized a share repurchase program of up to $30.0 million of the Company’s outstanding common stock. The increase in cash position from year-end can mainly be attributed to net income generated duringrepurchase program has been authorized for twelve months. As of June 30, 2022, the current year.
Company repurchased 414,963 shares at a cost of approximately $2.5 million.
Our primary source of cash is tuition collected from our students. The majority of students enrolled at our schools rely on funds received under various government-sponsored student financial aid programs to pay a substantial portion of their tuition and other education-related expenses. The most significant source of student financing is Title IV Programs, which represented approximately 77%75% of our cash receipts relating to revenues in 2020.2021. Pursuant to applicable regulations, students must apply for a new loan for each academic period. Federal regulations dictate the timing of disbursements of funds under Title IV Programs and loan funds are generally provided by lenders in two disbursements for each academic year. The first disbursement is usually received approximately 31 days after the start of a student’s academic year and the second disbursement is typically received at the beginning of the sixteenth week from the start of the student’s academic year. Certain types of grants and other funding are not subject to a 31-day delay. In certain instances, if a student withdraws from a program prior to a specified date, any paid but unearned tuition or prorated Title IV Program financial aid is refunded according to federal, state and accrediting agency standards.
As a result of the significant amount of Title IV Program funds received by our students, we are highly dependent on these funds to operate our business. Any reduction in the level of Title IV Program funds that our students are eligible to receive or any restriction on our eligibility to receive Title IV Program funds would have a significant impact on our operations and our financial condition. For more information, see Part I, Item 1A. “Risk Factors - Risks Related to Our Industry” inof our Form 10-K.
Operating Activities
Net cash used in operating activities was $10.0 million for the six months ended June 30, 2022 compared to cash provided by operating activities was $17.8of $1.1 million and $10.2 million for each ofin the nine months ended September 30, 2021 and 2020, respectively. Includedprior year comparable period. The cash used in cashor provided by operating activities is subject to changes in working capital, which at any point in time is subject to many variables including the nineseasonality of our business, timing of cash receipts and cash payments and vendor payments terms. For the six months ended SeptemberJune 30, 2020 was $11.5 million in federal funds received under the Cares Acts intended for reimbursement to students for expenses related to disruptions in campus operations as a direct result of the COVID-19 pandemic. Excluding these funds, we would have reported2022 net cash used in operating activities of $1.2 million. The increase of $19.0 million in cash provided by operating activities was primarily driven by changes in working capital in addition to a decrease in net income generated for the nine months ended September 30, 2021.earnings year over year.
Investing Activities
Net cash used in investing activities was $5.3$1.2 million for the ninesix months ended SeptemberJune 30, 20212022 compared to $3.5 million in the prior year comparable period. The decrease in net cash used was driven by an increase in liquidity resulting from $2.4 million in net proceeds received from the sale of our former campus located in Suffield, Connecticut executed during the second quarter of the current year.
One of our primary uses of cash in investing activities was capital expenditures associated with investments in training technology, classroom furniture, and new program buildouts.
We currently lease a majority of our campuses. We own our realcampus in Nashville, Tennessee, which currently is subject to a sale leaseback agreement (described elsewhere in this Form 10-Q) for the sale of the property in Grand Prairie, Texas; Nashville, Tennessee; and Denver, Colorado and our former school property located in Suffield, Connecticut.which is currently expected to be consummated within the next fifteen months.
Capital expenditures were 2% of revenues in 20202021 and are expected to approximate 2%3% of revenues in 2021.2022. We expect to fund future capital expenditures with cash generated from operating activities and borrowings under our credit facility.cash on hand.
Financing Activities
Net cash used in financing activities was $3.4$5.1 million for the ninesix months ended SeptemberJune 30, 20212022 compared to $17.8$2.6 million in the prior year comparable period. The decreaseincrease in net cash used of $14.4$2.5 million was primarily driven by the implementation of a decrease in net payments on borrowingsshare repurchase program during the second quarter of $15.0 million year over year, partially offset by an increase of $0.7 million in equity based compensation.the current year.
Credit Facility with Sterling National Bank
On November 14, 2019, the Company entered into a new senior secured credit agreement (the “Credit Agreement”) with its lender, Sterling National Bank (the “Lender”), providing for borrowing in the aggregate principal amount of up to $60 million (the “Credit Facility”).
The Initially, the Credit Facility iswas comprised of four facilities: (1) a $20 million senior secured term loan maturing on December 1, 2024 (the “Term Loan”), with monthly interest and principal payments based on 120-month amortization with the outstanding balance due on the maturity date; (2) a $10 million senior secured delayed draw term loan maturing on December 1, 2024 (the “Delayed Draw Term Loan”), with monthly interest payments for the first 18 months and thereafter monthly payments of interest and principal based on 120-month amortization and all balances due on the maturity date; (3) a $15 million senior secured committed revolving line of credit providing a sublimit of up to $10 million for standby letters of credit maturing on November 13, 2022 (the “Revolving Loan”), with monthly payments of interest only; and (4) a $15 million senior secured non-restoring line of credit maturing on January 31, 2021 (the “Line of Credit Loan”). The Credit Agreement gives the Company the right to permanently terminate, in its entirety, the Revolving Loan or the Line of Credit Loan or permanently reduce the amount available for borrowing under the Revolving Loan or the Line of Credit Loan. In April 2020, the Company terminated the Line of Credit Loan. On November 10, 2020, the Company entered into an amendment to its Credit Agreement to extend the Delayed Draw Availability Period by one year to May 31, 2022 and to increase the amount of permitted cash dividends that the Company can pay on its Series A Preferred Stock during the first twenty-four months of the Credit Agreement from $1.7 million to $2.3 million.
The Credit Facility is secured by a first priority lien in favor of the Lender on substantially all of the personal property owned by the Company, as well as a pledge of the stock and other equity in the Company’s subsidiaries and mortgages on parcels of real property owned by the Company in Colorado, Tennessee and Texas, at which three of the Company’s schools are located, as well as a former school property owned by the Company located in Connecticut.
At the closing of the Credit Facility, the Lender advanced the Term Loan to the Company, the net proceeds of which were $19.7 million after deduction of the Lender’s origination fee in the amount of $0.3 million and other Lender fees and reimbursements to the Lender that are customary for facilities of this type. The Company used the net proceeds of the Term Loan, together with cash on hand, to repay the existing credit facility and transaction expenses.
Pursuant to the terms of the Credit Agreement, letters of credit issued under the Revolving Loan reduce dollar for dollar the availability of borrowings under the Revolving Loan.
Accrued interest on each loan under the Credit Facility is payable monthly in arrears. The Term Loan and the Delayed Draw Term Loan bear interest at a floating interest rate based on the then one month London Interbank Offered Rate (“LIBOR”) plus 3.50%. At the closing of the Credit Facility, the Company entered into a swap transaction with the Lender for 100% of the principal balance of the Term Loan which maturesmaturing on the same date as the Term Loan. AtUnder the endterms of the borrowing availability period forCredit Facility accrued interest on each loan is payable monthly in arrears with the Term Loan and the Delayed Draw Term Loan the Company is required to enter intobearing interest at a swap transaction with the Lender for 100% of the principal balance of the Delayed Draw Term Loan, which will maturefloating interest rate based on the same date as the Delayed Draw Term Loan, pursuant to a swap agreement between the Companythen one-month London Interbank Offered Rate (“LIBOR”) plus 3.50% and the Lender or the Lender’s affiliate. The Term Loan and Delayed Draw Term Loan are subject to a LIBOR interest rate floor of .25%0.25% if there is no swap agreement.
Revolving Loans bear interest at a floating interest rate based on the then LIBOR plus an indicative spread determined by the Company’s leverage as defined in the Credit Agreement or, if the borrowing of a Revolving Loan is to be repaid within 30 days of such borrowing, the Revolving Loan will accrue interest at the Lender’s prime rate plus .50%0.50% with a floor of 4.0%. RevolvingLine of Credit Loans are subject towill bear interest at a LIBORfloating interest rate floorbased on the Lender’s prime rate of .00%.
interest. Letters of credit issued under the Revolving Loan reduce, on a dollar-for-dollar basis, the availability of borrowings under the Revolving Loan. Letters of credit are charged an annual fee equal to (i) an applicable margin determined by the leverage ratio of the Company less (ii) .25%0.25%, paid quarterly in arrears, in addition to the Lender’s customary fees for issuance, amendment and other standard fees. Letters of credit totaling $4 million that were outstandingBorrowings under the existing credit facilityLine of Credit Loan are treated as letters of credit under the Revolving Loan.
Under the terms of the Credit Agreement, the Company may prepay the Term Loan and/or the Delayed Draw Term Loan in full or in part without penalty except for any amount required to compensate the Lender for any swap breakage or other costs incurred in connection with such prepayment.secured by cash collateral. The Lender receives an unused facility fee of 0.50% per annum payable quarterly in arrears on the unused portions of the Revolving Loan and the Line of Credit Loan.
In addition to the foregoing, the Credit Agreement contains customary representations, warranties and affirmative and negative covenants (including financial covenants that (i) restrict capital expenditures, (ii) restrict leverage, (iii) require maintaining minimum tangible net worth, (iv) require maintaining a minimum fixed charge coverage ratio and (v) require the maintenance of a minimum of $5 million in quarterly average aggregate balances on deposit with the Lender, which, if not maintained, will result in the assessment of a quarterly fee of $12,500), as well as events of default customary for facilities of this type. As of September 30, 2021, the Company was in compliance with all debt covenants. The Credit Agreement also limited the payment of cash dividends during the first twenty-four months of the agreement to $1.7 million but an amendment to the Credit Agreement entered into on November 10, 2020 raised the cash dividend limit to $2.3 million in such twenty-four-month period.period to increase the amount of permitted cash dividends that the Company can pay on its Series A Preferred Stock.
As further discussed below, the Credit Facility was secured by a first priority lien in favor of the Lender on substantially all of the personal property owned by the Company, as well as a pledge of the stock and other equity in the Company’s subsidiaries and mortgages on parcels of real property owned by the Company in Colorado, Tennessee and Texas, at which three of the Company’s schools are located, as well as a former school property owned by the Company located in Connecticut.
On September 23, 2021, in connection with entering into the agreements relating to the sale leaseback transaction for the Company’s Denver, Grand Prairie and Nashville campuses (collectively, the “Property Transactions”), the Company and certain of its subsidiaries entered into a Consent and Waiver Letter Agreement (the “Consent Agreement”) to the Company’s existing Credit Agreement.Agreement with its lender. The Consent Agreement consents to certain real estate transactions with respectprovides the Lender’s consent to the Nashville, Denver and Grand Prairie campuses (collectively, the “Property Transactions”)Property Transactions and waives certain covenants in the Credit Agreement, subject to certain conditions specified therein.conditions. In addition, in connection with the consummation of the Property Transactions, the Lender has agreed to releasereleased its mortgages and other liens on the subject-properties. In connection withsubject-properties upon the Consent Agreement, at the closing of the Property Transactions, the Company is required to payCompany’s payment in full of the outstanding principal and accrued interest ofon the Term Loan and any swap obligations arising from any swap transaction entered intotransaction. Upon the consummation of the Property Transaction on October 29, 2021 the Company paid the Lender approximately $16.7 million in connection withrepayment of the Term Loan and the swap termination fee and no further borrowings may be made under the Term Loan or the Delayed Draw Term Loan. On October 29, 2021,Further, during the sale lease-backsecond quarter of the Denver and Grand Prairie campuses was consummated which provided2022, the Company withsold a property located in Suffield, Connecticut for net proceeds of approximately $28.5 million after deduction of transaction-related expenses of approximately $1.2 million and repayment$2.4 million. Prior to the consummation of the Company’s outstanding term loan and swap termination feetransaction, Lincoln obtained consent from the Lender to enter into the sale of approximately $16.8 million. The Company is exploring alternatives regarding a future credit facility.this property.
As of SeptemberJune 30, 20212022, and December 31, 2020,2021, the Company had $16.3 million and $17.8 million, respectively,zero debt outstanding under the Credit Facility offset by $0.5 millionfor both periods and $0.6 million of deferred finance fees, respectively.was in compliance with all debt covenants. As of SeptemberJune 30, 20212022, and December 31, 2020,2021, letters of credit in the aggregate outstanding principal amount of $4.0 million and $4.0 million, respectively, were outstanding under the Credit Facility.
On August 5, 2022, the Company entered into a third amendment to its Credit Agreement with its lender (the “Third Amendment”), in order to extend the maturity date of the revolving loan thereunder through November 14, 2023. The following table sets forth our long-term debt (in thousands):foregoing description of the Third Amendment is not complete and is qualified in its entirety by reference to the Third Amendment which is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.
| | | September 30, 2021 | | | December 31, 2020 | |
| Credit agreement | | $ | 16,333 | | | $ | 17,833 | |
| Deferred Financing Fees | | | (485 | ) | | | (621 | ) |
| | | | 15,848 | | | | 17,212 | |
| Less current maturities | | | (2,000 | ) | | | (2,000 | ) |
| | | $ | 13,848 | | | $ | 15,212 | |
Contractual Obligations
Current portion of Long-Term Debt, Long-Term Debt and Lease Commitments. As of SeptemberJune 30, 2021, our current portion of long-term2022, we have no debt and long-term debt consisted of borrowings under our Credit Facility.outstanding. We lease offices, educational facilities and various items of equipment for varying periods through the year 20312041 at basic annual rentals (excluding taxes, insurance, and other expenses under certain leases).
As of SeptemberJune 30, 2021,2022, we had outstanding loan principal commitments to our active students of $30.3$30.0 million. These are institutional loans and no cash is advanced to students. The full loan amount is not guaranteed unless the student completes the program. The institutional loans are considered commitments because the students are packaged to fund their education using these funds and they are not reported on our financials.financial statements.
Regulatory Updates
DOE and OIG Audit Findings. Our schools are subject to audits, program reviews, site visits, and other reviews by various federal and state regulatory agencies, including, but not limited to, the DOE, the DOE’s Office of Inspector General (“OIG”), state education agencies and other state regulators, the U.S. Department of Veterans Affairs and other federal agencies, and by our accrediting commissions. In addition, each of our institutions must retain an independent certified public accountant to conduct an annual audit of the institution’s administration of Title IV Program funds. The institution must submit the resulting audit report to the DOE for review. See our Form 10-K at “Business – Regulatory Environment – Compliance with Regulatory Standards and Effect of Regulatory Violations.” Some of the findings in the annual Title IV Program compliance audits for some of our institutions resulted in the DOE placing those institutions on provisional certification. See Form 10-K at “Business - Regulatory Environment – Regulation of Federal Student Financial Aid Programs.”
On October 5, 2021, our New Britain institution received a final audit determination letter from the DOE in connection with the Title IV compliance audit for the 2020 fiscal year. The letter contained 8 findings of alleged noncompliance with certain Title IV requirements. The letter noted that several of the findings were repeat findings that had appeared in prior audit reports. The total amount of questioned funds in the report totaled approximately $16,000, all of which had been repaid prior to the issuance of the final audit determination. The letter requires that the institution correct all of the deficiencies noted in the audit report and requires the auditor to comment in the 2021 fiscal year audit on the actions taken by the institution in response to the findings and required actions. The letter indicates that repeat findings in future audits or failure to satisfactorily resolve the findings of the audit could lead to an adverse action. The letter also notes that, due to the seriousness of one or more of the findings, the letter has been referred to a separate office within the DOE for consideration of possible adverse action. The letter states that an adverse action may include the imposition of a fine; the limitation, suspension, or termination of the institution’s Title IV eligibility; the revocation of the institution’s provisional program participation agreement; or the denial of a future application for renewal of the institution’s Title IV certification. The letter indicates that the DOE will notify the institution if the DOE initiates an adverse action and will notify the institution of its appeal rights and procedures on how to contest the action if any is taken. We are continuing to cooperate with the audit process and to respond to the DOE’s requests for information in connection with the audits.
Our other two institutions had findings of noncompliance in their respective Title IV compliance audits for the 2020 fiscal year. The DOE requested that, in connection with some of the findings in the audit reports, the institutions conduct a file review of all student files from the 2020 fiscal year in order to determine the extent of alleged noncompliance related to those findings. We are in the process of conducting those reviews, preparing our responses to the findings, and ultimately submitting them to the DOE. Once we have submitted our responses, the DOE will issue a final audit determination letter to each institution after it completes its review and consideration of our responses. We cannot predict whether some of the findings may be referred to a separate office within the DOE for consideration of a possible adverse action. We cannot predict the outcome of these audits, any action the DOE might initiate in response to the audit findings, or the outcome of any appeal that might result in response to a DOE action related to the findings. We are continuing to cooperate with the audit process and to respond to the DOE’s requests for information in connection with the audits.
On December 16, 2020, the OIG began an audit of our Indianapolis institution to ensure we used the funds provided under the Higher Education Emergency Relief Fund (“HEERF”) for allowable and intended purposes and to perform limited work on the institution’s cash management practices and HEERF reporting. We have been cooperating with the OIG during its audit of the institution.On September 24, 2021, the OIG issued a final audit report containing 3 findings of alleged non-compliance and 2 additional topics that were each classified as an “other matter.” The final report is inclusive of our response to the findings and other matters. The final audit report has been sent to the DOE for further consideration. We cannot predict the outcome of the audit, any liabilities or other actions the DOE might initiate in response to the audit findings, or the outcome of any appeal that might result in response to a DOE action related to the findings. We are continuing to cooperate with the ongoing audit process.
FTC and FSA Office of Enforcement.In recent years, Congress, the DOE, states, accrediting agencies, the Consumer Financial Protection Bureau (“CFPB”), the Federal Trade Commission (“FTC”), state attorneys general and the media have scrutinized the for-profit postsecondary education sector. Under the current leadership of the DOE, there is an increased likelihood of scrutiny of our institutions by federal agencies. See our Form 10-K at “Business – Regulatory Environment – Scrutiny of the For-Profit Postsecondary Education Sector.”
On October 6, 2021, the FTC issued an announcement regarding its plan to target false claims by for-profit colleges on topics such as promises about graduates’ job and earnings prospects and other outcomes, its intent to impose “significant financial penalties” on violators, and its intent to monitor the market carefully with federal and state partners. The FTC indicated in the announcement that it had put 70 for-profit higher education institutions on notice that the agency would be “cracking down” on any such false promises. All of our institutions were among the 70 institutions who received this notice. Although the FTC stated that a school’s presence on the list of 70 institutions does not reflect any assessment as to whether they have engaged in deceptive or unfair conduct, the FTC’s announcement and its issuance of notices to schools could lead to further scrutiny, investigations, and potential attempted enforcement actions by the FTC and other regulators against for-profit schools, including our schools.
On October 8, 2021, the DOE announced the establishment of an Office of Enforcement within the Federal Student Aid office that oversees institutions participating in the Title IV programs. The action restored an office that previously was established in 2016 but deprioritized during the prior presidential administration. The office will comprise four existing divisions including the Administrative Actions and Appeals Services Group (which among other things initiates adverse actions against institutions), the Borrower Defense Group (which analyzes borrower defense to repayment claims), the Investigations Group (which evaluates and investigations potential institutional noncompliance and collaborates with other federal and state regulators), and the Resolution and Referral Management Group (which tracks and resolves referrals, allegations and complaints about institutions and other parties that participate in the Title IV programs). The establishment of the Office of Enforcement could result in an increase in enforcement actions and other activities against for-profit schools and school companies, including us.
The ARPA and the “90/10 Rule.”In March 2021, the $1.9 trillion American Rescue Plan Act of 2021 (“ARPA”) was signed into law. Among other things, the ARPA provides $40 billion in relief funds that will go directly to colleges and universities with $395.8 million going to for-profit institutions. We have been allocated approximately $8 million in funds that must be used entirely for student financial aid grants. As of September 30, 2021, none of these funds have been drawn down. We expect to distribute a majority of the funds in the fourth quarter of 2021.
In addition, the ARPA also includes a provision that amends the 90/10 rule. A proprietary institution that derives more than 90% of its total revenue from Title IV Programs for two consecutive fiscal years becomes immediately ineligible to participate in Title IV Programs and may not reapply for eligibility until the end of at least two fiscal years. An institution with revenues exceeding 90% for a single fiscal year will be placed on provisional certification and may be subject to other enforcement measures. See our Form 10-K at “Regulatory Environment – The ‘90/10 Rule’” and “Risk Factors – Our institutions would lose eligibility to participate in Title IV Programs if the percentage of their revenues derived from those programs exceeds 90%, which could reduce our student population and revenues.” If Congress or the DOE were to amend the 90/10 Rule to treat other forms of federal financial aid as Title IV Program revenue for 90/10 Rule purposes, lower the 90% threshold, or otherwise change the calculation methodology, or make other changes to the 90/10 Rule, those changes could make it more difficult for our institutions to comply with the 90/10 Rule.
The ARPA amends the 90/10 rule by treating other “Federal funds that are disbursed or delivered to or on behalf of a student to be used to attend such institution” in the same way as Title IV funds are currently treated in the 90/10 rule calculation. This means that our institutions will be required to limit the combined amount of Title IV funds and applicable “Federal funds” revenue in a fiscal year to no more than 90% in a fiscal year as calculated under the rule. Consequently, the ARPA change to the 90/10 rule is expected to increase the 90/10 rule calculations at our institutions. The ARPA does not identify the specific Federal funding programs that will be covered by this provision, but it is expected to include funding from federal student aid programs such as the veterans’ benefits programs, which include the Post-9/11 GI Bill and Veterans Readiness and Employment services and from which we derived approximately 8% of our revenues on a cash basis in 2020. For the year ended December 31, 2020, approximately 77% (calculated based on cash receipts) of our revenues were derived from the Title IV Programs.
The ARPA states that the amendments to the 90/10 rule apply to institutional fiscal years beginning on or after January 1, 2023 and are subject to the HEA’s negotiated rulemaking process which may not commence earlier than October 1, 2021. Accordingly, the ARPA change to the 90/10 rule is not expected to apply to our 90/10 rule calculations until our 2023 fiscal year. Moreover, we cannot predict the additional changes to the 90/10 rule or other regulations that might occur as a result of negotiated rulemaking to be conducted during 2021 and 2022 as required by the ARPA. On October 4, 2021, the DOE published a notice in the Federal Register announcing its intention to establish a negotiated rulemaking committee to prepare proposed regulations affecting institutional and programmatic eligibility, including the 90/10 rule and the changes made by the ARPA. The DOE stated that it anticipated that the negotiations would begin no earlier than January 2022, that negotiations would occur during three sessions of five days each with approximately 4 weeks between sessions, and that the DOE would announce the topics and schedule of committee meetings in a subsequent Federal Register notice. We cannot predict the number and scope of regulations that the DOE may propose, but future regulations on 90/10 or other topics could have a materially adverse effect on us and other schools like ours.
We expect to make changes to our operations in order to address the future provisions in the 90/10 rule and in order to maintain the 90/10 percentages at our institutions below the 90% threshold as calculated under DOE regulations. However, we do not have significant control over the amount of Title IV funds that our students may receive and borrow. Our institutions’ 90/10 percentages can be increased by increases in Title IV aid availability (including, for example, increases in Pell Grant funds) and be decreased by decreases in the availability of state grant program funding and other sources of student aid that do not count as Title IV funds in the 90/10 calculation. Our institutions’ 90/10 percentages also will increase when the ARPA amendments to the 90/10 rule take effect to the extent that students eligible to receive military and veteran education assistance enroll and use their financial assistance at our institutions. We cannot be certain that the changes we make in the future will succeed in maintaining our institutions’ 90/10 percentages below required levels or that the changes will not materially impact our business operations, revenues, and operating costs.
If any of our institutions lose eligibility to participate in Title IV Programs, that loss would cause an event of default under our credit agreement, would also adversely affect our students’ access to various government-sponsored student financial aid programs, and would have a significant impact on the rate at which our students enroll in our programs and on our business and results of operations.
Borrower Defense to Repayment Regulations. RegulationsAs previously disclosed in our Form 10-K, the Company is subject to an extensive regulatory scheme which includes, without limitation, the Borrower Defense to Repayment regulations. .
On July 1, 2020, the DOE’s previously published final Borrower Defense to Repayment regulations became effective. Among other things, these new regulations amendamended the processes for borrowers to receive from the DOE a discharge of the obligation to repay certain Title IV Program loans first disbursed on or after July 1, 2020 based on certain acts or omissions by the institution or a covered party. The new and existing DOE regulations establish detailed procedures and standards for the loan discharge processes for periods prior to July 1, 2017, between July 1, 2017 and June 30, 2020, and on or after July 1, 2020, including the information required for borrowers to receive a loan discharge, and the authority of the DOE to seek recovery from the institution of the amount of discharged loans. The regulations also modify certain components of the financial responsibility regulations, including the list of triggering events that could result in the DOE determining that the institution lacks financial responsibility and must submit to the DOE a letter of credit or other form of acceptable financial protection and accept other conditions on the institution’s Title IV Program eligibility. See Form 10-K at Part I, Item 1. “Business - Regulatory Environment – Financial Responsibility Standards.” The final regulations also generally permit the use of arbitration clauses and class action waivers while requiring institutions to make certain disclosures to students.
The current and future rules could have a material adverse effect on our schools’ business and results of operations, and the broad sweep of the rules may, in the future, require our schools to submit a letter of credit based on expanded standards of financial responsibility. See our Form 10-K at “RegulatoryPart I, Item 1. “Business - Regulatory Environment – Borrower Defense to Repayment Regulations” and “Risk Factors – WeFinancial Responsibility Standards.” Moreover, Congress or the DOE could be subject to liabilities, letterenact or establish new laws or regulations that could restore prior versions of credit requirements, and other sanctions under the DOE’s Borrower Defense to Repayment Regulations.” The DOE is currently conducting a negotiated rulemaking process on a variety of topics, including borrower defense to repayment requirements or similar and potentially stricter requirements.
On July 13, 2022, the DOE published proposed regulations on borrower defense to repayment and other topics. The proposed regulations are subject to a notice and comment period during which the public may comment on the proposed regulations and the DOE may respond to such comments and ultimately publish final regulations. The proposed regulations regarding borrower defense to repayment and regarding closed school loan discharges are extensive and generally make it easier for borrowers to obtain discharges of student loans and for the DOE to assess liabilities and other sanctions on institutions based on the loan discharges.
Among other things, the proposed borrower defense to repayment regulations if adopted would establish a new process for evaluating borrower applications for loan discharges that would apply to all claims submitted or pending as of the anticipated July 1, 2023 effective date of the regulations. The proposed regulations would make it easier for borrowers to obtain loan discharges and for the DOE to recoup the costs of the discharges from the institutions. The new process would differ from the current regulations that establish a separate process for each of 3 categories of loans depending on the date the loans were disbursed to students (i.e., prior to July 1, 2017, between July 1, 2017 and June 30, 2020, and on or after July 1, 2020). As a result, the proposed new process would apply not just to loans disbursed on or after July 1, 2023, but also to older loans as long as the discharge requests are still pending as of July 1, 2023 or are submitted on or after July 1, 2023.
The proposed regulations expand the types of conduct that could result in a discharge of student loans including: 1) an expanded list of substantial misrepresentations, 2) a new section regarding substantial omissions of fact, 3) breaches of contract, 4) a new section regarding aggressive and deceptive recruitment, or 5) state or federal judgments or final DOE actions that could result in a borrower defense claim. Some of these forms of conduct also could result in other sanctions against the institutions. See Form 10-K at Part I, Item 1. “Business – Regulatory Environment – Substantial Misrepresentation.” The proposed regulations also make it easier for borrowers to qualify for loan discharges by establishing a presumption that borrowers reasonably relied on misrepresentations or omissions of fact, in some cases to establish a borrower defense to repayment claim based on a separate state law standard if the DOE does not approve their claims based on one of the other types of conduct, and it provides the DOE with the discretion to reopen its decisions at any time in accordance with regulatory requirements.
The DOE generally is required to publish final regulations by November 1 in order for the regulations to become effective on July 1 of the following year. We cannot predict the ultimate timing or content of the regulations that are anticipated to emerge from this process. The final regulations could result in new requirements that would make it easier for borrowers to obtain discharges of their loans and for the DOE to recover liabilities from institutions.institutions and impose other sanctions. The implementation of new borrower defense to repayment regulations by the DOE and the enforcement of the existing borrower defense to repayment regulations could have a material adverse effect on our business and results of operations. See “Negotiated Rulemaking” section below.Form 10-K at Part I, Item 1. “Business – Regulatory Environment – Negotiated Rulemaking.”
On April 29, 2021, the Company received communication from the DOE indicating that the DOE was in receipt of a number of borrower defense applications containing allegations concerning us and requiring the DOE to undertake a fact-finding process pursuant to DOE regulations. Among other things, the communication outlines a process by which the DOE willwould provide to us each application allowing the Companyapplications and allow us the opportunity to submit responses to the applications.them. Further, the communication outlines certain information requests, relating to the period between 2007 and 2013, in connection with the DOE’s preliminary review of the borrower defense applications. Based upon publicly available information, it appears that the DOE has undertaken similar reviews of other educational institutions which have also been the subject of various borrower defense applications. We subsequentlyhave received from the DOE one group of 175 borrower application claims in May 2021 and another group of 140 borrower application claims in July 2021. We have completed the process of thoroughly reviewing and responding to each borrower application sent to us by the DOE as well as providing information in response to the DOE’s information requests in the April 29, 2021 communication.requests.
Given the early stage of this matter, management is not able to predict the outcome of the DOE’s review at this time. If the DOE disagrees with our legal and factual grounds for contesting the applications, the DOE may impose liabilities on the Company based on the discharge of the loans at issue in the pending applications which could have a material adverse effect on our business and results of operations. If the proposed borrower defense to repayment regulations take effect on July 1, 2023 and if any or all of the borrower defense to repayment applications remain pending, the DOE could attempt to apply the new regulations to the pending applications which could increase the likelihood of the DOE granting the applications because the proposed regulations are more favorable to borrowers.
It is possible that we may receive from the DOE in the future borrower defense applications submitted by or on behalf of prior, current, or future Lincoln students and that the DOE could seek to recover liabilities from us for discharged loans.
If the DOE grants any pending or future borrower applications, the DOE regulations state that the DOE may initiate an appropriate proceeding to recover liabilities arising from the loans in the applications. If the DOE initiates such a proceeding, we would request reconsideration of the liabilities. We cannot predict the timing or amount of all borrower defense applications that borrowers may submit to the DOE or that the DOE may grant in the future, or the timing or amount of any possible liabilities that the DOE may seek to recover from the Company, if any.
On June 22, 2022, the DOE and plaintiffs in a lawsuit before a federal court in California submitted a proposed settlement agreement to the court. The plaintiffs contend, among other things, that the DOE has failed to timely decide and resolve borrower defense to repayment applications submitted to the DOE. If approved, the settlement would result in full discharge and refund payments to covered student borrowers who have asserted a borrower defense to repayment to the DOE and whose borrower defense claims have not yet been granted or denied on the merits.
The lawsuit is a class action against the DOE submitted by a group of students, none of whom attended any of our institutions. We were not a party to the lawsuit. The plaintiffs requested the court to compel the DOE to start approving or denying the pending applications. The court granted class certification and defined the class of plaintiffs generally to include all people who borrowed a Title IV Direct loan or FFEL loan, who have asserted a borrower defense to repayment claim to the DOE, and whose borrower defense claim has not been granted or denied on the merits. This includes an unidentified number of student borrowers who attended one of our institutions.
The proposed settlement agreement includes a long list of institutions including each of our institutions. The DOE would agree under the proposed settlement agreement to discharge loans and refund all prior loan payments to each class member with loan debt associated with an institution on the list (including our institutions), including borrowers whose applications the DOE previously denied after October 30, 2019. The DOE and the plaintiffs stated in a court filing that this provision is intended to provide for automatic relief for students at the listed schools which they estimate to total 200,000 class members. We anticipate that the DOE believes that the class includes the borrowers with claims to which we submitted responses to the DOE. The parties also stated that the DOE has determined that attendance at one of the institutions on the list justifies presumptive relief based on strong indicia regarding substantial misconduct by the institutions, whether credibly alleged or in some instances proven, and the high rate of class members with applications related to the listed schools. The proposed settlement agreement provides a separate process for reviewing claims associated with schools not on the list. It is unclear whether the DOE would seek to impose liabilities on us or other schools – or take other actions or impose other sanctions on us or other schools based on relief provided to students under the proposed settlement agreement (particularly if the DOE provides relief without evaluating or accounting for legal and factual information provided to the DOE by us and other schools).
On July 13, 2022, we and one other company submitted a motion to intervene in the lawsuit. Certain other school companies submitted separate motions to intervene in the lawsuit. We submitted the motion in order to protect our interests in the finalization and implementation of any settlement agreement the court might approve. We noted in the motion that the proposed settlement agreement introduced, for the first time, the prospect that the DOE would “automatically” and fully discharge loans and refund payments to student borrowers without adjudication of the merits of the students’ borrower-defense applications in accordance with the DOE’s borrower-defense regulations and without ensuring that we and other institutions can defend against allegations asserted in individual borrower-defense applications. In addition, we also asserted that it would be unlawful and inappropriate if the DOE sought recoupment against us based on loans that were forgiven under the proposed settlement agreement without providing us an opportunity to address the claims and accounting for our responses to the claims as we believe is required by the regulations. We also asserted that the lawsuit and the potential loan discharges could result in reputational harm to us and our institutions and could result in other actions against us by other federal and state agencies or by current and former students.
The court granted preliminary approval of the proposed settlement agreement on August 4, 2022, and also tentatively granted our motion for permissive intervention. The proposed settlement agreement is subject to further review by the court before final approval of the proposed settlement agreement. We likely will have an opportunity to file a brief opposing the final approval. The court has scheduled a final approval hearing for November 3, 2022, and we intend to participate in the hearing and present arguments. We cannot predict whether the court will provide final approval of the proposed settlement agreement or whether the DOE and plaintiffs will make amendments to the proposed settlement agreement. If the proposed settlement agreement as it is currently drafted receives final approval by the court, the DOE is expected to discharge all of the pending borrower defense applications concerning us without evaluating or accounting for any of the legal or factual grounds that we provided for contesting the applications that were provided to us. If the DOE discharges the loans and attempts to recoup from us the discharged loan amounts, we would consider options for challenging the legal and factual basis for attempting to recoup these liabilities. We cannot predict the timing or amount of all borrower defense applications that borrowers may submit to the DOE or that the DOE may grant in the future, or the timing or amount of any possible liabilities that the DOE may seek to recover from the Company, if any.
The “90/10 Rule.”
Under the Higher Education Act, a proprietary institution that derives more than 90% of its total revenue from Title IV Programs (its “90/10 Rule percentage”) for two consecutive fiscal years becomes immediately ineligible to participate in Title IV Programs and may not reapply for eligibility until the end of at least two fiscal years. See Form 10K at Part I, Item 1. “Business – Regulatory Environment – The 90/10 Rule.” An institution with revenues exceeding 90% for a single fiscal year will be placed on provisional certification and may be subject to other enforcement measures, including a potential requirement to submit a letter of credit. See Form 10K at Part I, Item 1. “Business - Regulatory Environment – Financial Responsibility Standards.” If an institution violated the 90/10 Rule and became ineligible to participate in Title IV Programs but continued to disburse Title IV Program funds, the DOE would require the institution to repay all Title IV Program funds received by the institution after the effective date of the loss of eligibility.
In March 2021, the American Rescue Plan Act of 2021 (“ARPA”) was signed into law. Among other provisions, the ARPA includes a provision that amends the 90/10 rule by treating other “Federal funds that are disbursed or delivered to or on behalf of a student to be used to attend such institution” in the same way as Title IV Program funds are currently treated in the 90/10 rule calculation. This means that our institutions will be required to limit the combined amount of Title IV Program funds and applicable “Federal funds” revenue in a fiscal year to no more than 90% as calculated under the rule. Consequently, the ARPA change to the 90/10 rule is expected to increase the 90/10 rule calculations at our institutions. The ARPA does not identify the specific Federal funding programs that will be covered by this provision, but it is expected to include funding from federal student aid programs such as the veterans’ benefits programs, which include the Post-9/11 GI Bill and Veterans Readiness and Employment services from which we derived approximately 7% of our revenues on a cash basis in 2021.
The ARPA states that the amendments to the 90/10 rule apply to institutional fiscal years beginning on or after January 1, 2023 and are subject to the HEA’s negotiated rulemaking process. Accordingly, the ARPA change to the 90/10 rule is not expected to apply to our 90/10 rule calculations until 2024 relating to our fiscal year ended 2023. Beginning in January 2022, the DOE convened negotiated rulemaking committee meetings on a variety of topics including the 90/10 rule. The committee reached consensus on proposed 90/10 rule regulations during meetings in March 2022.
On July 28, 2022, the DOE published proposed regulations regarding the 90/10 rule among other topics. See 10-Q at “Negotiated Rulemaking.” The proposed 90/10 rule regulations contain several new and amended provisions on a variety of topics including, among other things, confirming that the rules apply to fiscal years ending on or after January 1, 2023; noting that the DOE plans to identify the types of Federal funds to be included in the 90/10 rule in a notice in the Federal Register (which we anticipate will include a wide range of Federal student aid programs such as the veterans’ benefits programs); requiring institutions to disburse funds that students are eligible to receive for a fiscal year before the end of the fiscal year rather than delaying disbursements until a subsequent fiscal year; updating requirements for counting revenues generated from certain educational activities associated with institutional programs, from certain non-Title IV eligible educational programs, and from institutional aid programs such as institutional loans, scholarships, and income share agreements; updating technical rules for the 90/10 rule calculation; including rules for sanctions for noncompliance with the 90/10 rule and for required notifications to students and the DOE by the institution of noncompliance with the 90/10 rule.
The proposed regulations are subject to a notice and comment period before the DOE publishes final regulations after consideration of public comment. The comments are due by August 26, 2022. The DOE has stated that it intends to consider the comments and publish the final regulations in time for them to take effect on July 1, 2023. We cannot predict the ultimate timing and content of the final regulations, but the future regulations on 90/10 rule could have a material adverse effect on us and other schools like ours.
Negotiated Rulemaking. Rulemaking.
The DOE periodically issues new regulations and guidance that can have an adverse effect on ourinstitutions. See our Form 10-K at “Regulatory Environment – Negotiated Rulemaking” and “Risk Factors - The DOE has changed its regulations, and may make other changes in the future, in a manner which could require us to incur additional costs in connection with our administration of the Title IV Programs, affect our ability to remain eligible to participate in the Title IV Programs, impose restrictions on our participation in the Title IV Programs, affect the rate at which students enroll in our programs, or otherwise have a significant impact on our business and results of operations.” We cannot predict the timing and content of any new regulations or guidance that the DOE may seek to impose or whether and to what extent the DOE under the new administration may issue new regulations and guidance that could adversely impact for-profit schools including our institutions. For example, the ARPA will require theSee Form 10-K, at Part I, Item 1. at “Business – Regulatory Environment – Negotiated Rulemaking.” The DOE to initiate a process to amend its regulations regarding the 90/10 Rule. On October 4, 2021, the DOE published a notice in the Federal Register announcing its intention to establish ainitiated two additional negotiated rulemaking committee to prepareprocesses in 2021 and 2022, respectively. The first of the two negotiated rulemaking sessions took place during the last quarter of 2021 and resulted in proposed regulations affecting institutionalpublished on July 13, 2022. See Form 10-K, at Part I, Item 1. “Business – Regulatory Environment - Borrower Defense to Repayment Regulations.”
The second of the two negotiated rulemaking sessions began in January 2022 and programmatic eligibility, includingfinished during March 2022. The topics included the 90/10 rule, and the changes made by the ARPA. See “The ARPA and the ‘90/10 Rule.’”
In addition, inMay 2021, the DOE announced its intention to establish negotiated rulemaking committees to prepare proposed regulations on an extensive range of topics including without limitation changes of ownership and change in control of institutions of higher education, certification procedures for participation in the Title IV Programs, standards ofgainful employment, administrative capability ability to benefit standards, borrower defense to repayment, discharges for borrowers with a total and permanent disability, closed school loan discharges, discharges for false certification of student eligibility, loan repayment plans, the public service loan forgiveness program, mandatory pre-dispute arbitration and prohibition of class action lawsuits provisions in institutional enrollment agreements, financial responsibility standards, including events that indicate heightened financial risk, gainful employment,eligibility certification procedures, changes in ownership, and Pell Grant eligibility for prison education programs.ability to benefit. The DOE also could consider additional topics for proposed regulations during the negotiated rulemaking process. The negotiated rulemaking process could lead to future DOE regulations that could adversely impact for-profit schools including our institutions.
The negotiated rulemaking sessions began on October 4, 2021. The topics have included total and permanent disability discharges, closed school discharges, public student loan forgiveness, borrower defense to repayment, pre-dispute arbitration and class action waivers, income driven repayment, interest capitalization, false certification discharges, and prison exchange programs and could include other issues that the DOE might add to the agenda. The remaining sessions are scheduled to occur periodically through mid-December 2021. The DOE iswas expected to publish proposed regulations on each of these topics in the Federal Register for public comment during 2022. On June 22, 2022, the Office of Management and Budget (OMB) published a 2022 Spring Agenda with regulatory updates that indicated that specific Notices of Proposed Rulemaking (NPRMs) will be delayed until April 2023 for the following topics: gainful employment, administrative capability standards, financial responsibility standards, eligibility certification procedures, and ability to benefit. If the DOE does not publish proposed regulations until April 2023, the earliest general effective date for the final versions of regulations on these topics would be July 1, 2024. We cannot predict the ultimate timing and content of any final regulations on these topics.
The regulatory updates published by the OMB indicate that proposed regulations regarding 90/10 and changes in ownership are expected to be published in 2022. See Form 10-K, at Part I, Item 1. “Business – Regulatory Environment – The 90/10 Rule” and at Form 10K, at Part I, Item 1. “Business – Regulatory Environment – Change of Control.” The proposed regulations would be subject to a notice and comment period afterbefore the conclusion ofDOE publishes the negotiated rulemaking sessions.regulations in final. If the final regulations are published by or before November 1, 2022, then the regulations typically would not take effect until July 1, 2023. The new regulations that the DOE ultimately will publish and implement are expected to impose a broad range of additional requirements on institutions and especially on for-profit institutions like our schools. In turn, the new regulations are likely to increase the possibility that our schools could be subject to additional reporting requirements, to potential liabilities and sanctions such as letter of credit amounts, and to potential loss of Title IV eligibility if our efforts to modify our operations to comply with the new regulations are unsuccessful. However, we cannot predict the ultimate timing and content of any final regulations following the conclusion of the rulemaking process.
We also cannot predict with certainty the ultimate combined impact of the regulatory changes which have occurred in recent years and that may occur as a result of the upcoming negotiatedongoing rulemaking process, nor can we predict the effect of future legislative or regulatory action by federal, state or other agencies regulating our education programs or other aspects of our operations, how any resulting regulations will be interpreted or whether we and our institutions will be able to comply with these requirements in the future. Any such actions by legislative or regulatory bodies that affect our programs and operations could have a material adverse effect on our student population and our institutions, including the need to cease offering a number of programs.
Closed School Loan Discharges. 36The DOE may grant closed school loan discharges
Compliance with Regulatory Standards and Effect of Federal student loans based uponRegulatory Violationsapplications.
Our schools are subject to audits, program reviews, site visits, and other reviews by qualified students. The DOE also may initiate discharges on its own for students who havevarious federal and state regulatory agencies, including, but not reenrolled in another Title IV Program eligible school within three years after the closure and who attended campuses that closed on or after November 1, 2013, as did some of our former campuses. Iflimited to, the DOE, discharges somethe DOE’s Office of Inspector General (“OIG”), state education agencies and other state regulators, the U.S. Department of Veterans Affairs and other federal agencies (such as, for example, the Federal Trade Commission or allthe Consumer Financial Protection Board ), and by our accrediting commissions. See Form 10-K, at Part I, Item1. “Business – Regulatory Environment - Compliance with Regulatory Standards and Effect of these loans, the DOE may seek to recover the costRegulatory Violations” and at Form 10K, at Part I, Item 1. “Business – Regulatory Environment - Scrutiny of the loan discharges from us. The DOE is currently conducting a negotiated rulemaking process on a variety of topics, including closed school loan discharges, which could result in regulations that would make it easier for borrowers to obtain discharges of their loans and for the DOE to recover liabilities from institutions. See “Negotiated Rulemaking” section above.For-Profit Postsecondary Education Sector.”
We haveIn 2021, our New Britain, Iselin and Indianapolis institutions received five separatefinal audit determination letters from the DOE since September 3, 2020, asserting liabilities for closed school loan discharges in connection with the closureTitle IV Program compliance audits conducted for the 2020 fiscal year. The letters contain findings of somealleged noncompliance with certain Title IV Program requirements for each institution. The total amount of questioned funds in the reports were immaterial and had been repaid prior to the issuance of the final audit determination letters. In addition to the payment of the questioned amounts, the letters require the institutions to correct all of the deficiencies noted in the audit reports and require the auditor to comment in the 2021 fiscal year audit on the actions taken by the institutions in response to the findings and required actions. The letters indicate that repeat findings in future audits or failure to satisfactorily resolve the findings of the audit could lead to an adverse action. Each letter also notes that, due to the seriousness of one or more of the findings, the letter has been referred to a separate office within the DOE for consideration of possible adverse action including the possible imposition of a fine; the limitation, suspension, or termination of the institution’s Title IV Program eligibility; the revocation of the institution’s provisional program participation agreement; or the denial of a future application for renewal of the institution’s Title IV Program certification. Each letter indicates that the DOE will notify the institution if the DOE initiates an adverse action and will notify the institution of its appeal rights and procedures on how to contest the action if any is taken. We are continuing to cooperate with the audit process and to respond to the DOE’s requests for information in connection with the audits.
On December 16, 2020, the OIG began an audit of our campuses.Indianapolis institution to ensure that we used the funds provided under the Higher Education Emergency Relief Fund (“HEERF”) for allowable and intended purposes and to perform limited work on the institution’s cash management practices and HEERF reporting. We cooperated with the OIG during its audit of the institution. In September 2021, the OIG issued a final audit report containing 3 findings of alleged non-compliance and 2 additional topics that were each classified as an “other matter.” The total liability paidfinal report was inclusive of our response to the findings and other matters. The final audit report was sent to the DOE since Septemberfor further consideration. On May 3, 2020, has been approximately $345,000. We previously operated four other campuses that closed2022, the DOE issued a determination letter in connection with the 3 findings in the pastOIG final audit report. The DOE accepted our responses to each of the three findings and that could be subject to closed school loan dischargesindicated in the future, including automatic closedletter that it considers each of the findings resolved and did not contain any further discussion of the 2 additional topics that were each classified as an “other matter.” The DOE is not seeking recovery of funds in connection with any of the 3 findings and did not impose any liabilities or other sanctions in the May 3, 2022 determination letter.
On June 22, 2022, each of our three institutions received a separate letter from the DOE in connection with findings contained in our fiscal year 2020 compliance audit in connection with funds provided under HEERF. The DOE letters addressed two findings in the audits for our Iselin and New Britain institutions and three findings for our New Britain institution. Each DOE letter acknowledged our responses to the findings and deemed the findings to be resolved and closed. The DOE letters did not impose any liabilities or other sanctions.
School Acquisitions.
When a company acquires a school loan discharges that could be grantedis eligible to participate in Title IV Programs, that school undergoes a change of ownership resulting in a change of control as defined by the DOE. Upon such a change of control, a school’s eligibility to participate in Title IV Programs is generally suspended until it has applied for recertification by the DOE as an eligible school under its new ownership, which requires that the school also re-establish its state authorization and accreditation. See Form 10-K at Part I, Item 1. “Business – Regulatory Environment – School Acquisitions.” Thus, any plans to expand our business through acquisition of additional schools and have them certified by the DOE to participate in Title IV Programs must take into account the approval requirements of the DOE and the relevant state education agencies and accrediting commissions. On July 28, 2022, the DOE published proposed regulations on topics including changes in ownership that, among other things, may expand the requirements applicable to school acquisitions in ways that could make it more difficult to acquire additional schools. The DOE has stated that it intends to publish final regulations following a notice and comment period in time for the final regulations to take effect on July 1, 2023. We cannot predict any additional loan dischargesthe ultimate timing and content of new regulations that the DOE may approvepublish and implement. See “Negotiated Rulemaking.”
Change of Control.
In addition to school acquisitions, other types of transactions can also cause a change of control. The DOE, most state education agencies and our accrediting commissions have standards pertaining to the change of control of schools, but these standards are not uniform. See Form 10-K at Part 1, Item 1. “Business – Regulatory Environment – Change of Control.” A change of control could occur as a result of future transactions in which the Company or our schools are involved. Some corporate reorganizations and some changes in the liabilitiesboard of directors of the Company are examples of such transactions. Moreover, the potential adverse effects of a change of control could influence future decisions by us and our shareholders regarding the sale, purchase, transfer, issuance or redemption of our stock. In addition, the adverse regulatory effect of a change of control also could discourage bids for shares of our common stock and could have an adverse effect on the market price of our shares. On July 28, 2022, the DOE published proposed regulations on topics including regulations associated with the ownership and control of Title IV participating schools in ways that could further influence future decisions by us or by current or prospective shareholders regarding the sale, purchase, transfer, issuance or redemption of our stock, or that could impact our ability or willingness to make certain organizational changes. The DOE has stated that it intends to publish final regulations following a notice and comment period in time for the final regulations to take effect on July 1, 2023. We cannot predict the ultimate timing and content of new regulations that the DOE may seek from us for these campuses or other campuses that have closed in the past.publish and implement. See “Negotiated Rulemaking.”
Financial Responsibility Standards. As previously disclosed (see our Form 10-K at “Financial Responsibility Standards”), the DOE indicated in a January 13, 2020 letter its determination that our institutions were “in the zone” based on our composite score for the 2018 fiscal year and that we are required to operate under the Zone Alternative requirements, including the requirement to make disbursements under the Heightened Cash Monitoring 1 Payment Method (HCM1) payment method and to notify the DOE within 10 days of the occurrence of certain oversight and financial events. We also were required to submit to the DOE bi-weekly cash balance submissions outlining our available cash on hand, monthly actual and projected cash flow statements, and monthly student rosters. Subsequently, on February 16, 2021, we received a letter from the DOE confirming our composite score of 1.5 for fiscal year 2019 as well as removing us from the Zone Alternative requirements but indicating that we would remain on HCM1 until we met certain requirements outlined by the DOE in its letter. On August 26, 2021, the DOE sent us correspondence stating that our three institutions had performed all of the requirements of the February 16, 2021, letter and notifying us that the DOE had returned our institutions to advance pay on August 19, 2021.
Accreditation. Accreditation by an accrediting agency recognized by the DOE is required for an institution to be certified to participate in the Title IV Programs. All of our institutions are accredited by ACCSC, which is a DOE-recognized accrediting agency. See our Form 10-K at “Regulation – Accreditation.” Accrediting agencies are required to apply to the DOE on a periodic basis for continued recognition by the DOE. ACCSC is in the process of applying for continued recognition by the DOE.
On October 28, 2021, the DOE announced that it had notified ACCSC that a decision on its recognition by the DOE was deferred pending the submission of additional information about ACCSC’s monitoring, evaluation, and actions related to high-risk institutions. ACCSC reportedly will receive a period until January 10, 2022, to provide a written response to the DOE. DOE staff reportedly will receive a period of up to 75 days after receipt of the written response to the DOE to provide a written response. A designated senior DOE official is expected to make a decision regarding the continued recognition of ACCSC after the receipt and review of the responses. The DOE regulations indicate that ACCSC may appeal an adverse decision to the DOE Secretary and potentially to federal court.
If the DOE withdraws the recognition of an accrediting agency, the HEA indicates that the DOE may continue the eligibility of qualified institutions accredited by the accrediting agency for a period of up to 18 months from the date of the withdrawal of the DOE’s recognition of the accrediting agency. If provided, this period would provide time for institutions to apply for accreditation from another DOE-recognized accrediting body. The DOE could impose provisional certification and other conditions and restrictions on such institutions during this time period. If the DOE declines to continue its recognition of ACCSC and if the subsequent period for obtaining accreditation from another DOE-recognized accrediting agency lapses before we obtain accreditation from another DOE-recognize accrediting agency (or if the DOE does not provide such a period for institutions to obtain other accreditation), our schools could lose our Title IV eligibility.
We cannot predict the timing and outcome of the DOE’s decision on the continuation of its recognition of ACCSC, the timing and outcome of any appeal that ACCSC might pursue in the event of an adverse decision, or the duration and conditions of any period the DOE may elect to provide to institutions to obtain accreditation from another DOE-recognized accrediting agency.
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 in any given year and the related impact on revenue. Our expenses, however, typically do not vary significantly over the course of the year with changes in our student population and revenue.
| Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required by this item.
| Item 4. | CONTROLS AND PROCEDURES |
(a) Evaluation of disclosure controlsDisclosure Controls and procedures.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 SEC’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.
As a result of the COVID-19 pandemic, certain employees of the Company began working remotely in March 2020 but these changes to the working environment did not have a material effect on the Company’s internal control over financial reporting. There was no other change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. | PART II. OTHER INFORMATION |
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. Information regarding
In December 2021, we received a letter from the Consumer Financial Protection Bureau (“CFPB”) stating that the CFPB is assessing whether we are subject to CFPB’s supervisory authority based on our activities related to certain specific legal proceedingsextensions of credit to our students and requesting certain information. The letter states that the CFPB has the authority to supervise certain entities in which the Company is involved is contained in Part I, Item 3,private education loan market and in Note 15certain other consumer financial products and services. We have provided the requested information to the notesCFPB and are waiting for the CFPB to the Condensed Consolidated Financial Statements included in the Company’s Form 10-K. Unless otherwise indicated in this report, all proceedings discussed in the earlier report which are not indicated herein or therein as having been concluded, remain outstanding as of September 30, 2021.respond.
FollowingOn June 7, 2022, the Massachusetts Office of the Attorney General (“AGO”) issued a wavecivil investigative demand (“CID”) to Lincoln Technical Institute in Somerville, Massachusetts. The CID states that it is intended to investigate possible unfair or deceptive methods, acts, or practices in violation of hundreds of class action lawsuits being served upon collegesstate law and universities acrossthat it relates to allegations that the countryinstitution violated law by studentsengaging in unfair or deceptive practices in connection with transitioning from in-persontheir policies regarding fee refunds and associated disclosures to online classes due to COVID-19, a class action lawsuit was filed againststudents and prospective students. The CID has requested that the Company in New Jersey Federal District Court and served on December 21, 2020. Like most of the other lawsuits across the country, the suit alleges breach of contract, unjust enrichment and conversion. In lieu of an answer, on January 25, 2021 the Company filed a Motion to Dismiss Plaintiff’s Complaint for Failure to State a Claim. On July 9, 2021 the court granted the Company’s Motion to dismiss the breach of contract, unjust enrichment claims for tuition and registration fees and conversion claims in their entireties. The only claim remaining is for student and technology fees, where the judge stated it was premature to dismiss those claims. On July 23, 2021, the Company submitted its Motion for Reconsideration asinstitution provide to the remaining claimAGO a list of documentation generally from the period from January 1, 2020 to the present. We have provided documents requested by the CID and awaits a ruling in this regard. On November 3, 2021, thisare cooperating with the court granted the Company’s Motion to dismiss the lawsuit in its entirety.investigation.
The Company has no changes to the Risk Factors disclosed in our Form 10-K.
| Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
| (c) | Issuer Purchases of Equity Securities. |
On May 24, 2022, the Company announced that the Board of Directors had approved a share repurchase program for twelve months authorizing purchases of up to $30.0 million. The following table presents the number and average price of shares purchased during the three months ended June 30, 2022. The remaining authorized amount for share repurchases under the program is approximately $27.5 million.
| Period | | Total Number of Shares Purchased | | | Average Price Paid per Share | | | Total Number of Shares Purchased as Part of Publically Announced Plan | | | Maximum Dollar Value of Shares Remaining to be Purchased Under the Plan | |
| April 1, 2022 to April 30, 2022 | | | - | | | $ | - | | | | - | | | $ | - | |
| May 1, 2022 to May 31, 2022 | | | 106,170 | | | | 6.04 | | | | 106,170 | | | | 29,358,786 | |
| June 1, 2022 to June 30, 2022 | | | 308,793 | | | | 6.14 | | | | 308,793 | | | | 27,461,655 | |
| Total | | | 414,963 | | | | 6.12 | | | | 414,963 | | | | | |
For more information on the share repurchase plan, see Note 7 to our condensed consolidated financial statements.
| Item 3. | DEFAULTS ON SENIOR SECURITIES |
None.
| Item 4. | MINE SAFETY DISCLOSURES |
None.
Director RetirementOn August 5, 2022, the Company entered into a third amendment to its Credit Agreement with Webster Bank, National Bank (the “Third Amendment”), in order to extend the maturity date of the revolving loan thereunder through November 14, 2023. The foregoing description of the Third Amendment is not complete and is qualified in its entirety by reference to the Third Amendment which is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.
On November 4, 2021, Celia H. Currin, one of the long-standing members of the Company’s Board of Directors advised of her intention to step down from the Board effective on November 4, 2021. Concurrently, Ms. Currin will relinquish her positions as chair of the Company’s Nominating and Corporate Governance Committee (the “Governance Committee”) and member of the Company’s Audit Committee. Ms. Currin’s decision to retire and resign from the Board was not the result of any disagreement with the Company on any matter relating to its operations, policies or practices. The Board and management of the Company sincerely thank Ms. Currin for her dedicated service over the past twenty plus years.
39
Committee Changes
Following the acceptance of Ms. Currin’s resignation from the Board and in response thereto, the Board made certain changes to committee composition by appointing John A. Bartholdson as chair of the Governance Committee, Felecia Pryor as member of the Governance Committee and appointing both Michael Plater and Carlton Rose as members of the Audit Committee.
Exhibit Number | |
Description |
| | | |
| 3.1 | | Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to the Company’s Registration Statement on Form S-1/A (Registration No. 333-123644) filed June 7, 2005. |
| | | |
| 3.2 | | Certificate of Amendment, dated November 14, 2019, to the Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-3 filed October 6, 2020). |
| | | |
| 3.3 | | Bylaws of the Company as amended on March 8, 2019 (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed June 28 2005)April 30, 2020). |
| | | |
10.1 | | Contract forSecond Amendment to the Purchase of Real Estate,Credit Agreement dated as of September 24, 2021, byMay 23, 2022 among Lincoln Educational Services Corporation and between Nashville Acquisition, LLCits subsidiaries named therein and SLC Development, LLCWebster Bank, National Bank (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed September 28, 2021)May 24, 2022).
|
| | | |
10.2
10.2* | | Agreement for Purchase and Sale of Property, dated as of September 24, 2021 by and between Lincoln Technical Institute, Inc. and LNT Denver (Multi) LLC (incorporated by referenceThird Amendment to Exhibit 10.2 of the Company’s Form 8-K filed September 28, 2021).
|
| | |
10.3
| | Consent and Waiver LetterCredit Agreement dated as of September 23, 2021, by andAugust 5, 2022 among Lincoln Educational Services Corporation and certain of its subsidiaries named therein and SterlingWebster Bank, National Bank (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed September 28, 2021).
Bank. |
| | | |
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 SeptemberJune 30, 2021,2022, formatted in Inline Extensible Business Reporting Language (“iXBRL”): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive (Loss) Income, (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and in detail. |
| | | |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| ** | Furnished herewith. This exhibit will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. |
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: NovemberAugust 8, 20212022 | By: | /s/ Brian Meyers | |
| | | Brian Meyers |
| | | Executive Vice President, Chief Financial Officer and Treasurer |
Exhibit Index
| | Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to the Company’s Registration Statement on Form S-1/A (Registration No. 333-123644) filed June 7, 2005. |
| | | |
| | Certificate of Amendment, dated November 14, 2019, to the Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-3 filed October 6, 2020). |
| | | |
| | Bylaws of the Company, as amended on March 8, 2019 (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed June 28 2005)April 30 2020). |
| | | |
| | Contract forSecond Amendment to the Purchase of Real Estate,Credit Agreement dated as of September 24, 2021, byMay 23, 2022 among Lincoln Educational Services Corporation and between Nashville Acquisition, LLCits subsidiaries named therein and SLC Development, LLCWebster Bank, National Bank (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed September 28, 2021).
May 24, 2022) |
| | | |
| | Agreement for Purchase and Sale of Property, dated as of September 24, 2021 by and between Lincoln Technical Institute, Inc. and LNT Denver (Multi) LLC (incorporated by referenceThird Amendment to Exhibit 10.2 of the Company’s Form 8-K filed September 28, 2021).
|
| | |
| | Consent and Waiver LetterCredit Agreement dated as of September 23, 2021, by andAugust 5, 2022 among Lincoln Educational Services Corporation and certain of its subsidiaries named therein and SterlingWebster Bank, National Bank (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed September 28, 2021).
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 SeptemberJune 30, 2021,2022, formatted in Inline Extensible Business Reporting Language (“iXBRL”): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive (Loss) Income, (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and in detail. |
| | | |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| ** | Furnished herewith. This exhibit will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. |