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 ReportForm 10-Q 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 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 statementsConsolidated Financial Statements for ourthe last two fiscal years ended December 31, 2021.2022.
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 Form 10-Q10-Q.
The following table presents results for our two reportable segments for the three months ended March 31, 20222023 and 2021:2022:
Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021
Transportation and Skilled TradesCampus Operations
Operating income was $7.2increased $1.5 million, or 17.3% to $10.1 million for the three months ended March 31, 2022 compared to $12.32023 from $8.6 million in the prior year comparable period. The change quarter over quarterquarter-over-quarter was mainly driven by the following factors:
Revenue increased $3.1$5.6 million, or 5.6%6.9% to $58.8$86.4 million for the three months ended March 31, 20222023 from $55.7$80.8 million in the prior year comparable period. The increase in revenue was primarily driven by the Company’s new hybrid teaching model, which increases program efficiency and delivers accelerated revenue recognition in certain evening programs combined with a 6.3%9.0% increase in average revenue per student population mainly driven by tuition increases and a higher beginning of period population6.4% increase in student starts. Further contributing to the current year of approximately 730 students.revenue increase were additional student fees in certain programs that were increased to mitigate inflationary pressure from consumables.
Educational services and facilities expense increased $2.6$2.1 million, or 12.0%6.0% to $24.5$37.5 million for the three months ended March 31, 20222023 from $21.9$35.4 million in the prior year comparable period. Increased costs were primarily concentrated in instructional expense and facilities expense. Instructional salaries increased 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, consumables prices rose sharply driven by the on-going inflation spike impacted and supply-chain shortages. Facility expenses increased as a 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 and higher maintenance costs.
| o | Instructional salaries increased mainly due to higher staffing levels, merit increases and student testing. |
| o | Facility expenses increased by approximately $0.3 million, primarily the result of additional rent expense resulting from the new Atlanta, Georgia campus lease, which was executed at the end of the second quarter of 2022. |
Selling, general and administrative expense increased $5.6$2.0 million, or 25.9%5.3% to $27.0$38.8 million for the three months ended March 31, 20222023, from $21.4$36.8 million in the prior year comparable period. The increase was primarily driven by additional bad debt expenseinvestments in marketing and marketing investments,increased costs for student services, both of which are all discussed in more detail above in the consolidated results of operations.
Healthcare and Other ProfessionsTransitional
Operating income was $1.3On November 3, 2022, the Board of Directors approved a plan to close the Somerville, Massachusetts campus. The owner of the Somerville property has exercised an option to terminate the lease on December 8, 2023 and the Company has since determined not to pursue relocating the campus in this geographic region. The Company has also developed a plan to deliver instruction for the remaining students prior to the closing. Total costs to close the campus including the teach-out will be approximately $2.0 million and should be completed by the end of 2023.
Revenue decreased $0.8 million, or 47.4% to $0.9 million for the three months ended March 31, 2022 compared to $2.92023, from $1.7 million in the prior year comparable period. The change quarter over quarter was driven by the following factors:
Revenue increased $1.5Total operating expenses decreased $0.7 million, or 6.5%38.6%, to $23.8$1.1 million for the three months ended March 31, 20222023, from $22.3$1.8 million in the prior year comparable period. The increase in revenue was primarily
Decreased operating performance is the result of a 5.3% increase in average revenue per student.closing the campus and no longer enrolling new students.
Educational services and facilities expense increased $1.2 million, or 11.8% to $11.6 million for the three months ended March 31, 2022 from $10.4 million in the prior year comparable period. Increased costs were primarily concentrated in instructional expense and facilities expense. Instructional salaries increased 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. Increased facilities expense was the result of additional spending for common area maintenance quarter over quarter.
Selling, general and administrative expenses increased $1.9 million, or 20.7% to $10.8 million for the three months ended March 31, 2022 from $8.9 million in the prior year comparable period. The increase was primarily driven by additional bad debt expense and marketing investments, which are all discussed in more detail above in the consolidated results of operations.
Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses were $8.9$11.0 million and $9.3$8.9 million for the three months ended March 31, 2023 and 2022, and 2021, respectively. The decrease in expense quarter over quarter was primarilyIncreased costs were driven by a reduction in incentive compensation, partially offset byseveral factors including additional salaries and benefits, increased legal costs (see Part II, Item 1. “Legal Proceedings”) and an increase in stock-basedworkers compensation and severance.resulting from prior year claims.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are for the 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, prior to the termination thereof (as described below), borrowings under our Credit Facility. The following chart summarizes the principal elements of our cash flow for each of the three months ended March 31, 20222023 and 2021, respectively:2022:
| | | | Three Months Ended | |
| | | Three Months Ended March 31, | | | March 31, | |
| | | 2022 | | | 2021 | | | 2023 | | 2022 | |
| Net cash used in operating activities | | $ | (14,367 | ) | | $ | (8,299 | ) | | $ | (214 | ) | | $ | (14,367 | ) |
| Net cash used in investing activities | | (1,045 | ) | | (1,219 | ) | | (3,249 | ) | | (1,045 | ) |
| Net cash used in financing activities | | (2,296 | ) | | (1,766 | ) | | (2,335 | ) | | (2,296 | ) |
As of March 31, 2022,2023, the Company had $44.5 million in cash and cash equivalents of $65.6and restricted cash, in addition to $14.7 million in short-term investments, compared to $83.3$50.3 million at December 31, 2021.cash and cash equivalents and restricted cash, including $14.7 million in short-term investments. The decrease in the cash position from the prior year end was the result of several factors, including $3.2 million in capital expenses during the seasonality of our business and a decrease in accrued expensesfiscal quarter ended March 31, 2023, which was primarily driven by the paymentongoing buildout of the new Atlanta, Georgia campus, incentive compensation.compensation payments, share repurchases made under the share repurchase program, and one-time costs incurred in connection with the teach-out of our Somerville, Massachusetts campus. In addition, our cash position in prior years benefited from $2.4 million in net proceeds received as a result of the sale of a former campus located in Suffield, Connecticut, which was consummated during the second quarter of 2022.
On May 24, 2022, the Company announced that its Board of Directors had authorized a share repurchase program of up to $30.0 million of the Company’s outstanding Common Stock. The repurchase program was authorized for 12 months. On February 27, 2023, the Board of Directors extended the share repurchase program for an additional 12 months and authorized the repurchase of an additional $10.0 million of the Company’s Common Stock, for an aggregate of up to $30.6 million in additional repurchases. As of
During the three months ended March 31, 2023, the Company repurchased 104,030 shares at a cost of approximately $$0.5 million. Total repurchases made since the inception of the share repurchase program were 1,676,444 shares at a total cost of approximately $10.0 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 75%74% of our cash receipts relating to revenues in 2021.2022. Pursuant to applicable regulations, students must apply for a new loan for each academic period. Federal regulations dictate the timing of disbursements of funds under Title IV Programs and loan funds are generally provided by lenders in two disbursements for each academic year. The first disbursement is usually received approximately 31 days after the start of a student’s academic year and the second disbursement is typically received at the beginning of the sixteenth week from the start of the student's academic year. Certain types of grants and other funding are not subject to a 31-day delay. In certain instances, if a student withdraws from a program prior to a specified date, any paid but unearned tuition or prorated Title IV Program financial aid is refunded according to federal, state and accrediting agency standards.
As a result of the significant amount of Title IV Program funds received by our students, we are highly dependent on these funds to operate our business. Any reduction in the level of Title IV Program funds that our students are eligible to receive for tuition payments to us or any restriction on our eligibility to receive Title IV Program funds would have a significant impact on our operations and our financial condition. For more information, see Part I, Item 1A. “Risk Factors - Risks Related to Our Industry” of our Form 10-K.
Operating Activities
Operating cash flow results primarily from cash received from our students, offset by changes in working capital demands. Working capital can vary at any point in time based on several factors including seasonality, timing of cash receipts and payments and vendor payment terms.
Net cash used in operating activities was $14.4$0.2 million and $8.3 million for each of the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022, changes in our operating assets and liabilities resulted in cash outflows of $14.6 million, primarily attributable to a $13.4 million increase in accounts receivable driven by the timing of collections.
Investing Activities
Net cash used in investing activities was $1.0$14.4 million for the three months ended March 31, 2023 and 2022, respectively. The main driver for the decrease was due to the timing of $8.0 million of Title IV funds that was received in January of 2023, from the fourth quarter of the prior year. Further contributing to the decrease was a reduction in prior year accrued expenses resulting from a $6.1 million incentive compensation payment made during the first quarter of 2022.
Investing Activities
Net cash used in investing activities was $3.2 million for the three months ended March 31, 2023 compared to $1.2net cash used in investing activities of $1.0 million in the prior year comparable period.
The decrease in net cash used of $2.2 million was primarily driven by investments in capital expenditures for the new Atlanta, Georgia campus.
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 former campus located in Suffield, Connecticut and our campus in Nashville, Tennessee, which currently is subject to a sale leaseback agreement (described(as described elsewhere in this Form 10Q)10-Q) for the sale of the property, which is currently expected to be consummated in the thirdsecond quarter of 2022.2023.
Capital expenditures were
2%3% of revenues in
20212022 and are expected to approximate
3%11% of revenues in
2022.2023. The significant increase in planned capital expenditures over the prior year will be driven by several factors that include, but are not limited to, the buildout of our new Atlanta, Georgia area campus, additional space, the planned introduction of three new programs at the Lincoln, RI campus, and the anticipated introduction of new programs at five other campuses. We expect to fund future capital expenditures with cash generated from operating activities and cash on hand.
Financing Activities
Net cash used in financing activities wasremained essentially flat at $2.3 million for the three months ended March 31, 2023 and 2022, compared to $1.8 million in the prior year comparable period. The increase of $0.5 million was primarily driven by a $1.0 million increase in net share settlements for taxes related to equity-based compensation, partially offset by a $0.5 million reduction in payment on borrowings driven by the retirement of our term loan using proceeds from the sale leaseback transaction of our Denver and Grand Prairie campuses consummated during the fourth quarter of the prior year.respectively.
Credit Facility
On November 14, 2019, the Company entered into a 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”). Initially, the Credit Facility was 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 a 120-month amortization with the outstanding balance due on the maturity date; (2) a $10 million senior secured delayed draw term loan maturing on December 1, 2024 (the “Delayed Draw Term Loan”), with monthly interest payments for the first 18 months and thereafter monthly payments of interest and principal based on a 120-month amortization and all balances due on the maturity date; (3) a $15 million senior secured committed revolving line of credit providing a sublimit 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”).
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 maturing on the same date as the Term Loan. Under the terms of the Credit Facility accrued interest on each loan is payable monthly in arrears with the Term Loan and the Delayed Draw Term Loan bearing interest at a floating interest rate based on the then one month London Interbank Offered Rate (“LIBOR”) plus 3.50% and subject to a LIBOR interest rate floor of 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 0.50% with a floor of 4.0%. Line of Credit Loans bear interest at a floating interest rate based on the Lender’s prime rate of 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) 0.25%, paid quarterly in arrears, in addition to the Lender’s customary fees for issuance, amendment and other standard fees. Borrowings under the Line of Credit Loan are 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. 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 to increase the amount of permitted cash dividends that the Company is permitted to 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 equityrights 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 campus owned byCompany. The Credit Agreement was amended on various occasions.
On November 4, 2022, 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 Credit Agreementagreed with its lender. The Consent Agreement provides the Lender’s consentLender to the Property Transactions and waives certain covenants interminate the Credit Agreement subjectand the remaining Revolving Loan. The Lender agreed to certain specified conditions. In addition, in connection with the consummation of the Property Transactions, the Lender released its mortgages and other liens on the subject properties uponallow the Company’s payment in fullexisting letters of thecredit to remain outstanding, principal and accrued interest of the Term Loan and any swap obligations arising from any swap transaction. Upon the consummation of the sale leaseback transaction relating to the Denver and Grand Prairie campuses on October 29, 2021 the Company paid the Lender approximately $16.7 million in repayment of the Term Loan and the swap termination fee. No further borrowings may be made under the Term Loan or the Delayed Draw Term Loan.
provided that they are cash collateralized. As of March 31, 2022, and December 31, 2021,2023, the Company had zero debt outstanding under the Credit Facility for both periods and was in compliance with all debt covenants. As of March 31, 2022, and December 31, 2021, letters of credit, in the aggregate outstanding principal amount of $4.0 million, remained outstanding, were cash collateralized, and $4.0 million, respectively, were outstanding underclassified as restricted cash on the Credit Facility.Condensed Consolidated Balance Sheet. As of March 31, 2023, the Company did not have a credit facility and did not have any debt outstanding. The Company expects to negotiate a new credit facility in the second quarter of 2023.
Contractual Obligations
Current portion of Long-Term Debt, Long-Term Debt and Lease Commitments. As of March 31, 2022,2023, we havehad no debt outstanding. We lease offices, educational facilities and various items of equipment for varying periods through the year 2041 at basic annual rentals (excluding taxes, insurance, and other expenses under certain leases).
As of March 31, 2022,2023, we had outstanding loan principal commitments to our active students of $30.1$32.3 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 packagedrequired to fund their education using these funds and they are not reported on our financial statements.
Regulatory Updates
Gainful Employment.Borrower Defense to Repayment – Sweet Settlement Agreement
The DOE commencedOn November 16, 2022, a negotiated rulemaking processfederal district court in January 2022 that concludedCalifornia in March 2022 inthe lawsuit Sweet v. Cardona granted final approval of a settlement agreement under which it proposed to establish new gainful employment requirements that would be applicable to all of our educational programs. The DOE previously issued gainful employment regulations in October 2014 that subsequently were rescinded effective July 1, 2020, although the DOE providedwould agree to discharge loans and refund all prior loan payments to covered student borrowers who have asserted to the DOE a Borrower Defense to Repayment and whose borrower defense claims have not yet been granted or denied on the merits, which includes former students at our institutions with the opportunity to implement the new regulations early.as well as at a long list of other institutions. See Part I, Item I of our Form 10-K at “Regulatory Environment – Gainful Employment.Borrower Defense to Repayment Regulations.” Subsequently, we, and two other intervening school companies, filed notices of appeal and asked the district court to stay the settlement from taking effect until the appeals were decided. Plaintiffs and the DOE thereafter filed oppositions to our stay request and, after a hearing, the district court denied our stay request, but extended the temporary stay of loan discharges and refunds associated with the three school companies for seven days to allow us to file a motion for a stay with the U.S. Court of Appeals for the Ninth Circuit. On February 27, 2023, we and the two other school companies that appealed filed a joint motion for a stay with the Ninth Circuit. On March 29, 2023, the Ninth Circuit denied the motion to stay the judgment pending appeal. On April 4, 2023, we and the two other school companies filed an emergency application with the Supreme Court of the United States to stay the district court’s judgment. On April 13, 2023, the Supreme Court denied the petition.
Despite the denials of our stay requests, we intend to ask the Ninth Circuit to overturn the district court’s judgment approving the settlement. However, as a result of the denials of our stay requests, the DOE could automatically approve all of the pending borrower defense applications concerning us that were submitted to the DOE on or before June 22, 2022 and provide such automatic approval without evaluating or accounting for any of the legal or factual grounds that we provided for contesting the applications that were provided to us and without waiting for the Ninth Circuit to rule on the appeal of the district court’s judgment (which could take many months or more to occur). The DOE is expectedmay or may not attempt to publish proposed gainful employment regulationsseek recoupment from applicable schools relating to approval of borrower defense applications. If the DOE approves borrower defense applications concerning us and attempts to recoup from us the loan amounts in the approved applications, we would consider our options for public commentchallenging the legal and factual bases for such actions. The settlement also requires the DOE to publishreview borrower defense applications submitted after June 22, 2022 and before November 16, 2022 within 36 months of the final regulations later this year that would take effect on July 1, 2023, but wesettlement date. If the DOE grants some or all of these applications, the DOE also could attempt to recoup from us the loan amounts relating to these applications as well. We cannot predict whether the precisesettlement will be upheld on appeal, what actions the DOE might take if the settlement is upheld on appeal (including the ultimate timing effective date or contentamount of borrower defense applications the gainful employment regulations that are expected to emerge from this process. Further, we also cannot predict the extent to which our programsDOE may be adversely impacted by the tests that might be established by the gainful employment regulations.
The implementation of new gainful employment regulations could, among other things (i) require us to eliminate or modify certain educational programs, (ii) resultgrant in the lossfuture and the timing or amount of any possible liabilities or sanctions that the DOE may seek to recover from or impose on the Company, if any), whether the DOE or other agencies might take actions against us without waiting to see whether the settlement is upheld on appeal now that the stay requests have been denied, or what the outcome of our students’ accesschallenges to Title IV Program funds for the affected programs, and (iii)such actions will be, but such actions could have a significant impact on the rate at which students enroll in our programs and on our business and results of operations. If our programs are adversely impacted or we must eliminate or modify certain programs or our students lose access to Title IV Program funds there could be a material adverse effect on our business and results of operations.
Third-Party Servicer Requirements
In January 2023, the DOE would require the institutionindicated its intention 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 includesestablish 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 meetingsin 2023 to consider new proposed regulations 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. The DOE is expectedrelated to publish the consensus version of the proposed regulations with potential technical edits in the next few weeks or months.
The consensus version of the 90/10 rule regulations contains several new and amended provisions on a variety of topics including among other, 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; and including rules for sanctions for noncompliance with the 90/10 rule.
The proposed regulations typically are subject to a notice and comment period before the DOE publishes final regulations after consideration of public comment. 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.
Substantial Misrepresentation.
The DOE’s regulations prohibit an institution that participates in Title IV Programs from engaging in substantial misrepresentation of the nature of its educational programs, financial charges, graduate employability or its relationship with the DOE. The DOE has initiated a negotiated rulemaking process that may result in, among other things, an expansion of the categories of conduct deemed to be a misrepresentation and that also may result in new prohibitions on certain types of recruiting tactics and conduct that the DOE deems to be aggressive or deceptive.third-party servicers. See Part I, Item I of our Form 10-K at “Regulatory Environment – Substantial Misrepresentation.Negotiated Rulemaking.”
In March 2022, The DOE requires institutions and entities that meet the DOE published guidance aboutdefinition of third-party servicer to comply with requirements applicable to the enforcementservices performed by the servicer for the institution. The DOE also is in the process of developing a revised Dear Colleague Letter that could expand significantly the requirements regarding substantial misrepresentations.types of activities and functions that constitute third-party servicer activities for Title IV purposes and are subject to DOE regulations related to third-party servicers. The DOE indicated that it is monitoring complaints and borrower defense to repayment applications from veterans, servicemembers, and their family members who report that personnel and representatives of postsecondary schools suggested during the enrollment process that their military education benefits would cover alleffective date of the costsrevised final guidance letter would be at least six months after its publication to allow institutions and companies to meet any reporting requirements.
We anticipate that the DOE’s future guidance and regulations may require us to evaluate the activities performed by our service providers in order to identify those providers subject to the DOE’s third-party servicer requirements. This may require us to revise our contracts with these entities, report the servicers to the DOE, and ensure the servicers comply with applicable requirements. Servicers also are required to submit an annual compliance audit to the DOE and to be subject to review by the DOE which could lead to more scrutiny of their program but were told subsequently they would haveus and any of our service providers who are classified as third-party servicers. If some of our service providers decline to take out student loanscontinue working with us in order to finish the program. The DOE stated that it would ensure that institutions engaging in misrepresentations are held accountable if they cause a student to incur extra costs unwittingly or without a full understanding of the implications of borrowing. The DOE also indicated that such students could be entitled to discharge of their student loans and that it would share information and complaints about military-connected studentsavoid complying with the Departments of Defense and Veterans Affairs for potential agency action. In the event of any DOE determination that an institution may have engaged in substantial misrepresentation could result in the imposition of sanctions or other restrictions upon the institution including, but not limitedthird-party servicer requirements, we would need to fines, limitations, suspension or termination of eligibility to participate in Title IV Programs and discharge of students’ loans. See Part I, Item I of our Form 10-K at “Business - Regulatory Environment – Borrower Defense To Repayment Regulations.”
Federal Trade Commission.
On October 6, 2021, the Federal Trade Commission issued an announcement regarding its plan to target false claims by for-profit colleges on topics such as promises about graduates’ employment and earnings prospects and other outcomes and its intentions to impose “significant financial penalties” on violators andreplace these service providers. We continue to monitor the market carefully with federalguidance and state partners. The FTC indicated in the announcement that it had put 70 for-profit higher education institutionsrulemaking processes 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 allegedly 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 enforcement actions by the FTC and other regulators against for-profit schools, including our schools. See Part I, Item I of our Form10-K at “Regulatory Environment – Scrutiny of the For-Profit Education Sector.”
In March 2022, the FTC published an Advanced Notice of Proposed Rulemaking in the Federal Register announcing its consideration of potential rulemaking on the subject of false, misleading, and unsubstantiated earnings claims by various entities including for-profit colleges. The FTC stated that, if finalized, a rule in this area would allow the FTC to recover redress for impacted consumers and to seek steep penalties against entities including for-profit colleges. The FTC is accepting public comments on the potential rulemaking until May 10, 2022 and stated that the next step would be to issue a notice of proposed rulemaking if it determines to proceed with proposing regulations on this topic. Wethird-party servicer requirements but cannot predict whether and to what extent the FTC will establish new regulations, nor can we predict the timing or potential impactoutcome of these regulations.
Other Financial Assistance Programs
We are required to comply with applicable federal and state laws related to certain consumer and educational loans and credit extensions. See Part I, Item I of our Form 10-Kprocesses at “Regulatory Environment – Other Financial Assistance Programs.” In March 2022, the DOE published guidance reminding institutions of higher education of their legal obligations when recommending, promoting or endorsing private education loans including disclosure, consumer protection, and reporting requirements. The issuance of the guidance may lead to increased enforcement activity with respect to requirements related to private education loans. To the extent that these requirements apply to our institutions, our failure to comply with these requirements could result in enforcement actions that could have a material adverse impact on our operations.this time.
Seasonality
Our revenue and operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in total student population. Student population varies as a result ofdue to new student enrollments, graduations and student attrition. Historically, our schools have had lower student populations in our first and second quarters and we have experienced larger class starts in the third quarter and higher student attrition in the first half of the year. OurThe growth that we generally experience in the second half growthof the year is largely dependent on a successful high school recruiting season. We recruit high school students several months ahead of their scheduled start dates and, thus,as a consequence, while we have visibility on the number of students who have expressed interest in attending our schools, we cannot predict with certainty the actual number of new student enrollments in any given year and the related impact on revenue. Our expenses, however, typically do not vary significantly over the course of the year with changes in our student population and revenue.
| 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,Form 10-Q, 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.reporting, except for new internal controls related to ASC 326 and accounts payable payment processing that have been implemented.
PART
II.II. OTHER INFORMATION
On November 16, 2022, a federal district court in California in the lawsuit Sweet v. Cardona granted final approval of a settlement agreement under which the DOE would agree to discharge loans and refund all prior loan 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, which includes former students at our institutions as well as at a long list of other institutions. Subsequently, we, and two other intervening school companies, filed notices of appeal and asked the district court to stay the settlement from taking effect until the appeals were decided. Plaintiffs and the DOE thereafter filed oppositions to our stay request and, after a hearing, the district court denied our stay request, but extended the temporary stay of loan discharges and refunds associated with the three school companies for seven days to allow us to file a motion for a stay with the U.S. Court of Appeals for the Ninth Circuit. On February 27, 2023, we and the two other school companies that appealed filed a joint motion for a stay with the Ninth Circuit. On March 29, 2023, the Ninth Circuit denied the motion to stay the judgment pending appeal. On April 4, 2023, we and the two other school companies filed an emergency application with the Supreme Court of the United States to stay the district court’s judgment. On April 13, 2023, the Supreme Court denied the petition.
Despite the denials of our stay requests, we intend to ask the Ninth Circuit to overturn the district court’s judgment approving the settlement. However, as a result of the denials of our stay requests, the DOE could automatically approve all of the pending borrower defense applications concerning us that were submitted to the DOE on or before June 22, 2022 and provide such automatic approval without evaluating or accounting for any of the legal or factual grounds that we provided for contesting the applications that were provided to us and without waiting for the Ninth Circuit to rule on the appeal of the district court’s judgment (which could take many months or more to occur). The DOE may or may not attempt to seek recoupment from applicable schools relating to approval of borrower defense applications. If the DOE approves borrower defense applications concerning us and attempts to recoup from us the loan amounts in the approved applications, we would consider our options for challenging the legal and factual bases for such actions. The settlement also requires the DOE to review borrower defense applications submitted after June 22, 2022 and before November 16, 2022 within 36 months of the final settlement date. If the DOE grants some or all of these applications, the DOE also could attempt to recoup from us the loan amounts relating to these applications as well. We cannot predict whether the settlement will be upheld on appeal, what actions the DOE might take if the settlement is upheld on appeal (including the ultimate timing or amount of borrower defense applications the DOE may grant in the future and the timing or amount of any possible liabilities or sanctions that the DOE may seek to recover from or impose on the Company, if any), whether the DOE or other agencies might take actions against us without waiting to see whether the settlement is upheld on appeal now that the stay requests have been denied, or what the outcome of our challenges to such actions will be, but such actions could have a material adverse effect on our business and results of operations.
In addition to the foregoing, in the ordinary conduct of our business, we are subject to additional periodic lawsuits, investigations, regulatory proceedings and other claims, including, but not limited to, claims involving students or graduates, and routine employment matters. Although wematters and business disputes. We cannot predict with certainty the ultimate resolution of these lawsuits, investigations, regulatory proceedings and other claims asserted against us, but we do not believe that any currently pending legal proceeding to which we are a partyof these matters will have a material adverse effect on our business, financial condition, results of operations or cash flows.
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 extensions of credit to our students and requesting certain information. The letter states that the CFPB has the authority to supervise certain entities in the private education loan market and certain other consumer financial products and services. We have provided the requested information to the CFPB and are waiting for the CFPB to respond.
The Company has no changesIn addition to the Risk Factors disclosedother information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A of our Form 10-K, which could affect our business, financial condition, or operating results. The risks described in this Form 10-Q and in our 10-K are not the only risks we face. Additional risks and uncertainties not currently known to report.us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or operating results.
The U.S. Court of Appeals for the Ninth Circuit has denied our motion to stay the judgment of the U.S. District Court for the Northern District of California (Sweet v. Cardona, No. 3:19-cv-3674 (N.D. Cal.)) regarding a class action settlement approved by the court that could result in the automatic granting of all pending borrower defense applications submitted to the DOE on or before June 22, 2022 concerning our institutions and, potentially, could lead to the DOE seeking recoupment from us of all loan amounts in the granted applications, and the Supreme Court of the United States has denied our petition to stay the district court’s judgement.
On November 16, 2022, a federal district court in California in the lawsuit Sweet v. Cardona granted final approval of a settlement agreement under which the DOE would agree to discharge loans and refund all prior loan payments to covered student borrowers who have asserted to the DOE a Borrower Defense to Repayment and whose borrower defense claims have not yet been granted or denied on the merits, which includes former students at our institutions as well as at a long list of other institutions. See Form 10-K at “Regulatory Environment – Borrower Defense to Repayment Regulations.” Subsequently, we, and two other intervening school companies, filed notices of appeal and asked the district court to stay the settlement from taking effect until the appeals were decided. Plaintiffs and the DOE thereafter filed oppositions to our stay request and, after a hearing, the district court denied our stay request, but extended the temporary stay of loan discharges and refunds associated with the three school companies for seven days to allow us to file a motion for a stay with the U.S. Court of Appeals for the Ninth Circuit. On February 27, 2023, we and the two other school companies that appealed filed a joint motion for a stay with the Ninth Circuit. On March 29, 2023, the Ninth Circuit denied the motion to stay the judgment pending appeal. On April 4, 2023, we and the two other school companies filed an emergency application with the Supreme Court of the United States to stay the district court’s judgment. On April 13, 2023, the Supreme Court denied the petition.
Despite the denials of our stay requests, we intend to ask the Ninth Circuit to overturn the district court’s judgment approving the settlement. However, as a result of the denials of our stay requests, the DOE could automatically approve all of the pending borrower defense applications concerning us that were submitted to the DOE on or before June 22, 2022 and provide such automatic approval without evaluating or accounting for any of the legal or factual grounds that we provided for contesting the applications that were provided to us and without waiting for the Ninth Circuit to rule on the appeal of the district court’s judgment (which could take many months or more to occur). The DOE may or may not attempt to seek recoupment from applicable schools relating to approval of borrower defense applications. If the DOE approves borrower defense applications concerning us and attempts to recoup from us the loan amounts in the approved applications, we would consider our options for challenging the legal and factual bases for such actions. The settlement also requires the DOE to review borrower defense applications submitted after June 22, 2022 and before November 16, 2022 within 36 months of the final settlement date. If the DOE grants some or all of these applications, the DOE also could attempt to recoup from us the loan amounts relating to these applications as well. We cannot predict whether the settlement will be upheld on appeal, what actions the DOE might take if the settlement is upheld on appeal (including the ultimate timing or amount of borrower defense applications the DOE may grant in the future and the timing or amount of any possible liabilities or sanctions that the DOE may seek to recover from or impose on the Company, if any), whether the DOE or other agencies might take actions against us without waiting to see whether the settlement is upheld on appeal now that the stay requests have been denied, or what the outcome of our challenges to such actions will be, but such actions could have a material adverse effect on our business and results of operations.
| Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
| (c) | On May 24, 2022, the Company announced that the Board of Directors had approved a share repurchase program for 12 months authorizing purchases of up to $30.0 million. Subsequently, on February 27, 2023, the Board of Directors extended the share repurchase program for an additional 12 months and authorized the repurchase of an additional $10 million of the Company’s Common Stock, for an aggregate of up to $30.6 million in additional repurchases. |
None.
The following table presents the number and average price of shares purchased during the three months ended March 31, 2023. The remaining authorized amount for share repurchases under the program at March 31, 2023 was approximately $30.0 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 | |
January 1, 2023 to January 31, 2023 | | | - | | | $ | - | | | | - | | | $ | 20,554,775 | |
February 1, 2023 to February 28, 2023 | | | - | | | | - | | | | - | | | | 30,554,775 | 1 |
March 1, 2023 to March 31, 2023 | | | 104,030 | | | | 5.34 | | | | 104,030 | | | | 29,998,958 | |
Total | | | 104,030 | | | | 5.34 | | | | 104,030 | | | | | |
1 Includes additional $10.0 million for additional purchases under the share repurchase plan.
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.
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 April 30, 2020). |
| | | |
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 September 30, 2021,March 31, 2023, 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 XBRLiXBRL 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: May 9, 20228, 2023 | 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 April 30 2020). |
| | | |
|
| 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 September 30, 2021,March 31, 2023, 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 XBRLiXBRL 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. |
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