| 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 10-Q”) 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," “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 Form 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.
As of January 1, 2023, the Company’s business is now organized into two reportable business segments: (a) Campus Operations; and (b) Transitional. Based on trends in student demand and program expansion, there have been more cross-offerings of programs among the various campuses. Given this change, the Company has revised the way it manages the business, evaluates performance and allocates resources, resulting in an updated segment structure. The Campus Operations segment includes campuses that are continuing in operation and contribute to the Company’s core operations and performance. The Transitional segment refers to businesses that are marked for closure and are currently being taught-out. As of June 30, 2023, the only campus classified in the Transitional segment is the Somerville, Massachusetts campus, which is no longer enrolling new students and will be fully taught-out and closed by December 31, 2023.
We evaluate performance based on operating results. Adjustments to reconcile segment results to consolidated results are included in the caption “Corporate,” which primarily includes unallocated corporate activity.
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 Statements for the last two fiscal years ended December 31, 2022.
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, 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 campuses in 14 states, operate under Lincoln Technical Institute, Lincoln College of Technology, Lincoln Culinary Institute, 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.
Property Sale Agreement - Nashville, Tennessee Campus
On September 24, 2021, Nashville Acquisition, LLC, a subsidiary of the Company, entered into a Contract for the Purchase of Real Estate (the “Nashville Contract”) to sell the nearly 16-acre property located at 524 Gallatin Avenue, Nashville, Tennessee 37206, at which the Company operates its Nashville campus, to SLC Development, LLC, a subsidiary of Southern Land Company (“SLC”).
On June 8, 2023, the Company closed on the sale of its Nashville, Tennessee property to East Nashville Owner, LLC, an affiliate of SLC, for $33.8 million pursuant to the Nashville Contract. In connection with the sale, the parties entered into a lease agreement allowing Lincoln to continue to occupy the campus and operate it on a rent-free basis for a period of 15 months while the Company seeks to relocate to a more modern facility within the Nashville market. In addition to the initial 15-month term, the lease includes three options to extend the term for consecutive 30-day terms for a rental payment of $150,000 per extension term. While the new campus location has not yet been determined, the Company intends to invest between $15.0 million to $20.0 million for the buildout of the new campus, which will include two new programs with the addition of HVAC and electrical.
The net proceeds from the Nashville sale are approximately $33.3 million, net of closing costs, which will be available for working capital, acquisitions, other strategic initiatives and general corporate purposes. The property’s carrying value is approximately $4.5 million and the estimated fair value of the rent for the 15-month rent-free period is approximately $2.3 million, which is currently included in prepaid expenses and other current asset on the Company’s balance sheet.
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 Consolidated Financial Statements included in our Form 10-K and Note 1 to the Condensed Consolidated Financial Statements included in this Form 10-Q.
Allowance for Credit Losses
On January 1, 2023, the Company adopted ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” As a result of the adoption, the Company has revised the way in which it calculates reserves on outstanding student accounts receivable balances. Details considered by management in the estimate include the following:
We extend credit to a portion of the students who are enrolled at our academic institutions for tuition and certain other educational costs. Based upon past experience and judgment, we establish an allowance for credit losses with respect to student receivables which we estimate will ultimately not be collectible. Our standard student receivable allowance is based on an estimate of lifetime expected credit losses for student receivables that considers vintages of receivables to determine a loss rate. Our estimation methodology considers a number of quantitative and qualitative factors that, based on our collection experience, we believe have an impact on our repayment risk and ability to collect student receivables. Changes in the trends in any of these factors may impact our estimate of the allowance for credit losses. These factors include, but are not limited to: internal repayment history, changes in the current economic, legislative or regulatory environments, internal cash collection forecasts and the ability to complete the federal financial aid process with the student. These factors are monitored and assessed on a regular basis. Overall, our allowance estimation process for student receivables is validated by trending analysis and comparing estimated and actual performance.
Management makes a range of assumptions to determine what is believed to be the appropriate level of allowance for credit losses. Management determines a reasonable and supportable forecast based on the expectation of future conditions over a supportable forecast period as described above, as well as qualitative adjustments based on current and future conditions that may not be fully captured in the historical modeling factors described above. All of these estimates are susceptible to significant change.
We monitor our collections and write-off experience to assess whether or not adjustments to our allowance percentage estimates are necessary. Changes in trends in any of the factors that we believe impact the collection of our student receivables, as noted above, or modifications to our collection practices, and other related policies may impact our estimate of our allowance for credit losses and our results from operations.
Because a substantial portion of our revenue is derived from Title IV Programs, any legislative or regulatory action that significantly reduces the funding available under Title IV Programs, or the ability of our students or institutions to participate in Title IV Programs, would likely have a material impact on the realizability of our receivables.
Effect of Inflation
Inflation has not had a material effect on our operations, except for some inflationary pressures on certain instructional expenses, including consumables, and in instances where potential students have not wanted to incur additional debt or increased travel expense.
Results of Continuing Operations for the Three and Six Months Ended June 30, 2023
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 | | | Six Months Ended | |
| | | June 30, | | | June 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| Revenue | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| Costs and expenses: | | | | | | | | | | | | | | | | |
| Educational services and facilities | | | 45.2 | % | | | 44.0 | % | | | 44.4 | % | | | 43.9 | % |
| Selling, general and administrative | | | 58.5 | % | | | 55.8 | % | | | 58.0 | % | | | 56.2 | % |
| Gain on sale of assets | | | -34.9 | % | | | -0.2 | % | | | -17.6 | % | | | -0.1 | % |
| Impairment of goodwill and long-lived assets | | | 4.8 | % | | | 0.0 | % | | | 2.4 | % | | | 0.0 | % |
| Total costs and expenses | | | 73.5 | % | | | 99.5 | % | | | 87.3 | % | | | 100.0 | % |
| Operating income | | | 26.5 | % | | | 0.5 | % | | | 12.7 | % | | | 0.0 | % |
| Interest income, net | | | 0.6 | % | | | 0.0 | % | | | 0.5 | % | | | 0.0 | % |
| Income (loss) from operations before income taxes | | | 27.1 | % | | | 0.4 | % | | | 13.3 | % | | | 0.0 | % |
| Provision (benefit) for income taxes | | | 7.7 | % | | | 0.1 | % | | | 3.5 | % | | | -0.3 | % |
| Net income | | | 19.5 | % | | | 0.3 | % | | | 9.7 | % | | | 0.3 | % |
Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022
Consolidated Results of Operations
Revenue. Revenue increased $6.5 million, or 7.9% to $88.6 million for the three months ended June 30, 2023 from $82.1 million in the prior year comparable period. Excluding the Transitional segment revenue of $0.4 million and $1.8 million for the three months ended June 30, 2023 and 2022, respectively, our revenue would have increased $7.9 million, or 9.8%. The remaining revenue increase was due to average revenue per student up 8.6%, driven in part by the continuing roll-out of the Company’s hybrid teaching model in combination with tuition increases. The Company’s hybrid teaching model increases program efficiency and delivers accelerated revenue recognition in certain evening programs. Revenue also benefited from the 17.9% growth in student starts
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 million, or 10.9% to $40.0 million for the three months ended June 30, 2023 from $36.1 million in the prior year comparable period. Excluding the Transitional segment educational services and facilities expense of $0.5 million and $0.8 million for the three months ended June 30, 2023 and 2022, respectively, our educational services and facilities expense would have increased $4.2 million, or 12.0%. Increased costs were primarily concentrated in instructional expense, facilities expense and books and tools expense.
Instructional expenses increased $1.6 million driven by several factors including higher staffing levels resulting from increased student starts, merit salary increases for instructors and the transition to the Company’s hybrid teaching model.
Facilities expense increased by approximately $1.3 million, driven by several factors including additional rent expense of $0.3 million resulting from the new Atlanta, Georgia campus lease, and the sale of our Nashville, Tennessee property. Additional costs included an increase in utility expense resulting from higher usage and inflation in addition to increases in real estate taxes.
Books and tools expense increased $1.3 million, driven by a 17.9% increase in student starts quarter-over-quarter.
Educational services and facilities expense, as a percentage of revenue, increased to 45.2% from 44.0% for the three months ended June 30, 2023 and 2022, respectively.
Selling, general and administrative expense. Our selling, general and administrative expense increased $6.0 million, or 13.0% to $51.8 million for the three months ended June 30, 2023, from $45.8 million in the prior year comparable period. Excluding the Transitional segment selling, general and administrative expense of $0.4 million and $1.1 million for the three months ended June 30, 2023 and 2022, respectively, our selling general and administrative expense would have increased $6.6 million, or 14.8%. Increased costs were driven by the following:
Administrative cost increases of $5.4 million, driven by several factors including increased salaries expense, stock-based compensation, performance-based incentives, bad debt expense and legal costs (see Part II, Item 1. “Legal Proceedings”). Bad debt expense increased driven in part by revenue growth quarter-over-quarter in addition to a higher accounts receivable balance in the current year resulting in part from student start growth. Further contributing to additional bad debt expense were increases in reserve rates resulting from the implementation of ASC Topic 326, which requires an entity to change its accounting approach in determining impairment of certain financial instruments, including trade receivables, from an “incurred loss” methodology to a “current expected credit loss” methodology (“CECL”). Partially offsetting the administrative costs was a reduction in medical expense of $1.0 million resulting from reduced claims.
Marketing investments increased $0.6 million as a result of a continuing shift in marketing strategy to include additional spending in digital channels that generate higher quality, better converting leads but which come at a higher cost-per-lead. These efforts are driven primarily through the paid search and paid social media channels. We continue to reduce our dependency on lower cost third-party affiliate/pay-per-lead inquiries, which convert at relatively lower levels. Additional investments in marketing have contributed to the increase in starts quarter-over-quarter.
Student services increased $0.6 million primarily resulting from costs associated with the centralization of our financial aid department.
Selling, general and administrative expense, as a percentage of revenue, increased to 58.5% from 55.8% for the three months ended June 30, 2023 and 2022, respectively.
Gain on sale of assets. Gain on sale of assets was $30.9 million, resulting from the sale of the Company’s Nashville, Tennessee property. Net proceeds from the sale were approximately $33.3 million.
Impairment of goodwill and long-lived assets. Impairment of goodwill and long-lived assets was $4.2 million as a result of the sale of the Nashville, Tennessee property on June 8, 2023. The result of the sale created a change in the trajectory of the fair value of the Nashville, Tennessee operations and as such, the Company recorded a pre-tax non-cash impairment charge of $3.8 million relating to goodwill and an additional $0.4 million impairment relating to long-lived assets. As of June 30, 2022, there were no impairments of goodwill or long-lived assets.
Net interest income / expense. Net interest income was $0.5 million for the three months ended June 30, 2023 compared to net interest expense of less than $0.1 million in the prior year comparable period. The increase to net interest income was primarily driven by the Company’s investment of its cash reserves into various short-term investments.
Income taxes. Our provision for income taxes was $6.8 million and $0.1 million for each of the three months ended June 30, 2023 and 2022, respectively. The increase in provision for the three months ended June 30, 2023 was due primarily to the gain on the sale of the Nashville, Tennessee property, which drove an increase in the Company’s pre-tax income. The effective tax rate for both periods remained essentially flat at 28.2%.
Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022
Consolidated Results of Operations
Revenue. Revenue increased $11.2 million, or 6.8% to $175.9 million for the six months ended June 30, 2023 from $164.7 million in the prior year comparable period. Excluding the Transitional segment revenue of $1.4 million and $3.6 million for the six months ended June 30, 2023 and 2022, respectively, our revenue would have increased $13.4 million, or 8.3%. The remaining revenue increase was due to average revenue per student up 8.8%, driven in part by the continuing roll-out of the Company’s hybrid teaching model in combination with tuition increases. The Company’s hybrid teaching model increases program efficiency and delivers accelerated revenue recognition in certain evening programs. Revenue also benefited from the 12.5% growth in student starts..
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 $5.8 million, or 8.1% to $78.1 million for the six months ended June 30, 2023 from $72.3 million in the prior year comparable period. Excluding the Transitional segment educational services and facilities expense of $1.1 million and $1.6 million for the six months ended June 30, 2023 and 2022, respectively, our educational services and facilities expense would have increased $6.4 million, or 9.0%. Increased costs were primarily concentrated in instructional expense, facilities expense and books and tools expense.
Instructional expenses increased $3.2 million driven by several factors including higher staffing levels resulting from increased student starts, merit salary increases for instructors and the transition to the Company’s hybrid teaching model.
Facilities expense increased by approximately $1.6 million, driven by several factors including additional rent expense of $0.5 million resulting from the new Atlanta, Georgia campus lease, and the sale of our Nashville, Tennessee property. Additional costs included an increase in utility expense resulting from higher usage and inflation in addition to increases in real estate taxes.
Books and tools expense increased $1.6 million, driven by the 12.5% increase in student starts year-over-year.
Educational services and facilities expense, as a percentage of revenue, increased to 44.4% from 43.9% for the six months ended June 30, 2023 and 2022, respectively.
Selling, general and administrative expense. Our selling, general and administrative expense increased $9.6 million, or 10.4% to $102.1 million for the six months ended June 30, 2023, from $92.5 million in the prior year comparable period. Excluding the Transitional segment selling, general and administrative expense of $0.9 million and $2.1 million for the six months ended June 30, 2023 and 2022, respectively, our selling general and administrative expense would have increased $10.7 million, or 11.9%. Increased costs were driven by the following:
Administrative cost increases of $8.2 million, driven by several factors including increased salaries expense, stock-based compensation, performance-based incentives, bad debt expense and legal costs (see Part II, Item 1. “Legal Proceedings”). Bad debt expense increased driven in part by revenue growth year-over-year in addition to a higher accounts receivable balance in the current year resulting in part from student start growth. Further contributing to additional bad debt expense were increases in reserve rates resulting from the implementation of ASC Topic 326, which requires an entity to change its accounting approach in determining impairment of certain financial instruments, including trade receivables, from an “incurred loss” methodology to a “current expected credit loss” methodology (“CECL”). Partially offsetting the administrative costs was a reduction in medical expense of $1.0 million resulting from reduced claims.
Marketing investments increased $1.5 million as a result of a continuing shift in marketing strategy to include additional spending in digital channels that generate higher quality, better converting leads but which come at a higher cost-per-lead. These efforts are driven primarily through the paid search and paid social media channels. We continue to reduce our dependency on lower cost third-party affiliate/pay-per-lead inquiries, which convert at relatively lower levels. Additional marketing investments have contributed to the increase in starts year-over-year.
Student services increased $1.0 million primarily resulting from costs associated with the centralization of our financial aid department,
Selling, general and administrative expense, as a percentage of revenue, increased to 58.0% from 56.2% for the six months ended June 30, 2023 and 2022, respectively.
Gain on sale of assets. Gain on sale of assets was $30.9 million, resulting from the sale of the Company’s Nashville, Tennessee property. Net proceeds from the sale were approximately $33.3 million.
Impairment of goodwill and long-lived assets. Impairment of goodwill and long-lived assets was $4.2 million as a result of the sale of the Nashville, Tennessee property on June 8, 2023. The result of the sale created a change in the trajectory of the fair value of the Nashville, Tennessee operations and as such, the Company recorded a pre-tax non-cash impairment charge of $3.8 million relating to goodwill and an additional $0.4 million impairment relating to long-lived assets. As of June 30, 2022, there were no impairments of goodwill or long-lived assets.
Net interest income / expense. Net interest income was $1.0 million for the six months ended June 30, 2023 compared to net interest expense of less than $0.1 million in the prior year comparable period. The increase to net interest income was primarily driven by the Company’s investment of its cash reserves into various short-term investments.
Income taxes. Our provision for income taxes was $6.2 million for the six months ended June 30, 2023 compared to a benefit for income taxes of $0.5 million in the prior year comparable period. The provision for the six months ended June 30, 2023 was due to the gain on the sale of the Nashville, Tennessee property, which drove an increase in the Company’s pre-tax income. The benefit for the six months ended June 30, 2022 was due primarily to a pre-tax book loss and a discrete item relating to Restricted Stock vesting.
Segment Results of Operations
As of January 1, 2023, the Company’s business is now organized into two reportable business segments: (a) Campus Operations; and (b) Transitional. Based on trends in student demand and our program expansions, there have been more cross-offerings of programs among the various campuses. Given this change, the Company has revised the way it manages the business, evaluates performance, and allocates resources, resulting in an updated segment structure. As a result, the Company has shifted its focus to the two new segments as defined below:
Campus Operations – The Campus Operations segment includes all campuses that are continuing in operation and contribute to the Company’s core operations and performance.
Transitional – The Transitional segment refers to businesses that are marked for closure and are currently being taught-out. As of March 31, 2023, the only campus classified in the Transitional segment is the Somerville, Massachusetts campus, which is no longer enrolling new students and will be fully taught-out and closed by December 31, 2023.
We evaluate performance based on operating results. Adjustments to reconcile segment results to consolidated results are included in the caption “Corporate,” which primarily includes unallocated corporate activity.
The following table presents results for our two reportable segments for the three months ended June 30, 2023 and 2022:
| | | Three Months Ended June 30, | |
| | | 2023 | | | 2022 | | | % Change | |
| Revenue: | | | | | | | | | |
| Campus Operations | | $ | 88,213 | | | $ | 80,349 | | | | 9.8 | % |
| Transitional | | | 433 | | | | 1,793 | | | | -75.9 | % |
| Total | | $ | 88,646 | | | $ | 82,142 | | | | 7.9 | % |
| Operating Income (loss): | | | | | | | | | |
| Campus Operations | | $ | 4,169 | | | $ | 8,791 | | | | -52.6 | % |
| Transitional | | | (482 | ) | | | (88 | ) | | | 447.7 | % |
| Corporate | | | 19,828 | | | | (8,307 | ) | | | 338.7 | % |
| Total | | $ | 23,515 | | | $ | 396 | | | | 5838.1 | % |
| Starts: | | | | | | | | | |
| Campus Operations | | | 4,411 | | | | 3,742 | | | | 17.9 | % |
| Transitional | | | - | | | | 110 | | | | -100.0 | % |
| Total | | | 4,411 | | | | 3,852 | | | | 14.5 | % |
Average Population:
| | | | | | | | | |
| Campus Operations | | | 12,369 | | | | 12,326 | | | | 0.3 | % |
| Transitional | | | 84 | | | | 311 | | | | -73.0 | % |
| Total | | | 12,453 | | | | 12,637 | | | | -1.5 | % |
| End of Period Population: | | | | | | | | | |
| Campus Operations | | | 12,959 | | | | 12,704 | | | | 2.0 | % |
| Transitional | | | 45 | | | | 298 | | | | -84.9 | % |
| Total | | | 13,004 | | | | 13,002 | | | | 0.0 | % |
Campus Operations
Operating income was $4.2 million and $8.8 million for each of the three months ended June 30, 2023 and 2022, respectively. The change quarter-over-quarter was mainly driven by the following factors:
| • | Revenue increased $7.9 million, or 9.8% to $88.2 million for the three months ended June 30, 2023 from $80.3 million in the prior year comparable period. The remaining revenue increase was due to average revenue per student up 8.6%, driven in part by the continuing roll-out of the Company’s hybrid teaching model in combination with tuition increases. The Company’s hybrid teaching model increases program efficiency and delivers accelerated revenue recognition in certain evening programs. Revenue also benefited from the 17.9% growth in student starts. |
| • | Educational services and facilities expense increased $4.2 million, or 12.0% to $39.5 million for the three months ended June 30, 2023 from $35.3 million in the prior year comparable period. Increased costs were primarily concentrated in instructional, facilities expense and books and tools expense. |
| | o | Instructional expenses increased $1.6 million driven by several factors including higher staffing levels resulting from increased student starts, merit salary increases for instructors and the transition to the Company’s hybrid teaching model. |
| o | Facilities expense increased by approximately $1.3 million, driven by several factors including additional rent expense of $0.3 million resulting from the new Atlanta, Georgia campus lease, and the sale of our Nashville, Tennessee property. Additional costs included an increase in utility expense resulting from higher usage and inflation in addition to increases in real estate taxes. |
| o | Books and tools increased $1.3 million, driven by the 17.9% increase in student starts quarter-over-quarter. |
| • | Selling, general and administrative expense increased $4.0 million, or 11.1% to $40.3 million for the three months ended June 30, 2023, from $36.3 million in the prior year comparable period. The increase was primarily driven by additional salaries expense, performance-based incentives, bad debt expense, increased investments in marketing and additional costs for student services, all of which are discussed above in the consolidated results of operations. |
| • | Impairment of goodwill and long-lived assets was $4.2 million as a result of the sale the Nashville, Tennessee property on June 8, 2023. The result of the sale created a change in the trajectory of the fair value of the Nashville, Tennessee operations and as such, the Company recorded a pre-tax non-cash impairment charge of $3.8 million relating to goodwill and an additional $0.4 million impairment relating to long-lived assets. As of June 30, 2022, there were no impairments of goodwill or long-lived assets. |
Transitional
On November 3, 2022, the Board of Directors approved a plan to close the Somerville, Massachusetts campus. The owner of the Somerville property has exercised an option to terminate the lease on December 8, 2023 and the Company has since determined not to pursue relocating the campus in this geographic region. The Company has also developed a plan to deliver instruction for the remaining students prior to the closing. Total costs to close the campus including the teach-out will be approximately $2.0 million. The campus will be fully taught-out and closed by December 31, 2023.
| • | Revenue decreased $1.4 million, or 75.9% to $0.4 million for the three months ended June 30, 2023, from $1.8 million in the prior year comparable period. |
| • | Total operating expenses decreased $1.0 million, or 51.4% to $0.9 million for the three months ended June 30, 2023, from $1.9 million in the prior year comparable period. |
Decreased operating performance is the result of closing the campus and no longer enrolling new students.
Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses were $11.1 million and $8.5 million after excluding a $30.9 million gain in the current year, resulting from the sale of our Nashville, Tennessee property and a $0.2 million gain in the prior year driven by the sale of our former campus property in Suffield, Connecticut. Increased costs were driven by several factors including additional salaries expense, stock-based compensation, performance-based incentives and an increase in legal costs (see Part II, Item 1. “Legal Proceedings”). Partially offsetting these costs was a decrease in medical expense resulting from reduced claims.
The following table presents results for our two reportable segments for the six months ended June 30, 2023 and 2022:
| | | Six Months Ended June 30, | |
| | | 2023 | | | 2022 | | | % Change | |
| Revenue: | | | | | | | | | |
| Campus Operations | | $ | 174,565 | | | $ | 161,130 | | | | 8.3 | % |
| Transitional | | | 1,364 | | | | 3,567 | | | | -61.8 | % |
| Total | | $ | 175,929 | | | $ | 164,697 | | | | 6.8 | % |
| Operating Income (loss): | | | | | | | | | |
| Campus Operations | | $ | 14,278 | | | $ | 17,406 | | | | -18.0 | % |
| Transitional | | | (679 | ) | | | (150 | ) | | | 352.7 | % |
| Corporate | | | 8,801 | | | | (17,186 | ) | | | 151.2 | % |
| Total | | $ | 22,400 | | | $ | 70 | | | | 31900.0 | % |
| Starts: | | | | | | | | | |
| Campus Operations | | | 7,851 | | | | 6,976 | | | | 12.5 | % |
| Transitional | | | - | | | | 229 | | | | -100.0 | % |
| Total | | | 7,851 | | | | 7,205 | | | | 9.0 | % |
| Average Population: | | | | | | | | | |
| Campus Operations | | | 12,297 | | | | 12,444 | | | | -1.2 | % |
| Transitional | | | 123 | | | | 317 | | | | -61.2 | % |
| Total | | | 12,420 | | | | 12,761 | | | | -2.7 | % |
| End of Period Population: | | | | | | | | | |
| Campus Operations | | | 12,959 | | | | 12,704 | | | | 2.0 | % |
| Transitional | | | 45 | | | | 298 | | | | -84.9 | % |
| Total | | | 13,004 | | | | 13,002 | | | | 0.0 | % |
Campus Operations
Operating income was $14.3 million and $17.4 million for each of the six months ended June 30, 2023 and 2022, respectively. The change year-over-year was mainly driven by the following factors:
| • | Revenue increased $13.4 million, or 8.3% to $174.5 million for the six months ended June 30, 2023 from $161.1 million in the prior year comparable period. The remaining revenue increase was due to average revenue per student up 8.8%, driven in part by the continuing roll-out of the Company’s hybrid teaching model in combination with tuition increases. The Company’s hybrid teaching model increases program efficiency and delivers accelerated revenue recognition in certain evening programs. Revenue also benefited from the 12.5% growth in student starts. |
| • | Educational services and facilities expense increased $6.4 million, or 9.0% to $77.0 million for the six months ended June 30, 2023 from $70.6 million in the prior year comparable period. Increased costs were primarily concentrated in instructional, facilities expense and books and tools expense. |
| o | Instructional expenses increased $3.2 million driven by several factors including higher staffing levels resulting from increased student starts, merit salary increases for instructors and the transition to the Company’s hybrid teaching model. |
| o | Facilities expense increased by approximately $1.6 million, driven by several factors including additional rent expense of $0.5 million resulting from the new Atlanta, Georgia campus lease, and the sale of our Nashville, Tennessee property. Additional costs included an increase in utility expense resulting from higher usage and inflation in addition to increases in real estate taxes |
| o | Books and tools increased $1.6 million, driven by the 12.5% increase in student starts year-over-year. |
| • | Selling, general and administrative expense increased $6.0 million, or 8.2% to $79.0 million for the six months ended June 30, 2023, from $73.0 million in the prior year comparable period. The increase was primarily driven by additional salaries expense, performance-based incentives, bad debt expense, increased investments in marketing and additional costs for student services, all of which are discussed above in the consolidated results of operations. |
| • | Impairment of goodwill and long-lived assets was $4.2 million as a result of the sale the Nashville, Tennessee property on June 8, 2023. The result of the sale created a change in the trajectory of the fair value of the Nashville, Tennessee operations and as such, the Company recorded a pre-tax non-cash impairment charge of $3.8 million relating to goodwill and an additional $0.4 million impairment relating to long-lived assets. As of June 30, 2022, there were no impairments of goodwill or long-lived assets. |
Transitional
On November 3, 2022, the Board of Directors approved a plan to close the Somerville, Massachusetts campus. The owner of the Somerville property has exercised an option to terminate the lease on December 8, 2023 and the Company has since determined not to pursue relocating the campus in this geographic region. The Company has also developed a plan to deliver instruction for the remaining students prior to the closing. Total costs to close the campus including the teach-out will be approximately $2.0 million. The campus will be fully taught-out and closed by December 31, 2023.
| • | Revenue decreased $2.2 million, or 61.7% to $1.4 million for the six months ended June 30, 2023, from $3.6 million in the prior year comparable period. |
| • | Total operating expenses decreased $1.7 million, or 45.0% to $2.0 million for the six months ended June 30, 2023, from $3.7 million in the prior year comparable period. |
Decreased operating performance is the result of closing the campus and no longer enrolling new students.
Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses were $22.1 million and $17.4 million after excluding a $30.9 million gain in the current year, resulting from the sale of our Nashville, Tennessee property and a $0.2 million gain in the prior year driven by the sale of our former campus property in Suffield, Connecticut. Increased costs were driven by several factors including additional salaries expense, stock-based compensation, performance-based incentives and an increase in legal costs (see Part II, Item 1. “Legal Proceedings”). Partially offsetting these costs was a decrease in medical expense resulting from reduced 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 six months ended June 30, 2023 and 2022:
| | | Six Months Ended | |
| | | June 30, | |
| | | 2023 | | | 2022 | |
| Net cash provided by (used in) operating activities | | $ | 10,403 | | | $ | (9,992 | ) |
| Net cash provided by (used in) investing activities | | | 12,823 | | | | (1,192 | ) |
| Net cash used in financing activities | | | (2,945 | ) | | | (5,138 | ) |
As of June 30, 2023, the Company had $70.6 million in cash and cash equivalents and restricted cash, in addition to $24.3 million in short-term investments, compared to $50.3 million cash and cash equivalents and restricted cash, including $14.7 million in short-term investments as of December 31, 2022. The increase in cash was primarily driven by the sale of our Nashville, Tennessee property, which yielded proceeds of approximately $33.3 million. Partially offsetting the increase in cash are several factors including $10.9 million in capital expenditure investments made during the six months ended June 30, 2023, which were primarily due to the ongoing buildout of the new Atlanta, Georgia campus, incentive 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 share 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 June 30, 2023, the Company has approximately $29.7 million remaining for repurchases.
During the six months ended June 30, 2023, the Company repurchased 165,064 shares at a cost of approximately $0.9 million. Total repurchases made since the inception of the share repurchase program through June 30, 2023 were 1,737,478 shares at a total cost of approximately $10.3 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 74% of our cash receipts relating to revenues in 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 provided by operating activities was $10.4 million for the six months ended June 30, 2023 compared to net cash used of $10.0 million in the prior year comparable period. The main drivers for the cash provided by operating activities included a $4.3 million increase in accounts payable during the six months ended June 30, 2023 resulting from the timing of cash disbursements, an increase in accrued expense of $8.5 million over the prior year resulting from a $6.1 million performance-based incentive payment made during the first quarter of 2022 and a $6.2 million increase in prepaid income taxes and income taxes payable, resulting from increased pre-tax earnings driven by the sale of the Nashville, Tennessee property during the second quarter of 2023.
Investing Activities
Net cash provided by investing activities was $12.8 million for the six months ended June 30, 2023 compared to net cash used in investing activities of $1.2 million in the prior year comparable period. Cash provided by investing activities in the current year was primarily driven by $33.3 million in proceeds received from the sale of our Nashville, Tennessee campus, partially offset by investments of $10.9 million in capital expenditures primarily relating to our new Atlanta, Georgia campus and net purchases of short-term investment totaling $9.6 million in 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. Additionally, the Company has reinvested $24.3 million for the purchase of short-term investments.
As we have now consummated the sale of the Nashville, Tennessee property, we currently lease all of our campuses.
Capital expenditures were 3% of revenues in 2022 and are expected to approximate 11% of revenues in 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, Rhode Island 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 for the six months ended June 30, 2023 and 2022 was $2.9 million and $5.1 million, respectively. The decrease in cash used of $2.2 million was primarily driven by a $1.6 million reduction in repurchases made under the Company’s share repurchase program in the current year, in addition to $0.6 million of dividends payments made in the prior year.
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”). 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 rights in the Company’s subsidiaries and mortgages on parcels of real property owned by the Company. The Credit Agreement was amended on various occasions.
On November 4, 2022, the Company agreed with its Lender to terminate the Credit Agreement and the remaining Revolving Loan. The Lender agreed to allow the Company’s existing letters of credit to remain outstanding provided that they are cash collateralized. As of June 30, 2023, the letters of credit, in the aggregate outstanding principal amount of $4.0 million, remained outstanding, were cash collateralized, and were classified as restricted cash on the Condensed Consolidated Balance Sheet. As of June 30, 2023, the Company did not have a credit facility and did not have any debt outstanding. The Company is continuing to consider potential lenders for its future credit needs.
Contractual Obligations
Current portion of Long-Term Debt, Long-Term Debt and Lease Commitments. As of June 30, 2023, we had 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 June 30, 2023, we had outstanding loan principal commitments to our active students of $29.4 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 required to fund their education using these funds and they are not reported on our financial statements.
Regulatory Updates
Negotiated Rulemaking
The DOE initiated rulemaking on several topics in January 2022 and, after delays in the process, announced in January 2023 its intention to reinitiate the rulemaking process on topics including gainful employment, financial responsibility, administrative capability, certification procedures, ability to benefit and improving income driven repayment of loans. See our Form 10-K at “Business – Regulatory Environment – Negotiated Rulemaking.” On May 19, 2023, the DOE published a notice of proposed rulemaking in the Federal Register that includes proposed regulations on topics including:
| • | Gainful Employment: The proposed regulations would replace prior gainful employment regulations, rescinded by the DOE in 2019, that required each of our educational programs to achieve threshold rates in at least one of two debt measure categories. See our Form 10-K at “Business – Regulatory Environment – Gainful Employment.” The proposed regulations would establish rules for annually evaluating each of our educational programs based on the calculation of debt-to-earnings rates (an annual debt-to-earnings rate and a discretionary debt-to-earnings rate) and a median earnings measure. The DOE would calculate these rates and measures under complex regulatory formulas outlined in the proposed regulations and using data such as student debt (including not only Title IV loans but also certain private loans and extensions of credit), student earnings data, and comparative median earnings data for young working adults with only a high school diploma or GED. If one or more of our educational programs were to yield debt-to-earnings rates or a median earnings measures that do not comply with regulatory benchmarks for two of three consecutive years, we would lose Title IV eligibility for each of the impacted educational programs. The proposed regulations also would require us to provide warnings to current and prospective students for programs in danger of losing of Title IV eligibility (which could deter prospective students from enrolling and current students from continuing their respective programs). The regulations also require providing certifications and reporting data to the DOE and providing required student disclosures related to gainful employment. |
The proposed regulations include gainful employment rates and measures that would be based in part on data that is not readily accessible to us and other institutions, which would make it difficult for us to predict with certainty how our educational programs will perform under the new gainful employment benchmarks and the extent to which certain programs could become ineligible for Title IV participation. The DOE released performance data at the time it published the proposed regulations that calculates rates for each school’s program while acknowledging that the methodology used to produce the calculations differs from the methodology in the proposed regulations due to limitations in data availability. Because neither we nor the DOE have access to all of the data that would ultimately be used under the proposed regulations to evaluate our programs, we cannot predict, whether or the extent to which our programs could fail to comply with the new gainful employment benchmarks. Moreover, we would not have control over some of the factors that could impact the rates and measures for our programs, which would limit our ability to eliminate or mitigate the impact of the proposed regulations on us and our educational programs.
We cannot predict the substance or extent of the final regulations or how our programs will perform under the final version of the gainful employment metrics.
| • | Financial Responsibility: The DOE’s proposed financial responsibility regulations include an expanded list of mandatory and discretionary triggering events that could result in the DOE determining that an 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 our Form 10-K at “Business – Regulatory Environment – Financial Responsibility Standards.” |
The proposed regulations if adopted would, among other things, modify and substantially expand the number of triggers and, as a result, increase the likelihood that the DOE could impose a financial protection requirement and other conditions on us and our institutions. The proposed rules require the institution to notify the DOE of a triggering event and provide information demonstrating why the event does not warrant the submission of a letter of credit or imposition of other requirements. The proposed rules state that, if the DOE requires financial protection as a result of more than one mandatory or discretionary trigger, the DOE will require separate financial protection for each individual trigger, which could substantially increase the amount of financial protection we and other institutions could be required to provide to the DOE.
Examples of mandatory triggering events under the proposed regulations are a lawsuit by a federal or state authority, or through a qui tam lawsuit, in which the federal government has intervened where the suit has been pending for 120 days, where the DOE seeks to recover the cost of adjudicated claims in favor of borrowers under the borrower loan discharge regulations and the claims would lower the institution’s composite score below 1.0, certain debts or settlements in certain judicial, administrative or arbitration proceedings, certain withdrawals of owner’s equity including by dividend, gainful employment issues, accreditor requirements to submit a teach-out plan, certain state actions by state licensing agencies, certain actions taken against a publicly traded company or failure to file timely certain annual or quarterly reports, 90/10 issues, cohort default rate issues, loss of eligibility for other federal educational assistance programs, contributions and distributions occurring near the fiscal year end that materially impact the composite score, certain defaults or other adverse events under a financing arrangement or certain financial exigencies or receiverships.
Examples of discretionary triggering events under the proposed regulations are certain accrediting agency actions, certain creditor events, fluctuations in Title IV volume, high annual dropout rates, indicators of material change in the financial condition of the institution, the formation by the DOE of a group process to consider borrower defense claims against the institution, the institution’s discontinuation of education programs affecting at least 25 percent of enrolled students, the institution’s closure of most of its locations, certain state licensing agency actions, certain instances of short-term borrowing, the loss of program eligibility in another federal educational assistance program, a requirement to disclose in a public filing that the company is under investigation for possible violations of law or if the institution is cited and faces loss of education assistance funds from another federal agency if it does not comply with agency requirements. The proposed regulations also establish new rules for evaluating financial responsibility during a change in ownership.
| • | Administrative Capability: The DOE assesses the administrative capability of each institution that participates in Title IV Programs under a series of separate standards. Failure to satisfy any of the standards may lead the DOE to find the institution ineligible to participate in Title IV Programs or to place the institution on provisional certification as a condition of its participation. See our Form 10-K at “Business – Regulatory Environment – Administrative Capability.” Newly proposed rules would add more standards related to topics such as the provision of adequate financial aid counseling and career services, ensuring the availability of clinical and externship opportunities, the disbursement of Title IV funds in a timely manner, compliance with high school diploma requirements, preventing misrepresentations, complying with gainful employment requirements and avoiding significant negative actions with a federal, state, or accrediting agency. |
| • | Certification Regulations: The proposed regulations expand the grounds for placing institutions on provisional certification, expand the types of conditions the DOE may impose on provisionally certified institutions and expand the number of requirements contained in the institution’s program participation agreement with the DOE (including, among other requirements, an obligation to comply generally with state consumer protection laws). The DOE typically provides provisional certification to an institution following a change in ownership resulting in a change of control and also may provisionally certify an institution for other reasons including, but not limited to, noncompliance with certain standards of administrative capability and financial responsibility. The DOE provisionally certified all of our institutions based on findings in recent audits of each institution’s Title IV Program compliance that the DOE alleges identified deficiencies related to DOE regulations regarding an institution’s level of administrative capability. An institution that is provisionally certified receives fewer due process rights than those received by other institutions in the event the DOE takes certain adverse actions against the institution, is required to obtain prior DOE approvals of new campuses and educational programs and may be subject to heightened scrutiny by the DOE. Provisional certification makes it easier for the DOE to revoke or decline to renew our Title IV eligibility if the DOE under the current administration chooses to take such an action against us and other provisionally certified for-profit schools without undergoing a formal administrative appeal process. See our Form 10-K at “Business – Regulatory Environment – Regulation of Federal Student Financial Aid Programs.” |
The proposed regulations if adopted would allow the DOE to place institutions on provisional certification if, among other reasons, the institution does not meet financial responsibility factors or administrative capability standards, if the institution is required by the DOE to submit a letter of credit as a result of a mandatory or discretionary triggering event or if the DOE deems the institution to be at risk of closure.
The proposed regulations also would allow the DOE to determine whether to certify or impose conditions on an institution based on consideration of factors including, for example, the institution’s withdrawal rate, the institution’s gainful employment metrics such as its debt-to-earnings rates and earnings premium measures, the amounts the institution spent on recruiting activities, advertising, and other pre-enrollment activities, and the passage rate for licensure exams for programs that are designed to meet the educational requirements for a professional license required for employment in an occupation.
The proposed regulations expand the types of conditions the DOE can impose on provisionally certified institutions including, for example, restrictions on the addition of new programs or locations, restrictions on the rate of growth or new enrollment of students or of Title IV volume, restrictions on the institution providing a teach-out on behalf of another institution, restrictions on the acquisition of another participating institution (including financial protection requirements), additional reporting requirements, limitations on entering into certain written arrangements with institutions or entities for providing part of an educational program, requirements to submit marketing and recruiting materials to the DOE for approval (if the institution is alleged or found to have engaged in misrepresentations to students, engaged in aggressive recruiting practices, or violated incentive compensation rules) and other potential conditions imposed by the DOE.
The DOE will receive public comments to the proposed regulations and consider whether to modify the proposed regulations before publishing the final regulations. If the DOE publishes final regulations by November 1, 2023, the regulations typically would have a general effective date of July 1, 2024. We are still reviewing the proposed regulations and cannot predict the ultimate timing, content and impact of the final regulations on all of these topics. However, the final version of these regulations is expected to impose a broad range of additional requirements on institutions, especially on for-profit institutions like our schools which would likely increase the possibility that our schools could be subject to additional reporting requirements, to potential liabilities and sanctions and to potential loss of Title IV eligibility if our efforts to modify our operations to comply with the regulations are unsuccessful.
Accreditation
Accreditation by an accrediting agency recognized by the DOE is required for an institution to be certified to participate in Title IV Programs. As of June 30, 2023, all 22 of our campuses are nationally accredited by the Accrediting Commission of Career Schools and Colleges (the “ACCSC”). On October 28, 2021, the DOE announced that it had notified ACCSC that a decision on the recognition by the DOE of ACCSC as an accrediting agency was being deferred pending the submission of additional information about ACCSC’s monitoring, evaluation and actions related to high-risk institutions. ACCSC’s loss of DOE recognition could have led to adverse consequences to our schools including, but not limited to, their loss of Title IV eligibility. See our Form 10-K at “Business – Regulatory Environment – Accreditation.” On May 25, 2023, the DOE notified ACCSC that it would continue the DOE’s recognition of the agency as a nationally recognized accreditor for three years.
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 due 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. The growth that we generally experience in the second half of 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, 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 Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)) as of the end of the quarterly period covered by this 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, except for new internal controls related to ASC 326 and accounts payable payment processing that have been implemented.
PART II. OTHER INFORMATION
On November 16, 2022, the U.S. District Court for the Northern District of California granted final approval of a settlement agreement in the lawsuit Sweet v. Cardona, No. 3:19-cv-3674 (N.D. Cal.). Under the settlement agreement, the DOE agreed 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 our 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 our petition.
Despite the denials of our stay requests, we have filed a joint appeal with the Ninth Circuit to overturn the District Court’s judgment approving the final settlement and expect that oral argument will be scheduled for late 2023 or early 2024 However, as previously reported, 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 have provided for contesting the applications that were provided to us and without waiting for the Ninth Circuit to rule on our appeal. 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 of November 16, 2022. It is not possible at this time to 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.
Further, in the ordinary conduct of its business, the Company is subject to certain lawsuits, investigations and claims, including, but not limited to, claims involving students or graduates and routine employment matters. Although the Company cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against it, the Company does not believe that any of these matters will have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
In addition to the other 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 and those contained in our previously filed Form 10-Q, which could affect our business, financial condition, or operating results. The risks we describe in our periodic reports are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or operating results. For the quarter ended June 30, 2023, the Company is not aware of any specific new and additional risk factors not previously disclosed.
| 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. |
The following table presents the number and average price of shares purchased during the three months ended June 30, 2023. The remaining authorized amount for share repurchases under the program as of June 30, 2023 was approximately $29.7 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, 2023 to April 30, 2023 | | | 58,875 | | | $ | 5.49 | | | | 58,875 | | | $ | 29,675,533 | |
| May 1, 2023 to May 31, 2023 | | | 2,159 | | | | 5.50 | | | | 2,159 | | | | 29,663,667 | |
| June 1, 2023 to June 30, 2023 | | | - | | | | - | | | | - | | | | - | |
| Total | | | 61,034 | | | | 5.49 | | | | 61,034 | | | | | |
For more information on the share repurchase plan, see Note 7 to our Condensed Consolidated Financial Statements.
| Item 3. | DEFAULTS UPON SENIOR SECURITIES |
| 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. |
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| 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). |
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31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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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 the Company’s 10-Q for the quarter ended June 30, 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 iXBRL 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: August 7, 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. |
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| Certificate of Amendment, dated November 14, 2019, to the Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-3 filed October 6, 2020). |
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| 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). |
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| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| 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. |
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101* | The following financial statements from the Company’s 10-Q for the quarter ended June 30, 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. |
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104 | Cover Page Interactive Data File (formatted as iXBRL 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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