| 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 the 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 has been organized into two reportable business segments: (a) Campus Operations; and (b) Transitional. 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 campuses that have been marked for closure and are being taught out. As of June 30, 2024, no campuses were classified in the Transitional segment. During the prior year, the Company’s Somerville, Massachusetts campus was classified in the Transitional segment. It was fully taught out as of December 31, 2023.
We evaluate performance based on operating results. Adjustments to reconcile segment results with 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, 2023.
General
Lincoln Educational Services Corporation and its subsidiaries (collectively, the “Company”, “we”, “our”, and “us”, as applicable) provide diversified career-oriented post-secondary education to recent high school graduates and working adults. The Company, which currently operates 22 campuses in 13 states, offers programs in skilled trades (which include HVAC, welding, computerized numerical control and electrical and electronic systems technology, among other programs), automotive technology, 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. The schools 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 accredited and are eligible to participate in federal financial aid programs by the U.S. Department of Education (“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.
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 Accounting Standards Update (“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 series 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.
We do not believe that there is any direct correlation between tuition increases, the credit we extend to students and our financing commitments. The extended financing plans we offer to our students are made on a student-by-student basis and are predominantly a function of the specific student’s financial condition. We only extend credit to the extent there is a financing gap between the tuition and fees charged for the program and the amount of grants, loans and parental loans each student receives. Each student’s funding requirements are unique. Factors that determine the amount of aid available to a student include whether they are dependent or independent students, Pell Grants awarded, federal Direct Loans awarded, PLUS loans awarded to parents and the student’s personal resources and family contributions. As a result, it is extremely difficult to predict the number of students that will need us to extend credit to them.
Because a substantial portion of our revenues is derived from Title IV Programs, any legislative or regulatory action that significantly reduces the funding available under Title IV Programs or the ability of our students or schools to participate in Title IV Programs could have a material effect on the realizability of our receivables.
Effect of Inflation
Inflation has not had a material effect on our operations.
Results of Continuing Operations for the Three and Six Months Ended June 30, 2024
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, | |
| | | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| Revenue | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| Costs and expenses: | | | | | | | | | | | | | | | | |
| Educational services and facilities | | | 44.3 | % | | | 45.2 | % | | | 42.9 | % | | | 44.4 | % |
| Selling, general and administrative | | | 56.2 | % | | | 58.5 | % | | | 57.4 | % | | | 58.0 | % |
| Loss (gain) on sale of assets | | | 0.6 | % | | | -34.9 | % | | | 0.4 | % | | | -17.6 | % |
| Impairment of goodwill and long-lived assets | | | 0.0 | % | | | 4.8 | % | | | 0.0 | % | | | 2.4 | % |
| Total costs and expenses | | | 101.1 | % | | | 73.5 | % | | | 100.8 | % | | | 87.3 | % |
| Operating (loss) income | | | -1.1 | % | | | 26.5 | % | | | -0.8 | % | | | 12.7 | % |
| Interest income, net | | | 0.0 | % | | | 0.6 | % | | | 0.0 | % | | | 0.5 | % |
| (Loss) income from operations before income taxes | | | -1.1 | % | | | 27.1 | % | | | -0.7 | % | | | 13.3 | % |
| (Benefit) provision for income taxes | | | -0.4 | % | | | 7.7 | % | | | -0.3 | % | | | 3.5 | % |
| Net (loss) income | | | -0.7 | % | | | 19.5 | % | | | -0.4 | % | | | 9.7 | % |
Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023
Consolidated Results of Operations
Revenue. Revenue increased by $14.3 million, or 16.1% to $102.9 million for the three months ended June 30, 2024, from $88.6 million in the prior year comparable period. The primary reasons for the increase were an 11.7% rise in average student population resulting from entering this quarter with 11.2% more students combined with new student start growth of 12.3%. Further revenue growth was driven by an increase in average revenue per student.
Educational services and facilities expense. Our educational services and facilities expense increased $5.5 million, or 13.8% to $45.5 million from $40.0 million in the prior year comparable period. Included in the increase over the prior year were approximately $2.6 million of new campus and relocation costs relating to the recently opened East Point, Georgia campus; relocation costs associated with the Nashville, Tennessee and the Levittown, Pennsylvania campuses, both expected to open in the first half of 2025; and costs associated with the new Houston, Texas campus, which is expected to open by the end of 2025. The remaining expense increases were due mostly to costs directly related to an increased student population.
Educational services and facilities expense, as a percentage of revenue, decreased to 44.3% from 45.2% for the three months ended June 30, 2024 and 2023, respectively.
Selling, general and administrative expense. Our selling, general and administrative expense increased $6.1 million, or 11.7% to $57.9 million for the three months ended June 30, 2024, from $51.8 million in the prior year comparable period. Included in the increase over the prior year were approximately $1.2 million of expenses primarily relating to the recently opened East Point, Georgia campus. The remaining increase was driven by higher administrative expenses, marketing investments and sales expense, with additional increases in student services resulting from a larger student population.
Administrative costs increased $2.3 million due to several factors including an increase in salary expense driven by merit increases and new hires resulting from population growth, in combination with a higher provision for credit losses largely driven by revenue growth.
Marketing investments increased $1.0 million, helping drive student starts, which were up 12.3% quarter-over-quarter.
Sales expenses increased $1.0 million primarily driven by increased personnel to continue to support and drive student start growth and program expansions.
Selling, general and administrative expense, as a percentage of revenue, decreased to 56.2% from 58.5% for the three months ended June 30, 2024 and 2023, respectively.
Net interest expense / income. Net interest expense was less than $0.1 million for the three months ended June 30, 2024 compared to net interest income of $0.5 million in the prior year comparable period. Interest income for the three months ended June 30, 2024 and 2023 remained essentially flat, with an increase in interest expense in the current year resulting from the addition of two new finance leases.
Income taxes. The benefit for income taxes was $0.5 million for the three months ended June 30, 2024 compared to a provision for income taxes of $6.8 million in the prior year comparable period. The benefit in the current quarter was driven by a pre-tax loss and a discrete item, compared to a provision in the prior year comparable period resulting from pre-tax income driven by a $30.9 million gain on the sale of the Nashville, Tennessee property.
Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023
Consolidated Results of Operations
Revenue. Revenue increased $30.4 million, or 17.3% to $206.3 million for the six months ended June 30, 2024 from $175.9 million in the prior year comparable period. The primary reasons for the increase were an 11.8% rise in average student population due to starting the year with approximately 9.0%, or 1,100 more students, coupled with 13.6% growth in student starts. Further revenue growth was driven by an increase in average revenue per student.
Educational services and facilities expense. Our educational services and facilities expense increased $10.5 million, or 13.4% to $88.6 million from $78.1 million in the prior year comparable period. Included in the increase over the prior year were approximately $4.2 million of new campus and relocation costs relating to the recently opened East Point, Georgia campus; relocation costs associated with the Nashville, Tennessee and the Levittown, Pennsylvania campuses, both expected to open in the first half of 2025; and costs associated with the new Houston, Texas campus, which is expected to open by the end of 2025. The remaining expense increases were due mostly to costs directly related to an increased student population.
Educational services and facilities expense, as a percentage of revenue, decreased to 42.9% from 44.4% for the six months ended June 30, 2024 and 2023, respectively.
Selling, general and administrative expense. Our selling, general and administrative expense increased $16.2 million, or 15.9% to $118.3 million for the six months ended June 30, 2024, from $102.1 million in the prior year comparable period. Included in the increase over the prior year were approximately $2.5 million of expenses primarily related to the recently opened East Point, Georgia campus. The remaining increase was driven by higher administrative expenses, marketing investments and sales expense, with additional increases in student services resulting from a larger student population.
Administrative costs increased $8.4 million due to several factors including an increase in salary expense driven by merit increases and new hires resulting from population growth, in combination with a higher provision for credit losses, largely driven by revenue growth.
Marketing investments increased $1.9 million, helping drive student starts, which were up 13.6% year-over-year.
Sales expenses increased $1.9 million, primarily driven by increased personnel to continue to support and drive student start growth and program expansions.
Selling, general and administrative expense, as a percentage of revenue, decreased to 57.4% from 58.0% for the six months ended June 30, 2024 and 2023, respectively.
Net interest income. Net interest income was $0.1 million and $1.0 million for the six months ended June 30, 2024 and 2023, respectively. Interest income increased in the current year compared to the prior year, resulting from additional investments and higher interest rates. Partially offsetting these gains was an increase in interest expense in the current year, resulting from the addition of two new finance leases.
Income taxes. The benefit for income taxes was $0.6 million for the six months ended June 30, 2024 compared to a provision for income taxes of $6.2 million in the prior year comparable period. The benefit in the current quarter was driven by a pre-tax loss and a discrete item compared to a provision in the prior year comparable period resulting from pre-tax income, which was driven by a $30.9 million gain on the sale of the Nashville, Tennessee property.
Segment Results of Operations
Since January 1, 2023, the Company’s business has been organized into two reportable business segments: (a) Campus Operations; and (b) Transitional. These segments are 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 campuses that have been marked for closure and are being taught out. As of June 30, 2024, no campuses were classified in the Transitional segment. During the prior year, the Company’s Somerville, Massachusetts campus was classified in the Transitional segment. It was fully taught out as of December 31, 2023.
We evaluate performance based on operating results. Adjustments to reconcile segment results with 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, 2024 and 2023:
| | | Three Months Ended June 30, | |
| | | 2024 | | | 2023 | | | % Change | |
| Revenue: | | | | | | | | | |
| Campus Operations | | $ | 102,914 | | | $ | 88,213 | | | | 16.7 | % |
| Transitional | | | - | | | | 433 | | | | -100.0 | % |
| Total | | $ | 102,914 | | | $ | 88,646 | | | | 16.1 | % |
| | | | | | | | | | | | | |
| Operating Income (loss): | | | | | | | | | | | | |
| Campus Operations | | $ | 9,630 | | | $ | 4,169 | | | | 131.0 | % |
| Transitional | | | - | | | | (482 | ) | | | -100.0 | % |
| Corporate | | | (10,746 | ) | | | 19,828 | | | | -154.2 | % |
| Total | | $ | (1,116 | ) | | $ | 23,515 | | | | -104.7 | % |
| | | | | | | | | | | | | |
| Starts: | | | | | | | | | | | | |
| Campus Operations | | | 4,953 | | | | 4,411 | | | | 12.3 | % |
| Total | | | 4,953 | | | | 4,411 | | | | 12.3 | % |
| | | | | | | | | | | | | |
| Average Population: | | | | | | | | | | | | |
| Campus Operations | | | 13,811 | | | | 12,369 | | | | 11.7 | % |
| Transitional | | | - | | | | 84 | | | | -100.0 | % |
| Total | | | 13,811 | | | | 12,453 | | | | 10.9 | % |
| | | | | | | | | | | | | |
| End of Period Population: | | | | | | | | | | | | |
| Campus Operations | | | 14,481 | | | | 12,959 | | | | 11.7 | % |
| Transitional | | | - | | | | 45 | | | | -100.0 | % |
| Total | | | 14,481 | | | | 13,004 | | | | 11.4 | % |
Campus Operations
Operating income increased $5.4 million to $9.6 million for the three months ended June 30, 2024 from $4.2 million in the prior year comparable period. The change quarter-over-quarter was mainly driven by the following factors:
| • | Revenue increased $14.7 million, or 16.7% to $102.9 million for the three months ended June 30, 2024 from $88.2 million in the prior year comparable period. The primary reasons for this increase were an 11.7% rise in average student population resulting from entering the quarter with 11.2% more students combined with new student start growth of 12.3%. Further revenue growth was driven by an increase in average revenue per student. |
| • | Our educational services and facilities expense increased $6.0 million, or 15.3% to $45.5 million for the three months ended June 30, 2024 from $39.5 million in the prior year comparable period. Included in the increase over the prior year are approximately $2.6 million of new campus and relocation costs relating to the East Point, Georgia campus; relocation costs associated with the Nashville, Tennessee and Levittown, Pennsylvania campuses and costs associated with the new Houston, Texas campus. The remaining expense increases were due mostly to costs related to an increased student population, all of which are discussed above in Consolidated Results of Operations. |
| • | Our selling, general and administrative expense increased $6.8 million, or 16.9% to $47.1 million for the three months ended June 30, 2024, from $40.3 million in the prior year comparable period. Included in the increase over the prior year were approximately $1.2 million of expenses primarily related to the recently opened East Point, Georgia campus. The remaining increase was driven by higher administrative expenses, marketing investments and sales expense, all of which are discussed above in Consolidated Results of Operations. |
Transitional
On November 3, 2022, the Board of Directors approved a plan to close the Somerville, Massachusetts campus. The owner of the Somerville property exercised an option to terminate the lease on December 8, 2023 and the Company determined not to pursue relocating the campus in this geographic region. The campus was fully taught out as of December 31, 2023 and did not generate any expense for the current quarter.
| • | Revenue decreased $0.4 million, or 100.0% to zero for the three months ended June 30, 2024, from $0.4 million in the prior year comparable period. |
| • | Total operating expenses decreased $0.9 million, or 100.0% to zero for the three months ended June 30, 2024, from $0.9 million in the prior year comparable period. |
The change in operating performance was 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 $10.7 million and $11.1 million for the three months ended June 30, 2024 and 2023, respectively, after excluding a $30.9 million gain in the prior year resulting from the sale of the Nashville, Tennessee property. The decrease in expense from the prior year was primarily driven by a reduction in stock-based compensation expense resulting from a cumulative catch-up of expense in the prior year due to meeting financial performance targets, partially offset by additional salaries and benefits expense resulting in part from student population growth.
The following table presents results for our two reportable segments for the six months ended June 30, 2024 and 2023:
| | | Six Months Ended June 30, | |
| | | 2024 | | | 2023 | | | % Change | |
| Revenue: | | | | | | | | | |
| Campus Operations | | $ | 206,281 | | | $ | 174,565 | | | | 18.2 | % |
| Transitional | | | - | | | | 1,364 | | | | -100.0 | % |
| Total | | $ | 206,281 | | | $ | 175,929 | | | | 17.3 | % |
| | | | | | | | | | | | | |
| Operating Income (loss): | | | | | | | | | | | | |
| Campus Operations | | $ | 21,954 | | | $ | 14,278 | | | | 53.8 | % |
| Transitional | | | - | | | | (679 | ) | | | -100.0 | % |
| Corporate | | | (23,529 | ) | | | 8,801 | | | | -367.3 | % |
| Total | | $ | (1,575 | ) | | $ | 22,400 | | | | -107.0 | % |
| | | | | | | | | | | | | |
| Starts: | | | | | | | | | | | | |
| Campus Operations | | | 8,920 | | | | 7,851 | | | | 13.6 | % |
| Total | | | 8,920 | | | | 7,851 | | | | 13.6 | % |
| | | | | | | | | | | | | |
| Average Population: | | | | | | | | | | | | |
| Campus Operations | | | 13,745 | | | | 12,297 | | | | 11.8 | % |
| Transitional | | | - | | | | 123 | | | | -100.0 | % |
| Total | | | 13,745 | | | | 12,420 | | | | 10.7 | % |
| | | | | | | | | | | | | |
| End of Period Population: | | | | | | | | | | | | |
| Campus Operations | | | 14,481 | | | | 12,959 | | | | 11.7 | % |
| Transitional | | | - | | | | 45 | | | | -100.0 | % |
| Total | | | 14,481 | | | | 13,004 | | | | 11.4 | % |
Campus Operations
Operating income increased 53.8%, or $7.7 million to $22.0 million for the six months ended June 30, 2024 from $14.3 million in the prior year comparable period. The change year-over-year was mainly driven by the following factors:
| • | Revenue increased $31.7 million, or 18.2% to $206.2 million for the six months ended June 30, 2024 from $174.5 million in the prior year comparable period. The primary reasons for this increase were an 11.8% rise in average student population due to starting the year with approximately 9.0% or 1,100 more students, coupled with a 13.6% growth in student starts. Further revenue growth was driven by an increase in average revenue per student. |
| • | Our educational services and facilities expense increased $11.6 million, or 15.0% to $88.6 million for the six months ended June 30, 2024 from $77.0 million in the prior year comparable period. Included in the increase over the prior year were approximately $4.2 million of new campus and relocation costs related to the East Point, Georgia campus; relocation costs associated with the Nashville, Tennessee and Levittown, Pennsylvania campuses and costs associated with the new Houston, Texas campus. The remaining expense increases were due mostly to costs related to an increased student population, all of which are discussed above in Consolidated Results of Operations. |
| • | Our selling, general and administrative expense increased $16.1 million, or 20.4% to $95.1 million for the six months ended June 30, 2024, from $79.0 million in the prior year comparable period. Included in the increase over the prior year were approximately $2.5 million of expenses primarily related to the recently opened East Point, Georgia campus. The remaining increase was driven by higher administrative expenses, marketing investments and sales expense, with additional increases in student services resulting from a larger student population, all of which are discussed above in Consolidated Results of Operations. |
Transitional
On November 3, 2022, the Board of Directors approved a plan to close the Somerville, Massachusetts campus. The owner of the Somerville property exercised the option to terminate the lease on December 8, 2023 and the Company determined not to pursue relocating the campus in this geographic region. The campus was fully taught out as of December 31, 2023 and did not generate any expense for the current year.
| • | Revenue decreased $1.4 million, or 100.0% to zero for the six months ended June 30, 2024, from $1.4 million in the prior year comparable period. |
| • | Total operating expenses decreased $2.0 million, or 100.0% to zero for the six months ended June 30, 2024, from $2.0 million in the prior year comparable period. |
The change in 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 $23.2 million and $22.1 million for the six months ended June 30, 2024 and 2023, respectively, after excluding a $0.3 million loss on sale of assets in the current year and a $30.9 million gain on sale of assets in the prior year resulting from the sale of the Nashville, Tennessee property. The increase from the prior year was primarily driven by additional salaries and benefits expense due in part to population growth, partially offset by a reduction in stock-based compensation expense driven by a cumulative catch-up of expense in the prior year in addition to reduced legal costs in the current year.
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 borrowings under our credit facility with Fifth Third Bank. The following chart summarizes the principal elements of our cash flow for each of the six months ended June 30, 2024 and 2023:
| | | Six Months Ended | |
| | | June 30, | |
| | | 2024 | | | 2023 | |
| Net cash (used in) provided by operating activities | | $ | (6,599 | ) | | $ | 10,403 | |
| Net cash (used in) provided by investing activities | | $ | (3,007 | ) | | $ | 12,823 | |
| Net cash used in financing activities | | $ | (3,676 | ) | | $ | (2,945 | ) |
As of June 30, 2024, the Company had $67.0 million in cash and cash equivalents, compared to $80.3 million in cash and cash equivalents and restricted cash as of December 31, 2023. The change in cash position from the end of the year was driven in part by the payment of incentive compensation during the first quarter and investments in capital expenditures relating to our East Point, Georgia campus in addition to new programs and program expansions and the seasonality of our business, which yields greater returns in the second half of the year. In addition, the prior year cash position benefited from $33.3 million in proceeds resulting from the sale of our Nashville, Tennessee property.
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.
On May 7, 2024, the Company announced that its Board of Directors had authorized an extension of its share repurchase program for an additional twelve months through May 24, 2025. During the three and six months ended June 30, 2024, the Company did not repurchase any additional shares. The Company has approximately $29.7 million remaining for repurchase under the program.
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 81% of our cash receipts relating to revenues in 2023. 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 payment 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 $6.6 million for the six months ended June 30, 2024 compared to cash provided by operating activities of $10.4 million in the prior year comparable period. The decrease in cash position was primarily due to an $11.8 million decrease in accounts payable and accrued expenses, representing a cash outflow driven by increased vendor payments and payment of incentive-based compensation during the first quarter. The remaining decrease in cash position resulted from higher accounts receivable driven by the timing of cash receipts and Title IV disbursements.
Investing Activities
Net cash used in investing activities was $3.0 million for the six months ended June 30, 2024 compared to net cash provided by investing activities of $12.8 million in the prior year comparable period. The prior year’s cash position benefited from several factors including the sale of the Nashville, Tennessee property and proceeds received from short-term investments. Partially offsetting these cash inflows was the purchase of additional short-term investments.
We currently lease all of our campuses.
Capital expenditures were approximately 11.0% of revenues in 2023 and are expected to approximate 18.0% of revenues in 2024. 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 East Point, Georgia campus and the new Nashville, Tennessee campus, additional space, the planned introduction of three new programs at the Lincoln, Rhode Island campus, and the anticipated introduction of new programs at certain 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, 2024 and 2023 was $3.7 million and $2.9 million, respectively. The increase in cash used was driven primarily by the tax impact of vested stock grants in the current year.
Credit Facility
On February 16, 2024, the Company entered into a secured credit agreement (the “Fifth Third Credit Agreement”) with Fifth Third Bank, National Association (the “Bank”), pursuant to which the Company, as borrower, obtained a revolving credit facility in the aggregate principal amount of $40.0 million including a $10.0 million letter of credit sublimit and a $20.0 million accordion feature (the “Facility”), the proceeds of which are to be used for working capital, general corporate and certain other permitted purposes. The Facility is guaranteed by the Company’s wholly-owned subsidiaries and is secured by a first priority lien in favor of the Bank on substantially all of the personal property owned by the Company and its subsidiaries. The term of the Facility is 36 months, maturing on February 16, 2027.
Each advance under the Facility will bear interest on the outstanding principal amount thereof from the date when made at an interest rate determined at the election of the Company at either the Tranche Rate (which is the forward-looking Secured Overnight Financing Rate (SOFR) for one or three months), or the Base Rate (which is a variable per annum rate, as of any date of determination, equal to the Bank’s Prime Rate), plus an Applicable Margin. The Applicable Margin is determined pursuant to a Pricing Grid, which for loans subject to the Tranche Rate varies from 1.75% to 2.50% and for loans subject to the Base Rate varies from 0.75% to 1.50%. The Applicable Margin may change quarterly based on the Total Leverage Ratio at such time. The Total Leverage Ratio is determined with respect to the Company and its subsidiaries on a consolidated basis for an applicable quarterly period by dividing the aggregate principal amount of various forms of borrowed indebtedness as of the last day of a determination period by EBITDA (earnings before interest expense, taxes, depreciation and amortization) for such period. Interest is paid in arrears, either quarterly or monthly depending on the Company’s interest rate election, with the principal due at maturity.
Under the terms of the Fifth Third Credit Agreement, the Company will pay to the Bank an unused facility fee on the average daily unused balance of the Facility at a rate per annum equal to 0.50%, which fee is payable in arrears on dates when interest is due and payable. The Company will also pay to the Bank a letter of credit fee equal to the Applicable Margin for loans subject to the Tranche Rate multiplied by the maximum amount available to be drawn under such letter of credit.
The Fifth Third Credit Agreement contains customary representations, warranties and affirmative and negative covenants, as well as events of default customary for facilities of this type. In connection with the Fifth Third Credit Agreement, the Company paid the Bank a closing fee in the amount of $200,000 and other customary fees and reimbursements.
On July 18, 2024, the Company entered into a first amendment of the Fifth Third Credit Agreement (“the Amendment”). Among other things, the Amendment contains certain modifications to (i) clarify certain representations and affirmative covenants of the Company, (ii) clarify certain conditions to each advance, (iii) clarify and/or replace certain events of default and (iv) delete or revise certain definitions in order to harmonize them with the other modifications made. The Amendment also contains customary releases, representations and warranties and reaffirmations consistent with the original terms of the Credit Agreement.
As of June 30, 2024, there was no debt outstanding under the Facility.
Contractual Obligations
Current portion of Long-Term Debt, Long-Term Debt and Lease Commitments. As of June 30, 2024, we had no debt outstanding. We lease offices, educational facilities and various items of equipment for varying periods through the year 2045 at basic annual rental rates (excluding taxes, insurance, and other expenses under certain leases).
As of June 30, 2024, we had outstanding loan principal commitments to our active students of $38.0 million. These are institutional loans and no cash is advanced to students. The full loan amount is not guaranteed unless the student completes the program. The institutional loans are considered commitments because the students are required to fund their education using these funds and they are not reported on our financial statements.
Regulatory Updates
State Authorization. Some of our educational programs prepare students for occupations that require professional licensure in order to work in the specified occupation. These programs are subject to the requirements of state occupational agencies that require our schools that offer these programs to obtain agency approval of the programs and to comply with the applicable requirements of these applicable agencies. See 10-K at Part I, Item 1. “Business - Regulatory Environment – State Authorization.” The practical nursing program taught at three of our campuses in New Jersey is such a program and is accredited by the New Jersey Board of Nursing (“NJBON”).
Among the various requirements applicable to the practical nursing program is the requirement that at least 75% of the program’s graduates pass the state licensure examination on their first attempt. Subsequent to the end of the quarter, on July 12, 2024, the NJBON voted to place our Paramus, New Jersey campus (the “Paramus campus”) practical nursing program on probation because, for three consecutive calendar years, less than 75 percent of the program’s graduates passed the state licensure examination on their first attempt. The program is taught at the Company’s other campuses in Iselin and Moorestown, New Jersey as well where the licensure pass rate requirement has been successfully achieved by the graduates of the programs at these campuses.
As a result of the probation status of the Paramus campus program, the Paramus campus is required to submit to the NJBON an 18-month action plan demonstrating its plan for improving the licensure pass rate to at least 75 percent in the next calendar year (or within an extension period if granted by the NJBON) within ninety days of receipt of written communication regarding the probation status (which has not yet been received). Furthermore, during this probationary period, the NJBON will not allow the Paramus campus to enroll any new students or accept any transfer students in its practical nursing program. If the program does not achieve the required licensure pass rate within one calendar year (or within an extension period if granted by the NJBON), the NJBON rules indicate that the program would not be eligible for restoration to accredited status and, therefore, would lose accreditation permanently.
While the loss of the ability to enroll new students or accept transfer students during the probation period, or the ultimate loss of accreditation for the practical nursing program at the Paramus campus should that occur, would not be expected to be material to the Company, it could have a negative reputational impact and have an adverse financial impact on the Paramus campus if we are unable to enroll more students in other existing programs at the Paramus campus and/or add other programs at this campus. Additionally, we would expect that the loss in practical nursing students at this location would be offset, at least in part, by increased enrollments at our Iselin and Moorestown, New Jersey campuses where this program is also taught and where the licensure pass rate requirement has been successfully achieved.
Negotiated Rulemaking. The DOE has initiated and engaged in rulemaking on several topics. See 10-K at Part I, Item 1. “Business -Regulatory Environment – Negotiated Rulemaking.” The DOE commenced a new negotiated rulemaking process with meetings held in January through March 2024 on several topics including state authorization, accreditation, return of unearned Title IV Program funds for students who withdraw from school without completing their educational programs, cash management, and distance education. See 10-K at Part I, Item 1. “Business – Regulatory Environment – State Authorization,” “Regulatory Environment – Accreditation,” and “Regulatory Environment – Return of Title IV Program Funds.”
On July 17, 2024, the DOE announced that it does not plan to publish a notice of proposed rulemaking on state authorization, accreditation, and cash management topics until 2025. The DOE also announced its intention to conduct negotiated rulemaking at a date to be determined to consider regulations related to third-party servicers on topics including, for example, the definition of third-party servicers, audit requirements for servicers, an application process for servicers, and reporting, financial, past performance, and other compliance requirements. The DOE also announced that it plans to issue no sooner than late 2024 revised guidance on how institutions of higher education may compensate their recruiters. See 10-K at Part I, Item 1. “Business - Regulatory Environment – Restrictions on payment of Commissions, Bonuses and Other Incentive Payments.” We cannot predict the timing and scope of any regulations or guidance the DOE might issue on these topics, but new regulations or guidance on these or other topics could have a significant impact on our business and results of operations.
On July 24, 2024, the DOE published a notice of proposed rulemaking on topics including distance education, return of Title IV funds and other topics. The proposed distance education rules would add a definition of ‘‘distance education course,’’ requiring institutions to report their students’ distance education status, disallow asynchronous distance education in clock-hour programs for Title IV purposes, add a definition of “distance education course,” and expand the definition of additional location to include virtual locations
for programs offered entirely online or through correspondence. The proposed return of Title IV funds regulations would, among other things, amend rules related to return calculations, the definition of a withdrawal from school, and return calculations for distance education programs. In the notice of proposed rulemaking, the DOE states that it expects the proposed distance and correspondence education reporting requirement to be implemented no earlier than July 1, 2026.
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
There are no material developments relating to previously disclosed legal proceedings. See the “Legal Proceedings” section of the Company’s Form 10-K and previous Form 10-Qs for information regarding existing legal proceedings. Additionally, see “Regulatory Updates” for additional information concerning the status of Borrower Defense to Repayment applications.
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 risk factors discussed in Part I, Item 1A of our Form 10-K and those contained in our previously filed Form 10-Qs, 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 may also materially adversely affect our business, financial condition, or operating results. For the quarter ended June 30, 2024, the Company is not aware of any specific new and additional risk factors that were 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 repurchases of up to $30.0 million of the Company’s Common Stock. On February 27, 2023, the Board of Directors extended the share repurchase program for an additional 12 months and authorized an additional $10.0 million in repurchases, for an aggregate of up to $30.6 million in additional repurchases. On May 7, 2024, the Company announced that its Board of Directors had authorized an extension of the share repurchase program for an additional twelve months through May 24, 2025. The Company did not repurchase any additional shares in the three months ended June 30, 2024, as reflected in the table below, and has approximately $29.7 million remaining for additional repurchases under the program.
|
| 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, 2024 to April 30, 2024 | | | - | | | $ | - | | | | - | | | $ | 29,663,667 | |
| May 1, 2024 to May 31, 2024 | | | - | | | | - | | | | - | | | | - | |
| June 1, 2024 to June 30, 2024 | | | - | | | | - | | | | - | | | | - | |
| Total | | | - | | | | - | | | | - | | | | | |
For more information on the share repurchase plan, see Part I, Item 1. “Notes to Condensed Consolidated Financial Statements”, Note 7 – Stockholders’ Equity.
| Item 3. | DEFAULTS UPON SENIOR SECURITIES |
| Item 4. | MINE SAFETY DISCLOSURES |
None.
| (c) | During the six months ended June 30, 2024, none of the Company’s directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted, terminated or modified a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” (as such terms are defined in Item 408 of Regulation S-K). |
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). |
| | | |
| 10.1 | | Amendment to Credit Agreement, dated July 18, 2024, between Lincoln Educational Services Corporation and Fifth Third Bank, National Association (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed July 23, 2024). |
| | | |
| 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 the Company’s 10-Q for the quarter ended June 30, 2024, 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 8, 2024 | 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). |
| | | |
| | Amendment to Credit Agreement, dated July 18, 2024, between Lincoln Educational Services Corporation and Fifth Third Bank, National Association (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed July 23, 2024). |
| | | |
| | 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 the Company’s 10-Q for the quarter ended June 30, 2024, 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. |
