UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


Form 10-Q
(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020
 
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from______ to______


Commission File Number 000-51371


LINCOLN EDUCATIONAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)

New Jersey
 
57-1150621
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)

200 Executive Drive, Suite 340
 
07052
West Orange, NJ
 
(Zip Code)
(Address of principal executive offices)
   

(973) 736-9340
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, no par value per share
LINC
The NASDAQ Stock Market LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐  No ☒
 
As of November 9, 2020, there were 26,476,329 shares of the registrant’s common stock outstanding
 


LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020

PART I.
FINANCIAL INFORMATION
 
Item 1.
1
 
1
  2
  5
  6
  7
  8
Item 2.
25
Item 4.
41
PART II.
41
Item 1.
41
Item 6.
41
  42

PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)

   
September 30,
2020
   
December 31,
2019
 
ASSETS
           
CURRENT ASSETS:
           
Cash and cash equivalents
 
$
26,520
   
$
23,644
 
Restricted cash
   
1,073
     
-
 
Accounts receivable, less allowance of $24,502 and $18,107 at September 30, 2020 and December 31, 2019, respectively
   
33,553
     
20,652
 
Inventories
   
2,866
     
1,608
 
Prepaid income taxes and income taxes receivable
   
111
     
383
 
Prepaid expenses and other current assets
   
2,721
     
4,190
 
Total current assets
   
66,844
     
50,477
 
                 
PROPERTY, EQUIPMENT AND FACILITIES - At cost, net of accumulated depreciation and amortization of $174,966 and $172,408 at September 30, 2020 and December 31, 2019, respectively
   
49,199
     
49,345
 
                 
OTHER ASSETS:
               
Noncurrent restricted cash
   
-
     
15,000
 
Noncurrent receivables, less allowance of $3,420 and $2,260 at September 30, 2020 and December 31, 2019, respectively
   
16,690
     
15,337
 
Operating lease right-of-use assets
   
57,579
     
49,065
 
Goodwill
   
14,536
     
14,536
 
Other assets, net
   
968
     
1,003
 
Total other assets
   
89,773
     
94,941
 
TOTAL ASSETS
 
$
205,816
   
$
194,763
 

See notes to unaudited condensed consolidated financial statements.

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
(Continued)

   
September 30,
2020
   
December 31,
2019
 
LIABILITIES, SERIES A CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
           
CURRENT LIABILITIES:
           
Current portion of credit agreement
 
$
2,000
   
$
2,000
 
Unearned tuition
   
19,354
     
23,411
 
Accounts payable
   
17,580
     
14,584
 
Accrued expenses
   
12,532
     
7,869
 
CARES Act student funds liability
   
1,073
     
-
 
CARES Act institutional funds liability
   
10,387
     
-
 
Current portion of operating lease liabilities
   
8,323
     
9,142
 
Other short-term liabilities
   
29
     
199
 
Total current liabilities
   
71,278
     
57,205
 
                 
NONCURRENT LIABILITIES:
               
Long-term credit agreement and term loan
   
15,667
     
32,028
 
Pension plan liabilities
   
3,767
     
4,015
 
Deferred income taxes, net
   
153
     
153
 
Long-term portion of operating lease liabilities
   
55,239
     
46,018
 
Other long-term liabilities
   
2,435
     
214
 
Total liabilities
   
148,539
     
139,633
 
                 
COMMITMENTS AND CONTINGENCIES
               
                 
SERIES A CONVERTIBLE PREFERRED STOCK
               
Preferred stock, no par value - 10,000,000 shares authorized, Series A convertible preferred shares, 12,700 shares issued and outstanding at September 30, 2020 and December 31, 2019
   
11,982
     
11,982
 
                 
STOCKHOLDERS' EQUITY:
               
Common stock, no par value - authorized: 100,000,000 shares at September 30, 2020 and December 31, 2019; issued and outstanding: 32,386,870 shares at September 30, 2020 and 31,142,251 shares at December 31, 2019
   
141,377
     
141,377
 
Additional paid-in capital
   
30,113
     
30,145
 
Treasury stock at cost - 5,910,541 shares at September 30, 2020 and December 31, 2019
   
(82,860
)
   
(82,860
)
Accumulated deficit
   
(39,513
)
   
(42,058
)
Accumulated other comprehensive loss
   
(3,822
)
   
(3,456
)
Total stockholders' equity
   
45,295
     
43,148
 
TOTAL LIABILITIES, SERIES A CONVERTIBLE PREFERRED STOCK AND EQUITY
 
$
205,816
   
$
194,763
 

See notes to unaudited condensed consolidated financial statements.

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2020
   
2019
   
2020
   
2019
 
                         
REVENUE
 
$
78,792
   
$
72,594
   
$
211,303
   
$
199,427
 
COSTS AND EXPENSES:
                               
Educational services and facilities
   
34,251
     
33,211
     
90,733
     
92,940
 
Selling, general and administrative
   
40,700
     
37,451
     
117,011
     
111,512
 
Loss (gain) on disposition of assets
   
1
     
(211
)
   
(96
)
   
(211
)
Total costs & expenses
   
74,952
     
70,451
     
207,648
     
204,241
 
OPERATING INCOME (LOSS)
   
3,840
     
2,143
     
3,655
     
(4,814
)
OTHER:
                               
Interest income
   
-
     
1
     
-
     
7
 
Interest expense
   
(278
)
   
(754
)
   
(960
)
   
(2,141
)
INCOME (LOSS) BEFORE INCOME TAXES
   
3,562
     
1,390
     
2,695
     
(6,948
)
PROVISION FOR INCOME TAXES
   
50
     
50
     
150
     
244
 
NET INCOME (LOSS)
 
$
3,512
   
$
1,340
   
$
2,545
   
$
(7,192
)
PREFERRED STOCK DIVIDENDS
   
1,074
     
-
     
1,074
     
-
 
INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
 
$
2,438
   
$
1,340
   
$
1,471
   
$
(7,192
)
Basic
                               
Net income (loss) per common share
 
$
0.08
   
$
0.05
   
$
0.05
   
$
(0.29
)
Diluted
                               
Net income (loss) per common share
 
$
0.08
   
$
0.05
   
$
0.05
   
$
(0.29
)
Weighted average number of common shares outstanding:
                               
Basic
   
24,822
     
24,563
     
24,721
     
24,551
 
Diluted
   
24,822
     
24,608
     
24,721
     
24,551
 

See notes to unaudited condensed consolidated financial statements.

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2020
   
2019
   
2020
   
2019
 
Net income (loss)
 
$
3,512
   
$
1,340
   
$
2,545
   
$
(7,192
)
Other comprehensive income (loss)
                               
Derivative qualifying as a cash flow hedge, net of taxes (nil)
   
57
     
-
     
(786
)
   
-
 
Employee pension plan adjustments, net of taxes (nil)
   
140
     
154
     
420
     
462
 
Comprehensive income (loss)
 
$
3,709
   
$
1,494
   
$
2,179
   
$
(6,730
)

See notes to unaudited condensed consolidated financial statements.

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
(Unaudited)

   
Stockholders' Equity
       
   
Common Stock
   
Additional
Paid-in
   
Treasury
   
Accumulated
   
Accumulated
Other
Comprehensive
         
Series A
Convertible
Preferred Stock
 
   
Shares
   
Amount
   
Capital
   
Stock
   
Deficit
   
Loss
   
Total
   
Shares
   
Amount
 
BALANCE - January 1, 2020
   
31,142,251
   
$
141,377
   
$
30,145
   
$
(82,860
)
 
$
(42,058
)
 
$
(3,456
)
 
$
43,148
     
12,700
   
$
11,982
 
Net loss
   
-
     
-
     
-
     
-
     
(1,750
)
   
-
     
(1,750
)
   
-
     
-
 
Employee pension plan adjustments
   
-
     
-
     
-
     
-
     
-
     
140
     
140
     
-
     
-
 
Derivative qualifying as cash flow hedge
   
-
     
-
     
-
     
-
     
-
     
(748
)
   
(748
)
   
-
     
-
 
Stock-based compensation expense
                                                                       
Restricted stock
   
1,191,262
     
-
     
291
     
-
     
-
     
-
     
291
     
-
     
-
 
Net share settlement for equity-based compensation
   
(58,451
)
   
-
     
(172
)
   
-
     
-
     
-
     
(172
)
   
-
     
-
 
BALANCE - March 31, 2020
   
32,275,062
     
141,377
     
30,264
     
(82,860
)
   
(43,808
)
   
(4,064
)
   
40,909
     
12,700
     
11,982
 
Net income
   
-
     
-
     
-
     
-
     
783
     
-
     
783
     
-
     
-
 
Employee pension plan adjustments
   
-
     
-
     
-
     
-
     
-
     
140
     
140
     
-
     
-
 
Derivative qualifying as cash flow hedge
   
-
     
-
     
-
     
-
     
-
     
(95
)
   
(95
)
   
-
     
-
 
Stock-based compensation expense
                                                                       
Restricted stock
   
111,376
     
-
     
325
     
-
     
-
     
-
     
325
     
-
     
-
 
Net share settlement for equity-based compensation
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
BALANCE - June 30, 2020
   
32,386,438
   
$
141,377
   
$
30,589
   
$
(82,860
)
 
$
(43,025
)
 
$
(4,019
)
 
$
42,062
     
12,700
   
$
11,982
 
Net income
   
-
     
-
     
-
     
-
     
3,512
     
-
     
3,512
     
-
     
-
 
Preferred stock dividends
   
-
     
-
     
(1,074
)
   
-
     
-
     
-
     
(1,074
)
   
-
     
-
 
Employee pension plan adjustments
   
-
     
-
     
-
     
-
     
-
     
140
     
140
     
-
     
-
 
Derivative qualifying as cash flow hedge
   
-
     
-
     
-
     
-
     
-
     
57
     
57
     
-
     
-
 
Stock-based compensation expense
                                                                       
Restricted stock
   
17,096
     
-
     
670
     
-
     
-
     
-
     
670
     
-
     
-
 
Net share settlement for equity-based compensation
   
(16,664
)
   
-
     
(72
)
   
-
     
-
     
-
     
(72
)
   
-
     
-
 
BALANCE - September 30, 2020
   
32,386,870
   
$
141,377
   
$
30,113
   
$
(82,860
)
 
$
(39,513
)
 
$
(3,822
)
 
$
45,295
     
12,700
   
$
11,982
 

   
Stockholders' Equity
  
         
     
Common Stock
   
Additional
Paid-in
   
Treasury
   
Accumulated
   
Accumulated
Other
Comprehensive
           
Series A
Convertible
Preferred Stock
 
   
Shares
   
Amount
   
Capital
   
Stock
   
Deficit
   
Loss
   
Total
   
Shares
   
Amount
 
BALANCE - January 1, 2019
   
30,552,333
   
$
141,377
   
$
29,484
   
$
(82,860
)
 
$
(44,073
)
 
$
(4,062
)
 
$
39,866
     
-
   
$
-
 
Net loss
   
-
     
-
     
-
     
-
     
(5,467
)
   
-
     
(5,467
)
   
-
     
-
 
Employee pension plan adjustments
   
-
     
-
     
-
     
-
     
-
     
154
     
154
     
-
     
-
 
Stock-based compensation expense
                                                                       
Restricted stock
   
478,853
     
-
     
52
     
-
     
-
     
-
     
52
     
-
     
-
 
Net share settlement for equity-based compensation
   
(5,518
)
   
-
     
(18
)
   
-
     
-
     
-
     
(18
)
   
-
     
-
 
BALANCE - March 31, 2019
   
31,025,668
     
141,377
     
29,518
     
(82,860
)
   
(49,540
)
   
(3,908
)
   
34,587
     
-
     
-
 
Net loss
   
-
     
-
     
-
     
-
     
(3,064
)
   
-
     
(3,064
)
   
-
     
-
 
Employee pension plan adjustments
   
-
     
-
     
-
     
-
     
-
     
154
     
154
     
-
     
-
 
Stock-based compensation expense
                                                                       
Restricted stock
   
116,583
     
-
     
191
     
-
     
-
     
-
     
191
     
-
     
-
 
Net share settlement for equity-based compensation
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
BALANCE - June 30, 2019
   
31,142,251
     
141,377
     
29,709
     
(82,860
)
   
(52,604
)
   
(3,754
)
   
31,868
     
-
     
-
 
Net income
   
-
     
-
     
-
     
-
     
1,340
     
-
     
1,340
     
-
     
-
 
Employee pension plan adjustments
   
-
     
-
     
-
     
-
     
-
     
154
     
154
     
-
     
-
 
Stock-based compensation expense
                                                                       
Restricted stock
   
-
     
-
     
218
     
-
     
-
     
-
     
218
     
-
     
-
 
Net share settlement for equity-based compensation
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
BALANCE - September 30, 2019
   
31,142,251
   
$
141,377
   
$
29,927
   
$
(82,860
)
 
$
(51,264
)
 
$
(3,600
)
 
$
33,580
     
-
   
$
-
 

See notes to unaudited condensed consolidated financial statements.

LINCOLN EDUATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

   
Nine Months Ended
September 30,
 
   
2020
   
2019
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
 
$
2,545
   
$
(7,192
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                       
Depreciation and amortization
   
5,546
     
5,972
 
Amortization of deferred finance charges
   
136
     
354
 
Deferred income taxes
   
-
     
424
 
Gain on disposition of assets
   
(96
)
   
(211
)
Fixed asset donations
   
(334
)
   
(893
)
Provision for doubtful accounts
   
21,692
     
15,157
 
Stock-based compensation expense
   
1,286
     
460
 
(Increase) decrease in assets:
               
Accounts receivable
   
(35,946
)
   
(21,034
)
Inventories
   
(1,258
)
   
(448
)
Prepaid income taxes and income taxes receivable
   
272
     
(180
)
Prepaid expenses and current assets
   
1,296
     
554
 
Other assets, net
   
(77
)
   
(1,003
)
Increase (decrease) in liabilities:
               
Accounts payable
   
1,656
     
4,197
 
Accrued expenses
   
4,663
     
(33
)
CARES Act student funds liability
   
1,073
     
-
 
CARES Act institutional funds liability
   
10,387
     
-
 
Unearned tuition
   
(4,057
)
   
356
 
Deferred income taxes
   
-
     
93
 
Other liabilities
   
1,438
     
(1,466
)
Total adjustments
   
7,677
     
2,299
 
Net cash provided by (used in) operating activities
   
10,222
     
(4,893
)
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Capital expenditures
   
(3,554
)
   
(3,272
)
Proceeds from insurance
   
97
     
211
 
Net cash used in investing activities
   
(3,457
)
   
(3,061
)
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Payments on borrowings
   
(27,501
)
   
(27,167
)
Proceeds from borrowings
   
11,000
     
5,045
 
Dividends paid on shares of Series A preferred stock
   
(1,074
)
   
-
 
Credit (payment) of deferred finance fees
   
3
     
(98
)
Net share settlement for equity-based compensation
   
(244
)
   
(18
)
Net cash used in financing activities
   
(17,816
)
   
(22,238
)
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
   
(11,051
)
   
(30,192
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period
   
38,644
     
45,946
 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—End of period
 
$
27,593
   
$
15,754
 

See notes to unaudited condensed consolidated financial statements.

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
(Continued)

   
Nine Months Ended
September 30,
 
   
2020
   
2019
 
             
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
           
Cash paid for:
           
Interest
 
$
845
   
$
1,638
 
Income taxes
 
$
121
   
$
113
 
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
               
Liabilities accrued for or noncash purchases of fixed assets
 
$
1,847
   
$
1,679
 

See notes to unaudited condensed consolidated financial statements.

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(In thousands, except share and per share amounts and unless otherwise stated)
(Unaudited)

1.
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Business Activities— Lincoln Educational Services Corporation and its subsidiaries (collectively, the “Company”, “we”, “our” and “us”, as applicable) provide diversified career-oriented post-secondary education to recent high school graduates and working adults.  The Company, which currently operates 22 schools in 14 states, offers programs in automotive technology, skilled trades (which include HVAC, welding and computerized numerical control 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.  The schools operate under Lincoln Technical Institute, Lincoln College of Technology, Lincoln Culinary Institute, and Euphoria Institute of Beauty Arts and Sciences and associated brand names.  Most of the campuses serve major metropolitan markets and each typically offers courses in multiple areas of study.  Five of the campuses are destination schools, which attract students from across the United States and, in some cases, from abroad. The Company’s other campuses primarily attract students from their local communities and surrounding areas.  All of the campuses are nationally or regionally accredited and are eligible to participate in federal financial aid programs by the U.S. Department of Education (the “DOE” or the “Department”) 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.

The Company’s business is organized into three reportable business segments: (a) Transportation and Skilled Trades, (b) Healthcare and Other Professions (“HOPS”), and (c) Transitional, which refers to our campus operations which have been closed.

COVID-19 Pandemic— During the first quarter of 2020, the coronavirus disease (“COVID-19”) began to spread worldwide and has caused significant disruptions to the U.S. and world economies.  In early March 2020, the Company began seeing the impact of the COVID-19 pandemic on our business. The impact was primarily related to transitioning classes from in-person, hands-on learning to online, remote learning.  As part of this transition, the Company has incurred additional expenses.  In addition, some students were placed on leave of absence as they could not complete their externships and some students chose not to participate in online learning. Additionally, certain programs were extended due to restricted access to externship sites and classroom labs.  Due to state and local provisions, our schools reopened on a phased basis from May through August 2020.  Currently, all of our schools have re-opened and the majority of the students who were placed on leave or otherwise deferred their programs are actively working to finish their programs over the next few months.  As COVID-19 continues to affect many states and its course is unpredictable, the full impact on the Company’s consolidated financial statements remains uncertain.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law which includes a $2 trillion federal economic relief package providing financial assistance and other relief to individuals and businesses impacted by the spread of COVID-19. The CARES Act includes provisions for financial assistance and other regulatory relief benefitting students and their postsecondary institutions.  The Company has and will continue to evaluate the impact of the CARES Act on the Company’s results of operations and cash flows.  See Note 12 – COVID-19 Pandemic and CARES Act included elsewhere in this Quarterly Report on Form 10-Q for additional discussion about the CARES Act.

Liquidity—  As of September 30, 2020, the Company had cash, cash equivalents and restricted cash of $27.6 million, which includes cash received under the CARES Act of $11.5 million.  As of September 30, 2020, the Company had a net cash balance of $9.9 million calculated as cash, cash equivalents and restricted cash, less both the short-term and long-term portion of the Company’s Credit Facility (defined below). Excluding cash deposits from the CARES Act of $11.5 million, the Company had a net debt balance of $1.5 million.  As of September 30, 2020, the Company also can borrow an additional $21.0 million under its Credit Facility.  As of December 31, 2019, the Company had a net cash balance of $4.6 million.  The Company believes that its likely sources of cash should be sufficient to fund operations for the next twelve months and thereafter for the foreseeable future. However, the circumstances relating to COVID-19 and its evolution are unpredictable and, if circumstances surrounding COVID-19 should evolve in a significantly adverse manner it is possible our liquidity could be materially and adversely affected.

Basis of Presentation – The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements.  Certain information and footnote disclosures normally included in annual financial statements have been omitted or condensed pursuant to such regulations.  These financial statements, which should be read in conjunction with the December 31, 2019 consolidated financial statements and related disclosures of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, reflect all adjustments, consisting of normal recurring adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows for such periods.  The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the full fiscal year ending December 31, 2020.

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

Use of Estimates in the Preparation of Financial Statements – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period.  On an ongoing basis, the Company evaluates the estimates and assumptions, including those used to determine the incremental borrowing rate to calculate lease liabilities and right-of-use (“ROU”) assets, lease term to calculate lease cost, revenue recognition, bad debts, impairments, useful lives of fixed assets, income taxes, benefit plans and certain accruals.  Actual results could differ from those estimates.
 
New Accounting Pronouncements – In August 2020, Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”. This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU removes separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature and hence most of the instruments will be accounted for as a single model (either debt or equity). The ASU also states that entities must apply the if-converted method to all convertible instruments for calculation of diluted EPS and the treasury stock method is no longer available. An entity can use either a full or modified retrospective approach to adopt the ASU’s guidance. ASU No. 2020-06 is effective for the Company as a smaller reporting company for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. For convertible instruments that include a down-round feature, entities may early adopt the amendments that apply to the down-round features if they have not yet adopted the amendments in ASU 2017-11. The Company is currently assessing the impact that this ASU will have on its condensed consolidated financial statements and related disclosures.
 
In March 2020, the FASB issued ASU 2020-03, “Codification Improvements to Financial Instruments” (“ASU 2020-03”). ASU 2020-03 improves and clarifies various financial instruments topics. ASU 2020-03 includes seven different issues that describe the areas of improvement and the related amendments to GAAP. The Company adopted ASU 2020-03 upon issuance, which did not have a material effect on the Company’s condensed consolidated financial statements and related disclosures.
 
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes”, which simplifies the accounting for income taxes by removing certain exceptions to the general principles of ASC 740, “Income Taxes”. ASU 2019-12 also clarifies and amends GAAP for other areas of Topic 740. This ASU is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. Depending on the amendment, adoption may be applied on a retrospective, modified retrospective or prospective basis. The Company is currently assessing the impact that this ASU will have on its condensed consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU  2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans”. This ASU adds, modifies and clarifies several disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This guidance is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company is currently assessing the impact that this ASU will have on its condensed consolidated financial statements and related disclosures.
 
 In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and subsequently issued additional guidance that modified ASU 2016-13. ASU 2016-13 and the subsequent modifications are identified as Accounting Standards Codification (“ASC”) 326. The standard requires an entity to change its accounting approach in determining impairment of certain financial instruments, including trade receivables, from an “incurred loss” to a “current expected credit loss” model. Further, the FASB issued ASU No. 2019-04, ASU No. 2019-05 and ASU 2019-11 to provide additional guidance on the credit losses standard. In November 2019, FASB issued ASU No. 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)”.  This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.  Additionally, in February and March 2020, the FASB issued ASU 2020-02, “Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842)” ASU 2020-02 adds a SEC paragraph pursuant to the issuance of SEC Staff Accounting Bulletin No. 119 on loan losses to FASB Codification Topic 326 and also updates the SEC section of the Codification for the change in the effective date of Topic 842. Early adoption is permitted. We are currently assessing the impact that these ASUs will have on our condensed consolidated financial statements and related disclosures.
 
Income Taxes – The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes”. This statement requires an asset and a liability approach for measuring deferred taxes based on temporary differences between the financial statement and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for years in which taxes are expected to be paid or recovered.
 
In accordance with ASC 740, the Company assesses our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable.  A valuation allowance is required to be established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. In accordance with ASC 740, our assessment considers whether there has been sufficient income in recent years and whether sufficient income is expected in future years in order to utilize the deferred tax asset. In evaluating the realizability of deferred income tax assets, the Company considered, among other things, historical levels of income, expected future income, the expected timing of the reversals of existing temporary reporting differences, and the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future income tax benefits. Significant judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and/or tax returns.  Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on the Company’s consolidated financial position or results of operations.  Changes in, among other things, income tax legislation, statutory income tax rates, or future income levels could materially impact the Company’s valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods.
 
During the three and nine months ended September 30, 2020 and 2019, the Company did not recognize any interest and penalties expense associated with uncertain tax positions.
 
See Note 12 – COVID-19 Pandemic and CARES Act included in this Quarterly Report on Form 10-Q for additional discussion about the CARES Act impact on taxes.
 
Derivative InstrumentsThe Company records the fair value of derivative instruments as either assets or liabilities on the balance sheet. The accounting for gains and losses resulting from changes in fair value is dependent on the use of the derivative and whether it is designated and qualifies for hedge accounting.
 
All qualifying hedging activities are documented at the inception of the hedge and must meet the definition of highly effective in offsetting changes to future cash. The Company utilizes the change in variable cash flows method to evaluate hedge effectiveness quarterly. We record the fair value of the qualifying hedges in other long-term liabilities (for derivative liabilities) and other assets (for derivative assets). All unrealized gains and losses on derivatives that are designated and qualify for hedge accounting are reported in other comprehensive income (loss) and recognized when the underlying hedged transaction affects earnings. Changes in the fair value of these derivatives are recognized in other comprehensive income (loss).  The Company classifies the cash flows from a cash flow hedge within the same category as the cash flows from the items being hedged.
 
The Company adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, on January 1, 2019, which changes the recognition and presentation requirements of hedge accounting, including eliminating the requirement to separately measure and report hedge ineffectiveness and presenting all items that affect earnings in the same income statement line item as the hedged item. The ASU also provides new alternatives for applying hedge accounting to additional hedging strategies, measuring the hedged item in fair value hedges of interest rate risk, reducing the cost and complexity of applying hedge accounting by easing the requirements for effectiveness testing, hedge documentation and application of the critical terms match method and reducing the risk of a material error correction if a company applies the shortcut method inappropriately. The adoption of ASU 2017-12 had no impact on the Company’s consolidated financial statements.
 
2.
NET INCOME (LOSS) PER COMMON SHARE

The Company presents basic and diluted income (loss) per common share using the two-class method which requires all outstanding Series A Preferred Stock and unvested restricted stock that contain rights to non-forfeitable dividends and therefore participate in undistributed income with common shareholders to be included in computing income (loss) per common share. Under the two-class method, net income is reduced by the amount of dividends declared in the period for each class of common stock and participating security. The remaining undistributed income is then allocated to common stock and participating securities, based on their respective rights to receive dividends. Series A Preferred Stock and unvested restricted stock contain non-forfeitable rights to dividends on an if-converted basis and on the same basis as common shares, respectively, and are considered participating securities. The Series A Preferred Stock and unvested restricted stock are not included in the computation of basic income (loss) per common share in periods in which we have a net loss, as the Series A Preferred Stock and unvested restricted stock are not contractually obligated to share in our net losses. However, the cumulative dividends on preferred stock for the period decreases the income or increases the net loss allocated to common shareholders unless the dividend is paid in the period. Basic income (loss) per common share has been computed by dividing net income (loss) allocated to common shareholders by the weighted-average number of common shares outstanding.

10

The basic and diluted net loss amounts are the same for the nine months ended September 30, 2019 as a result of the net loss and anti-dilutive impact of the potentially dilutive securities.  For the three and nine months ended September 30, 2019 income (loss) per common share was calculated using the treasury stock method. Dilutive potential common shares include outstanding stock options, unvested restricted stock and Series A Preferred Stock. The Company uses the more dilutive method of calculating the diluted income per share by applying the more dilutive of either (a) the treasury stock method, if-converted method, or (b) the two-class method in its diluted income (loss) per common share calculation. Potentially dilutive shares are determined by applying the treasury stock method to the assumed exercise of outstanding stock options and the assumed vesting of restricted stock. Potentially dilutive shares issuable upon conversion of the Series A Preferred Stock are calculated using the if-converted method.

The following is a reconciliation of the numerator and denominator of the diluted net income (loss) per share computations for the periods presented below:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(in thousands, except share data)
 
2020
   
2019
   
2020
   
2019
 
Numerator:
                       
Net income (loss)
 
$
3,512
   
$
1,340
   
$
2,545
   
$
(7,192
)
Less: preferred stock dividend
   
(1,074
)
   
-
     
(1,074
)
   
-
 
Less: allocation to preferred stockholders
   
(433
)
   
-
     
(259
)
   
-
 
Less: allocation to restricted stockholders
   
(120
)
   
-
     
(65
)
   
-
 
Net income (loss) allocated to common stockholders
 
$
1,885
   
$
1,340
   
$
1,147
   
$
(7,192
)
                                 
Basic income (loss) per share:
                               
Denominator:
                               
Weighted average common shares outstanding
   
24,821,665
     
24,563,038
     
24,720,817
     
24,550,999
 
Basic income (loss) per share
 
$
0.08
   
$
0.05
   
$
0.05
   
$
(0.29
)
                                 
Diluted income (loss) per share:
                               
Denominator:
                               
Weighted average number of:
                               
Common shares outstanding
   
24,821,665
     
24,563,038
     
24,720,817
     
24,550,999
 
Dilutive potential common shares outstanding:
                               
Series A Preferred Stock
   
-
     
-
     
-
     
-
 
Unvested restricted stock
   
-
     
44,466
     
-
     
-
 
Stock options
   
-
     
-
     
-
     
-
 
Dilutive shares outstanding
   
24,821,665
     
24,607,504
     
24,720,817
     
24,550,999
 
Diluted income (loss) per share
 
$
0.08
   
$
0.05
   
$
0.05
   
$
(0.29
)

11

The following table summarizes the potential weighted average shares of common stock that were excluded from the determination of our diluted shares outstanding as they were anti-dilutive:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(in thousands, except share data)
 
2020
   
2019
   
2020
   
2019
 
Series A Preferred Stock
   
-
     
-
     
-
     
-
 
Unvested restricted stock
   
767,056
     
-
     
566,370
     
93,654
 
     
767,056
     
-
     
566,370
     
93,654
 

3.
REVENUE RECOGNITION

Substantially all of our revenues are considered to be revenues from contracts with students.  The related accounts receivable balances are recorded in our balance sheets as student accounts receivable.  We do not have significant revenue recognized from performance obligations that were satisfied in prior periods, and we do not have any transaction price allocated to unsatisfied performance obligations other than in our unearned tuition.  We record revenue for students who withdraw from our schools only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.  Unearned tuition represents contract liabilities primarily related to our tuition revenue. We have elected not to provide disclosure about transaction prices allocated to unsatisfied performance obligations if original contract durations are less than one-year, or if we have the right to consideration from a student in an amount that corresponds directly with the value provided to the student for performance obligations completed to date in accordance with ASC 606. We have assessed the costs incurred to obtain a contract with a student and determined them to be immaterial.

Unearned tuition in the amount of $19.4 million and $23.4 million is recorded in the current liabilities section of the accompanying condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019, respectively. The change in this contract liability balance during the nine-month period ended September 30, 2020 is the result of payments received in advance of satisfying performance obligations, offset by revenue recognized during that period. Revenue recognized for the nine-month period ended September 30, 2020 that was included in the contract liability balance at the beginning of the year was $23.4 million.

The following table depicts the timing of revenue recognition:

   
Three months ended September 30, 2020
   
Nine months ended September 30, 2020
 
   
Transportation
and Skilled
Trades Segment
   
Healthcare
and Other
Professions
Segment
   
Consolidated
   
Transportation
and Skilled
Trades Segment
   
Healthcare
and Other
Professions
Segment
   
Consolidated
 
Timing of Revenue Recognition
                                   
Services transferred at a point in time
 
$
5,520
   
$
1,466
   
$
6,986
   
$
10,056
   
$
3,479
   
$
13,535
 
Services transferred over time
   
51,308
     
20,498
     
71,806
     
138,743
     
59,025
     
197,768
 
Total revenues
 
$
56,828
   
$
21,964
   
$
78,792
   
$
148,799
   
$
62,504
   
$
211,303
 

   
Three months ended September 30, 2019
   
Nine months ended September 30, 2019
 
   
Transportation
and Skilled
Trades Segment
   
Healthcare
and Other
Professions
Segment
   
Consolidated
   
Transportation
and Skilled
Trades Segment
   
Healthcare
and Other
Professions
Segment
   
Consolidated
 
Timing of Revenue Recognition
                                               
Services transferred at a point in time
 
$
4,792
   
$
1,308
   
$
6,100
   
$
9,360
   
$
3,541
   
$
12,901
 
Services transferred over time
   
47,860
     
18,634
     
66,494
     
131,646
     
54,880
     
186,526
 
Total revenues
 
$
52,652
   
$
19,942
   
$
72,594
   
$
141,006
   
$
58,421
   
$
199,427
 

12

4.
LEASES

The Company determines if an arrangement is a lease at inception. The Company considers any contract where there is an identified asset and that it has the right to control the use of such asset in determining whether the contract contains a lease.  An operating lease ROU asset represents the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are to be recognized at the commencement date based on the present value of lease payments over the lease term. As all of the Company’s operating leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available on the adoption date in determining the present value of lease payments. We estimate the incremental borrowing rate based on a yield curve analysis, utilizing the interest rate derived from the fair value analysis of our credit facility and adjusting it for factors that appropriately reflect the profile of secured borrowing over the expected term of the lease. The operating lease ROU assets include any lease payments made prior to the rent commencement date and exclude lease incentives. Our leases have remaining lease terms of one year to 11 years. Lease terms may include options to extend the lease term used in determining the lease obligation when it is reasonably certain that the Company will exercise that option.  Lease expense for lease payments are recognized on a straight-line basis over the lease term for operating leases.

Our operating lease cost for the three months ended September 30, 2020 and 2019, was $3.9 and $3.6 million, respectively.  Our operating lease cost for the nine months ended September 30, 2020 and 2019, was $11.4 and $10.9 million, respectively.  Our variable lease cost for the three and nine months ended September 30, 2020 was zero and $0.6 million, respectively.  The net change in the ROU asset and lease liability are included in other assets in the condensed consolidated cash flows for the nine months ended September 30, 2020 and 2019.

During the three and nine months ended September 30, 2020, the Company has withheld portions of and/or delayed payments to certain of its landlords as the Company sought to renegotiate payment terms, in order to further maintain liquidity given the temporary closures of its facilities. In some instances, the negotiations with landlords have already led to agreements with landlords for rent abatements or rental deferrals, while, in other cases, negotiations are ongoing. Total payments withheld or deferred as of September 30, 2020 were approximately $0.6 million and are included in current liabilities.

In accordance with the FASB’s recent Staff Q&A regarding rent concessions related to the effects of the COVID-19 pandemic, the Company has elected to account for agreed concessions by landlords that do not result in a substantial increase in the rights of the landlord or the obligations of the Company, as lessee, as though enforceable rights and obligations for those concessions existed in the original lease agreements and the Company has elected not to re-measure the related lease liabilities and right-of-use assets. For qualifying rent abatement concessions, the Company has recorded negative lease expense for the amount of the concession during the period of relief, and for qualifying deferrals of rental payments, the Company has recognized a payable in lieu of recognizing a decrease in cash for the lease payment that would have been made based on the original terms of the lease agreement, which will be reduced when the deferred payment is made in the future. During the three and nine months ended September 30, 2020, the Company recognized $0.1 million and $0.6 million, respectively, of negative lease expense related to rent abatement concessions.

Supplemental cash flow information and non-cash activity related to our operating leases are as follows:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2020
   
2019
   
2020
   
2019
 
Operating cash flow information:
                       
Cash paid for amounts included in the measurement of operating lease liabilities
 
$
3,894
   
$
3,674
   
$
11,537
   
$
11,277
 
Non-cash activity:
                               
Lease liabilities arising from obtaining right-of-use assets
 
$
6,311
   
$
2,811
   
$
15,092
   
$
51,445
 

As of September 30, 2020, there were lease re-measurements of $15.0 million.

Weighted-average remaining lease term and discount rate for our operating leases is as follows:

   
September 30,
 
   
2020
   
2019
 
Weighted-average remaining lease term
 
6.29 years
   
5.75 years
 
Weighted-average discount rate
   
11.38
%
   
14.34
%

13

Maturities of lease liabilities by fiscal year for our operating leases as of September 30, 2020 are as follows:

Year ending December 31,
     
2020 (excluding the nine months ended September 30, 2020)
 
$
3,860
 
2021
   
14,791
 
2022
   
14,838
 
2023
   
13,526
 
2024
   
12,305
 
2025
   
10,748
 
Thereafter
   
18,381
 
Total lease payments
   
88,449
 
Less: imputed interest
   
(24,887
)
Present value of lease liabilities
 
$
63,562
 

5.
GOODWILL AND LONG-LIVED ASSETS

The Company reviews long-lived assets for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.  There were no long-lived asset impairments during the nine months ended September 30, 2020 and 2019, respectively.

The Company reviews goodwill for impairment when indicators of impairment exist.  Annually, or more frequently if necessary, the Company evaluates goodwill for impairment, with any resulting impairment reflected as an operating expense.  The Company has concluded that, as of September 30, 2020, there were no indicators of potential impairment and, accordingly, the Company did not test goodwill for impairment.

The carrying amount of goodwill at September 30, 2020 and 2019 is as follows:

   
Gross
Goodwill
Balance
   
Accumulated
Impairment
Losses
   
Net
Goodwill
Balance
 
Balance as of January 1, 2020
 
$
117,176
   
$
(102,640
)
 
$
14,536
 
Adjustments
   
-
     
-
     
-
 
Balance as of September 30, 2020
 
$
117,176
   
$
(102,640
)
 
$
14,536
 

   
Gross
Goodwill
Balance
   
Accumulated
Impairment
Losses
   
Net
Goodwill
Balance
 
Balance as of January 1, 2019
 
$
117,176
   
$
(102,640
)
 
$
14,536
 
Adjustments
   
-
     
-
     
-
 
Balance as of September 30, 2019
 
$
117,176
   
$
(102,640
)
 
$
14,536
 

As of September 30, 2020 and 2019, the goodwill balance is related to the Transportation and Skilled Trades segment.

14

6.
LONG-TERM DEBT

Long-term debt consists of the following:

   
September 30,
2020
   
December 31,
2019
 
Credit agreement
 
$
18,333
   
$
34,833
 
Deferred Financing Fees
   
(666
)
   
(805
)
     
17,667
     
34,028
 
Less current maturities
   
(2,000
)
   
(2,000
)
   
$
15,667
   
$
32,028
 

Credit Facility with Sterling National Bank

On November 14, 2019, the Company entered into a new senior secured credit agreement (the “Credit Agreement”) with its lender, Sterling National Bank (the “Lender”), providing for borrowing in the aggregate principal amount of up to $60 million (the “Credit Facility”).

The Credit Facility is comprised of four facilities: (1) a $20 million senior secured term loan maturing on December 1, 2024 (the “Term Loan”), with monthly interest and principal payments based on 120-month amortization with the outstanding balance due on the maturity date; (2) a $10 million senior secured delayed draw term loan maturing on December 1, 2024 (the “Delayed Draw Term Loan”), with monthly interest payments for the first 18 months and thereafter monthly payments of interest and principal based on 120-month amortization and all balances due on the maturity date; (3) a $15 million senior secured committed revolving line of credit providing a sublimit of up to $10 million for standby letters of credit maturing on November 13, 2022 (the “Revolving Loan”), with monthly payments of interest only; and (4) a $15 million senior secured non-restoring line of credit maturing on January 31, 2021 (the “Line of Credit Loan”).  The Credit Agreement gives the Company the right to permanently terminate, in its entirety, the Revolving Loan or the Line of Credit Loan or permanently reduce the amount available for borrowing under the Revolving Loan or the Line of Credit Loan.  In April 2020, the Company terminated the Line of Credit Loan.

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

At the closing of the Credit Facility, the Lender advanced the Term Loan to the Company, the net proceeds of which were $19.7 million after deduction of the Lender’s origination fee in the amount of $0.3 million and other Lender fees and reimbursements to the Lender that are customary for facilities of this type.  The Company used the net proceeds of the Term Loan, together with cash on hand, to repay the existing credit facility and transaction expenses.

Pursuant to the terms of the Credit Agreement, letters of credit issued under the Revolving Loan reduce dollar for dollar the availability of borrowings under the Revolving Loan.  Borrowings under the Line of Credit Loan are to be secured by cash collateral.

Under the Credit Agreement, borrowing under the Delayed Draw Term Loan was available through May 31, 2021 but an amendment to the Credit Agreement entered into on November 10, 2020 extended the period through May 31. 2022.

Accrued interest on each loan under the Credit Facility will be payable monthly in arrears.  The Term Loan and the Delayed Draw Term Loan bear interest at a floating interest rate based on the then one month London Interbank Offered Rate (“LIBOR”) plus 3.50%.  At the closing of the Credit Facility, the Company entered into a swap transaction with the Lender for 100% of the principal balance of the Term Loan, which matures on the same date as the Term Loan.  At the end of the borrowing availability period for the Delayed Draw Term Loan, the Company is required to enter into a swap transaction with the Lender for 100% of the principal balance of the Delayed Draw Term Loan, which will mature on the same date as the Delayed Draw Term Loan, pursuant to a swap agreement between the Company and the Lender or the Lender’s affiliate.  The Term Loan and Delayed Draw Term Loan are subject to a LIBOR interest rate floor of .25% if there is no swap agreement.

Revolving Loans bear interest at a floating interest rate based on the then LIBOR plus an indicative spread determined by the Company’s leverage as defined in the Credit Agreement or, if the borrowing of a Revolving Loan is to be repaid within 30 days of such borrowing, the Revolving Loan will accrue interest at the Lender’s prime rate plus .50% with a floor of 4.0%.  Line of Credit Loans will bear interest at a floating interest rate based on the Lender’s prime rate of interest.  Revolving Loans are subject to a LIBOR interest rate floor of .00%.

15

Letters of credit are charged an annual fee equal to (i) an applicable margin determined by the leverage ratio of the Company less (ii) .25%, paid quarterly in arrears, in addition to the Lender’s customary fees for issuance, amendment and other standard fees.  Letters of credit totaling $4 million that were outstanding under the existing credit facility are treated as letters of credit under the Revolving Loan.

Under the terms of the Credit Agreement, the Company may prepay the Term Loan and/or the Delayed Draw Term Loan in full or in part without penalty except for any amount required to compensate the Lender for any swap breakage or other costs incurred in connection with such prepayment.  The Lender receives an unused facility fee of 0.50% per annum payable quarterly in arrears on the unused portions of the Revolving Loan and the Line of Credit Loan.

In addition to the foregoing, the Credit Agreement contains customary representations, warranties and affirmative and negative covenants (including financial covenants that (i) restrict capital expenditures, (ii) restrict leverage, (iii) require maintaining minimum tangible net worth, (iv) require maintaining a minimum fixed charge coverage ratio and (v) require the maintenance of a minimum of $5 million in quarterly average aggregate balances on deposit with the Lender, which, if not maintained, will result in the assessment of a quarterly fee of $12,500), as well as events of default customary for facilities of this type. As of September 30, 2020, the Company was in compliance with all debt covenants.  The Credit Agreement also limited the payment of cash dividends during the first twenty-four months of the agreement to $1.7 million but an amendment to the Credit Agreement entered into on November 10, 2020 raised the cash dividend limit to $2.3 million in such twenty-four month period.

As of September 30, 2020 and December 31, 2019, the Company had $18.3 million and $34.8 million, respectively, outstanding under the Credit Facility offset by $0.7 million and $0.8 million of deferred finance fees, respectively.  In January 2020, the Company repaid the $15.0 million outstanding on the Line of Credit Loan.  As of September 30, 2020 and December 31, 2019, letters of credit in the aggregate outstanding principal amount of $4.0 million and $4.0 million, respectively, were outstanding under the Credit Facility.

Scheduled maturities of long-term debt at September 30, 2020 are as follows:

Year ending December 31,
     
2020
 
$
500
 
2021
   
2,000
 
2022
   
2,000
 
2023
   
2,000
 
2024
   
11,833
 
   
$
18,333
 

7.
STOCKHOLDERS’ EQUITY

Common Stock

Holders of our common stock are entitled to receive dividends when and as declared by our Board of Directors and have the right to one vote per share on all matters requiring shareholder approval. The Company has not declared or paid any cash dividends on our common stock since the Company’s Board of Directors discontinued our quarterly cash dividend program in February 2015.  The Company has no current intentions to resume the payment of cash dividends to holders of common stock in the foreseeable future.

Preferred Stock
 
On November 14, 2019, the Company raised gross proceeds of $12.7 million from the sale of 12,700 shares of its newly designated Series A Convertible Preferred Stock, no par value per share (the “Series A Preferred Stock”).  The Series A Preferred Stock was designated by the Company’s Board of Directors pursuant to a certificate of amendment to the Company’s amended and restated certificate of incorporation (the “Charter Amendment”). The liquidation preference associated with the Series A Preferred Stock was $1,000 per share at December 31, 2019.  Upon issuance each share of Series A Preferred Stock was convertible at $2.36 per share of common stock (as may be adjusted pursuant to the Charter Amendment, the “Conversion Price”) into 423,729 shares of common stock (the number of shares into which the Series A Preferred Stock is convertible at any time, the “Conversion Shares”).  The Company incurred issuance costs of $0.7 million as part of this transaction.
 
16

The description below provides a summary of certain material terms of the Series A Preferred Stock:
 
Securities Purchase Agreement.
 
The Series A Preferred Stock was sold by the Company pursuant to a Securities Purchase Agreement dated as of November 14, 2019 (the “SPA”) among the Company, Juniper Targeted Opportunity Fund, L.P. and Juniper Targeted Opportunities, L.P. (together, “Juniper Purchasers”) and Talanta Investment, Inc. (“Talanta,” together with Juniper Purchasers, the “Investors”). Among other things, the SPA includes covenants relating to the appointment of a director to the Company’s Board of Directors to be selected solely by the holders of the Series A Preferred Stock.
 
Dividends. Dividends on the Series A Preferred Stock (“Series A Dividends”), at the initial annual rate of 9.6% is to be paid, in arrears, from the date of issuance quarterly on each December 31, March 31, June 30 and September 30 with September 30, 2020 being the first dividend payment date.  The Company, at its option, may pay dividends either (a) in cash or (b) by increasing the number of Conversion Shares by the dollar amount of the dividend divided by the Conversion Price.  The dividend rate is subject to increase (a) 2.4% per annum on the fifth anniversary of the issuance of the Series A Preferred Stock (b) by 2% per annum but in no event above 14% per annum should the Company fail to perform certain obligations under the Charter Amendment.  The Series A Preferred Stock is not currently redeemable and may not become redeemable in the future. As a result, the Company is not required to re-measure the Series A Preferred Stock and does not accrete changes in the redemption value.  As of September 30, 2020, we paid a $1.1 million cash dividend on the outstanding shares of Series A Preferred Stock rather than increasing the number of Conversion Shares.
 
Series A Preferred Stock Holders Right to Convert into Common Stock.  Each share of Series A Preferred Stock, at any time, is convertible into a number of shares of common stock equal to (i) the sum of (A) $1,000 (subject to adjustment as provided in the Charter Amendment) plus (B) the dollar amount of any declared Series A Dividends not paid in cash divided by (ii) the Conversion Price ($2.36 per share subject to anti-dilution adjustments) as of the applicable Conversion Date (as defined in the Charter Amendment). At all times, however, the number of Conversion Shares that can be issued to any Series A Preferred Stock Holder may not result in such holder and its affiliates owning more than 19.99% of the total number of shares of common stock outstanding after giving effect to the conversion (the “Hard Cap”), unless prior shareholder approval is obtained or no longer required by the rules of the principal stock exchange on which the Company’s common stock trade.
 
Mandatory Conversion. If, at any time following November 14, 2022 the volume weighted average price of the Company’s common stock equals or exceeds 2.25 times the Conversion Price (currently $5.31 per share) for a period of 20 consecutive trading days and on each such trading day at least 20,000 shares of common stock was traded, the Company may, at its option and subject to the Hard Cap, require that any or all of the then outstanding shares of Series A Preferred Stock be automatically converted into Conversion Shares.
 
Redemption. Beginning November 14, 2024, the Company may redeem all or any of the Series A Preferred Stock for a cash price equal to the greater of (“Liquidation Preference”) (i) the sum of $1,000 (subject to adjustment as provided in the Charter Amendment) plus the dollar amount of any declared Series A Dividends not paid in cash and (ii) the value of the Conversion Shares were such Series A Preferred Stock converted (as determined in the Charter Amendment) without regard to the Hard Cap.
 
Change of Control.  In the event of certain changes of control, some of which are not in the Company’s control, as defined in the Charter Amendment as a “Fundamental Change” or a “Liquidation” (as defined in the Charter Amendment), the holders of Series A Preferred Stock shall be entitled to receive the Liquidation Preference, unless such Fundamental Change is a stock merger in which certain value and volume requirements are met, in which case the Series A Preferred Stock will be converted into common stock in connection with such stock merger.  The Company has classified the Series A Preferred Stock as mezzanine equity on the Consolidated Balance Sheet based upon the terms of a change of control which could be outside the Company’s control.
 
Voting. Holders of shares of Series A Preferred Stock will be entitled to vote with the holders of shares of common stock and not as a separate class, at any annual or special meeting of shareholders of the Company, on an as-converted basis, in all cases subject to the Hard Cap.  In addition, a majority of the voting power of the Series A Preferred Stock must approve certain significant actions of the Company, including (i) declaring a dividend or otherwise redeeming or repurchasing any shares of common stock and other junior securities, if any, subject to certain exceptions, (ii) incurring indebtedness, except for certain permitted indebtedness and (iii) creating a subsidiary other than a wholly-owned subsidiary.
 
Additional Provisions.  The Series A Preferred Stock is perpetual and therefore does not have a maturity date.  The conversion price of the Series A Preferred Stock is subject to anti-dilution protections if the Company affects a stock split, stock dividend, subdivision, reclassification or combination of its common stock and certain other economically dilutive events.
 
17

Registration Rights Agreement. The Company also is a party to a Registration Rights Agreement (“RRA”) with the investors of the Series A Preferred Stock.  The RRA provides for unlimited demand registration rights, of which there can be two underwritten offerings each for at least $5 million in gross proceeds, and piggyback registration rights, with respect to the Conversion Shares. In addition, the RRA obligates the Company to register “for the shelf” the resale of the Conversion Shares through the filing of registration statement to such effect (the “Resale Shelf Registration Statement”) and have such Resale Shelf Registration Statement declared effective by the Securities and Exchange Commission (the “SEC”) no later than November 14, 2020.  The SEC declared the Resale Shelf Registration Statement effective on October 16, 2020.

Restricted Stock

The Company currently has three stock incentive plans: a Long-Term Incentive Plan (the “LTIP”), a Non-Employee Directors Restricted Stock Plan (the “Non-Employee Directors Plan”) and the Lincoln Educational Services Corporation 2020 Incentive Compensation Plan (the “2020 Plan”).

2020 Plan

On March 26, 2020, the Board adopted the 2020 Plan to provide an incentive to certain directors, officers, employees and consultants of the Company to align their interests in the Company’s success with those of its shareholders through the grant of equity-based awards. On June 16, 2020, the shareholders of the Company approved the 2020 Plan.  The 2020 Plan is administered by the Compensation Committee of the Board, or such other qualified committee appointed by the Board, who will, among other duties, have full power and authority to take all actions and to make all determinations required or provided for under the 2020 Plan. Pursuant to the 2020 Plan, the Company may grant options, share appreciation rights, restricted shares, restricted share units, incentive stock options and nonqualified stock options.  The Plan has a duration of 10 years.

Subject to adjustment as described in the 2020 Plan, the aggregate number of common shares available for issuance under the 2020 Plan is 2,000,000 shares.  As of September 30, 2020, 111,376 restricted shares have been issued to non-employee directors which vest on the first anniversary of the grant date.

On August 7, 2020, two non-employee directors were appointed to the Company’s Board of Directors and 17,096 restricted shares were granted to each non-employee director.  The restricted shares vest on June 16, 2021.

Also on August 7, 2020, a non-employee director retired from his position on the Company’s Board of Directors.  Accordingly, 12,762 shares were accelerated to vest effective August 7, 2020.

LTIP

Under the LTIP, certain employees have received awards of restricted shares of common stock based on service and performance.  The number of shares granted to each employee is based on the amount of the award and the fair market value of a share of common stock on the date of grant. The 2020 Plan makes it clear that there will be no new grants under the LTIP effective as of the date of shareholder approval, June 16, 2020.  The 2020 Plan also states that the shares available under the 2020 Plan will be two million shares plus the number of shares remaining available under the LTIP.  As no shares remain available under the LTIP there can be no additional grants under the LTIP. Grants under the LTIP remain in effect according to their terms.  Therefore, those grants are subject to the particular award agreement relating thereto and to the LTIP to the extent that the prior plan provides rules relating to those grants.  The LTIP remains in effect only to that extent.

On February 20, 2020, performance-based restricted shares were granted to certain employees of the Company.  The shares vest 20%, 30% and 50% on the first, second and third anniversary dates, respectively, based upon the attainment of a financial target during each fiscal years ending December 31, 2020, 2021 and 2022, respectively, except in extraordinary circumstances.  There is no restriction on the right to vote or the right to receive dividends with respect to any of such restricted shares.  For the three and nine months ended September 30, 2020, the Company recorded expense of $0.2 million and $0.5 million, respectively, as the expectation of attainment of the target is probable.

On February 28, 2019, restricted shares were granted to certain employees of the Company, which shares ratably vest over three years.  There is no restriction on the right to vote or the right to receive dividends with respect to any of such restricted shares. For the nine months ending September 30, 2020, and 2019, the Company recorded expense of $0.4 million and $0.3 millionin connection with this grant , respectively.

18

Non-Employee Directors Plan

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

For the nine months ended September 30, 2020 and 2019, the Company completed a net share settlement for 75,115 and 5,518 restricted shares, respectively, on behalf of certain employees that participate in the LTIP upon the vesting of the restricted shares pursuant to the terms of the LTIP.  The net share settlement was in connection with income taxes incurred on restricted shares that vested and were transferred to the employees during 2019 and/or 2018, creating taxable income for the employees.  At the employees’ request, the Company will pay these taxes on behalf of the employees in exchange for the employees returning an equivalent value of restricted shares to the Company.  These transactions resulted in a decrease of $0.2 million and less than $0.1 million for each of the nine months ended September 30, 2020 and 2019, respectively, to equity on the condensed consolidated balance sheets as the cash payment of the taxes effectively was a repurchase of the restricted shares granted in previous years.

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

   
Shares
   
Weighted
Average Grant
Date Fair Value
Per Share
 
Nonvested restricted stock outstanding at December 31, 2019
   
595,436
   
$
3.15
 
Granted
   
1,319,734
     
2.68
 
Canceled
   
-
     
-
 
Vested
   
(343,011
)
   
3.40
 
                 
Nonvested restricted stock outstanding at September 30, 2020
   
1,572,159
     
2.77
 

The restricted stock expense for the three months ended September 30, 2020 and 2019 was $0.7 million and $0.2 million, respectively.  The restricted stock expense for the nine months ended September 30, 2020 and 2019 was $1.3 million and $0.5 million, respectively.  The unrecognized restricted stock expense as of September 30, 2020 and December 31, 2019 was $3.6 million and $1.2 million, respectively.  As of September 30, 2020, outstanding restricted shares under the LTIP had aggregate intrinsic value of $8.7 million.

Stock Options

The fair value of the stock options used to compute stock-based compensation is the estimated present value at the date of grant using the Black-Scholes option pricing model.  The following is a summary of transactions pertaining to stock options:

   
Shares
   
Weighted
Average
Exercise Price
Per Share
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic Value (in thousands)
 
Outstanding at December 31, 2019
   
116,000
   
$
10.56
 
1.83 years
 
$
-
 
Granted/Vested
   
-
     
-
       
-
 
Canceled
   
(35,000
)
   
16.95
       
-
 
                           
Outstanding at September 30, 2020
   
81,000
     
7.79
 
1.42 years
   
-
 
                           
Vested as of September 30, 2020
   
81,000
     
7.79
 
1.42 years
   
-
 
                           
Exercisable as of September 30, 2020
   
81,000
     
7.79
 
1.42 years
   
-
 

As of September 30, 2020, there was no unrecognized pre-tax compensation expense.

19

8.
INCOME TAXES

The provision for income taxes for the three months ended September 30, 2020 and 2019 was less than $0.1 million, or 1.4% of pretax income, and $0.1 million, or 3.6% of pretax loss, respectively. The provision for income taxes for the nine months ended September 30, 2020 and 2019 was $0.2 million, or 5.6% of pretax income, and $0.2 million, or 3.5% of pretax loss, respectively.

The Company assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to recover the existing deferred tax assets.  In this regard, a significant objective negative evidence was the cumulative losses incurred by the Company in recent years.  On the basis of this evaluation, the realization of the Company’s deferred tax assets was not deemed to be more likely than not and, thus, the Company maintained a full valuation allowance on its net deferred tax assets as of September 30, 2020.

See Note 12 – COVID-19 Pandemic and CARES Act to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional discussion about the CARES Act for impact on taxes.

9.
COMMITMENTS AND CONTINGENCIES

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

Information regarding certain specific legal proceedings in which the Company is involved is contained in Part I, Item 3, and in Note 15 to the Notes to the Condensed Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.  Unless otherwise indicated in this report, all proceedings discussed in the earlier report which are not indicated therein as having been concluded, remain outstanding as of September 30, 2020.

10.
SEGMENTS

We operate our business in three reportable segments: (a) the Transportation and Skilled Trades segment; (b) the Healthcare and Other Professions segment; and (c) the Transitional segment.  Our reportable segments have been determined based on a method by which we now evaluate performance and allocate resources.  Each reportable segment represents a group of post-secondary education providers that offer a variety of degree and non-degree academic programs.  These segments are organized by key market segments to enhance operational alignment within each segment to more effectively execute our strategic plan.  Each of the Company’s schools is a reporting unit and an operating segment.  Our operating segments are described below.

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

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

TransitionalThe Transitional segment refers to our campus operations which have been closed.  The schools in the Transitional segment employed a gradual teach-out process that enabled the schools to continue to operate to allow their current students to complete their course of study.

The Company continually evaluates each campus for profitability, earning potential, and customer satisfaction.  This evaluation takes several factors into consideration, including the campus’s geographic location and program offerings, as well as skillsets required of our students by their potential employers.  The purpose of this evaluation is to ensure that our programs provide our students with the best possible opportunity to succeed in the marketplace with the goals of attracting more students to our programs and, ultimately, to provide our shareholders with the maximum return on their investment.  Campuses classified in the Transitional segment have been subject to this process and have been strategically identified for closure.  As of September 30, 2020 and 2019 and December 31, 2019, no campuses have been categorized in the Transitional segment.

We evaluate segment performance based on operating results.  Adjustments to reconcile segment results to consolidated results are included under the caption “Corporate,” which primarily includes unallocated corporate activity.

20

Summary financial information by reporting segment is as follows:

   
For the Three Months Ended September 30,
 
   
Revenue
   
Operating Income (Loss)
 
   
2020
   
% of
Total
   
2019
   
% of
Total
   
2020
   
2019
 
Transportation and Skilled Trades
 
$
56,828
     
72.1
%
 
$
52,652
     
72.5
%
 
$
9,138
   
$
6,752
 
Healthcare and Other Professions
   
21,964
     
27.9
%
   
19,942
     
27.5
%
   
1,654
     
1,403
 
Corporate
   
-
             
-
             
(6,952
)
   
(6,012
)
Total
 
$
78,792
     
100.0
%
 
$
72,594
     
100.0
%
 
$
3,840
   
$
2,143
 

   
For the Nine Months Ended September 30,
 
   
Revenue
   
Operating Income (Loss)
 
     
2020
   
% of
Total
     
2019
   
% of
Total
     
2020
     
2019
 
Transportation and Skilled Trades
 
$
148,799
     
70.4
%
 
$
141,005
     
70.7
%
 
$
18,848
   
$
11,051
 
Healthcare and Other Professions
   
62,504
     
29.6
%
   
58,422
     
29.3
%
   
6,388
     
4,214
 
Corporate
   
-
             
-
             
(21,581
)
   
(20,079
)
Total
 
$
211,303
     
100.0
%
 
$
199,427
     
100.0
%
 
$
3,655
   
$
(4,814
)

   
Total Assets
 
   
September 30, 2020
   
December 31, 2019
 
Transportation and Skilled Trades
 
$
138,123
   
$
121,611
 
Healthcare and Other Professions
   
34,628
     
27,945
 
Corporate
   
33,065
     
45,207
 
Total
 
$
205,816
   
$
194,763
 

21

11.
FAIR VALUE

The carrying amount and estimated fair value of the Company’s financial instrument assets and liabilities, which are not measured at fair value on the Condensed Consolidated Balance Sheet, are listed in the table below:

   
September 30, 2020
 
   
Carrying
Amount
   
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Total
 
Financial Assets:
                             
Cash and cash equivalents
 
$
26,520
   
$
26,520
   
$
-
   
$
-
   
$
26,520
 
Restricted cash
   
1,073
     
1,073
     
-
     
-
     
1,073
 
Prepaid expenses and other current assets
   
2,721
     
-
     
2,721
     
-
     
2,721
 
                                         
Financial Liabilities:
                                       
Accrued expenses
 
$
12,532
   
$
-
   
$
12,532
   
$
-
   
$
12,532
 
Other short term liabilities
   
29
     
-
     
29
     
-
     
29
 
Derivative qualifying cash flow hedge
   
960
     
-
     
960
     
-
     
960
 
Credit facility
   
17,667
     
-
     
14,904
     
-
     
14,904
 

   
December 31, 2019
 
   
Carrying
Amount
   
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Total
 
Financial Assets:
                                       
Cash and cash equivalents
 
$
23,644
   
$
23,644
   
$
-
   
$
-
   
$
23,644
 
Restricted cash
   
15,000
     
15,000
     
-
     
-
     
15,000
 
Prepaid expenses and other current assets
   
4,190
     
-
     
4,190
     
-
     
4,190
 
                                         
Financial Liabilities:
                                       
Accrued expenses
 
$
7,869
   
$
-
   
$
7,869
   
$
-
   
$
7,869
 
Other short term liabilities
   
199
     
-
     
199
     
-
     
199
 
Derivative qualifying cash flow hedge
   
174
     
-
     
174
     
-
     
174
 
Credit facility
   
34,028
     
-
     
34,028
     
-
     
34,028
 

As of September 30, 2020, we estimated the fair value of the Credit Facility based on a present value analysis utilizing aggregate market yields obtained from independent pricing sources for similar financial instruments. As of December 31, 2019, we estimated that the carrying value of the Credit Facility approximates the fair value due to the fact that the Credit Facility was entered into in close proximity.

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

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

Qualifying Hedge Derivative

As discussed above, on November 14, 2019, the Company entered into an interest rate swap for the Term Loan with a notional amount of $20M which expires on December 1, 2024.  The loan has a 10-year straight line amortization.  A principal amount of $0.2 million is paid monthly.  This interest rate swap converts the floating interest rate Term Loan to a fixed rate, plus a borrowing spread.  The interest rate is variable based on LIBOR plus 3.50% and the Company’s fixed rate is 5.36%. The Company designated this interest rate swap as a cash flow hedge.

22

The Company entered into this interest rate swap to hedge exposure resulting from the interest rate risk. The purpose of this hedge is to reduce the variability of the interest rate based on LIBOR.  The Company manages these exposures within specified guidelines through the use of derivatives. All of our derivative instruments are utilized for risk management purposes, and the Company does not use derivatives for speculative trading purposes.

The following summarizes the fair value of the outstanding derivative:

   
September 30, 2020
   
December 31, 2019
 
   
Liability(1)
   
Liability(1)
 
   
Notional
   
Fair Value
   
Notional
   
Fair Value
 
Derivative derived as a hedging instrument:
                       
Interest Rate Swap
 
$