UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2024
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from______ to______
Commission File Number 000-51371
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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(Zip Code)
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(Address of principal executive offices)
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(973 ) 736-9340
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading
Symbol(s)
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Name of each exchange on which registered
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The
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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.
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Large accelerated filer ☐
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Non-accelerated filer ☐
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Smaller reporting company
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Emerging growth company
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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 12, 2024, there were 31,479,167
shares of the registrant’s Common Stock outstanding.
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2024
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PART I.
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2 |
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Item 1.
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2
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3
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4
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5
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6
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7
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9
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Item 2.
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21 | |
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Item 3.
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32
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Item 4.
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32
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PART II.
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32
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Item 1.
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32 | |
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Item 1A.
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33 | |
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Item 2.
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33
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Item 3.
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33
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Item 4.
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33
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Item 5.
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33
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Item 6.
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34
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35
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Forward-Looking Statements
This Quarterly Report on Form 10-Q and the documents incorporated by reference herein contain “forward-looking statements” within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation and availability of
resources. These forward-looking statements include, without limitation, statements regarding proposed new programs, expectations that regulatory developments or other matters will or will not have a material adverse effect on our consolidated
financial position, results of operations or liquidity, statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operating results and future economic performance; and statements of
management’s goals and objectives and other similar expressions concerning matters that are not historical facts. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,”
“plans,” “believes,” “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate
indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with
respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such
differences include, but are not limited to the following:
| • |
compliance with the extensive existing regulatory framework applicable to our industry or our failure to timely obtain and maintain regulatory approvals and
accreditation;
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| • |
compliance with continuous changes in applicable federal laws and regulations, including pending rulemaking by the U.S. Department of Education;
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| • |
the effect of current and future Title IV Program regulations arising out of negotiated rulemakings, including any potential reductions in funding or restrictions
on the use of funds received through Title IV Programs;
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| • |
successful updating and expansion of the content of existing programs and developing new programs in a cost-effective manner or on a timely basis;
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| • |
uncertainties regarding our ability to comply with federal laws and regulations regarding the 90/10 Rule and cohort default rates;
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| • |
successful implementation of our strategic plan;
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| • |
our inability to maintain eligibility for or to process federal student financial assistance;
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| • |
regulatory investigations of, or actions commenced against, us or other companies in our industry;
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| • |
changes in the state regulatory environment or budgetary constraints;
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enrollment declines or challenges in our students’ ability to find employment as a result of economic conditions;
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| • |
maintenance and expansion of existing industry relationships and develop new industry relationships;
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| • |
a loss of members of our senior management or other key employees;
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uncertainties associated with opening of new campuses and closing existing campuses;
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| • |
uncertainties associated with integration of acquired schools;
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| • |
industry competition;
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| • |
the effect of any cybersecurity incident;
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| • |
the effect of public health outbreaks, epidemics and pandemics;
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| • |
general economic conditions; and
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| • |
other factors discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 as well as the Company’s subsequent Quarterly
Reports on Form 10-Q under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as applicable.
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Forward-looking statements speak only as of the date the statements are made. Except as required under the federal securities laws and rules and
regulations of the United States Securities and Exchange Commission, we undertake no obligation to update or revise forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking
information. We caution you not to unduly rely on the forward-looking statements when evaluating the information presented herein.
| Item 1. |
FINANCIAL
STATEMENTS
|
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED
BALANCE
SHEETS
(In thousands, except share amounts)
(Unaudited)
| September 30, | December 31, | |||||||
|
2024
|
2023
|
|||||||
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ASSETS
|
||||||||
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CURRENT ASSETS:
|
||||||||
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Cash and cash equivalents
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$
|
|
$
|
|
||||
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Restricted cash
|
||||||||
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Accounts receivable, less allowance for credit losses of $
|
|
|
||||||
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Inventories
|
|
|
||||||
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Prepaid income taxes and income taxes receivable
|
||||||||
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Prepaid expenses and other current assets
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|
|
||||||
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Assets held for sale
|
||||||||
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Total current assets
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|
|
||||||
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PROPERTY, EQUIPMENT AND FACILITIES - At cost, net of accumulated depreciation and amortization of $
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|
||||||
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OTHER ASSETS:
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||||||||
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Noncurrent receivables, less allowance for credit losses of $
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|
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||||||
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Deferred finance charges
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||||||||
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Deferred income taxes, net
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||||||
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Operating lease right-of-use assets
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||||||
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Finance lease right-of-use assets
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||||||||
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Goodwill
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||||||
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Other assets, net
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||||||
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Pension plan assets, net
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||||||||
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Total other assets
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||||||
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TOTAL ASSETS
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$
|
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$
|
|
||||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
(In thousands, except share amounts)
(Unaudited)
| September 30, | December 31, | |||||||
|
2024
|
2023
|
|||||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
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CURRENT LIABILITIES:
|
||||||||
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Unearned tuition
|
$
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|
$
|
|
||||
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Accounts payable
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|
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||||||
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Accrued expenses
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|
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||||||
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Income taxes payable
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||||||
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Current portion of operating lease liabilities
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||||||
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Current portion of finance lease liabilities
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||||||
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Total current liabilities
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||||||
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NONCURRENT LIABILITIES:
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||||||||
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Long-term portion of operating lease liabilities
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||||||
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Long-term portion of finance lease liabilities
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||||||||
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Other long-term liabilities
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||||||||
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Total liabilities
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||||||
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STOCKHOLDERS’ EQUITY:
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||||||||
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Common stock,
|
|
|
||||||
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Additional paid-in capital
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||||||
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Retained earnings
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||||||
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Accumulated other comprehensive loss
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(
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)
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(
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)
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||||
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Total stockholders’ equity
|
|
|
||||||
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
|
$
|
|
||||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
(In thousands, except per share amounts)
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
|
September 30,
|
September 30,
|
|||||||||||||||
|
2024
|
2023
|
2024
|
2023
|
|||||||||||||
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REVENUE
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$
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$
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$
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$
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|
||||||||
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COSTS AND EXPENSES:
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||||||||||||||||
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Educational services and facilities
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||||||||||||
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Selling, general and administrative
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||||||||||||
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(Gain) loss on sale of assets
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( |
) | ( |
) | ||||||||||||
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Gain on insurance proceeds
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( |
) | ( |
) | ||||||||||||
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Impairment of goodwill and long-lived assets
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Total costs & expenses
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OPERATING INCOME
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||||||||||||
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OTHER:
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||||||||||||||||
| Interest income | ||||||||||||||||
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Interest expense
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(
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)
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(
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)
|
(
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)
|
(
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)
|
||||||||
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INCOME BEFORE INCOME TAXES
|
|
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|
||||||||||||
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PROVISION FOR INCOME TAXES
|
|
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|
||||||||||||
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NET INCOME
|
$
|
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$
|
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$
|
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$
|
|
||||||||
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Basic
|
||||||||||||||||
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Net income per common share
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$
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$
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$
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$
|
|
||||||||
| Diluted | ||||||||||||||||
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Net income per common share
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$ | $ | $ | $ | ||||||||||||
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Weighted average number of common shares outstanding:
|
||||||||||||||||
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Basic
|
|
|
|
|
||||||||||||
|
Diluted
|
||||||||||||||||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
(In thousands)
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
|
September 30,
|
September 30,
|
|||||||||||||||
|
2024
|
2023
|
2024
|
2023
|
|||||||||||||
|
Net income
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Other comprehensive loss
|
||||||||||||||||
|
Employee pension plan adjustments, net of taxes ()
|
|
(
|
)
|
|
(
|
)
|
||||||||||
|
Comprehensive income
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
(In thousands, except share amounts)
(Unaudited)
|
Stockholders’ Equity
|
||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
|
Common Stock
|
Paid-in
|
Retained
|
Comprehensive
|
|||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Earnings
|
Loss
|
Total
|
|||||||||||||||||||
|
BALANCE - January 1, 2024
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||||||||
| Net loss | - | ( |
) | ( |
) | |||||||||||||||||||
|
Stock-based compensation expense
|
||||||||||||||||||||||||
|
Restricted stock
|
|
|
|
|
|
|
||||||||||||||||||
|
Net share settlement for equity-based compensation
|
(
|
)
|
|
(
|
)
|
|
|
(
|
)
|
|||||||||||||||
|
BALANCE - March 31, 2024
|
|
|
|
|
(
|
)
|
|
|||||||||||||||||
|
Net loss
|
-
|
|
|
(
|
)
|
|
(
|
)
|
||||||||||||||||
|
Stock-based compensation expense
|
||||||||||||||||||||||||
|
Restricted stock
|
|
|
|
|
|
|||||||||||||||||||
|
BALANCE - June 30, 2024
|
|
|
|
|
|
|
|
|
(
|
)
|
|
|
||||||||||||
| Net income |
- | |||||||||||||||||||||||
| Stock-based compensation expense |
||||||||||||||||||||||||
|
Restricted stock
|
( |
) | ||||||||||||||||||||||
|
Share repurchase
|
||||||||||||||||||||||||
| Net share settlement for equity-based compensation |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| BALANCE - September 30, 2024 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
|
Stockholders’ Equity
|
||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
|
|
Common Stock
|
Paid-in
|
Retained
|
Comprehensive
|
||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Earnings
|
Loss
|
Total
|
|||||||||||||||||||
|
BALANCE - January 1, 2023
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||||||||
| Net cumulative effect from adoption of
(a) |
( |
) | ( |
) | ||||||||||||||||||||
|
Net loss
|
-
|
|
|
(
|
)
|
|
(
|
)
|
||||||||||||||||
|
Employee pension plan adjustments
|
-
|
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||||
|
Stock-based compensation expense
|
||||||||||||||||||||||||
|
Restricted stock
|
|
|
|
|
|
|
||||||||||||||||||
|
Share repurchase
|
( |
) | ( |
) | ( |
) | ||||||||||||||||||
|
Net share settlement for equity-based compensation
|
(
|
)
|
|
(
|
)
|
|
|
(
|
)
|
|||||||||||||||
|
BALANCE - March 31, 2023
|
|
|
|
|
(
|
)
|
|
|||||||||||||||||
|
Net income
|
-
|
|
|
|
|
|
||||||||||||||||||
|
Employee pension plan adjustments
|
-
|
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||||
|
Stock-based compensation expense
|
||||||||||||||||||||||||
|
Restricted stock
|
|
|
|
|
|
|
||||||||||||||||||
|
Share repurchase
|
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Net share settlement for equity-based compensation |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
|
BALANCE - June 30, 2023
|
|
|
|
|
|
|
|
|
(
|
)
|
|
|
||||||||||||
| Net income |
- | |||||||||||||||||||||||
| Employee pension plan adjustments |
- | ( |
) | ( |
) | |||||||||||||||||||
| Stock-based compensation expense |
||||||||||||||||||||||||
|
Restricted stock
|
||||||||||||||||||||||||
| BALANCE - September 30, 2023 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
(a) Net cumulative adjustment to equity based on the adoption of Accounting Standards Update No. 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements. See Note 12 to the Condensed Consolidated Financial Statements.
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
(In thousands)
(Unaudited)
| Nine Months Ended | ||||||||
|
September 30,
|
||||||||
|
2024
|
2023
|
|||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net income
|
$
|
|
$
|
|
||||
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
|
||||||||
|
Depreciation and amortization
|
|
|
||||||
|
Finance lease amortization
|
||||||||
|
Amortization of deferred finance charges
|
||||||||
|
Deferred income taxes
|
|
|
||||||
|
Loss (gain) on sale of assets
|
( |
) | ||||||
|
Gain on insurance proceeds
|
( |
) | ||||||
|
Proceeds from insurance
|
||||||||
|
Impairment of goodwill and long-lived assets
|
||||||||
|
Fixed asset donations
|
(
|
)
|
(
|
)
|
||||
|
Provision for credit losses
|
|
|
||||||
|
Stock-based compensation expense
|
|
|
||||||
|
(Increase) decrease in assets:
|
||||||||
|
Accounts receivable
|
(
|
)
|
(
|
)
|
||||
|
Inventories
|
|
(
|
)
|
|||||
|
Prepaid income taxes and income taxes payable
|
(
|
)
|
|
|||||
|
Prepaid expenses and current assets
|
|
(
|
)
|
|||||
|
Other assets, net
|
|
|
||||||
|
Increase (decrease) in liabilities:
|
||||||||
|
Accounts payable
|
|
|
||||||
|
Accrued expenses
|
(
|
)
|
|
|||||
|
Unearned tuition
|
(
|
)
|
(
|
)
|
||||
| Income taxes payable |
( |
) | ||||||
|
Other liabilities
|
(
|
)
|
(
|
)
|
||||
|
Total adjustments
|
(
|
)
|
(
|
)
|
||||
|
Net cash (used in) provided by operating activities
|
(
|
)
|
|
|||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Capital expenditures
|
(
|
)
|
(
|
)
|
||||
|
Proceeds from sale of property and equipment
|
|
|
||||||
|
Proceeds from short-term investment
|
||||||||
|
Purchase of short-term investment
|
( |
) | ||||||
|
Net cash used in investing activities
|
(
|
)
|
(
|
)
|
||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Payment of deferred finance fees
|
(
|
)
|
|
|||||
|
Finance lease principal paid
|
( |
) | ||||||
| Tenant allowance finance leases |
||||||||
|
Share repurchase
|
( |
) | ||||||
|
Net share settlement for equity-based compensation
|
(
|
)
|
(
|
)
|
||||
|
Net cash used in financing activities
|
(
|
)
|
(
|
)
|
||||
|
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
(
|
)
|
(
|
)
|
||||
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period
|
|
|
||||||
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—End of period
|
$
|
|
$
|
|
||||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
(Continued)
| Nine Months Ended | ||||||||
|
September 30,
|
||||||||
|
2024
|
2023
|
|||||||
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||
|
Cash paid for:
|
||||||||
|
Interest
|
$
|
|
$
|
|
||||
|
Income taxes
|
$
|
|
$
|
|
||||
|
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
|
||||||||
|
Liabilities accrued for or noncash additions of fixed assets
|
$
|
|
$
|
|
||||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
(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 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 & 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.
Basis of Presentation – The accompanying unaudited
Condensed Consolidated Financial Statements have been prepared by the Company pursuant to the rules and regulations of the United States 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, 2023 audited Consolidated Financial Statements and notes thereto and related disclosures of the Company included in the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2023 (“Form 10-K”), 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 nine months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the full fiscal year ending December 31, 2024.
Since 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 September
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. The campus 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 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 as of 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 November 2023, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,
which provides updates to qualitative and quantitative reportable segment disclosure requirements, including enhanced disclosures about significant segment expenses and increased interim disclosure requirements, among others. The amendments in
ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted, and the amendments should be applied retrospectively. The Company will adopt this ASU
in its Form 10-K for the year-ending December 31, 2024.
In December 2023, the FASB
issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASC 740”). The amendments in this ASU require that public business entities on an annual basis 1) disclose specific categories in the rate reconciliation, and 2) provide additional information for reconciling items that meet a
quantitative threshold. The amendments require disclosure about the amount of income taxes paid disaggregated (1) by federal, state and foreign taxes, and (2) by individual jurisdictions in which income taxes paid is equal or greater than
five percent of total income taxes paid. The amendment also requires entities to disclose income or loss from continuing operations before income tax expense disaggregated between domestic and foreign and income tax expense or benefit from
continuing operations disaggregated by federal, state and foreign. For all public business entities, ASC 740 is effective for annual periods beginning after December 15, 2024; early adoption is permitted. We do not expect ASC 740 will have
a material impact on our Condensed Consolidated Financial Statements.
Income Taxes— The Company accounts for income taxes in accordance with ASC 740. 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 considers, 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 Condensed 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, results of operations or liquidity. 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.
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the nine months ended September 30,
2024 and 2023, we did no no
| 2. |
NET EARNINGS PER COMMON SHARE
|
Basic and diluted earnings per share (“EPS”)
are determined in accordance with ASU No. 2015-06, Earnings per Share (Topic 260): Effects on historical earnings per unit of master limited partnership dropdown transactions, which specifies the
computation, presentation and disclosure requirements for EPS. Basic EPS excludes all dilutive Common Stock equivalents. It is based upon the weighted average number of common shares outstanding during the period. Diluted EPS, as calculated using
the treasury stock method, reflects the potential dilution that would occur if our dilutive outstanding stock options and stock awards were issued.
The weighted average
number of common shares used to compute basic and diluted earnings per share for the three and nine months ended September 30, 2024 and 2023 was as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
|
September 30,
|
September 30, | |||||||||||||||
|
|
2024
|
2023
|
2024 | 2023 |
||||||||||||
|
Basic shares outstanding
|
|
|
||||||||||||||
|
Dilutive effect of stock options
|
|
|
||||||||||||||
|
Diluted shares outstanding
|
|
|
||||||||||||||
| 3. |
REVENUE RECOGNITION
|
Substantially all of our revenues are considered to be revenues from our contracts with students. The related accounts receivable balances are
recorded on our Condensed Consolidated 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 ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606). We have assessed the costs incurred to obtain a contract with a student and determined them to be immaterial.
Unearned tuition in the amounts of $23.0
million and $26.9 million are recorded as current liabilities in the accompanying Condensed Consolidated Balance Sheets as of September 30,
2024 and December 31, 2023, respectively. The change in this contract liability balance during the nine-month period ended September 30, 2024 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, 2024 that was included in the contract liability balance at the beginning of the year was $26.0 million.
The following table depicts the timing of revenue recognition:
|
Three Months Ended September 30, 2024
|
Nine months ended September 30, 2024
|
|||||||||||||||||||||||
|
Campus
Operations
|
Transitional |
Consolidated
|
Campus
Operations
|
Transitional |
Consolidated
|
|||||||||||||||||||
|
Timing of Revenue Recognition
|
||||||||||||||||||||||||
|
Services transferred at a point in time
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
Services transferred over time
|
|
|
|
|
|
|
||||||||||||||||||
|
Total revenues
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
Three Months Ended September 30, 2023
|
Nine months ended September 30, 2023
|
|||||||||||||||||||||||
|
Campus
Operations
|
Transitional |
Consolidated
|
Campus
Operations
|
Transitional |
Consolidated
|
|||||||||||||||||||
|
Timing of Revenue Recognition
|
||||||||||||||||||||||||
|
Services transferred at a point in time
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
Services transferred over time
|
|
|
|
|
|
|
||||||||||||||||||
|
Total revenues
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
| 4. |
LEASES
|
The Company determines if an arrangement is a lease at its inception. The Company considers any contract where there is an identified asset as to
which the Company has the right to control its use 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 commencement 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 21 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.
During the three months ended September 30, 2024, the
Company received gross insurance proceeds in the amount of $2.8 million relating to hail damage at one of our campuses. The proceeds
related to the incident have been reported as a gain on insurance proceeds on the statement of operations and disclosed in the operating activities section of the statement of cash flows. Work related to the incident is currently underway.
The new asset is expected to be classified as leasehold improvements and amortized over the remining term of the lease.
On September 28, 2023, the Company purchased a 90,000
square foot property located at 311 Veterans Highway, Levittown, Pennsylvania for approximately $10.2 million and subsequently on
January 30, 2024 entered into a sale-leaseback transaction for this property. As of December 31, 2023, this property was classified as held-for-sale on the Condensed Consolidated Balance Sheets. However, the sale was consummated in the first
quarter of the current year.
On October 18, 2023, the Company entered into a lease for approximately 120,000 square feet of space to serve as the Company’s new campus in Nashville, Tennessee. The lease term commenced on November 1, 2023, with an initial lease term of 15 years . The lease contains two five-year renewal options.
On October 31, 2023, the Company entered into a lease for approximately 100,000 square feet of space to serve as the Company’s new campus in Houston, Texas, which is expected to open in the second
half of 2025. The lease term commenced on January 2, 2024, with an initial lease term of 21 years and 6 months . The
lease contains three five-year
renewal options.
The following table presents
components of lease cost and classification on the Condensed Consolidated Statements of Operations:
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||||
|
in thousands
|
Consolidated Statement of Operations Classification
|
2024
|
2023
|
2024 | 2023 | |||||||||||||
|
Operating Lease Cost
|
Selling, general and administrative
|
$
|
|
$
|
|
$ | $ | |||||||||||
|
Finance lease cost
|
|
|||||||||||||||||
|
Amortization of leased assets
|
Depreciation and amortization
|
|
|
|||||||||||||||
|
Interest on lease Liabilities
|
Interest expense
|
|
|
|||||||||||||||
|
Variable lease cost
|
Selling, general and administrative
|
|
|
|||||||||||||||
|
|
|
$
|
|
$
|
|
$ | $ | |||||||||||
The net change in ROU asset and finance lease liability is split between principal payments, interest expense and amortization expense. Principal payments are classified in the
financing section, interest expense and amortization expense are broken out separately in the operating section of the Condensed Consolidated Statements of Cash Flows.
Supplemental
cash flow information and non-cash activity related to our leases are as follows:
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
|
2024
|
2023
|
2024 | 2023 | |||||||||||||
|
Cash flow information:
|
||||||||||||||||
|
Cash paid for amounts included in the measurement of lease liabilities
|
||||||||||||||||
|
Operating Cash Flows - operating leases
|
$ | $ | $ | $ | ||||||||||||
| Operating Cash Flows - finance leases |
$ | $ | $ | $ | ||||||||||||
|
Financing Cash Flows - finance leases
|
$ | $ | $ | $ | ||||||||||||
|
Non-cash activity:
|
||||||||||||||||
|
Lease liabilities arising from obtaining right-of-use assets
|
||||||||||||||||
|
Operating leases
|
$ | $ | $ | $ | ||||||||||||
|
Finance leases
|
$ | $ | $ | $ | ||||||||||||
During the nine months ended September 30, 2024, the Company entered into one
new operating, one new finance lease and nine lease modifications. The Company obtained the operating and finance ROU asset in exchange for an operating and finance lease liability of $15.7 million and $12.6 million, respectively. In addition, the nine lease modifications resulted in a noncash re-measurement of the related ROU asset and operating lease liability of $32.7 million.
Weighted-average remaining lease term and discount rate for our leases are as follows:
|
As of
September 30,
|
||||||||
|
2024
|
2023
|
|||||||
|
Weighted-average remaining lease term
|
|
|
||||||
| Operating leases |
||||||||
| Finance leases |
- |
|||||||
|
Weighted-average discount rate
|
||||||||
| Operating leases |
% | % | ||||||
| Finance leases |
% | |||||||
Maturities of lease liabilities by fiscal year for our leases as of September 30, 2024, are as follows:
|
Operating Leases
|
Finance Leases
|
|||||||
|
Year ending December 31,
|
||||||||
|
2024 (excluding the nine months ending September 30, 2024)
|
$
|
|
$ | |||||
|
2025
|
|
|||||||
|
2026
|
|
|||||||
|
2027
|
|
|||||||
|
2028
|
|
|||||||
|
2029
|
|
|||||||
|
Thereafter
|
|
|||||||
|
Total lease payments
|
|
|||||||
|
Less: imputed interest
|
(
|
)
|
( |
) | ||||
|
Present value of lease liabilities
|
$
|
|
$ | |||||
| 5. |
GOODWILL AND LONG-LIVED ASSETS
|
The Company reviews the carrying value of
its long-lived assets and identifiable intangibles annually, or more frequently if necessary, for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. If the Company determines
that an asset’s carrying value is impaired, it will record a write-down of the carrying value of the asset and charge the impairment as an operating expense in the period in which the determination is made. For other long-lived assets, including
ROU lease assets, the Company evaluates assets for recoverability when there is an indication of potential impairment. If the undiscounted cash flows from a group of assets being evaluated is less than the carrying value of that group of assets,
the fair value of the asset group is determined and the carrying value of the asset group is written down to fair value.
When we perform the quantitative impairment
test for long-lived assets, we examine estimated future cash flows using Level 3 inputs. These cash flows are evaluated by using weighted probability techniques as well as comparisons of past performance against projections. Assets may also be
evaluated by identifying independent market values.
During the three
months ended September 30, 2024 and 2023, there were no no impairment to goodwill and a $3.8 million impairment to goodwill, respectively. Additionally, during the nine months ended September 30, 2024 and 2023, the Company incurred no impairment to long-lived assets and a $0.4
million impairment to long-lived assets, respectively. The impairments to goodwill and long-lived assets during the nine months ended September 30, 2023 related to the Company’s Nashville, Tennessee property.
The carrying amount of goodwill on September 30, 2024 and 2023 was as follows:
|
Gross
Goodwill
Balance
|
Accumulated
Impairment
Losses
|
Net
Goodwill
Balance
|
||||||||||
|
Balance as of January 1, 2024
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
Adjustments
|
-
|
|
|
|||||||||
|
Balance as of September 30, 2024
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
Gross
Goodwill
Balance
|
Accumulated
Impairment
Losses
|
Net
Goodwill
Balance
|
||||||||||
|
Balance as of January 1, 2023
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
Adjustments
|
-
|
(
|
)
|
(
|
)
|
|||||||
|
Balance as of September 30, 2023
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
| 6. |
LONG-TERM DEBT
|
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 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 Fifth Third Credit Agreement
As of September 30, 2024, there was no debt outstanding under the Facility.
|
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 no t 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 currently
has no intention to pay cash dividends to holders of Common Stock in the foreseeable future.
Restricted Stock
The Company currently has only one
active stock incentive plan: the Lincoln Educational Services Corporation 2020 Long-Term Incentive Plan (the “LTIP”)
LTIP
On March 26, 2020, the Board of Directors adopted the LTIP 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 LTIP. The LTIP is administered by the Compensation
Committee of the Board of Directors, or such other qualified committee appointed by the Board of Directors, which will, among other duties, have the full power and authority to take all actions and make all determinations required or provided for
under the LTIP. Pursuant to the LTIP, the Company may grant options, share appreciation rights, restricted shares, restricted share units, incentive stock options and nonqualified stock options. Under the LTIP, employees may surrender shares as
payment of applicable income tax withholding on the vested Restricted Stock. The LTIP has a duration of 10 years. On February 23, 2023,
the Board of Directors approved, subject to shareholder approval, an amendment of the LTIP to increase the aggregate number of shares available under the LTIP from 2,000,000 shares to 4,000,000 shares. The amendment was approved and adopted
by the shareholders at the Annual Meeting of Shareholders held on May 5, 2023.
For the three and nine
months ended September 30, 2024, the Company completed a net share settlement of 7,252 shares and 315,611 shares, respectively, compared to zero
shares and 337,050 shares for the three and nine months ended September 30, 2023, respectively. The net share settlement was
performed 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 2024 and/or 2023, creating taxable income for the employees. At the employees’ request, the Company paid 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 decreases of $0.1 million and $3.1 million for the three and nine months ended September 30, 2024, respectively, compared to zero and $2.0 million for the three and nine months ended
September 30, 2023, respectively. These transactions resulted in a decrease 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, 2023
|
|
$
|
|
|||||
|
Granted
|
|
|
||||||
| Canceled |
( |
) | ||||||
|
Vested
|
(
|
)
|
|
|||||
|
Nonvested Restricted Stock outstanding at September 30, 2024
|
|
$
|
|
|||||
The Restricted Stock expense for the three and nine months ended September 30, 2024 was $1.2 million and $3.4 million,
respectively, compared to $0.7 million and $4.0 million for the three and nine months ended September 30, 2023, respectively. The unrecognized Restricted Stock expense as of September 30, 2024 and December 31, 2023 was $5.5 million and $4.3 million,
respectively. As of September 30, 2024, the outstanding shares of Restricted Stock had an aggregate intrinsic value of $11.5
million.
Share Repurchase
Plan
On May 24, 2022, the Company announced that its Board of Directors had
authorized a share repurchase program of up to $30.0 million of the Company’s outstanding Common Stock. The repurchase program was
authorized for 12 months . Pursuant to the program, purchases may be made, from time to time, in open-market transactions at
prevailing market prices, in privately negotiated transactions or by other means as determined by the Company’s management and in accordance with applicable federal securities laws. The timing of purchases and the number of shares repurchased
under the program depend on a variety of factors including price, trading volume, corporate and regulatory requirements and market conditions. The Company retains the right to limit, terminate or extend the share repurchase program at any time
without prior notice.
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 the share repurchase
program for an additional 12 months through May 24, 2025. During the three months ended
September 30, 2024 and 2023, the Company did no zero
shares and 165,064 shares at a cost of $0.9 million. As of September 30, 2024, the Company had approximately $29.7
million remaining for repurchases under the program. Since inception of the program, the Company has made repurchases of approximately 1.7
million shares of the Company’s Common Stock at an average share price of $5.95 for an aggregate expenditure of approximately $10.3 million.
The following table presents information about our repurchases of Common Stock, all
of which were completed through open market purchases:
|
Three Months Ended
|
Nine Months Ended | |||||||||||||||
|
September 30,
|
September 30, |
|||||||||||||||
|
(in thousands, except share data)
|
2024
|
2023
|
2024
|
2023
|
||||||||||||
|
Total number of shares repurchased1
|
|
|
||||||||||||||
|
Total cost of shares repurchased
|
$
|
|
$
|
|
$ | $ | ||||||||||
1 These shares were subsequently canceled and recorded as a reduction of Common Stock.
| 8. |
INCOME TAXES
|
The provision for income taxes was $1.7 million and $0.8 million for the three months ended September 30, 2024
and 2023, respectively. The increase in tax provision was primarily driven by an increase in pre-tax income.
The provision for income taxes was $1.1 million and $7.0 million for the nine months ended September 30, 2024
and 2023, respectively. The decrease in provision was primarily driven by a gain in the prior year due to the sale of the Nashville, Tennessee property during the second quarter of 2023, which drove an increase in the Company’s pre-tax income.
| 9. |
COMMITMENTS AND CONTINGENCIES
|
There are no material developments related 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.
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.
| 10. |
SEGMENTS
|
As of 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 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 September 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. The campus 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.
Summary financial information by reporting segment is as follows:
| For the Three Months Ended September 30, |
||||||||||||||||||||||||
|
Revenue
|
Operating Income (Loss)
|
|||||||||||||||||||||||
|
2024
|
% of
Total
|
2023
|
% of
Total
|
2024
|
2023
|
|||||||||||||||||||
|
Campus Operations
|
$
|
|
|
%
|
$
|
|
|
%
|
$
|
|
$
|
|
||||||||||||
|
Transitional
|
|
|
%
|
|
|
%
|
|
(
|
)
|
|||||||||||||||
|
Corporate
|
|
% |
|
% |
(
|
)
|
(
|
)
|
||||||||||||||||
|
Total
|
$
|
|
|
%
|
$
|
|
|
%
|
$
|
|
$
|
|
||||||||||||
|
For the Nine
Months Ended September 30,
|
||||||||||||||||||||||||
|
Revenue
|
Operating income (Loss)
|
|||||||||||||||||||||||
|
2024
|
% of
Total
|
2023
|
% of
Total |
2024
|
2023
|
|||||||||||||||||||
|
Campus Operations
|
$
|
|
|
%
|
$
|
|
|
%
|
$
|
|
$
|
|
||||||||||||
|
Transitional
|
|
|
%
|
|
|
%
|
|
(
|
)
|
|||||||||||||||
|
Corporate
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||||||
|
Total
|
$
|
|
|
%
|
$
|
|
|
%
|
$
|
|
$
|
|
||||||||||||
|
Total Assets
|
||||||||
|
September 30,
2024
|
December 31, 2023
|
|||||||
|
Campus Operations
|
$
|
|
$
|
|
||||
|
Transitional
|
|
|
||||||
|
Corporate
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
|
11.
|
FAIR VALUE
|
The accounting
framework for determining fair value includes a hierarchy for ranking the quality and reliability of the information used to measure fair value, which enables the reader of the financial statements to assess the inputs used to develop those
measurements. The fair value hierarchy consists of three tiers:
Level 1: Defined as quoted market prices in active markets for identical assets or liabilities.
Level 2: Defined as inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active,
model-based valuation techniques for which all significant assumptions are observable in the market or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Defined as unobservable inputs that are not corroborated by market data.
The Company measures the fair value of money market funds and treasury bills using Level 1 inputs. Pricing sources may
include industry standard data providers, security master files from large financial institutions and other third-party sources used to determine a daily market value.
The
following charts reflect the fair market value of cash equivalents and short-term investments as of September 30, 2024 and December 31, 2023, respectively.
|
September 30, 2024
|
||||||||||||||||||||
|
Carrying
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
|||||||||||||||||
|
Amount
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Total
|
||||||||||||||||
|
Cash equivalents:
|
||||||||||||||||||||
|
Money market fund
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||
|
Total cash equivalents and short-term investments
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||
|
December 31, 2023
|
||||||||||||||||||||
|
Carrying
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
|||||||||||||||||
|
Amount
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Total
|
||||||||||||||||
|
Cash equivalents:
|
||||||||||||||||||||
|
Money market fund
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||
|
Treasury bill
|
|
|
|
|
|
|||||||||||||||
|
Total cash equivalents and short-term investments
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||
The carrying amount of the Company’s financial instruments, including cash
equivalents, short-term investments, prepaid expenses and other current assets, accrued expenses and other short-term liabilities, approximates fair value due to the short-term nature of these items.
|
12.
|
STUDENT RECEIVABLES
|
Student
receivables represent funds owed to us in exchange for the educational services provided to a student. Student receivables are reflected net of an allowance for credit losses at the end of the reporting period. Student receivables, net, are
reflected on our Condensed Consolidated Balance Sheets as components of both current and non-current assets.
Our students pay for their costs through a variety of funding sources, including federal loan and grant programs,
institutional payment plans, Veterans Administration and other military funding and grants, private and institutional scholarships and cash payments. Cash receipts from government-related sources are typically received during the current academic
term. Students who have not applied for any type of financial aid generally set up a payment plan with the institution and make payments on a monthly basis as per the terms of the payment plan. A student receivable balance is written off when deemed uncollectable, which is typically once
a student is out of school and there has been no payment activity on the account for 150 days . If, however, the student does
remit a payment during this time period, the 150-day policy for write-off starts again until either (1) the student continues making
payments, or (2) the student does not make any additional payments after which the student receivable balance is written off after 150 days .
Effective
January 1, 2023, the Company adopted Accounting Standard Update (“ASU”) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” commonly
known as “CECL” (“CECL”). On the January 1,
2023 date of adoption, based on forecasts of macroeconomic conditions and exposures at that time, the aggregate impact to the Company resulted in an opening balance sheet adjustment increasing the allowance for credit losses related to the
Company’s accounts receivables of approximately $10.8 million, a decrease in retained earnings of $7.9 million, after-tax and a deferred tax asset increase of $2.9 million.
Students
enrolled in the Company’s programs are provided with a variety of funding
resources, including financial aid, grants, scholarships and private loans. After exhausting all fund options, if the student is
still in need of additional financing, the Company may offer an institutional loan as a lender of last resort. Institutional loan terms are
pre-determined at enrollment and are not typically restructured.
Our
standard student receivable allowance is based on an estimate of lifetime expected credit losses on student receivables that considers vintages of receivables to determine a loss rate. In considering lifetime credit losses, if the expected life
goes beyond the Company’s reasonable ability to forecast, the Company then reverts back to historical loss experience as an indicator of collections. In determining the expected credit losses for the period, student receivables were disaggregated
and pooled into two different categories to refine the calculation. Other information considered included external factors outside the Company’s control. Given that collection history during the COVID-19 pandemic was not considered to be a
reliable indicator of a student’s repayment history, the Company adjusted the historical loss calculation by normalizing the financial data relating to that time period. Our estimation methodology further considered 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, student status, changes in the current economic condition, 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.
Student
Receivables
The Company has student receivables that are due greater than 12 months from the date of our Condensed Consolidated Balance Sheets. As of September 30, 2024 and December 31, 2023, the amount of non-current student receivables under
payment plans that is longer than 12 months in duration, net of allowance for credit losses, was $19.8 million and $17.5 million, respectively.
The following table presents the amortized cost basis of student receivables as of September 30, 2024 and 2023, respectively, by year of origination.
|
As of September 30,
|
|||||||||||
|
2024
|
2023
|
||||||||||
|
Student
|
Student
|
||||||||||
|
Year
|
Receivables (1)
|
Year
|
Receivables (1)
|
||||||||
|
2024
|
$
|
|
2023
|
$
|
|
||||||
|
2023
|
|
2022
|
|
||||||||
|
2022
|
|
2021
|
|
||||||||
|
2021
|
|
2020
|
|
||||||||
|
2020
|
|
2019
|
|
||||||||
|
Prior
|
|
Prior
|
|
||||||||
|
Total
|
$
|
|
Total
|
$
|
|
||||||
|
(1)
|
|
The following table presents write-off amounts during the three and nine months ended September 30,
2024 and 2023, respectively, based on the student’s school departure
year.
|
September 30, 2024
|
September 30, 2023
|
||||||||||||||||||
|
Three Months Ended
|
Nine Months Ended
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||||
|
Year
|
Write-Offs
|
Write-Offs
|
Year
|
Write-Offs
|
Write-Offs
|
||||||||||||||
|
2024
|
$
|
|
$
|
|
2023
|
$
|
|
$
|
|
||||||||||
|
2023
|
|
|
2022
|
|
|
||||||||||||||
|
2022
|
|
|
2021
|
|
|
||||||||||||||
|
2021
|
|
|
2020
|
|
|
||||||||||||||
|
2020
|
|
|
2019
|
|
|
||||||||||||||
|
Prior
|
|
|
Prior
|
|
|
||||||||||||||
|
Total
|
$
|
|
$
|
|
Total
|
$
|
|
$
|
|
||||||||||
Allowance
for Credit Losses
We define student receivables as a portfolio segment under CECL. Changes in our current and non-current allowance for credit losses
related to our student receivable portfolio are calculated in accordance with the guidance effective January 1, 2023 under CECL for the three and nine months ended September 30, 2024 and 2023, respectively.
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
|
2024
|
2023
|
2024
|
2023
|
|||||||||||||
|
Balance, beginning of period
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Cumulative effect of ASC 326
|
|
|
|
|||||||||||||
|
Adjusted beginning of period balance
|
|
|
|
|
||||||||||||
|
Provision for credit losses
|
|
|
|
|
||||||||||||
|
Write-off’s
|
( |
) |
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Balance, at end of period
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
Fair
Value Measurements
The carrying amount reported in our Condensed Consolidated Balance Sheets for the current portion of student receivables approximates fair value because of the nature of these financial instruments, as they generally have short maturity
periods. It is not practicable to estimate the fair value of the non-current portion of student receivables, since observable market data is not readily available and no reasonable estimation methodology exists.
|
13.
|
Subsequent
Event
|
Planned Sale of Las Vegas, Nevada Campus
Subsequent to the end of the third quarter, the board of directors approved a plan to sell the assets related to its Las Vegas, Nevada campus operated under Euphoria Institute of Beauty Arts
& Sciences (“Euphoria”). The Company is in discussions with a prospective purchaser and expects to enter into a signed agreement prior to year-end. While the proposed transaction will not be material, it is expected that, for regulatory
purposes, the transaction will be a school closure by Lincoln. There are currently approximately 300
students enrolled in programs at Euphoria and it is further expected that enrolled students would be permitted to transfer to the purchaser-operated school post-closing and continue their programs such that the sale should not have a
significant impact on the student experience. In the fourth quarter, net assets of Euphoria will be classified on the balance sheet as assets held for sale and the related statement of operations information will be classified in the Transitional
segment.
The DOE has confirmed that the proposed transaction will not be treated as a change in ownership and, instead, it will be
treated as the closure of Euphoria and the establishment of a new location by the purchaser at the site of Euphoria. Although the parties intend to work toward enabling our current students at the Las Vegas, Nevada campus to complete their
programs with the purchaser, certain current and former students could qualify for closed school loan discharges if they do not continue and complete their programs and, in turn, the DOE could impose liabilities and other sanctions on us based on
any such closed school loan discharges. Also, we will be required to comply with other DOE, state, and accreditor requirements associated with the transaction, the transfer of the site, and the teaching of current students. Based on current
discussions, the transaction is currently expected to close in January, 2025, subject to receipt of required regulatory approvals and satisfaction of other closing conditions.
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 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 September
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. The campus 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 & 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,” – commonly known as “CECL” (“CECL”). 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 Nine Months Ended September 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
September 30,
|
Nine Months Ended
September 30,
|
||||||||||||||
|
|
2024
|
2023
|
2024
|
2023
|
||||||||||||
|
Revenue
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||||||
|
Costs and expenses:
|
||||||||||||||||
|
Educational services and facilities
|
42.0
|
%
|
43.3
|
%
|
42.6
|
%
|
44.0
|
%
|
||||||||
|
Selling, general and administrative
|
55.4
|
%
|
54.7
|
%
|
56.7
|
%
|
56.8
|
%
|
||||||||
|
(Gain) loss on sale of assets
|
0.0
|
%
|
0.0
|
%
|
0.3
|
%
|
-11.2
|
%
|
||||||||
|
Gain on insurance proceeds
|
-2.4 |
% |
0.0 |
% |
-0.9 |
% |
0.0 |
% |
||||||||
|
Impairment of goodwill and long-lived assets
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
1.5
|
%
|
||||||||
|
Total costs and expenses
|
94.9
|
%
|
98.0
|
%
|
98.7
|
%
|
91.1
|
%
|
||||||||
|
Operating income
|
5.1
|
%
|
2.0
|
%
|
1.3
|
%
|
8.9
|
%
|
||||||||
|
Interest expense, net
|
-0.2
|
%
|
0.9
|
%
|
0.0
|
%
|
0.7
|
%
|
||||||||
|
Income from operations before income taxes
|
4.9
|
%
|
2.9
|
%
|
1.3
|
%
|
9.5
|
%
|
||||||||
|
Provision for income taxes
|
1.5
|
%
|
0.8
|
%
|
0.3
|
%
|
2.5
|
%
|
||||||||
|
Net income
|
3.5
|
%
|
2.1
|
%
|
1.0
|
%
|
7.0
|
%
|
||||||||
Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023
Consolidated Results of Operations
Revenue. Revenue increased $14.8 million, or 14.8% to $114.4 million for the three months ended September 30, 2024 from $99.6
million in the prior year comparable period. Revenue growth was primarily due to a 10.6% increase in average student population, driven by four consecutive quarters of double digit start growth, which was up 21.1% for the three months ended
September 30, 2024. Included in the increase was $3.4 million of revenue generated from the recently opened East Point, Georgia campus.
Educational services
and facilities expense. Our educational services and facilities expense increased $4.9 million, or 11.4% to $48.0 million for the three months ended September 30, 2024 from $43.1 million in the prior year comparable period. This
increase over the prior quarter includes $2.3 million in costs associated with new programs in addition to expenses related to new campuses including the recently opened East Point, Georgia campus and the new Houston, Texas campus, which is
expected to open in the second half of 2025. Also included in this increase are costs related to the relocation of the Nashville, Tennessee and Levittown, Pennsylvania campuses, which are expected to open in the first half of 2025 and the
second half of 2025, respectively. The remaining expense increase was driven by several factors including additional depreciation expense, resulting from increased investments in capital expenditures, an increase in books and tools expense
driven by a 21.1% increase in student starts and increased instructional costs driven by a larger student population, which as a percentage of revenue have declined over the prior year comparable period reflecting increased operational
efficiencies. Partially offsetting these costs was a reduction of $0.5 million resulting from the Transitional segment.
Educational services and facilities expense, as a percentage of revenue, decreased to 42.0% from 43.3% for the three months ended September 30, 2024 and 2023, respectively.
Selling, general
and administrative expense. Our selling, general and administrative expense increased $8.8 million, or 16.3% to $63.3 million for the three months ended September 30, 2024, from $54.5 million in the prior year comparable period.
Included in the increase over the prior year are approximately $3.0 million of one-time items including new campus costs and campus relocation costs. The remaining expense increases were driven by several factors including higher
administrative costs, increased marketing investments and additional sales and student services expense. Partially offsetting these costs was a reduction of $0.4 million resulting from the Transitional segment.
Administrative costs increased $3.9 million driven by several factors including additional salary expense due to an increase in personnel combined with merit increases, increased stock-based
compensation expense due to the acceleration of expense for certain employees, an increase in legal costs and a higher provision for credit losses driven in part by revenue growth.
Marketing investments increased $0.7 million, while the costs to obtain potential students declined, demonstrating increased efficiencies per dollar spent. Additional marketing initiatives
have contributed to the 21.1% student start growth over the prior quarter and will continue to yield returns through the end of the year.
Sales and student services expense increased $1.6 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, increased to 55.4% from 54.7% for the three months ended September 30, 2024 and 2023, respectively.
Gain on insurance
proceeds. During the three months ended September 30, 2024, the Company received gross insurance proceeds in the amount of $2.8 million relating to hail damage at one of our campuses.
Net interest expense / income. Net interest expense was $0.2 million for the three months ended September 30, 2024 compared to net
interest income of $0.9 million in the prior year comparable period. Interest income in the current period was lower than prior year by approximately $0.4 million due to higher investment amounts in combination with more favorable interest rates
in the prior year. Interest expense increased by roughly $0.6 million in the current year resulting from two additional finance leases.
Income taxes. The provision for
income taxes was $1.7 million and $0.8 million for the three months ended September 30, 2024 and 2023, respectively. The increase in tax provision was primarily driven by an increase in pre-tax income.
Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023
Consolidated Results of Operations
Revenue. Revenue increased $45.1 million, or 16.4% to $320.6 million for the nine months ended September 30, 2024 from $275.5
million in the prior year comparable period. Revenue growth was primarily due to a 10.6% increase in average student population, driven by starting the year with approximately 9.0% or 1,100 more students combined with four consecutive quarters of
double digit start growth, which was up 16.6% for the nine months ended September 30, 2024. Included in the increase was $5.2 million of revenue generated from the recently opened East Point, Georgia campus.
Educational services
and facilities expense. Our educational services and facilities expense increased $15.4 million, or 12.7% to $136.6 million for the nine months ended September 30, 2024 from $121.2 million in the prior year comparable period. This
increase over the prior quarter includes $7.2 million in costs associated with new programs at existing campuses in addition to expenses related to new campuses including the recently opened East Point, Georgia campus and the new Houston, Texas
campus, which is expected to open in the second half of 2025. Also included in this increase are costs related to the relocations of the Nashville, Tennessee and Levittown, Pennsylvania campuses, which are expected to open in the first half of
2025 and the second half of 2025, respectfully. The remaining expense increase was driven by several factors including additional depreciation expense, resulting from increased investments in capital expenditures, an increase in books and
tools expense driven by a 16.6% increase in student starts and increased instructional costs driven by a larger student population, which as a percentage of revenue have declined over the prior year comparable period reflecting increased
operational efficiencies. Partially offsetting these costs was a reduction of $1.6 million resulting from the Transitional segment.
Educational services and facilities expense, as a percentage of revenue, decreased to 42.6% from 44.0% for the nine months ended September 30, 2024 and 2023, respectively.
Selling, general and
administrative expense. Our selling, general and administrative expense increased $25.1 million, or 16.0% to $181.7 million for the nine months ended September 30, 2024, from $156.6 million in the prior year comparable period.
Included in the increase over the prior year are approximately $2.4 million of one-time items including new campus costs and campus relocation costs. The remaining expense increases were driven by several factors including higher
administrative costs, increased marketing investments and additional sales and student services expense. Partially offsetting these costs was a reduction of $1.3 million resulting from the Transitional segment.
Administrative costs increased $16.1 million driven by several factors including additional salary expense due to an increase in personnel combined with merit increases and a higher provision
for credit losses driven in part by revenue growth. Partially offsetting the costs increases were reduced stock-based compensation expense and legal fees.
Marketing investments increased $2.6 million, while the costs to obtain potential students declined, demonstrating increased efficiencies per dollar spent. Additional marketing initiatives
have contributed to the 16.6% student start growth over the prior quarter and will continue to yield returns through the end of the year.
Sales expense and student services increased $5.2 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 slightly to 56.7% from 56.8% for the nine months ended September 30, 2024 and 2023, respectively.
Gain on insurance
proceeds. During the nine months ended September 30, 2024, the Company received gross insurance proceeds in the amount of $2.8 million relating to hail damage at one of our campuses.
Impairment of
goodwill and long-lived assets. Impairment of goodwill and long-lived assets of $4.2 million in the prior year was the result of the sale of the Nashville, Tennessee property. The result of the sale created a change in the
trajectory of the fair value of the Nashville, Tennessee operations and as such, the Company recorded a pre-tax non-cash impairment charge of $3.8 million related to goodwill and an additional $0.4 million impairment related to long-lived
assets. During the nine months ended September 30, 2024, there were no impairments of goodwill or long-lived assets.
Net interest expense
/ income. Net interest expense was $0.1 million for the nine months ended September 30, 2024 compared to interest income of $1.8 million in the prior year. Interest income for the nine months ended September 30, 2024 and 2023
remained essentially flat, with an increase in interest expense in the current year resulting from two additional finance leases.
Income taxes. The provision for
income taxes was $1.1 million and $7.0 million for the nine months ended September 30, 2024 and 2023, respectively. The decrease in provision was primarily driven by a gain in the prior year due to the sale of the Nashville, Tennessee property
during the second quarter of 2023, which drove an increase in the Company’s pre-tax income.
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
September 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. The campus 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 September 30, 2024 and 2023:
|
Three Months Ended September 30,
|
||||||||||||
|
2024
|
2023
|
% Change
|
||||||||||
|
Revenue:
|
||||||||||||
|
Campus Operations
|
$
|
114,410
|
$
|
99,527
|
15.0
|
%
|
||||||
|
Transitional
|
-
|
91
|
-100.0
|
%
|
||||||||
|
Total
|
$
|
114,410
|
$
|
99,618
|
14.8
|
%
|
||||||
|
Operating Income (loss):
|
||||||||||||
|
Campus Operations
|
$
|
14,865
|
$
|
11,889
|
25.0
|
%
|
||||||
|
Transitional
|
-
|
(745
|
)
|
-100.0
|
%
|
|||||||
|
Corporate
|
(9,043
|
)
|
(9,148
|
)
|
1.1
|
%
|
||||||
|
Total
|
$
|
5,822
|
$
|
1,996
|
191.7
|
%
|
||||||
|
Starts:
|
||||||||||||
|
Campus Operations
|
6,243
|
5,157
|
21.1
|
%
|
||||||||
|
Total
|
6,243
|
5,157
|
21.1
|
%
|
||||||||
|
Average Population:
|
||||||||||||
|
Campus Operations
|
14,309
|
12,923
|
10.7
|
%
|
||||||||
|
Transitional
|
-
|
19
|
-100.0
|
%
|
||||||||
|
Total
|
14,309
|
12,942
|
10.6
|
%
|
||||||||
|
End of Period Population:
|
||||||||||||
|
Campus Operations
|
15,887
|
14,027
|
13.3
|
%
|
||||||||
|
Transitional
|
-
|
4
|
-100.0
|
%
|
||||||||
|
Total
|
15,887
|
14,031
|
13.2
|
%
|
||||||||
Campus Operations
Operating income increased $3.0 million, or 25.0% to $14.9 million for the three months ended September 30, 2024 from $11.9 million in the prior year comparable period. The change
quarter-over-quarter was mainly driven by the following factors:
| • |
Revenue increased $14.9 million, or 15.0% to $114.4 million for the three months ended September 30, 2024 from $99.5 million in the prior year comparable period. Revenue growth was
primarily due to a 10.7% increase in average student population, driven by four consecutive quarters of double digit start growth, which was up 21.1% for the three months ended September 30, 2024. Included in the increase was $3.4
million of revenue generated from the recently opened East Point, Georgia campus.
|
|
•
|
Our educational services and facilities expense increased $5.4 million, or 12.6% to $48.0 million for the three months
ended September 30, 2024 from $42.6 million in the prior year comparable period. This increase over the prior quarter includes $2.3 million in costs associated with new programs in addition to expenses related to new campuses
including the recently opened East Point, Georgia campus and the new Houston, Texas campus, which is expected to open in the second half of 2025. Also included in this increase are costs related to the relocation of the Nashville,
Tennessee and Levittown, Pennsylvania campuses, which are expected to open in the first half of 2025 and the second half of 2025, respectively. The remaining expense increase was driven by several factors including additional
depreciation expense, resulting from increased investments in capital expenditures, an increase in books and tools expense driven by a 21.1% increase in student starts and increased instructional costs driven by a larger student
population, which as a percentage of revenue has declined over the prior year comparable period reflecting increased operational efficiencies. Partially offsetting these costs was a reduction of $0.5 million resulting from the
Transitional segment.
|
|
•
|
Our selling, general and administrative expense increased $6.6 million, or 14.5% to $51.5 million for the three months ended September 30, 2024, from $44.9 million in the prior year comparable
period. Included in the increase over the prior year was approximately $1.5 million of expenses related primarily to the recently opened East Point, Georgia campus. The remaining expense increases were driven by higher
administrative costs, marketing investments and sales and student services expense, all of which are discussed above in the 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 $0.1 million, or 100.0% to zero for the three months ended September 30, 2024, from $0.1 million in the prior year comparable period.
|
| • |
Total operating expenses decreased $0.8 million, or 100.0% to zero for the three months ended September 30, 2024, from $0.8 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 expense incurred on behalf of the entire Company. Corporate and other expense was $9.0 million
and $9.1 million for the three months ended September 30, 2024 and 2023, respectively. Included in the current year is a gain of $2.8 million related to insurance proceeds received as a result of hail damage at one of our campuses. Partially
offsetting the gain are additional expenses relating to salaries and benefits expense, increased stock-based incentives and legal costs.
The following table presents results for our two reportable segments for the nine months ended September 30, 2024 and 2023:
|
Nine Months Ended September 30,
|
||||||||||||
|
2024
|
2023
|
% Change
|
||||||||||
|
Revenue:
|
||||||||||||
|
Campus Operations
|
$
|
320,691
|
$
|
274,093
|
17.0
|
%
|
||||||
|
Transitional
|
-
|
1,455
|
-100.0
|
%
|
||||||||
|
Total
|
$
|
320,691
|
$
|
275,548
|
16.4
|
%
|
||||||
|
Operating Income (loss):
|
||||||||||||
|
Campus Operations
|
$
|
36,819
|
$
|
26,167
|
40.7
|
%
|
||||||
|
Transitional
|
-
|
(1,423
|
)
|
-100.0
|
%
|
|||||||
|
Corporate
|
(32,571
|
)
|
(347
|
)
|
-9286.5
|
%
|
||||||
|
Total
|
$
|
4,248
|
$
|
24,397
|
-82.6
|
%
|
||||||
|
Starts:
|
||||||||||||
|
Campus Operations
|
15,163
|
13,008
|
16.6
|
%
|
||||||||
|
Total
|
15,163
|
13,008
|
16.6
|
%
|
||||||||
|
Average Population:
|
||||||||||||
|
Campus Operations
|
13,933
|
12,506
|
11.4
|
%
|
||||||||
|
Transitional
|
-
|
88
|
-100.0
|
%
|
||||||||
|
Total
|
13,933
|
12,594
|
10.6
|
%
|
||||||||
|
End of Period Population:
|
||||||||||||
|
Campus Operations
|
15,887
|
14,027
|
13.3
|
%
|
||||||||
|
Transitional
|
-
|
4
|
-100.0
|
%
|
||||||||
|
Total
|
15,887
|
14,031
|
13.2
|
%
|
||||||||
Campus Operations
Operating income increased 40.7%, or $10.6 million to $36.8 million for the nine months ended September 30, 2024 from $26.2 million in the prior year comparable period. The change
year-over-year was mainly driven by the following factors:
| • |
Revenue increased $46.6 million, or 17.0% to $320.7 million for the nine months ended September 30, 2024 from $274.1 million in the prior year comparable period. Revenue growth was
primarily due to a 11.4% increase in average student population, driven by starting the year with approximately 9.0% or 1,100 more students combined with four consecutive quarters of double digit start growth, which was up 16.6% for the
nine months ended September 30, 2024. Included in the increase was $5.2 million of revenue generated from the recently opened East Point, Georgia campus.
|
|
•
|
Our educational services and facilities expense increased $16.9 million, or 14.2% to $136.6 million for the nine months
ended September 30, 2024 from $119.7 million in the prior year comparable period. This increase over the prior quarter includes $7.2 million in costs associated with new programs at existing campuses in addition to expenses related
to new campuses including the recently opened East Point, Georgia campus and the new Houston, Texas campus, which is expected to open in the second half of 2025. Also included in this increase are costs related to the relocation of
the Nashville, Tennessee and Levittown, Pennsylvania campuses, which are expected to open in the first half of 2025 and the second half of 2025, respectfully. The remaining expense increase was driven by several factors including
additional depreciation expense, resulting from increased investments in capital expenditures, an increase in books and tools expense driven by a 16.6% increase in student starts and increased instructional costs driven by a larger
student population, which as a percentage of revenue have declined over the prior year comparable period reflecting increased operational efficiencies.
|
|
•
|
Our selling, general and administrative expense increased $22.6 million, or 18.2% to $146.6 million for the nine
months ended September 30, 2024, from $124.0 million in the prior year comparable period. Included in the increase over the prior year was approximately $4.0 million of expenses related primarily to the recently opened East
Point, Georgia campus. The remaining expense increases were driven by higher administrative costs, marketing investments and sales expense and student services expense, all of which are discussed above in the 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 $1.5 million, or 100.0% to zero for the nine months ended September 30, 2024, from $1.5 million in the prior year comparable period.
|
| • |
Total operating expenses decreased $2.9 million, or 100.0% to zero for the nine months ended September 30, 2024, from $2.9 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 expense incurred on behalf of the entire Company. Corporate and other expense were $32.6 million
and $0.3 million for the nine months ended September 30, 2024 and 2023, respectively. Included in the current year is a gain of $2.8 million related to insurance proceeds received as a result of hail damage at one of our campuses. Prior year
includes a $30.9 million gain on sale of assets resulting from the sale of the Nashville, Tennessee property. The increase in expense was primarily driven by additional
salaries and benefits expense, 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, National Association. The following chart summarizes the principal elements of our cash flow for each of the nine months ended September 30, 2024 and 2023:
|
Nine Months Ended
September 30,
|
||||||||
|
2024
|
2023
|
|||||||
|
Net cash (used in) provided by operating activities
|
$
|
(993
|
)
|
$
|
3,612
|
|||
|
Net cash used in investing activities
|
$
|
(22,199
|
)
|
$
|
(4,961
|
)
|
||
|
Net cash used in financing activities
|
$
|
(3,115
|
)
|
$
|
(2,945
|
)
|
||
As of September 30, 2024, the Company had $54.0 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 related
to our recently opened East Point, Georgia campus, the new Houston Texas campus, the relocations of the Nashville, Tennessee and Levittown, Pennsylvania campuses, and new programs and program expansions. Further, 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 12 months through May 24, 2025. During the three
and nine months ended September 30, 2024, the Company did not repurchase any additional shares. As of September 30, 2024, the Company had 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 related 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 payments to us or any restriction on our eligibility to receive Title IV Program funds would have a significant impact on our operations and our financial condition. For more
information, see Part I, Item 1A. “Risk Factors - Risks Related to Our Industry” of our Form 10-K..
Operating Activities
Operating cash flow results primarily from cash received from our students, offset by changes in working capital demands. Working capital can vary at any point in time based on several factors
including seasonality, timing of cash receipts and payments and vendor payment terms.
Net cash used in operating activities was $1.0 million for the nine months ended September 30, 2024 compared to cash provided by operating activities of $3.6 million in the prior year
comparable period. The decrease in cash position was primarily related to a higher accounts receivable balance due to the timing of cash receipts and Title IV disbursements, partially offset by an decrease in prepaid expenses representing a $4.8
million cash inflow and a $2.5 million increase in accounts payable, representing a cash inflow driven by the timing of vendor payments.
Investing Activities
Net cash used in investing activities was $22.2 million for the nine months ended September 30, 2024 compared to $5.0 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 recently opened 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 nine months ended September 30, 2024 and 2023 was $3.1 million and $2.9 million,
respectively. The increase in cash used was primarily driven by cash outflows in the current year of $1.2 million related to the tax impact for vested stock grants, $0.5 million paid for implementing the new credit facility with Fifth Third
Bank, National Association, and $0.2 million related to lease payments made under the Company’s two additional finance leases. Partially offsetting these cash outflows was a $0.8 million inflow for a tenant allowance related to one of the
Company’s finance leases in the current year. The prior year also had $0.9 million in cash outflows related to the Company’s share repurchase plan.
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 Fifth Third Credit Agreement
As of September 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 September 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 September 30, 2024, we had outstanding loan principal commitments to our active students of $38.4 million. These are institutional loans and no cash is advanced to students. The full
loan amount is not guaranteed unless the student completes the program. The institutional loans are considered commitments because the students are required to fund their education using these funds and they are not reported on our financial
statements.
Regulatory Updates
Negotiated Rulemaking. The DOE has initiated and engaged in rulemaking which has included negotiated rulemaking meetings held in
late 2023 and early 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, distance
education, and student debt relief. See 10-K at Part I, Item 1. “Business – Regulatory Environment – Negotiated Rulemaking,” “Business – Regulatory Environment – State Authorization,” “Business – Regulatory Environment – Accreditation,” and
“Business – 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. On July 24, 2024, the DOE published a notice of proposed rulemaking on topics including distance education and return of Title IV funds; however, the DOE did not publish final regulations
by November 1, 2024, for those rules to take effect by July 1, 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 the forementioned topics, but new regulations or guidance on these or other topics could have a significant impact on our
business and results of operations.
The DOE also published two sets of proposed regulations on April 17, 2024, and October 31, 2024, that would, among other things,
specify the DOE’s discretionary authority to waive the requirement for borrowers to repay some or all their Title IV federal student loans. The reasons for such waivers would include, for example, different scenarios involving schools or
programs that close or lose Title IV eligibility or different types of borrower hardship including, among many other examples, attendance at certain types and levels of institutions (which the DOE has indicated could include for-profit
institutions like our schools). The DOE has not published final regulations in connection with either of the aforementioned sets of proposed regulations and is in the process of receiving public comments through December 2, 2024, to the
proposed regulations that were published on October 31, 2024. We cannot predict the timing and scope of any final regulations the DOE might issue, but new regulations on these topics could have a significant impact on our business and results
of operations.
Planned Sale of Las Vegas, Nevada Campus
Subsequent to the end of the third quarter, the board of directors approved a plan to sell the assets related to its Las Vegas, Nevada campus
operated under Euphoria Institute of Beauty Arts & Sciences (“Euphoria”). The Company is in discussions with a prospective purchaser and expects to enter into a signed agreement prior to year-end. While the proposed transaction will not be
material, it is expected that, for regulatory purposes, the transaction will be a school closure by Lincoln. There are currently approximately 300 students enrolled in programs at Euphoria and it is further expected that enrolled students would
be permitted to transfer to the purchaser-operated school post-closing and continue their programs such that the sale should not have a significant impact on the student experience. In the fourth quarter, net assets of Euphoria will be
classified on the balance sheet as assets held for sale and the related statement of operations information will be classified in the Transitional segment.
The DOE has confirmed that the proposed transaction will not be treated as a change in ownership and, instead, it will be treated as the
closure of Euphoria and the establishment of a new location by the purchaser at the site of Euphoria. Although the parties intend to work toward enabling our current students at the Las Vegas, Nevada campus to complete their programs with the
purchaser, certain current and former students could qualify for closed school loan discharges if they do not continue and complete their programs and, in turn, the DOE could impose liabilities and other sanctions on us based on any such closed
school loan discharges. Also, we will be required to comply with other DOE, state, and accreditor requirements associated with the transaction, the transfer of the site, and the teaching of current students. Based on current discussions, the
transaction is currently expected to close in January, 2025, subject to receipt of required regulatory approvals and satisfaction of other closing conditions.
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.
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.
(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 CECL and accounts payable payment
processing that have been implemented.
There are no material developments related to previously disclosed legal proceedings. See the “Legal Proceedings” section of the
Company’s Form 10-K and subsequently filed Form 10-Qs for information regarding existing legal proceedings.
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 September 30, 2024, the Company is not aware of any specific new and additional risk
factors that were not previously disclosed.
| (a) |
None.
|
| (b) |
None.
|
| (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 12 months through May 24, 2025. The Company did not repurchase any additional shares in the three
months ended September 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
|
||||||||||||
|
July 1, 2024 to July 31, 2024
|
-
|
$
|
-
|
-
|
$
|
29,663,667
|
||||||||||
|
August 1, 2024 to August 31, 2024
|
-
|
-
|
-
|
-
|
||||||||||||
|
September 1, 2024 to September 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.
| (a) |
None.
|
| (b) |
None
|
None.
| (a) |
None.
|
| (b) |
None.
|
| (c) |
During the nine months ended September 30, 2024, none of the Company's directors or officers (as defined in Rule 16a-1(f) of the Exchange Act)
|
|
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 September 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).
|
| * |
Filed herewith.
|
| ** |
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: November 12, 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 September 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)
|
| * |
Filed herewith.
|
| ** |
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.
|
36
EXHIBIT 31.1
CERTIFICATION
I, Scott Shaw, certify that:
| 1. |
I have reviewed this Quarterly Report on Form 10-Q of Lincoln Educational Services Corporation;
|
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
|
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
|
| 4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
| 5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
|
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
EXHIBIT 31.2
CERTIFICATION
I, Brian Meyers, certify that:
| 1. |
I have reviewed this Quarterly Report on Form 10-Q of Lincoln Educational Services Corporation;
|
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
|
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
|
| 4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
| 5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
|
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Date: November 12, 2024
|
|
|
|
|
|
|
| /s/ Brian Meyers |
|
|
| Brian Meyers | ||
|
Chief Financial Officer
|
||
EXHIBIT 32
CERTIFICATION
Pursuant to 18 U.S.C. 1350 as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002
Each of the undersigned, Scott Shaw, Chief Executive Officer of Lincoln Educational Services Corporation (the “Company”), and Brian Meyers, Chief Financial Officer of the Company,
has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2024 (the “Report”).
Each of the undersigned hereby certifies that, to his respective knowledge:
| 1. |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
|
| 2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
|
Date: November 12, 2024
|
|
|
|
|
|
|
| /s/ Scott Shaw |
|
|
|
Scott Shaw
|
||
|
Chief Executive Officer
|
||
|
/s/ Brian Meyers
|
||
|
Brian Meyers
|
||
|
Chief Financial Officer
|
||