Lincoln Educational Services(LINC) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for the company Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Lincoln Educational Services Corporation and its subsidiaries, including balance sheets, statements of operations, comprehensive income (loss), changes in equity, and cash flows, along with detailed notes explaining business activities, accounting policies, and specific financial items for the periods ended September 30, 2021, and December 31, 2020 Condensed Consolidated Balance Sheets This section presents the unaudited condensed consolidated balance sheets as of September 30, 2021, and December 31, 2020 Balance Sheet Metrics | Metric | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | ASSETS | | | | Cash and cash equivalents | $47,150 | $38,026 | | Total current assets | $110,953 | $74,164 | | Property, equipment and facilities, net | $23,251 | $48,388 | | Total assets | $253,456 | $245,190 | | LIABILITIES & EQUITY | | | | Total current liabilities | $68,875 | $66,842 | | Total liabilities | $139,511 | $142,141 | | Total stockholders' equity | $101,963 | $91,067 | | Total liabilities, preferred stock and equity | $253,456 | $245,190 | - Total assets increased by $8.266 million (3.37%) from December 31, 2020, to September 30, 2021, primarily driven by an increase in cash and cash equivalents and assets held for sale[8] - Total stockholders' equity increased by $10.896 million (11.96%) from December 31, 2020, to September 30, 2021[11] Condensed Consolidated Statements of Operations This section presents the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020 Statements of Operations Metrics | Metric | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------------------------- | :-------------------------------------- | | Revenue | $89,059 | $78,792 | $247,520 | $211,303 | | Total costs & expenses | $83,314 | $74,952 | $232,303 | $207,648 | | Operating income | $5,745 | $3,840 | $15,217 | $3,655 | | Net income | $3,839 | $3,512 | $10,754 | $2,545 | | Income available to common shareholders | $3,535 | $2,438 | $9,842 | $1,471 | | Basic and diluted net income per common share | $0.11 | $0.08 | $0.30 | $0.05 | - Revenue increased by 13.0% for the three months ended September 30, 2021, and by 17.1% for the nine months ended September 30, 2021, compared to the prior year periods[14] - Operating income significantly increased by 49.6% for the three months and 316.3% for the nine months ended September 30, 2021, year-over-year[14] Condensed Consolidated Statements of Comprehensive Income (Loss) This section presents the unaudited condensed consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2021 and 2020 Comprehensive Income (Loss) Metrics | Metric | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------------------------- | :-------------------------------------- | | Net income | $3,839 | $3,512 | $10,754 | $2,545 | | Other comprehensive income (loss) | | | | | | Derivative qualifying as a cash flow hedge, net of taxes | $65 | $57 | $326 | $(786) | | Employee pension plan adjustments, net of taxes | $(134) | $140 | $(403) | $420 | | Comprehensive income | $3,770 | $3,709 | $10,677 | $2,179 | - Comprehensive income increased by 1.6% for the three months and 389.9% for the nine months ended September 30, 2021, compared to the prior year periods[17] Condensed Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders' Equity This section presents changes in convertible preferred stock and stockholders' equity for the nine months ended September 30, 2021 Changes in Equity Metrics | Metric | Balance Jan 1, 2021 (in thousands) | Balance Sep 30, 2021 (in thousands) | | :--------------------------------------- | :--------------------------------- | :--------------------------------- | | Common Stock Amount | $141,377 | $141,377 | | Additional Paid-in Capital | $30,512 | $31,643 | | Treasury Stock | $(82,860) | $(82,860) | | Retained Earnings | $6,203 | $16,045 | | Accumulated Other Comprehensive Loss | $(4,165) | $(4,242) | | Total Stockholders' Equity | $91,067 | $101,963 | | Series A Convertible Preferred Stock Amount | $11,982 | $11,982 | - Total stockholders' equity increased by $10.896 million from January 1, 2021, to September 30, 2021, primarily due to net income and stock-based compensation expense, partially offset by preferred stock dividends and employee pension plan adjustments[20] Condensed Consolidated Statements of Cash Flows This section presents the unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2021 and 2020 Cash Flow Metrics | Metric | Nine Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net cash provided by operating activities | $17,750 | $10,222 | | Net cash used in investing activities | $(5,252) | $(3,457) | | Net cash used in financing activities | $(3,374) | $(17,816) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $9,124 | $(11,051) | | Cash, cash equivalents and restricted cash—End of period | $47,150 | $27,593 | - Net cash provided by operating activities increased by $7.528 million (73.6%) for the nine months ended September 30, 2021, compared to the prior year, primarily driven by higher net income[22][183] - Net cash used in financing activities decreased significantly by $14.442 million (81.07%) for the nine months ended September 30, 2021, mainly due to a decrease in net payments on borrowings[22][187] Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed notes explaining the company's business activities, accounting policies, and specific financial items Note 1. Description of Business and Basis of Presentation Lincoln Educational Services Corporation provides diversified career-oriented post-secondary education across 22 schools in 14 states, offering programs in automotive technology, skilled trades, healthcare services, hospitality, and information technology. The company operates under two reportable segments: Transportation and Skilled Trades, and Healthcare and Other Professions (HOPS). The financial statements are unaudited and prepared in accordance with GAAP for interim reporting, reflecting all necessary adjustments - The Company operates 22 schools in 14 states under brands like Lincoln Technical Institute, Lincoln College of Technology, Lincoln Culinary Institute, and Euphoria Institute of Beauty Arts and Sciences[28] - Business is organized into two reportable segments: Transportation and Skilled Trades, and Healthcare and Other Professions (HOPS)[29] Liquidity Position | Metric | September 30, 2021 (in millions) | December 31, 2020 (in millions) | | :---------------- | :------------------------------- | :------------------------------- | | Cash and cash equivalents | $47.2 | $38.0 | | Net cash balance | $31.3 | $20.8 | | Additional borrowing capacity | $21.0 | N/A | Note 2. Net Income Per Common Share The Company calculates basic and diluted income per common share using the two-class method, which includes Series A Preferred Stock and unvested restricted common stock as participating securities. For the three and nine months ended September 30, 2021, basic and diluted EPS were $0.11 and $0.30, respectively, showing an increase from the prior year - Basic and diluted net income per common share for the three months ended September 30, 2021, was $0.11, up from $0.08 in the prior year[14][48] - Basic and diluted net income per common share for the nine months ended September 30, 2021, was $0.30, up from $0.05 in the prior year[14][48] Net Income Allocated to Common Stockholders (in thousands) | Period | 2021 | 2020 | | :-------------------------------- | :----- | :----- | | Three Months Ended September 30 | $2,721 | $1,885 | | Nine Months Ended September 30 | $7,579 | $1,147 | Note 3. Revenue Recognition The Company recognizes revenue primarily from student contracts, with unearned tuition representing contract liabilities. Revenue recognized from contract liabilities at the beginning of the year for the nine months ended September 30, 2021, was $22.6 million. The majority of revenue is transferred over time, reflecting the ongoing educational services - Unearned tuition, a contract liability, was $24.7 million as of September 30, 2021, compared to $23.5 million at December 31, 2020[50] - Revenue recognized for the nine months ended September 30, 2021, that was included in the beginning-of-year contract liability balance was $22.6 million[50] Consolidated Revenue by Timing of Recognition (in thousands) | Timing of Revenue Recognition | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :---------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Services transferred at a point in time | $7,821 | $6,986 | $19,022 | $13,535 | | Services transferred over time | $81,238 | $71,806 | $228,498 | $197,768 | | Total revenues | $89,059 | $78,792 | $247,520 | $211,303 | Note 4. Leases The Company recognizes operating lease right-of-use (ROU) assets and liabilities based on the present value of lease payments. Operating lease costs remained stable at $3.8 million for the three months and $11.4 million for the nine months ended September 30, 2021 and 2020, respectively. A sale-leaseback transaction for the Denver and Grand Prairie campuses closed in October 2021 Operating Lease Costs (in millions) | Period | 2021 | 2020 | | :-------------------------------- | :--- | :--- | | Three Months Ended September 30 | $3.8 | $3.9 | | Nine Months Ended September 30 | $11.4 | $11.4 | Weighted-Average Lease Metrics | Metric | As of September 30, 2021 | As of September 30, 2020 | | :-------------------------- | :----------------------- | :----------------------- | | Remaining lease term | 5.49 years | 6.29 years | | Discount rate | 10.77% | 11.38% | - A sale-leaseback transaction for the Denver and Grand Prairie campuses closed on October 29, 2021, generating approximately $28.5 million in net proceeds after expenses and debt repayment[54][132] Note 5. Goodwill and Long-Lived Assets The Company reviews long-lived assets for recoverability and goodwill for impairment annually or more frequently if indicators exist. As of September 30, 2021, no long-lived asset impairments were recognized, and no indicators of goodwill impairment were identified. The goodwill balance of $14.536 million is entirely related to the Transportation and Skilled Trades segment - No long-lived asset impairments were recognized during the nine months ended September 30, 2021 and 2020[59] - No indicators of potential goodwill impairment were identified as of September 30, 2021[60] Goodwill Carrying Amount (in thousands) | Metric | September 30, 2021 | September 30, 2020 | | :---------------- | :----------------- | :----------------- | | Gross Goodwill Balance | $117,176 | $117,176 | | Accumulated Impairment Losses | $(102,640) | $(102,640) | | Net Goodwill Balance | $14,536 | $14,536 | - The entire goodwill balance is related to the Transportation and Skilled Trades segment[61] Note 6. Long-Term Debt The Company's long-term debt primarily consists of a $60 million senior secured credit facility with Sterling National Bank, comprising a Term Loan, Delayed Draw Term Loan, and Revolving Loan. As of September 30, 2021, $16.3 million was outstanding under the Credit Facility. A recent Consent Agreement related to property transactions requires full repayment of the Term Loan and swap obligations upon closing, which occurred for the Denver and Grand Prairie campuses in October 2021 Long-Term Debt (in thousands) | Metric | September 30, 2021 | December 31, 2020 | | :---------------------- | :----------------- | :----------------- | | Credit agreement | $16,333 | $17,833 | | Deferred Financing Fees | $(485) | $(621) | | Less current maturities | $(2,000) | $(2,000) | | Long-term debt, net | $13,848 | $15,212 | - The Credit Facility includes a $20 million Term Loan, a $10 million Delayed Draw Term Loan, and a $15 million Revolving Loan[64] - As of September 30, 2021, the Company was in compliance with all debt covenants[73] - A Consent Agreement on September 23, 2021, required full repayment of the Term Loan and swap obligations upon closing of certain property transactions. Approximately $16.5 million was paid in October 2021 related to the Denver and Grand Prairie sale-leaseback[74] Note 7. Stockholders' Equity Stockholders' equity includes common stock, Series A Convertible Preferred Stock, restricted stock, and stock options. The Series A Preferred Stock, issued in 2019, has a 9.6% annual dividend rate and is convertible into common stock, subject to certain caps. The Company issues restricted stock under the 2020 Long-Term Incentive Plan, with performance-based awards vesting over time. Stock options outstanding as of September 30, 2021, totaled 81,000 shares with a weighted-average exercise price of $7.79 - The Company has not declared or paid cash dividends on common stock since February 2015 and has no current intentions to resume[78] - Series A Convertible Preferred Stock has an initial annual dividend rate of 9.6%, payable quarterly, and is convertible into common stock at $2.36 per share[81][82] Restricted Stock Activity (Nine Months Ended Sep 30, 2021) | Metric | Shares | Weighted Average Grant Date Fair Value Per Share | | :--------------------------------------- | :------- | :--------------------------------------------- | | Nonvested restricted stock outstanding at Dec 31, 2020 | 1,572,159 | $2.77 | | Granted | 657,076 | $5.97 | | Vested | (498,936) | $3.04 | | Nonvested restricted stock outstanding at Sep 30, 2021 | 1,730,299 | $3.87 | - Restricted stock expense for the nine months ended September 30, 2021, was $2.1 million, up from $1.3 million in the prior year[104] Stock Options Outstanding (as of Sep 30, 2021) | Metric | Shares | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Term | | :-------------------------- | :------- | :-------------------------------------- | :------------------------------------------ | | Outstanding at Sep 30, 2021 | 81,000 | $7.79 | 0.42 years | | Vested as of Sep 30, 2021 | 81,000 | $7.79 | 0.42 years | | Exercisable as of Sep 30, 2021 | 81,000 | $7.79 | 0.42 years | Note 8. Income Taxes The Company's provision for income taxes significantly increased for the three and nine months ended September 30, 2021, to $1.6 million and $3.6 million, respectively, compared to prior year periods. This increase is primarily due to the reversal of a full valuation allowance at December 31, 2020, resulting in an effective tax rate of 29.6% for the three months and 25.0% for the nine months ended September 30, 2021 Provision for Income Taxes (in millions) | Period | 2021 | 2020 | | :-------------------------------- | :--- | :--- | | Three Months Ended September 30 | $1.6 | $0.1 | | Nine Months Ended September 30 | $3.6 | $0.2 | Effective Tax Rate | Period | 2021 | 2020 | | :-------------------------------- | :----- | :----- | | Three Months Ended September 30 | 29.6% | 1.4% | | Nine Months Ended September 30 | 25.0% | 5.6% | - The increase in income tax provision is primarily due to the reversal of a full valuation allowance at December 31, 2020[106] Note 9. Commitments and Contingencies The Company is subject to various lawsuits, investigations, and claims in the ordinary course of business. While the ultimate resolution of these matters cannot be predicted with certainty, management does not believe any currently pending legal proceedings will have a material adverse effect on the Company's business, financial condition, results of operations, or cash flows - The Company is subject to lawsuits, investigations, and claims, including those involving students, graduates, and employment matters[107] - Management believes that currently pending legal proceedings will not have a material adverse effect on the Company's business, financial condition, results of operations, or cash flows[107] Note 10. Segments The Company operates in two reportable segments: Transportation and Skilled Trades, and Healthcare and Other Professions (HOPS). Segment performance is evaluated based on operating results, with unallocated corporate activities reported under 'Corporate.' Both segments showed revenue and operating income growth for the three and nine months ended September 30, 2021 - The two reportable segments are Transportation and Skilled Trades (automotive, diesel, HVAC, welding, manufacturing) and Healthcare and Other Professions (health sciences, hospitality, business, IT)[109][110][111] Segment Revenue (in thousands) | Segment | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Transportation and Skilled Trades | $64,950 | $56,828 | $177,586 | $148,799 | | Healthcare and Other Professions | $24,109 | $21,964 | $69,934 | $62,504 | | Total | $89,059 | $78,792 | $247,520 | $211,303 | Segment Operating Income (Loss) (in thousands) | Segment | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Transportation and Skilled Trades | $11,842 | $9,138 | $35,423 | $18,848 | | Healthcare and Other Professions | $1,833 | $1,654 | $7,743 | $6,388 | | Corporate | $(7,930) | $(6,952) | $(27,949) | $(21,581) | | Total | $5,745 | $3,840 | $15,217 | $3,655 | Note 11. Fair Value The Company's financial instruments, including cash, prepaid expenses, accrued expenses, and credit facility, are reported at carrying amounts that approximate fair value due to their liquid or short-term nature. The interest rate swap, designated as a cash flow hedge, is measured at fair value using observable market inputs (Level 2) and is classified as a derivative liability - Cash and cash equivalents, prepaid expenses, accrued expenses, and other short-term liabilities approximate fair value due to their highly liquid or short-term nature[115] - The Credit Facility's fair value is estimated using a present value analysis with aggregate market yields from independent pricing sources[114] Derivative Qualifying Cash Flow Hedge (Interest Rate Swap) (in thousands) | Metric | September 30, 2021 | December 31, 2020 | | :---------------- | :----------------- | :----------------- | | Notional | $16,333 | $17,833 | | Fair Value (Liability) | $552 | $877 | | Interest Expense | $100 (3 months) / $200 (9 months) | $100 (3 months) / $100 (9 months) | | OCI (Loss) Income | $65 (3 months) / $326 (9 months) | $56 (3 months) / $(786) (9 months) | Note 12. COVID-19 Pandemic and CARES Act The COVID-19 pandemic led to operational changes, including a transition to online learning and additional expenses, but did not have a material adverse impact on the Company's financial statements as of September 30, 2021. The Company received and utilized $27.4 million in HEERF funds from the CARES Act, distributing emergency grants to students and offsetting institutional costs. An additional $15.4 million from CRRSAA has been allocated but not yet drawn down - COVID-19 impact primarily involved transitioning to online learning and incurring additional expenses, but no material adverse impacts on financial results as of September 30, 2021[121] - The Company received $27.4 million in HEERF funds from the CARES Act, fully distributed as emergency grants to students and utilized for institutional costs by September 30, 2021[124] - An additional $15.4 million in HEERF funds from CRRSAA was allocated in February 2021, but none had been drawn down as of September 30, 2021[129] - The Company deferred $4.5 million in FICA payroll taxes through January 1, 2021, with repayment scheduled for January 2022 and January 2023[126] Note 13. Property Sale Agreements The Company entered into two significant property sale agreements: one to sell its Nashville campus for $34.5 million, with an expected closing in Q1 2022 and a lease-back period; and a sale-leaseback transaction for its Denver and Grand Prairie campuses for $46.5 million, which closed on October 29, 2021, providing $28.5 million in net proceeds after debt repayment - Agreement to sell Nashville campus for $34.5 million, with closing expected in Q1 2022, followed by a 12-month rent-free lease-back period[131] - Sale-leaseback of Denver and Grand Prairie campuses for $46.5 million closed on October 29, 2021[132] - The Denver/Grand Prairie transaction yielded approximately $28.5 million in net proceeds after deducting $1.2 million in transaction expenses and repaying $16.8 million of outstanding term loan and swap termination fees[132] - The lease agreement for Denver and Grand Prairie properties is for a twenty-year term with an initial annual base rent of approximately $2.6 million, increasing by 2.00% annually[132] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance, condition, and future outlook, discussing revenue and expense trends, segment results, liquidity, capital resources, and the impact of regulatory changes and the COVID-19 pandemic for the three and nine months ended September 30, 2021 General Business Overview and COVID-19 Impact This section provides an overview of the company's business, its segments, and the operational impacts of the COVID-19 pandemic - The Company provides career-oriented post-secondary education across 22 schools in 14 states, with programs in automotive technology, skilled trades, healthcare services, hospitality, and information technology[136] - Business is organized into two reportable segments: Transportation and Skilled Trades, and Healthcare and Other Professions (HOPS)[137] - COVID-19 impact primarily involved transitioning to online learning, incurring additional expenses, and placing some students on leave of absence, though all schools have since reopened[139] Critical Accounting Policies and Estimates This section outlines the key accounting policies and estimates requiring significant management judgment, including revenue recognition and goodwill - Key accounting policies requiring significant management judgment include revenue recognition, allowance for doubtful accounts, goodwill and long-lived assets, stock-based compensation, derivative instruments, borrowings, lease assumptions, and income taxes[142] - Reassessment of accounting policies due to COVID-19 did not have a significant impact on results of operations and cash flows for the presented periods[142] Results of Continuing Operations This section analyzes the company's consolidated financial performance, including revenue, expenses, and net income, for the reported periods Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020 This section compares the company's consolidated financial results for the three months ended September 30, 2021, and 2020 Consolidated Financial Performance (Three Months Ended Sep 30) | Metric | 2021 (in millions) | 2020 (in millions) | % Change | | :-------------------------------- | :----------------- | :----------------- | :------- | | Revenue | $89.1 | $78.8 | 13.0% | | Educational services and facilities expense | $38.1 | $34.2 | 11.3% | | Selling, general and administrative expense | $45.2 | $40.7 | 11.1% | | Operating income | $5.7 | $3.8 | 49.6% | | Net income | $3.8 | $3.5 | 9.1% | | Effective tax rate | 29.6% | 1.4% | N/A | - Revenue increase driven by an 8.3% increase in average student population and a 4.3% increase in average revenue per student[145] - Selling, general and administrative expense increased due to higher incentive and stock-based compensation and increased marketing investments[150] Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020 This section compares the company's consolidated financial results for the nine months ended September 30, 2021, and 2020 Consolidated Financial Performance (Nine Months Ended Sep 30) | Metric | 2021 (in millions) | 2020 (in millions) | % Change | | :-------------------------------- | :----------------- | :----------------- | :------- | | Revenue | $247.5 | $211.3 | 17.1% | | Educational services and facilities expense | $104.1 | $90.7 | 14.8% | | Selling, general and administrative expense | $128.2 | $117.0 | 9.5% | | Operating income | $15.2 | $3.7 | 310.8% | | Net income | $10.8 | $2.5 | 332.0% | | Effective tax rate | 25.0% | 5.6% | N/A | - Revenue increase driven by an 11.3% increase in average student population, 8.8% student start growth, and a 5.2% increase in average revenue per student, along with normalization of in-person instruction[155] - Educational services and facilities expense increased due to inflationary pressures on instructor salaries, larger student population, and operating with a hybrid instruction model[158] - Selling, general and administrative expense increased due to a $3.1 million rise in incentive and stock-based compensation, normalization of operating expenses, and increased marketing investments[160] Segment Results of Operations This section analyzes the financial performance of the company's Transportation and Skilled Trades and Healthcare and Other Professions segments Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020 This section compares segment-level financial results for the three months ended September 30, 2021, and 2020 Segment Performance (Three Months Ended Sep 30) | Metric | Transportation and Skilled Trades (2021) | Transportation and Skilled Trades (2020) | HOPS (2021) | HOPS (2020) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :---------- | :---------- | | Revenue (in thousands) | $64,950 | $56,828 | $24,109 | $21,964 | | Operating Income (Loss) (in thousands) | $11,842 | $9,138 | $1,833 | $1,654 | | Starts | 3,976 | 3,982 | 1,454 | 1,528 | | Average Population (Excl. LOA) | 8,854 | 8,016 | 4,324 | 4,149 | - Transportation and Skilled Trades revenue increased by 14.3%, driven by a 10.5% increase in average student population and a 3.5% increase in average revenue per student[172] - HOPS revenue increased by 9.8%, driven by a 4.2% increase in average student population and a 5.3% increase in average revenue per student[174] - Corporate expenses increased by $1.0 million to $7.9 million, primarily due to incentive and stock-based compensation tied to improved financial performance[173] Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020 This section compares segment-level financial results for the nine months ended September 30, 2021, and 2020 Segment Performance (Nine Months Ended Sep 30) | Metric | Transportation and Skilled Trades (2021) | Transportation and Skilled Trades (2020) | HOPS (2021) | HOPS (2020) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :---------- | :---------- | | Revenue (in thousands) | $177,586 | $148,799 | $69,934 | $62,504 | | Operating Income (Loss) (in thousands) | $35,423 | $18,848 | $7,743 | $6,388 | | Starts | 8,824 | 8,004 | 3,857 | 3,651 | | Average Population (Excl. LOA) | 8,296 | 7,391 | 4,370 | 3,988 | - Transportation and Skilled Trades revenue increased by 19.3%, driven by a 12.2% increase in average student population, 10.2% student start growth, and a 6.3% increase in average revenue per student[177] - HOPS revenue increased by 11.9%, driven by a 9.6% increase in average student population, 5.6% student start growth, and a 2.1% increase in average revenue per student[179] - Corporate expenses increased by $6.3 million to $27.9 million, driven by normalization of operating expenses, improved business climate, and a $3.1 million increase in incentive and stock-based compensation[178] Liquidity and Capital Resources This section discusses the company's cash flows from operating, investing, and financing activities, along with its credit facilities and capital needs Operating Activities This section details the net cash provided by or used in the company's operating activities for the reported periods Net Cash Provided by Operating Activities (in thousands) | Period | 2021 | 2020 | | :-------------------------------- | :------- | :------- | | Nine Months Ended September 30 | $17,750 | $10,222 | - Increase of $7.5 million in cash from operating activities for the nine months ended September 30, 2021, primarily driven by net income[183] - Excluding $11.5 million in CARES Act federal funds received in 2020, net cash used in operating activities would have been $1.2 million in 2020[183] Investing Activities This section details the net cash provided by or used in the company's investing activities for the reported periods Net Cash Used in Investing Activities (in thousands) | Period | 2021 | 2020 | | :-------------------------------- | :------- | :------- | | Nine Months Ended September 30 | $(5,252) | $(3,457) | - Primary uses of cash in investing activities include capital expenditures for training technology, classroom furniture, and new program buildouts[184] - Capital expenditures are expected to approximate 2% of revenues in 2021, funded by operating cash and credit facility borrowings[185] Financing Activities This section details the net cash provided by or used in the company's financing activities for the reported periods Net Cash Used in Financing Activities (in thousands) | Period | 2021 | 2020 | | :-------------------------------- | :------- | :------- | | Nine Months Ended September 30 | $(3,374) | $(17,816) | - Decrease of $14.4 million in cash used in financing activities for the nine months ended September 30, 2021, primarily due to a $15.0 million decrease in net payments on borrowings[187] Credit Facility with Sterling National Bank This section describes the company's senior secured credit agreement, including its terms, outstanding amounts, and compliance with covenants - The Company has a $60 million senior secured credit agreement with Sterling National Bank, consisting of a Term Loan, Delayed Draw Term Loan, and Revolving Loan[188][189] - An amendment in November 2020 extended the Delayed Draw Availability Period to May 31, 2022, and increased the permitted cash dividends on Series A Preferred Stock[189] - As of September 30, 2021, $16.3 million was outstanding under the Credit Facility, and the Company was in compliance with all debt covenants[198][200] - A Consent Agreement in September 2021 facilitated real estate transactions, requiring full repayment of the Term Loan and swap obligations upon closing, which occurred for Denver and Grand Prairie campuses in October 2021[199] Contractual Obligations This section outlines the company's significant contractual obligations, including loan principal commitments to active students - As of September 30, 2021, the Company had outstanding loan principal commitments to active students of $30.3 million, which are institutional loans not advanced as cash[203] Regulatory Updates This section provides updates on various regulatory matters, including audits, enforcement actions, and changes to federal student aid rules DOE and OIG Audit Findings This section details audit findings from the Department of Education and Office of Inspector General regarding compliance and HEERF funds - The New Britain institution received a final audit determination letter from the DOE for the 2020 fiscal year with 8 findings of alleged noncompliance, totaling approximately $16,000 in questioned funds, which were repaid[205] - Other institutions had noncompliance findings in their 2020 Title IV compliance audits, requiring file reviews and responses to the DOE[206] - The OIG issued a final audit report for the Indianapolis institution on September 24, 2021, with 3 findings of alleged non-compliance regarding HEERF funds and cash management practices[207] FTC and FSA Office of Enforcement This section discusses new enforcement initiatives from the FTC and DOE's Office of Enforcement targeting for-profit colleges - The FTC announced a plan on October 6, 2021, to target false claims by for-profit colleges, putting 70 institutions, including all of the Company's, on notice for potential 'significant financial penalties'[208] - The DOE established an Office of Enforcement within the Federal Student Aid office on October 8, 2021, increasing the likelihood of enforcement actions against for-profit schools[210] The ARPA and the "90/10 Rule" This section explains the impact of the American Rescue Plan Act and changes to the 90/10 rule on the company's federal funding - The American Rescue Plan Act of 2021 (ARPA) allocated approximately $8 million in relief funds to the Company, to be used entirely for student financial aid grants, with distribution expected in Q4 2021[211] - ARPA amends the 90/10 rule, treating other 'Federal funds' (e.g., veterans' benefits) as Title IV funds for calculation purposes, effective for institutional fiscal years beginning on or after January 1, 2023[213][214] - In 2020, approximately 77% of the Company's revenues were derived from Title IV Programs, with veterans' benefits contributing about 8%[213] Borrower Defense to Repayment Regulations This section addresses borrower defense applications received by the company and potential liabilities from discharged student loans - The Company received borrower defense applications from the DOE in May and July 2021 (175 and 140 claims, respectively) concerning allegations from 2007-2013[219] - Management cannot predict the outcome of the DOE's review, but potential liabilities from discharged loans could materially affect business and operations[220] Negotiated Rulemaking This section discusses the Department of Education's negotiated rulemaking process and its potential impact on regulations affecting for-profit schools - The DOE announced its intention to establish a negotiated rulemaking committee to prepare proposed regulations on various topics, including the 90/10 rule, starting no earlier than January 2022[223] - Negotiated rulemaking sessions began on October 4, 2021, covering topics like borrower defense, closed school discharges, and financial responsibility standards[225] - New regulations could adversely impact for-profit schools, potentially requiring additional costs, affecting Title IV eligibility, or imposing restrictions[226] Closed School Loan Discharges This section details payments made for closed school loan discharges and potential changes to related regulations - The Company has paid approximately $345,000 to the DOE since September 3, 2020, for closed school loan discharges related to former campuses[228] - The DOE is conducting negotiated rulemaking on closed school loan discharges, which could make it easier for borrowers to obtain discharges and for the DOE to recover liabilities from institutions[227] Financial Responsibility Standards This section outlines the company's compliance with financial responsibility standards and its return to advance pay status - The DOE returned the Company's three institutions to advance pay on August 19, 2021, after they met requirements to be removed from Heightened Cash Monitoring 1 (HCM1) payment method[229] - Previously, the institutions were operating under Zone Alternative requirements and HCM1 based on a composite score of 1.5 for fiscal year 2018[229] Accreditation This section discusses the accreditation status of the company's institutions and the ongoing review of its accrediting agency - All of the Company's institutions are accredited by ACCSC, a DOE-recognized accrediting agency[230] - The DOE deferred a decision on ACCSC's continued recognition, pending submission of additional information by January 10, 2022, regarding monitoring of high-risk institutions[231] - If DOE withdraws ACCSC's recognition, institutions may have up to 18 months to obtain accreditation from another recognized body to maintain Title IV eligibility[233] Seasonality This section describes the seasonal fluctuations in the company's revenue, student populations, and operating results - Revenue and operating results fluctuate seasonally, with lower student populations in Q1 and Q2, larger class starts in Q3, and higher student attrition in the first half of the year[235] - Second-half growth is largely dependent on a successful high school recruiting season, with recruiting occurring several months ahead of start dates[235] Item 4. Controls and Procedures The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were adequate and effective as of September 30, 2021. No material changes to internal control over financial reporting occurred during the quarter, despite some employees working remotely due to the COVID-19 pandemic - Disclosure controls and procedures were deemed adequate and effective as of September 30, 2021[236] - No material changes to internal control over financial reporting occurred during the quarter ended September 30, 2021[237][238] PART II. OTHER INFORMATION This section provides additional information on legal proceedings, changes in the board of directors, and required exhibits Item 1. Legal Proceedings The Company is involved in various legal proceedings, including a class action lawsuit related to the transition to online classes due to COVID-19. While management does not believe these will have a material adverse effect on the Company's financial condition, a class action lawsuit filed in December 2020 was dismissed in its entirety on November 3, 2021 - A class action lawsuit filed in December 2020, alleging breach of contract and unjust enrichment related to COVID-19 online class transitions, was dismissed in its entirety on November 3, 2021[241] - Management does not believe any currently pending legal proceedings will have a material adverse effect on the Company's business, financial condition, results of operations, or cash flows[239] Item 5. Other Information Celia H. Currin retired from the Board of Directors and her committee positions effective November 4, 2021. Following her resignation, the Board appointed John A. Bartholdson as chair of the Governance Committee and added Felecia Pryor, Michael Plater, and Carlton Rose to various committees - Celia H. Currin retired from the Board of Directors and her committee positions (chair of Nominating and Corporate Governance Committee, member of Audit Committee) effective November 4, 2021[242] - John A. Bartholdson was appointed chair of the Governance Committee, and Felecia Pryor, Michael Plater, and Carlton Rose were appointed as members to various committees[243] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, material contracts such as property sale agreements and credit facility amendments, certifications from the CEO and CFO, and financial statements formatted in iXBRL - Includes Amended and Restated Certificate of Incorporation, Bylaws, and Certificate of Amendment[244] - Material contracts listed include property sale agreements for Nashville, Denver, and Grand Prairie, and a Consent and Waiver Letter Agreement for the Credit Facility[244] - Certifications from the Chief Executive Officer and Chief Financial Officer (pursuant to Sections 302 and 906 of Sarbanes-Oxley Act) are filed/furnished[244] - Financial statements and notes are provided in Inline Extensible Business Reporting Language (iXBRL) format[244] SIGNATURES This section confirms the official signing of the report by the company's Chief Financial Officer and Treasurer - The report was signed by Brian Meyers, Executive Vice President, Chief Financial Officer and Treasurer, on November 8, 2021[249]