Lincoln Educational Services(LINC) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements Unaudited Q1 2023 condensed consolidated financial statements detail $87.3 million revenue, a $0.1 million net loss, and the impact of ASC 326 Q1 2023 vs Q1 2022 Key Financials (in thousands) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Revenue | $87,284 | $82,554 | | Operating Loss | $(1,116) | $(326) | | Net (Loss) Income | $(109) | $272 | | Net Loss per Common Share | $(0.00) | $(0.00) | Condensed Balance Sheet (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $107,587 | $114,135 | | Total Assets | $281,093 | $291,566 | | Total Current Liabilities | $54,574 | $55,020 | | Total Liabilities | $145,839 | $146,689 | | Total Stockholders' Equity | $135,254 | $144,877 | Condensed Cash Flow Statement (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(214) | $(14,367) | | Net cash used in investing activities | $(3,249) | $(1,045) | | Net cash used in financing activities | $(2,335) | $(2,296) | | Net decrease in cash | $(5,798) | $(17,708) | Notes to Condensed Consolidated Financial Statements Detailed notes explain segment reorganization, ASC 326 adoption, property sale, preferred stock conversion, and credit facility - Effective January 1, 2023, the company reorganized its business into two reportable segments: 'Campus Operations' (ongoing core operations) and 'Transitional' (campuses marked for closure) As of March 31, 2023, the only transitional campus is Somerville, MA, expected to be fully taught-out by year-end 2023[37][88][90] - The company adopted ASC 326 (CECL) for credit losses on January 1, 2023, resulting in a one-time opening balance sheet adjustment that increased the allowance for credit losses by approximately $10.8 million and decreased retained earnings by $7.9 million, after-tax[43][108] - The sale of the Nashville, TN campus property for $34.5 million is now expected to close in the second quarter of 2023, classified as 'asset held for sale' on the balance sheet[104][105] - On November 30, 2022, all outstanding Series A Preferred Stock was mandatorily converted into 5,381,356 shares of common stock, terminating all future preferred dividend obligations[51][71] - The company's credit facility was terminated on November 4, 2022, with no debt outstanding as of March 31, 2023, but expects to negotiate a new credit facility in Q2 2023 Existing letters of credit of $4.0 million remain outstanding and are cash collateralized[68][166] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2023 financial results, noting 5.7% revenue growth to $87.3 million, widened operating loss from increased SG&A, and solid liquidity Results of Operations Q1 2023 revenue grew 5.7% to $87.3 million, but faster cost growth, especially 7.8% SG&A increase, led to a $1.1 million operating loss Consolidated Results of Operations (in thousands) | Line Item | Q1 2023 | Q1 2022 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $87,284 | $82,554 | 5.7% | | Educational services and facilities | $38,093 | $36,196 | 5.2% | | Selling, general and administrative | $50,307 | $46,684 | 7.8% | | Operating Loss | $(1,116) | $(326) | 242.3% | - The revenue increase was driven by a new hybrid teaching model, a 9.0% increase in average revenue per student from tuition hikes, and a 6.4% increase in student starts[134] - The increase in SG&A expense was primarily due to a $2.7 million rise in administrative costs (salaries, benefits, legal) and a $0.6 million increase in marketing investments[138][139] Segment Results Segment analysis shows Campus Operations revenue up 6.9% to $86.4 million and operating income up 17.4%, while Transitional segment revenue declined 47.4% Segment Performance (Q1 2023 vs Q1 2022) | Segment | Revenue (in thousands) | Operating Income (Loss) (in thousands) | Student Starts | | :--- | :--- | :--- | :--- | | Campus Operations | $86,352 (+6.9%) | $10,109 (+17.4%) | 3,440 (+6.4%) | | Transitional | $932 (-47.4%) | $(197) (vs. $(62)) | 0 (-100.0%) | | Corporate | N/A | $(11,028) (-24.2%) | N/A | - The Transitional segment consists of the Somerville, MA campus, which is planned to be fully taught-out with a total closure cost of approximately $2.0 million by the end of 2023[150] Liquidity and Capital Resources Liquidity remains strong with $44.5 million cash, improved operating cash flow, and projected 11% capital expenditures for the new Atlanta campus - Cash, cash equivalents, and restricted cash was $44.5 million at quarter-end The company also holds $14.7 million in short-term investments[153] - Net cash used in operating activities decreased to $0.2 million from $14.4 million YoY, mainly due to the timing of $8.0 million in Title IV funds received in January 2023[159] - Capital expenditures are expected to be approximately 11% of revenues in 2023, a significant increase from 3% in 2022, driven by the new Atlanta campus buildout and other program expansions[162] - During Q1 2023, the company repurchased 104,030 shares for approximately $0.5 million under its share repurchase program[154] Regulatory Updates Regulatory updates focus on the Sweet v. Cardona lawsuit, where stay requests were denied, posing a material risk of DOE recoupment, and new third-party servicer regulations - In the Sweet v. Cardona case, the company's motions to stay the settlement were denied by the Ninth Circuit and the Supreme Court, although the company intends to continue its appeal[169] - As a result of the stay denials, the DOE could automatically approve pending borrower defense applications and seek to recoup loan amounts from the company, which could have a material adverse effect on business and operations[170] - The DOE is considering new regulations related to third-party servicers, which may expand the definition and require the company to revise contracts and increase oversight of its vendors[172][173] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the company is not required to provide quantitative and qualitative disclosures about market risk - The company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information otherwise required by this item[175] Controls and Procedures CEO and CFO concluded disclosure controls and procedures were effective, with new internal controls implemented for ASC 326 and accounts payable - The CEO and CFO concluded that the company's disclosure controls and procedures are adequate and effective as of March 31, 2023[176] - There were no material changes to internal control over financial reporting, except for the implementation of new controls related to ASC 326 and accounts payable payment processing[177] PART II. OTHER INFORMATION Legal Proceedings Details involvement in the Sweet v. Cardona lawsuit, where stay requests were denied, potentially leading to automatic loan discharges and DOE recoupment - The company is appealing the Sweet v. Cardona settlement, which involves Borrower Defense to Repayment claims[179] - Requests to stay the settlement pending appeal were denied by the U.S. Court of Appeals for the Ninth Circuit on March 29, 2023, and by the Supreme Court on April 13, 2023[179] - The denial of the stay requests means the DOE could automatically approve pending borrower defense applications and seek to recoup funds from the company, creating a significant potential liability[180] Risk Factors Highlights material risk from the Sweet v. Cardona lawsuit, where stay denials could lead to automatic borrower defense grants and DOE recoupment actions - The primary risk highlighted is the denial of the company's motion to stay the judgment in the Sweet v. Cardona case by the Ninth Circuit and the Supreme Court[184][185] - This could result in the DOE automatically granting all pending borrower defense applications submitted before June 22, 2022, and potentially seeking recoupment of all associated loan amounts from the company[186] Unregistered Sales of Equity Securities and Use of Proceeds Details Q1 2023 share repurchases of 104,030 shares for $0.5 million, with the program extended and $30.0 million remaining authorized - On February 27, 2023, the Board of Directors extended the share repurchase program for an additional 12 months and authorized an additional $10 million for repurchases[188] Share Repurchases in Q1 2023 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January 2023 | 0 | N/A | | February 2023 | 0 | N/A | | March 2023 | 104,030 | $5.34 | | Total | 104,030 | $5.34 | - As of March 31, 2023, approximately $30.0 million remained authorized for future share repurchases[187][189] Defaults Upon Senior Securities The company reports no defaults upon senior securities - None[191] Mine Safety Disclosures The company reports no mine safety disclosures - None[191] Other Information The company reports no other information for this item - None[193] Exhibits Lists exhibits filed with Form 10-Q, including corporate governance documents and CEO/CFO certifications required by Sarbanes-Oxley Act - The filing includes certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[192] - Financial statements formatted in Inline Extensible Business Reporting Language (iXBRL) are included as Exhibit 101[192]