U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
Commission File Number 000-51371
LINCOLN EDUCATIONAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey
(State or other jurisdiction of incorporation or organization)
57-1150621
(IRS Employer Identification No.)
200 Executive Drive, Suite 340
West Orange, NJ 07052
(Address of principal executive offices)
(973) 736-9340
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Common Stock, no par value per share
LINC
Name of exchange on which
registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
No ☒
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
and posted pursuant to Rule 405 of Regulation S-T 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 emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the 23,644,412 shares of common stock held by non-affiliates of the registrant issued and
outstanding as of June 28, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, was
$54,618,592. This amount is based on the closing price of the common stock on the Nasdaq Global Select Market of $2.31 per
share on that date. Shares of common stock held by executive officers and directors and persons who own 5% or more of the
outstanding common stock have been excluded since such persons may be deemed affiliates. This determination of affiliate status
is not a determination for any other purpose.
The number of shares of the registrant’s common stock outstanding as of March 3, 2020 was 26,364,521.
Documents Incorporated by Reference
Certain information required in Part III of this Annual Report on Form 10-K will be included in a definitive proxy statement for
the registrant’s annual meeting of shareholders or an amendment to this Annual Report on Form 10-K, in either case filed with
the Commission within 120 days after December 31, 2019, and is incorporated by reference herein.
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019
PART I.
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART II.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8
ITEM 9.
ITEM 9A.
ITEM 9B.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
PART III.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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30
30
30
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43
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Index
Forward-Looking Statements
This Annual Report on Form 10-K and the documents incorporated by reference 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:
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our failure to comply with the extensive existing regulatory framework applicable to our industry or our failure to obtain timely regulatory
approvals in connection with a change of control of our company or acquisitions;
the promulgation of new regulations in our industry as to which we may find compliance challenging;
our success in updating and expanding the content of existing programs and developing new programs in a cost-effective manner or on a timely
basis;
our ability to implement our strategic plan;
risks associated with changes in applicable federal laws and regulations including pending rulemaking by the U.S. Department of Education;
uncertainties regarding our ability to comply with federal laws and regulations regarding the 90/10 rule and cohort default rates;
risks associated with maintaining accreditation
risks associated with opening new campuses and closing existing campuses;
risks associated with integration of acquired schools;
industry competition;
conditions and trends in our industry;
general economic conditions; and
other factors discussed under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
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.
Index
ITEM 1.
BUSINESS
Overview
PART I.
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 14 states, offers programs in automotive technology, skilled trades (which include
HVAC, welding and computerized numerical control and electrical and electronic systems technology, among other programs),
healthcare services (which include nursing, dental assistant and medical administrative assistant, among other programs),
hospitality services (which include culinary, therapeutic massage, cosmetology and aesthetics) and information technology
(which consists of information technology programs). The schools operate under Lincoln Technical Institute, Lincoln College of
Technology, Lincoln Culinary Institute, and Euphoria Institute of Beauty Arts and Sciences and associated brand names. Most of
the campuses serve major metropolitan markets and each typically offers courses in multiple areas of study. Five of the campuses
are destination schools, which attract students from across the United States and, in some cases, from abroad. The Company’s
other campuses primarily attract students from their local communities and surrounding areas. All of the campuses are nationally
or regionally accredited and are eligible to participate in federal financial aid programs managed by the U.S. Department of
Education (the “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. Lincoln Educational Services Corporation was
incorporated in New Jersey in 2003 as the successor-in-interest to various acquired schools including Lincoln Technical Institute,
Inc. which opened its first campus in Newark, New Jersey in 1946.
Our business is organized into three reportable business segments: (a) Transportation and Skilled Trades, (b) Healthcare and
Other Professions (“HOPS”), and (c) Transitional, which refers to our campus operations which have been closed prior to 2019.
As of December 31, 2019, we had 11,285 students enrolled at 22 campuses. Our average enrollment for the year ended
December 31, 2019 was 10,985 students which represented an increase of 3.7% from average enrollment in 2018. For the year
ended December 31, 2019, our revenues were $273.3 million, which represented an increase of 3.9 % from the prior year. For
more information relating to our revenues, profits and financial condition, please refer to “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and our consolidated financial statements included in this Annual
Report on Form 10-K.
We believe that we provide our students with the highest quality career-oriented training available for our areas of study in our
markets. We offer programs in areas of study that we believe are typically underserved by traditional providers of post-secondary
education and for which we believe there exists significant demand among students and employers. Furthermore, we believe our
convenient class scheduling, career-focused curricula and emphasis on job placement offer our students valuable advantages that
have been neglected by the traditional academic sector. By combining substantial hands-on training with traditional classroom-
based training led by experienced instructors, we believe we offer our students a unique opportunity to develop practical job
skills in many of the key areas of expected job demand. We believe these job skills enable our students to compete effectively for
employment opportunities and to pursue salary and career advancement.
Business Strategy
We strive to strengthen our position as a leading provider of career‑oriented post-secondary education by continuing to pursue the
following strategy:
•
Expand Existing Areas of Study and Existing Facilities. We believe we can leverage our operations to expand our program offerings in existing
areas of study and new high-demand areas of study in the Transportation and Skilled Trades segment to capitalize on demand from students and
employers in our target markets. Whenever possible, we seek to replicate programs across our campuses.
• Maximize Utilization of Existing Facilities. We are focused on improving capacity utilization of existing facilities through increased enrollments,
the introduction of new programs and partnerships with industry.
•
Expand Market. We believe that we can enter new markets and broaden the Lincoln brand by partnering with nationally recognized brands to
provide the skills needed to train our nation’s workforce. We continue to expand our industry relationships both to attract new students and to
offer our graduates more employment opportunities. We continue to establish partnerships with companies like BMW, Chrysler (FCA),
Hussmann, Volkswagen and Audi that will enable graduates to receive higher wages. We expect to continue investing in marketing, recruiting and
retention resources to increase enrollment.
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Index
Programs and Areas of Study
We structure our program offerings to provide our students with a practical, career-oriented education and position them for
attractive entry-level job opportunities in their chosen fields. Our diploma and certificate programs typically take between 19 to
136 weeks to complete, with tuition ranging from $7,000 to $44,000. Our associate’s degree programs typically take between 64
to 98 weeks to complete, with tuition ranging from $27,000 to $37,000. As of December 31, 2019, all of our schools offer
diploma and certificate programs and nine of our schools are currently approved to offer associate’s degree programs. In order to
accommodate the schedules of our students and maximize classroom utilization at some of our campuses, we typically offer
courses four to five days a week in three shifts per day and start new classes every month. We update and expand our programs
frequently to reflect the latest technological advances in the field, providing our students with the specific skills and knowledge
required in the current marketplace. Classroom instruction combines lectures and demonstrations by our experienced faculty with
comprehensive hands-on laboratory exercises in simulated workplace environments.
The following table lists the programs offered as of December 31, 2019:
Area of Study
Associate’s Degree
Diploma and Certificate
Current Programs Offered
Automotive Technology
Automotive Service Management,
Collision Repair & Refinishing Service
Management, Diesel & Truck Service
Management
Automotive Mechanics, Automotive Technology, Automotive
Technology with Audi, Automotive Technology with BMW
FastTrack, Automotive Technology with Mopar X-Press,
Automotive Technology with High Performance, Automotive
Technology with Volkswagon, Collision Repair and
Refinishing Technology, Diesel & Truck Mechanics, Diesel &
Truck Technology, Diesel & Truck Technology with Alternate
Fuel Teechnology, Diesel & Truck Technology with Transport
Refrigeration, Diesel & Truck with Automotive Technology,
Heavy Equipment Maintenance Technology, Heavy
Equipment and Truck Technology
Skilled Trades
Electronic Engineering Technology,
HVAC, Electronics Systems Service
Management
Electrical Technology, Electrical & Electronics Systems
Technician, HVAC, Welding Technology, Welding with
Introduction to Pipefitting, CNC
Health Sciences
Medical Assisting Technology, Medical
Office Management
Hospitality Services
Medical Office Assistant, Medical Assistant, Patient Care
Technician, Medical Coding & Billing, Dental Assistant,
Licensed Practical Nursing
Culinary Arts, Cosmetology, Aesthetics, International Baking
and Pastry, Nail Technolgy, Therapeutic Massage &
Bodywork Technician
Information Technology
Computer Networking and Support
Computer & Network Support Technician
Automotive Technology. Automotive technology is our largest area of study, with 35% of our total average student enrollment
for the year ended December 31, 2019 falling into this area. Our automotive technology programs are 28 to 136 weeks in length,
with tuition rates of $14,000 to $44,000. We believe that we are a leading provider of automotive technology education in each of
our local markets. Graduates of our programs are qualified to obtain entry-level employment ranging from positions as
technicians and mechanics to various apprentice level positions. Our graduates are employed by a wide variety of companies,
ranging from automotive and diesel dealers, to independent auto body paint and repair shops to trucking and construction
companies.
As of December 31, 2019, 12 campuses offered programs in automotive technology and most of these campuses offer other
technical programs. Our campuses in East Windsor, Connecticut; Nashville, Tennessee; Grand Prairie, Texas; Indianapolis,
Indiana; and Denver, Colorado are destination campuses, attracting students throughout the United States and, in some cases,
from abroad.
Skilled Trades. Our skilled trades programs include electrical, heating and air conditioning repair, welding, computerized
numerical control and electronic and electronic systems technology. For the year ended December 31, 2019, skilled trades was
our second largest area of study, representing 31% of our total average student enrollment. Our skilled trades programs are 28 to
98 weeks in length, with tuition rates of $16,000 to $34,000. Graduates of our programs are qualified to obtain entry-level
employment positions such as electrician, cable installer, welder, wiring and heating, ventilating and air conditioning, or HVAC
installer and are employed by a wide variety of types of employers, including residential and commercial construction,
telecommunications installation companies and architectural firms. As of December 31, 2019, we offered skilled trades programs
at 14 campuses.
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Index
Health Sciences. Our health sciences programs qualify students to obtain positions such as licensed practical nurse, dental
assistant, medical assistant, medical administrative assistant and claims examiner. For the year ended December 31, 2019, 26%
of our total average student enrollment was in our health science programs. Our health science programs are 35 to 104 weeks in
length, with tuition rates of $15,000 to $32,000. Graduates of our health sciences programs may be employed by a wide variety
of employers, including hospitals, laboratories, insurance companies and doctors’ offices. Our practical nursing and medical
assistant programs are our largest health science programs. As of December 31, 2019, we offered health science programs at 10
of our campuses.
Hospitality Services. Our hospitality programs include culinary, therapeutic massage, cosmetology and aesthetics. For the year
ended December 31, 2019, 6% of our total average student enrollment was in our hospitality services programs. Our hospitality
services programs are 19 to 88 weeks in length, with tuition rates of $7,000 to $22,000. Graduates of the hospitality services
programs work in salons, spas, cruise ships or are self-employed. We offer massage programs at three campuses and
cosmetology programs at one campus. Our culinary graduates are employed by restaurants, hotels, cruise ships and bakeries. As
of December 31, 2019, we offered these programs at six campuses.
Information Technology. We have focused our current information technology, or IT, program offerings on those that are most
in demand, such as our computer and network support technician program. For the year ended December 31, 2019, 2% of our
total average student enrollment was in our information technology programs. Our information technology programs are 40 to 80
weeks in length, with tuition rates of $20,000 to $33,000. Our IT technology program graduates obtain entry-level positions with
both small and large corporations. As of December 31, 2019, we offered these programs at four of our campuses.
Marketing and Student Recruitment
We utilize a variety of marketing and recruiting methods to attract students and increase enrollment. Our marketing and recruiting
efforts are targeted at prospective students who are high school graduates entering the workforce, or who are currently
underemployed or unemployed and require additional training to enter or re-enter the workforce.
Marketing and Advertising. We utilize a fully integrated marketing approach in our lead generation and admissions process
that includes the use of traditional media such as television, radio, billboards, direct mail, a variety of print media and event
marketing campaigns as well as digital marketing efforts, which include paid search, search engine optimization, online video
and display advertising and social media channels, which have grown significantly in recent years and currently drive the
majority of our new student leads and enrollments. Our website’s integrated marketing campaigns direct prospective students to
call us or visit the Lincoln website where they will find details regarding our programs and campuses and can request additional
information regarding the programs that interest them. Our internal systems enable us to closely monitor and track the
effectiveness of each marketing execution on a daily or weekly basis and make adjustments accordingly to enhance efficiency
and limit our student acquisition costs.
Referrals. Referrals from current students, high school counselors and satisfied graduates and their employers have historically
represented 16% of our new enrollments. Our school administrators actively work with our current students to encourage them to
recommend our programs to prospective students. We endeavor to build and retain strong relationships with high school guidance
counselors and instructors by offering annual seminars at our training facilities to further familiarize these individuals on the
strengths of our programs.
Recruiting. Our recruiting efforts are conducted by a group of approximately 250 campus-based and field representatives who
meet directly with prospective students during presentations conducted at high schools, in the prospective students’ homes or
during a visit to one of our campuses. We also recruit adult career-seekers or career-changers through our campus based
representatives
During 2019, we recruited approximately 23% of our students directly out of high school. Field sales continue to be a large part
of our business and developing local community relationships is one of our most important functions. In 2019, we added one
high school manager to the corporate team to assist in training and development of our team in the field.
Student Admissions, Enrollment and Retention
Admissions. In order to attend our schools, students must have either a high school diploma or a high school equivalency
certificate (or
General Education Development Certificate, GED). In addition, students must complete an application and pass an entrance
assessment. We take admissions requirements very seriously as they are the best indicators of our students’ likelihood of
graduation and of subsequent successful employment. While each of our programs has different admissions criteria, we screen all
applications and counsel prospective students on the most appropriate program to increase the likelihood that our students
complete the requisite coursework and obtain and sustain employment following graduation.
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Index
Enrollment. We enroll students continuously throughout the year, with our largest classes enrolling in late summer or early fall
following high school graduation. We had 11,285 students enrolled as of December 31, 2019 and our average enrollment for the
year ended December 31, 2019 was 10,985 students, an increase of 3.7% in average enrollment from December 31, 2018. We had
10,525 students enrolled as of December 31, 2018 and our average enrollment for that year was 10,591 students, a decrease of
1.7% in average enrollment from December 31, 2017.
Retention. To maximize student retention, the staff at each school is trained to recognize the early warning signs of a potential
drop and to assist and advise students on academic, financial and employment matters. We monitor our retention rates by
instructor, course, program and school. When we become aware that a particular instructor or program is experiencing a higher
than normal dropout rate, we quickly seek to determine the cause of the problem and attempt to correct it. When we identify that
a student is experiencing difficulty academically, we offer tutoring.
Job Placement
We believe that assisting our graduates in securing employment after completing their program of study is critical to our mission
as a post-secondary educational institution as well as to our ability to attract high quality students and enhance our reputation in
the industry. In addition, we believe that high job placement rates result in low student loan default rates, an important
requirement for continued participation in Title IV of the Higher Education Act of 1965, as amended (“Title IV Programs”). See
Part I, Item 1. “Business - Regulatory Environment—Regulation of Federal Student Financial Aid Programs.” Accordingly, we
dedicate significant resources to maintaining an effective graduate placement program. Our non-destination schools work closely
with local employers to ensure that we are training students with skills that local employers seek. Each school has an advisory
council comprised of local employers who provide us with direct feedback on how well we are preparing our students to succeed
in the workplace. This enables us to tailor our programs to the marketplace. The placement staff in each of our destination
schools maintains databases of potential employers throughout the country, allowing us to more effectively assist our graduates in
securing employment in their career field upon graduation. Throughout the year, we hold numerous job fairs at our facilities
where we provide the opportunity for our students to meet and interact with potential employers. In addition, many of our
schools have internship programs that provide our students with opportunities to work with employers prior to graduation. For
example, some of the students in our automotive programs have the opportunity to complete a portion of their hands-on training
in an actual work environment. In addition, some of our students in health sciences programs are required to participate in an
externship program during which they work in the field as part of their career training. We also assist students with resume
writing, interviewing and other job search skills.
Faculty and Employees
We hire our faculty in accordance with established criteria, including relevant work experience, educational background and
accreditation and state regulatory standards. We require meaningful industry experience of our teaching staff in order to maintain
the quality of instruction in all of our programs and to address current and industry-specific issues in our course content. In
addition, we provide intensive instructional training and continuing education, including quarterly instructional development
seminars, annual reviews, technical upgrade training, faculty development plans and weekly staff meetings. Our average
student/teacher ratio is approximately 16 to 1.
The staff of each school typically includes a school director, a director of graduate placement, an education director, a director of
student services, a financial-aid director, an accounting manager, a director of admissions and instructors, all of whom are
industry professionals with experience in our areas of study.
As of December 31, 2019, we had approximately 1,922 employees, including 476 full-time faculty and 390 part-time
instructors. At six of our campuses, the teaching professionals are represented by unions. These employees are covered by
collective bargaining agreements that expire between 2020 and 2022. We believe that we have good relationships with these
unions and with our employees.
Competition
The for-profit, post-secondary education industry is highly competitive and highly fragmented with no one provider controlling
significant market share. Direct competition between career-oriented schools like ours and traditional four-year colleges or
universities is limited. Thus, our main competitors are other for-profit, career-oriented schools, not-for-profit public schools and
private schools, and public and private two-year junior and community colleges, most of which are eligible to receive funding
under the federal programs of student financial aid authorized by Title IV Programs. Competition is generally based on location,
the type of programs offered, the quality of instruction, placement rates, reputation, recruiting and tuition rates; therefore, our
competition is different in each market depending on, among other things, the availability of other options. Public institutions are
generally able to charge lower tuition than our schools, due in part to government subsidies and other financial sources not
available to for-profit schools. In addition, some of our other competitors have a more extensive network of schools and
campuses which enables them to recruit students more efficiently from a wider geographic area. Nevertheless, we believe that we
are able to compete effectively in our local markets because of the diversity of our program offerings, quality of instruction, the
strength of our brands, our reputation and our graduates’ success in securing employment after completing their program of
study.
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Index
Our competition differs in each market depending on the curriculum that we offer. For example, a school offering automotive
technology, healthcare services and skilled trades programs will have a different group of competitors than a school offering
healthcare services and IT technology programs. Also, because schools can add new programs within six to twelve months,
competition can emerge relatively quickly. Moreover, with the introduction of online education, the number of competitors in
each market has increased because students can now attend classes from an online institution. On average, each of our schools
has at least three direct competitors and at least a dozen indirect competitors.
Environmental Matters
We use hazardous materials at our training facilities and campuses, and generate small quantities of regulated waste such as used
oil, antifreeze, paint and car batteries. As a result, our facilities and operations are subject to a variety of environmental laws and
regulations governing, among other things, the use, storage and disposal of solid and hazardous substances and waste, and the
clean-up of contamination at our facilities or off-site locations to which we send or have sent waste for disposal. We are also
required to obtain permits for our air emissions and to meet operational and maintenance requirements at certain of our campuses.
In the event we do not maintain compliance with any of these laws and regulations, or are responsible for a spill or release of
hazardous materials, we could incur significant costs for clean-up, damages, and fines or penalties. Climate change has not had
and is not expected to have a significant impact on our operations.
Regulatory Environment
Students attending our schools finance their education through a combination of personal resources, family contributions, private
loans and federal financial aid programs. Each of our schools participates in the Title IV Programs, which are administered by the
DOE. For the year ended December 31, 2019, approximately 78% (calculated based on cash receipts) of our revenues were
derived from the Title IV Programs. Students obtain access to federal student financial aid through a DOE prescribed application
and eligibility certification process.
In connection with the students’ receipt of federal financial aid under the Title IV Programs, our schools are subject to extensive
regulation by governmental agencies and licensing and accrediting bodies. In particular, the Higher Education Act of 1965, as
amended the (“HEA”), and the regulations issued by the DOE subject us to significant regulatory scrutiny in the form of
numerous standards that each of our schools must satisfy in order to participate in the Title IV Programs. To participate in the
Title IV Programs, a school must be authorized to offer its programs of instruction by the applicable state education agencies in
the states in which it is physically located, be accredited by an accrediting commission recognized by the DOE and be certified as
an eligible institution by the DOE. The DOE defines an eligible institution to consist of both a main campus and its additional
locations, if any. Our schools are either a main campus or an additional location of a main campus. Each of our schools is subject
to extensive regulatory requirements imposed by state education agencies, accrediting commissions, and the DOE. Because the
DOE periodically revises its regulations and changes its interpretations of existing laws and regulations, we cannot predict with
certainty how Title IV Program requirements will be applied in all circumstances. Our schools also participate in other federal
and state financial aid programs that assist students in paying the cost of their education and that impose standards that we must
satisfy.
State Authorization
Each of our schools must be authorized by the applicable education agencies in the states in which the school is physically
located, and in some cases other states, in order to operate and to grant degrees, diplomas or certificates to its students. State
agency authorization is also required in each state in which a school is physically located in order for the school to become and
remain eligible to participate in Title IV Programs. If we are found not to be in compliance with the applicable state regulations
and a state seeks to restrict one or more of our business activities within its boundaries, we may not be able to recruit or enroll
students in that state and may have to stop providing services in that state, which could have a significant impact on our business
and results of operations. Currently, each of our schools is authorized by the applicable state education agencies in the states in
which the school is physically located and in which it recruits students.
Our schools are subject to extensive, ongoing regulation by each of these states. State laws typically establish standards for
instruction, curriculum, qualifications of faculty, location and nature of facilities and equipment, administrative procedures,
marketing, recruiting, financial operations, student outcomes and other operational matters. State laws and regulations may limit
our ability to offer educational programs and to award degrees, diplomas or certificates. For example, the governor of New York
has proposed increased oversight of for-profit schools operating in New York, which would include our Queens campus, but the
details of this proposed oversight has not been introduced. However, the implementation of these regulations could have a
significant impact on our operations in New York and on the Company. In addition, legislation has been proposed in Maryland
that would apply to certain for-profit schools operating in Maryland, which would include our Columbia campus, and that, among
other things, would limit the percentage of revenue that an institution could receive from federal or state funds, or from loans or
grants provided or guaranteed by the institution, and establish a threshold for instructional expenses. The implementation of
these laws or any related regulations could have a significant impact on our operations in Maryland and on the Company. We
cannot predict the timing or ultimate scope of any final laws and regulations that New York, Maryland, or other states might issue
on these or other topics in the future. Some states prescribe standards of financial responsibility that are different from, and in
certain cases more stringent than, those prescribed by the DOE. Some states require schools to post a surety bond. We have
posted surety bonds on behalf of our schools and education representatives with multiple states in a total amount of
approximately $12.8 million.
5
Index
The DOE published regulations that took effect on July 1, 2011, that expanded the requirements for an institution to be
considered legally authorized in the state in which it is physically located for Title IV Program purposes. In some cases, the
regulations required states to revise their current requirements and/or to license schools in order for institutions to be deemed
legally authorized in those states and, in turn, to participate in Title IV Programs. If the states do not amend their requirements
where necessary and if schools do not receive approvals where necessary that comply with these new requirements, then the
institution could be deemed to lack the state authorization necessary to participate in Title IV Programs. The DOE stated when it
published the final regulations that it will not publish a list of states that meet, or fail to meet, the requirements, and it is uncertain
how the DOE will interpret these requirements in each state.
If any of our schools fail to comply with state licensing requirements, they are subject to the loss of state licensure or
authorization. If any one of our schools lost its authorization from the education agency of the state in which the school is
located, or failed to comply with the DOE’s state authorization requirements, that school would lose its eligibility to participate in
Title IV Programs, the Title IV Program eligibility of its related additional locations could be affected, the impacted schools
would be unable to offer its programs, and we could be forced to close the schools. If one of our schools lost its state
authorization from a state other than the state in which the school is located, the school would not be able to recruit students or to
operate in that state.
Due to state budget constraints in certain states in which we operate, it is possible that those states may continue to reduce the
number of employees in, or curtail the operations of, the state education agencies that oversee our schools. A delay or refusal by
any state education agency in approving any changes in our operations that require state approval could prevent us from making
such changes or could delay our ability to make such changes. States periodically change their laws and regulations applicable to
our schools and such changes could require us to change our practices and could have a significant impact on our business and
results of operations.
Accreditation
Accreditation is a non-governmental process through which a school submits to ongoing qualitative and quantitative review by an
organization of peer institutions. Accrediting commissions primarily examine the academic quality of the school’s instructional
programs, and a grant of accreditation is generally viewed as confirmation that the school’s programs meet generally accepted
academic standards. Accrediting commissions also review the administrative and financial operations of the schools they accredit
to ensure that each school has the resources necessary to perform its educational mission.
Accreditation by an accrediting commission recognized by the DOE is required for an institution to be certified to participate in
Title IV Programs. In order to be recognized by the DOE, accrediting commissions must adopt specific standards for their review
of educational institutions. As of December 31, 2019, all 22 of our campuses are nationally accredited by the Accrediting
Commission of Career Schools and Colleges, or ACCSC. The following is a list of the dates on which each campus was
accredited by its accrediting commission and the date by which its accreditation must be renewed.
6
Index
Accrediting Commission of Career Schools and Colleges Reaccreditation Dates
School
Philadelphia, PA2
Union, NJ1
Mahwah, NJ1
Melrose Park, IL2
Denver, CO1
Columbia, MD
Grand Prairie, TX1
Allentown, PA2
Nashville, TN1
Indianapolis, IN
New Britain, CT
Shelton, CT2
Queens, NY1
East Windsor, CT2
South Plainfield, NJ1
Iselin, NJ
Moorestown, NJ3
Paramus, NJ3
Lincoln, RI3
Somerville, MA3
Summerlin, NV3
Marietta, GA3
Last Accreditation Letter
November 26, 2018
May 24, 2019
December 4, 2019
December 2, 2019
June 14, 2016
March 8, 2017
June 20, 2017
March 8, 2017
September 6, 2017
May 15, 2018
June 5, 2018
March 1, 2019
September 4, 2018
October 17, 2017
December 2, 2019
May 15, 2018
May 15, 2018
May 15, 2018
May 15, 2018
May 15, 2018
May 15, 2018
May 15, 2018
1 Branch campus of main campus in Indianapolis, IN
2 Branch campus of main campus in New Britain, CT
3 Branch campus of main campus in Iselin, NJ
Next Accreditation
May 1, 2023
February 1, 2024
August 1, 2024
November 1, 2024
February 1, 2021
February 1, 2022
August 1, 2021
February 1, 2022
May 1, 2022
November 1, 2021
January 1, 2023
September 1, 2023
June 1, 2023
February 1, 2023
August 1, 2024
May 15, 2023
May 15, 2023
May 15, 2023
May 15, 2023
May 15, 2023
May 15, 2023
May 15, 2022
The Company received a letter dated January 31, 2019 from ACCSC, which indicated that the ACCSC commission voted to
continue our schools on financial reporting with a subsequent review scheduled for ACCSC’s August 2019 meeting. The
commission continued the financial reporting status based on the net working capital deficit, accumulated deficit, and net loss
reported in the nine-month financial statements submitted to ACCSC. The commission recognized the Company’s continued
efforts to improve its financial position through, among other things, closing underperforming schools and growing student
enrollments, and determined that, while improvements are being realized, additional monitoring of the Company’s financial
position is warranted. The letter required us to submit certain financial information to ACCSC by July 12, 2019, for
consideration at ACCSC’s August 2019 meeting. Although the Company submitted certain financial information to ACCSC by
July 12, 2019, we have not received a response yet from ACCSC to the submission.
If one of our schools fails to comply with accrediting commission requirements, the institution and its main and/or branch
campuses are subject to the loss of accreditation or may be placed on probation or a special monitoring or reporting status which,
if the noncompliance with accrediting commission requirements is not resolved, could result in loss of accreditation or
restrictions on the addition of new locations, new programs, or other substantive changes. If any one of our schools loses its
accreditation, students attending that school would no longer be eligible to receive Title IV Program funding, and we could be
forced to close that school.
Programmatic accreditation is the process through which specific programs are reviewed and approved by industry and program-
specific accrediting entities. Although programmatic accreditation is not generally necessary for Title IV Program eligibility, such
accreditation may be required to allow students to sit for certain licensure exams or to work in a particular profession or career or
to meet other requirements. Failure to obtain or maintain such programmatic accreditation may lead to a decline in enrollments
in such programs.
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Index
Nature of Federal and State Support for Post-Secondary Education
The federal government provides a substantial part of the support for post-secondary education through Title IV Programs, in the
form of grants and loans to students who can use those funds at any institution that has been certified as eligible by the DOE.
Most aid under Title IV Programs is awarded on the basis of financial need, generally defined as the difference between the cost
of attending the institution and the expected amount a student and his or her family can reasonably contribute to that cost. A
recipient of Title IV Program funds must maintain a satisfactory grade point average and progress in a timely manner toward
completion of his or her program of study and must meet other applicable eligibility requirements for the receipt of Title IV
Program funds. In addition, each school must ensure that Title IV Program funds are properly accounted for and disbursed in the
correct amounts to eligible students and provide reports on recipient data.
Other Financial Assistance Programs
Some of our students receive financial aid from federal sources other than Title IV Programs, such as programs administered by
the U.S. Department of Veterans Affairs and under the Workforce Investment Act. In addition, some states also provide financial
aid to our students in the form of grants, loans or scholarships. The eligibility requirements for state financial aid and these other
federal aid programs vary among the funding agencies and by program. States that provide financial aid to our students are facing
significant budgetary constraints and some of these have reduced the level of state financial aid available to our students. Due to
state budgetary shortfalls and constraints in certain states in which we operate, we believe that the overall level of state financial
aid for our students is likely to continue to decrease in the near term, but we cannot predict how significant any such reductions
will be or how long they will last. Federal budgetary shortfalls and constraints, or decisions by federal lawmakers to limit or
prohibit access by our institutions or their students to federal financial aid, could result in a decrease in the level of federal
financial aid for our students.
In addition to Title IV Programs and other government-administered programs, all of our schools participate in alternative loan
programs for their students. Alternative loans fill the gap between what the student receives from all financial aid sources and
what the student may need to cover the full cost of his or her education. Students or their parents can apply to a number of
different lenders for this funding at current market interest rates. We are required to comply with applicable federal and state
laws related to certain consumer and educational loans and credit extensions.
We also extend credit for tuition and fees to many of our students that attend our campuses.
Regulation of Federal Student Financial Aid Programs
To participate in Title IV Programs, an institution must be authorized to offer its programs by the relevant state education
agencies in the state in which it is physically located, be accredited by an accrediting commission recognized by the DOE and be
certified as eligible by the DOE. The DOE will certify an institution to participate in Title IV Programs only after reviewing and
approving an institution’s application to participate in the Title IV Programs. The DOE defines an institution to consist of both a
main campus and its additional locations, if any. Under this definition, for DOE purposes as of December 31, 2019 we had the
following four institutions, collectively consisting of four main campuses and 18 additional locations:
Main Institution/Campus(es)
Iselin, NJ
New Britain, CT
Indianapolis, IN
Columbia, MD
Additional Location(s)
Moorestown, NJ
Paramus, NJ
Somerville, MA
Lincoln, RI
Marietta, GA
Las Vegas, NV (Summerlin)
Shelton, CT
Philadelphia, PA
East Windsor, CT
Melrose Park, IL
Allentown, PA
Grand Prairie, TX
Nashville, TN
Denver, CO
Union, NJ
Mahwah, NJ
Queens, NY
South Plainfield, NJ
8
Index
Each institution must periodically apply to the DOE for continued certification to participate in Title IV Programs. The institution
also must apply for recertification when it undergoes a change in ownership resulting in a change of control. The institution also
may come under DOE review when it undergoes a substantive change that requires the submission of an application, such as
opening an additional location or raising the highest academic credential it offers. All institutions are recertified on various dates
for various periods of time. The following table sets forth the expiration dates for each of our institutions’ current Title IV
Program participation agreements:
Institution
Columbia, MD
Iselin, NJ
Indianapolis, IN
New Britain, CT
Expiration Date of Current
Program Participation
Agreement
September 30, 20221
September 30, 2020
September 30, 20221
September 30, 20221
1 Provisionally certified.
The DOE typically provides provisional certification to an institution following a change in ownership resulting in a change of
control and also may provisionally certify an institution for other reasons, including, but not limited to, noncompliance with
certain standards of administrative capability and financial responsibility. Three of our institutions, Indianapolis, Columbia, and
New Britain, are provisionally certified by the DOE. These institutions generate 72% of the Company’s revenue based on
revenues for the 2019 fiscal year. Indianapolis, New Britain and Columbia are provisionally certified based on findings in recent
audits of the institutions’ Title IV Program compliance that the DOE alleges identified deficiencies related to DOE regulations
regarding an institutions’ level of administrative capability. An institution that is provisionally certified receives fewer due
process rights than those received by other institutions in the event the DOE takes certain adverse actions against the institution,
is required to obtain prior DOE approvals of new campuses and educational programs, and may be subject to heightened scrutiny
by the DOE. However, provisional certification does not otherwise limit an institution’s access to Title IV Program funds.
The DOE is responsible for overseeing compliance with Title IV Program requirements. As a result, each of our schools is
subject to detailed oversight and review, and must comply with a complex framework of laws and regulations. Because the DOE
periodically revises its regulations and changes its interpretation of existing laws and regulations, we cannot predict with
certainty how the Title IV Program requirements will be applied in all circumstances.
Significant factors relating to Title IV Programs that could adversely affect us include the following:
Congressional Action. Political and budgetary concerns significantly affect Title IV Programs. Congress periodically revises the
Higher Education Act of 1965, as amended (“HEA”) and other laws governing Title IV Programs. Congress is currently
considering reauthorization of Title IV Programs, but it is not known if or when Congress will pass final legislation that amends
the Higher Education Act or other laws affecting U.S. Federal student aid.
In addition, Congress reviews and determines federal appropriations for Title IV Programs on an annual basis. Congress can also
make changes in the laws affecting Title IV Programs in the annual appropriations bills and in other laws it enacts between the
HEA reauthorizations. Because a significant percentage of our revenues are derived from Title IV Programs, any action by
Congress or the DOE that significantly reduces Title IV Program funding, that limits or restricts the ability of our schools,
programs, or students to receive funding through the Title IV Programs, or that imposes new restrictions or constraints upon our
business or operations could reduce our student enrollment and our revenues, and could increase our administrative costs and
require us to modify our practices in order for our schools to comply fully with Title IV Program requirements.
Further, current requirements for student or school participation in Title IV Programs may change or one or more of the present
Title IV Programs could be replaced by other programs with materially different student or school eligibility requirements. If we
cannot comply with the provisions of the HEA, as they may be amended, or if the cost of such compliance is excessive, or if
funding is materially reduced, our revenues or profit margin could be materially adversely affected.
Gainful Employment. In October 2014, the DOE issued final gainful employment regulations requiring each educational
program offered by our institutions to achieve threshold rates in at least one of two debt measure categories related to an annual
debt to annual earnings ratio and an annual debt to discretionary income ratio. On July 1, 2019, the DOE issued final regulations
that rescind the gainful employment regulations. The final regulations have an effective date of July 1, 2020, but the DOE stated
in an electronic announcement dated June 28, 2019 that institutions may elect to implement immediately the new regulations and
that institutions that early implement the regulations will not be required to report gainful employment data for the 2018-2019
award year, to comply with requirements for including a gainful employment disclosure template in their promotional materials
or directly distributing the disclosure template to prospective students, to post the gainful employment template and any other
gainful employment disclosures required under the gainful employment regulations on their web pages, or to comply with
certification requirements for gainful employment. The DOE stated in the electronic announcement that institutions that do not
early implement the new regulations are expected to comply with the existing gainful employment regulations until July 1, 2020.
We have elected to implement the new regulations early and have documented our early implementation of the new regulations as
required by the DOE.
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Index
Borrower Defense to Repayment Regulations. The DOE published borrower defense to repayment regulations on November 1,
2016 (“2016 Final Regulations”) with an effective date of July 1, 2017, but subsequently delayed the effective date of a majority
of the regulations until July 1, 2019 to ensure that there would be adequate time to conduct negotiated rulemaking and, as
necessary, develop revised regulations. However, a federal court ruled that the delay in the effective date of the regulations was
unlawful and, on October 16, 2018, denied a request to extend a stay preventing the regulations from taking effect. The current
regulations, among other things, include rules for;
•
•
•
•
•
•
establishing new processes, and updating existing processes, for enabling borrowers to obtain from the DOE a discharge of some or all of their
federal student loans based on circumstances such as certain acts or omissions of the institution and for the DOE to impose and collect liabilities
against the institution following the loan discharges;
establishing expanded standards of financial responsibility (see “Regulatory Environment – Financial Responsibility Standards”);
requiring institutions to make disclosures to current and prospective students regarding the existence of certain of the circumstances identified in
the expanded standards of financial responsibility;
calculating a loan repayment rate for each proprietary institution under standards established by the regulations and requiring institutions to
provide warnings to current and prospective students if the institution has a loan repayment rate below specified thresholds;
prohibiting certain contractual provisions imposed by or on behalf of schools on students regarding arbitration, dispute resolution, and
participation in class actions; and
expanding the existing definition of misrepresentations that could result in grounds for discharge of student loans and in liabilities and sanctions
against the institution, including, without limitation, potential loss of Title IV Program eligibility.
On January 19, 2017, the DOE issued new regulations that update the DOE’s hearing procedures for actions to establish liability
against an institution and to establish procedural rules governing recovery proceedings under the DOE’s borrower defense to
repayment regulations.
On March 15, 2019, the DOE published an electronic announcement with guidance regarding how the DOE is implementing the
2016 Final Regulations, including, among other things, the provisions regarding the processes for enabling borrowers to obtain
from the DOE a discharge of some or all of their federal student loans based on circumstances involving the institution and for
the DOE to impose and collect liabilities against the institution following the loan discharges, the prohibition on certain
contractual provisions regarding arbitration, dispute resolution, and participation in class actions, and the requirement to submit
certain arbitral and judicial records to the DOE in connection with certain proceedings concerning borrower defense claims. The
DOE also stated that it would provide guidance at a later date about providing repayment warnings to students in the future and
disclosures to students regarding the occurrence of certain financial events, actions, or conditions. The DOE also provided
guidance regarding the reporting of certain events under the financial responsibility regulations. See Part I, Item 1. “Business -
Regulatory Environment – Financial Responsibility Standards.”
The DOE published proposed regulations on July 31, 2018 that would modify the defense to repayment regulations, including
regulations regarding, among other things, (i) acts or omissions of an institution of higher education a borrower may assert as a
defense to repayment of certain Title IV Program loans; (ii) permitting the use of arbitration clauses and class action waivers in
enrollment agreements and (iii) triggering events that would result in recalculating a school’s financial responsibility score and
require the school to post a letter of credit or other surety. On September 23, 2019, the DOE published the final regulations
which have a general effective date of July 1, 2020. The current regulations will remain in effect until the new regulations
generally take effect on July 1, 2020.
Among other things, the new regulations amend the processes for borrowers to receive from DOE a discharge of the obligation to
repay certain Title IV Program loans first disbursed on or after July 1, 2020 based on certain acts or omissions by the institution
or a covered party. The regulations establish detailed procedures and standards for the loan discharge processes, including the
information required for borrowers to receive a loan discharge, and the authority of the DOE to seek recovery from the institution
of the amount of discharged loans. The regulations also modify the list of triggering events that could result in the DOE
determining that the institution lacks financial responsibility and must submit to the DOE a letter of credit or other form of
acceptable financial protection and accept other conditions on the institution’s Title IV Program eligibility. See Part I, Item 1.
“Business - Regulatory Environment – Financial Responsibility Standards.” The final regulations also will eliminate the current
regulations regarding loan repayment rate warning requirements and generally will permit the use of arbitration clauses and class
action waivers while requiring institutions to make certain disclosures to students.
The current and future rules could have a material adverse effect on our schools’ business and results of operations, and the broad
sweep of the rules may, in the future, require our schools to submit a letter of credit based on expanded standards of financial
responsibility. See Part I, Item 1. “Business - Regulatory Environment – Financial Responsibility Standards.”
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Index
The “90/10 Rule.” Under the HEA, a proprietary institution that derives more than 90% of its total revenue from Title IV
Programs (its “90/10 Rule percentage”) for two consecutive fiscal years becomes immediately ineligible to participate in Title IV
Programs and may not reapply for eligibility until the end of at least two fiscal years. An institution with revenues exceeding 90%
for a single fiscal year will be placed on provisional certification and may be subject to other enforcement measures, including a
potential requirement to submit a letter of credit. See Part I, Item 1. “Business - Regulatory Environment – Financial
Responsibility Standards.” If an institution violated the 90/10 Rule and became ineligible to participate in Title IV Programs but
continued to disburse Title IV Program funds, the DOE would require the institution to repay all Title IV Program funds received
by the institution after the effective date of the loss of eligibility.
We have calculated that, for our 2019 fiscal year, our institutions’ 90/10 Rule percentages ranged from 75% to 83%. For 2018
and 2017, none of our existing institutions derived more than 90% of their revenues from Title IV Programs. Our calculations are
subject to review by the DOE.
If Congress or the DOE were to amend the 90/10 Rule to treat other forms of federal financial aid as Title IV Program revenue
for 90/10 Rule purposes, lower the 90% threshold, or otherwise change the calculation methodology (each of which has been
proposed by some Congressional members in proposed legislation), or make other changes to the 90/10 Rule, those changes
could make it more difficult for our institutions to comply with the 90/10 Rule. A loss of eligibility to participate in Title IV
Programs for any of our institutions would have a significant impact on the rate at which our students enroll in our programs and
on our business and results of operations.
Student Loan Defaults. The HEA limits participation in Title IV Programs by institutions whose former students defaulted on
the repayment of federally guaranteed or funded student loans above a prescribed rate (the “cohort default rate”). The DOE
calculates these rates based on the number of students who have defaulted, not the dollar amount of such defaults. The cohort
default rate is calculated on a federal fiscal year basis and measures the percentage of students who enter repayment of a loan
during the federal fiscal year and default on the loan on or before the end of the federal fiscal year or the subsequent two federal
fiscal years.
Under the HEA, an institution whose Federal Family Education Loan, or FFEL, and Federal Direct Loan, or FDL, cohort default
rate is 30% or greater for three consecutive federal fiscal years loses eligibility to participate in the FFEL, FDL, and Pell
programs for the remainder of the federal fiscal year in which the DOE determines that such institution has lost its eligibility and
for the two subsequent federal fiscal years. An institution whose FFEL and FDL cohort default rate for any single federal fiscal
year exceeds 40% loses its eligibility to participate in the FFEL and FDL programs for the remainder of the federal fiscal year in
which the DOE determines that such institution has lost its eligibility and for the two subsequent federal fiscal years. If an
institution’s three-year cohort default rate equals or exceeds 30% in two of the three most recent federal fiscal years for which the
DOE has issued cohort default rates, the institution may be placed on provisional certification status and could be required to
submit a letter of credit to the DOE. See Part I, Item 1. “Business - Regulatory Environment – Financial Responsibility
Standards.”
In September 2019, the DOE released the final cohort default rates for the 2016 federal fiscal year. These are the most recent
final rates published by the DOE. The rates for our existing institutions for the 2016 federal fiscal year range from 8.3% to
16.6%. None of our institutions had a cohort default rate equal to or greater than 30% for the 2016 federal fiscal year.
In February 2020, the DOE released draft three-year cohort default rates for the 2017 federal fiscal year. The draft cohort default
rates are subject to change pending receipt of the final cohort default rates, which the DOE is expected to publish in September
2020. The draft rates for our institutions for the 2017 federal fiscal year range from 8.0% to 14.2%. None of our institutions had
draft cohort default rates of 30% or more.
Financial Responsibility Standards.
All institutions participating in Title IV Programs must satisfy specific standards of financial responsibility. The DOE evaluates
institutions for compliance with these standards each year, based on the institution’s annual audited financial statements, as well
as following a change in ownership resulting in a change of control of the institution.
The most significant financial responsibility measurement is the institution’s composite score, which is calculated by the DOE
based on three ratios:
•
•
•
The equity ratio, which measures the institution’s capital resources, ability to borrow and financial viability;
The primary reserve ratio, which measures the institution’s ability to support current operations from expendable resources; and
The net income ratio, which measures the institution’s ability to operate at a profit.
The DOE assigns a strength factor to the results of each of these ratios on a scale from negative 1.0 to positive 3.0, with negative
1.0 reflecting financial weakness and positive 3.0 reflecting financial strength. The DOE then assigns a weighting percentage to
each ratio and adds the weighted scores for the three ratios together to produce a composite score for the institution. The
composite score must be at least 1.5 for the institution to be deemed financially responsible without the need for further
oversight.
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Index
If an institution’s composite score is below 1.5, but is at least 1.0, it is in a category denominated by the DOE as “the zone.”
Under the DOE regulations, institutions that are in the zone typically may be permitted by the DOE to continue to participate in
the Title IV Programs by choosing one of two alternatives: 1) the “Zone Alternative” under which an institution is required to
make disbursements to students under the Heightened Cash Monitoring 1 (“HCM1”) payment method and to notify the DOE
within 10 days after the occurrence of certain oversight and financial events or 2) submit a letter of credit to the DOE equal to 50
percent of the Title IV Program funds received by the institution during its most recent fiscal year. The DOE permits an
institution to participate under the “Zone Alternative” for a period of up to three consecutive fiscal years. Under the HCM1
payment method, the institution is required to make Title IV Program disbursements to eligible students and parents before it
requests or receives funds for the amount of those disbursements from the DOE. As long as the student accounts are credited
before the funding requests are initiated, an institution is permitted to draw down funds through the DOE’s electronic system for
grants management and payments for the amount of disbursements made to eligible students. Unlike the Heightened Cash
Monitoring 2 (“HCM2”) used under circumstances where an institution’s composite score is below 1.0 and the reimbursement
payment methods, the HCM1 payment method typically does not require schools to submit documentation to the DOE and wait
for DOE approval before drawing down Title IV Program funds. Effective July 1, 2016, a school under HCM1, HCM2 or
reimbursement payment methods must also pay any credit balances due to a student before drawing down funds for the amount
of those disbursements from the DOE, even if the student or parent provides written authorization for the school to hold the credit
balance.
If an institution’s composite score is below 1.0, the institution is considered by the DOE to lack financial responsibility. If the
DOE determines that an institution does not satisfy the DOE’s financial responsibility standards, depending on its composite
score and other factors, that institution may establish its eligibility to participate in the Title IV Programs on an alternative basis
by, among other things:
•
•
Posting a letter of credit in an amount equal to at least 50% of the total Title IV Program funds received by the institution during the institution’s
most recently completed fiscal year; or
Posting a letter of credit in an amount equal to at least 10% of the Title IV Program funds received by the institution during its most recently
completed fiscal year accepting provisional certification; complying with additional DOE monitoring requirements and agreeing to receive Title
IV Program funds under an arrangement other than the DOE’s standard advance funding arrangement
The DOE has evaluated the financial responsibility of our institutions on a consolidated basis. We have submitted to the DOE
our audited financial statements for the 2018 and 2017 fiscal years reflecting a composite score of 1.1 and 1.1, respectively, based
upon our calculations. The DOE determined in a January 13, 2020, letter that our institutions are “in the zone” based on our
composite scores for the 2018 and 2017 fiscal years and that we are required to operate under the Zone Alternative requirements,
including the requirement to make disbursements under the HCM1 payment method and to notify the DOE within 10 days of the
occurrence of certain oversight and financial events. We also are required to submit to the DOE bi-weekly cash balance
submissions outlining our available cash on hand, monthly actual and projected cash flow statements, and monthly student
rosters.
For the 2019 fiscal year, we calculated our composite score to be 1.6. This score is subject to determination by the DOE based on
its review of our consolidated audited financial statements for the 2019 fiscal year, but we believe it is likely that the DOE will
determine that our institutions comply with the composite score requirement and no longer require us to operate under the Zone
Alternative requirements after it makes its determination, although we cannot be certain how long it will take for the DOE to
make its determination and it is possible that it may elect to retain following its determination some of the conditions and
reporting requirements previously imposed on us.
On November 1, 2016, the DOE published new Borrower Defense to Repayment regulations that included expanded standards of
financial responsibility that could result in a requirement that we submit to the DOE a substantial letter of credit or other form of
financial protection in an amount determined by the DOE, and be subject to other conditions and requirements, based on any one
of an extensive list of triggering circumstances. The DOE delayed the effective date of a majority of the borrower defense to
repayment regulations until July 1, 2019 to ensure that there would be adequate time to conduct negotiated rulemaking and, as
necessary, develop revised regulations. However, a federal court ruled that the delay in the effective date of the regulations was
unlawful and, on October 16, 2018, denied a request to extend a stay preventing the regulations from taking effect. On September
23, 2019, the DOE published the final regulations which have a general effective date of July 1, 2020. The current regulations
generally will remain in effect until the new regulations generally take effect on July 1, 2020, and the DOE has published
guidance regarding the current regulations.
Among other things, the current regulations, which are scheduled to remain in effect until July 1, 2020, expand the financial
responsibility regulations to include two lists of events that an institution must report to the DOE and could result in the DOE
requiring a letter of credit or other form of financial protection and imposing other conditions on the institution. The first list of
events includes:
•
the institution is required to pay any debt or incur any liability arising from a final judgment in a judicial proceeding or from an administrative
proceeding or determination, or from a settlement;
12
Index
•
•
•
•
•
the institution is being sued in an action that has been pending for 120 days and that was brought by a federal or state authority for financial
relief on claims related to making a Direct Loan for enrollment at the institution or the provision of educational services;
the institution is being sued in other litigation and the institution’s motion for summary judgment has been denied or was not filed with the
court;
the institution is closing any or all of its locations and is required by its accrediting agency to submit a teach-out plan;
the institution has one or more gainful employment programs with gainful employment rates that could result in the programs becoming
ineligible based on their rates for the next award year; or
if the institution’s composite score is less than 1.5, any withdrawal of owner’s equity from the institution occurs by any means, including by
declaring a dividend, unless the transfer is to an entity included in the affiliated entity group on whose basis the institution’s composite score
was calculated.
If one or more of these events occur, DOE may recalculate the institution’s composite score by estimating the amount of actual
and potential losses resulting from the events and determining whether the recalculated composite score is a failing score below
1.0 and requires the submission of a letter of credit or other form of acceptable financial protection and the acceptance of other
conditions or requirements.
The current regulations also identify the following events that could result in the DOE deeming the institution to fail DOE’s
financial responsibility standards, thus requiring a letter of credit or other form of acceptable financial protection and the
acceptance of other conditions or requirements: failure to comply with the 90/10 Rule for the most recently completed fiscal year;
SEC warning that it may suspend trading on the institution’s stock; failure to file certain reports with the SEC; the exchange on
which the institution’s stock is traded notifying the institution that it is not in compliance with exchange requirements or that its
stock is delisted; cohort default rates of at least 30 percent for its two most recent rates; certain significant fluctuations in Title IV
Program funding; certain citations for failure to comply with state agency requirements; failure to comply with yet to be
developed DOE financial stress tests; high annual dropout rates; placement of the institution on probation or issuance of a show-
cause or similar action by its accrediting agency; certain violations of loan agreements; expected or pending claims for borrower
relief discharges and certain other events that DOE might identify as reasonably likely to have a material adverse effect on the
financial condition, business or results of operations of the institutions.
If the DOE deems the institution to fail the financial responsibility standards based on one or more of the aforementioned events
listed in the regulations or based on the institution’s failure to comply with other requirements in the financial responsibility
regulations, the DOE may permit the institution to continue participating in the Title IV Programs under a provisional
certification and would require the institution to submit a letter of credit or other form of financial protection in an amount to be
determined by the DOE, comply with the zone requirements and potentially accept other conditions or restrictions.
On March 15, 2019, the DOE published an electronic announcement with guidance regarding the requirement to notify the DOE
within specified timeframes of the occurrence of any of a list of events, actions or conditions that occur on or after July 1, 2017.
The DOE stated in the electronic announcement that it recognized that some institutions may have been uncertain about how to
comply with these requirements in light of the delays and court orders regarding the effective date of the 2016 Final Regulations.
The DOE guidance generally gives institutions a 60-day period commencing from the date of the electronic announcement to
send notifications of events, actions, or conditions that, with certain exceptions, occurred between the July 1, 2017 effective date
of the 2016 Final Regulations and the date of the electronic announcement. Institutions have an ongoing obligation under the
2016 Final Regulations to notify the DOE of subsequent events, actions or conditions that are triggering circumstances in the
regulations.
For example, one of the triggering circumstances in the current regulations is if an institution’s accrediting agency requires the
institution to submit a teach-out plan that covers the closing of the institution or one of its locations. In 2018, we notified the
DOE that we intended to close our Southington, Connecticut campus which was closed by December 31, 2018 and that our
accrediting agency required a teach-out plan. The DOE could attempt to recalculate our composite score, could seek to treat all
Title IV Program funds received by the school in its most recently completed fiscal year at that campus as a loss in the
recalculation, and could seek to impose a letter of credit based on the reduced composite score. However, it is uncertain whether
the DOE would apply the regulation to the accrediting agency’s request for a teach-out plan which occurred after the July 1, 2017
effective date of the regulations, but prior to the expiration of the stay of the regulation on October 16, 2018; whether the DOE’s
recalculation of the composite score would result in a letter of credit requirement; or whether the DOE would require a letter of
credit given that the campus is currently closed.
On September 23, 2019, the DOE published final regulations with a general effective date of July 1, 2020 that, among other
things, will modify the list of triggering events that could result in the DOE determining that the institution lacks financial
responsibility and must submit to the DOE a letter of credit or other form of acceptable financial protection and accept other
conditions on the institution’s Title IV Program eligibility. The current regulations generally will remain in effect until the new
regulations take effect on July 1, 2020. The regulations create lists of mandatory triggering events and discretionary triggering
events. An institution is not able to meet its financial or administrative obligations if a mandatory triggering event occurs. The
mandatory triggering events include:
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Index
•
•
•
•
the institution’s recalculated composite score is less than 1.0 as determined by the DOE as a result of an institutional liability from a settlement,
final judgment, or final determination in an administrative or judicial action or proceeding brought by a Federal or State entity;
the institution’s recalculated composite score goes from less than 1.5 to less than 1.0 as determined by the DOE as a result of a withdrawal of
owner’s equity from the institution;
the SEC takes certain actions against the institution or the institution fails to comply with certain filing requirements; or
the occurrence of two or more discretionary triggering events (as described below) within a certain time period.
The DOE also may determine that an institution lacks financial responsibility if one of the following discretionary triggering
events occurs and the event is likely to have a material adverse effect on the financial condition of the institution:
•
•
•
•
•
•
a show cause or similar order from the institution’s accrediting agency that could result in the withdrawal, revocation or suspension of institutional
accreditation;
a notice from the institution’s state licensing agency of an intent to withdraw or terminate the institution’s state licensure if the institution does not
take steps to comply with state requirements;
a default, delinquency, or other event occurs as a result of an institutional violation of a security or loan agreement that enables the creditor to
require an increase in collateral, a change in contractual obligations, an increase in interest rates or payment, or other sanctions, penalties or fees;
a failure to comply with the 90/10 rule during the institution’s most recently completed fiscal year;
high annual drop-out rates from the institution as determined by the DOE; or
official cohort default rates of at least 30 percent for the two most recent years unless a pending appeal could sufficiently reduce one of the rates.
The regulations require the institution to notify the DOE of the occurrence of a mandatory or discretionary triggering event and to
provide certain information to the DOE to demonstrate why the event does not establish the institution’s lack of financial
responsibility or require the submission of a letter of credit or imposition of other requirements.
The expanded financial responsibility regulations could result in the DOE recalculating and reducing our composite score to
account for DOE estimates of potential losses under one or more of the extensive list of triggering circumstances and also could
result in the imposition of conditions and requirements including a requirement to provide a letter of credit or other form of
financial protection. .
It is difficult to predict the amount or duration of any letter of credit requirement that the DOE might impose under the
regulation. The requirement to submit a letter of credit or to accept other conditions or restrictions could have a material adverse
effect on our schools’ business and results of operations.
Return of Title IV Program Funds. An institution participating in Title IV Programs must calculate the amount of unearned
Title IV Program funds that have been disbursed to students who withdraw from their educational programs before completing
them, and must return those unearned funds to the DOE or the applicable lending institution in a timely manner, which is
generally within 45 days from the date the institution determines that the student has withdrawn.
If an institution is cited in an audit or program review for returning Title IV Program funds late for 5% or more of the students in
the audit or program review sample or if the regulatory auditor identifies a material weakness in the institution’s report on
internal controls relating to the return of unearned Title IV Program funds, the institution may be required to post a letter of credit
in favor of the DOE in an amount equal to 25% of the total amount of Title IV Program funds that should have been returned for
students who withdrew in the institution’s prior fiscal year.
On January 11, 2018, the DOE sent letters to our Columbia, Maryland and Iselin, New Jersey institutions requiring each
institution to submit a letter of credit to the DOE based on findings of late returns of Title IV Program funds in the annual Title
IV Program compliance audits submitted to the DOE for the fiscal year ended December 31, 2016. Accordingly, we submitted
letters of credit in the amounts of $0.5 million and $0.1 million to the DOE by the February 23, 2018 deadline and we continue to
comply with the letter of credit requirement.
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Index
Negotiated Rulemaking. On October 15, 2018, the DOE published a notice in the Federal Register announcing its intent to
establish a negotiated rulemaking committee and three subcommittees to develop proposed regulations related to several matters,
including, but not limited to, requirements for accrediting agencies in their oversight of member institutions and programs;
criteria used by the DOE to recognize accrediting agencies; simplification of the DOE’s recognition and review of accrediting
agencies; clarification of the core oversight responsibilities amongst accrediting agencies, states and the DOE to hold institutions
accountable; clarification of the permissible arrangements between an institution of higher education and another organization to
provide a portion of an educational program; roles and responsibilities of institutions and accrediting agencies in the teach-out
process; regulatory changes required to ensure equitable treatment of brick-and-mortar and distance education programs;
regulatory changes required to enable expansion of direct assessment programs, distance education, and competency-based
education; regulatory changes required to clarify disclosure and other requirements of state authorization; protections to ensure
that accreditors recognize and respect institutional mission and evaluate an institution’s policies and educational programs based
on that mission; simplification of state authorization requirements related to distance education; defining “regular and substantive
interaction” as it relates to distance education; defining the term “credit hour”; defining the requirements related to the length of
educational programs and entry level requirements for the occupation; addressing regulatory barriers in the DOE’s institutional
eligibility and general provision regulations; addressing direct assessment programs and competency-based education; and other
matters. The DOE released draft proposed regulations for consideration and negotiation by the negotiated rulemaking committee
and subcommittees that covered additional topics and made additional revisions and updates to the draft proposed regulations
prior to subsequent meetings of the committee and subcommittee in early 2019, including, but not limited to, amendments to
current regulations regarding the clock to credit hour conversion formula; the requirements for measuring the lengths of certain
educational programs; the requirements for returning unearned Title IV Program funds received for students who withdraw
before completing their educational programs; and the requirements for measuring a student’s satisfactory academic progress.
The committee and subcommittees completed their meetings in April 2019 and reached consensus on draft proposed regulations.
On June 12, 2019, the DOE published proposed regulations on some of the topics in a notice of proposed rulemaking in the
Federal Register for public comment and to consider revisions to the regulations in response to the comments before publishing
final versions of the regulations. The DOE stated that it intends to publish proposed regulations on the remaining issues in a
separate notice of proposed rulemaking, but did not indicate when it would publish those proposed changes. On November 1,
2019, the DOE published the final regulations. The regulations have a general effective date of July 1, 2020. We are in the
process of analyzing the new regulations and their potential impact on us and our institutions.
Substantial Misrepresentation. The DOE’s regulations prohibit an institution that participates in the Title IV Programs from
engaging in substantial misrepresentation of the nature of its educational programs, financial charges, graduate employability or
its relationship with the DOE. A “misrepresentation” includes any false, erroneous, or misleading statement (whether made in
writing, visually, orally, or through other means) that is made by an eligible institution, by one of its representatives, or by a third
party that provides to the institution educational programs, marketing, advertising, recruiting, or admissions services and that is
made to a student, prospective student, any member of the public, an accrediting or state agency, or to DOE. The DOE defines a
“substantial misrepresentation” to include any misrepresentation on which the person to whom it was made could reasonably be
expected to rely, or has reasonably relied, to that person’s detriment. The definition of “substantial misrepresentation” is broad
and, therefore, it is possible that a statement made by the institution or one of its service providers or representatives could be
construed by the DOE to constitute a substantial misrepresentation. If the DOE determines that one of our institutions has
engaged in substantial misrepresentation, the DOE may impose sanctions or other conditions upon the institution including, but
not limited to, initiating an action to fine the institution or limit, suspend, or terminate its eligibility to participate in the Title IV
Programs and may seek to discharge students’ loans and impose liabilities upon the institution.
School Acquisitions. When a company acquires a school that is eligible to participate in Title IV Programs, that school
undergoes a change of ownership resulting in a change of control as defined by the DOE. Upon such a change of control, a
school’s eligibility to participate in Title IV Programs is generally suspended until it has applied for recertification by the DOE as
an eligible school under its new ownership, which requires that the school also re-establish its state authorization and
accreditation. The DOE may temporarily and provisionally certify an institution seeking approval of a change of control under
certain circumstances while the DOE reviews the institution’s application. The time required for the DOE to act on such an
application may vary substantially. The DOE recertification of an institution following a change of control will be on a
provisional basis. Thus, any plans to expand our business through acquisition of additional schools and have them certified by the
DOE to participate in Title IV Programs must take into account the approval requirements of the DOE and the relevant state
education agencies and accrediting commissions.
Change of Control. In addition to school acquisitions, other types of transactions can also cause a change of control. The DOE,
most state education agencies and our accrediting commissions have standards pertaining to the change of control of schools, but
these standards are not uniform. DOE regulations describe some transactions that constitute a change of control, including the
transfer of a controlling interest in the voting stock of an institution or the institution’s parent corporation. For a publicly traded
corporation, DOE regulations provide that a change of control occurs in one of two ways: (a) if a person acquires ownership and
control of the corporation so that the corporation is required to file a Current Report on Form 8-K with the Securities and
Exchange Commission disclosing the change of control or (b) if the corporation has a shareholder that owns at least 25% of the
total outstanding voting stock of the corporation and is the largest shareholder of the corporation, and that shareholder ceases to
own at least 25% of such stock or ceases to be the largest shareholder. These standards are subject to interpretation by the DOE.
A significant purchase or disposition of our common stock could be determined by the DOE to be a change of control under this
standard.
Most of the states and our accrediting commissions include the sale of a controlling interest of common stock in the definition of
a change of control although some agencies could determine that the sale or disposition of a smaller interest would result in a
change of control. A change of control under the definition of one of these agencies would require the affected school to reaffirm
its state authorization or accreditation. Some agencies would require approval prior to a sale or disposition that would result in a
change of control in order to maintain authorization or accreditation. The requirements to obtain such reaffirmation from the
states and our accrediting commissions vary widely.
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Index
A change of control could occur as a result of future transactions in which the Company or our schools are involved. Some
corporate reorganizations and some changes in the board of directors of the Company are examples of such transactions.
Moreover, the potential adverse effects of a change of control could influence future decisions by us and our shareholders
regarding the sale, purchase, transfer, issuance or redemption of our stock. In addition, the adverse regulatory effect of a change
of control also could discourage bids for shares of our common stock and could have an adverse effect on the market price of our
shares.
Opening Additional Schools and Adding Educational Programs. For-profit educational institutions must be authorized by
their state education agencies and be fully operational for two years before applying to the DOE to participate in Title IV
Programs. However, an institution that is certified to participate in Title IV Programs may establish an additional location and
apply to participate in Title IV Programs at that location without reference to the two-year requirement, if such additional
location satisfies all other applicable DOE eligibility requirements. Our expansion plans are based, in part, on our ability to open
new schools as additional locations of our existing institutions and take into account the DOE’s approval requirements.
A student may use Title IV Program funds only to pay the costs associated with enrollment in an eligible educational program
offered by an institution participating in Title IV Programs. Generally, unless otherwise required by the DOE, an institution that is
eligible to participate in Title IV Programs may add a new educational program without DOE approval if that new program leads
to an associate’s level or higher degree and the institution already offers programs at that level, or if that program prepares
students for gainful employment in the same or a related occupation as an educational program that has previously been
designated as an eligible program at that institution and meets minimum length requirements. Institutions that are provisionally
certified may be required to obtain approval of certain educational programs. Our Indianapolis, New Britain, and Columbia
institutions are provisionally certified and required to obtain prior DOE approval of new locations and of new degree, non-
degree, and short-term training educational programs because of our composite score. If an institution erroneously determines
that an educational program is eligible for purposes of Title IV Programs, the institution would likely be liable for repayment of
Title IV Program funds provided to students in that educational program. Our expansion plans are based, in part, on our ability to
add new educational programs at our existing schools.
Some of the state education agencies and our accrediting commission also have requirements that may affect our schools’ ability
to open a new campus, establish an additional location of an existing institution or begin offering a new educational program.
Administrative Capability. The DOE assesses the administrative capability of each institution that participates in Title IV
Programs under a series of separate standards. Failure to satisfy any of the standards may lead the DOE to find the institution
ineligible to participate in Title IV Programs or to place the institution on provisional certification as a condition of its
participation. These criteria require, among other things, that the institution:
•
•
•
•
•
•
•
•
•
•
•
•
Comply with all applicable federal student financial aid requirements;
Have capable and sufficient personnel to administer the federal student Title IV Programs;
Administer Title IV Programs with adequate checks and balances in its system of internal controls over financial reporting;
Divide the function of authorizing and disbursing or delivering Title IV Program funds so that no office has the responsibility for both functions;
Establish and maintain records required under the Title IV Program regulations;
Develop and apply an adequate system to identify and resolve discrepancies in information from sources regarding a student’s application for
financial aid under the Title IV Program;
Have acceptable methods of defining and measuring the satisfactory academic progress of its students;
Refer to the Office of the Inspector General any credible information indicating that any applicant, student, employee, third party servicer or other
agent of the school has been engaged in any fraud or other illegal conduct involving Title IV Programs;
Not be, and not have any principal or affiliate who is, debarred or suspended from federal contracting or engaging in activity that is cause for
debarment or suspension;
Provide adequate financial aid counseling to its students;
Submit in a timely manner all reports and financial statements required by the Title IV Program regulations; and
Not otherwise appear to lack administrative capability.
The DOE has placed three of our institutions on provisional certification based on findings in recent audits of the institutions’
Title IV compliance that the DOE alleges identified deficiencies in regulations related to DOE regulations regarding an
institutions’ level of administrative capability. See Part I. Item 1. “Business - Regulatory Environment – Regulation of Federal
Student Financial Aid Programs.” Failure by us to satisfy any of these or other administrative capability criteria could cause our
institutions to be subject to sanctions or other actions by the DOE or to lose eligibility to participate in Title IV Programs, which
would have a significant impact on our business and results of operations.
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Index
Restrictions on Payment of Commissions, Bonuses and Other Incentive Payments. An institution participating in Title IV
Programs may not provide any commission, bonus or other incentive payment based directly or indirectly on success in securing
enrollments or financial aid to any person or entity engaged in any student recruiting or admission activities or in making
decisions regarding the awarding of Title IV Program funds. The DOE’s regulations established twelve “safe harbors” identifying
types of compensation that could be paid without violating the incentive compensation rule. On October 29, 2010, the DOE
adopted final rules that took effect on July 1, 2011 and amended the incentive compensation rule by, among other things,
eliminating the twelve safe harbors (thereby reducing the scope of permissible compensatory payments under the rule) and
expanding the scope of compensatory payments and employees subject to the rule. The DOE has stated that it does not intend to
provide private guidance regarding particular compensation structures in the future and will enforce the regulations as written.
We cannot predict how the DOE will interpret and enforce the revised incentive compensation rule. The implementation of the
final regulations required us to change our compensation practices and has had and will continue to have a significant impact the
productivity of our employees, on the retention of our employees and on our business and results of operations.
Compliance with Regulatory Standards and Effect of Regulatory Violations. Our schools are subject to audits, program
reviews, site visits, and other reviews by various federal and state regulatory agencies, including, but not limited to, the DOE, the
DOE’s Office of Inspector General, state education agencies and other state regulators, the U.S. Department of Veterans Affairs
and other federal agencies, and by our accrediting commissions. In addition, each of our institutions must retain an independent
certified public accountant to conduct an annual audit of the institution’s administration of Title IV Program funds. The
institution must submit the resulting audit report to the DOE for review.Some of the findings in the annual Title IV Program
compliance audits for some of our institutions resulted in the DOE placing those institutions on provisional certification. See Part
I. Item 1. “Business - Regulatory Environment – Regulation of Federal Student Financial Aid Programs.”
The DOE may grant closed school loans discharges of Federal student loans based upon applications by qualified students. The
DOE also may initiate discharges on its own for students who have not reenrolled in another Title IV Program eligible school
within three years after the closure and who attended campuses that closed on or after November 1, 2013 as did some of our
former campuses. If the DOE discharges some or all of these loans, the DOE may seek to recover the cost of the loan discharges
from us. We have the right to appeal any asserted liabilities under an administrative appeal process within the DOE. We cannot
predict the timing or amount of any loan discharges that the DOE may approve or the liabilities that the DOE may seek from us.
We also cannot predict the timing or potential outcome of any administrative appeals of any such liabilities.
If one of our schools fails to comply with accrediting or state licensing requirements, such school and its main and/or branch
campuses could be subject to the loss of state licensure or accreditation, which in turn could result in a loss of eligibility to
participate in Title IV Programs. If the DOE or another agency determined that one of our institutions improperly disbursed Title
IV Program funds or violated a provision of the HEA or DOE regulations, the institution could be required to repay such funds
and related costs to the DOE and lenders, and could be assessed an administrative fine. The DOE could also place the institution
on provisional certification status and/or transfer the institution to the reimbursement or cash monitoring system of receiving Title
IV Program funds, under which an institution must disburse its own funds to students and document the students’ eligibility for
Title IV Program funds before receiving such funds from the DOE. See Part I, Item 1. “Business - Regulatory Environment –
Financial Responsibility Standards.”
Significant violations of Title IV Program requirements by the Company or any of our institutions could be the basis for the DOE
to limit, suspend or terminate the participation of the affected institution in Title IV Programs or to seek civil or criminal
penalties. Generally, such a termination of Title IV Program eligibility extends for 18 months before the institution may apply for
reinstatement of its participation. There is no DOE proceeding pending to fine any of our institutions or to limit, suspend or
terminate any of our institutions’ participation in Title IV Programs.
We and our schools are also subject to claims and lawsuits relating to regulatory compliance brought not only by federal and state
regulatory agencies and our accrediting bodies, but also by third parties, such as present or former students or employees and
other members of the public. If we are unable to successfully resolve or defend against any such claim or lawsuit, we may be
required to pay money damages or be subject to fines, limitations, loss of federal funding, injunctions or other penalties.
Moreover, even if we successfully resolve or defend against any such claim or lawsuit, we may have to devote significant
financial and management resources in order to reach such a result.
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Item 1A.
RISK FACTORS
The risk factors described below and other information included elsewhere in this Annual Report on Form 10-K are among the
numerous risks faced by our Company and should be carefully considered before deciding to invest in, sell or retain shares of our
common stock. These are factors that, individually or in the aggregate, could cause our actual results to differ materially from
expected and historical results and the risks and uncertainties described below are not the only ones we face. Investors should
understand that it is not possible to predict or identify all such risks and, as such, should not consider the following to be a
complete discussion of all potential risks and uncertainties that may affect the Company.
RISKS RELATED TO OUR INDUSTRY
Our failure to comply with the extensive regulatory requirements for participation in Title IV Programs and school
operations could result in financial penalties, restrictions on our operations and loss of external financial aid funding,
which could affect our revenues and impose significant operating restrictions on us.
Our industry is highly regulated by federal and state governmental agencies and by accrediting commissions. In particular, the
HEA and DOE regulations specify extensive criteria and numerous standards that an institution must satisfy to establish to
participate in the Title IV Programs. For a description of these criteria, see Part I, Item 1. “Business - Regulatory Environment.”
If we are found not to have satisfied the DOE’s requirements for Title IV Programs funding, one or more of our institutions,
including its additional locations, could be limited in its access to, or lose, Title IV Program funding, which could adversely
affect our revenue, as we received approximately 78% of our revenue (calculated based on cash receipts) from Title IV Programs
in 2019, and have a significant impact on our business and results of operations. Furthermore, if any of our schools fails to
comply with applicable regulatory requirements, the school and its related main campus and/or additional locations could be
subject to, among other things, the loss of state licensure or accreditation, the loss of eligibility to participate in and receive funds
under the Title IV Programs, the loss of the ability to grant degrees, diplomas and certificates, provisional certification, or the
imposition of liabilities or monetary penalties, any of which could adversely affect our revenues and impose significant operating
restrictions upon us. In addition, the loss by any of our schools of its accreditation, its state authorization or license, or its
eligibility to participate in Title IV Programs would constitute an event of default under our credit agreement with our lender,
which could result in the acceleration of all amounts then outstanding with respect to our outstanding loan obligations. The
various regulatory agencies applicable to our business periodically revise their requirements and modify their interpretations of
existing requirements and restrictions. We cannot predict with certainty how any of these regulatory requirements will be applied
or whether each of our schools will be able to comply with these requirements or any additional requirements instituted in the
future.
If we fail to demonstrate “administrative capability” to the DOE, our business could suffer.
DOE regulations specify extensive criteria an institution must satisfy to establish that it has the requisite “administrative
capability” to participate in Title IV Programs. For a description of these criteria, see Part I, Item 1. “Business - Regulatory
Environment – Administrative Capability.”
If we are found not to have satisfied the DOE’s “administrative capability” requirements, or otherwise failed to comply with one
or more DOE requirements, one or more of our institutions, including its additional locations, could be limited in its access to, or
lose, Title IV Program funding. A loss or decrease in Title IV Program funding could adversely affect our revenue, as we
received approximately 78% of our revenue (calculated based on cash receipts) from Title IV Programs in 2019, which would
have a significant impact on our business and results of operations.
Congress and the DOE may make changes to the laws and regulations applicable to, or reduce funding for, Title IV
Programs, which could reduce our student population, revenues or profit margin.
Congress periodically revises the HEA and other laws governing Title IV Programs and annually determines the funding level for
each Title IV Program. We cannot predict what if any legislative or other actions will be taken or proposed by Congress in
connection with the reauthorization of the HEA or with other activities of Congress. See Part I, Item 1. “Business - Regulatory
Environment – Congressional Action.” Because a significant percentage of our revenues are derived from the Title IV Programs,
any action by Congress or the DOE that significantly reduces funding for Title IV Programs or that limits or restricts the ability
of our schools, programs, or students to receive funding through those Title IV Programs or that imposes new restrictions or
constraints upon our business or operations could reduce our student enrollment and our revenues, and could increase our
administrative costs and require us to modify our practices in order for our schools to comply fully with Title IV Program
requirements. In addition, current requirements for student or school participation in Title IV Programs may change or one or
more of the present Title IV Programs could be replaced by other programs with materially different student or school eligibility
requirements. If we cannot comply with the provisions of the HEA, as they may be revised, or if the cost of such compliance is
excessive, or if funding is materially reduced, our revenues or profit margin could be materially adversely affected.
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Index
The DOE has changed its regulations, and may make other changes in the future, in a manner which could require us to
incur additional costs in connection with our administration of the Title IV Programs, affect our ability to remain eligible
to participate in the Title IV Programs, impose restrictions on our participation in the Title IV Programs, affect the rate
at which students enroll in our programs, or otherwise have a significant impact on our business and results of operations.
In January 2016, the DOE began negotiated rulemaking to develop proposed regulations regarding a borrower’s ability to allege
acts or omissions by an institution as a defense to the repayment of certain Title IV Program loans and the consequences to the
borrower, the DOE, and the institution. See Part I, Item 1. “Business - Regulatory Environment – Borrower Defense to
Repayment Regulations.” On November 1, 2016, the DOE published in the Federal Register the final version of these
regulations with a general effective date of July 1, 2017 and which, among other things, include rules for:
•
•
•
•
•
•
establishing new processes, and updating existing processes, for enabling borrowers to obtain from the DOE a discharge of some or all of their
federal student loans based on circumstances such as certain acts or omissions of the institution and for the DOE to impose and collect liabilities
against the institution following the loan discharges;
establishing expanded standards of financial responsibility (see “Regulatory Environment – Financial Responsibility Standards”);
requiring institutions to make disclosures to current and prospective students regarding the existence of certain of the circumstances identified in
the expanded standards of financial responsibility;
calculating a loan repayment rate for each proprietary institution under standards established by the regulations and requiring institutions to
provide warnings to current and prospective students if the institution has a loan repayment rate below specified thresholds;
prohibiting certain contractual provisions imposed by or on behalf of schools on students regarding arbitration, dispute resolution, and
participation in class actions; and
expanding the existing definition of misrepresentations that could result in grounds for discharge of student loans and in liabilities and sanctions
against the institution, including, without limitation, potential loss of Title IV Program eligibility.
On January 19, 2017, the DOE issued new regulations that update the DOE’s hearing procedures for actions to establish liability
against an institution and to establish procedural rules governing recovery proceedings under the DOE’s borrower defense to
repayment regulations.
The DOE had delayed the effective date of a majority of these regulations until July 1, 2019 to ensure that there is adequate time
to conduct negotiated rulemaking and, as necessary, develop revised regulations. However, a federal court ruled that the delay in
the effective date of the regulations was unlawful and, on October 16, 2018, denied a request to extend a stay preventing the
regulations from taking effect, and the DOE has published subsequent guidance regarding how it is implementing these
regulations. See Part I, Item 1. “Business - Regulatory Environment – Borrower Defense to Repayment Regulations” and
“Regulatory Environment – Financial Responsibility Standards.”
The DOE published proposed regulations on July 31, 2018 that would modify the defense to repayment regulations. On
September 23, 2019, the DOE published the final regulations which have a general effective date of July 1, 2020. The current
regulations generally will remain in effect until the new regulations generally take effect on July 1, 2020. Among other things, the
new regulations amend the processes for borrowers to receive from DOE a discharge of the obligation to repay certain Title IV
Program loans first disbursed on or after July 1, 2020 based on certain acts or omissions by the institution or a covered party. The
regulations establish detailed procedures and standards for the loan discharge processes, including the information required for
borrowers to receive a loan discharge, and the authority of the DOE to seek recovery from the institution of the amount of
discharged loans. See Part I, Item 1. “Business - Regulatory Environment – Borrower Defense to Repayment Regulations.” The
regulations also modify the list of triggering events that could result in the DOE determining that the institution lacks financial
responsibility and must submit to the DOE a letter of credit or other form of acceptable financial protection and accept other
conditions on the institution’s Title IV Program eligibility. See Part I, Item 1. “Business - Regulatory Environment – Financial
Responsibility Standards.” The final regulations also will eliminate the current regulations regarding loan repayment rate
warning requirements and generally will permit the use of arbitration clauses and class action waivers while requiring institutions
to make certain disclosures to students.
We cannot predict how the DOE would interpret and enforce current or future borrower defense to repayment rules or how these
rules, or any rules that may arise out of a negotiated rulemaking process or any other rules that DOE may promulgate on this or
other topics, may impact our schools’ participation in the Title IV Programs; however, current or future rules could have a
material adverse effect on our schools’ business and results of operations, and the broad sweep of the recent rules may, in the
future, require our schools to submit a letter of credit based on expanded standards of financial responsibility.
The DOE published a notice in the Federal Register on October 15, 2018 announcing its intent to establish a negotiated
rulemaking committee and three subcommittees to develop proposed regulations related to several matters, and subsequently
released draft proposed regulations that covered additional topics including, but not limited to, amendments to current
regulations regarding the clock to credit hour conversion formula for measuring the lengths of certain educational programs, the
return of unearned Title IV Program funds received for students who withdraw before completing their educational programs,
and the measurement of student academic progress. See Part I, Item 1. “Business - Regulatory Environment – Negotiated
Rulemaking.” The committee and subcommittees completed their meetings in April 2019 and reached consensus on draft
proposed regulations. On June 12, 2019, the DOE published proposed regulations on some of the topics in a notice of proposed
rulemaking in the Federal Register for public comment and to consider revisions to the regulations in response to the comments
before publishing final versions of the regulations. The DOE stated that it intends to publish proposed regulations on the
remaining issues in a separate notice of proposed rulemaking, but did not indicate when it would publish those proposed
changes. On November 1, 2019, the DOE published the final regulations. The regulations have a general effective date of July 1,
2020. We are in the process of analyzing the new regulations and their potential impact on us and our institutions.
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If we or our eligible institutions do not meet the financial responsibility standards prescribed by the DOE, we may be
required to post letters of credit or our eligibility to participate in Title IV Programs could be terminated or limited,
which could significantly reduce our student population and revenues.
To participate in Title IV Programs, an eligible institution must satisfy specific measures of financial responsibility prescribed by
the DOE or post a letter of credit in favor of the DOE and possibly accept other conditions on its participation in Title IV
Programs. The DOE published new regulations that establish expanded standards of financial responsibility that could result in a
requirement that we submit to the DOE a substantial letter of credit or other form of financial protection in an amount determined
by the DOE, and be subject to other conditions and requirements, based on any one of an extensive list of triggering
circumstances. See Part I, Item 1. “Business - Regulatory Environment – Financial Responsibility Standards.” Any obligation to
post one or more letters of credit would increase our costs of regulatory compliance. Our inability to obtain a required letter of
credit or limitations on, or termination of, our participation in Title IV Programs could limit our students’ access to various
government-sponsored student financial aid programs, which could significantly reduce our student population and revenues.
We are subject to fines and other sanctions if we pay impermissible commissions, bonuses or other incentive payments to
individuals involved in certain recruiting, admissions or financial aid activities, which could increase our cost of
regulatory compliance and adversely affect our results of operations.
An institution participating in Title IV Programs may not provide any commission, bonus or other incentive payment based
directly or indirectly on success in enrolling students or securing financial aid to any person involved in any student recruiting or
admission activities or in making decisions regarding the awarding of Title IV Program funds. See Part I, Item 1. “Business -
Regulatory Environment -- Restrictions on Payment of Commissions, Bonuses and Other Incentive Payments.” We cannot
predict how the DOE will interpret and enforce the incentive compensation rule. The implementation of these regulations has
required us to change our compensation practices and has had and may continue to have a significant impact on the rate at which
students enroll in our programs and on our business and results of operations. If we are found to have violated this law, we could
be fined or otherwise sanctioned by the DOE or we could face litigation filed under the qui tam provisions of the Federal False
Claims Act.
If our schools do not maintain their accreditation, they may not participate in Title IV Programs, which could adversely
affect our student population and revenues.
An institution must be accredited by an accrediting commission recognized by the DOE in order to participate in Title IV
Programs. See Part I, Item 1. “Business - Regulatory Environment – Accreditation.” Our schools are currently on financial
reporting status with ACCSC. If any of our schools fails to comply with accrediting commission requirements, the institution
and its main and/or branch campuses are subject to the loss of accreditation or may be placed on probation or a special
monitoring or reporting status which, if the noncompliance with accrediting commission requirements is not resolved, could
result in loss of accreditation. Loss of accreditation by any of our main campuses would result in the termination of eligibility of
that school and all of its branch campuses to participate in Title IV Programs and could cause us to close the school and its
branches, which could have a significant adverse impact on our business and operations.
Programmatic accreditation is the process through which specific programs are reviewed and approved by industry- and program-
specific accrediting entities. Although programmatic accreditation is not generally necessary for Title IV Program eligibility, such
accreditation may be required to allow students to sit for certain licensure exams or to work in a particular profession or career or
to meet other requirements. Failure to obtain or maintain such programmatic accreditation may lead to a decline in enrollments
in such programs.
Our institutions would lose eligibility to participate in Title IV Programs if the percentage of their revenues derived from
those programs exceeds 90%, which could reduce our student population and revenues.
A proprietary institution that derives more than 90% of its total revenue from Title IV Programs for two consecutive fiscal years
becomes immediately ineligible to participate in Title IV Programs and may not reapply for eligibility until the end of at least two
fiscal years. An institution with revenues exceeding 90% for a single fiscal year will be placed on provisional certification and
may be subject to other enforcement measures. See Part I, Item 1. “Business - Regulatory Environment – 90/10 Rule.” If any of
our institutions loses eligibility to participate in Title IV Programs, that loss would cause an event of default under our credit
agreement, would also adversely affect our students’ access to various government-sponsored student financial aid programs, and
would have a significant impact on the rate at which our students enroll in our programs and on our business and results of
operations.
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Our institutions would lose eligibility to participate in Title IV Programs if their former students defaulted on repayment
of their federal student loans in excess of specified levels, which could reduce our student population and revenues.
An institution may lose its eligibility to participate in some or all Title IV Programs if the rates at which the institution’s current
and former students default on their federal student loans exceed specified percentages. See Part I, Item 1. “Business -
Regulatory Environment – Student Loan Defaults.” If former students defaulted on repayment of their federal student loans in
excess of specified levels, our institutions would lose eligibility to participate in Title IV Programs, would cause an event of
default under our credit agreement, would also adversely affect our students’ access to various government-sponsored student
financial aid programs, and would have a significant impact on the rate at which our students enroll in our programs and on our
business and results of operations.
We are subject to sanctions if we fail to correctly calculate and timely return Title IV Program funds for students who
withdraw before completing their educational program, which could increase our cost of regulatory compliance and
decrease our profit margin.
An institution participating in Title IV Programs must correctly calculate the amount of unearned Title IV Program funds that
have been credited to students who withdraw from their educational programs before completing them and must return those
unearned funds in a timely manner, generally within 45 days of the date the institution determines that the student has withdrawn.
If the unearned funds are not properly calculated and timely returned, we may have to post a letter of credit in favor of the DOE
or may be otherwise sanctioned by the DOE, which could increase our cost of regulatory compliance and adversely affect our
results of operations. Based upon the findings of an annual Title IV Program compliance audit of our Columbia, Maryland and
Iselin, New Jersey institutions, the Company submitted letters of credit in the amounts of $0.5 million and $0.1 million to the
DOE. See Part I, Item 1. “Business - Regulatory Environment – Return of Title IV Program Funds.”
We are subject to sanctions if we fail to comply with the DOE’s regulations regarding prohibitions against substantial
misrepresentations, which could increase our cost of regulatory compliance and decrease our profit margin.
The DOE’s regulations prohibit an institution that participates in the Title IV Programs from engaging in substantial
misrepresentation of the nature of its educational programs, financial charges, graduate employability or its relationship with the
DOE. See Part I, Item 1. “Business - Regulatory Environment – Substantial Misrepresentation.” If the DOE determines that one
of our institutions has engaged in substantial misrepresentation, the DOE may impose sanctions or other conditions upon the
institution including, but not limited to, initiating an action to fine the institution or limit, suspend, or terminate its eligibility to
participate in the Title IV Programs and may seek to discharge students’ loans and impose liabilities upon the institution.
Several of our institutions are provisionally certified by the DOE which may make them more vulnerable to unfavorable
DOE action and place additional regulatory burdens on its operations.
Our Indianapolis, Indiana, Columbia, Maryland, and New Britain, Connecticut institutions are provisionally certified by the
DOE. See Part I, Item 1. “Business - Regulatory Environment – Regulation of Federal Student Financial Aid Programs.” The
DOE typically places an institution on provisional certification following a change in ownership resulting in a change of control,
and may provisionally certify an institution for other reasons including, but not limited to, failure to comply with certain
standards of administrative capability or financial responsibility. During the time when an institution is provisionally certified, it
may be subject to adverse action with fewer due process rights than those afforded to other institutions. In addition, an institution
that is provisionally certified must apply for and receive approval from the DOE for certain substantive changes including, but
not limited to, the establishment of an additional location, an increase in the level of academic offerings or the addition of certain
programs. Any adverse action by the DOE or increased regulatory burdens as a result of the provisional status of one of our
institutions could have a material adverse effect on enrollments and our revenues, financial condition, cash flows and results of
operations.
Regulatory agencies or third parties may conduct compliance reviews, bring claims or initiate litigation against us. If the
results of these reviews or claims are unfavorable to us, our results of operations and financial condition could be
adversely affected.
Because we operate in a highly regulated industry, we are subject to compliance reviews and claims of noncompliance and
lawsuits by government agencies and third parties. We may be subject to further reviews related to, among other things, issues of
noncompliance identified in recent audits and reviews related to our institutions’ compliance with Title IV requirements or
related to liabilities for the discharge of loans to certain students who attended campuses of our institutions that are now closed.
See Part I, Item 1. “Business - Regulatory Environment – Compliance with Regulatory Standards and Effect of Regulatory
Violations.” If the results of these reviews or proceedings are unfavorable to us, or if we are unable to defend successfully
against third-party lawsuits or claims, we may be required to pay money damages or be subject to fines, limitations on the
operations of our business, loss of federal and state funding, injunctions or other penalties. Even if we adequately address issues
raised by an agency review or successfully defend a third-party lawsuit or claim, we may have to divert significant financial and
management resources from our ongoing business operations to address issues raised by those reviews or defend those lawsuits
or claims. Certain of our institutions are subject to ongoing reviews and proceedings. See Part I, Item 1. “Business - Regulatory
Environment – State Authorization,” “Regulatory Environment – Accreditation,” and “Regulatory Environment - Compliance
with Regulatory Standards and Effect of Regulatory Violations.”
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A decline in the overall growth of enrollment in post-secondary institutions, or in our core disciplines, could cause us to
experience lower enrollment at our schools, which could negatively impact our future growth.
Enrollment in post-secondary institutions over the next ten years is expected to be slower than in the prior ten years. In addition,
the number of high school graduates eligible to enroll in post-secondary institutions is expected to fall before resuming a growth
pattern for the foreseeable future. In order to increase our current growth rates in degree granting programs, we will need to
attract a larger percentage of students in existing markets and expand our markets by creating new academic programs. In
addition, if job growth in the fields related to our core disciplines is weaker than expected, as a result of any regional or national
economic downturn or otherwise, fewer students may seek the types of diploma or degree granting programs that we offer or seek
to offer. Our failure to attract new students, or the decisions by prospective students to seek diploma or degree programs in other
disciplines, would have an adverse impact on our future growth.
Our business could be adversely impacted by additional legislation, regulations, or investigations regarding private
student lending because students attending our schools rely on private student loans to pay tuition and other institutional
charges.
The U.S. Consumer Financial Protection Bureau (“CFPB”), under the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010, has exercised supervisory authority over private education loan providers. The CFPB has been active in conducting
investigations into the private student loan market and issuing several reports with findings that are critical of the private student
loan market. The CFPB has initiated investigations into the lending practices of other institutions in the for-profit education
sector.
We cannot predict whether any of this activity, or other activities, will result in Congress, the DOE, the CFPB or other regulators
adopting new legislation or regulations, or conducting new investigations, into the private student loan market or into the loans
received by our students to attend our institutions. Any new legislation, regulations, or investigations regarding private student
lending could limit the availability of private student loans to our students, which could have a significant impact on our business
and operations.
Changes in the executive branch of our federal government as a result of the outcome of elections or other events could
result in further legislation, appropriations, regulations and enforcement actions that could materially or adversely affect
our business.
Our industry is subject to an intensive ongoing federal and state regulatory environment that affects our industry. The
composition of federal and state executive offices, executive agencies and legislatures that are subject to change based on the
results of elections, appointments and other events, may adversely impact our industry through constant changes in that
regulatory environment resulting from the disparate views towards the for-profit education industry.
RISKS RELATED TO OUR BUSINESS
Our success depends in part on our ability to update and expand the content of existing programs and develop new
programs in a cost-effective manner and on a timely basis.
Prospective employers of our graduates increasingly demand that their entry-level employees possess appropriate technological
skills. These skills are becoming more sophisticated in line with technological advancements in the automotive, diesel,
information technology, and skilled trades. Accordingly, educational programs at our schools must keep pace with those
technological advancements. The expansion of our existing programs and the development of new programs may not be accepted
by our students, prospective employers or the technical education market. Even if we are able to develop acceptable new
programs, we may not be able to introduce these new programs as quickly as our competitors or as quickly as employers demand.
If we are unable to adequately respond to changes in market requirements due to financial constraints, unusually rapid
technological changes or other factors, our ability to attract and retain students could be impaired, our placement rates could
suffer and our revenues could be adversely affected.
In addition, if we are unable to adequately anticipate the requirements of the employers we serve, we may offer programs that do
not teach skills useful to prospective employers or students seeking a technical or career-oriented education which could affect
our placement rates and our ability to attract and retain students, causing our revenues to be adversely affected.
Competition could decrease our market share and cause us to lower our tuition rates.
The post-secondary education market is highly competitive. Our schools compete for students and faculty with traditional public
and private two-year and four-year colleges and universities and other proprietary schools, many of which have greater financial
resources than we do. Some traditional public and private colleges and universities, as well as other private career-oriented
schools, offer programs that may be perceived by students to be similar to ours. Most public institutions are able to charge lower
tuition than our schools, due in part to government subsidies and other financial resources not available to for-profit schools.
Some of our competitors also have substantially greater financial and other resources than we have which may, among other
things, allow our competitors to secure strategic relationships with some or all of our existing strategic partners or develop other
high profile strategic relationships, or devote more resources to expanding their programs and their school network, or provide
greater financing alternatives to their students, all of which could affect the success of our marketing programs. In addition, some
of our competitors have a larger network of schools and campuses than we do, enabling them to recruit students more effectively
from a wider geographic area. If we are unable to compete effectively with these institutions for students, our student enrollment
and revenues will be adversely affected.
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Index
We may be required to reduce tuition or increase spending in response to competition in order to retain or attract students or
pursue new market opportunities. As a result, our market share, revenues and operating margin may be decreased. We cannot be
sure that we will be able to compete successfully against current or future competitors or that the competitive pressures we face
will not adversely affect our revenues and profitability.
Our financial performance depends in part on our ability to continue to develop awareness and acceptance of our
programs among high school graduates and working adults looking to return to school.
The awareness of our programs among high school graduates and working adults looking to return to school is critical to the
continued acceptance and growth of our programs. Our inability to continue to develop awareness of our programs could reduce
our enrollments and impair our ability to increase our revenues or maintain profitability. The following are some of the factors
that could prevent us from successfully marketing our programs:
•
•
•
•
Student dissatisfaction with our programs and services;
Diminished access to high school student populations;
Our failure to maintain or expand our brand or other factors related to our marketing or advertising practices; and
Our inability to maintain relationships with employers in the automotive, diesel, skilled trades and IT services industries.
An increase in interest rates could adversely affect our ability to attract and retain students.
Our students and their families have benefitted from historic lows on student loan interest rates in recent years. Much of the
financing our students receive is tied to floating interest rates. Recently, however, student loan interest rates have been edging
higher, making borrowing for education more expensive. Increases in interest rates result in a corresponding increase in the cost
to our existing and prospective students of financing their education, which could result in a reduction in the number of students
attending our schools and could adversely affect our results of operations and revenues. Higher interest rates could also contribute
to higher default rates with respect to our students’ repayment of their education loans. Higher default rates may in turn adversely
impact our eligibility for Title IV Program participation or the willingness of private lenders to make private loan programs
available to students who attend our schools, which could result in a reduction in our student population.
A substantial decrease in student financing options, or a significant increase in financing costs for our students, could
have a significant impact on our student population, revenues and financial results.
The consumer credit markets in the United States have recently suffered from increases in default rates and foreclosures on
mortgages. Adverse market conditions for consumer and federally guaranteed student loans could result in providers of
alternative loans reducing the attractiveness and/or decreasing the availability of alternative loans to post-secondary students,
including students with low credit scores who would not otherwise be eligible for credit-based alternative loans. Prospective
students may find that these increased financing costs make borrowing prohibitively expensive and abandon or delay enrollment
in post-secondary education programs. Private lenders could also require that we pay them new or increased fees in order to
provide alternative loans to prospective students. If any of these scenarios were to occur, our students’ ability to finance their
education could be adversely affected and our student population could decrease, which could have a significant impact on our
financial condition, results of operations and cash flows.
In addition, any actions by the U.S. Congress or by states that significantly reduce funding for Title IV Programs or other student
financial assistance programs, or the ability of our students to participate in these programs, or establish different or more
stringent requirements for our schools to participate in those programs, could have a significant impact on our student population,
results of operations and cash flows.
Our total assets include substantial intangible assets. In the event that our schools do not achieve satisfactory operating
results, we may be required to write-off a significant portion of unamortized intangible assets which would negatively
affect our results of operations.
Our total assets reflect substantial intangible assets. At December 31, 2019, goodwill associated with our acquisitions decreased
to approximately 7.5% from 10.0% of total assets at December 31, 2018. On at least an annual basis, we assess whether there has
been an impairment in the value of goodwill. If the carrying value of the tested asset exceeds its estimated fair value, impairment
is deemed to have occurred. In this event, the amount is written down to fair value. Under current accounting rules, this would
result in a charge to operating earnings. Any determination requiring the write-off of a significant portion of goodwill would
negatively affect our results of operations and total capitalization, which could be material.
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Index
We cannot predict our future capital needs, and if we are unable to secure additional financing when needed, our
operations and revenues would be adversely affected.
We may need to raise additional capital in the future to fund acquisitions, working capital requirements, expand our markets and
program offerings or respond to competitive pressures or perceived opportunities. We cannot be sure that additional financing
will be available to us on favorable terms, or at all. If adequate funds are not available when required or on acceptable terms, we
may be forced to forego attractive acquisition opportunities, cease our operations and, even if we are able to continue our
operations, our ability to increase student enrollment and revenues would be adversely affected.
We may not be able to retain our key personnel or hire and retain the personnel we need to sustain and grow our
business.
Our success has depended, and will continue to depend, largely on the skills, efforts and motivation of our executive officers who
generally have significant experience within the post-secondary education industry. Our success also depends in large part upon
our ability to attract and retain highly qualified faculty, school directors, administrators and corporate management. Due to the
nature of our business, we face significant competition in the attraction and retention of personnel who possess the skill sets that
we seek. In addition, key personnel may leave us and subsequently compete against us. Furthermore, we do not currently carry
“key man” life insurance on any of our employees. The loss of the services of any of our key personnel, or our failure to attract
and retain other qualified and experienced personnel on acceptable terms, could have an adverse effect on our ability to operate
our business efficiently and to execute our growth strategy.
Strikes by our employees may disrupt our ability to hold classes as well as our ability to attract and retain students, which
could materially adversely affect our operations. In addition, we contribute to multiemployer benefit plans that could
result in liabilities to us if these plans are terminated or we withdraw from them.
As of December 31, 2019, the teaching professionals at six of our campuses are represented by unions and covered by collective
bargaining agreements that expire between 2020 and 2022. Although we believe that we have good relationships with these
unions and with our employees, any strikes or work stoppages by our employees could adversely impact our relationships with
our students, hinder our ability to conduct business and increase costs.
We also contribute to multiemployer pension plans for some employees covered by collective bargaining agreements. These
plans are not administered by us, and contributions are determined in accordance with provisions of negotiated labor contracts.
The Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendments Act of
1980, imposes certain liabilities upon employers who are contributors to a multiemployer plan in the event of the employer’s
withdrawal from, or upon termination of, such plan. We do not routinely review information on the net assets and actuarial
present value of the multiemployer pension plans’ unfunded vested benefits allocable to us, if any, and we are not presently aware
of any material amounts for which we may be contingently liable if we were to withdraw from any of these plans. In addition, if
any of these multiemployer plans enters “critical status” under the Pension Protection Act of 2006, we could be required to make
significant additional contributions to those plans.
System disruptions to our technology infrastructure could impact our ability to generate revenue and could damage the
reputation of our institutions.
The performance and reliability of our technology infrastructure is critical to our reputation and to our ability to attract and retain
students. We license the software and related hosting and maintenance services for our online platform and our student
information system from third-party software providers. Any system error or failure, or a sudden and significant increase in
bandwidth usage, could result in the unavailability of systems to us or our students or result in delays and/or errors in processing
student financial aid and related disbursements. Any such system disruptions could impact our ability to generate revenue and
affect our ability to access information about our students and could also damage the reputation of our institutions. Any of the
cyber-attacks, breaches or other disruptions or damage described above could interrupt our operations, result in theft of our and
our students’ data or result in legal claims and proceedings, liability and penalties under privacy laws and increased cost for
security and remediation, each of which could adversely affect our business and financial results. We may be required to expend
significant resources to protect against system errors, failures or disruptions or to repair problems caused by any actual errors,
disruptions or failures.
We are subject to privacy and information security laws and regulations due to our collection and use of personal
information, and any violations of those laws or regulations, or any breach, theft or loss of that information, could
adversely affect our reputation and operations.
Our efforts to attract and enroll students result in us collecting, using and storing substantial amounts of personal information
regarding applicants, our students, their families and alumni, including social security numbers and financial data. We also
maintain personal information about our employees in the ordinary course of our activities. Our services, the services of many of
our health plan and benefit plan vendors, and other information can be accessed globally through the Internet. We rely
extensively on our network of interconnected applications and databases for day to day operations as well as financial reporting
and the processing of financial transactions. Our computer networks and those of our vendors that manage confidential
information for us or provide services to our student may be vulnerable to cyber-attacks and breaches, acts of vandalism,
ransomware, software viruses and other similar types of malicious activities. Regular patching of our computer systems and
frequent updates to our virus detection and prevention software with the latest virus and malware signatures may not catch newly
introduced malware and viruses or “zero-day” viruses, prior to their infecting our systems and potentially disrupting our data
integrity, taking sensitive information or affecting financial transactions. While we utilize security and business controls to limit
access to and use of personal information, any breach of student or employee privacy or errors in storing, using or transmitting
personal information could violate privacy laws and regulations resulting in fines or other penalties. A wide range of high profile
data breaches in recent years has led to renewed interest in federal data and cybersecurity legislation that could increase our costs
and/or require changes in our operating procedures or systems. A breach, theft or loss of personal information held by us or our
vendors, or a violation of the laws and regulations governing privacy could have a material adverse effect on our reputation or
result in lawsuits, additional regulation, remediation and compliance costs or investments in additional security systems to protect
our computer networks, the costs of which may be substantial.
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Index
Our credit agreement imposes significant operating and financial restrictions on the Company, which may prevent us
from capitalizing on business opportunities, and we may incur additional debt in the future that may include similar or
additional restrictions.
On November 14, 2019, the Company executed a new credit agreement with its lender relating to our $60 million credit facility.
See Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent
Transactions.” The credit agreement imposes significant operating and financial restrictions. These restrictions, which are subject
to a number of qualifications and exceptions, could limit our ability to, among other things:
incur additional indebtedness and guarantee indebtedness;
undertake capital expenditures;
create or incur liens;
pay dividends and distributions or repurchase capital stock;
•
•
•
•
• make investments, loans and advances; and
enter into certain transactions with affiliates.
•
In addition, the credit agreement requires us to maintain a minimum tangle net worth, a minimum fixed charge coverage ratio and
a minimum of $5 million in quarterly average aggregate balances on deposit with the lender which if not maintained will result in
the assessment of a quarterly fee of $12,500. See Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Liquidity and Capital Resources.”
These covenants could materially adversely affect our ability to finance our future operations or capital needs. Furthermore, they
may restrict our ability to expand and pursue our business strategies and otherwise conduct our business. Our ability to comply
with these covenants may be affected by circumstances and events beyond our control, such as prevailing economic conditions
and changes in regulations, and we cannot assure you that we will be able to comply with such covenants. These restrictions
could also limit our ability to obtain future financings to withstand a future downturn in our business or the economy in general.
In addition, complying with these covenants may also cause us to take actions that make it more difficult for us to successfully
execute our business strategies and compete against companies that are not subject to such restrictions.
Our failure to comply with the covenants and other terms of the credit agreement could result in an event of default. If any such
event of default occurs and is not waived, the lender could elect to declare all amounts outstanding and accrued and unpaid
interest, if any, under the credit facility to be immediately due and payable, and could foreclose on the assets securing the credit
facility. The lender would also have the right in these circumstances to terminate any commitments they have to provide further
credit extensions. If we are forced to refinance any borrowings under the credit facility on less favorable terms or if we cannot
refinance these borrowings, our financial condition and results of operations could be materially adversely affected.
In addition, although the credit agreement contains restrictions on the incurrence of additional indebtedness, these restrictions are
subject to a number of qualifications and exceptions, and we may be able to incur substantial additional indebtedness in
compliance with these restrictions in the future. The terms of any future indebtedness we may incur could include more
restrictive covenants.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase
significantly.
Borrowings under our credit facility are at variable rates of interest and expose us to interest rate risk. If interest rates increase,
our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed remains the same,
and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease. Our
obligations under our credit facility are secured by a lien on substantially all of our assets and any assets that we or our
subsidiaries may acquire in the future. As of December 31, 2019, we had $34.8 million outstanding under the 2019 Credit
Agreement for which we hedged 57% of the amount outstanding by entering into a cash flow hedge with a fixed interest rate of
5.36%. In the future, we may again enter into interest rate swaps to reduce interest rate volatility. However, we may not maintain
interest rate swaps with respect to all of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our
interest rate risk.
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Index
In addition, the interest rates under our credit agreement are calculated using the London Interbank Offered Rate (“LIBOR”). On
July 27, 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced its intention to stop compelling
banks to submit rates for the calculation of LIBOR after 2021 and it is unclear whether new methods of calculating LIBOR will
be established. If LIBOR ceases to exist after 2021, a comparable or successor reference rate as approved by the lender under our
credit agreement will apply under the credit agreement. The U.S. Federal Reserve and the Federal Reserve Bank of New York
formed a committee, the Alternative Reference Rates Committee (the “ARRC”), comprised of private-sector entities with a
presence in markets affected by LIBOR and public-sector entities, including the Securities and Exchange Commission, banking
regulators and other financial sector regulators, to recommend an alternative rate to U.S. dollar LIBOR. The ARRC has identified
an index, the Secured Overnight Financing Rate (“SOFR”), as its preferred alternative rate for U.S. dollar LIBOR. SOFR is a
measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable
U.S. Treasury-backed repurchase transactions. Some market participants are also considering other U.S. dollar reference rates for
certain instruments. It is not possible to predict the effect of these changes, other reforms or the establishment of a dominant
successor to LIBOR or a variety of alternative reference rates in the United States or elsewhere. To the extent these interest rates
increase, our interest expense will increase, which could adversely affect our financial condition, operating results and cash
flows.
Changes in U.S. tax laws or adverse outcomes from examination of our tax returns could have an adverse effect upon our
financial results.
We are subject to income tax requirements in various jurisdictions in the United States. Legislation or other changes in the tax
laws of the jurisdictions where we do business could increase our liability and adversely affect our after-tax profitability. In
addition, we are subject to examination of our income tax returns by the Internal Revenue Service and the taxing authorities of
various states. We regularly assess the likelihood of adverse outcomes resulting from tax examinations to determine the
adequacy of our provision for income taxes and we have accrued tax and related interest for potential adjustments to tax liabilities
for prior years. However, there can be no assurance that the outcomes from these tax examinations will not have a material
effect, either positive or negative, on our business, financial conditions and results of operation.
Public health epidemics or outbreaks could adversely impact our business.
In December 2019, a novel strain of coronavirus, COVID-19, emerged in Wuhan, Hubei Province, China. While initially
concentrated in China, the outbreak has now spread to other countries and infections have been reported globally including in the
United States. The extent to which the coronavirus, like any other rapidly spreading contagious illness, may impact our
operations will depend on the evolution of the outbreak, which is highly speculative at this time and cannot be predicted with any
level of confidence. The duration of the outbreak, new information which emerges concerning the severity of the illness and the
actions to be taken to contain the spread of the virus or its treatment remains unclear. We believe that the continued spread of the
coronavirus could adversely impact our operations. A quarantine of one or more of our instructors for two or more weeks due to
exposure to the coronavirus or other contagious illness could eliminate a program unless a substitute was readily available and
quarantine of an instructor or student could cause the temporary closure of an affected school which could have an adverse
impact on our business and our financial results. Further, the spread of a contagious illness or fear of such an event could have a
material adverse effect on enrollment at least in the short-term.
RISKS RELATED TO OUR CAPITAL STRUCTURE
The current holders of our Series A Preferred Stock, Juniper Investment Company Inc. and Talanta Investment Group,
Inc., with their affiliates, beneficially own approximately 18% and 9%, respectively, of our outstanding common stock on
an “as converted basis.” As such, each holder of Series A Preferred Stock possesses significant voting power over the
common stock, and there can be no assurance that their interests will align with the interests of the other common
shareholders.
In November 2019, we issued shares of Series A Preferred Stock (see Part II, Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Recent Transactions” below) to two investors that requires us to obtain the
approval of the holders of a majority of the outstanding Series A Preferred Stock to authorize numerous actions, including to pay
dividends on our common stock, repurchase our common stock, issue certain new classes of preferred stock, and incur
indebtedness. There can be no assurance that we will be able to obtain such approval should we seek to take an action requiring
their approval.
In addition to the blocking rights noted above, the holders of the Series A Preferred Stock vote with the holders of shares of
common stock and not as a separate class, at any annual or special meeting of shareholders of our Company, and may act by
written consent in the same manner as the holders of common stock, on an as-converted basis, but in all cases each holder of
Series A Preferred Stock together with its affiliates, may not vote more than 19.99% of the total number of shares of common
stock outstanding after giving effect to the shares being voted by the holder (the “Hard Cap”), unless prior shareholder approval
is obtained or no longer required by the rules of the Nasdaq Stock Market. The current holders of our Series A Preferred Stock,
Juniper Investment Company Inc. and Talanta Investment Group, Inc., with their affiliates, beneficially own approximately 18%
and 9%, respectively, of our outstanding common stock on an “as converted basis.” As such, each holder of Series A Preferred
Stock possesses significant voting power over the common stock, and there can be no assurance that their interests will align with
the interests of the other common shareholders.
In addition to possessing significant common stock voting power on any matter put to a vote of the common shareholders, which
includes the appointment of directors, the holders of Series A Preferred Stock, voting as a separate class, have the right to appoint
one director to the Company’s Board of Directors (the “Series A Director”) who may serve on any committees of the Board, until
the later of (i) the time that the shares of Series A Preferred Stock have been converted into common stock or (ii) the time that a
holder still owns shares of Series A Preferred Stock that are subject to conversion and the sum of such shares plus any other
shares of common stock represent at least 10% of the total outstanding shares of common stock. John A. Bartholdson currently
serves as the Series A Director.
26
Index
We have an obligation to pay dividends on our shares of Series A Preferred Stock.
Dividends on the Series A Preferred Stock (“Series A Dividends”), at the initial annual rate of 9.6% are to be paid, in advance,
from the date of issuance quarterly on each December 31, March 31, June 30 and September 30 with September 30, 2020 as the
first dividend payment date. The Company, at its option, may pay dividends in cash or by increasing the number of shares of
common stock issuable upon conversion of the Series A Preferred Stock (the “Conversion Shares”). The value of any dividend
paid in Conversion Shares will increase the dollar amount subject to the dividend rate and thereby increase subsequent dividend
amounts. We anticipate satisfying our dividend obligation by increase in the Conversion Shares for the foreseeable future. As a
result, it is likely that the holders of our Series A Preferred Stock will increase their ownership percentage in our Company and
thereby lower the ownership percentage of our common shareholders. In addition, by not paying cash dividends, we will be
increasing the dollar amount of future dividends.
The dividend rate is subject to increase (a) by 2.4% per annum on the fifth anniversary of the issuance of the Series A Preferred
Stock and (b) by 2% per annum but in no event above 14% per annum should the Company fail to perform certain obligations
owed to the holders of our Series A Preferred Stock. In order to pay Series A Dividends in cash, we require the approval of our
lender under our credit agreement and there can be no assurance that even were we able to pay Series A Dividends in cash, we
would be able to secure the necessary lender approvals to do so.
While we have not paid dividends to our common shareholders since February 2015 and we do not foresee doing so in the future,
in addition to obtaining the approval of the holders of the Series A Preferred Stock, of which there can be no assurance, the
holders of the Series A Preferred Stock are required to participate in any such cash dividend on an “as converted basis” thereby
diluting any such dividend payment to the common shareholders.
The Series A Preferred Stock is perpetual.
The Series A Preferred Stock is perpetual having no fixed maturity date. However, on and after November 14, 2024, the
Company may redeem all or any of the Series A Preferred Stock for a cash price (the “Liquidation Preference”) equal to the
greater of (i) the sum of $1,000 (subject to adjustment) plus the dollar amount of any declared Series A Dividends not paid in
cash and (ii) the value of the Conversion Shares were such shares of Series A Preferred Stock converted. There can be no
assurance that we will have sufficient funds or available financing sources to redeem the Series A Preferred Stock, or if we had
the necessary funding we would be able to obtain the consent of our then lender to redeem the Series A Preferred Stock. It is
therefore possible that the Series A Preferred Stock will be outstanding for an indefinite period of time.
We may not be able to force the conversion of the Series A Preferred Stock.
Each share of Series A Preferred Stock, at any time, is convertible into a number of shares of common stock equal to the quotient
of (i) the sum of (A) $1,000 (subject to adjustment) plus (B) the dollar amount of any declared Series A Dividends not paid in
cash divided by (ii) the Series A Conversion Price as of the applicable Conversion Date, but subject to the Hard Cap. The initial
Conversion Price is $2.36 (the “Convertible Formula”).
If, at any time following November 14, 2022, the volume weighted average price of the Company’s common stock for a period of
20 consecutive trading days and on each such trading day at least 20,000 shares of common stock was traded, equals or exceeds
$5.31 per share (2.25 times the Conversion Price) the Company may, at its option and subject to the Hard Cap, require that any or
all of the then outstanding shares of Series A Preferred Stock be automatically converted into shares of common stock at the then
applicable Convertible Formula. To the extent that we satisfy our Series A Dividend obligation by increasing the number of
common shares issuable upon conversion of the Series A Preferred Stock, that would further dilute our common stock and likely
result in downward pressure on the trading price of our common stock. There can be no assurance that our common stock will
trade at the per share price, for the necessary period of time and with the required volume to cause the conversion of the Series A
Preferred Stock into common stock, at any time or at all.
Registration of the Conversion Shares may cause overhang.
The holders of the Series A Preferred Stock are entitled to unlimited registration rights for the Conversion Shares, including 2 of
which that may require us to effectuate an underwritten offering. Although unless our stock price significantly increases, it is
likely that the Series A Holders will hold their Series A Preferred Stock and not convert them into shares of common stock, we
are obligated to file with the SEC by November 13, 2020 a registration statement for the shelf covering the Conversion Shares
(the “Resale Shelf”) and use our commercially reasonable efforts to cause the Resale Shelf to be declared effective by the SEC
not later than 60 days after the filing thereof. The filing of the Resale Shelf covering the Conversion Shares may create market
overhang on our common stock and thereby downward pressure on the price of our common stock. Should we be unable to cause
the Resale Shelf (and certain other registration statements concerning the Conversion Shares) to be declared effective by the SEC
timely, or certain other events occur with respect to such registration statements, some of which are beyond our control, we are
required to pay the holders of Series A Preferred Stock an amount equal to 1.5% of the value of the Conversion Shares covered
thereby for each 30 day period that such registration statements are not declared effective, up to a maximum of 7.5%.
27
Index
Shareholders of Series A Preferred Stock may transfer their shares after November 13, 2020 without our approval.
The holders of Series A Preferred Stock may, subject to compliance with the securities laws, sell their Series A Preferred Stock to
any purchaser, without our prior approval. While we believe we have a good relationship with the current holders of Series A
Preferred Stock, there can be no assurance that we will continue to enjoy good relations with them or with any purchaser of their
Series A Preferred Stock.
In the event of certain changes of control, holders of Series A Preferred Stock shall be entitled to receive a liquidation
preference.
In the event of certain changes of control, some of which are not within the Company’s control (as defined in the Company’s
amended and restated certificate of incorporation as a “Fundamental Change” or a “Liquidation”), the holders of Series A
Preferred Stock shall be entitled to receive the Liquidation Preference, unless such Fundamental Change is a stock merger in
which certain value and volume requirements are met, in which case the Series A Preferred Stock will be converted into common
stock in connection with such stock merger. As a result, this provision (along with the other provisions of the Series A Preferred
Stock) may make the Company less attractive to a potential acquirer.
Our principal shareholder owns a significant percentage of our capital stock and is able to influence certain corporate
matters.
As of December 31, 2019, Juniper Investment Company, LLC and its affiliates (“Juniper”) beneficially owned, in the aggregate,
approximately 18% of our outstanding common stock and 88% of our outstanding Series A Preferred Stock, which votes on an
as-converted basis subject to a voting cap, as described below. The voting power of Juniper, including the common stock and the
as-converted preferred stock with the voting cap described below, was approximately 19.9% as of December 31, 2019.
Each share of Series A Preferred Stock is convertible, at any time, into a number of shares of common stock equal to
(“Convertible Formula”) the quotient of (i) the sum of (A) $1,000 (subject to adjustment as provided in the Company’s certificate
of incorporation, as amended) plus (B) the dollar amount of any dividends applicable to the Series A Preferred Stock and not paid
in cash divided by (ii) the Series A Conversion Price (as defined and adjusted in the Company’s certificate of incorporation) as of
the applicable date of conversion. The initial conversion price is $2.36. At all times, however, the number of shares of common
stock that can be issued to any holder of Series A Preferred Stock may not result in such holder and its affiliates owning more
than 19.99% of the total number of shares of common stock outstanding after giving effect to the conversion (the “Hard Cap”),
unless prior shareholder approval is obtained or no longer required by the rules of the Nasdaq Stock Market. If, at any time
following November 14, 2022 the volume weighted average price of the Company’s common stock equals or exceeds 2.25 times
the conversion price for a period of 20 consecutive trading days and on each such trading day at least 20,000 shares of common
stock was traded, the Company may, at its option and subject to the Hard Cap, require that any or all of the then outstanding
shares of Series A Preferred Stock be automatically converted into shares of common stock at the then applicable Convertible
Formula.
The holders of Series A Preferred Stock, voting as a separate class, have the right to appoint one director to the Company’s Board
of Directors (the “Series A Director”) who may serve on any committees of the Board, until such time as the later of (i) the shares
of Series A Preferred Stock have been converted into common stock or (ii) a holder still owns shares of Series A Preferred Stock
that are subject to conversion and the sum of such shares plus any other shares of common stock represent at least 10% of the
total outstanding shares of common stock.
Holders of shares of Series A Preferred Stock are entitled to vote with the holders of shares of common stock and any other class
or series similarly entitled to vote with the holders of common stock and not as a separate class, at any annual or special meeting
of shareholders of our Company, and may act by written consent in the same manner as the holders of common stock, on an as-
converted basis, in all cases subject to the Hard Cap. In addition, a majority of the voting power of the Series A Preferred Stock
must approve certain significant actions of the Company, including (i) declaring a dividend or otherwise redeeming or
repurchasing any shares of common stock and other junior securities, if any, subject to certain exceptions, (ii) incurring
indebtedness, except for certain permitted indebtedness and (iii) creating a subsidiary other than a wholly-owned subsidiary.
Anti-takeover provisions in our amended and restated certificate of incorporation, our bylaws and New Jersey law could
discourage a change of control that our shareholders may favor, which could negatively affect our stock price.
In addition to the Series A Preferred Stock, provisions in our amended and restated certificate of incorporation and our bylaws
and applicable provisions of the New Jersey Business Corporation Act may make it more difficult and expensive for a third party
to acquire control of the Company even if a change of control would be beneficial to the interests of our shareholders. These
provisions could discourage potential takeover attempts and could adversely affect the market price of our common stock. For
example, applicable provisions of the New Jersey Business Corporation Act may discourage, delay or prevent a change in control
by prohibiting us from engaging in a business combination with an interested shareholder for a period of five years after the
person becomes an interested shareholder. Furthermore, our amended and restated certificate of incorporation and bylaws:
28
Index
•
•
•
•
•
•
•
authorize the issuance of blank check preferred stock that could be issued by our board of directors to thwart • a takeover attempt;
prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of stock to elect some
directors;
require super-majority voting to effect amendments to certain provisions of our amended and restated certificate of incorporation;
limit who may call special meetings of both the board of directors and shareholders;
prohibit shareholder action by non-unanimous written consent and otherwise require all shareholder actions to be taken at a meeting of the
shareholders;
establish advance notice requirements for nominating candidates for election to the board of directors or for proposing matters that can be acted
upon by shareholders at shareholders’ meetings; and
require that vacancies on the board of directors, including newly created directorships, be filled only by a majority vote of directors then in office.
We can issue shares of preferred stock without general shareholder approval (thought approval of the holders of Series A
Preferred Stock would be necessary), which could adversely affect the rights of common shareholders.
Our amended and restated certificate of incorporation permits us to establish the rights, privileges, preferences and restrictions,
including voting rights, of future series of our preferred stock and to issue such stock without approval from our shareholders.
The rights of holders of our common stock may suffer as a result of the rights granted to holders of preferred stock that may be
issued in the future. In addition, we could issue preferred stock to prevent a change in control of our Company, depriving
common shareholders of an opportunity to sell their stock at a price in excess of the prevailing market price.
The trading price of our common stock may continue to fluctuate substantially in the future.
Our stock price has declined substantially over the past five years and has and may fluctuate significantly as a result of a number
of factors, some of which are not in our control. These factors include:
•
•
•
•
•
•
•
•
•
general economic • conditions;
general conditions in the for-profit, post-secondary education industry;
negative media coverage of the for-profit, post-secondary education industry;
failure of certain of our schools or programs to maintain compliance under the gainful employment regulation, 90-10 Rule or with financial
responsibility standards;
the impact of DOE rulemaking and other changes in the highly regulated environment in which we operate;
the initiation, pendency or outcome of litigation, accreditation reviews and regulatory reviews, inquiries and investigations;
loss of key personnel;
quarterly variations in our operating results;
our ability to meet or exceed, or changes in, expectations of investors and analysts, or the extent of analyst coverage of us; and decisions by any
significant investors to reduce their investment in our common stock.
In addition, the trading volume of our common stock is relatively low. This may cause our stock price to react more to these
factors and various other factors and may impact an investor’s ability to sell our common stock at the desired time at a price
considered satisfactory. Any of these factors may adversely affect the trading price of our common stock, regardless of our actual
operating performance, and could prevent an investor from selling shares of our common stock at or above the price at which the
investor purchased them.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
29
Index
ITEM 2.
PROPERTIES
As of December 31, 2019, we leased all of our facilities, except for our campuses in Nashville, Tennessee, Grand Prairie, Texas,
and Denver, Colorado, and former school property in Suffield, Connecticut, all of which we own. Our lease in Southington,
Connecticut expired in January 2020 as that school was closed in December 2019. We continue to re-evaluate our facilities to
maximize our facility utilization and efficiency and to allow us to introduce new programs and attract more students. As of
December 31, 2019, all of our existing leases expire between 2020 and 2030.
The following table provides information relating to our facilities as of December 31, 2019, including our corporate office:
Location
Las Vegas, Nevada
Southington, Connecticut
Columbia, Maryland
Denver, Colorado
Grand Prairie, Texas
Indianapolis, Indiana
Marietta, Georgia
Melrose Park, Illinois
Allentown, Pennsylvania
East Windsor, Connecticut
Iselin, New Jersey
Lincoln, Rhode Island
Mahwah, New Jersey
Moorestown, New Jersey
New Britain, Connecticut
Paramus, New Jersey
Philadelphia, Pennsylvania
Queens, New York
Shelton, Connecticut
Somerville, Massachusetts
South Plainfield, New Jersey
Union, New Jersey
Nashville, Tennessee
West Orange, New Jersey
Blue Bell, Pennsylvania
Suffield, Connecticut
Brand
Euphoria Institute
Former Lincoln College of New England
Lincoln College of Technology
Lincoln College of Technology
Lincoln College of Technology
Lincoln College of Technology
Lincoln College of Technology
Lincoln College of Technology
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute and Lincoln Culinary Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln Technical Institute
Lincoln College of Technology
Corporate Office
Corporate Office
Former Lincoln Technical Institute
Approximate Square Footage
19,000
113,000
110,000
212,000
146,000
189,000
30,000
88,000
26,000
289,000
32,000
39,000
79,000
35,000
35,000
30,000
29,000
48,000
47,000
33,000
60,000
56,000
281,000
52,000
4,000
132,000
We believe that our facilities are suitable for their present intended purposes.
ITEM 3.
LEGAL PROCEEDINGS
In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations and claims, including, but not limited
to, claims involving students or graduates and routine employment matters. Although we cannot predict with certainty the
ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal
proceeding to which we are a party will have a material effect on our business, financial condition, results of operations or cash
flows.
As previously reported, on July 6, 2018, the Company received an administrative subpoena from the Office of the Attorney
General of the State of New Jersey (“NJ OAG”). Pursuant to the subpoena, the NJ OAG requested certain documents and
detailed information relating to the November 21, 2012 Civil Investigative Demand letter addressed to the Company by the
Massachusetts Office of the Attorney General (“MOAG”) that resulted in a previously reported Final Judgment by Consent
between the Company and the MOAG dated July 13, 2015. The Company responded to this request and, the NJ OAG issued two
supplemental subpoenas requesting additional information. The Company has responded to these requests and is continuing to
cooperate with the NJ OAG.
Also, on February 12, 2019, the Company received a notification from the State of Colorado Department of Law (“CDOL”)
advising that it was initiating a compliance examination of one of its subsidiaries, Lincoln Technical Institute, Inc. The
examination sought to review a fixed number of company transactions seeking information responsive to its examination. The
Company submitted its response and, on December 5, 2019, received notifications from the CDOL that it had completed its
examination with no violations reported.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
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Index
PART II.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Market for our Common Stock
Our common stock, no par value per share, is quoted on the Nasdaq Global Select Market under the symbol “LINC”.
On March 3, 2020, the last reported sale price of our common stock on the Nasdaq Global Select Market was $2.60 per share. As
of March 3, 2020, based on the information provided by Continental Stock Transfer & Trust Company, there were 58
shareholders of record of our common stock.
Dividend Policy
The Company has not declared or paid any cash dividends on its common stock since the Company’s Board of Directors
discontinued our quarterly cash dividend program in February 2015. The Company has no current intentions to resume the
payment of cash dividends in the foreseeable future.
Share Repurchases
The Company did not repurchase any shares of our common stock during the fourth quarter of the fiscal year ended December
31, 2019.
Equity Compensation Plan Information
We have various equity compensation plans under which equity securities are authorized for issuance. Information regarding
these securities as of December 31, 2019 is as follows:
Number of
Securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
(a)
Weighted-
average
exercise
price of
outstanding
options,
warrants and
rights
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a))
116,000 $
-
116,000 $
10.56
-
10.56
1,451,656
-
1,451,656
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
ITEM 6.
SELECTED FINANCIAL DATA
Not Required.
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Index
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with the “Selected Financial Data,” “Forward-Looking Statements” and the
consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. This
discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections
about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in
such forward-looking statements as a result of a number of factors, including those we discuss under “Risk Factors” and
“Forward-Looking Statements” and elsewhere in this Annual Report on Form 10-K.
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 schools in 14 states, offers programs in automotive technology, skilled trades (which include HVAC,
welding and computerized numerical control and electrical and electronic systems technology, among other programs), healthcare
services (which include nursing, dental assistant and medical administrative assistant, among other programs), hospitality
services (which include culinary, therapeutic massage, cosmetology and aesthetics) and information technology (which includes
information technology). The schools operate under Lincoln Technical Institute, Lincoln College of Technology, Lincoln
Culinary Institute, and Euphoria Institute of Beauty Arts and Sciences and associated brand names. Most of the campuses serve
major metropolitan markets and each typically offers courses in multiple areas of study. Five of the campuses are destination
schools, which attract students from across the United States and, in some cases, from abroad. The Company’s other campuses
primarily attract students from their local communities and surrounding areas. All of the campuses are nationally or regionally
accredited and are eligible to participate in federal financial aid programs by the U.S. Department of Education (the “DOE”) 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.
Our business is organized into three reportable business segments: (a) Transportation and Skilled Trades, (b) Healthcare and
Other Professions (“HOPS”), and (c) Transitional, which refers to our campus operations which have been closed prior to 2019.
As of December 31, 2019, we had 11,285 students enrolled at 22 campuses.
Our campuses, a majority of which serve major metropolitan markets, are located throughout the United States. Five of our
campuses are destination schools, which attract students from across the United States and, in some cases, from abroad. Our other
campuses primarily attract students from their local communities and surrounding areas. All of our schools are either nationally
or regionally accredited and are eligible to participate in federal financial aid programs.
Our revenues consist primarily of student tuition and fees derived from the programs we offer. Our revenues are reduced by
scholarships granted to our students. We recognize revenues from tuition and one-time fees, such as application fees, ratably over
the length of a program, including internships or externships that take place prior to graduation. We also earn revenues from our
bookstores, dormitories, cafeterias and contract training services. These non-tuition revenues are recognized upon delivery of
goods or as services are performed and represent less than 10% of our revenues.
Our revenues are directly dependent on the average number of students enrolled in our schools and the courses in which they are
enrolled. Our average enrollment is impacted by the number of new students starting, re-entering, graduating and withdrawing
from our schools. Our diploma/certificate programs range from 19 to 136 weeks, our associate’s degree programs range from 64
to 98 weeks, and students attend classes for different amounts of time per week depending on the school and program in which
they are enrolled. Because we start new students every month, our total student population changes monthly. The number of
students enrolling or re-entering our programs each month is driven by the demand for our programs, the effectiveness of our
marketing and advertising, the availability of financial aid and other sources of funding, the number of recent high school
graduates, the job market and seasonality. Our retention and graduation rates are influenced by the quality and commitment of our
teachers and student services personnel, the effectiveness of our programs, the placement rate and success of our graduates and
the availability of financial aid. Although similar courses have comparable tuition rates, the tuition rates vary among our
numerous programs.
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 largest of these programs are Title
IV Programs which represented approximately 78% of our revenue on a cash basis while the remainder is primarily derived from
state grants and cash payments made by students during both 2019 and 2018. The Higher Education Act of 1965, as amended
(the “HEA”) requires institutions to use the cash basis of accounting when determining its compliance with the 90/10 rule.
32
Index
We extend credit for tuition and fees to many of our students that attend our campuses. Our credit risk is mitigated through the
students’ participation in federally funded financial aid programs unless students withdraw prior to the receipt by us of Title IV
Program funds for those students. Under Title IV Programs, the government funds a certain portion of a student’s tuition, with the
remainder, referred to as “the gap,” financed by the students themselves under private party loans, including credit extended by
us. The gap amount has continued to increase over the last several years as we have raised tuition on average for the last several
years by 2-3% per year and restructured certain programs to reduce the amount of financial aid available to students, while funds
received from Title IV Programs increased at lower rates.
The additional financing that we are providing to students may expose us to greater credit risk and can impact our liquidity.
However, we believe that these risks are somewhat mitigated due to the following:
•
•
•
Our internal financing is provided to students only after all other funding resources have been exhausted; thus, by the time this funding is
available, students have completed approximately two-thirds of their curriculum and are more likely to graduate;
Funding for students who interrupt their education is typically covered by Title IV Program funds as long as they have been properly packaged for
financial aid; and
Creditworthy criteria to demonstrate a student’s ability to pay.
The operating expenses associated with an existing school do not increase or decrease proportionally as the number of students
enrolled at the school increases or decreases. We categorize our operating expenses as:
•
•
Educational services and facilities. Major components of educational services and facilities expenses include faculty compensation and
benefits, expenses of books and tools, facility rent, maintenance, utilities, depreciation and amortization of property and equipment used in the
provision of education services and other costs directly associated with teaching our programs excluding student services which is included in
selling, general and administrative expenses.
Selling, general and administrative. Selling, general and administrative expenses include compensation and benefits of employees who are
not directly associated with the provision of educational services (such as executive management and school management, finance and central
accounting, legal, human resources and business development), marketing and student enrollment expenses (including compensation and
benefits of personnel employed in sales and marketing and student admissions), costs to develop curriculum, costs of professional services,
bad debt expense, rent for our corporate headquarters, depreciation and amortization of property and equipment that is not used in the
provision of educational services and other costs that are incidental to our operations. Selling, general and administrative expenses also
includes the cost of all student services including financial aid and career services. All marketing and student enrollment expenses are
recognized in the period incurred.
RECENT TRANSACTIONS
On November 14, 2019, we entered into a Securities Purchase Agreement with Juniper Investment Company, Inc. (“Juniper
Purchasers”) and Talanta Investment Group, Inc. (“Talanta”) with their affiliates, to sell an aggregate of 12,700 shares of Series A
9.6% Convertible Preferred Stock, no par value per share (the “Series A Preferred Stock”) for a total purchase price of $12.7
million. Each share of Series A Preferred Stock is initially convertible into approximately 424 shares of the Company’s common
stock, representing a conversion premium of 39% based upon Lincoln’s closing stock price of $1.70 per share on the NASDAQ
on November 14, 2019. Beginning November 14, 2024, the Company can redeem outstanding Series A Preferred Stock under
certain circumstances at a price determined pursuant to the terms of the agreement. The Series A Preferred Stock may be voted
on an as-converted basis with the common stock, however both the voting rights and conversion rights are subject to a 19.99%
ownership cap for each investor. The proceeds from the offering are intended to be used to provide flexibility to execute long-
term growth initiatives such as expansion of existing high demand programs, the addition of new programs with strong employer
demand and the expansion of the existing call center which reaches prospective students throughout the country. In addition, the
Company plans to explore strategic acquisitions consistent with the Company’s core business, upgrade training equipment to
enhance the student experience, and increase marketing investments that will cost-effectively expand our reach to potential new
students in key markets while raising overall brand awareness. See Note 10 of the Notes to our Consolidated Financial
Statements contained elsewhere in this Annual Report on Form 10-K for further discussion.
Additionally, on November 14, 2019, the Company executed a new credit agreement with Sterling National Bank (the “Lender”)
replacing our prior facility. The credit facility is comprised of four separate facilities providing in the aggregate $60 million
comprised of: (1) a $20 million term loan funded at closing to refinance the existing facility, (2) a $10 million delayed draw term
loan, (3) a $15 million committed revolving line of credit, with a sublimit of up to $10 million for standby letters of credit, and
(4) a $15 million cash collateralized line of credit. All of the facilities are senior secured with the term loans maturing in five
years, the revolving line of credit maturing in three years, and the cash collateralized line of credit maturing on January 31, 2021.
The credit facility increases the Company’s available liquidity by approximately $25.0 million supporting working capital and
growth initiatives. The Company further anticipates realizing annualized interest savings of approximately $1.0 million as a
result of a reduction in the interest rate by an anticipated 30%. The Company’s prior credit facility as of the closing had an
outstanding balance of $21.8 million. See Note 9 of the Notes to our Consolidated Financial Statements contained elsewhere in
this Annual Report on Form 10-K for further discussion.
33
Index
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussions of our financial condition and results of operations are based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the period. On an ongoing basis, we evaluate our
estimates and assumptions, including those related to revenue recognition, bad debts, fixed assets, goodwill and other intangible
assets, income taxes and certain accruals. Actual results could differ from those estimates. The critical accounting policies
discussed herein are not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting
treatment of a particular transaction is specifically dictated by GAAP and does not result in significant management judgment in
the application of such principles. We believe that the following accounting policies are most critical to us in that they represent
the primary areas where financial information is subject to the application of management’s estimates, assumptions and judgment
in the preparation of our consolidated financial statements.
Revenue recognition.
Prior to adoption of ASU 2014-09
Revenues are derived primarily from programs taught at our schools. Tuition revenues, textbook sales and one-time fees, such as
nonrefundable application fees and course material fees, are recognized on a straight-line basis over the length of the applicable
program as the student proceeds through the program, which is the period of time from a student’s start date through his or her
graduation date (including internships or externships, if any, occurring prior to graduation), and we complete the performance of
teaching the student entitling us to the revenue. Other revenues, such as tool sales and contract training revenues, are recognized
as goods are delivered or training completed. On an individual student basis, tuition earned in excess of cash received is recorded
as accounts receivable, and cash received in excess of tuition earned is recorded as unearned tuition.
We evaluate whether collectability of revenue is reasonably assured prior to the student commencing a program by attending
class and reassess collectability of tuition and fees when a student withdraws from a course. We calculate the amount to be
returned under Title IV Programs and its stated refund policy to determine eligible charges and, if there is a balance due from the
student after this calculation, we expect payment from the student. We have a process to pursue uncollected accounts whereby,
based upon the student’s financial means and ability to pay, a payment plan is established with the student to ensure that
collectability is reasonable. We continuously monitor our historical collections to identify potential trends that may impact our
determination that collectability of receivables for withdrawn students is realizable. If a student withdraws from a program prior
to a specified date, any paid but unearned tuition is refunded. Refunds are calculated and paid in accordance with federal, state
and accrediting agency standards. Generally, the amount to be refunded to a student is calculated based upon the period of time
the student has attended classes and the amount of tuition and fees paid by the student as of his or her withdrawal date. These
refunds typically reduce deferred tuition revenue and cash on our consolidated balance sheets as we generally do not recognize
tuition revenue in our consolidated statements of income (loss) until the related refund provisions have lapsed. Based on the
application of our refund policies, we may be entitled to incremental revenue on the day the student withdraws from one of our
schools. We record revenue for students who withdraw from one of our schools when payment is received because collectability
on an individual student basis is not reasonably assured.
After adoption of ASU 2014-09
On January 1, 2018, we adopted the new standard on revenue recognition promulgated by the Federal Accounting Standards
Board (the “FASB”), Accounting Standards Update (“ASU”) 2014-09, using the modified retrospective approach of ASU 2016-
10. The adoption of the guidance in ASU 2014-09 as amended by ASU 2016-10 did not have a material impact on the
Company’s measurement or recognition of revenue in any prior or current reporting periods and there was no adjustment to
retained earnings. The core principle of the new standard is that a company should recognize revenue to depict the transfer of
promised goods or services to students in an amount that reflects the consideration to which the company expects to be entitled in
exchange for such goods or services.
Substantially all of our revenues are considered to be revenues from contracts with students. The related accounts receivable
balances are recorded in our balance sheets as student accounts receivable. We do not have significant revenue recognized from
performance obligations that were satisfied in prior periods, and we do not have any transaction price allocated to unsatisfied
performance obligations other than in our unearned tuition. We record revenue for students who withdraw from one of 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 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. We have assessed the costs incurred to obtain a contract with a student and
determined them to be immaterial.
34
Index
Allowance for uncollectible accounts. Based upon experience and judgment, we establish an allowance for uncollectible
accounts with respect to tuition receivables. We use an internal group of collectors in our collection efforts. In establishing our
allowance for uncollectible accounts, we consider, among other things, current and expected economic conditions, a student’s
status (in-school or out-of-school), whether or not a student is currently making payments, and overall collection history. Changes
in trends in any of these areas may impact the allowance for uncollectible accounts. The receivables balances of withdrawn
students with delinquent obligations are reserved for based on our collection history. Although we believe that our reserves are
adequate, if the financial condition of our students deteriorates, resulting in an impairment of their ability to make payments,
additional allowances may be necessary, which will result in increased selling, general and administrative expenses in the period
such determination is made.
Our bad debt expense as a percentage of revenues for the years ended December 31, 2019, 2018 and 2017 was 7.6%, 6.7% and
5.2%, respectively. A 1% increase in our bad debt expense as a percentage of revenues for the years ended December 31, 2019,
2018 and 2017 would have resulted in an increase in bad debt expense of $2.7 million, $2.6 million and $2.6 million,
respectively.
We do not believe that there is any direct correlation between tuition increases, the credit we extend to students and our loan
commitments. Our loan commitments 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. Our tuition increases have averaged 2-3% annually and have not meaningfully impacted overall
funding requirements, since the amount of financial aid funding available to students in recent years has increased at greater rates
than our tuition increases.
Because a substantial portion of our revenues are 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.
Goodwill. We test our goodwill for impairment annually, or whenever events or changes in circumstances indicate an
impairment may have occurred, by comparing its fair value to its carrying value. Impairment may result from, among other
things, deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws
or regulations, including changes that restrict the activities of the acquired business, and a variety of other circumstances. If we
determine that impairment has occurred, we are required to record a write-down of the carrying value and charge the impairment
as an operating expense in the period the determination is made. In evaluating the recoverability of the carrying value of goodwill
and other indefinite-lived intangible assets, we must make assumptions regarding estimated future cash flows and other factors to
determine the fair value of the acquired assets. Changes in strategy or market conditions could significantly impact these
judgments in the future and require an adjustment to the recorded balances.
Goodwill represents a significant portion of our total assets. As of December 31, 2019, goodwill was approximately $14.5
million, or 7.5%, of our total assets, from approximately $14.5 million, or 10.0%, of our total assets at December 31, 2018. The
goodwill is allocated among nine reporting units within the Transportation and Skilled Trades Segment.
When we test goodwill balances for impairment, we determine the fair value of each of our reporting units using an equal
weighting of the discounted cash flow model and the market approach. The determination of fair value using the discounted cash
flow model requires significant estimates and assumptions related to forecasts of future revenues, which is driven by student start
growth, EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization) margins, the long-term growth rate used in the
calculation of the terminal value, and the discount rate to apply against each reporting unit’s financial metrics. The determination
of fair value using the market approach requires significant estimates and assumptions related to the selection of EBITDA
multiples and the control premiums. Changes in these assumptions could have a significant impact on either the fair value, the
amount of any goodwill impairment charge, or both.
Although we believe our projected future operating results and cash flows and related estimates regarding fair values are based
on reasonable assumptions, historically projected operating results and cash flows have not always been achieved. The failure of
one of our reporting units to achieve projected operating results and cash flows in the near term or long term may reduce the
estimated fair value of the reporting unit below its carrying value and result in the recognition of a goodwill impairment charge.
Significant management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate
future cash flows. Assumptions used in our impairment evaluations, such as forecasted growth rates and our cost of capital, are
based on the best available market information and are consistent with our internal forecasts and operating plans. In addition to
cash flow estimates, our valuations are sensitive to the rate used to discount cash flows and future growth assumptions.
At December 31, 2019, 2018 and 2017, we conducted our annual test for goodwill impairment and determined we did not have
an impairment.
Income taxes. We account for income taxes in accordance with Accounting Standards Codification (“ASC”) Topic 740,
“Income Taxes” (“ASC 740”) which 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.
35
Index
In accordance with ASC 740, we assess 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 we
considered, among other things, historical levels of income, expected future income, the expected timing of the reversals of
existing temporary reporting differences, and the expected impact of tax planning strategies that may be implemented to prevent
the potential loss of future income tax benefits. Significant judgment is required in determining the future tax consequences of
events that have been recognized in our consolidated financial statements and/or tax returns. Differences between anticipated and
actual outcomes of these future tax consequences could have a material impact on our consolidated financial position or results of
operations. Changes in, among other things, income tax legislation, statutory income tax rates, or future income levels could
materially impact our 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 years ended
December 31, 2019 and 2018, we did not record any interest and penalties expense associated with uncertain tax positions.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation known as the Tax Cuts and Jobs Act (the
“Tax Act”). The Tax Act establishes new tax laws that took effect in 2018, including, but not limited to (1) reduction of the U.S.
federal corporate tax rate from a maximum of 35% to 21%; (2) elimination of the corporate alternative minimum tax (AMT); (3)
a new limitation on deductible interest expense; (4) the repeal of the domestic production activity deduction; (5) limitations on
the deductibility of certain executive compensation; and (6) limitation on net operating losses (NOLs) generated after December
31, 2017, to 80% of taxable income. In addition, certain changes were made to the bonus depreciation rules that impacted fiscal
year 2017.
Results of Continuing Operations for the Three Years Ended December 31, 2019
The following table sets forth selected consolidated statements of continuing operations data as a percentage of revenues for each
of the periods indicated:
Revenue
Costs and expenses:
Educational services and facilities
Selling, general and administrative
(Gain) loss on sale of assets
Total costs and expenses
Operating income (loss)
Interest expense, net
Other income
Income (loss) from opeartions before income taxes
Provision (benefit) for income taxes
Net income (loss)
2019
Year Ended Dec 31,
2018
2017
100.0%
100.0%
100.0%
45.2%
53.1%
-0.2%
98.1%
1.9%
-1.1%
0.0%
0.8%
0.1%
0.7%
47.6%
53.7%
0.2%
101.5%
-1.5%
-0.9%
0.0%
-2.4%
0.1%
-2.5%
49.4%
53.0%
-0.6%
101.8%
-1.8%
-2.7%
0.0%
-4.5%
-0.1%
-4.4%
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Consolidated Results of Operations
Revenue. Revenue increased $10.1 million, or 3.9% to $273.3 million for the year ended December 31, 2019 from $263.2
million in the prior fiscal year. The increase in revenue was a result of over two years of consistent student start growth which
drove a 10.7% and 3.9% increase in average student population in both the Healthcare and Other Professions segment and the
Transportation and Skilled Trades segment, respectively. Further contributing to the revenue increase year over year was
increased focus on student retention which increased retention rates. Excluding the Transitional segment, which had revenue of
zero and $5.8 million during the years ended December 31, 2019 and 2018, respectively, revenue would have increased $15.9
million or 6.2% year over year.
Total student starts increased 3.8% for the fiscal year ended December 31, 2019 as compared to the prior year comparable
period. Excluding the Transitional segment, student starts would have increased 5.0%. Contributing to the increase in the student
start rates were improved high school student starts, which are up 2.7% year over year. We attribute the consistent growth to our
investments in marketing and admissions.
36
Index
For a general discussion of trends in our student enrollment, see Part II, Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Seasonality and Outlook” below.
Educational services and facilities expense. Our educational services and facilities expense decreased $1.9 million, or 1.5%, to
$123.5 million for the fiscal year ended December 31, 2019 from $125.4 million in the prior fiscal year. Excluding the
Transitional segment, which had expense of zero and $5.3 million in the current and prior year, respectively, educational services
and facilities expense increased $3.4 million. The increase was primarily the result of increases in instructional salaries and
benefits expense and books and tools expense resulting from a larger student population year over year. Partially offsetting the
increases in expense were cost savings in facilities expense resulting from the successful negotiation of more favorable lease
terms at two of our campuses. Educational services and facilities expense, as a percentage of revenue, decreased to 45.2% from
47.6% for the years ended December 31, 2019 and 2018, respectively.
Selling, general and administrative expense. Our selling general and administrative expense increased $4.0 million, or 2.8% to
$145.2 million for the fiscal year ended December 31, 2019 from $141.2 million in the prior fiscal year. Excluding the
Transitional segment, which had expense of zero and $6.5 million in the current and prior year, respectively, selling general and
administrative expense increased $10.4 million. Increases in expense were due in part to several factors including additional bad
debt expense; investments made in sales expense and marketing expense; increases in salaries and benefits expense resulting
from a larger student population and costs incurred in connections with strategic initiatives intended to increase shareholder
value. No additional costs pertaining to these strategic initiatives will be incurred going forward.
Bad debt expense increased due to certain factors including tuition increases along with a slight increase in reserve rates due to
lower historical repayment rates. In addition, modifications were made to our institutional loan program to address student
affordability barriers both at the time of enrollment and while in school. Although these student friendly changes have positively
impacted student starts and retention, it may have resulted in lower repayment rates. As of December 31, 2019, less than one
third of the student population relied on the institutional loan program to help subsidize their education.
Marketing investments were up year over year primarily to capitalize on cost effective lead generating opportunities in higher
converting channels, while also investing in greater brand awareness. Although marketing spend was up, cost per start was down
for the year ended December 31, 2019. The reduced cost per start is a positive indicator demonstrating a strong return on
investment.
Sales expense also increased during the year and is tied in part to additional marketing investments, which are generating more
leads and requiring additional resources.
Selling general and administrative expenses, as a percentage of revenue, decreased to 53.1% for the fiscal year ended December
31, 2019 from 53.7% in the prior fiscal year.
Net interest expense. Net interest expense for the fiscal year ended December 31, 2019 increased by $0.6 million, or 23.6% to
$3.0 million from $2.4 million in the prior fiscal year. This increase was driven by $0.5 million in additional expense in the
current year resulting from the write-off of previously capitalized costs incurred under our prior credit agreement. With the
execution of the new senior secured credit agreement with Sterling National Bank and approximately $12.0 million in net
proceeds obtained through the issuance of 12,700 shares of Series A Convertible Preferred Stock.
Income taxes. Our provision for income taxes was $0.3 million, or 11.7% of pretax income, for the fiscal year ended December
31, 2019, compared to a benefit for income taxes of $0.2 million, or 3.2% of pretax loss, in the prior fiscal year. No federal or
state income tax benefit was recognized for the current period loss due to the recognition of a full valuation allowance. Income
tax expense resulted from various minimal state tax expenses.
Segment Results of Operations
We operate our business in three reportable segments: (a) the Transportation and Skilled Trades segment; (b) the Healthcare and
Other Professions (“HOPS”) segment; and (c) the Transitional segment. Our reportable segments have been determined based on
a method by which we now evaluate performance and allocate resources. Each reportable segment represents a group of post-
secondary education providers that offer a variety of degree and non-degree academic programs. These segments are organized
by key market segments to enhance operational alignment within each segment to more effectively execute our strategic plan.
Each of the Company’s schools is a reporting unit and an operating segment. Our operating segments are described below.
Transportation and Skilled Trades – The Transportation and Skilled Trades segment offers academic programs mainly in the
career-oriented disciplines of transportation and skilled trades (e.g. automotive, diesel, HVAC, welding and manufacturing).
Healthcare and Other Professions – The Healthcare and Other Professions segment offers academic programs in the career-
oriented disciplines of health sciences, hospitality and business and information technology (e.g. dental assistant, medical
assistant, practical nursing, culinary arts and cosmetology).
37
Index
Transitional – The Transitional segment refers to campus operations which have been closed prior to 2019. The schools in the
Transitional segment employed a gradual teach-out process that enabled the schools to continue to operate to allow their current
students to complete their course of study.
The Company continually evaluates each campus for profitability, earning potential, and customer satisfaction. This evaluation
takes several factors into consideration, including the campus’s geographic location and program offerings, as well as skillsets
required of our students by their potential employers. The purpose of this evaluation is to ensure that our programs provide our
students with the best possible opportunity to succeed in the marketplace with the goals of attracting more students to our
programs and, ultimately, to provide our shareholders with the maximum return on their investment. As of December 31, 2019,
no campuses have been categorized in the Transitional segment.
We evaluate segment performance based on operating results. Adjustments to reconcile segment results to consolidated results
are included under the caption “Corporate,” which primarily includes unallocated corporate activity.
For all prior periods presented, the Company reclassified its Marietta, Georgia campus from the HOPS segment to the
Transportation and Skilled Trades segment. This reclassification occurred to address how the Company evaluates performance
and allocates resources and was approved by the Company’s Board of Directors.
The following table present results for our three reportable segments for the years ended December 31, 2019 and 2018:
Twelve Months Ended Dec 31,
2018
% Change
2019
Revenue:
Transportation and Skilled Trades
Healthcare and Other Professions
Transitional
Total
Operating Income (Loss):
Transportation and Skilled Trades
Healthcare and Other Professions
Transitional
Corporate
Total
Starts:
Transportation and Skilled Trades
Healthcare and Other Professions
Transitional
Total
Average Population:
Transportation and Skilled Trades
Healthcare and Other Professions
Transitional
Total
End of Period Population:
Transportation and Skilled Trades
Healthcare and Other Professions
Transitional
Total
$
$
$
$
193,722 $
79,620
-
273,342 $
185,263
72,135
5,802
263,200
21,979 $
7,588
-
(24,329)
5,238 $
17,661
6,469
(5,994)
(22,090)
(3,954)
8,294
4,023
140
12,457
7,042
3,312
237
10,591
6,988
3,537
-
10,525
8,548
4,386
-
12,934
7,319
3,666
-
10,985
7,349
3,936
-
11,285
38
4.6%
10.4%
-100.0%
3.9%
24.4%
17.3%
100.0%
-10.1%
232.5%
3.1%
9.0%
-100.0%
3.8%
3.9%
10.7%
-100.0%
3.7%
5.2%
11.3%
-
7.2%
Index
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Transportation and Skilled Trades
Student start results increased 3.1% to 8,548 for the fiscal year ended December 31, 2019 from 8,294 in the prior fiscal year.
Operating income increased $4.3 million, or 24.4% to $22.0 million for the fiscal year ended December 31, 2019 from $17.7
million in the prior fiscal year. The increase fiscal year over year was mainly driven by the following factors:
● Revenue increased $8.5 million, or 4.6% to $193.7 million for the fiscal year ended December 31, 2019 from $185.3 million in the prior fiscal
year. This increase was a result of over two years of consistent student start growth, which has driven average population up 3.9% year over
year.
● Educational services and facilities expense increased $0.4 million, or less than one percent to $85.7 million for the fiscal year ended
December 31, 2019 from $85.4 million in the prior fiscal year. The increase year over year is primarily a result of a larger student population
driving a $1.7 million, or 3.4% increase in instructional expense and books and tools expense. Partially offsetting this increase are cost
savings of $1.3 million in facilities expense primarily resulting from the successful negotiation of more favorable lease terms at two of our
campuses.
● Selling, general and administrative expense increased $4.3 million, or 5.2% to $86.6 million for the fiscal year ended December 31, 2019
from $82.3 million in the prior fiscal year. Increases in expense were primarily the result of additional bad debt expense; increases in
marketing expense and sales expense and increases in salaries and benefits expense. Additional expense incurred for bad debt, marketing and
sales are detailed in the consolidated results of operations. Increases in salaries and benefits expense were due in part to a growing student
population.
Healthcare and Other Professions
Student start results increased 9.0% to 4,386 for the fiscal year ended December 31, 2019 from 4,023 in the prior fiscal year.
Operating income increased 17.3% to $7.6 million for the fiscal year ended December 31, 2019 from $6.5 million in the prior
fiscal year. The $1.1 million increase was mainly driven by the following factors:
● Revenue increased by $7.5 million, or 10.4% to $79.6 million for the fiscal year ended December 31, 2019 from $72.1 million in the prior
fiscal year. This increase was a result of over two years of consistent student start growth, which has driven average population up 10.7%
year over year.
● Educational services and facilities expense increased by $3.0 million, or 8.8% to $37.8 million for the fiscal year ended December 31, 2019
from $34.7 million in the prior fiscal year. The increase in expense year over year was primarily due to a larger student population driving a
$2.6 million, or 10.2% increase in instructional expense and books and tools expense.
● Selling, general and administrative expense increased $3.3 million to $34.3 million for the fiscal year ended December 31, 2019 from $31.0
million in the prior fiscal year. Increases in expense were primarily the result of additional bad debt expense in combination with additional
investments in marketing expense and sales expense as detailed in the consolidated results of operations.
Transitional
During the year ended December 31, 2018, one campus, the LCNE campus at Southington, Connecticut was categorized in the
Transitional segment. This campus was fully taught out as of December 31, 2018 and financial information for this campus was
included in the Transitional segment for the year ended December 31, 2018. As of December 31, 2019, no campuses were
categorized in the Transitional segment.
Revenue was zero and $5.8 million for the year ended December 31, 2019 and 2018, respectively. Operating loss was zero and
$6.0 million for the year ended December 31, 2019 and 2018, respectively
Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses were $24.3
million for the fiscal year ended December 31, 2019 as compared to $22.1 million, in the prior fiscal year. The increase in
expense was due to costs incurred in connection with the evaluation of strategic initiatives intended to increase shareholder value.
No additional costs pertaining to these strategic initiatives will be incurred going forward. In addition, in the prior fiscal period, a
$0.4 million loss on the sale of a corporate property was realized.
39
Index
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are for 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. The
following chart summarizes the principal elements of our cash flow for each of the three fiscal years in the period ended
December 31, 2019:
Cash Flow Summary
Year Ended December 31,
2018
(In thousands)
2017
2019
Net cash provided by (used in) operating activities
Net (cash used) provided by in investing activities
Net (cash used) provided by in financing activities
$
$
$
988 $
(4,810) $
(3,480) $
(1,694) $
(2,349) $
(4,565) $
(11,321)
10,707
7,453
As of December 31, 2019, the Company had a net cash balance of $4.6 million compared to a net debt balance of $3.4 million as
of December 31, 2018. The net cash balance is calculated as our cash, cash equivalents and both short and long-term restricted
cash less both short and long-term portion of the credit agreement. The increase in cash position was primarily attributable to net
proceeds of approximately $12.0 million obtained through the issuance in November 2019 of 12,700 shares of Series A
Convertible Preferred Stock, no par value, the termination of our prior credit facility and the execution of a new senior secured
credit facility with Sterling National Bank increasing aggregate borrowings to $60 million from $47 million, and net income
generated for the year ended December 31, 2019 of approximately $2.0 million. Partially offsetting the increases in liquidity
were repayments made on net borrowings of $14.5 million as of December 31, 2019.
To fund our business plans, including any anticipated future losses, purchase commitments, capital expenditures and principal
and interest payments on borrowings, we leveraged our owned real estate. We are also continuing to take actions to improve cash
flow by aligning our cost structure to our student population, in addition to our current sources of capital that provide short term
liquidity.
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 78% of our cash receipts relating to revenues in 2019. 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 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”.
Operating Activities
Net cash provided by operating activities was $1.0 million for the fiscal year ended December 31, 2019 compared to net cash
used in operating activities of $1.7 million in the prior fiscal year. The increase of $2.7 million was driven by net income
generated for the year ended December 31, 2019 in combination with other working capital items such as accounts receivable,
accounts payable, accrued expenses and unearned tuition year over year.
Investing Activities
Net cash used in investing activities was $4.8 million for the fiscal year ended December 31, 2019 compared to $2.3 million in
the prior fiscal year. The increase of $2.5 million was primarily the result of the sale of the Mangonia Park, Florida property on
August 23, 2018 which generated a cash inflow of $2.3 million in the prior year.
One of our primary uses of cash in investing activities was capital expenditures associated with investments in training
technology, classroom furniture, and new program buildouts.
We currently lease a majority of our campuses. We own our real property in Grand Prairie, Texas; Nashville, Tennessee; and
Denver, Colorado and our former school property located in Suffield, Connecticut.
40
Index
Capital expenditures were 2% of revenues in 2020 and are expected to approximate 2% of revenues in 2021. We expect to fund
future capital expenditures with cash generated from operating activities and borrowings under our credit facility.
Financing Activities
Net cash used in financing activities was $3.5 million for the fiscal year ended December 31, 2019 compared $4.6 million in the
prior fiscal year. The decrease of $1.1 million was primarily due to net proceeds of approximately $12.0 million from the
issuance of Series A Convertible Preferred Stock in November 2019, partially offset by an increase in net payments on
borrowings year over year of $10.4 million.
Net payments on borrowings consisted of: (a) total borrowing to date under our secured credit facility of $40 million; and (b)
$54.5 million in total repayments made by the Company.
Credit Agreement
As noted above under “Recent Transactions,” on November 14, 2019, the Company entered into a new senior secured credit
agreement (the “2019 Credit Agreement”) with its Lender pursuant to which the Company obtained a credit facility in the
aggregate principal amount of up to $60 million (the “2019 Credit Facility”). The 2019 Credit Facility replaced the Company’s
existing facility with the Lender and, among other things, increased aggregate borrowing from $47 million to $60 million.
The 2019 Credit Facility is comprised of four facilities: a $20 million senior secured term loan maturing on December 1, 2024
(the “Term Loan”), with monthly interest and principal payments based on 120-month amortization with the outstanding balance
due on the maturity date; a $10 million senior secured delayed draw term loan maturing on December 1, 2024 (the “Delayed
Draw Term Loan”), with monthly interest payments for the first 18 months and thereafter monthly payments of interest and
principal based on 120-month amortization and all balances due on the maturity date; a $15 million senior secured committed
revolving line of credit providing a sublimit of up to $10 million for standby letters of credit maturing on November 13, 2022
(the “Revolving Loan”), with monthly payments of interest only, and a $15 million senior secured non-restoring line of credit
maturing on January 31, 2021 (the “Line of Credit Loan”).
The 2019 Credit Facility is secured by a first priority lien in favor of the Lender on substantially all of the personal property
owned by the Company, as well as a pledge of the stock and other equity in the Company’s subsidiaries and mortgages on parcels
of real property owned by the Company in Colorado, Tennessee and Texas, at which three of the Company’s schools are located,
as well as a former school property owned by the Company located in Connecticut.
At the closing of the 2019 Credit Facility, the Lender advanced the Term Loan to the Company, the net proceeds of which was
$19.7 million after deduction of the Lender’s origination fee in the amount of $0.3 million and other Lender fees and
reimbursements to the Lender that are customary for facilities of this type. The Company used the net proceeds of the Term
Loan, together with cash on hand, to repay the existing credit facility and transaction expenses.
Pursuant to the terms of the 2019 Credit Agreement, letters of credit issued under the Revolving Loan reduce dollar for dollar the
availability of borrowings under the Revolving Loan. Borrowings under the Line of Credit Loan are to be secured by cash
collateral.
Borrowing under the Delayed Draw Term Loan is available during the period commencing on the closing date of the 2019 Credit
Facility and ending on May 31, 2021. Any amounts not borrowed during this period will not be available to the Company. As of
December 31, 2019 there were no amounts borrowed under the Delayed Draw Term Loan
Accrued interest on each loan under the 2019 Credit Facility is being paid monthly in arrears. The Term Loan and the Delayed
Draw Term Loan each bear interest at a floating interest rate based on the then one month London Interbank Offered Rate
(“LIBOR”) plus 3.50%. At the closing of the 2019 Credit Facility, the Company entered into a swap transaction with the Lender
for 100% of the principal balance of the Term Loan, which matures on the same date as the Term Loan at a fixed interest rate of
5.36%. At the end of the borrowing availability period for the Delayed Draw Term Loan, the Company is required to enter into a
swap transaction with the Lender for 100% of the principal balance of the Delayed Draw Term Loan, which will mature on the
same date as the Delayed Draw Term Loan, pursuant to a swap agreement between the Company and the Lender or the Lender’s
affiliate. The Term Loan and Delayed Draw Term Loan are subject to a LIBOR interest rate floor of .25% if there is no swap
agreement.
Revolving Loans will bear interest at a floating interest rated based on the then LIBOR plus an indicative spread determined by
the Company’s leverage as defined in the 2019 Credit Agreement or, if the borrowing of a Revolving Loan is to be repaid within
30 days of such borrowing, the Revolving Loan will accrue interest at the Lender’s prime rate plus .50% with a floor of 4.0%.
Line of Credit Loans will bear interest at a floating interest rated based on the Lender’s prime rate of interest. Revolving Loans
are subject to a LIBOR interest rate floor of .00%.
41
Index
Letters of credit will be charged an annual fee equal to (i) an applicable margin determined by the leverage ratio of the Company
less (ii) .25%, paid quarterly in arrears, in addition to the Lender’s customary fees for issuance, amendment and other standard
fees. Letters of credit totaling $4 million that were outstanding under the existing credit facility are treated as letters of credit
under the Revolving Loan.
Under the terms of the 2019 Credit Agreement, the Company may prepay the Term Loan and/or the Delayed Draw Term Loan in
full or in part without penalty except for any amount required to compensate the Lender for any swap breakage or other costs
incurred in connection with such prepayment. The Lender receives an annual unused facility fee of 0.50% payable quarterly in
arrears on the unused portions of the Revolving Loan and the Line of Credit Loan.
In addition to the foregoing, the 2019 Credit Agreement contains customary representations, warranties and affirmative and
negative covenants (including financial covenants that (i) restrict capital expenditures, (ii) restrict leverage, (iii) require
maintaining minimum tangible net worth, (iv) require maintaining a minimum fixed charge coverage ratio and (v) require the
maintenance of a minimum of $5 million in quarterly average aggregate balances on deposit with the Lender, which, if not
maintained, will result in the assessment of a quarterly fee of $12,500), as well as events of default customary for facilities of this
type. As of December 31, 2019, the Company is in compliance with all covenants.
As of December 31, 2019, the Company had $34.8 million outstanding under the 2019 Credit Facility; offset by $0.8 million of
deferred finance fees. As of December 31, 2018, the Company had $49.3 million outstanding under the 2019 Credit Facility,
offset by $0.5 million of deferred finance fees, which were written-off. As of December 31, 2019 and December 31, 2018, letters
of credit in the aggregate outstanding principal amount of $4.0 million and $1.8 million, respectively, were outstanding under the
2019 Credit Facility.
Long-term debt and lease obligations consist of the following:
Credit agreement
Deferred financing fees
Subtotal
Less current maturities
Total long-term debt
As of December 31,
2019
2018
34,833 $
(805)
34,028
(2,000)
32,028 $
49,301
(532)
48,769
(15,000)
33,769
$
$
As of December 31, 2019, we had outstanding loan commitments to our students of $75.5 million, as compared to $63.1 million
at December 31, 2018. Loan commitments, net of interest that would be due on the loans through maturity, were $54.7 million at
December 31, 2019, as compared to $46.2 million at December 31, 2018.
Climate Change
Climate change has not had and is not expected to have a significant impact on our operations.
Contractual Obligations
Current portion of Long-Term Debt, Long-Term Debt and Lease Commitments. As of December 31, 2019, our current
portion of long-term debt and long-term debt consisted of borrowings under our Credit Facility. We lease offices, educational
facilities and various items of equipment for varying periods through the year 2030 at basic annual rentals (excluding taxes,
insurance, and other expenses under certain leases).
The following table contains supplemental information regarding our total contractual obligations as of December 31, 2019:
Credit facility*
Operating leases
Interest on Term Loan **
Total contractual cash obligations
Payments Due by Period
Total
34,833 $
79,508
4,057
118,398 $
$
$
Less than
1 year
1-3 years
3-5 years
More than 5
years
2,000 $
15,510
1,031
18,541 $
19,000 $
25,254
1,793
46,047 $
13,833 $
18,737
1,233
33,803 $
-
20,007
-
20,007
Excludes deferred finance fees of $0.8 million.
*
** Includes fixed rate interest payment resulting from the cash flow hedge.
42
Index
OFF-BALANCE SHEET ARRANGEMENTS
We had no off-balance sheet arrangements as of December 31, 2019, except for surety bonds. At December 31, 2019, we posted
surety bonds in the total amount of approximately $12.8 million. We are required to post surety bonds on behalf of our campuses
and education representatives with multiple states to maintain authorization to conduct our business. These off-balance sheet
arrangements do not adversely impact our liquidity or capital resources.
SEASONALITY AND OUTLOOK
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 as a result of 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. Our second half growth is largely dependent on a
successful high school recruiting season. We recruit our high school students several months ahead of their scheduled start dates
and, thus, 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 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. During the first
half of the year, we make significant investments in marketing, staff, programs and facilities to meet our second half of the year
targets and, as a result, such expenses do not fluctuate significantly on a quarterly basis. To the extent new student enrollments,
and related revenue, in the second half of the year fall short of our estimates, our operating results could be negatively impacted.
We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns. Such patterns may
change as a result of new school openings, new program introductions, and increased enrollments of adult students and/or
acquisitions.
Outlook
Our nation is a facing a skills gap caused by technological, demographic and policy changes. Technology is permeating every
industry and job necessitating retraining of the existing workforce in order to remain productive and engaged. At the same time,
the retirement of baby boomers in large numbers is forcing companies to look for replacement employees. Unfortunately, there
are not enough new skilled employees to replace those retiring. A major reason for this shortfall is caused by the reduction of
career education in many high schools starting in the 1980s as policy makers decided more students needed to attend college and
resources and programs were steered in that direction. Consequently, today there are more job openings than qualified
individuals to fill them. This problem, we believe presents a great opportunity for our Company.
Traditionally, our enrollments decline in a low unemployment environment. However, for the last seven quarters, we have
achieved growth despite declining unemployment levels. We attribute this growth to both better marketing of our high return-on-
investment programs and a growing awareness that four year post-secondary degrees along with their attendant high costs may
not be the best option for everyone. By partnering with industry and increasing our advertising spend, we expect to continue to
grow awareness of our schools and increase our enrollments as we seek to eliminate the skills gap. Employers are reaching out
to us seeking to employ our graduates. Like the economy in general, we have more job requests from employers than graduates
to fill them.
Furthermore, when the economy slows down, we expect that our enrollments will also increase as more people are displaced
from the workforce and need to acquire different or additional skills to find employment.
Effect of Inflation
Inflation has not had and is not expected to have a significant impact on our operations.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks as part of our on-going business operations. Our obligations under our credit facility are
secured by a lien on substantially all of our assets and any assets that we or our subsidiaries may acquire in the future. As of
December 31, 2019, we had $34.8 million outstanding under the 2019 Credit Agreement for which we hedged 57% of the
amount outstanding by entering into a cash flow hedge with a fixed interest rate of 5.36%.
Based on our remaining unhedged outstanding debt balance as of December 31, 2019, a change of one percent in the interest rate
would have caused a change in our interest expense of approximately $0.2 million, or $0.01 per basic share, on an annual basis.
Changes in interest rates could have an impact on our operations, which are greatly dependent on our students’ ability to obtain
financing and, as such, any increase in interest rates could greatly impact our ability to attract students and have an adverse
impact on the results of our operations.
43
Index
The use of the derivative instrument exposes us to credit risk if the counterparty fails to perform when the fair value of a
derivative instrument contract is positive. If the counterparty fails to perform, collateral is not required by any party whether
derivatives are in an asset or liability position.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See “Index to Consolidated Financial Statements” on page F-1 of this Annual Report on Form 10-K.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Our Chief Executive Officer and Chief Financial Officer, after evaluating, together with management, the effectiveness of our
disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)) as of December 31, 2019 have
concluded that our disclosure controls and procedures are effective to reasonably ensure that material information required to be
disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified by Securities and Exchange Commissions’ 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.
Internal Control Over Financial Reporting
During the quarter ended December 31, 2019, there has been no change in our internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We implemented
internal controls to ensure that we adequately evaluated our contracts and properly assessed the impact of the new accounting
standards related to leases on our financial statements to facilitate their adoption on January 1, 2019. There were no significant
changes to our internal control over financial reporting due to the adoption of the new standard.
Management’s Annual Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control
system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019,
based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control—Integrated Framework (2013). Based on its assessment, management believes that, as of December 31, 2019,
the Company’s internal control over financial reporting is effective.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s independent auditors, Deloitte & Touche LLP, an independent registered public accounting firm, audited the
Company’s internal control over financial reporting as of December 31, 2019, as stated in their report included in this Form 10-K
that follows.
ITEM 9B.
OTHER INFORMATION
None.
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Index
PART III.
Certain information required by this item will be included in a definitive proxy statement for the Company’s annual meeting of
shareholders or an amendment to this Annual Report on Form 10-K, in either case filed with the Securities and Exchange
Commission within 120 days after December 31, 2019, and is incorporated by reference herein.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
Certain information required by this Item 10 of Part III is incorporated by reference from a definitive proxy statement or an
amendment to this Annual Report on Form 10-K that will be filed with the Securities and Exchange Commission within 120 days
after December 31, 2019.
Code of Ethics
We have adopted a Code of Conduct and Ethics applicable to our directors, officers and employees and certain other persons,
including our Chief Executive Officer and Chief Financial Officer. A copy of our Code of Ethics is available on our website at
www.lincolntech.edu. If any amendments to or waivers from the Code of Conduct are made, we will disclose such amendments
or waivers on our website.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item 11 of Part III is incorporated by reference from a definitive proxy statement or an
amendment to this Annual Report on Form 10-K that will be filed with the Securities and Exchange Commission within 120 days
after December 31, 2019.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by this Item 12 of Part III is incorporated by reference from a definitive proxy statement or an
amendment to this Annual Report on Form 10-K that will be filed with the Securities and Exchange Commission within 120 days
after December 31, 2019.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 of Part III is incorporated by reference from a definitive proxy statement or an
amendment to this Annual Report on Form 10-K that will be filed with the Securities and Exchange Commission within 120 days
after December 31, 2019.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 of Part III is incorporated by reference from a definitive proxy statement or an
amendment to this Annual Report on Form 10-K that will be filed with the Securities and Exchange Commission within 120 days
after December 31, 2019.
45
Index
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1.
Financial Statements
PART IV.
See “Index to Consolidated Financial Statements” on page F-1 of this Annual Report on Form 10-K.
2.
Financial Statement Schedule
See “Index to Consolidated Financial Statements” on page F-1 of this Annual Report on Form 10-K.
3.
Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit
Number
Description
3.1
3.2
3.3
4.1
4.2
4.3*
10.1
10.2
10.3
10.4
10.5
10.6
10.7
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 the Company’s Quarterly Report on Form 10-Q filed November 14, 2019
Bylaws of the Company, as amended on March 8, 2019 (incorporated by reference to the Company’s Form 8-K filed June 28 2005).
Specimen Stock Certificate evidencing shares of common stock (incorporated by reference to the Company’s Registration Statement on
Form S-1/A (Registration No. 333-123644) filed June 21, 2005).
Registration Rights Agreement, dated as of November 14, 2019, between the Company and the investors parties thereto (incorporated by
reference to the Company’s Quarterly Report on Form 10-Q filed November 14, 2019.
Description of Securities of the Company
Employment Agreement, dated as of November 8, 2017, between the Company and Scott M. Shaw (incorporated by reference to the
Company’s Quarterly Report on Form 10-Q filed November 13, 2017).
Employment Agreement, dated as of November 7, 2018, between the Company and Scott M. Shaw (incorporated by reference to the
Company’s Quarterly Report on Form 10-Q filed November 9, 2018).
Employment Agreement, dated as of November 8, 2017, between the Company and Brian K. Meyers (incorporated by reference to the
Company’s Quarterly Report on Form 10-Q filed November 13, 2017).
Employment Agreement, dated as of November 7, 2018, between the Company and Brian K. Meyers (incorporated by reference to the
Company’s Quarterly Report on Form 10-Q filed November 9, 2018).
Change in Control Agreement, dated as of November 7, 2018, between the Company and Stephen M. Buchenot (incorporated by reference
to the Company’s Quarterly Report on Form 10-Q filed November 9, 2018).
Lincoln Educational Services Corporation Amended and Restated 2005 Long-Term Incentive Plan (incorporated by reference to the
Company’s Form 8-K filed May 6, 2013).
Lincoln Educational Services Corporation Amended and Restated 2005 Non-Employee Directors Restricted Stock Plan (incorporated by
reference to the Company’s Registration Statement on Form S-8 (Registration No. 333-211213) filed May 6, 2016).
46
Index
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
Lincoln Educational Services Corporation 2005 Deferred Compensation Plan (incorporated by reference to the Company’s Registration
Statement on Form S-1 (Registration No. 333-123644) filed March 29, 2005).
Form of Stock Option Agreement under our 2005 Long-Term Incentive Plan (incorporated by reference to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2007).
Form of Restricted Stock Agreement under our 2005 Long-Term Incentive Plan (incorporated by reference to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2012).
Form of Performance-Based Restricted Stock Award Agreement under our Amended & Restated 2005 Long-Term Incentive Plan
(incorporated by reference to the Company’s Form 8-K filed May 5, 2011).
Securities Purchase Agreement, dated as of November 14, 2019, between the Company and the investors parties thereto (incorporated by
reference to the Company’s Quarterly Report on Form 10-Q filed November 14, 2019).
Credit Agreement, dated as of November 14, 2019, among the Company, Lincoln Technical Institute, Inc. and its subsidiaries, and Sterling
National Bank (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 14, 2019).
Form of Indemnification Agreement between the Company and each director of the Company (incorporated by reference to the Company’s
Quarterly Report on Form 10-Q filed November 14, 2019).
Indemnification Agreement between the Company and John A. Bartholdson (incorporated by reference to the Company’s Quarterly Report
on Form 10-Q filed November 14, 2019).
21.1*
Subsidiaries of the Company.
23*
24*
31.1 *
31.2 *
32 *
101**
*
**
Consent of Independent Registered Public Accounting Firm.
Power of Attorney (included on the Signatures page of the Company’s Annual Report on Form 10-K filed March 6, 2020).
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.
The following financial statements from Lincoln Educational Services Corporation’s Annual Report on Form 10-K for the year ended
December 31, 2019, formatted in XBRL: (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated
Statements of Cash Flows, (iv) Consolidated Statements of Comprehensive (Loss) Income, (v) Consolidated Statement of Changes in
Stockholders’ Equity and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.
Filed herewith.
As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of
1933 and Section 18 of the Securities Exchange Act of 1934.
47
Index
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 6, 2020
LINCOLN EDUCATIONAL SERVICES CORPORATION
By:
/s/ Brian Meyers
Brian Meyers
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Accounting and Financial Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned constitutes and appoints Scott M. Shaw
and Brian K. Meyers, and each of them, as attorneys-in-fact and agents, with full power of substitution and re-substitution, for
and in the name, place and stead of the undersigned, in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K, and to file the same, with all exhibits thereto and all other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as
the undersigned might or could do in person, hereby ratifying and confirming all that each of said attorney-in-fact or substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Scott M. Shaw
Scott M. Shaw
/s/ Brian K. Meyers
Brian K. Meyers
/s/ Alvin O. Austin
Alvin O. Austin
/s/ John A. Bartholdson
John A. Bartholdson
/s/ Peter S. Burgess
Peter S. Burgess
/s/ James J. Burke, Jr.
James J. Burke, Jr.
/s/ Celia H. Currin
Celia H. Currin
/s/ Ronald E. Harbour
Ronald E. Harbour
/s/ J. Barry Morrow
J. Barry Morrow
Chief Executive Officer and Director
March 6, 2020
Executive Vice President, Chief Financial Officer and
Treasurer (Principal Accounting and Financial Officer)
Director
Director
Director
Director
Director
Director
Director
48
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
Index
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Other Comprehensive Income (Loss) for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity for the years ended December 31, 2019,
2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Schedule II-Valuation and Qualifying Accounts
Page Number
F-2
F-4
F-6
F-7
F-8
F-9
F-11
F-36
F-1
Index
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Lincoln Educational Services Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Lincoln Educational Services Corporation and subsidiaries
(the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive
income (loss), changes in convertible preferred stock and stockholders’ equity, and cash flows, for each of the three years in the
period ended December 31, 2019, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as
the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of
the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 6, 2020, expressed an unqualified opinion on the Company’s internal control over
financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, effective January 1, 2019, the Company adopted FASB Accounting Standards
Update 2016-02, Leases, using the modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 6, 2020
We have served as the Company’s auditor since 1999.
F-2
Index
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Lincoln Educational Services Corporation
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Lincoln Educational Services Corporation and subsidiaries (the
“Company”) as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established
in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report
dated March 6, 2020, expressed an unqualified opinion on those consolidated financial statements and included an explanatory
paragraph regarding the Company’s adoption of a new accounting standard.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 6, 2020
F-3
Index
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Restricted cash
Accounts receivable, less allowance of $18,107 and $15,590 at December 31, 2019 and 2018, respectively
Inventories
Prepaid income taxes and income taxes receivable
Prepaid expenses and other current assets
Total current assets
PROPERTY, EQUIPMENT AND FACILITIES - At cost, net of accumulated depreciation and amortization of
$172,408 and $171,109 at December 31, 2019 and 2018, respectively
OTHER ASSETS:
Noncurrent restricted cash
Noncurrent receivables, less allowance of $2,260 and $1,403 at December 31, 2019 and 2018, respectively
Deferred income taxes, net
Operating lease right-of-use assets
Goodwill
Other assets, net
Total other assets
TOTAL ASSETS
See notes to consolidated financial statements.
F-4
December 31,
2019
2018
$
$
$
23,644
-
20,652
1,608
383
4,190
50,477
17,571
16,775
18,675
1,451
178
2,461
57,111
49,345
49,292
15,000
15,337
-
49,065
14,536
1,003
94,941
194,763
$
11,600
12,175
424
-
14,536
900
39,635
146,038
Index
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Continued)
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of credit agreement
Unearned tuition
Accounts payable
Accrued expenses
Current portion of operating lease liabilities
Other short-term liabilities
Total current liabilities
NONCURRENT LIABILITIES:
Long-term credit agreement
Pension plan liabilities
Deferred income taxes, net
Long-term portion of operating lease liabilities
Accrued rent
Other long-term liabilities
Total liabilities
COMMITMENTS AND CONTINGENCIES
SERIES A CONVERTIBLE PREFERRED STOCK
December 31,
2019
2018
$
$
2,000
23,411
14,584
7,869
9,142
199
57,205
32,028
4,015
153
46,018
-
214
139,633
15,000
22,545
14,107
10,605
-
2,324
64,581
33,769
4,271
-
-
3,410
141
106,172
Preferred stock, no par value - 10,000,000 shares authorized, Series A convertible preferred shares, 12,700 shares
issued and outstanding at December 31, 2019 and no shares issued and outstanding at December 31, 2018
11,982
-
STOCKHOLDERS’ EQUITY:
Common stock, no par value - authorized 100,000,000 shares at December 31, 2019 and 2018, issued and
outstanding 31,142,251 shares at December 31, 2019 and 30,552,333 shares at December 31, 2018
Additional paid-in capital
Treasury stock at cost - 5,910,541 shares at December 31, 2019 and 2018
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ equity
TOTAL LIABILITIES, SERIES A CONVERTIBLE PREFERRED STOCK AND EQUITY
$
141,377
30,145
(82,860)
(42,058)
(3,456)
43,148
194,763
$
141,377
29,484
(82,860)
(44,073)
(4,062)
39,866
146,038
See notes to consolidated financial statements.
F-5
Index
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
REVENUE
COSTS AND EXPENSES:
Educational services and facilities
Selling, general and administrative
(Gain) loss on sale of assets
Total costs and expenses
OPERATING INCOME (LOSS)
OTHER:
Interest income
Interest expense
INCOME (LOSS) BEFORE INCOME TAXES
PROVISION (BENEFIT) FOR INCOME TAXES
NET INCOME (LOSS)
Basic
Earnings (loss) per share
Diluted
Earnings (loss) per share
Weighted average number of common shares outstanding:
Basic
Diluted
Year Ended December 31,
2018
2019
2017
$
273,342 $
263,200 $
261,853
123,495
145,176
(567)
268,104
5,238
8
(2,963)
2,283
268
2,015 $
125,373
141,244
537
267,154
(3,954)
31
(2,422)
(6,345)
200
(6,545) $
129,413
138,779
(1,623)
266,569
(4,716)
56
(7,098)
(11,758)
(274)
(11,484)
0.08 $
(0.27) $
(0.48)
0.08 $
(0.27) $
(0.48)
24,554
24,554
24,423
24,423
23,906
23,906
$
$
$
See notes to consolidated financial statements
F-6
Index
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
(In thousands)
Net income (loss)
Other comprehensive income (loss)
Derivative qualifying as cash flow hedge
Employee pension plan adjustments
Comprehensive income (loss)
2019
December 31,
2018
2017
$
2,015 $
(6,545) $
(11,484)
(174)
780
2,621 $
-
448
(6,097) $
-
1,591
(9,893)
$
See notes to consolidated financial statements
F-7
Index
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
Stockholders’ Equity
Treasury
Stock
$ (82,860) $
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Total
(26,044) $
(11,484)
(6,101) $ 54,926
-
(11,484)
Series A
Convertible
Preferred Stock
Amount
-
$
-
Shares
-
-
Common Stock
Shares
BALANCE - January 1, 2017 30,685,017
-
Net loss
Employee pension plan
Amount
$ 141,377
-
Additional
Paid-in
Capital
$
28,554
-
adjustments
Stock-based compensation
expense Restricted stock
Net share settlement for
-
128,810
equity-based compensation
(189,420)
-
-
-
-
1,220
(440)
30,624,407
-
141,377
-
29,334
-
(82,860)
equity-based compensation
(207,642)
30,552,333
-
141,377
-
29,484
-
(82,860)
BALANCE - December 31,
2017
Net loss
Employee pension plan
adjustments
Stock-based compensation
expense Restricted stock
Net share settlement for
BALANCE - December 31,
2018
Net income
Employee pension plan
adjustments
Derivative qualifying as cash
flow hedge
Issuance of series A
convertible preferred stock,
net of issuance costs
Stock-based compensation
expense Restricted stock
Net share settlement for
-
135,568
-
-
-
595,436
equity-based compensation
(5,518)
BALANCE - December 31,
-
-
-
-
522
(372)
-
-
-
-
-
-
-
-
679
(18)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,591
1,591
-
-
1,220
(440)
(37,528)
(6,545)
(4,510) 45,813
-
(6,545)
-
-
-
448
448
-
-
522
(372)
(44,073)
2,015
(4,062) 39,866
2,015
-
780
780
(174)
(174)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
12,700
11,982
679
(18)
-
-
-
-
-
-
-
-
-
2019
31,142,251
$ 141,377
$
30,145
$ (82,860) $
(42,058) $
(3,456) $ 43,148
12,700
$ 11,982
See notes to consolidated financial statements.
F-8
Index
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
$
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
2,015 $
(6,545) $
(11,484)
Year Ended December 31,
2018
2019
2017
Depreciation and amortization
Amortization of deferred finance costs
Write-off of deferred finance charges
Deferred income taxes
(Gain) loss on disposition of assets
Fixed asset donation
Provision for doubtful accounts
Stock-based compensation expense
Deferred rent
(Increase) decrease in assets:
Accounts receivable
Inventories
Prepaid income taxes and income taxes receivable
Prepaid expenses and current assets
Other assets
Increase (decrease) in liabilities:
Accounts payable
Accrued expenses
Unearned tuition
Other liabilities
Total adjustments
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
Proceeds from insurance settlement
Proceeds from sale of property and equipment
Net cash (used in) provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings
Payments on borrowings
Payment of deferred finance fees
Net share settlement for equity-based compensation
Proceeds from sale of convertible preferred stock
Payment of convertible preferred stock issuance costs
Net cash (used in) provided by financing activities
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of year
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—End of year
$
See notes to consolidated financial statements.
F-9
8,116
190
512
153
(567)
(1,084)
20,847
679
-
(25,986)
(157)
219
(502)
(1,368)
444
(1,687)
866
(1,702)
(1,027)
988
(5,385)
575
-
(4,810)
40,045
(54,514)
(975)
(18)
12,700
(718)
(3,480)
(7,302)
45,946
38,644 $
8,421
369
-
-
537
-
17,705
522
(958)
(23,836)
206
29
(109)
(191)
3,753
(1,136)
(2,102)
1,641
4,851
(1,694)
(4,697)
-
2,348
(2,349)
31,000
(35,099)
(94)
(372)
-
-
(4,565)
(8,608)
54,554
45,946 $
8,702
583
2,161
(424)
(1,623)
(19)
13,720
1,220
(1,312)
(15,733)
30
55
532
(1,163)
(3,193)
(3,613)
(131)
371
163
(11,321)
(4,755)
-
15,462
10,707
75,900
(66,766)
(1,241)
(440)
-
-
7,453
6,839
47,715
54,554
Index
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Continued)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest
Income taxes
Year Ended December 31,
2018
2019
2017
$
$
2,155 $
118 $
2,030 $
191 $
2,790
139
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
$
Liabilities accrued for or noncash purchases of fixed assets
2,852 $
265 $
1,447
See notes to consolidated financial statements.
F-10
Index
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019 AND 2018 AND FOR THE THREE YEARS ENDED DECEMBER 31, 2019
(In thousands, except share and per share amounts, schools, training sites, campuses and unless otherwise stated)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activities— Lincoln Educational Services Corporation and its subsidiaries (collectively, the “Company”, “we”, “our”
and “us”, as applicable) provide diversified career-oriented post-secondary education to recent high school graduates and
working adults. The Company, which currently operates 22 schools in 14 states, offers programs in automotive technology,
skilled trades (which include HVAC, welding and computerized numerical control and electronic systems technology, among
other programs), healthcare services (which include nursing, dental assistant and medical administrative assistant, among other
programs), hospitality services (which include culinary, therapeutic massage, cosmetology and aesthetics) and information
technology. The schools operate under Lincoln Technical Institute, Lincoln College of Technology, Lincoln Culinary Institute,
and Euphoria Institute of Beauty Arts and Sciences and associated brand names. Most of the campuses serve major metropolitan
markets and each typically offers courses in multiple areas of study. Five of the campuses are destination schools, which attract
students from across the United States and, in some cases, from abroad. The Company’s other campuses primarily attract students
from their local communities and surrounding areas. All of the campuses are nationally or regionally accredited and are eligible
to participate in federal financial aid programs by the U.S. Department of Education (the “DOE”) and applicable state education
agencies and accrediting commissions which allow students to apply for and access federal student loans as well as other forms
of financial aid.
The Company’s business is organized into three reportable business segments: (a) Transportation and Skilled Trades, (b)
Healthcare and Other Professions (“HOPS”), and (c) Transitional, which refers to our campus operations which have been closed
prior to 2019.
Liquidity—For several years, the Company and the proprietary school sector have faced deteriorating earnings. Government
regulations have negatively impacted earnings by making it more difficult for potential students to obtain loans, which, when
coupled with the overall economic environment, have discouraged potential students from enrolling in post-secondary schools. In
light of these factors, the Company has incurred significant operating losses as a result of lower student population. However,
over the last two years earnings have been improving and the Company had net income for the year ended December 31, 2019.
As of December 31, 2019, the Company had a net cash balance of $4.6 million calculated as cash, cash equivalents and both
short and long-term restricted cash less both short and long-term portion of the Company’s credit facility. The increase in cash
position was primarily attributable to net proceeds of approximately $12.0 million obtained through the sale in November, 2019
of 12,700 shares of Series A Convertible Preferred Stock, no par value, the termination of our prior credit facility and the
execution of a new senior secured credit facility with Sterling National Bank increasing available borrowings to $60 million from
$47 million, and net income generated for the year ended December 31, 2019 of approximately $2.0 million. At December 31,
2019, the Company’s sources of cash primarily included cash and cash equivalents of $38.6 million (of which $15.0 million is
restricted). In addition, the Company has availability to borrow additional funds under its credit facility for an additional $25.0
million. The Company is also continuing to take actions to improve cash flow by aligning its cost structure to its student
population. The Company believes that the likely sources of cash should be sufficient to fund operations for the next twelve
months and thereafter for the foreseeable future.
Principles of Consolidation—The accompanying consolidated financial statements include the accounts of Lincoln Educational
Services Corporation and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents—Cash and cash equivalents include all cash balances and highly liquid short-term investments,
which contain original maturities within three months of purchase. Pursuant to the DOE’s cash management requirements, the
Company retains funds from financial aid programs under Title IV of the Higher Education Act in segregated cash management
accounts. The segregated accounts do not require a restriction on use of the cash and, as such, these amounts are classified as
cash and cash equivalents on the consolidated balance sheet.
Restricted Cash—Restricted cash consists of deposits maintained at financial institutions under a cash collateral agreement
pursuant to the Company’s credit facility and cash collateral for letters of credit as to 2018 under the Company’s prior credit
facility. The amounts of $15.0 million and $11.6 million as of December 31, 2019 and 2018, respectively, of restricted cash are
included in long-term assets in the consolidated balance sheets as the restrictions are greater than one year. Refer to Note 9 for
more information on the Company’s credit facility.
Accounts Receivable—The Company reports accounts receivable at net realizable value, which is equal to the gross receivable
less an estimated allowance for uncollectible accounts. Noncurrent accounts receivable represent amounts due from graduates in
excess of 12 months from the balance sheet date.
F-11
Index
Allowance for Uncollectible Accounts—Based upon experience and judgment, an allowance is established for uncollectible
accounts with respect to tuition receivables. In establishing the allowance for uncollectible accounts, the Company considers,
among other things, current and expected economic conditions, a student’s status (in-school or out-of-school), whether or not a
student is currently making payments, and overall collection history. Changes in trends in any of these areas may impact the
allowance for uncollectible accounts. The receivables balances of withdrawn students with delinquent obligations are reserved for
based on our collection history.
Inventories—Inventories consist mainly of textbooks, computers, tools and supplies. Inventories are valued at the lower of cost
or market on a first-in, first-out basis.
Property, Equipment and Facilities—Depreciation and Amortization—Property, equipment and facilities are stated at cost.
Major renewals and improvements are capitalized, while repairs and maintenance are expensed when incurred. Upon the
retirement, sale or other disposition of assets, costs and related accumulated depreciation are eliminated from the accounts and
any gain or loss is reflected in operating income (loss). For financial statement purposes, depreciation of property and equipment
is computed using the straight-line method over the estimated useful lives of the assets, and amortization of leasehold
improvements is computed over the lesser of the term of the lease or its estimated useful life.
Advertising Costs—Costs related to advertising are expensed as incurred and approximated $29.8 million, $29.4 million and
$27.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. These amounts are included in selling,
general and administrative expenses in the consolidated statements of operations.
Goodwill and Other Intangible Assets— The Company tests its goodwill for impairment annually, or whenever events or
changes in circumstances indicate an impairment may have occurred, by comparing its reporting unit’s carrying value to its
implied fair value. Impairment may result from, among other things, deterioration in the performance of the acquired business,
adverse market conditions, adverse changes in applicable laws or regulations, reductions in market value of the Company, and
changes that restrict the activities of the acquired business, and a variety of other circumstances. If the Company determines that
an impairment has occurred, it is required to record a write-down of the carrying value and charge the impairment as an operating
expense in the period the determination is made. In evaluating the recoverability of the carrying value of goodwill and other
indefinite-lived intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to
determine the fair value of the acquired assets. Changes in strategy or market conditions could significantly impact these
judgments in the future and require an adjustment to the recorded balances. The goodwill is allocated among nine reporting units
within the Transportation and Skilled Trades Segment.
When we test goodwill balances for impairment, we determine the fair value of each of our reporting units using an equal
weighting of the discounted cash flow model and the market approach. The determination of fair value using the discounted cash
flow model requires significant estimates and assumptions related to forecasts of future revenues, which is driven by student start
growth, EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization) margins, the long-term growth rate used in the
calculation of the terminal value, and the discount rate to apply against each reporting unit’s financial metrics. The determination
of fair value using the market approach requires significant estimates and assumptions related to the selection of EBITDA
multiples and the control premiums. Changes in these assumptions could have a significant impact on either the fair value, the
amount of any goodwill impairment charge, or both.
Although we believe our projected future operating results and cash flows and related estimates regarding fair values are based
on reasonable assumptions, historically projected operating results and cash flows have not always been achieved. The failure of
one of our reporting units to achieve projected operating results and cash flows in the near term or long term may reduce the
estimated fair value of the reporting unit below its carrying value and result in the recognition of a goodwill impairment charge.
Significant management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate
future cash flows. Assumptions used in our impairment evaluations, such as forecasted growth rates and our cost of capital, are
based on the best available market information and are consistent with our internal forecasts and operating plans. In addition to
cash flow estimates, our valuations are sensitive to the rate used to discount cash flows and future growth assumptions.
At December 31, 2019, 2018 and 2017, we conducted our annual test for goodwill impairment and determined we did not have
an impairment.
Impairment of Long-Lived Assets—The Company reviews the carrying value of its long-lived assets and identifiable intangibles
for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.
The Company evaluates long-lived assets for impairment by examining 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. 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.
F-12
Index
The Company concluded that for the years ended December 31, 2019, 2018 and 2017, there were no long-lived asset
impairments.
Concentration of Credit Risk—Financial instruments that potentially subject the Company to concentrations of credit risk
consist principally of temporary cash investments. The Company places its cash and cash equivalents with high credit quality
financial institutions. The Company’s cash balances with financial institutions typically exceed the Federal Deposit Insurance
Corporation (“FDIC”) limit of $0.25 million. The Company’s cash balances on deposit at December 31, 2019, exceeded the
balance insured by the FDIC by approximately $38.0 million. The Company has not experienced any losses to date on its
invested cash.
The Company extends credit for tuition and fees to many of its students. The credit risk with respect to these accounts receivable
is mitigated through the students’ participation in federally funded financial aid programs unless students withdraw prior to the
receipt of federal funds for those students. In addition, the remaining tuition receivables are primarily comprised of smaller
individual amounts due from students.
With respect to student receivables, the Company had no significant concentrations of credit risk as of December 31, 2019 and
2018.
Use of Estimates in the Preparation of Financial Statements—The preparation of financial statements in conformity with
generally accepted accounting principles in the United States (“GAAP’) requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the period. On an ongoing basis, the
Company evaluates the estimates and assumptions, including those used to determine the incremental borrowing rate to calculate
lease liabilities and right-of-use (“ROU”) assets, lease term to calculate lease cost, revenue recognition, bad debts, impairments,
fixed assets, income taxes, benefit plans and certain accruals. Actual results could differ from those estimates.
Income Taxes—The Company accounts for income taxes in accordance with Accounting Standards Codification (“ASC”) Topic
740, “Income Taxes” (“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 considered, among other things, historical levels of income, expected future income, the expected timing of the
reversals of existing temporary reporting differences, and the expected impact of tax planning strategies that may be implemented
to prevent the potential loss of future income tax benefits. Significant judgment is required in determining the future tax
consequences of events that have been recognized in our consolidated financial statements and/or tax returns. Differences
between anticipated and actual outcomes of these future tax consequences could have a material impact on the Company’s
consolidated financial position or results of operations. Changes in, among other things, income tax legislation, statutory income
tax rates, or future income levels could materially impact the Company’s valuation of income tax assets and liabilities and could
cause our income tax provision to vary significantly among financial reporting periods. See information regarding the impact of
the Tax Cuts and Jobs Act in Note 12.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the
years ended December 31, 2019 and 2018, we did not record any interest and penalties expense associated with uncertain tax
positions.
Derivative Instruments—The Company records the fair value of derivative instruments as either assets or liabilities on the
balance sheet. The accounting for gains and losses resulting from changes in fair value is dependent on the use of the derivative
and whether it is designated and qualifies for hedge accounting.
All qualifying hedging activities are documented at the inception of the hedge and must meet the definition of highly effective in
offsetting changes to future cash. The Company utilizes the change in variable cash flows method to evaluate hedge effectiveness
quarterly. We record the fair value of the qualifying hedges in other long-term liabilities (for derivative liabilities) and other
assets (for derivative assets). All unrealized gains and losses on derivatives that are designated and qualify for hedge accounting
are reported in other comprehensive income (loss) and recognized when the underlying hedged transaction affects earnings.
Changes in the fair value of these derivatives are recognized in other comprehensive income (loss). The Company classifies the
cash flows from a cash flow hedge within the same category as the cash flows from the items being hedged.
F-13
Index
The Company adopted Accounting Standards Update (“ASU”) 2017-12, Derivatives and Hedging (Topic 815): Targeted
Improvements to Accounting for Hedging Activities, on January 1, 2019, which changes the recognition and presentation
requirements of hedge accounting, including eliminating the requirement to separately measure and report hedge ineffectiveness
and presenting all items that affect earnings in the same income statement line item as the hedged item. The ASU also provides
new alternatives for applying hedge accounting to additional hedging strategies, measuring the hedged item in fair value hedges
of interest rate risk, reducing the cost and complexity of applying hedge accounting by easing the requirements for effectiveness
testing, hedge documentation and application of the critical terms match method and reducing the risk of a material error
correction if a company applies the shortcut method inappropriately. The adoption of ASU 2017-12 had no impact on the
Company’s consolidated financial statements.
Start-up Costs—Costs related to the start of new campuses are expensed as incurred.
New Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)
2019-12, “Simplifying the Accounting for Income Taxes”, which simplifies the accounting for income taxes by removing certain
exceptions to the general principles of ASC 740, Income Taxes. The amendments also improve consistent application of and
simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for fiscal years
beginning after December 15, 2020 and early adoption is permitted. Depending on the amendment, adoption may be applied on a
retrospective, modified retrospective or prospective basis. The Company is currently assessing the effect that this ASU will have
on its consolidated financial statements and related disclosures.
In July 2019, the FASB issued ASU No. 2019-07, “Codification Updates to SEC Sections,” to reflect the recently adopted
amendments to the SEC final rules that were done to modernize and simplify certain reporting requirements for public
companies, investment advisers and investment companies. This ASU is effective upon issuance and did not have a significant
impact on the Company’s consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans – General
(Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans”. This ASU adds,
modifies and clarifies several disclosure requirements for employers that sponsor defined benefit pension or other postretirement
plans. This guidance is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company is
currently assessing the effect that this ASU will have on its consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair
Value Measurement (“ASU No. 2018-13”), which eliminates, adds and modifies certain fair value measurement disclosure
requirements of Accounting Standards Codification 820, Fair Value Measurement. The amendments in this ASU are effective for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted ASU No.
2018-13 on January 1, 2020. The Company will apply these changes to its related disclosures.
In July 2018, FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases (“ASU No. 2018-10”) to further
clarify, correct and consolidate various areas previously discussed in ASU 2016-02. FASB also issued ASU No. 2018-11, Leases:
Targeted Improvements (“ASU 2018-11”) to provide entities another option for transition and lessors with a practical expedient.
The transition option allows entities to not apply ASU No. 2016-02 in comparative periods in the financial statements in the year
of adoption. The practical expedient offers lessors an option to not separate non-lease components from the associated lease
components when certain criteria are met.
The amendments to ASU No. 2016-02, ASU No. 2018-10 and ASU No. 2018-11 are effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years, and allow for modified retrospective adoption with early
adoption permitted. The Company adopted the amendments on January 1, 2019 using the modified retrospective approach and
elected the transition relief package of practical expedients by applying previous accounting conclusions under ASC 840 to all
leases that existed prior to the transition date. As a result, the Company did not reassess (1) whether existing or expired contracts
contain leases, 2) lease classification for any existing or expired leases and 3) whether lease origination costs qualified as initial
direct costs. The Company did not elect the practical expedient to use hindsight in determining a lease term and impairment of
the ROU assets at the adoption date. Additionally, the Company did not separate lease components from non-lease components
for the specified asset classes.
Upon adoption of the new leasing standards, the Company recognized a lease liability of $42.3 million and a right-to-use asset of
$37.9 million on our consolidated balance sheet. There was no impact to retained earnings.
In June 2018, FASB issued ASU No. 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting” (“ASU No.
2018-07”), which intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to
nonemployees. This ASU expands the scope of Topic 718, “Compensation - Stock Compensation” (“Topic 718”), to include
share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements
of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost.
The Company adopted ASU No. 2018-07 on January 1, 2019. The adoption of this ASU did not have a material impact on the
Company’s consolidated financial statements and related disclosures.
F-14
Index
In February 2018, the FASB issued ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220)”. The
updated guidance allows entities to reclassify stranded income tax effects resulting from the Tax Cuts and Jobs Act (the “Tax
Act”) from accumulated other comprehensive income to retained earnings in their consolidated financial statements. Under the
Tax Act, deferred taxes were adjusted to reflect the reduction of the historical corporate income tax rate to the newly enacted
corporate income tax rate, which left the tax effects on items within accumulated other comprehensive income stranded at an
inappropriate tax rate. The updated guidance is effective for fiscal years beginning after December 15, 2018, including interim
periods within those years. The Company adopted this ASU on January 1, 2019 and it did not have a material impact on the
Company’s consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments” and subsequently issued additional guidance that modified ASU 2016-13. ASU 2016-13 and the
subsequent modifications are identified as Accounting Standards Codification (“ASC”) 326. The standard requires an entity to
change its accounting approach in determining impairment of certain financial instruments, including trade receivables, from an
“incurred loss” to a “current expected credit loss” model. Further, the FASB issued ASU No. 2019-04, ASU No. 2019-05 and
ASU 2019-11 to provide additional guidance on the credit losses standard. In November 2019, FASB issued ASU No. 2019-10,
“Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)”. This ASU
defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the
SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is
permitted. We are currently assessing the effect that this ASC will have on our consolidated financial statements and related
disclosures.
2.
FINANCIAL AID AND REGULATORY COMPLIANCE
Financial Aid
The Company’s schools and students participate in a variety of government-sponsored financial aid programs that assist students
in paying the cost of their education. The largest source of such support is the federal programs of student financial assistance
under Title IV of the Higher Education Act of 1965, as amended, commonly referred to as the Title IV Programs, which are
administered by the U.S. Department of Education (the “DOE”). During the years ended December 31, 2019, 2018 and 2017,
approximately 78%, 78% and 78%, respectively, of net revenues on a cash basis were indirectly derived from funds distributed
under Title IV Programs.
For the years ended December 31, 2019, 2018 and 2017, the Company calculated that no individual DOE reporting entity
received more than 90% of its revenue, determined on a cash basis under DOE regulations, from the Title IV Program funds. The
Company’s calculations may be subject to review by the DOE. Under DOE regulations, a proprietary institution that derives
more than 90% of its total revenue from the Title IV Programs for two consecutive fiscal years becomes immediately ineligible to
participate in the Title IV Programs and may not reapply for eligibility until the end of two fiscal years. An institution with
revenues exceeding 90% for a single fiscal year, will be placed on provisional certification and may be subject to other
enforcement measures. If one of the Company’s institutions violated the 90/10 Rule and became ineligible to participate in Title
IV Programs but continued to disburse Title IV Program funds, the DOE would require the institution to repay all Title IV
Program funds received by the institution after the effective date of the loss of eligibility.
Regulatory Compliance
To participate in Title IV Programs, a school must be authorized to offer its programs of instruction by relevant state education
agencies, be accredited by an accrediting commission recognized by the DOE and be certified as an eligible institution by the
DOE. For this reason, the schools are subject to extensive regulatory requirements imposed by all of these entities. After the
schools receive the required certifications by the appropriate entities, the schools must demonstrate their compliance with the
DOE regulations of the Title IV Programs on an ongoing basis. Included in these regulations is the requirement that the
institution must satisfy specific standards of financial responsibility. The DOE evaluates institutions for compliance with these
standards each year, based upon the institution’s annual audited financial statements, as well as following a change in ownership
resulting in a change of control of the institution. The DOE calculates the institution’s composite score for financial responsibility
based on its (i) equity ratio, which measures the institution’s capital resources, ability to borrow and financial viability; (ii)
primary reserve ratio, which measures the institution’s ability to support current operations from expendable resources; and (iii)
net income ratio, which measures the institution’s ability to operate at a profit. This composite score can range from -1 to +3.
F-15
Index
The composite score must be at least 1.5 for the institution to be deemed financially responsible without the need for further
oversight. If an institution’s composite score is below 1.5, but is at least 1.0, it is in a category denominated by the DOE as “the
zone.” Under the DOE regulations, institutions that are in the zone typically may be permitted by the DOE to continue to
participate in the Title IV Programs by choosing one of two alternatives: (1) the “Zone Alternative” under which an institution is
required to make disbursements to students under the Heightened Cash Monitoring 1 (“HCM1”) payment method and to notify
the DOE within 10 days after the occurrence of certain oversight and financial events or (2) submit a letter of credit to the DOE
equal to 50 percent of the Title IV Program funds received by the institution during its most recent fiscal year. The DOE permits
an institution to participate under the “Zone Alternative” for a period of up to three consecutive fiscal years. Under the HCM1
payment method, the institution is required to make Title IV Program disbursements to eligible students and parents before it
requests or receives funds for the amount of those disbursements from the DOE. As long as the student accounts are credited
before the funding requests are initiated, an institution is permitted to draw down funds through the DOE’s electronic system for
grants management and payments for the amount of disbursements made to eligible students. Unlike the Heightened Cash
Monitoring 2 (“HCM2”) used under circumstances where an institution’s composite score is below 1.0 and reimbursement
payment methods, the HCM1 payment method typically does not require schools to submit documentation to the DOE and wait
for DOE approval before drawing down Title IV Program funds. Effective July 1, 2016, a school under HCM1, HCM2 or
reimbursement payment methods must also pay any credit balances due to a student before drawing down funds for the amount
of those disbursements from the DOE, even if the student or parent provides written authorization for the school to hold the credit
balance.
If an institution’s composite score is below 1.0, the institution is considered by the DOE to lack financial responsibility. If the
DOE determines that an institution does not satisfy the DOE’s financial responsibility standards, depending on its composite
score and other factors, that institution may establish its eligibility to participate in the Title IV Programs on an alternative basis
by, among other things:
● Posting a letter of credit in an amount equal to at least 50% of the total Title IV Program funds received by the institution during the institution’s
most recently completed fiscal year; or
● Posting a letter of credit in an amount equal to at least 10% of the Title IV Program funds received by the institution during its most recently
completed fiscal year accepting provisional certification; complying with additional DOE monitoring requirements and agreeing to receive Title
IV Program funds under an arrangement other than the DOE’s standard advance funding arrangement
The DOE has evaluated the financial responsibility of our institutions on a consolidated basis. We have submitted to the DOE
our audited financial statements for the 2018 and 2017 fiscal years reflecting a composite score of 1.1 and 1.1, respectively, based
upon our calculations. The DOE determined in a January 13, 2020, letter that our institutions are “in the zone” based on our
composite scores for the 2018 and 2017 fiscal years and that we are required to operate under the Zone Alternative requirements,
including the requirement to make disbursements under the HCM1 payment method and to notify the DOE within 10 days of the
occurrence of certain oversight and financial events. We also are required to submit to the DOE bi-weekly cash balance
submissions outlining our available cash on hand, monthly actual and projected cash flow statements, and monthly student
rosters.
For the 2019 fiscal year, we calculated our composite score to be 1.6. This score is subject to determination by the DOE based on
its review of our consolidated audited financial statements for the 2019 fiscal year, but we believe it is likely that the DOE will
determine that our institutions comply with the composite score requirement and no longer require us to operate under the Zone
Alternative requirements after it makes its determination, although we cannot be certain how long it will take for the DOE to
make its determination and it is possible that it may elect to retain following its determination some of the conditions and
reporting requirements previously imposed on us.
An institution participating in Title IV Programs must calculate the amount of unearned Title IV Program funds that have been
disbursed to students who withdraw from their educational programs before completing them, and must return those unearned
funds to the DOE or the applicable lending institution in a timely manner, which is generally within 45 days from the date the
institution determines that the student has withdrawn.
If an institution is cited in an audit or program review for returning Title IV Program funds late for 5% or more of the students in
the audit or program review sample or if the regulatory auditor identifies a material weakness in the institution’s report on
internal controls relating to the return of unearned Title IV Program funds, the institution may be required to post a letter of credit
in favor of the DOE in an amount equal to 25% of the total amount of Title IV Program funds that should have been timely
returned for students who withdrew in the institution’s previous fiscal year.
3.
EARNINGS PER SHARE
The Company presents basic and diluted earnings (loss) per share using the two-class method which requires all outstanding
Series A Preferred Stock and unvested restricted stock that contain rights to non-forfeitable dividends and therefore participate in
undistributed earnings with common shareholders be included in computing earnings per share. Under the two-class method, net
income is reduced by the amount of dividends declared in the period for each class of common stock and participating security.
The remaining undistributed earnings are then allocated to common stock and participating securities, based on their respective
rights to receive dividends. Series A Preferred Stock and unvested restricted stock contain non-forfeitable rights to dividends on
an if-converted basis and on the same basis as common shares, respectively, and are considered participating securities. Basic
earnings (loss) per share has been computed by dividing net income (loss) allocated to common shareholders by the weighted-
average number of common shares outstanding.
F-16
Index
The Series A Preferred Stock and unvested restricted stock are not included in the computation of basic earnings (loss) per share
in periods in which we have a net loss, as the Series A Preferred Stock and unvested restricted stock are not contractually
obligated to share in our net losses. The two-class method was not applicable for the years ended December 31, 2018 and 2017
and was calculated using the treasury stock method. Dilutive potential common shares include outstanding stock options,
unvested restricted stock and Series A Preferred Stock. The Company uses the more dilutive method of calculating the diluted
earnings per share by applying the more dilutive of either (a) the treasury stock method, if-converted method, or (b) the two-class
method in its diluted EPS calculation. Potentially dilutive shares are determined by applying the treasury stock method to the
assumed exercise of outstanding stock options and the assumed vesting of restricted stock. Potentially dilutive shares issuable
upon conversion of the Series A Preferred Stock are calculated using the if-converted method.
For the year ended December 31, 2019, diluted earnings per share was calculated using the two-class method because these
amounts are more dilutive than applying the treasury stock method and if-converted methods which yielded antidilutive shares of
692,942 and 88,848 for Series A Preferred Stock and restricted shares, respectively, for the year ended December 31, 2019.
For the years ended December 31, 2018, and 2017, options to acquire 50,422, and 570,306 shares, respectively, were excluded
from the below table because the Company reported a net loss for the year and, therefore, their impact on reported loss per share
would have been antidilutive. For the years ended December 31, 2019, 2018 and 2017, options to acquire 116,000, 139,000, and
167,667 shares, respectively, were excluded from the below table because they have an exercise price that is greater than the
average market price of the Company’s common stock and, therefore, their impact on reported loss per share would have been
antidilutive.
The following is a reconciliation of the numerator and denominator of the diluted net income (loss) per share computations for
the periods presented below:
(in thousands, except share data)
Numerator:
Net income (loss)
Less: preferred stock dividend
Less: allocation to preferred stockholders
Less: allocation to restricted stockholders
Net income (loss) allocated to common stockholders
Basic earnings (loss) per share:
Denominator:
Year Ended December 31,
2018
2017
2019
$
$
2,015 $
-
(54)
(38)
1,923 $
(6,545) $
-
-
-
(6,545) $
(11,484)
-
-
-
(11,484)
Weighted average common shares outstanding
Basic earnings (loss) per share
24,554,033
0.08 $
24,423,479
(0.27) $
23,906,395
(0.48)
$
Diluted earnings (loss) per share:
Denominator:
Weighted average number of:
Common shares outstanding
Dilutive potential common shares outstanding:
Series A Preferred Stocck
Unvested restricted stock
Stock options
Dilutive shares outstanding
Diluted earnings (loss) per share
$
24,554,033
24,423,479
23,906,395
-
-
-
24,554,033
0.08 $
-
-
-
24,423,479
(0.27) $
-
-
-
23,906,395
(0.48)
F-17
Index
4.
REVENUE RECOGNITION
Prior to adoption of ASU 2014-09
Revenues are derived primarily from programs taught at our schools. Tuition revenues, textbook sales and one-time fees, such as
nonrefundable application fees and course material fees, are recognized on a straight-line basis over the length of the applicable
program as the student proceeds through the program, which is the period of time from a student’s start date through his or her
graduation date (including internships or externships, if any, occurring prior to graduation), and we complete the performance of
teaching the student entitling us to the revenue. Other revenues, such as tool sales and contract training revenues, are recognized
as goods are delivered or training completed. On an individual student basis, tuition earned in excess of cash received is recorded
as accounts receivable, and cash received in excess of tuition earned is recorded as unearned tuition.
We evaluate whether collectability of revenue is reasonably assured prior to the student commencing a program by attending
class and reassess collectability of tuition and fees when a student withdraws from a course. We calculate the amount to be
returned under Title IV Programs and its stated refund policy to determine eligible charges and, if there is a balance due from the
student after this calculation, we expect payment from the student. We have a process to pursue uncollected accounts whereby,
based upon the student’s financial means and ability to pay, a payment plan is established with the student to ensure that
collectability is reasonable. We continuously monitor our historical collections to identify potential trends that may impact our
determination that collectability of receivables for withdrawn students is realizable. If a student withdraws from a program prior
to a specified date, any paid but unearned tuition is refunded. Refunds are calculated and paid in accordance with federal, state
and accrediting agency standards. Generally, the amount to be refunded to a student is calculated based upon the period of time
the student has attended classes and the amount of tuition and fees paid by the student as of his or her withdrawal date. These
refunds typically reduce deferred tuition revenue and cash on our consolidated balance sheets as we generally do not recognize
tuition revenue in our consolidated statements of income (loss) until the related refund provisions have lapsed. Based on the
application of our refund policies, we may be entitled to incremental revenue on the day the student withdraws from one of our
schools. We record revenue for students who withdraw from one of our schools when payment is received because collectability
on an individual student basis is not reasonably assured.
After adoption of ASU 2014-09
On January 1, 2018, we adopted the new standard on revenue recognition, ASU 2014-09, using the modified retrospective
approach of ASU 2016-10. The adoption of the guidance in ASU 2014-09 as amended by ASU 2016-10 did not have a material
impact on the measurement or recognition of revenue in any prior or current reporting periods and there was no adjustment to
retained earnings. The core principle of the new standard is that a company should recognize revenue to depict the transfer of
promised goods or services to students in an amount that reflects the consideration to which the company expects to be entitled in
exchange for such goods or services. Substantially all of our revenues are considered to be revenues from contracts with
students. The related accounts receivable balances are recorded in our balance sheets as student accounts receivable. We do not
have significant revenue recognized from performance obligations that were satisfied in prior periods, and we do not have any
transaction price allocated to unsatisfied performance obligations other than in our unearned tuition. We record revenue for
students who withdraw from our schools only to the extent that it is probable that a significant reversal in the amount of
cumulative revenue recognized will not occur. Unearned tuition represents contract liabilities primarily related to our tuition
revenue. We have elected not to provide disclosure about transaction prices allocated to unsatisfied performance obligations if
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. We have assessed the costs
incurred to obtain a contract with a student and determined them to be immaterial.
Unearned tuition in the amount of $23.4 million and $22.5 million is recorded in the current liabilities section of the
accompanying condensed consolidated balance sheets as of December 31, 2019 and 2018, respectively. The change in this
contract liability balance during the year ended December 31, 2019 is the result of payments received in advance of satisfying
performance obligations, offset by revenue recognized during that period. Revenue recognized for the year ended December 31,
2019 that was included in the contract liability balance at the beginning of the year was $21.7 million.
F-18
Index
The following table depicts the timing of revenue recognition:
Timing of Revenue Recognition
Services transferred at a point in time
Services transferred over time
Total revenues
Timing of Revenue Recognition
Services transferred at a point in time
Services transferred over time
Total revenues
Timing of Revenue Recognition
Services transferred at a point in time
Services transferred over time
Total revenues
5.
LEASES
Year ended December 31, 2019
Transportation and
Skilled Trades
Segment
Healthcare and
Other Professions
Segment
Transitional
Segment
Consolidated
$
$
11,881 $
181,841
193,722 $
4,521 $
75,099
79,620 $
- $
-
- $
16,402
256,940
273,342
Year ended December 31, 2018
Transportation and
Skilled Trades
Segment
Healthcare and
Other Professions
Segment
Transitional
Segment
Consolidated
$
$
10,351 $
174,912
185,263 $
3,834 $
68,301
72,135 $
72 $
5,730
5,802 $
14,257
248,943
263,200
Year ended December 31, 2017
Transportation and
Skilled Trades
Segment
Healthcare and
Other Professions
Segment
Transitional
Segment
Consolidated
$
$
8,987 $
172,341
181,328 $
2,860 $
60,781
63,641 $
28 $
16,856
16,884 $
11,875
249,978
261,853
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU No. 2016-02”). This guidance amends the existing
accounting considerations and treatments for leases through the creation of Topic 842, Leases, to increase transparency and
comparability among organizations by requiring the recognition of right-of-use assets and lease liabilities on the balance sheet.
Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user
of the financial statements to assess the amount, timing and uncertainty of cash flows arising from such leases.
The Company determines if an arrangement is a lease at inception. The Company considers any contract where there is an
identified asset and that it has the right to control the use of such asset in determining whether the contract contains a lease. An
operating lease ROU asset represents the Company’s right to use an underlying asset for the lease term and lease liabilities
represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are to be
recognized at commencement date based on the present value of lease payments over the lease term. As all of the Company’s
operating leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information
available on the adoption date in determining the present value of lease payments. We estimate the incremental borrowing rate
based on a yield curve analysis, utilizing the interest rate derived from the fair value analysis of our credit facility and adjusting it
for factors that appropriately reflect the profile of secured borrowing over the expected term of the lease. The operating lease
ROU assets include any lease payments made prior to the rent commencement date and exclude lease incentives. Our leases have
remaining lease terms of one year to 11 years. Lease terms may include options to extend the lease term used in determining the
lease obligation when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments are
recognized on a straight-line basis over the lease term for operating leases.
F-19
Index
The following table present the cumulative effect of the changes made to the condensed consolidated balance sheets as of January
1, 2019, as a result of the adoption of ASC Topic 842:
Operating lease right-of-use asset
Current portion of operating lease liability
Other short-term liabilities
Long-term portion of operating lease liability
Accrued rent
December 31, 2018
ASC 842
January 1, 2019
$
$
$
$
$
- $
- $
968 $
- $
3,410 $
37,993 $
8,999 $
(968) $
33,372 $
(3,410) $
37,993
8,999
-
33,372
-
Our operating lease cost for the year ended December 31, 2019 was $14.5 million. Our variable lease cost for the year ended
December 31, 2019 was $2.9 million. The net change in ROU asset amortization, operating lease liability amortization, and
impact from re-measurements of $0.9 million is included in other assets in the condensed consolidated cash flows for the year
ended December 31, 2019.
Supplemental cash flow information and non-cash activity related to our operating leases are as follows:
Operating cash flow information:
Cash paid for amounts included in the measurement of operating lease liabilities
Non-cash activity:
Lease liabilities arising from obtaining right-of-use assets*
December 31, 2019
$
$
12,926
63,911
* Includes effect of adoption of ASU 2016-02 and related amendments and a new lease entered into on January 1, 2019 of $5.6
million.
Weighted-average remaining lease term and discount rate for our operating leases is as follows:
Weighted-average remaining lease term
Weighted-average discount rate
Year Ended
December 31, 2019
6.22 years
12.86%
Maturities of lease liabilities by fiscal year for our operating leases as of December 31, 2019 are as follows:
Year ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: imputed interest
Present value of lease liabilities
15,412
13,600
11,607
9,988
8,749
20,008
79,364
(24,204)
55,160
$
As of December 31, 2018, minimum lease payments under non-cancelable operating leases by period were expected to be as
follows:
2019
2020
2021
2022
2023
Thereafter
16,939
14,183
10,708
8,180
5,811
17,610
73,431
$
$
F-20
Index
6.
GOODWILL
Changes in the carrying amount of goodwill during the years ended December 31, 2019 and 2018 are as follows:
Balance as of January 1, 2018
Adjustments
Balance as of December 31, 2018
Adjustments
Balance as of December 31, 2019
Gross
Goodwill
Balance
Accumulated
Impairment
Losses
Net
Goodwill
Balance
$
$
117,176 $
-
117,176
-
117,176 $
102,640 $
-
102,640
-
102,640 $
14,536
-
14,536
-
14,536
As of December 31, 2019 and 2018, the goodwill balance of $14.5 million is related to the Transportation and Skilled Trades
segment.
7.
PROPERTY, EQUIPMENT AND FACILITIES
Property, equipment and facilities consist of the following:
Land
Buildings and improvements
Equipment, furniture and fixtures
Vehicles
Construction in progress
Less accumulated depreciation and amortization
Useful life
(years)
At December 31,
2019
2018
-
1-25
1-7
3
-
$
$
$
6,969
131,739
81,900
825
320
221,753
(172,408)
$
49,345
6,969
128,431
83,766
916
319
220,401
(171,109)
49,292
Depreciation and amortization expense of property, equipment and facilities was $8.1 million, $8.4 million and $8.7 million for
the years ended December 31, 2019, 2018 and 2017, respectively.
8.
ACCRUED EXPENSES
Accrued expenses consist of the following:
Accrued compensation and benefits
Accrued rent and real estate taxes
Other accrued expenses
At December 31,
2019
2018
$
$
3,785 $
1,763
2,321
7,869 $
4,337
3,057
3,211
10,605
F-21
Index
9.
LONG-TERM DEBT
Long-term debt consists of the following:
Credit agreement
Deferred financing fees
Less current maturities
At December 31,
2019
2018
34,833 $
(805)
34,028
(2,000)
32,028 $
49,301
(532)
48,769
(15,000)
33,769
$
$
$60 Million Credit Facility with Sterling National Bank
On November 14, 2019, the Company entered into a new senior secured credit agreement (the “2019 Credit Agreement”) with its
lender, Sterling National Bank (the “Lender”), pursuant to which the Company obtained a new credit facility in the aggregate
principal amount of up to $60 million (the “2019 Credit Facility”). The 2019 Credit Facility replaces the Company’s existing
facility with the Lender and, among other things, increases aggregate borrowing from $47 million to $60 million.
The 2019 Credit Facility is comprised of four facilities: a $20 million senior secured term loan maturing on December 1, 2024
(the “Term Loan”), with monthly interest and principal payments based on 120-month amortization with the outstanding balance
due on the maturity date; a $10 million senior secured delayed draw term loan maturing on December 1, 2024 (the “Delayed
Draw Term Loan”), with monthly interest payments for the first 18 months and thereafter monthly payments of interest and
principal based on 120-month amortization and all balances due on the maturity date; a $15 million senior secured committed
revolving line of credit providing a sublimit of up to $10 million for standby letters of credit maturing on November 13, 2022
(the “Revolving Loan”), with monthly payments of interest only; and a $15 million senior secured non-restoring line of credit
maturing on January 31, 2021 (the “Line of Credit Loan”).
The 2019 Credit Facility is secured by a first priority lien in favor of the Lender on substantially all of the personal property
owned by the Company, as well as a pledge of the stock and other equity in the Company’s subsidiaries and mortgages on parcels
of real property owned by the Company in Colorado, Tennessee and Texas, at which three of the Company’s schools are located,
as well as a former school property owned by the Company located in Connecticut.
At the closing of the 2019 Credit Facility, the Lender advanced the Term Loan to the Company, the net proceeds of which was
$19.7 million after deduction of the Lender’s origination fee in the amount of $0.3 million and other Lender fees and
reimbursements to the Lender that are customary for facilities of this type. The Company used the net proceeds of the Term
Loan, together with cash on hand, to repay the existing credit facility and transaction expenses.
Pursuant to the terms of the 2019 Credit Agreement, letters of credit issued under the Revolving Loan reduce dollar for dollar the
availability of borrowings under the Revolving Loan. Borrowings under the Line of Credit Loan are to be secured by cash
collateral.
Borrowing under the Delayed Draw Term Loan is available during the period commencing on the closing date of the 2019 Credit
Facility and ending on May 31, 2021. Any amounts not borrowed during this period will not be available to the Company.
Accrued interest on each loan under the 2019 Credit Facility will be payable monthly in arrears. The Term Loan and the Delayed
Draw Term Loan will bear interest at a floating interest rate based on the then one month London Interbank Offered Rate
(“LIBOR”) plus 3.50%. At the closing of the 2019 Credit Facility, the Company entered into a swap transaction with the Lender
for 100% of the principal balance of the Term Loan, which matures on the same date as the Term Loan. pursuant to a swap
agreement between the Company and the Lender. At the end of the borrowing availability period for the Delayed Draw Term
Loan, the Company is required to enter into a swap transaction with the Lender for 100% of the principal balance of the Delayed
Draw Term Loan, which will mature on the same date as the Delayed Draw Term Loan, pursuant to a swap agreement between
the Company and the Lender or the Lender’s affiliate. The Term Loan and Delayed Draw Term Loan are subject to a LIBOR
interest rate floor of .25% if there is no swap agreement.
Revolving Loans bear interest at a floating interest rated based on the then LIBOR plus an indicative spread determined by the
Company’s leverage as defined in the 2019 Credit Agreement or, if the borrowing of a Revolving Loan is to be repaid within 30
days of such borrowing, the Revolving Loan will accrue interest at the Lender’s prime rate plus .50% with a floor of 4.0%. Line
of Credit Loans will bear interest at a floating interest rated based on the Lender’s prime rate of interest. Revolving Loans are
subject to a LIBOR interest rate floor of .00%.
F-22
Index
Letters of credit will be charged an annual fee equal to (i) an applicable margin determined by the leverage ratio of the Company
less (ii) .25%, paid quarterly in arrears, in addition to the Lender’s customary fees for issuance, amendment and other standard
fees. Letters of credit totaling $4 million that were outstanding under the existing credit facility are treated as letters of credit
under the Revolving Loan.
Under the terms of the 2019 Credit Agreement, the Company may prepay the Term Loan and/or the Delayed Draw Term Loan in
full or in part without penalty except for any amount required to compensate the Lender for any swap breakage or other costs
incurred in connection with such prepayment. The Lender receives an unused facility fee of 0.50% per annum payable quarterly
in arrears on the unused portions of the Revolving Loan and the Line of Credit Loan.
In addition to the foregoing, the 2019 Credit Agreement contains customary representations, warranties and affirmative and
negative covenants (including financial covenants that (i) restrict capital expenditures, (ii) restrict leverage, (iii) require
maintaining minimum tangible net worth, (iv) require maintaining a minimum fixed charge coverage ratio and (v) require the
maintenance of a minimum of $5 million in quarterly average aggregate balances on deposit with the Lender, which, if not
maintained, will result in the assessment of a quarterly fee of $12,500), as well as events of default customary for facilities of this
type.
As of December 31, 2019, the Company had $34.8 million outstanding under the 2019 Credit Facility; offset by $0.8 million of
deferred finance fees. In January 2020, the Company repaid the $15.0 million outstanding on the Line of Credit Loan which was
fully cash collateralized. As of December 31, 2018, the Company had $49.3 million outstanding under the its prior credit facility,
offset by $0.5 million of deferred finance fees, which were written-off. As of December 31, 2019 and December 31, 2018, letters
of credit in the aggregate outstanding principal amount of $4.0 million and $1.8 million, respectively, were outstanding under the
Credit Facility.
On March 31, 2017, the Company obtained a secured credit facility from the Lender pursuant to a credit agreement dated March
31, 2017 among the Company, the Company’s subsidiaries and the Lender, which was subsequently amended on each of
November 29, 2017, February 23, 2018, July 11, 2018 and March 6, 2019. This credit facility was subsequently terminated on
November 14, 2019 at which time the outstanding balance was $22.1 million at an incurred interest rate of 7.85%.
Scheduled maturities of long-term debt at December 31, 2019 are as follows:
Year ending December 31,
2020
2021
2022
2023
2024
$
$
2,000
17,000
2,000
2,000
11,833
34,833
10.
STOCKHOLDERS’ EQUITY
Common Stock
Holders of our common stock are entitled to receive dividends when and as declared by our Board of Directors and have the right
to one vote per share on all matters requiring shareholder approval. The Company has not declared or paid any cash dividends on
our common stock since the Company’s Board of Directors discontinued our quarterly cash dividend program in February 2015.
The Company has no current intentions to resume the payment of cash dividends in the foreseeable future.
Preferred Stock
On November 14, 2019, the Company raised gross proceeds of $12.7 million from the sale of 12,700 shares of its newly
designated Series A 9.6% Convertible Preferred Stock, no par value per share (the “Series A Preferred Stock”). The Series A
Preferred Stock was designated by the Company’s Board of Directors pursuant to a certificate of amendment to the Company’s
amended and restated certificate of incorporation. The liquidation preference associated with the Series A Preferred Stock was
$1,000 per share at December 31, 2019. The Company incurred issuance cost of $0.7 million as part of this transaction.
The description below provides a summary of certain material terms of the Series A Preferred Stock pursuant to the Securities
Purchase Agreement and set forth in the Certificate of Amendment (the “Charter Amendment”) affecting the Series A Preferred
Stock:
F-23
Index
Securities Purchase Agreement.
The Series A Preferred Stock was sold by the Company pursuant to a Securities Purchase Agreements dated as of November 14,
2019 (the “SPA”) among the Company, Juniper Targeted Opportunity Fund, L.P. and Junior Targeted Opportunities, L.P.
(together, “Juniper Purchasers”) Talanta Investment, Inc. (“Talanta”, together with Juniper Purchasers, the “Investors”). Among
other things, the SPA includes covenants relating to the appointment of a director to the Company’s Board of Directors to be
selected solely by the holders of the Series A Preferred Stock.
Dividends. Dividends on the Series A Preferred Stock (“Series A Dividends”), at the initial annual rate of 9.6% is to be paid, in
advance, from the date of issuance quarterly on each December 31, March 31, June 30 and September 30 with September 30,
2020 as the first dividend payment date. The Company, at its option, may pay dividends in cash or dividends will accrue and
thereby increase the number of shares issuable upon conversion of the Series A Preferred Stock. The dividend rate is subject to
increase (a) 2.4% per annum on the fifth anniversary of the issuance of the Series A Preferred Stock (b) by 2% per annum but in
no event above 14% per annum should the Company fail to perform certain obligations under the Charter Amendment. The
Series A Preferred Stock is not currently redeemable and it is not probable it will become redeemable in the future. As a result,
the Company is not required to re-measure the Series A Preferred Stock and does not accrete changes in the redemption value.
As of December 31, 2019, undeclared accrued dividends are approximately $0.2 million.
Series A Preferred Stock Holders Right to Convert into common stock. Each share of Series A Preferred Stock, at any time, is
convertible into a number of shares of common stock equal to (“Convertible Formula”) the quotient of (i) the sum of (A) $1,000
(subject to adjustment as provided in the Charter Amendment) plus (B) the dollar amount of any declared Series A Dividends
not paid in cash divided by (ii) the Series A Conversion Price (as defined and adjusted in the Charter Amendment) as of the
applicable Conversion Date (as defined in the Charter Amendment). The initial Conversion Price is $2.36. At all times, however,
the number of Conversion Shares that can be issued to any Series A Preferred Stock Holder may not result in such holder and its
affiliates owning more than 19.99% of the total number of shares of common stock outstanding after giving effect to the
conversion (the “Hard Cap”), unless prior shareholder approval is obtained or no longer required by the rules of the principal
stock exchange on which the Company’s common stock trade.
Mandatory Conversion. If, at any time following November 14, 2022 the volume weighted average price of the Company’s
common stock equals or exceeds 2.25 times the Conversion Price for a period of 20 consecutive trading days and on each such
trading day at least 20,000 shares of common stock was traded, the Company may, at its option and subject to the Hard Cap,
require that any or all of the then outstanding shares of Series A Preferred Stock be automatically converted into shares of
common stock at the then applicable convertible Formula at the Company’s discretion.
Redemption. Beginning November 14, 2024, the Company may redeem all or any of the Series A Preferred Stock for a cash price
equal to the greater of (“Liquidation Preference”) (i) the sum of $1,000 (subject to adjustment as provided in the Charter
Amendment) plus the dollar amount of any declared Series A Dividends not paid in cash and (ii) the value of the Conversion
Shares were such Series A Preferred Stock converted (as determined in the Charter Amendment) without regard to the Hard Cap.
Change of Control. In the event of certain changes of control, some of which are not in the Company’s control, as defined in the
Charter Amendment as a “Fundamental Change” or a “Liquidation” (as defined in the Charter Amendment), the Series A
Preferred Stockholders shall be entitled to receive the Liquidation Preference, unless such Fundamental Change is a stock merger
in which certain value and volume requirements are met, in which case the Series A Preferred Stock will be converted into
common stock in connection with such stock merger. The Company has classified the Series A Preferred Stock as mezzanine
equity on the Consolidated Balance Sheet based upon the terms of a change of control which could be outside the Company’s
control.
Voting. Holders of shares of Series A Preferred Stock will be entitled to vote with the holders of shares of common stock and not
as a separate class, at any annual or special meeting of shareholders of the Company, on an as-converted basis, in all cases subject
to the Hard Cap. In addition, a majority of the voting power of the Series A Preferred Stock must approve certain significant
actions of the Company, including (i) declaring a dividend or otherwise redeeming or repurchasing any shares of common stock
and other junior securities, if any, subject to certain exceptions, (ii) incurring indebtedness, except for certain permitted
indebtedness and (iii) creating a subsidiary other than a wholly-owned subsidiary.
Additional Provisions. The Series A Preferred Stock is perpetual and therefore does not have a maturity date. The conversion
price of the Series A Preferred Stock is subject to anti-dilution protections if the Company affects a stock split, stock dividend,
subdivision, reclassification or combination of its common stock and certain other economically dilutive events.
Registration Rights Agreement. The Company also is a party to a Registration Rights Agreement (“RRA”) with the investors of
the Series A Preferred Stock. The RRA provides for unlimited demand registration rights, of which there can be two
underwritten offerings each for at least $5 million in gross proceeds, and piggyback registration rights, with respect to the
Conversion Shares.
F-24
Index
Restricted Stock
The Company has two stock incentive plans: a Long-Term Incentive Plan (the “LTIP”) and a Non-Employee Directors Restricted
Stock Plan (the “Non-Employee Directors Plan”).
Under the LTIP, certain employees received awards of restricted shares of common stock based on service and performance. The
number of shares granted to each employee is based on the fair market value of a share of common stock on the date of grant.
On February 28, 2019, restricted shares were granted to certain employees of the Company, which shares ratably vest over three
years. There is no restriction on the right to vote or the right to receive dividends with respect to any of such restricted shares.
On February 23, 2018, restricted shares of common stock of the Company were granted to certain employees of the Company,
which shares vested immediately. There is no restriction on the right to vote or the right to receive dividends with respect to any
of such restricted shares; however, the recipient can only sell or otherwise transfer the shares after the expiration of a specified
period of time ranging from 120 to 240 days following the date of grant.
On May 13, 2016 and January 16, 2017, performance-based restricted shares were granted to certain employees of the Company,
which vest on March 15, 2017 and March 15, 2018 based upon the attainment of a financial metric during each fiscal year ending
December 31, 2016 and 2017. These shares were fully vested as of March 31, 2018 and are held without restriction.
Pursuant to the Non-Employee Directors Plan, each non-employee director of the Company receives an annual award of
restricted shares of common stock on the date of the Company’s annual meeting of shareholders. The number of shares granted
to each non-employee director is based on the fair market value of a share of common stock on that date. There is no restriction
on the right to vote or the right to receive dividends with respect to any of the restricted shares.
In 2019, 2018 and 2017, the Company completed a net share settlement for 5,518, 207,642 and 189,420 restricted shares and
stock options exercised, respectively, on behalf of certain employees that participate in the LTIP upon the vesting of the restricted
shares pursuant to the terms of the LTIP or exercise of the stock options. The net share settlement was in connection with income
taxes incurred on restricted shares or stock option exercises that vested and were transferred to the employee during 2019, 2018
and/or 2017, creating taxable income for the employee. At the employees’ request, the Company will pay these taxes on behalf
of the employees in exchange for the employees returning an equivalent value of restricted shares or shares acquired upon the
exercise of stock options to the Company. These transactions resulted in a decrease of approximately less than $0.1 million, $0.4
million and $0.4 million in 2019, 2018 and 2017, respectively, to equity as the cash payment of the taxes effectively was a
repurchase of the restricted shares or shares acquired through the exercise of stock options granted in previous years.
The following is a summary of transactions pertaining to restricted stock:
Nonvested restricted stock outstanding at December 31, 2017
Granted
Cancelled
Vested
Nonvested restricted stock outstanding at December 31, 2018
Granted
Cancelled
Vested
Nonvested restricted stock outstanding at December 31, 2019
Weighted
Average Grant
Date Fair Value
Per Share
1.90
1.60
-
1.82
2.23
3.15
3.17
2.23
3.15
Shares
$
607,994
135,568
-
(707,654)
35,908
598,982
(3,546)
(35,908)
595,436
The restricted stock expense for each of the years ended December 31, 2019, 2018 and 2017 was $0.7 million, $0.5 million and
$1.2 million, respectively. The unrecognized restricted stock expense as of December 31, 2019 and 2018 was $1.2 million and
$0.1 million, respectively. As of December 31, 2019, unrecognized restricted stock expense will be expensed over the weighted-
average period of approximately 12 months. As of December 31, 2019, outstanding restricted shares under the LTIP had an
aggregate intrinsic value of $1.6 million.
F-25
Index
Stock Options
During 2019, 2018 and 2017 there were no new stock option grants. The following is a summary of transactions pertaining to the
option plans:
Outstanding January 1, 2017
Cancelled
Outstanding December 31, 2017
Cancelled
Outstanding December 31, 2018
Cancelled
Outstanding December 31, 2019
Vested as of December 31, 2019
Weighted
Average
Exercise Price
Per Share
Shares
218,167
(50,500)
$
167,667
(28,667)
139,000
(23,000)
Weighted
Average
Remaining
Contractual
Term
3.33 years $
12.11
12.09
12.11
11.98
12.14
20.15
2.97 years
2.53 years
116,000
10.56
1.83 years
116,000
10.56
1.83 years
Exercisable as of December 31, 2019
116,000
10.56
1.83 years
Aggregate
Intrinsic
Value
-
-
-
-
-
-
-
-
As of December 31, 2019, there are no unrecognized pre-tax compensation expense for unvested stock option awards.
The following table presents a summary of options outstanding at December 31, 2019:
Stock Options Outstanding
Stock Options Exercisable
At December 31, 2019
Range of Exercise Prices
$
$
7.79
20.62
Shares
91,000
25,000
Contractual
Weighted
Average life
(years)
Weighted
Average
Exercise Price
Shares
Weighted
Average Exercise
Price
2.17 $
0.59
7.79
20.62
91,000 $
25,000
7.79
20.62
10.56
116,000
1.83
10.56
116,000
F-26
Index
11.
PENSION PLAN
The Company sponsors a noncontributory defined benefit pension plan covering substantially all of the Company’s union
employees. Benefits are provided based on employees’ years of service and earnings. This plan was frozen on December 31,
1994 for non-union employees.
The following table sets forth the plan’s funded status and amounts recognized in the consolidated financial statements:
CHANGES IN BENEFIT OBLIGATIONS:
Benefit obligation-beginning of year
Service cost
Interest cost
Actuarial loss (gain)
Benefits paid
Benefit obligation at end of year
CHANGE IN PLAN ASSETS:
Fair value of plan assets-beginning of year
Actual return on plan assets
Benefits paid
Fair value of plan assets-end of year
$
Year Ended December 31,
2018
2019
2017
21,105 $
33
812
2,103
(1,221)
22,832
16,835
3,203
(1,221)
18,817
23,492 $
28
755
(1,951)
(1,219)
21,105
19,055
(1,000)
(1,220)
16,835
22,916
29
840
721
(1,014)
23,492
17,548
2,521
(1,014)
19,055
BENEFIT OBLIGATION IN EXCESS OF FAIR VALUE FUNDED STATUS:
$
(4,015) $
(4,270) $
(4,437)
For the year ended December 31, 2019, the actuarial loss of $2.1 million was due to the decrease in the discount rate from 4.01%
to 2.93%.
Amounts recognized in the consolidated balance sheets consist of:
Noncurrent liabilities
$
(4,015) $
(4,270)
At December 31,
2019
2018
Amounts recognized in accumulated other comprehensive loss consist of:
Accumulated loss
Deferred income taxes
Accumulated other comprehensive loss
Year Ended December 31,
2018
2017
2019
$
$
(5,648) $
2,366
(3,282) $
(6,428) $
2,366
(4,062) $
(6,876)
2,366
(4,510)
The accumulated benefit obligation was $22.8 million and $21.1 million at December 31, 2019 and 2018, respectively.
The following table provides the components of net periodic cost for the plan:
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost
Interest cost
Expected return on plan assets
Recognized net actuarial loss
Net periodic benefit cost
Year Ended December 31,
2018
2017
2019
$
$
33 $
812
(1,011)
691
525 $
28 $
755
(1,104)
601
280 $
29
840
(1,058)
850
661
The estimated net loss and prior service cost for the plan that will be amortized from accumulated other comprehensive loss into
net periodic benefit cost over the next year is $0.6 million.
F-27
Index
The following tables present plan assets using the fair value hierarchy as of December 31, 2019 and 2018. The fair value
hierarchy has three levels based on the reliability of inputs used to determine fair value. Level 1 refers to fair values determined
based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using observable prices that
are based on inputs not quoted in active markets but observable by market data, while Level 3 includes the fair values estimated
using significant non-observable inputs. The level in the fair value hierarchy within which the fair value measurement falls is
determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Equity securities
Fixed income
International equities
Real estate
Cash and equivalents
Balance at December 31, 2019
Equity securities
Fixed income
International equities
Real estate
Cash and equivalents
Balance at December 31, 2018
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
6,259 $
6,313
4,165
964
1,116
18,817 $
- $
-
-
-
-
- $
- $
-
-
-
-
- $
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
5,428 $
5,852
3,734
795
1,026
16,835 $
- $
-
-
-
-
- $
- $
-
-
-
-
- $
Total
6,259
6,313
4,165
964
1,116
18,817
Total
5,428
5,852
3,734
795
1,026
16,835
Fair value of total plan assets by major asset category as of December 31:
Equity securities
Fixed income
International equities
Real estate
Cash and equivalents
Total
2019
2018
33%
34%
22%
5%
6%
100%
32%
35%
22%
5%
6%
100%
Weighted-average assumptions used to determine benefit obligations as of December 31:
Discount rate
Rate of compensation increase
2019
2018
2.93%
2.75%
4.01%
2.50%
Weighted-average assumptions used to determine net periodic pension cost for years ended December 31:
Discount rate
Rate of compensation increase
Long-term rate of return
2019
2018
2017
2.93%
2.75%
5.75%
4.01%
2.50%
6.25%
3.36%
2.50%
6.00%
As this plan was frozen to non-union employees on December 31, 1994, the difference between the projected benefit obligation
and accumulated benefit obligation is not significant in any year.
F-28
Index
The Company invests plan assets based on a total return on investment approach, pursuant to which the plan assets include a
diversified blend of equity and fixed income investments toward a goal of maximizing the long-term rate of return without
assuming an unreasonable level of investment risk. The Company determines the level of risk based on an analysis of plan
liabilities, the extent to which the value of the plan assets satisfies the plan liabilities and the plan’s financial condition. The
investment policy includes target allocations ranging from 30% to 70% for equity investments, 20% to 60% for fixed income
investments and 0% to 10% for cash equivalents. The equity portion of the plan assets represents growth and value stocks of
small, medium and large companies. The Company measures and monitors the investment risk of the plan assets both on a
quarterly basis and annually when the Company assesses plan liabilities.
The Company uses a building block approach to estimate the long-term rate of return on plan assets. This approach is based on
the capital markets assumption that the greater the volatility, the greater the return over the long term. An analysis of the
historical performance of equity and fixed income investments, together with current market factors such as the inflation and
interest rates, are used to help make the assumptions necessary to estimate a long-term rate of return on plan assets. Once this
estimate is made, the Company reviews the portfolio of plan assets and makes adjustments thereto that the Company believes are
necessary to reflect a diversified blend of equity and fixed income investments that is capable of achieving the estimated long-
term rate of return without assuming an unreasonable level of investment risk. The Company also compares the portfolio of plan
assets to those of other pension plans to help assess the suitability and appropriateness of the plan’s investments.
The Company does not expect to make contributions to the plan in 2020. However after considering the funded status of the
plan, movements in the discount rate, investment performance and related tax consequences, the Company may choose to make
additional contributions to the plan in any given year.
The total amount of the Company’s contributions paid under its pension plan was zero for each of the years ended December 31,
2019 and 2018, respectively.
Information about the expected benefit payments for the plan is as follows:
Year Ending December 31,
2020
2021
2022
2023
2024
Years 2025-2029
$
1,318
1,325
1,346
1,371
1,384
6,757
The Company has a 401(k) defined contribution plan for all eligible employees. Employees may contribute up to 25% of their
compensation into the plan. The Company may contribute up to an additional 30% of the employee’s contributed amount up to
6% of compensation. For the years ended December 31, 2019, 2018 and 2017, the Company’s expense for the 401(k) plan
amounted to $0.1 million, $0.1 million and $0.1 million, respectively.
F-29
Index
12.
INCOME TAXES
Components of the provision for income taxes were as follows:
Current:
Federal
State
Total
Deferred:
Federal
State
Total
Year Ended December 31,
2018
2017
2019
$
- $
115
115
120
33
153
- $
200
200
-
-
-
Total provision (benefit)
$
268 $
200 $
-
150
150
(424)
-
(424)
(274)
Effective Tax rate
The reconciliation of the effective tax rate to the U.S. Statutory Federal Income tax rate was:
Income (loss) before taxes
Expected tax (benefit)
State tax benefit (net of federal)
Valuation allowance
Federal tax reform - deferred rate change
Other
Total
$
$
$
2019
2,283
479
148
(428)
-
69
268
Year Ended December 31,
2018
$
(6,345)
2017
$
(11,758)
21.0% $
6.5
(18.8)
-
3.0
11.7% $
(1,332)
200
1,230
49
53
200
21.0% $
(3.2)
(19.4)
(0.8)
(0.8)
(3.2%) $
(4,115)
150
(13,920)
17,671
(60)
(274)
35.0%
(1.3)
118.4
(150.3)
0.5
2.3%
On December 22, 2017, the U.S. government enacted comprehensive tax legislation known as the Tax Cuts and Jobs Act (the
“Tax Act”). The Tax Act establishes new tax laws that took effect in 2018, including, but not limited to (1) reduction of the U.S.
federal corporate tax rate from a maximum of 35% to 21%; (2) elimination of the corporate alternative minimum tax (AMT); (3)
a new limitation on deductible interest expense; (4) the repeal of the domestic production activity deduction; (5) limitations on
the deductibility of certain executive compensation; and (6) limitation on net operating losses generated after December 31, 2017,
to 80% of taxable income. In addition, certain changes were made to the bonus depreciation rules that impacted fiscal year 2017.
Our provision for income taxes was $0.3 million, or 11.7% of pretax income, for the year ended December 31, 2019, compared to
a benefit for income taxes of $0.2 million, or 3.2% of pretax loss, in the prior year comparable period. No federal or state income
tax benefit was recognized for the current period loss due to the recognition of a full valuation allowance. Income tax expense
resulted from various minimal state tax expenses.
F-30
Index
Deferred Taxes and Valuation Allowance
The components of the non-current deferred tax (liabilities)/assets were as follows:
$
Gross noncurrent deferred tax (liabilities) assets
Allowance for bad debts
Accrued rent
Stock-based compensation
Lease liability
Right-of-use asset
163J interest limitation
Depreciation
Goodwill
Other intangibles
Pension plan liabilities
Net operating loss carryforwards
AMT credit
Gross noncurrent deferred tax assets, net
Less valuation allowance
Noncurrent deferred tax (liabilities) assets, net
$
At December 31,
2019
2018
5,461 $
-
178
14,822
(13,156)
-
10,981
(766)
135
1,286
18,261
-
37,202
(37,355)
(153) $
4,828
1,833
18
-
-
19
16,259
(98)
211
1,163
17,927
424
42,584
(42,160)
424
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be
generated to use the existing deferred tax assets. A significant piece of objective negative evidence was the cumulative losses
incurred by the Company in recent years.
On the basis of this evaluation the Company believes it is not more likely than not that it will realize its deferred tax assets As a
result, as of December 31, 2019 and 2018, the Company has recorded a valuation allowance of $37.4 million and $42.2 million,
respectively, against its net deferred tax assets. With respect to AMT credit, the Company has recorded a $0.4 million receivable
since it is expected that 50% will be refunded as a result of filing the Company’s 2018 federal corporate income tax return and
the remaining 50% will be refunded upon the filings of the Company’s future federal corporate income tax returns.
As of December 31, 2019, the Company has net operating loss (“NOL”) carryforwards of $66.7 million. Of the $66.7 million
NOL carryforwards, $58.5 million will start expiring in 2029 and ending in 2038 if unused. The net operating losses of $8.2
million generated in 2018 can be carried over indefinitely under the Tax Act. Utilization of the NOL carryforwards may be
subject to a substantial limitation due to ownership change limitations that may occur in the future, as required by Section 382 of
the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state and foreign provisions. These ownership
changes may limit the amount of NOL and tax credit carryforwards that can be utilized annually to offset future taxable income
and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or
series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the
outstanding stock of a company by certain shareholders or public groups.
As of December 31, 2019, 2018 and 2017, the Company no longer has any liability for uncertain tax positions. The Company
recognizes accrued interest and penalties related to uncertain tax positions in income tax expense.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states. The Company
is no longer subject to U.S. federal income tax examinations for years before 2016 and, generally, is no longer subject to state and
local income tax examinations by tax authorities for years before 2016 with few exceptions.
F-31
Index
13.
FAIR VALUE
The carrying amount and estimated fair value of the Company’s financial instrument assets and liabilities, which are not
measured at fair value on the Consolidated Balance Sheets, are listed in the table below:
Financial Assets:
Cash and cash equivalents
Restricted cash
Prepaid expenses and other current assets
Financial Liabilities:
Accrued expenses
Other short term liabilities
Derivative qualifying as cash flow hedge
Credit facility
Financial Assets:
Cash and cash equivalents
Restricted cash
Prepaid expenses and other current assets
Financial Liabilities:
Accrued expenses
Other short term liabilities
Credit facility
December 31, 2019
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Carrying
Amount
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
$
$
23,644 $
15,000
23,644 $
15,000
- $
-
4,190
-
4,190
7,869 $
199
174
34,028
- $
-
-
-
7,869 $
199
174
34,028
December 31, 2018
- $
-
-
- $
-
-
-
23,644
15,000
4,190
7,869
199
174
34,028
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Carrying
Amount
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
17,571 $
28,375
17,571 $
28,375
- $
-
2,461
-
2,461
10,605 $
2,324
48,769
- $
-
-
10,605 $
2,324
43,096
- $
-
-
- $
-
-
17,571
28,375
2,461
10,605
2,324
43,096
We estimate that the carrying value of the Credit Facility approximates the fair value due to the fact that the Credit Facility was
entered into in close proximity to December 31, 2019.
For the year ended December 31, 2018 we estimated the fair value of Facility 1 and Facility 2 of the revolving credit facility
based on a present value analysis utilizing aggregate market yields obtained from independent pricing sources for similar
financial instruments. The carrying value for Facility 3 of the revolving credit facility approximated fair value due to the fact that
the borrowings were made in close proximity to December 31, 2018.
The carrying amounts reported on the Consolidated Balance Sheets for Cash and cash equivalents, Restricted cash and
Noncurrent restricted cash approximate fair value because they are highly liquid.
The carrying amounts reported on the Consolidated Balance Sheets for Prepaid expenses and Other current assets, Accrued
expenses and Other short term liabilities approximate fair value due to the short-term nature of these items.
Qualifying Hedge Derivative
On November 14, 2019, the Company entered into an interest rate swap for the Term Loan with a notional amount of $20M
which expires on December 1, 2024. The loan has a 10-year straight line amortization. A principal amount of $0.2 million is
paid monthly. This interest rate swap converts the floating interest rate Term Loan to a fixed rate, plus a borrowing spread. The
interest rate is variable based on LIBOR plus 3.50% and the Company’s fixed rate is 5.36%. The Company designated this
interest rate swap as a cash flow hedge.
F-32
Index
The Company entered into this interest rate swap to hedge exposure resulting from the interest rate risk. The purpose of this
hedge is to reduce the variability of the interest rate based on LIBOR. The Company manages these exposures within specified
guidelines through the use of derivatives. All of our derivative instruments are utilized for risk management purposes, and the
Company does not use derivatives for speculative trading purposes.
The interest rate swap had a notional amount of $19.8 million and a fair value of $0.1 million as of December 31, 2019. The
Company derivative liability is measured at fair value using observable market inputs such as interest rates and our own credit
risk as well as an evaluation of our counterparty’s credit risk. Based on these inputs the derivative liability is classified within
Level 2 of the valuation hierarchy.
The interest expense recorded as a result of the interest rate swap was $0.1 million as of December 31, 2019. The loss recognized
in accumulated other comprehensive income (loss) and the derivative liability which was recorded in other long-term liabilities
was $0.1 million as of December 31, 2019.
14.
SEGMENT REPORTING
We operate our business in three reportable segments: (a) the Transportation and Skilled Trades segment; (b) the Healthcare and
Other Professions segment; and (c) the Transitional segment. Our reportable segments have been determined based on a method
by which we now evaluate performance and allocate resources. Each reportable segment represents a group of post-secondary
education providers that offer a variety of degree and non-degree academic programs. These segments are organized by key
market segments to enhance operational alignment within each segment to more effectively execute our strategic plan. Each of
the Company’s schools is a reporting unit and an operating segment. Our operating segments are described below.
Transportation and Skilled Trades – The Transportation and Skilled Trades segment offers academic programs mainly in the
career-oriented disciplines of transportation and skilled trades (e.g. automotive, diesel, HVAC, welding and manufacturing).
Healthcare and Other Professions – The Healthcare and Other Professions segment offers academic programs in the career-
oriented disciplines of health sciences, hospitality and business and information technology (e.g. dental assistant, medical
assistant, practical nursing, culinary arts and cosmetology).
Transitional – The Transitional segment refers to our campus operations which have been closed prior to 2019. The schools in
the Transitional segment employed a gradual teach-out process that enabled the schools to continue to operate to allow their
current students to complete their course of study.
The Company continually evaluates each campus for profitability, earning potential, and customer satisfaction. This evaluation
takes several factors into consideration, including the campus’s geographic location and program offerings, as well as skillsets
required of our students by their potential employers. The purpose of this evaluation is to ensure that our programs provide our
students with the best possible opportunity to succeed in the marketplace with the goals of attracting more students to our
programs and, ultimately, to provide our shareholders with the maximum return on their investment. Campuses classified in the
Transitional segment have been subject to this process and have been strategically identified for closure. As of December 31,
2019, no campuses have been categorized in the Transitional segment.
We evaluate segment performance based on operating results. Adjustments to reconcile segment results to consolidated results
are included under the caption “Corporate,” which primarily includes unallocated corporate activity.
For all prior periods presented, the Company reclassified its Marietta, Georgia campus from the HOPS segment to the
Transportation and Skilled Trades segment. This reclassification occurred to address how the Company evaluates performance
and allocates resources and was approved by the Company’s Board of Directors.
F-33
Index
Summary financial information by reporting segment is as follows:
2019
% of
Total
For the Year Ended December 31,
Revenue
2018
% of
Total
2017
% of
Total
Operating Income (Loss)
2019
2018
2017
Transportation and Skilled
Trades
Healthcare and Other
Professions
Transitional
Corporate
Total
$ 193,722
70.9% $ 185,263
70.4% $ 181,328
69.2% $
21,979 $
17,661 $
17,795
79,620
-
-
$ 273,342
72,135
29.1%
5,802
0.0%
0.0%
-
100% $ 263,200
63,641
27.4%
16,884
2.3%
0.0%
-
100% $ 261,853
24.3%
6.4%
0.0%
100% $
7,588
-
(24,329)
5,238 $
6,469
(5,994)
(22,090)
(3,954) $
3,937
(6,926)
(19,522)
(4,716)
Transportation and Skilled Trades
Healthcare and Other Professions
Transitional
Corporate
Total
15.
COMMITMENTS AND CONTINGENCIES
Total Assets
December 31, 2019 December 31, 2018
92,070
$
14,078
527
39,363
146,038
121,611 $
27,945
-
45,207
194,763 $
$
Litigation and Regulatory Matters— In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations
and claims, including, but not limited to, claims involving students or graduates and routine employment matters. Although we
cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe
that any currently pending legal proceeding to which we are a party will have a material effect on our business, financial
condition, results of operations or cash flows.
As previously reported, on July 6, 2018, the Company received an administrative subpoena from the Office of the Attorney
General of the State of New Jersey (“NJ OAG”). Pursuant to the subpoena, the NJ OAG requested certain documents and
detailed information relating to the November 21, 2012 Civil Investigative Demand letter addressed to the Company by the
Massachusetts Office of the Attorney General (“MOAG”) that resulted in a previously reported Final Judgment by Consent
between the Company and the MOAG dated July 13, 2015. The Company responded to this request and, by letter dated April 11,
2019, the NJ OAG issued a supplemental subpoena requesting additional information for the time period from April 11, 2014 to
the present. The Company submitted its response to the supplemental subpoena. Subsequently, by email dated August 20, 2019,
the NJ OAG requested additional records of the Company from the years 2012 and 2013. The Company has responded to the NJ
OAG’s most recent record request and is continuing to cooperate with the NJ OAG.
Also, on February 12, 2019, the Company received a notification from the State of Colorado Department of Law (“CDOL”)
advising that it was initiating a compliance examination of one of its subsidiaries, Lincoln Technical Institute, Inc. The
examination sought to review a fixed number of company transactions seeking information responsive to its examination. The
Company submitted its response and , on December 5, 2019, received notifications from the CDOL that it had completed its
examination with no violations reported.
Student Loans—At December 31, 2019, the Company had outstanding net loan commitments to its students to assist them in
financing their education of approximately $54.7 million, net of interest.
Executive Employment Agreements—The Company entered into employment contracts with key executives that provide for
continued salary payments if the executives are terminated for reasons other than cause, as defined in the agreements. The future
employment contract commitments for such employees were approximately $4.1 million at December 31, 2019.
Change in Control Agreements—In the event of a change of control several key executives will receive continued salary
payments based on their employment agreements.
Surety Bonds—Each of the Company’s campuses must be authorized by the applicable state education agency in which the
campus is located to operate and to grant degrees, diplomas or certificates to its students. The campuses are subject to extensive,
ongoing regulation by each of these states. In addition, the Company’s campuses are required to be authorized by the applicable
state education agencies of certain other states in which the campuses recruit students. The Company is required to post surety
bonds on behalf of its campuses and education representatives with multiple states to maintain authorization to conduct its
business. At December 31, 2019, the Company has posted surety bonds in the total amount of approximately $12.8 million.
F-34
Index
16.
RELATED PARTY
The Company has an agreement with Matco Tools, whereby Matco will provide to the Company, on an advance commission
basis, credits in Matco-branded tools, tool storage, equipment, and diagnostics products. The chief executive officer of the parent
company of Matco was considered an immediate family member of one of the Company’s Board members, however as of
December 2018, that individual is no longer considered an immediate family member. The amount of the Company’s purchases
from this third party was $1.8 million for the year ended December 31, 2018. Management believes that its agreement with
Matco is an arm’s length transaction and on similar terms as would have been obtained from unaffiliated third parties.
17.
UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following tables have been updated to reflect changes in discontinued operations. Quarterly financial information for 2019
and 2018 is as follows:
2019
Revenue
Net (loss) income
Basic
Net (loss) earnings per share
Diluted
Net (loss) earnings per share
Weighted average number of common shares outstanding:
Basic
Diluted
2018
Revenue
Net (loss) income
Basic
Net (loss) earnings per share
Diluted
Net (loss) earnings per share
First
Second
Third
Fourth
Quarter
63,263 $
(5,467)
63,569 $
(3,064)
72,594 $
1,340
73,915
9,206
(0.22) $
(0.12) $
0.05 $
(0.22) $
(0.12) $
0.05 $
0.33
0.33
24,534
24,534
24,555
24,555
24,563
24,608
24,563
24,563
First
Second
Third
Fourth
Quarter
61,889 $
(6,874)
61,120 $
(4,104)
70,078 $
(600)
70,113
5,033
(0.28) $
(0.17) $
(0.02) $
(0.28) $
(0.17) $
(0.02) $
0.21
0.20
$
$
$
$
$
$
Weighted average number of common shares outstanding:
Basic
Diluted
24,138
24,138
24,486
24,486
24,533
24,533
24,533
24,562
F-35
Index
LINCOLN EDUCATIONAL SERVICES CORPORATION
Schedule II—Valuation and Qualifying Accounts
(in thousands)
Description
Allowance accounts for the year ended:
December 31, 2019 Student receivable allowance
December 31, 2018 Student receivable allowance
December 31, 2017 Student receivable allowance
Balance at
Beginning
of Period
Charged to
Expense
Accounts
Written-off
Balance at
End of
Period
16,993
13,784
14,794
$
$
$
20,847
17,705
13,720
$
$
$
(17,473) $
(14,496) $
(14,730) $
20,367
16,993
13,784
$
$
$
F-36
DESCRIPTION OF SECURITIES REGISTERED PURSUANT TO
SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Exhibit 4.3
General
The following is a description of the material terms of our capital stock included in our amended and restated certificate
of incorporation, as amended (our “certificate of incorporation”) and our bylaws, as amended (our “bylaws”) and is only a
summary. Our common stock is the only class or series of our securities which has been registered under Section 12 of the
Securities Exchange Act of 1934, as amended, and is listed on The Nasdaq Global Select Market under the symbol “LINC”. This
summary does not purport to be complete and is subject to, and is qualified in its entirety by reference to: (i) our certificate of
incorporation; (ii) our bylaws; and (iii) the applicable provisions of the New Jersey Business Corporation Act (the “NJBCA”).
You should refer to complete copies of our certificate of incorporation and our bylaws, which are incorporated by reference as
exhibits to the Annual Report on Form 10-K, of which this Exhibit 4.3 is a part, and to the relevant provisions of the NJBCA for
additional information. Except as otherwise indicated or unless the context requires otherwise, all references herein to the
“Company,” “we,” “us,” “our” and similar terms refer to Lincoln Educational Services Corporation.
We are currently authorized to issue 110,000,000 shares of capital stock, including 100,000,000 shares of common stock,
no par value per share, and 10,000,000 shares of preferred stock, no par value per share. Of the 10,000,000 authorized shares of
preferred stock, 12,700 shares are designated as Series A Convertible Preferred Stock, no par value per share (“Series A Preferred
Stock”), and are issued and outstanding.
Common Stock
As of March [3], 2020 there were [25,113,569] shares of common stock outstanding, which were held of record by [10]
shareholders.
Voting rights. Our shares of common stock are entitled to voting rights for the election of directors and for all other
purposes, each holder of common stock being entitled to one vote for each share, except as otherwise required by law, and subject
to the rights of the holders of preferred stock. The common stock does not have cumulative voting rights.
Dividend rights. Subject to any prior rights of holders of shares of any then-outstanding series of preferred stock, all
shares of our common stock are entitled to share equally in any dividends that our Board of Directors may declare from legally
available sources. Our existing credit agreement currently imposes restrictions on our ability to declare dividends with respect to
our common stock.
Liquidation rights. Upon liquidation or dissolution of our Company, whether voluntary or involuntary, all shares of our
common stock will be entitled to share equally in the assets available for distribution to shareholders after payment of all of our
prior obligations, including obligations on our preferred stock.
Other matters. The holders of our common stock have no preemptive or conversion rights and our common stock is not
subject to further calls or assessments by us. There are no redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of our common stock are fully paid and non-assessable.
Listing and Transfer Agent. Shares of our common stock are listed for trading on The Nasdaq Global Market under the
symbol “LINC.” Continental Stock Transfer & Trust Company is the transfer agent and registrar for our common stock.
Preferred Stock
As of March [3], 2020, there were 12,700 shares of Series A Preferred Stock outstanding, which were held of record by
three shareholders.
Our certificate of incorporation provides that the Board of Directors has the authority, without action by the shareholders,
to designate and issue shares of preferred stock in one or more classes or series and to fix the powers, rights, preferences, and
privileges of each class or series of preferred stock, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, and the number of shares constituting any class or series, which may be greater than the
rights of the holders of our common stock. Any issuance of shares of preferred stock could adversely affect the voting power of
holders of common stock, and the likelihood that the holders will receive dividend payments and payments upon liquidation
could have the effect of delaying, deferring, or preventing a change in control.
We are currently authorized to issue 10,000,000 shares of preferred stock, no par value per share, of which 12,700 shares
are designated as Series A Convertible Preferred Stock, no par value per share, and are issued and outstanding
Dividends. Dividends on the Series A Preferred Stock (“Series A Dividends”), at the initial annual rate of 9.6%, are to be
paid from the date of issuance quarterly on each December 31, March 31, June 30 and September 30 with September 30, 2020 as
the first dividend payment date. The Company, at its option, may pay dividends in cash or by increasing the number of
conversion shares issuable upon conversion of the Series A Preferred Stock (the “Conversion Shares”). The dividend rate is
subject to increase (a) 2.4% per annum on the fifth anniversary of the issuance of the Series A Preferred Stock (b) by 20% per
annum but in no event above 14% per annum should the Company fail to perform certain obligations under the certificate of
incorporation.
Series A Preferred Shareholders’ Right to Convert into Common Stock. Each share of Series A Preferred Stock, at any
time, is convertible into a number of shares of common stock equal to (the “Convertible Formula”) the quotient of (i) the sum of
(A) $1,000 (subject to adjustment as provided in the certificate of incorporation) plus (B) the dollar amount of any declared
Series A Dividends not paid in cash divided by (ii) the Series A Conversion Price (initially $2.36 per share subject to anti-dilution
adjustments as provided in the certificate of incorporation) as of the applicable Conversion Date (as defined in the certificate of
incorporation). At all times, however, the number of Conversion Shares that can be issued to any Series A Preferred Stock Holder
may not result in such holder and its affiliates owning more than 19.99% of the total number of shares of common stock
outstanding after giving effect to the conversion (the “Hard Cap”), unless prior shareholder approval is obtained or no longer
required by the rules of the principal stock exchange on which the Company’s common stock trade.
Mandatory Conversion. If, at any time following November 14, 2022, the volume weighted average price of the
Company’s common stock equals or exceeds 2.25 times the Conversion Price ($5.31 per share based on the initial Conversion
Price) for a period of 20 consecutive trading days and on each such trading day at least 20,000 shares of common stock was
traded, the Company may, at its option and subject to the Hard Cap, require that any or all of the then outstanding shares of Series
A Preferred Stock be automatically converted into shares of common stock at the then applicable Convertible Formula.
Redemption. Beginning November 14, 2024, the Company may redeem all or any of the Series A Preferred Stock for a
cash price equal to the greater of (the “Liquidation Preference”) (i) the sum of $1,000 (subject to adjustment as provided in the
certificate of incorporation) plus the dollar amount of any declared Series A Dividends not paid in cash and (ii) the value of the
Conversion Shares were such Series A Preferred Stock converted (as determined in the certificate of incorporation) without
regard to the Hard Cap.
Change of Control. In the event of certain changes of control, some of which are not in the Company’s control, as defined
in the certificate of incorporation as a “Fundamental Change” or a “Liquidation”, the Series A Preferred Shareholders shall be
entitled to receive the Liquidation Preference, unless such Fundamental Change is a stock merger in which certain value and
volume requirements are met, in which case the Series A Preferred Stock will be converted into common stock in connection
with such stock merger.
Voting. Holders of shares of Series A Preferred Stock will be entitled to vote with the holders of shares of common stock
and not as a separate class, at any annual or special meeting of shareholders of the Company, on an as-converted basis, in all
cases subject to the Hard Cap. In addition, a majority of the voting power of the Series A Preferred Stock must approve certain
significant actions of the Company, including (i) declaring a dividend or otherwise redeeming or repurchasing any shares of
common stock and other junior securities, if any, subject to certain exceptions, (ii) incurring indebtedness, except for certain
permitted indebtedness or (iii) creating a subsidiary other than a wholly-owned subsidiary.
Board Representation. The holders of Series A Preferred Stock, voting as a separate class, have the right to appoint one
director to the Board of Directors (the “Series A Director”) who may serve on any committees of the Board of Directors, until
such time as the later of (i) the shares of Series A Preferred Stock have been converted into common stock or (ii) a holder still
owns Conversion Shares and the sum of such Conversion Shares plus any other shares of common stock represent at least 10% of
the total outstanding shares of common stock.
Additional Provisions. The Series A Preferred Stock is perpetual and therefore does not have a maturity date. The
conversion price of the Series A Preferred Stock is subject to anti-dilution protections if the Company effects a stock split, stock
dividend, subdivision, reclassification or combination of its common stock and certain other economically dilutive events.
Directors’ Exculpation and Indemnification
Our certificate of incorporation provides that none of our directors shall be liable to us or our shareholders for monetary
damages for any breach of fiduciary duty as a director, except to the extent otherwise required by the New Jersey Business
Corporation Act, or the NJBCA. The effect of this provision is to eliminate our rights, and our shareholders’ rights, to recover
monetary damages against a director for breach of a fiduciary duty of care as a director, except to the extent otherwise required
by the NJBCA. This provision does not limit or eliminate our right, or the right of any shareholder, to seek non-monetary relief,
such as an injunction or rescission in the event of a breach of a director’s duty of care. In addition, our amended and restated
certificate of incorporation provides that, if the NJBCA is amended to authorize the further elimination or limitation of the
liability of a director, then the liability of the directors shall be eliminated or limited to the fullest extent permitted by the NJBCA,
as so amended. These provisions will not alter the liability of directors under federal or state securities laws.
Anti-Takeover Effects of New Jersey Law, the Certificate of Incorporation and the Bylaws
Certain provisions of the NJBCA, our certificate of incorporation and our bylaws may have the effect of delaying,
deferring or preventing another person from acquiring control of the Company, including takeover attempts that might result in a
premium over the market price for the shares of common stock.
New Jersey Law
We are subject to the provisions of Section 14A-10A of the NJBCA, which is known as the “New Jersey Shareholders
Protection Act.” Under the New Jersey Shareholders Protection Act, we are prohibited from engaging in any “business
combination” with any “interested shareholder” for a period of five years following the time at which that shareholder becomes
an “interested shareholder” unless the business combination is approved by our Board of Directors before that shareholder
became an “interested shareholder.” After this five-year period has expired, any business combination with an “interested
shareholder” must be approved by holders of 662/3% of the voting shares not held by the “interested shareholder” or meet certain
prescribed value requirements. Covered business combinations include certain mergers, dispositions of assets or shares and
recapitalizations.
An “interested shareholder” is (i) any person that directly or indirectly beneficially owns 10% or more of the voting
power of our outstanding voting stock; or (ii) any of our affiliates or associates (as those terms are defined in the New Jersey
Shareholders Protection Act) that directly or indirectly beneficially owned 10% or more of the voting power of our then
outstanding stock at any time within a five-year period immediately prior to the date in question.
Certificate of Incorporation and Bylaws
Authorized but Unissued Preferred Stock. Our certificate of incorporation and bylaws permit us to establish the rights,
privileges, preferences and restrictions, including voting rights, of future series of our preferred stock and to issue such stock
without approval from our common shareholders.
Board of Directors. Our certificate of incorporation and bylaws provide that our Board of Directors shall consist of at
least three directors but not more than eleven directors, as may be determined by the Board of Directors from time to time.
Currently, our Board of Directors consists of eight directors, seven of whom are independent directors, including one designated
Series A Director. Other than a vacancy arising from the departure of a Series A Director, any vacancy on our Board of Directors,
including a vacancy resulting from an enlargement of our Board of Directors, may be filled only by the affirmative vote of a
majority of the directors then in office, though less than a quorum. Any such director so elected shall hold office for the
remainder of the full term of the director for which the vacancy was created or occurred and until his or her successor shall have
been elected and qualified. The limitation on filling vacancies could make it more difficult for a third party to acquire, or
discourage a third party from attempting to acquire, control of our Company.
Removal of Directors. Except for the rights of Series A Preferred Stock holders entitled to elect a Series A Director
separately (and who retain the right to remove the Series A Director), any director may only be removed from office, without
assigning any cause, by the approval of holders of a majority of the combined voting power of the then outstanding shares of our
stock entitled to vote generally in the election of directors, voting together as a single class.
Board meetings. Our bylaws provide that special meetings of the Board of Directors may be called by the chairman of
our Board of Directors, the president, the chief financial officer or by any two directors in office.
Shareholder meetings. Our certificate of incorporation provides that any action required or permitted to be taken by our
shareholders at an annual meeting or special meeting of shareholders may only be taken if it is properly brought before such
meeting and may not be taken by non-unanimous written action in lieu of a meeting. Our bylaws further provide that special
meetings of the shareholders may only be called by the chairman of the Board of Directors, our president, by a committee that is
duly designated by the Board of Directors, by resolution adopted by the affirmative vote of the majority of the Board of Directors
or pursuant to an order of the New Jersey Superior Court in accordance with NJBCA.
Requirements for advance notification of shareholder nominations and proposals. Our bylaws establish advance notice
procedures with respect to shareholder proposals and the nomination of candidates for election as directors, other than
nominations made by or at the direction of our Board of Directors or a committee of the Board of Directors. In order for any
matter to be considered “properly brought” before a meeting, a shareholder must comply with requirements regarding advance
notice and provide certain information to us. These provisions could have the effect of delaying until the next shareholders
meeting shareholder actions that are favored by the holders of a majority of our outstanding voting securities. These provisions
could also discourage a third party from making a tender offer for our common stock, because even if it acquired a majority of
our outstanding voting securities, it would be able to take action as a shareholder (such as electing new directors or approving a
merger) only at a duly called shareholders meeting and not by non-unanimous written consent.
Shareholder action by written consent. Our certificate of incorporation and bylaws prohibit shareholder action by non-
unanimous written consent and require all such actions to be taken at a meeting of shareholders of our common stock.
Cumulative voting. Our certificate of incorporation provides that our shareholders shall have no cumulative voting rights.
Amendment of certificate of incorporation and bylaws. The amendment of the provisions described above in our
certificate of incorporation generally will require the affirmative vote of a majority of our directors, as well as the affirmative
vote of the holders of at least 662/3% of our then-outstanding voting stock. Our bylaws may be amended (i) by the affirmative
vote of the majority of our Board of Directors or (ii) by the affirmative vote of holders of a majority of our then outstanding
voting stock.
The following is a list of Lincoln Educational Services Corporation’s subsidiaries as of December 31, 2019:
Subsidiaries of the Company
Exhibit 21.1
Name
Lincoln Technical Institute, Inc. (wholly owned)
New England Acquisition LLC (wholly owned through Lincoln Technical Institute, Inc.)
Nashville Acquisition, LLC (wholly owned through Lincoln Technical Institute, Inc.)
Euphoria Acquisition, LLC (wholly owned through Lincoln Technical Institute, Inc.)
LTI Holdings, LLC (wholly owned through Lincoln Technical Institute, Inc.)
LCT Acquisition, LLC (wholly owned through Lincoln Technical Institute, Inc.)
NN Acquisition, LLC (wholly owned through Lincoln Technical Institute, Inc.)
Jurisdiction
New Jersey
Delaware
Delaware
Delaware
Colorado
Delaware
Delaware
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-148406 and 333-152854 on Form S-3 and 333-
126066, 333-132749, 333-138715, 333-158923, 333-173880, 333-188240, 333-138715 “POS,” 333-203806 and 333-211213 on
Form S-8 of our reports dated March 6, 2020, relating to the consolidated financial statements and financial statement schedule of
Lincoln Educational Services Corporation and subsidiaries’, and the effectiveness Lincoln Educational Services Corporation and
subsidiaries’ internal control over financial reporting, appearing in this Annual Report on Form 10-K of Lincoln Educational
Services Corporation, for the year ended December 31, 2019.
Exhibit 23
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 6, 2020
EXHIBIT 31.1
I, Scott Shaw, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Lincoln Educational Services Corporation;
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;
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;
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;
and
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
(e) 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: March 6, 2020
/s/ Scott Shaw
Scott Shaw
Chief Executive Officer
EXHIBIT 31.2
I, Brian Meyers, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Lincoln Educational Services Corporation;
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;
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;
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; and
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: March 6, 2020
/s/ Brian Meyers
Brian Meyers
Chief Financial Officer
CERTIFICATION
Pursuant to 18 U.S.C. 1350 as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32
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 Annual Report on Form 10-K for the fiscal year ended
December 31, 2019 (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: March 6, 2020
/s/ Scott Shaw
Scott Shaw
Chief Executive Officer
/s/ Brian Meyers
Brian Meyers
Chief Financial Officer