2 0 2 1 A N N U A L R E P O RT
Dear Shareholders,
Your company successfully adapted to a unique array of challenges during the fiscal year ended December
31, 2021. Our performance met or exceeded our operating and financial objectives as we grew student
starts, graduate placements, and each of our campuses generated positive EBITDA for the year. Our
financial performance enabled Lincoln to expand its investment in our students, faculty, and curricula
while also strengthening our balance sheet, significantly. We are a much stronger company with greater
flexibility to implement a multi-year growth strategy, which includes new campuses and programs. These
factors combine to position Lincoln for consistent growth in the coming years.
Scott Shaw
President & CEO
Our actions are designed to maximize shareholder value as well as achieve our mission to provide students with the skills required
for high demand, essential careers. Over the 75 years of Lincoln’s operations we have graduated more than 255,000 students and
our graduate placement rate has been consistently high. Today, approximately 90% of our graduates enter careers that meet the
U.S. Department of Homeland Security definition for a “critical infrastructure worker.” These are fulfilling, well-paid careers that
allow our graduates to become contributors to their workplace and their local communities.
Our country is facing a severe skills gap – it’s the gap between the skills required to perform the jobs being created, and the
skill set of the available labor pool. This issue has existed for years and is likely to continue well into the future. The gap,
which impacts millions of jobs, threatens economic growth. We believe Lincoln’s role is crucial in reducing the gap by training
tomorrow’s essential workforce to revitalize the nation’s infrastructure. To help meet this challenge, we have increased Lincoln’s
Scholarship Fund to $75 million over the next five years, a fitting way to celebrate our 75 years of being student-focused as well
as prudent stewards of our shareholders’ investment.
For the full year, Lincoln generated revenue growth of 14.4%, with a 7.5% increase in student starts. We also entered 2022
with approximately 850 more students compared to a year-ago. This higher year-end headcount gives us greater confidence
that we will generate continued growth in 2022. However, our success also depends on our keen ability to survey the education
landscape and determine where future opportunities exist. For example, during the past year we evaluated the valuable lessons
learned during the pandemic’s darkest days and how to use them moving forward. While in-person/hands-on learning will
remain the stalwart of our programs, we plan to integrate a remote learning format into our curricula to enhance the learning
experience for our students while offering greater efficiencies at the campus and corporate level. These initiatives are currently
underway, and it will take us upwards of two years to fully implement.
As of December 31, our cash position of $83 million was more than double the same period a year-ago. The increased liquidity
includes the net proceeds from the sale-leaseback transactions for the Denver, CO and Grand Prairie, TX campuses. Further,
we have a contract of sale to sell our Nashville, TN campus for net proceeds of approximately $34 million. If the sale closes we
will add those proceeds to our balance sheet. This substantial improvement in capital resources puts us in a position to further
improve the performance of our existing campuses with various initiatives designed to build long term growth. These include
adding new programs at our existing campuses as well as relocating our Nashville, TN campus to a newer, more efficient facility.
Additionally, in early 2023 we plan to open a campus in a new market that we have identified as currently being underserved.
This new campus will serve as the model for a well-researched, prudent strategy for opening additional campuses over the next
several years. Most importantly, this strategy has been well embraced by our corporate partners.
In summary, 2021 was a successful year for Lincoln. It was also critically important because, aside from our operating
performance, we now have the liquidity to support sustained success. We have momentum entering 2022 and believe we are
well-positioned to execute our current and future plans. We thank you for your support and look forward to keeping you
abreast of our progress.
Sincerely,
Scott Shaw
President and Chief Executive Officer
Lincoln Educational Services Corporation
_________________________________________________________________________________________________________
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, 2021
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.)
14 Sylvan Way, Suite A
Parsippany, NJ 07054
(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
Name of exchange on which
Common Stock, no par
value per share
LINC
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 (cid:31) 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 (cid:31) 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 (cid:31)
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company
or 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 (cid:31)
Accelerated filer
Non-accelerated filer (cid:31)
Smaller reporting company
Emerging growth company (cid:31)
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. (cid:31)
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting
firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:31) No
The aggregate market value of the 21,542,068 shares of common stock held by non-affiliates of the registrant issued and outstanding as of
June 30, 2021, the last business day of the registrant’s most recently completed second fiscal quarter, was $167,597,289. This amount is based on
the closing price of the common stock on the Nasdaq Global Select Market of $7.78 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 1, 2022 was 27,449,203.
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, 2021, and is incorporated by reference herein.
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2021
PART I.
BUSINESS
ITEM 1.
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 3.
ITEM 4. MINE SAFETY DISCLOSURES
PROPERTIES
LEGAL PROCEEDINGS
PART II.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
[RESERVED]
ITEM 6.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8
ITEM 9.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
ITEM 9C.
PART III.
DISCLOSURES REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
ITEM 16. FORM 10-K SUMMARY
SIGNATURES
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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:
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;
the effect of public health outbreaks, epidemics and pandemics including, without limitation, COVID-19
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.
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 skilled trades (which include HVAC, welding and computerized numerical control
and electrical and electronic systems technology, among other programs), automotive technology, healthcare services (which include
nursing, dental assistant and medical administrative assistant, among other programs), hospitality services (which include culinary,
therapeutic massage, cosmetology and aesthetics) and information technology (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 accredited and are eligible to participate in federal financial aid programs administered 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 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 two reportable business segments: (a) Transportation and Skilled Trades, and (b) Healthcare and Other
Professions. As of December 31, 2021, we had 13,059 students enrolled at 22 campuses. Our average enrollment for the year ended
December 31, 2021 was 12,899 students, which represented an increase of 10.0% from average enrollment in 2020, excluding in each of
2021 and 2020, 45 and 375 students on leave of absence due to COVID-19. For the year ended December 31, 2021, our revenues were
$335.3 million, which represented an increase of 14.4% over 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
thereby serving students, local employers and their communities. 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 previously unaddressed by the traditional academic sector. By combining substantial
distance 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:
Replicate Programs and Expand Existing Areas of Study. Whenever possible, we seek to replicate programs across our
campuses. In addition, 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 both of our segments. The skills gap continues to expand as talent retires faster than new
employees are hired and as the need for education and training increases in all careers with the accelerating pace of technological
change.
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. In addition, we see opportunities to
reduce our real estate needs with the advancement of blended in-person and virtual training that we expect to roll out over the
next two years.
Expand Geographically. We plan to deploy our resources to strengthen our brand, invest in new programs and seek opportunities
to expand our footprint into new markets. We have a solid portfolio of corporate and industry partners requesting that we explore
new geographies to serve them better. Regardless of whether we expand our current campuses to take advantage of the operating
leverage or establish new campuses, our goal is to remain competitive and prudently deploy our resources. Our expansion plans
may be achieved organically through the opening of new campuses with existing resources or through acquisitions.
1
Expand Teaching Platform. Using the lessons learned from the COVID-19 pandemic, we believe we can continue to transform
our in-person education model to a hybrid in-person/virtual training model that combines instructor-facilitated online teaching and
demonstrations with hands-on labs. Blended learning provides students with greater flexibility and convenience which should
help us attract more students. Moreover, we believe blended learning will create operating efficiencies that will enable us to
contain tuition increases over the coming years and thus provide our students with a higher return on investment in their
education.
Expand Market. We know that many potential students do not have the time and resources to take a one-year program in order to
get into the workforce. Consequently, we are exploring opportunities that for programs that are shorter in duration and less
expensive but more intensive providing skills sufficient to gain employment. We are developing programs internally as well as in
concert with industry partners.
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/certificate programs typically take between 19 to 136 weeks to complete,
with tuition ranging from $7,000 to $45,000. Our associate’s degree programs typically take between 64 to 98 weeks to complete, with
tuition ranging from $28,000 to $38,000. As of December 31, 2021, 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.
2
The following table lists the programs offered as of December 31, 2021:
Current Programs Offered
Area of Study
Associate's Degree
Diploma and Certificate
Skilled Trades
Electronic Engineering
Technology, Electronics
Systems Service
Management
Electrical & Electronics Systems Technology, Electrician Training,
HVAC, Welding Technology, Welding and Metal Fabrication
Technology, Welding with Introduction to Pipefitting, CNC Maching
and Manufacturing, Advanced Manufacturing with Robotics
Automotive
Automotive Service
Management, Collision
Repair & Refinishing
Service Management,
Diesel & Truck Service
Management, Heavy
Equipment Maintenance
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 Volkswagen, Collision Repair and Refinishing
Technology, Diesel & Truck Mechanics, Diesel & Truck
Technology, Diesel & Truck Technology with Alternate Fuel
Technology, Diesel & Truck Technology with Transport
Refrigeration, Diesel & Truck with Automotive Technology, Heavy
Equipment Maintenance Technology, Heavy Equipment and Truck
Technology
Health Sciences
Medical Assisting
Technology
Medical Office Assistant, Medical Assistant, Patient Care
Technician, Medical Coding & Billing, Dental Assistant, Licensed
Practical Nursing
Hospitality
Services
Culinary Arts & Food Services, Cosmetology, Aesthetics,
International Baking and Pastry, Nail Technology, Therapeutic
Massage & Bodywork Technician
Information
Technology
Computer Networking and
Support
Computer & Network Support Technician, Computer Systems
Support Technician
Skilled Trades. For the year ended December 31, 2021, skilled trades were our largest area of study, representing 36% of our total
average student enrollment. Our skilled trades programs are 28 to 98 weeks in length, with tuition rates ranging from $18,000 to $33,000.
Our skilled trades programs include electrical, heating and air conditioning repair, welding, computerized numerical control and electronic
and electronic systems technology. Graduates of our programs are qualified to obtain entry-level employment positions such as electrician,
CNC machinist, cable installer, welder, wiring and heating, ventilating and air conditioning, or HVAC installer. Our graduates are
employed by a wide variety of employers, including residential and commercial construction, telecommunications installation companies
and architectural firms. As of December 31, 2021, we offered skilled trades programs at 15 campuses.
Automotive Technology. Automotive technology is our second largest area of study, with 30% of our total average student enrollment
for the year ended December 31, 2021. Our automotive technology programs are 28 to 136 weeks in length, with tuition rates ranging from
$15,000 to $45,000. We believe 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, 2021, we offered programs in automotive
technology at 12 campuses and most of these campuses offered other technical programs as well. 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.
Health Sciences. For the year ended December 31, 2021, 25% of our total average student enrollment was in our health science program.
Our health science programs are 27 to 104 weeks in length, with tuition rates ranging from $15,000 to $30,000. Graduates of our programs
3
are qualified to obtain positions such as licensed practical nurse, registered nurse, dental assistant, medical assistant, medical
administrative assistant, and claims examiner. Our graduates are 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, 2021, we offered health science programs at 11 of our campuses.
Hospitality Services. For the year ended December 31, 2021, 7% 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 ranging from $7,000 to $22,000. Our
hospitality programs include culinary, therapeutic massage, cosmetology and aesthetics. Graduates work in salons, spas, cruise ships or
are self-employed. We offer massage programs at three campus and cosmetology programs at one campus. Our culinary graduates are
employed by restaurants, hotels, cruise ships and bakeries. As of December 31, 2021, we offered culinary programs at two campuses.
Information Technology. For the year ended December 31, 2021, 2% of our total average student enrollment was in our information
technology programs. Our information technology programs are 42 to 78 weeks in length, with tuition rates of $20,000 to $30,000. 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. Our graduates obtain entry-level positions with both small and large corporations. As of December 31, 2021,
we offered these programs at six 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
intended to raise brand awareness. In addition, we continually grow and enhance our digital marketing efforts, which include paid search,
search engine optimization, online video and display advertising and social media channels. These channels currently drive the majority of
our new student leads and enrollments. Our fully integrated marketing campaigns direct prospective students to contact us directly, visit
the Lincoln website or other customized landing pages on the internet 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 our 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 student starts. In fiscal year 2021, referrals were approximately 14% of our new student starts which decrease
we attribute to the impact of Covid-19. 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 fiscal year 2021, we recruited approximately 22% 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.
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 admissions interview and complete a learner
assessment. We take admissions requirements very seriously as they are the best indicators of our students’ likelihood for program success
and completion thus leading to successful employment in the industry. The learner assessment is a questionnaire designed to discover
student challenges and address them prior to attending. 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.
Enrollment. We enroll students continuously throughout the year, with our largest classes enrolling in late summer or early fall
following high school graduation. As of December 31, 2021, we had 13,059 students enrolled at 22 campuses and our average enrollment
for the year ended December 31, 2021 was 12,899 students which represented an increase of 10.0% from average enrollment in 2020
excluding 45 and 375 students enrolled in each of 2021 and 2020, respectively, who were on leave of absence due to COVID-19.
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Retention. To maximize student retention, the staff at each school is trained to recognize the early warning signs of a potential drop in
retention 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. As we moved to online delivery of instruction we saw a slight decline in our student retention
rate but we believe this is temporary and will improve as our as faculty become better skilled at online delivery and to ensure that this
happens we have developed online teacher training for all faculty.
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 each 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.
Human Capital Management
Overview
We believe that each of our employees plays an important role in our enterprise. This is particularly true of our faculty. We are focused
on attracting and retaining highly qualified personnel needed to support our objectives of providing superior education in the programs that
our schools provide. We believe that diversity and inclusion of our personnel is an essential component for providing a meaningful student
experience by drawing upon a variety of backgrounds and experiences.
As of December 31, 2021, we had approximately 2,056 employees, including 536 full-time instructors and 384 part-time instructors, and
approximately 1,136 employees serving in various administrative and management positions. We had no seasonal workers. The number of
individuals comprising our workforce has increased by approximately 6.4% in the most recent year.
Our Board of Directors regularly reviews with management the following areas regarding our human capital management:
Staffing Our Schools
Our schools typically are staffed by a school president, a director of career services, a director of education, a director of financial-aid, a
director of administrative services, a director of admissions and, of course, a variety of instructors, all of whom are industry professionals
with experience in the areas of study at that particular school.
Our average student/teacher ratio is approximately 16 to 1, however, in fiscal year 2021, our average in-person student/teacher ratio has
remained lower than our typical ratio due to ongoing social distancing requirements necessitated by COVID-19 which varied on a state-by-
state basis.
Diversity and Inclusion
We strive to create a culture of diversity and inclusion through our human capital management practices. The achievement of workforce
diversity is one important goal in the outreach efforts for recruitment of professionals. As a result, since January 1, 2017, our diverse
workforce percentage has increased from 33.5% to 40.8%. Further, the generational range of our workforce, at the end of 2021, was
approximately equally divided among Baby Boomers, GenXers and Millennials. The largest growth in the generational workforce makeup
was in the Millennial and GenZ bands. Our human resources programs work to eliminate discrimination and harassment in all forms and
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our Human Resources Department has established a diversity and inclusion policy intended to assist us in meeting our goals of establishing
an environment of inclusion and opportunity in hiring, promotions, training and development, working conditions and compensation.
Development, Training and Retention
The Company employs a staff to attract and engage talent and applies fully integrated recruiting software to track and manage hiring
processes for our campuses and corporate functions. 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 high quality of instruction in all of our programs that we expect 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.
The Company acknowledges the relevance of managing productivity and efficiency of its workforce. The Company uses current
technology resources for sales and student services tasks, education support, graduate placement services, and internal talent management.
Through the application of these technology tools, productivity data are obtained for key positions and used for process improvement,
training, and evaluative purposes.
The Company recognizes the value to both the Company and our students of employee knowledge and skill development throughout their
careers and of preparing current employees for succession opportunities. Therefore, employees receive position-based training, as well as
online access to a multitude of programs designed to support their effectiveness and growth-potential. The Company identifies high-
performing employee participants for acceleration training programs to develop internal candidates for succession opportunities in key
functions.
Labor Relations
We believe that we have good relationships with all of our employees. At six of our 22 campuses, the teaching professionals are
represented by various unions. These approximately 177 employees are covered by collective bargaining agreements that expire between
2022 and 2024. Those expiring in the short term are in the process of renegotiation. We believe that we have good relationships with
these unions and with the employees covered by these collective bargaining agreements and do not foresee issues with entering into
satisfactory new agreements.
Health and Safety; COVID-19 Response
The Company considers the well-being and safety of our employees and students to be of paramount importance. In response to the
COVID-19 pandemic, we applied CDC guidance and safety protocols; developed work-from-home options where necessary and possible;
covered COVID-19 testing, when requested by a health provider, and COVID-19 vaccination 100% through our health plans and reduced
the number of personnel and students onsite at any time. Our COVID-19 management procedures resulted in continuing operations with
strong support and no reductions in force in 2021. As of January 15, 2022, we have covered eight over-the-counter at home COVID-19
tests per covered employee, every thirty days, through our health plans according to plan provisions.
Our Management
We believe our management team has the experience necessary to effectively implement our growth strategy and continue to drive positive
educational and employment outcomes for our students. Under the circumstances of the challenging and changing landscape of COVID-
19, our management demonstrated its abilities in innovation and resilience. For a discussion of the risks relating to the attraction and
retention of management and executive management employees, see Item 1A. “Risk Factors.”
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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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
Each of our schools participates in the Title IV Programs, which are administered by the DOE. For the year ended December 31, 2021,
approximately 75% (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. All of our schools are currently
offering both online and in-person learning due to the COVID-19 pandemic. Accrediting agencies and some states agencies require
schools to obtain approval and meet certain requirements in order to offer programs via distance education in states where the school does
not have a campus. The DOE also generally requires schools that offer a program through distance education to students in a state in
which the school is not physically located to meet the requirements of the state to offer programs by distance education in the state. All of
our schools are currently approved to offer both online and in-person learning. 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
as well as other federal and state agencies. 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 for 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 on ground and online 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. The DOE also generally requires schools that offer a program through distance education to students in a
state in which the school is not physically located to meet the requirements of the state to offer programs by distance education in the state.
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. 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.
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. It is possible that states could change their state laws and regulations in the future
that could impact the Company and its schools. 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
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bonds on behalf of our schools and education representatives with multiple states in a total amount of approximately $12.8 million.
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, 2021, 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.
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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
Next Accreditation
May 1, 2023
May 24, 2019
October 15, 2020
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
February 1, 2024
August 1, 2024
November 1, 2024
February 1, 20214
February 1, 2022
August 1, 20214
February 1, 2022
May 1, 2022
November 1, 20214
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
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
4 Campus going through reaccreditation
In February 2022, the ACCSC determined to discontinue previously required system-wide financial reporting of our schools and instead
determined to continue monitoring financial stability with system-wide heightened monitoring which is not considered reporting and
accordingly the restrictions applied to a school subject to reporting do not apply to schools subject to heightened monitoring. We plan to
provide the information requested by ACCSC by the requested deadline at the end of June 2022 for consideration at the Commission’s
August 2022 meeting.
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.
On October 28, 2021, the DOE announced that it had notified ACCSC that a decision on the recognition by the DOE of ACCSC as an
accrediting agency was being deferred pending the submission of additional information about ACCSC’s monitoring, evaluation, and actions
related to high-risk institutions. DOE staff reportedly has up to 75 days after receipt of the written response from ACCSC (on or before
January 10, 2022) to provide a written response. A designated senior DOE official is expected to make a decision regarding the continued
recognition of ACCSC after the receipt and review of the responses. The DOE regulations indicate that ACCSC may appeal an adverse
decision to the DOE Secretary and potentially to federal court.
If the DOE withdraws the recognition of an accrediting agency, the HEA indicates that the DOE may continue the eligibility of qualified
institutions accredited by the accrediting agency for a period of up to 18 months from the date of the withdrawal of the DOE’s recognition
of the accrediting agency. If provided, this period would provide time for institutions to apply for accreditation from another DOE-recognized
accrediting body. The DOE could impose provisional certification and other conditions and restrictions on such institutions during this time
period. If the DOE declines to continue its recognition of ACCSC and if the subsequent period for obtaining accreditation from another
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DOE-recognized accrediting agency lapses before we obtain accreditation from another DOE-recognize accrediting agency (or if the DOE
does not provide such a period for institutions to obtain other accreditation), our schools could lose our Title IV eligibility.
We cannot predict the timing and outcome of the DOE’s decision on the continuation of its recognition of ACCSC, the timing and outcome
of any appeal that ACCSC might pursue in the event of an adverse decision, or the duration and conditions of any period the DOE may elect
to provide to institutions to obtain accreditation from another DOE-recognized accrediting agency.
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.
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 (“VA”). 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 2021, we derived approximately 7% of our revenues, on a cash basis, from veterans’ benefits programs, which include the Post-9/11 GI
Bill and Veteran Readiness and Employment services. To continue participation in veterans’ benefits programs, an institution must comply
with certain requirements established by the VA, including that the institution report on the enrollment status of eligible students; maintain
student records and make such records available for inspection; follow rules applicable to the individual benefits programs; comply with
rules applicable to distance education and hybrid programs; and comply with applicable limits on the percentage of students having a
portion of their tuition or other institutional charges paid by the school or with certain veterans’ benefits.
The VA shares responsibility for VA benefit approval and oversight with designated State Approving Agencies (“SAAs”). SAAs play a
critical role in evaluating institutions and their programs to determine if they meet VA benefit eligibility requirements. Processes and
approval criteria, as well as interpretation of applicable requirements, can vary from state to state. Therefore, approval in one state does not
necessarily result in approval in all states.
The VA imposes limitations on the percentage of students per program who have a portion of their tuition or other institutional charges
paid by the school or with certain veterans’ benefits, unless the program qualifies for certain exemptions. If the VA determines that a
program is out of compliance with these limitations, the VA will continue to provide benefits to current students, but new students will not
be eligible to use their veterans’ benefits for an affected program until we demonstrate compliance. Additionally, the VA requires a
campus be in operation for two years before it can apply to participate in VA benefit programs. All of our campuses are eligible to
participate in VA education benefit programs.
During 2012, President Obama signed an Executive Order directing the Department of Defense (“DOD”), Veterans Affairs and Education
to establish “Principles of Excellence” (“Principles”), based on certain guidelines set forth in the Executive Order, to apply to educational
institutions receiving federal funding for service members, veterans and family members. As requested, we provided written confirmation
of our intent to comply with the Principles to the VA in June 2012. We are required to comply with the Principles to continue recruitment
activities on military installations. Additionally, there is a requirement to possess a memorandum of understanding (“MOU”) with the
DOD as well as with certain individual installations. Our access to bases for student recruitment has become more limited due to recent
changes in the Transition Assistance Program (Transition Goals, Plans, Success) and increased enforcement of the MOU requirement.
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Each of our institutions has an MOU with the DOD. We have MOUs with certain key individual installations and are pursuing MOUs at
additional locations; however, some installations will not provide MOUs to institutions that do not teach at the installation. We continue to
strengthen and develop relationships with our existing contacts and with new contacts in order to maintain and rebuild our access to
military installations.
In addition to Title IV Programs and other government-administered programs, all of our schools offer extended financing programs to
their students. This extension of credit helps 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. On December 21, 2021, we received a letter from the Consumer Financial Protection Bureau
(“CFPB”) stating that the CFPB is assessing whether we are subject to CFPB’s supervisory authority based on its activities related to
consumer lending. The letter states that the CFPB has the authority to supervise certain entities in the private education loan market and
certain other consumer financial products and services. The CFPB requested a list of information from us in order to conduct its
assessment. We have provided the requested information to the CFPB and are waiting for the CFPB to respond.
On January 20, 2022, the CFPB issued a press release announcing that it would begin examining the “operations of post-secondary
schools, such as for-profit colleges, that extend private loans directly to students.” The CFPB also issued an update to its exam procedures
including a new section on institutional loans. The CFPB examiners will consider both general lending issues and issues specific to
educational institutions. The CFPB announcement indicates that CFPB examiners will look into issues such as enrollment restrictions for
students late on payments, withholding transcripts, accelerating payments when a student withdraws, failing to issue appropriate refunds,
and improper lending relationships. The CFPB could decide to conduct further reviews of private lending to students at our schools,
initiate proceedings against us, or seek to impose requirements on us or private lending to students at our schools. We cannot predict
whether the CFPB or other regulators will conduct further reviews or take actions that could require us to change private lending to
students at our schools or have a material adverse impact on our operations.
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, 2021 we had the following three institutions, collectively
consisting of three main campuses and 19 additional locations:
Main Institution/Campus(es)
Iselin, NJ
New Britain, CT
Indianapolis, IN
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
Columbia, MD
Grand Prairie, TX
Nashville, TN
Denver, CO
Union, NJ
Mahwah, NJ
Queens, NY
South Plainfield, NJ
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
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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
Iselin, NJ
Indianapolis, IN
New Britain, CT
Expiration Date of Current
Program Participation
Agreement
December 31, 20221
September 30, 20221
December 31, 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. These institutions generate 100% of the Company’s revenue based on revenues for
the 2021 fiscal year. All of our institutions 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. Provisional certification makes it easier for
the DOE to revoke or decline to renew our Title IV eligibility if the DOE under the new administration chooses to take such an action
against us and other provisionally certified for-profit schools without undergoing a formal administrative appeal process. The DOE could
attempt to use an institution’s provisional certification as a basis for imposing additional conditions or restrictions on the institution. The
DOE is currently engaged in a negotiated rulemaking process that is considering, among other issues, establishing rules to authorize
additional conditions and restrictions on provisionally certified institutions. See “Regulatory Environment – Negotiated Rulemaking.”
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. It is not known if or when Congress will pass
final legislation that comprehensively reauthorizes and 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 such as its recent amendment to the 90/10 rule in the HEA. See “Regulatory Environment – 90/10 Rule.” 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. The potential for changes that may be adverse to us and other for-profit schools like ours may increase as a
result of the change in administration and changes in Congress.
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 effective July 1, 2020, although the DOE provided institutions with the opportunity to implement the new
regulations early. It is possible that Congress or the DOE could enact or establish new law or regulations that could restore the gainful
employment requirements or similar and potentially stricter requirements, but we cannot predict the likelihood, timing or scope of such
requirements. The DOE commenced a negotiated rulemaking process in January 2022 in which it has proposed to establish new gainful
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employment requirements that would be applicable to all of our educational programs. The negotiated rulemaking process is expected to
take place during 2022 and to result in final regulations that would take effect on July 1, 2023, but we cannot predict the precise timing,
effective date and content of the gainful employment regulations that are expected to emerge from this process. We also cannot predict the
extent to which our programs may be adversely impacted by the tests that might be established by new regulations. The implementation of
new gainful employment regulations could require us to eliminate or modify certain educational programs, could result in the loss of our
students’ access to Title IV Program funds for the affected programs, and could have a significant impact on the rate at which students
enroll in our programs and on our business and results of operations. If our programs are adversely impacted or we must eliminate or
modify certain programs or our students lose access to Title IV Program funds there could be a material adverse effect on our business and
results of operations.
Borrower Defense to Repayment Regulations. On July 1, 2020, the DOE’s previously published final Borrower Defense to Repayment
regulations became effective. Among other things, these regulations amended the processes for borrowers to receive from the 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 new and existing DOE regulations establish detailed procedures and standards for the
loan discharge processes for periods prior to July 1, 2017, between July 1, 2017 and June 30, 2020, and on or after July 1, 2020, 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 certain components of the financial responsibility regulations, including 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
generally 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
“Business - Regulatory Environment – Financial Responsibility Standards.” Moreover, Congress or the DOE could enact or establish new
laws or regulations that could restore prior versions of the borrower defense to repayment requirements or similar and potentially stricter
requirements. The DOE convened a negotiated rulemaking committee in late 2021 aimed at developing new regulations on a variety of
topics including borrower defense to repayment. The DOE is expected to develop and publish proposed regulations that typically would
be subject to a notice and comment period during which the public may comment on the proposed regulations and the DOE may respond
to such comments and ultimately publish final regulations. The DOE generally is required to publish final regulations by November 1 in
order for the regulations to become effective on July 1 of the following year. We cannot predict the ultimate timing or content of the
regulations that are anticipated to emerge from this process. The final regulations could result in new requirements that would make it
easier for borrowers to obtain discharges of their loans and for the DOE to recover liabilities from institutions and impose other sanctions.
The implementation of new borrower defense to repayment regulations by the DOE and the enforcement of the existing borrower defense
to repayment regulations could have a material adverse effect on our business and results of operations. See “Business – Regulatory
Environment – Negotiated Rulemaking.”
On April 29, 2021, the Company received communication from the DOE indicating that the DOE was in receipt of a number of borrower
defense applications containing allegations concerning us and requiring the DOE to undertake a fact-finding process pursuant to DOE
regulations. Among other things, the communication outlines a process by which the DOE would provide to us the applications and allow
us the opportunity to submit responses to them. Further, the communication outlines certain information requests, relating to the period
between 2007 and 2013, in connection with the DOE’s preliminary review of the borrower defense applications. Based upon publicly
available information, it appears that the DOE has undertaken similar reviews of other educational institutions which have also been the
subject of various borrower defense applications. We have received the borrower application claims and have completed the process of
thoroughly reviewing and responding to each borrower application as well as providing information in response to the DOE’s requests.
Given the early stage of this matter, management is not able to predict the outcome of the DOE’s review at this time. If the DOE disagrees
with our legal and factual grounds for contesting the applications, the DOE may impose liabilities on the Company based on the discharge
of the loans at issue in the pending applications which could have a material adverse effect on our business and results of operations.
It is possible that we may receive from the DOE in the future borrower defense applications submitted by or on behalf of prior, current, or
future students and that the DOE could seek to recover liabilities from us for discharged loans.
If the DOE grants any pending or future borrower applications, the DOE regulations state that the DOE may initiate an appropriate
proceeding to recover liabilities arising from the loans in the applications. If the DOE initiates such a proceeding, we would request
reconsideration of the liabilities. We cannot predict the timing or amount of all borrower defense applications that borrowers may submit
to the DOE or that the DOE may grant in the future, or the timing or amount of any possible liabilities that the DOE may seek to recover
from the Company, if any.
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
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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 2021 fiscal year, our institutions’ 90/10 Rule percentages ranged from 72% to 80%. For 2020, 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, 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.
In March 2021, the American Rescue Plan Act of 2021 (“ARPA”) was signed into law. The ARPA includes a provision that amends the
90/10 rule. The ARPA amends the 90/10 rule by treating other “Federal funds that are disbursed or delivered to or on behalf of a student to
be used to attend such institution” in the same way as Title IV Program funds are currently treated in the 90/10 rule calculation. This
means that our institutions will be required to limit the combined amount of Title IV Program funds and applicable “Federal funds”
revenue in a fiscal year to no more than 90% in a fiscal year as calculated under the rule. Consequently, the ARPA change to the 90/10 rule
is expected to increase the 90/10 rule calculations at our institutions. The ARPA does not identify the specific Federal funding programs
that will be covered by this provision, but it is expected to include funding from federal student aid programs such as the veterans’ benefits
programs, which include the Post-9/11 GI Bill and Veterans Readiness and Employment services and from which we derived
approximately 7% of our revenues on a cash basis in 2021. For the year ended December 31, 2021, approximately 75% (calculated based
on cash receipts) of our revenues were derived from the Title IV Programs.
The ARPA states that the amendments to the 90/10 rule apply to institutional fiscal years beginning on or after January 1, 2023 and are
subject to the HEA’s negotiated rulemaking process. Accordingly, the ARPA change to the 90/10 rule is not expected to apply to our 90/10
rule calculations until 2024 relating to our fiscal year ended 2023. Moreover, we cannot predict the additional changes to the 90/10 rule or
other regulations that might occur as a result of negotiated rulemaking that recently began in January 2022 as required by the ARPA. The
negotiated rulemaking committee is expected to meet on a periodic basis through March 2022. The DOE is expected to publish proposed
regulations thereafter that typically are subject to a notice and comment period before the DOE publishes final regulations after
consideration of public comments. We cannot predict the ultimate timing and content of the final regulations, but the future regulations on
90/10 could have a material adverse effect on us and other schools like ours.
We anticipate making changes to our operations in order to address the possible future provisions in the 90/10 rule and in order to maintain
the 90/10 percentages at our institutions below the 90% threshold as calculated under DOE regulations. However, we do not have
significant control over the amount of Title IV Program funds that our students may receive and borrow. Our institutions’ 90/10
percentages can be increased by increases in Title IV Programs aid availability (including, for example, increases in Pell Grant funds) and
can be decreased by decreases in the availability of state grant program funding and other sources of student aid that do not count as Title
IV Programs funds in the 90/10 calculation. Our institutions’ 90/10 percentages also will increase when the ARPA amendments to the
90/10 rule take effect to the extent that students eligible to receive military and veteran education assistance enroll and use their financial
assistance at our institutions. We cannot be certain that the changes we make in the future will succeed in maintaining our institutions’
90/10 percentages below required levels or that the changes will not materially impact our business operations, revenues, and operating
costs.
If any of our institutions lose 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.
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
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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 2021, the DOE released the final cohort default rates for the 2018 federal fiscal year. These are the most recent final rates
published by the DOE. The rates for our existing institutions for the 2018 federal fiscal year range from 6.6% to 11.3%. None of our
institutions had a cohort default rate equal to or greater than 30% for the 2018 federal fiscal year.
In February 2022, the DOE released draft three-year cohort default rates for the 2019 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 2022. The draft
rates for our institutions for the 2019 federal fiscal year range from 2.0% to 3.0%. 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.
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, or a different payment method other than the advance
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”) 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 submitted to the DOE our audited
financial statements for the 2018 fiscal year reflecting a composite score of 1.1 based upon our calculations. The DOE indicated in a
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January 13, 2020 letter its determination that our institutions are “in the zone” based on our composite score for the 2018 fiscal year 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 were
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.
On February 16, 2021, we received a letter from the DOE confirming our composite score of 1.5 for fiscal year 2019 as well as removing
the Company from the Zone Alternative requirements. On August 26, 2021, the DOE sent us correspondence stating that our three
institutions had performed all of the requirements of the February 16, 2021, letter and notifying us that the DOE had returned our
institutions to advance pay on August 19, 2021.
For the 2020 and 2021 fiscal year, we calculated our composite score to be 2.7 and 3.0, respectively. These scores are subject to
determination by the DOE based on its review of our consolidated audited financial statements for the 2020 and 2021 fiscal years, but we
believe it is likely that the DOE will determine that our institutions comply with the composite score requirement.
On September 23, 2019, the DOE published final regulations with a general effective date of July 1, 2020 that, among other things,
modified 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 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:
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.
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As reported above, in January 2022, the DOE commenced a series of meetings with a negotiated rulemaking committee in order to develop
new regulations on a variety of topics including financial responsibility. The committee meetings are expected to take place through
March 2022 after which the DOE is expected to publish proposed regulations for public comment and ultimately publish final regulations
after consideration of public comments. The regulations typically would take effect on July 1, 2023 if the DOE publishes the final
regulations by November 1, 2022. We cannot predict the ultimate timing and content of the financial responsibility regulations that are
expected to emerge from this process. However, the DOE is considering proposals that, among other things, would expand the list and
scope of triggering events and other circumstances 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 implementation of new financial responsibility regulations could increase the likelihood
of the DOE concluding that we lack financial responsibility and must submit to the DOE a letter of credit and accept other conditions that
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 then 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. By letter dated February 16, 2021, the DOE notified us that our Columbia and Iselin institutions failed to comply with the
refund requirements based on their 2017, 2018, and 2019 audits. Consequently, the DOE has required us to maintain with the DOE a letter
of credit in the amount of $600,020. The expiration date of this letter of credit has been extended until January 31, 2023.
Negotiated Rulemaking. The DOE periodically issues new regulations and guidance that can have an adverse effect on our institutions.
We cannot predict the timing and content of any new regulations or guidance that the DOE may seek to impose or whether and to what
extent the DOE under the new administration may issue new regulations and guidance that could adversely impact for-profit schools
including our institutions.
The DOE engaged in additional negotiated rulemaking in 2019 that resulted in new regulations with a general effective date of July 1,
2020. 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 regulations have a general effective
date of July 1, 2020.
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The DOE conducted additional negotiated rulemaking in 2020 that resulted in new regulations with a general effective date of July 1,
2021. On April 2, 2020, the DOE published proposed regulations related primarily to distance education and to topics addressed during
negotiated rulemaking committee meetings that took place in early 2019. The proposed regulations address topics including, among other
things, correspondence courses, direct assessment programs, foreign institutions, written arrangements with ineligible institutions or
organizations to provide a portion of an educational program, requirements for prompt action by the DOE on certain Title IV eligibility
applications, requirements related to the length of educational programs and entry level requirements for the occupation, the clock to credit
hour conversion formula, 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. On September 2,
2020, the DOE published the final regulations with some amendments and a general effective date of July 1, 2021.
The DOE initiated two additional negotiated rulemaking processes in 2021 and 2022, respectively. The first of the two negotiated
rulemaking sessions took place during the last quarter of 2021. The topics included borrower defense to repayment (including, among
other things, potential expanded limitations on recruitment tactics and conduct that are deemed to be aggressive or deceptive), the return of
prohibitions on pre-dispute arbitration agreements and class action waivers, closed school loan discharges (including the reinstatement of
automatic closed school loan discharges), total and permanent disability discharges, public student loan forgiveness, income driven
repayment, interest capitalization, false certification discharges, and prison exchange programs. The DOE is expected to publish proposed
regulations in the Federal Register for public comment during 2022. If the final regulations are published by or before November 1, 2022,
then the regulations typically would not take effect until July 1, 2023. The future borrower defense to repayment and closed school loan
discharge rules are expected to be extensive and to make it easier for borrowers to obtain discharges of student loans and for the DOE to
assess liabilities and other sanctions on institutions based on the loan discharges. Moreover, the potential for expanded rules regarding
recruitment tactics and conduct could lead to increased scrutiny of recruiting and marketing practices and the potential for sanctions on
schools deemed to be noncompliant up to and including loss of Title IV eligibility. However, we cannot predict the ultimate timing and
content of any final regulations following the conclusion of the rulemaking process.
The second of the two negotiated rulemaking sessions began in January 2022 and are scheduled to finish during March 2022. The topics
include the 90/10 rule, gainful employment, administrative capability standards, financial responsibility standards, eligibility certification
procedures, changes in ownership, and ability to benefit. The DOE is expected to publish proposed regulations in the Federal Register for
public comment during 2022. If the final regulations are published by or before November 1, 2022, then the regulations typically would
not take effect until July 1, 2023. The new regulations that the DOE ultimately will publish and implement are expected to impose a broad
range of additional requirements on institutions and especially on for-profit institutions like our schools. In turn, the new regulations are
likely to increase the possibility that our schools could be subject to additional reporting requirements, to potential liabilities and sanctions
such as letter of credit amounts, and to potential loss of Title IV eligibility if our efforts to modify our operations to comply with the new
regulations are unsuccessful. However, we cannot predict the ultimate timing and content of any final regulations following the conclusion
of the rulemaking process.
We also cannot predict with certainty the ultimate combined impact of the regulatory changes which have occurred in recent years and that
may occur as a result of the upcoming negotiated rulemaking, nor can we predict the effect of future legislative or regulatory action by
federal, state or other agencies regulating our education programs or other aspects of our operations, how any resulting regulations will be
interpreted or whether we and our institutions will be able to comply with these requirements in the future. Any such actions by legislative
or regulatory bodies that affect our programs and operations could have a material adverse effect on our student population and our
institutions, including the need to cease offering a number of programs.
Substantial Misrepresentation. The DOE’s regulations prohibit an institution that participates in 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. See
Part I, Item 1. “Business - Regulatory Environment – Borrower Defense To Repayment Regulations.” The DOE has initiated a negotiated
rulemaking process that may result in, among other things, an expansion of the categories of conduct deemed to be a misrepresentation and
that also may result in new prohibitions on certain types of recruiting tactics and conduct that the DOE deems to be aggressive or
deceptive. The implementation of such regulations could result in further scrutiny of marketing and recruiting practices by institutions like
our schools and could increase the chances of the DOE finding practices to be noncompliant and imposing sanctions based on the alleged
noncompliance up to and including fines and potential loss of Title IV eligibility. The rulemaking process is ongoing and, therefore, we
cannot predict the ultimate timing and content of new regulations that the DOE may publish and implement. See Part I, Item 1. “Business
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– Regulatory Environment – Negotiated Rulemaking.”
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. The DOE has initiated a negotiated
rulemaking process that may result in new rules that, among other things, may expand the requirements applicable to school acquisitions in
ways that could make it more difficult to acquire additional schools. The rulemaking process is ongoing and, therefore, we cannot predict
the ultimate timing and content of new regulations that the DOE may publish and implement. See Part I, Item 1. “Business – Regulatory
Environment – Negotiated Rulemaking.”
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.
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. The DOE has initiated a negotiated rulemaking
process that may result in new rules that, among other things, may change the rules associated with the ownership and control of Title IV
participating schools in ways that could further influence future decisions by us or by current or prospective shareholders regarding the
sale, purchase, transfer, issuance or redemption of our stock, or that could impact our ability or willingness to make certain organizational
changes. The rulemaking process is ongoing and, therefore, we cannot predict the ultimate timing and content of new regulations that the
DOE may publish and implement. See Part I, Item 1. “Business – Regulatory Environment – Negotiated Rulemaking.”
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 or by DOE regulations, an institution
that is eligible to participate in Title IV Programs may add a new educational program without DOE approval. However, institutions that
are provisionally certified may be required to obtain approval of new 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 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.
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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. The DOE has initiated
a negotiated rulemaking process that may result in new rules that, among other things, may further restrict the ability of some schools –
such as schools that are provisionally certified – to add new locations or educational programs which could impact our ability to make such
changes if we are provisionally certified or subject to other criteria in the regulations that ultimately are adopted. The rulemaking process
is ongoing and, therefore, we cannot predict the ultimate timing and content of new regulations that the DOE may publish and implement.
See Part I, Item 1. “Business – Regulatory Environment – Negotiated Rulemaking.”
Closed School Loan Discharges. The DOE may grant closed school loan 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. The DOE is currently conducting a negotiated rulemaking process on a variety of topics, including closed school loan discharges (and,
among other things, the reintroduction of automatic closed school loan discharges), which could result in regulations that would make it
easier for borrowers to obtain discharges of their loans and for the DOE to recover liabilities from institutions. See Part I, Item 1.
“Business – Regulatory Environment – Negotiated Rulemaking.”.
We have received five separate letters from the DOE since September 3, 2020, asserting liabilities for closed school loan discharges in
connection with the closure of some of our campuses. The total liability paid to the DOE since September 3, 2020, has been approximately
$345,000. We previously operated four other campuses that closed in the past and that could be subject to closed school loan discharges in
the future, including automatic closed school loan discharges that could be granted by the DOE. We cannot predict any additional loan
discharges that the DOE may approve or the liabilities that the DOE may seek from us for these campuses or other campuses that have
closed in the past.
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. The DOE has initiated a negotiated rulemaking process that may result in new rules that, among
other things, may expand the scope of the administrative capability regulations to include other requirements (such as, for example,
providing adequate career services and refraining from misrepresentations and certain types of recruiting practices). The rulemaking
process is ongoing and, therefore, we cannot predict the ultimate timing and content of new regulations that the DOE may publish and
implement. See Part I, Item 1. “Business – Regulatory Environment – Negotiated Rulemaking.”
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
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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. We cannot predict how the DOE will interpret and enforce the revised incentive compensation rule and the limited
published guidance that the DOE has provided, nor how it will apply the rule and guidance to our past, present, and future compensation
practices. 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 (“OIG”), state education agencies and other state regulators, the U.S. Department of Veterans Affairs and other federal
agencies (such as, for example, the Federal Trade Commission (“FTC”) or the Consumer Financial Protection Board (“CFPB”)), 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.”
In 2021, our New Britain, Iselin and Indianapolis institutions received final audit determination letters from the DOE in connection with
the Title IV Program compliance audits conducted for the 2020 fiscal year. The letters contain findings of alleged noncompliance with
certain Title IV Program requirements for each institution. The total amount of questioned funds in the reports were immaterial and had
been repaid prior to the issuance of the final audit determination letters. In addition to the payment of the questioned amounts, the letters
require the institutions to correct all of the deficiencies noted in the audit reports and require the auditor to comment in the 2021 fiscal year
audit on the actions taken by the institutions in response to the findings and required actions. The letters indicate that repeat findings in
future audits or failure to satisfactorily resolve the findings of the audit could lead to an adverse action. Each letter also notes that, due to
the seriousness of one or more of the findings, the letter has been referred to a separate office within the DOE for consideration of possible
adverse action including the possible imposition of a fine; the limitation, suspension, or termination of the institution’s Title IV Program
eligibility; the revocation of the institution’s provisional program participation agreement; or the denial of a future application for renewal
of the institution’s Title IV Program certification. Each letter indicates that the DOE will notify the institution if the DOE initiates an
adverse action and will notify the institution of its appeal rights and procedures on how to contest the action if any is taken. We are
continuing to cooperate with the audit process and to respond to the DOE’s requests for information in connection with the audits.
On December 16, 2020, the OIG began an audit of our Indianapolis institution to ensure that we used the funds provided under the Higher
Education Emergency Relief Fund (“HEERF”) for allowable and intended purposes and to perform limited work on the institution’s cash
management practices and HEERF reporting. We have been cooperating with the OIG during its audit of the institution. In September 2021,
the OIG issued a final audit report containing 3 findings of alleged non-compliance and 2 additional topics that were each classified as an
“other matter.” The final report is inclusive of our response to the findings and other matters. The final audit report has been sent to the
DOE for further consideration. We cannot predict the outcome of the audit, any liabilities or other actions the DOE might initiate in response
to the audit findings, or the outcome of any appeal that might result in response to a DOE action related to the findings. We are continuing
to cooperate with the ongoing audit process.
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, terminate, revoke, or decline to renew the participation of the affected institution in Title IV Programs or to seek civil or criminal
penalties. Generally, 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, nor has the DOE notified us of an intent to revoke or decline to renew 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
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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.
Scrutiny of the For-Profit Postsecondary Education Sector. In recent years, Congress, the DOE, state legislatures, accrediting agencies,
the CFPB, the FTC, state attorneys general and the media have scrutinized the for-profit postsecondary education sector. Congressional
hearings and roundtable discussions were held regarding various aspects of the education industry, including issues surrounding student
debt as well as publicly reported student outcomes that may be used as part of an institution’s recruiting and admissions practices, and
reports were issued that are highly critical of for-profit colleges and universities. A group of influential U.S. senators, consumer advocacy
groups and some media outlets have strongly and repeatedly encouraged agencies such as the DOE, the FTC, the CFPB, the Department of
Defense and the Department of Veterans Affairs and its state approving agencies to take action to limit or terminate the participation of
institutions such as ours in existing tuition assistance programs. Both major political parties have conveyed significantly different views on
how they would propose to reauthorize the Title IV Programs and the various conditions on program or institutional eligibility they would
require. As a result of the election of President Biden and the new leadership of the DOE, there is an increased likelihood of scrutiny of
our institutions by federal agencies. It is not possible to know how this may affect the Company, however, any actions that limit our
participation in Title IV Programs or the amount of student financial aid for which our students are eligible would negatively impact our
business.
On December 21, 2021, we received a letter from the Consumer Financial Protection Bureau (“CFPB”) stating that the CFPB is assessing
whether we are subject to CFPB’s supervisory authority based on its activities related to consumer lending. The letter states that the CFPB
has the authority to supervise certain entities in the private education loan market and certain other consumer financial products and
services. The CFPB requested a list of information from us in order to conduct its assessment. We have provided the requested
information to the CFPB and are waiting for the CFPB to respond. See Part I. Item 1. “Business - Regulatory Environment – Other
Financial Assistance Programs.”
On October 6, 2021, the FTC issued an announcement regarding its plan to target false claims by for-profit colleges on topics such as
promises about graduates’ job and earnings prospects and other outcomes, its intent to impose “significant financial penalties” on violators,
and its intent to monitor the market carefully with federal and state partners. The FTC indicated in the announcement that it had put 70 for-
profit higher education institutions on notice that the agency would be “cracking down” on any such false promises. All of our institutions
were among the 70 institutions who received this notice. Although the FTC stated that a school’s presence on the list of 70 institutions
does not reflect any assessment as to whether they have engaged in deceptive or unfair conduct, the FTC’s announcement and its issuance
of notices to schools could lead to further scrutiny, investigations, and potential attempted enforcement actions by the FTC and other
regulators against for-profit schools, including our schools.
On October 8, 2021, the DOE announced the establishment of an Office of Enforcement within the Federal Student Aid office that
oversees institutions participating in the Title IV programs. The action restored an office that previously was established in 2016 but
deprioritized during the prior presidential administration. The office will comprise four existing divisions including the Administrative
Actions and Appeals Services Group (which among other things initiates adverse actions against institutions), the Borrower Defense
Group (which analyzes borrower defense to repayment claims), the Investigations Group (which evaluates and investigates potential
institutional noncompliance and collaborates with other federal and state regulators), and the Resolution and Referral Management Group
(which tracks and resolves referrals, allegations and complaints about institutions and other parties that participate in the Title IV
programs). The establishment of the Office of Enforcement could result in an increase in enforcement actions and other activities against
for-profit schools and school companies, including us.
Coronavirus Aid, Relief, and Economic Security (“CARES”). On March 27, 2020, the CARES Act was signed into law, which includes
a $2 trillion federal economic relief package providing financial assistance and other relief to individuals and businesses impacted by the
spread of COVID-19. The CARES Act includes provisions for financial assistance and other regulatory relief benefitting students and
their postsecondary institutions.
Among other things, the CARES Act includes a $14 billion HEERF funds for the DOE to distribute directly to institutions of higher
education. Institutions are required to use at least half of the HEERF funds for emergency grants to students for expenses related to
disruptions in campus operations (e.g., food, housing, etc.). Institutions are permitted to use the remainder of the funds for additional
emergency grants to students or to cover institutional costs associated with significant changes to the delivery of instruction due to the
COVID-19 emergency, provided that those costs do not include payment to contractors for the provision of pre-enrollment recruitment
activities, endowments, or capital outlays associated with facilities related to athletics, sectarian instruction, or religious worship. The law
requires institutions receiving funds to continue to the greatest extent practicable to pay its employees and contractors during the period of
any disruptions or closures related to the COVID-19 emergency.
The DOE has allocated funds to each institution of higher education based on a formula contained in the CARES Act. The formula is
heavily weighted toward institutions with large numbers of Pell Grant recipients. The DOE allocated $27.4 million to our schools
distributed in two equal installments and required them to be utilized by April 30, 2021 and May 14, 2021, respectively. The Company has
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distributed the full $13.7 million of its first installment as emergency grants to students and has utilized the full $13.7 million of its second
installment. If the funds are not spent or accounted for in accordance with applicable requirements, we could be required to return funds or
be subject to other sanctions. The DOE is currently reviewing a final audit report issued by the OIG on September 24, 2021 regarding
several matters including whether we used HEERF funds for allowable and intended purposes. See Part I. Item 1. “Business - Regulatory
Environment – Compliance with Regulatory Standards and Effect of Regulatory Violations.”
Coronavirus Response and Relief Supplemental Appropriations Act, 2021 (“CRRSAA”) and ARPA. On December 27, 2020, the
Consolidated Appropriations Act, 2021 was signed into law. This annual appropriations bill contained the CRRSAA. CRRSAA provided
an additional $81.9 billion to the Education Stabilization Fund including $22.7 billion for the HEERF, which were originally created by the
CARES Act in March 2020. The higher education provisions of the CRRSAA are intended in part to provide additional financial
assistance benefitting students and their postsecondary institutions in the wake of the spread of COVID-19 across the country and its
impact on higher educational institutions. In March 2021, the $1.9 trillion American Rescue Plan Act of 2021 (“ARPA”) was signed into
law. Among other things, the ARPA provides $40 billion in relief funds that will go directly to colleges and universities with $395.8
million going to for-profit institutions. The DOE has allocated a total of $24.4 million to our schools from the funds made available under
CRRSAA and ARPA. As of December 31, 2021, the Company has drawn down and distributed to our students $14.8 million of these
allocated funds. The remainder of the funds are on hold by the DOE and will be distributed to the students upon release. Failure to
comply with requirements for the usage and reporting of these funds could result in requirements to repay some or all of the allocated
funds and in other sanctions.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on our website at www.lincolntech.edu
under the “Investor Relations - Financial Information - SEC Filings” captions, as soon as reasonably practicable after we electronically file
such materials with, or furnish them to, the SEC. Reports of our executive officers, directors and any other persons required to file
securities ownership reports under Section 16(a) of the Exchange Act are also available through our website. Information contained on our
website is not a part of this Annual Report on Form 10-K and is not incorporated herein by reference.
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. Investors should consider carefully the risks and uncertainties described below in addition to
other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and related notes.
RISKS RELATED TO COVID-19
Public health outbreaks, epidemics and pandemics such as the COVID-19 pandemic can have far-reaching and negative impacts
on world economies. The pandemic caused by COVID-19 has had a significant impact on the U.S. economy which has continued
through 2021 and could have a materially adverse impact on our business, results of operations, financial condition and/or cash
flows.
The COVID-19 pandemic has caused significant disruption to the U.S. and world economies, including the closing of many schools and
businesses for extended periods of time, significantly higher unemployment and underemployment, significantly lower interest rates and
equity market valuations, and extreme volatility in the U.S. and world financial markets. The impact of the COVID-19 pandemic on the
U.S. economy has continued to be significant during 2021.
The extent to which the COVID-19 pandemic, including its variants, continues to impact our business, results of operations, financial
condition and/or cash flows will depend on future developments, which are highly uncertain, unpredictable and largely beyond our control,
including, among others: the scope and duration of COVID-19 and its variants; the number of our employees, students, and vendors
adversely affected by the pandemic; the broader public health and economic dislocations resulting from the pandemic; any legislative or
regulatory changes or other actions taken by governmental authorities to limit the public health, financial and economic impacts of the
COVID-19 pandemic; any reputational damage related to the public perception of our or our industry’s response to the COVID-19
pandemic; and the impact of the COVID-19 pandemic on local, and U.S. economies.
RISKS RELATED TO OUR INDUSTRY
Our failure to comply with the extensive regulatory requirements for participation in Title IV Programs and school operations
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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. 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 such revised requirements in the future. Given the complex nature of the regulations and the fact that they are
subject to interpretation, it is reasonable to conclude that in the conduct of our business, we may inadvertently violate such regulations. 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 federal, state, and accrediting agency criteria, see Part I, Item 1. “Business -
Regulatory Environment.”
If we are found not to have satisfied the HEA or 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 75% of our revenue (calculated based on cash receipts) from Title IV Programs in 2021, and have a
significant impact on our business and results of operations. If any of our schools fail to comply with applicable HEA or regulatory
requirements, our regulators could take a variety of adverse actions against us, and our schools could be subject to, among other things, a)
the loss of, or placement of material restrictions or conditions on (i) state licensure or accreditation, (ii) eligibility to participate in and
receive funds under the Title IV Programs or other federal or state financial assistance programs, or (iii) capacity to grant degrees,
diplomas and certificates or b) the imposition of liabilities or monetary penalties, any of which could have a material adverse effect on
academic or operational initiatives, revenues or financial condition, and impose significant operating restrictions upon us. See Part I, Item
1. “Business – Regulatory Environment – Compliance with Regulatory Standards and Effect of Regulatory Violations.”
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, and the DOE is currently engaged in a rulemaking process that may expand the number and scope of
these criteria. 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 and its additional locations, could be limited in its access to, or lose, Title IV Program
funding. This could adversely affect our revenue, as we received approximately 75% of our revenue (calculated based on cash receipts)
from Title IV Programs in 2021, which would have a significant impact on our business and results of operations. The DOE has placed all
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.”
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 other such activities of Congress, although Congress recently made a change to the 90/10 rule that will make
it harder for schools like ours that are subject to the rule to comply with the rule. 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 the ability of our schools, programs, or students to
receive funding through such programs or that imposes new restrictions upon our business or operations could reduce our student
enrollment and our revenues, increase our administrative costs, require us to arrange for alternative sources of financial aid for our
students, and require us to modify our practices in order to fully comply. In addition, current requirements for Title IV Program
participation may change or the present Title IV Programs could be replaced by other programs with materially different eligibility
requirements. The potential for changes that may be adverse to us and other for-profit schools like ours may increase as a result of the
change in administration and changes in Congress. The DOE is currently engaged in a process to establish new regulations that are
expected to increase the number and scope of regulatory requirements applicable to our schools. See Part I, Item 1. “Business –
Regulatory Environment – Negotiated Rulemaking.” If we cannot comply with the provisions of the HEA and the regulations of the DOE,
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.
We could be subject to liabilities, letter of credit requirements, and other sanctions under the DOE’s Borrower Defense to
Repayment Regulations.
On July 1, 2020, the DOE’s published final Borrower Defense to Repayment regulations became effective. Among other things, these new
regulations amend the processes for borrowers to receive from DOE a discharge of the obligation to repay certain Title IV Program loans
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first disbursed on or after July 1, 2020 based on certain acts or omissions by the institution or a covered party. The new and existing DOE
regulations establish detailed procedures and standards for the loan discharge processes for periods prior to July 1, 2017, between July 1,
2017 and June 30, 2020, and on or after July 1, 2020, 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 certain components of the financial
responsibility regulations, including 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 DOE is currently engaged in a process to establish additional regulations that could make it easier for borrowers to obtain
loan discharges and for the DOE to impose liabilities and other sanctions on schools based on the discharge of loans and that could
increase the number and scope of financial responsibility requirements. See Part I, Item 1. “Business – Regulatory Environment –
Negotiated Rulemaking.”
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.
The DOE periodically issues new regulations and guidance that can have an adverse effect on our institutions. We cannot predict the
timing and content of any new regulations or guidance that the DOE may seek to impose or whether and to what extent the DOE under the
new administration may issue new regulations and guidance that could adversely impact for-profit schools including our institutions. The
DOE recently published new regulations on a variety of topics on November 1, 2019 with a general effective date of July 1, 2020 and
published additional regulations on additional topics on September 2, 2020 with a general effective date of July 1, 2021. The DOE is
currently engaged in a rulemaking process that is expected to result in new regulations on a broad range of topics that could adversely
impact institutions including our institutions. See Part I, Item 1, “Business – Regulatory Environment – Negotiated Rulemaking. If we
cannot comply with the provisions of these or other regulations, as they currently exist or 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.
We cannot predict how the DOE would interpret and enforce current or future regulations or how these regulations, or any regulations that
may arise out of a negotiated rulemaking process or any other regulations that DOE may promulgate, may impact our schools’
participation in the Title IV Programs; however, current or future regulations could have a material adverse effect on our schools’ business
and results of operations, and the broad sweep of the recent rules and the rules that the Department is currently developing may, in the
future, require our schools to submit a letter of credit based on expanded standards of financial responsibility.
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.” The DOE is currently engaged in a rulemaking process that is expected to result in
new regulations that, among other things, may increase the number and scope of financial responsibility requirements and triggering
circumstances that could lead to a letter of credit requirement or other sanctions. 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 or revocation
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 make 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 and the limited published guidance that the DOE has provided, nor how it will apply the rule and
guidance to our past, present, and future compensation practices. These regulations have 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
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Federal False Claims Act.
If our schools do not maintain their state licensure and 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 and by applicable state educational agencies in
order to participate in Title IV Programs. See Part I, Item 1. “Business - Regulatory Environment – State Authorization” and “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 that school’s eligibility 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.
On October 28, 2021, the DOE announced that it had notified ACCSC that a decision on the recognition by the DOE of ACCSC as an
accrediting agency was being deferred pending the submission of additional information about ACCSC’s monitoring, evaluation, and
actions related to high-risk institutions. See Part 1, Item 1. “Business – Regulatory Environment – Accreditation.” If the DOE declines to
continue its recognition of ACCSC and if the subsequent period for obtaining accreditation from another DOE-recognized accrediting
agency lapses before we obtain accreditation from another DOE-recognize accrediting agency (or if the DOE does not provide such a
period for institutions to obtain other accreditation), our schools could lose our Title IV eligibility. We cannot predict the timing and
outcome of the DOE’s decision on the continuation of its recognition of ACCSC, the timing and outcome of any appeal that ACCSC might
pursue in the event of an adverse decision, or the duration and conditions of any period the DOE may elect to provide to institutions to
obtain accreditation from another DOE-recognized accrediting agency.
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. 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, 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. 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.
In March 2021, the ARPA amended the 90/10 rule by treating other “Federal funds that are disbursed or delivered to or on behalf of a
student to be used to attend such institution” in the same way as Title IV funds are currently treated in the 90/10 rule calculation. See Part
I, Item 1. “Business – Regulatory Environment – 90/10 Rule.” The ARPA states that the amendments to the 90/10 rule apply to
institutional fiscal years beginning on or after January 1, 2023 and are subject to the HEA’s negotiated rulemaking process. The DOE
initiated a negotiated rulemaking process to amend the 90/10 rule in January 2022. We cannot predict the ultimate timing and content of
the final regulations, but the future regulations on 90/10 could have a materially adverse effect on us and other schools like ours. See Part
I, Item 1. “Business – Regulatory Environment – 90/10 Rule” and “Business – Regulatory Environment – Negotiated Rulemaking.”
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.
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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 such student’s withdrawal. 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 and Iselin institutions, we are required to submit a letter of credit in the amount of $600,020 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. The DOE has initiated a
negotiated rulemaking process that may result in, among other things, an expansion of the categories of conduct deemed to be a
misrepresentation and that also may result in new prohibitions on certain types of recruiting tactics and conduct that the DOE deems to be
aggressive or deceptive. See Part I, Item 1. “Business - Regulatory Environment – Substantial Misrepresentation” and “Business –
Regulatory Environment – Negotiated Rulemaking.” 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.
All 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.
All of our 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
new programs. The DOE is currently engaged in a negotiated rulemaking process that is considering, among other issues, establishing
rules to authorize additional conditions and restrictions on provisionally certified institutions. See Part I, Item 1. “Business – Regulatory
Environment – Negotiated Rulemaking.” 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 Program 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 – Accreditation,” “Regulatory Environment – Other Financial Assistance Programs,” “Regulatory
Environment – Borrower Defense to Repayment,” “Regulatory Environment - Compliance with Regulatory Standards and Effect of
Regulatory Violations,” and “Regulatory Environment - Scrutiny of the For-Profit Postsecondary Education Sector.”
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
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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 and has indicated to the
Company that it is assessing whether we are subject to CFPB’s supervisory authority based on our activities related to consumer lending.
We have provided requested information to the CFPB and are waiting for the CFPB to respond. We cannot predict whether the CFPB or
other regulators will conduct further reviews or take actions that could require us to change private lending to students at our schools or
have a material adverse impact on our operations. See Part I, Item 1. “Business – Regulatory Environment – Other Financial Assistance
Programs.” 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 additional 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. See Part I, Item 1. “Business – Regulatory Environment – Scrutiny of the
For-Profit Postsecondary Education Sector.” Any laws that are adopted that limit our or our students’ participation in Title IV Programs or
in programs to provide funds for active duty service members and veterans or the amount of student financial aid for which our students
are eligible, or any decreases in enrollment related to the Congressional activity concerning this sector, could have a material adverse
effect on our academic or operational initiatives, cash flows, results of operations, or financial condition.
Adverse publicity arising from scrutiny of us or other for-profit postsecondary schools may negatively affect us or our schools.
In recent years, Congress, the DOE, state legislatures, accrediting agencies, the CFPB, the FTC, state attorneys general and the media have
scrutinized the for-profit postsecondary education sector. See Part I, Item 1. “Business – Regulatory Environment – Scrutiny of the For-
Profit Postsecondary Education Sector.” Adverse publicity regarding any past, pending, or future investigations, claims, settlements,
and/or actions against us or other for-profit postsecondary schools could negatively affect our reputation, student enrollment levels,
revenue, profit, and/or the market price of our common stock. Unresolved investigations, claims, and actions, or adverse resolutions
or settlements thereof, could also result in additional inquiries, administrative actions or lawsuits, increased scrutiny, the loss or
withholding of accreditation, state licensure, or eligibility to participate in the Title IV Programs or other financial assistance programs,
and/or the imposition of other sanctions by federal, state, or accrediting agencies which, individually or in the aggregate, could have a
material adverse effect on our business, financial condition, results of operations, and cash flows and result in the imposition of
significant restrictions on us and our ability to operate.
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 students require or as competitors or employers demand. If we are unable to adequately respond to changes in
market requirements due to financial or regulatory 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, 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. We 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
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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. This strong competition could adversely affect our
business.
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.
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 unavailable when required or on acceptable terms, we may be forced to forego
attractive acquisition opportunities, cease operations and, even if we are able to continue our operations, our ability to increase student
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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, 2021, the teaching professionals at six of our campuses are represented by unions and covered by collective
bargaining agreements that expire between 2022 and 2024. 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 computer hackers, organized cyber-attacks and physical or electronic breaches or unauthorized access, 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
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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.
We cannot assure you that a breach, loss, or theft of personal information will not occur.
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.
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 7%, 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 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 7%, 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.
We have an obligation to pay dividends on our shares of Series A Preferred Stock.
Beginning on September 30, 2020, dividends on the Series A Preferred Stock (“Series A Dividends”), at the initial annual rate of 9.6% are
paid, in advance, from the date of issuance quarterly on each December 31, March 31, June 30 and September 30. 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.
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.
31
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 were 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 maintain the effectiveness of the Resale Shelf (and certain other
registration statements concerning the Conversion Shares), or certain other events occur with respect to such registration statements, some
of which are beyond our control, we will be 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 effective, up to a maximum of
7.5%.
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.
32
Our principal shareholder owns a significant percentage of our capital stock and is able to influence certain corporate matters.
As of December 31, 2021, Juniper Investment Company, LLC and its affiliates (“Juniper”) beneficially owned, in the aggregate,
approximately 3% 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% as of December 31, 2021.
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:
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.
33
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.
34
ITEM 2.
PROPERTIES
As of December 31, 2021, we leased all of our facilities, except for our campuses in Nashville, Tennessee and former school property in
Suffield, Connecticut, all of which we own. 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, 2021, all of our existing leases expire between
2022 and 2041.
The following table provides information relating to our facilities as of December 31, 2021, including our corporate office:
Location
Las Vegas, Nevada
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
Parsippany, New Jersey
Suffield, Connecticut
Brand
Euphoria Institute
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
Former Lincoln Technical Institute
Approximate Square Footage
23,000
111,000
213,000
157,000
126,000
30,000
88,000
25,000
289,000
32,000
39,000
79,000
35,000
36,000
30,000
30,000
48,000
47,000
33,000
60,000
56,000
350,000
17,000
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.
Following a wave of hundreds of class action lawsuits being served upon colleges and universities across the country by students in
connection with transitioning from in-person to online classes due to COVID-19, a class action lawsuit, captioned John Gaviria vs. Lincoln
Educational Services Corporation, was filed against the Company in New Jersey Federal District Court and served on December 21,
2020. Like most of the other similar lawsuits across the country, the suit alleged breach of contract, unjust enrichment and conversion. In
lieu of an answer, on January 25, 2021, the Company filed a Motion to Dismiss Plaintiff’s Complaint for Failure to State a Claim. On July
9, 2021, the court granted the Company’s Motion to Dismiss three of the four claims finding that the ruling on the claim for student and
technology fees was premature. In response to the Company’s Motion for Reconsideration as to the remaining claim, the court granted the
Company’s Motion to Dismiss the lawsuit in its entirety whereupon the Plaintiff filed an appeal to the Third Circuit Court. On January 27,
2022, counsel for the Plaintiff contacted the Company’s counsel to request a voluntary dismissal of the case and the Company agreed to
and accepted the dismissal with prejudice.
As reported elsewhere under Part I, Item 1. Business – Regulatory Environment, in December 2021, we received a letter from the
Consumer Financial Protection Bureau (“CFPB”) stating that the CFPB is assessing whether we are subject to CFPB’s supervisory
authority based on our activities related to certain extensions of credit to our students and requesting certain information. The letter states
that the CFPB has the authority to supervise certain entities in the private education loan market and certain other consumer financial
products and services. We have provided the requested information to the CFPB and are waiting for the CFPB to respond.
35
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
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 1, 2022, the last reported sale price of our common stock on the Nasdaq Global Select Market was $7.71 per share. As of
March 1, 2022, based on the information provided by Continental Stock Transfer & Trust Company, there were 63 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 on its
common stock in the foreseeable future.
However, during the year ended December 31, 2021, the Company paid a $1.2 million cash dividend to its Series A preferred shareholders
pursuant to the Securities Purchase Agreement entered into on November 14, 2019 and the Company’s Amended and Restated Certificate
of Incorporation.
Share Repurchases
The Company did not repurchase any shares of our common stock during the fourth quarter of the fiscal year ended December 31, 2021.
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, 2021 is as follows:
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a))
1,447,757
-
1,447,757
Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
$
$
7.79
-
7.79
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
ITEM 6.
[RESERVED]
Number of
Securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
81,000
-
81,000
36
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion together with the “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 skilled trades (which include HVAC, welding and computerized numerical control and
electrical and electronic systems technology, among other programs), automotive technology, healthcare services (which include nursing,
dental assistant and medical administrative assistant, among other programs), hospitality services (which include culinary, therapeutic
massage, cosmetology and aesthetics) and information technology (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 accredited and are eligible to participate in federal financial aid programs administered 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 two reportable business segments: (a) Transportation and Skilled Trades, and (b) Healthcare and Other
Professions (“HOPS”).
As of December 31, 2021, we had 13,059 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 nationally 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 by us to some of 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 in duration from 19 to 136 weeks, our associate’s degree programs range in duration 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 and other sources of funding. 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 75% and 77% of our revenue on a cash basis while the remainder is primarily derived from
state grants and cash payments made by students during 2021 and 2020, respectively. 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. Part I, Item 1.
“Business - Regulatory Environment.”
We extend credit for tuition and fees to many of our students that attend our campuses. Our credit risk is mitigated by the students’
37
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 and extended financing agreements offered 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.
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 by 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 and, as
a consequence, more likely to pay outstanding tuition amounts;
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
the requirement that students meet creditworthiness 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.
Property Sale Agreements
Property Sale Agreement - Nashville, Tennessee Campus
On September 24, 2021, Nashville Acquisition, LLC, a subsidiary of the Company (“Nashville Acquisition”), entered into a Contract for the
Purchase of Real Estate (the “Nashville Contract”) to sell the property located at 524 Gallatin Road, Nashville, Tennessee, at which the
Company operates its Nashville campus, to SLC Development, LLC, a subsidiary of Southern Land Company (“SLC”), for an aggregate
sale price of $34.5 million, subject to customary adjustments at closing. The Company intends to relocate its Nashville campus to a more
efficient and technologically advanced facility in the Nashville metropolitan area but has not yet determined a location. The closing of the
sale transaction is expected to occur in the first half of 2022 subject to various closing conditions which must be satisfied or waived including
the satisfactory completion by the buyer of its due diligence review. During the due diligence period, SLC has the right to terminate the
Nashville Contract for any reason at its discretion; therefore, there can be no assurance that the sale will be consummated on a timely basis
or at all. Upon closing, Nashville Acquisition would be permitted to occupy the property and continue to operate the Nashville campus on
a rent-free basis for a lease-back period of 12 months, and, thereafter, will have the option to extend the lease-back period for one 90-day
term and three additional 30-day terms pursuant to a lease agreement currently being negotiated by the parties. The Nashville property is
included in assets held for sale in the consolidated balance sheet as of December 31, 2021.
Sale-Leaseback Transaction - Denver, Colorado and Grand Prairie, Texas Campuses
On September 24, 2021, Lincoln Technical Institute, Inc. and LTI Holdings, LLC, each a wholly-owned subsidiary of the Company
(collectively, “Lincoln”), entered into an Agreement for Purchase and Sale of Property for the sale of the properties located at 11194 E.
45th Avenue, Denver, Colorado 80239 and 2915 Alouette Drive, Grand Prairie, Texas 75052, at which the Company operates its Denver
and Grand Prairie campuses, respectively, to LNT Denver (Multi) LLC, a subsidiary of LCN Capital Partners (“LNT”), for an aggregate
sale price of $46.5 million, subject to customary adjustments at closing. Closing of the sale occurred on October 29, 2021. Concurrently
with consummation of the sale, the parties entered into a triple-net lease agreement for each of the properties pursuant to which the
properties are being leased back to Lincoln Technical Institute, Inc. for a twenty-year term at an initial annual base rent, payable quarterly
in advance, of approximately $2.6 million for the first year with annual 2.00% increases thereafter and includes four subsequent five-year
38
renewal options in which the base rent is reset at the commencement of each renewal term at then current fair market rent for the first year
of each renewal term with annual 2.00% increases thereafter in each such renewal term. The lease, in each case, provides Lincoln with a
right of first offer should LNT wish to sell the property. The Company has provided a guaranty of the financial and other obligations of
Lincoln Technical Institute, Inc. under each lease. The Company evaluated factors in Accounting Standards Codification (“ASC”) Topic
606, Revenue Recognition, to conclude that the transaction qualified as a sale. This included analyzing the right of first offer clause to
determine whether it represents a repurchase agreement that would preclude the transaction from being accounted for as a successful sale.
The Company recognized a gain on sale of assets of $22.5 million. Additionally, the Company evaluated factors in ASC Topic 842,
Leases, and concluded that the newly created leases met the definition an operating lease. The Company recorded Right of Use (“ROU”)
Asset and lease liabilities of $40.1 million. The sale lease-back transaction provided the Company with net proceeds of approximately
$45.4 million with the proceeds partially used for the repayment of the Company’s outstanding term loan of $16.2 million and swap
termination fee of $0.5 million.
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, goodwill and income taxes. 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.
Substantially all of our revenues are considered to be revenues from contracts with students. The related accounts receivable balances are
recorded in our balance sheets as student accounts receivable. We do not have significant revenue recognized from performance
obligations that were satisfied in prior periods, and we do not have any transaction price allocated to unsatisfied performance obligations
other than in our unearned tuition. We record revenue for students who withdraw from our schools only to the extent that it is probable
that a significant reversal in the amount of cumulative revenue recognized will not occur. Unearned tuition represents contract liabilities
primarily related to our tuition revenue. We have elected not to provide disclosure about transaction prices allocated to unsatisfied
performance obligations if original contract durations are less than one-year, or if we have the right to consideration from a student in an
amount that corresponds directly with the value provided to the student for performance obligations completed to date in accordance with
ASC Topic 606, Revenue from Contract with Customers. We have assessed the costs incurred to obtain a contract with a student and
determined them to be immaterial.
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, 2021 and 2020 was 8.0% and 9.2%, respectively. A
1% increase in our bad debt expense as a percentage of revenues for the years ended December 31, 2021 and 2020 would have resulted in
an increase in bad debt expense of $3.4 million and $2.9 million, respectively.
We do not believe that there is any direct correlation between tuition increases, the credit we extend to students and our financing
commitments. The extended financing plans we offer to our students are made on a student-by-student basis and are predominantly a
function of the specific student’s financial condition. We only extend credit to the extent there is a financing gap between the tuition and
fees charged for the program and the amount of grants, loans and parental loans each student receives. Each student’s funding
requirements are unique. Factors that determine the amount of aid available to a student include whether they are dependent or
independent students, Pell grants awarded, Federal Direct loans awarded, Plus loans awarded to parents and the student’s personal
resources and family contributions. As a result, it is extremely difficult to predict the number of students that will need us to extend credit
to them.
39
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. Goodwill represents the excess of the cost of an acquired business (reporting unit) over the estimated carrying value, assets net
of liabilities. Lincoln tests goodwill for impairment annually, in the fourth quarter of each year, unless there are events or changes in
circumstances that indicate an impairment may have occurred. Impairment may result from deterioration in performance, adverse market
conditions, adverse changes in laws or regulations, the restriction of activities associated with the acquired business, and/or a variety of
other circumstances. If we determine that impairment has occurred, we record a write-down of the carrying value and charge the
impairment as an operating expense in the period the determination is made.
As of December 31, 2021, goodwill was approximately $14.5 million, or 4.9%, of our total assets. The goodwill is allocated among nine
reporting units within the Transportation and Skilled Trades Segment.
When Lincoln performs our annual goodwill impairment assessment we first assess a number of qualitative factors to determine whether it
is more likely than not that the fair value of a reporting unit is less than its carrying value. If we conclude based on our qualitative review
that it is more likely than not that the fair value of the reporting unit is less than the carrying value, we proceed with a quantitative
impairment test.
Our qualitative assessment is subjective, it includes a review of macroeconomic and industry factors, review of the financial performance
of applicable reporting units, and assessment of adverse events that may negatively impact a reporting units carrying value. Adverse events
would include, but are not limited to, difficulty in accessing capital, a greater competitive environment, decline in market-dependent
multiples or metrics, regulatory or political developments, change in key personnel, strategy, or customers, or litigation.
When we perform our quantitative impairment test we believe the most critical assumptions and estimates in determining the estimated fair
value of our reporting units include, but are not limited to, future tuition revenues, operating costs, working capital changes, capital
expenditures and a discount rate. The assumptions used in determining our expected future cash flows consider various factors such as
historical operating trends particularly in student enrollment and pricing and long-term operating strategies and initiatives.
If Lincoln determines that quantitative tests are necessary, these tests are performed using projected future operating results and cash flows
on a weighted scale, 50% based on Discounted Cash Flows (Income Approach) and 50% on based EBITDA multipliers (Market
Approach). Management judgment is necessary in forecasting future cash flows and operating results, critical assumptions include growth
rates, changes in operating costs, capital expenditures, and changes in weighted average costs of capital. Additionally, Lincoln obtains
independent market metrics for the industry and our peers to assist in the development of these key assumptions. This process is consistent
with our internal forecasts and operating plans.
Lincoln has completed our 2021 goodwill impairment assessment and determined that it was more likely than not that the fair value of the
reporting units exceeded their carrying value. As such, we concluded that goodwill was not impaired.
Income taxes. We account for income taxes in accordance with 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.
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, 2021 and 2020, we did not record any interest and penalties expense associated with uncertain tax positions.
40
Results of Operations for the Two Years Ended December 31, 2021
The following table sets forth selected consolidated statements of 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 on sale of assets
Impairment of long-lived assets
Total costs and expenses
Operating income
Interest expense, net
Income from operations before income taxes
Provision (benefit) for income taxes
Net income
Year Ended Dec 31,
2021
2020
100.0%
100.0%
41.4%
50.4%
-6.7%
0.2%
85.3%
14.7%
-0.6%
14.1%
3.7%
10.4%
41.7%
53.3%
0.0%
0.0%
95.0%
5.0%
-0.4%
4.6%
-12.0%
16.6%
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Consolidated Results of Operations
Revenue. Revenue increased $42.2 million, or 14.4% to $335.3 million for the year ended December 31, 2021 from $293.1 million in the
prior year. The increase in revenue was the result of a 10% increase in average student population, driven by student start growth of 7.5%
in combination with starting the year with approximately 1,000 more students than in the prior year comparable period. Further
contributing to the increase was the normalization of our revenue stream driven by the return to in-person instruction at all of our campuses
as well as a 4.0% increase in average revenue per student.
The prior year financial results reflect the unprecedented impact from the COVID-19 pandemic which started in March of 2020. As a
result, certain financial and operational comparisons year over year may be distorted as a result of the impact of COVID-19.
Educational services and facilities expense. Our educational services and facilities expense increased $16.7 million, or 13.7% to $138.9
million for the year ended December 31, 2021 from $122.2 million in the prior year. Increased costs were mainly concentrated in
instructional expense, books and tools expense and facilities expense. Instructional expense increases were primarily driven by a larger
average student population, up 10%, which also drove increases in books and tools expense. Also contributing to the increase in
instructional expenses were increased instructor salaries driven by inflationary pressure and widespread instructor shortages in addition to
increases in consumable supplies, primarily in our welding programs. Facility expense increases were driven by additional rent expense
due to the elimination of one-time rent reductions in the prior year resulting from campus closures due to COVID-19 in combination with
additional rent expense in the current year as a result of the sale leaseback transaction consummated during the fourth quarter of 2021.
Educational services and facilities expense, as a percentage of revenue, decreased slightly to 41.4% from 41.7% for the year ended
December 31, 2021 and 2020, respectively.
Selling, general and administrative expense. Our selling general and administrative expense increased $12.7 million, or 8.1% to $168.9
million for the year ended December 31, 2021 from $156.2 million in the prior year. The increase was driven by several factors including
increased spend in administrative expense in combination with investments in marketing and sales expense. Partially offsetting the
increase was a slight reduction in bad debt expense.
Administrative expense increases were primarily driven by salaries and benefits expense resulting from the normalization of business
operations in the current year.
Marketing investments increased from additional expenditures primarily in paid social media channels utilizing video and display
advertising to reach a younger audience demographic, while sales expense increases were the result of additional salaries and benefits
driven by an expanded sales force due in part by the return to in-person instruction and the normalization of operations in the current year.
Despite both the additional investments in marketing and increases in sales expense, the cost per start is down year-over-year
demonstrating both the efficiency and effectiveness of marketing initiatives.
41
Bad debt expense for the year ended December 31, 2021 was favorable compared to the prior year by $0.1 million, as a result of an
adjustment to qualifying student accounts receivables following guidance published on March 19, 2021 by the Department of Education.
In accordance with this guidance, we combined applicable HEERF funding with Company’s funds to provide financial relief to students
who dropped from school due to COVID-19 related circumstances with unpaid accounts receivable balances during the period from March
15, 2020 to March 31, 2021. The relief resulted in a net benefit to bad debt expense of approximately $3.0 million. Without this
adjustment bad debt expense for 2021, as a percentage of total revenue, would have been comparable with prior year.
Selling, general and administrative expense, as a percentage of revenue, decreased to 50.4% for the year ended December 31, 2021, from
53.3% in the prior year.
Impairment of long-lived assets – Impairment of long-lived assets was $0.7 million, resulting from a one-time non-cash impairment
charge triggered by an adjustment to fair market value for a campus that was closed several years ago.
Gain on sale of assets. Gain on sale of assets for the year ended December 31, 2021 was $22.5 million, driven by the sale leaseback
transaction consummated in the fourth quarter of the current year.
Net interest expense. Net interest expense for the year ended December 31, 2021 increased $0.7 million, or 58.0% to $2.0 million from
$1.3 million in the prior year comparable period. Additional expense incurred as a result of the debt payoff which included fees for the
termination of our cash flow hedge of $0.5 million and the write-off of previously capitalized deferred financing fees totaling $0.5 million.
Excluding the additional expenses resulting from the debt payoff, interest expense year-over-year would have decreased by approximately
28.0%, or $0.4 million resulting from a lower loan balance in the current year.
Income taxes. Our income tax provision for the year ended December 31, 2021 was $12.5 million compared to an income tax benefit of
$35.1 million in the prior year. The tax benefit primarily related to a full release of our valuation allowance on deferred tax assets as of
December 31, 2020. Our effective tax rate was 26.5% for the year ended December 31, 2021.
Segment Results of Operations
We operate our business in two reportable operating segments: (a) the Transportation and Skilled Trades segment; and (b) the Healthcare
and Other Professions (“HOPS”) segment. Our reportable operating segments have been determined based on a method by which we now
evaluate performance and allocate resources. Each reportable operating 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).
The Company also utilizes the Transitional segment solely when and if it closes a school.
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.
42
The following table presents results for the activity for our reportable operating segments for the years ended December 31, 2021 and
2020:
Twelve Months Ended December 31,
2020
2021
% Change
Revenue:
Transportation and Skilled Trades
HOPS
Total
Operating Income:
Transportation and Skilled Trades
Healthcare and Other Professions
Corporate
Total
Starts:
Transportation and Skilled Trades
Healthcare and Other Professions
Total
Average Population:
Transportation and Skilled Trades
Leave of Absence - COVID-19
Transportation and Skilled Trades Excluding Leave of Absence - COVID-19
Healthcare and Other Professions
Leave of Absence - COVID-19
Healthcare and Other Professions Excluding Leave of Absence - COVID-19
Total
Total Excluding Leave of Absence - COVID-19
End of Period Population:
Transportation and Skilled Trades
Leave of Absence - COVID-19
Transportation and Skilled Trades Excluding Leave of Absence - COVID-19
Healthcare and Other Professions
Leave of Absence - COVID-19
Healthcare and Other Professions Excluding Leave of Absence - COVID-19
Total
Total Excluding Leave of Absence - COVID-19
$
$
240,531
94,805
335,336
$
$
207,434
85,661
293,095
$
$
52,055
11,845
(14,639)
49,261
34,458
11,068
(30,745)
14,781
$
$
10,291
5,111
15,402
8,505
(12)
8,493
4,439
(33)
4,406
12,944
12,899
8,648
-
8,648
4,411
-
4,411
13,059
13,059
9,442
4,879
14,321
7,872
(219)
7,653
4,232
(156)
4,076
12,104
11,729
7,917
(22)
7,895
4,402
(80)
4,322
12,319
12,217
16.0%
10.7%
14.4%
51.1%
7.0%
52.4%
233.3%
9.0%
4.8%
7.5%
8.0%
94.5%
11.0%
4.9%
78.8%
8.1%
6.9%
10.0%
9.2%
100.0%
9.5%
0.2%
100.0%
2.1%
6.0%
6.9%
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Transportation and Skilled Trades
Student start results increased 9.0% to 10,291 for the year ended December 31, 2021 from 9,442 in the prior year.
Operating income increased $17.6 million, or 51.1% to $52.1 million for the year ended December 31, 2021 from $34.5 million in the
prior year. The increase year over year was mainly driven by the following factors:
Revenue increased $33.1 million, or 16.0% to $240.5 million for the year ended December 31, 2021 from $207.4 million in
the prior year. The increase in revenue was primarily due to an 11.0% increase in average student population, driven by a
9.0% increase in student starts year over year. Further contributing to the increase was the normalization of our revenue
43
stream driven by the return to in-person instruction at all of our campuses as well as a 4.5% increase in average revenue per
student.
Educational services and facilities expense increased $11.3 million, or 13.5% to $94.7 million for the year ended December
31, 2021 from $83.4 million in the prior year. The higher costs were mainly concentrated in instructional expense, books and
tools expense and facilities expense. Instructional expense increases were primarily driven by a larger average student
population, up 11.0%, which also drove increases in books and tools expense. Also contributing to the increase in
instructional expenses were increased instructor salaries driven by inflationary pressure and widespread instructor shortages
in addition to increases in consumable supplies, primarily in welding programs. Facility expense increases were driven by
additional rent expense resulting from one-time rent reductions in the prior year resulting from campus closures due to
COVID-19 in combination with additional rent expense in the current year as a result of the sale leaseback transaction
entered into during the fourth quarter of 2021.
Selling, general and administrative expense increased $4.1 million, or 4.6% to $93.7 million for the year ended December 31,
2021 from $89.6 million in the prior year. The increase was driven by additional administrative expenses in combination
with increased investments in marketing and sales expense. Partially offsetting the increase was a reduction in bad debt
expense, all of which are discussed above in the consolidated results of operations.
Healthcare and Other Professions
Student start results increased 4.8% to 5,111 for the year ended December 31, 2021 from 4,879 in the prior year.
Operating income increased 7.0% to $11.8 million for the year ended December 31, 2021 from $11.1 million in the prior year. The $0.7
million increase was mainly driven by the following factors:
Revenue increased by $9.1 million, or 10.7% to $94.8 million for the year ended December 31, 2021 from $85.7 million in
the prior year. The increase in revenue was primarily due to an 8.1% increase in average student population, driven by a
4.8% increase in student starts year over year. Further contributing to the increase was the normalization of our revenue
stream driven by the return to in-person instruction at all of our campuses as well as a 2.4% increase in average revenue per
student.
Educational services and facilities expense increased $5.4 million, or 14.0% to $44.2 million for the year ended December
31, 2021 from $38.8 million in the prior year. Increased costs were primarily concentrated in instructional expense, books
and tools expense, and facilities expense. Instructional expense increases were primarily driven by a larger average student
population, up 8.1%, which also drove increases in books and tools expense. Also contributing to the increase in
instructional expense were increased instructor salaries driven by inflationary pressure and widespread instructor shortages in
addition to increases in consumable supplies. Facility expense increases were driven by additional rent expense resulting
from one-time rent reductions in the prior year resulting from campus closures due to COVID-19 in combination with
additional rent expense in the current year as a result of the sale leaseback transaction entered into during the fourth quarter of
2021. Facility expense increases were driven by additional rent expense due to one-time rent reductions in the prior year
resulting from campus closures due to COVID-19 coupled with overall facilities savings during campus closures as a result
of COVID-19.
Selling, general and administrative expense increased $2.9 million, or 8.2% to $38.7 million for the year ended December 31,
2021 from $35.8 million in the prior year. The increase was driven by additional administrative expenses in combination
with increased investments in marketing and sales expense, all of which are discussed above in the consolidated results of
operations.
Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses were $14.6 million
and $30.7 million for the years ended December 31, 2021 and 2020, respectively. Included in the current year is a $22.5 million gain
realized as a result of entering into a sale leaseback transaction, partially offset by a one-time non-cash impairment charge of $0.7 million.
Excluding the sale leaseback transaction and the impairment charge, corporate and other expenses would have been $36.4 million as of
December 31, 2021. The additional expense over prior year was due to increased benefits expense driven primarily by an uptick in
medical claims in combination with a slight increase in salary expense.
44
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 two fiscal years in the period ended December 31, 2021:
Cash Flow Summary
Year Ended December 31,
2021
2020
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash used in financing activities
(In thousands)
$
$
$
27,447
37,848
(20,014)
$
$
$
23,485
(5,483)
(18,620)
As of December 31, 2021, the Company had a net cash balance of $83.3 million compared to $20.8 million in the prior year comparable
period. The net cash balance is calculated as our cash and cash equivalents less both short and long-term portion of the credit agreement.
Cash at December 31, 2021 benefited from net income and the consummation of a sale leaseback transaction entered into during the fourth
quarter involving the Company’s Denver, Colorado and Grand Prairie, Texas campuses. The gross sale price for both properties totaled
$46.5 million and, upon consummation of the sale, the Company entered into a triple-net lease agreement for each property.
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 75% of our cash
receipts relating to revenues in 2021. Pursuant to applicable regulations, students must apply for a new loan for each academic period.
Federal regulations dictate the timing of disbursements of funds under Title IV Programs and loan funds are generally provided by lenders
in two disbursements for each academic year. The first disbursement is usually received approximately 31 days after the start of a student’s
academic year and the second disbursement is typically received at the beginning of the sixteenth week from the start of the student's
academic year. Certain types of grants and other funding are not subject to a 31-day delay. In certain instances, if a student withdraws
from a program prior to a specified date, any paid but unearned tuition or prorated Title IV Program financial aid is refunded according to
federal, state and accrediting agency standards.
As a result of the significant amount of Title IV Program funds received by our students, we are highly dependent on these funds to operate
our business. Any reduction in the level of Title IV Program funds that our students are eligible to receive for tuition payment to us or any
restriction on our eligibility to receive Title IV Program funds would have a significant impact on our operations and our financial
condition. For more information, see Part I, Item 1A. “Risk Factors - Risks Related to Our Industry”.
Operating Activities
Net cash provided by operating activities was $27.4 million and $23.5 million for the years ended December 31, 2021 and 2020,
respectively. The increase year over year was due primarily to increased operating income, up $34.5 million which includes a gain on the
sale of assets of $22.5 million over the prior year.
Investing Activities
Net cash provided by investing activities was $37.8 million for the year ended December 31, 2021 compared to net cash used in investing
activities of $5.5 million in the prior year comparable period. The increase of $43.3 million was primarily driven by proceeds of $45.4
million resulting from the consummation of a sale leaseback transaction during the fourth quarter of the current 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 Nashville, Tennessee, which is subject to a sale-leaseback
agreement which is expected to be consummated in the first half of the year and our former school property located in Suffield,
Connecticut.
Capital expenditures were 2% of revenues in 2021 and are expected to approximate 2% of revenues in 2022. We expect to fund future
capital expenditures with cash generated from operating activities and cash on hand.
45
Financing Activities
Net cash used in financing activities was $20.0 million for the year ended December 31, 2021 compared to $18.6 million in the prior year.
The increase of $1.4 million was the result of the retirement of our term loan using proceeds from the sale leaseback transaction involving
the Company’s Denver, Colorado and Grand Prairie, Texas campuses pursuant to agreement with our lending institution. Cash paid to
retire the loan was $16.3 million with additional payments made during the year of $1.5 million. In the prior year, net payments on
borrowings were $17.0 million.
Net payments on borrowings in the prior year consisted of: (a) total borrowings to date under our secured credit facility of $11.0 million;
and (b) $28.0 million in total repayments made by the Company.
Credit Facility
As reported elsewhere in this Annual Report on Form 10-K, in connection with the sale leaseback transactions involving the Company’s
Denver and Grand Prairie campuses, the Company retired its term loan and, as of December 31, 2021, the Company has no debt
outstanding. The Company had $4.0 million in letters of credit outstanding as of December 31, 2021. The Company is in negotiations
with respect to a new credit facility.
Long-term debt consists of the following:
At December 31,
Credit agreement
Deferred financing fees
Less current maturities
2021
-
$
-
-
-
$
-
2020
17,833
(621)
17,212
(2,000)
15,212
$
$
We had outstanding financing principal commitments to our active students of $30.0 million and $21.7 million as of December 31, 2021
and 2020, respectively. These are extended financing plans and no cash is advanced to students. The full amount is not guaranteed unless
the student completes the program. The extended financing plans are considered commitments because the students are packaged to fund
their education using these funds and they are not reported on our financials.
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, 2021, we have no debt
outstanding. We lease offices, educational facilities and various items of equipment for varying periods through the year 2041 at basic
annual rentals.
As of December 31, 2021, there were 2 new leases and 9 lease modifications that resulted in noncash re-measurements of the related ROU
asset and operating lease liability of $45.5 million which included the sale leaseback transactions of our campuses in Grand Prairie, Texas
and Denver, Colorado.
We had no off-balance sheet arrangements as of December 31, 2021, except for surety bonds. 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. At December
31, 2021, we posted surety bonds in the aggregate amount of approximately $12.8 million. 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
46
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.
Effect of Inflation
Inflation has not had a material effect on our operations except for some inflationary pressures on certain instructor salaries.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information
otherwise required under this item.
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.
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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, 2021 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, 2021, 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.
Management’s Annual Report on Internal Control over Financial Reporting and Attestation Report of Independent Registered
Public Accounting Firm
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, 2021, 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, 2021, 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, 2021, as stated in their report included in this Form 10-K that follows.
47
ITEM 9B.
OTHER INFORMATION
None.
ITEM 9C.
DISCLOSURES REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
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, 2021, 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,
2021.
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, 2021.
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, 2021.
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, 2021.
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, 2021.
48
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
Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to the Company’s
Registration Statement on Form S-1/A (Registration No. 333-123644) filed June 7, 2005.
Certificate of Amendment, dated November 14, 2019, to the Amended and Restated Certificate of Incorporation
of the Company (incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-3
filed October 6, 2020).
Bylaws of the Company, as amended on March 8, 2019 (incorporated by reference to Exhibit 3.1 of the
Company’s Form 8-K filed April 30, 2020).
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 Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q filed
November 14, 2019).
4.3
Description of Securities of the Company (incorporated by reference to Exhibit 4.3 of the Company’s Form 10-K
filed March 9, 2021)
10.1+
10.2+
10.3+
10.4+
10.5+
10.6+
Employment Agreement, dated as of December 10, 2020, between the Company and Scott M. Shaw
(incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed December 11,
2020).
Employment Agreement, dated as of November 7, 2018, between the Company and Scott M. Shaw (incorporated
by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed November 9, 2018).
Employment Agreement, dated as of December 10, 2020, between the Company and Brian K. Meyers
(incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed December 11,
2020).
Employment Agreement, dated as of November 7, 2018, between the Company and Brian K. Meyers
(incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q filed November 9,
2018).
Employment Agreement, dated as of December 10, 2020, between the Company and Stephen M. Buchenot
(incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed December 11,
2020).
Employment Agreement dated April 3, 2019 between the Company and Stephen M. Buchenot (incorporated by
reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed April 5, 2019).
49
10.7+
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
21*
23*
24*
Lincoln Educational Services Corporation 2020 Long-Term Incentive Plan (incorporated by reference to Exhibit
10.16 of the Current Report on Form 8-K dated June 5, 2020).
Securities Purchase Agreement, dated as of November 14, 2019, between the Company and the investor parties
thereto (incorporated by reference to Exhibit 10.1 of 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 Exhibit 10.3 of the Company’s Quarterly
Report on Form 10-Q filed November 14, 2019).
First Amendment to Credit Agreement, dated as of November 10, 2020, among the Company, Lincoln Technical
Institute, Inc. and its subsidiaries, and Sterling National Bank (incorporated by reference to Exhibit 10.1 of the
Company’s Quarterly Report on Form 10-Q filed November 12, 2020).
Consent and Waiver Letter Agreement, dated as of September 23, 2021, by and among the Company and certain
of its subsidiaries, and Sterling National Bank (incorporated by reference to Exhibit 10.3 of the Company’s
Current Report on Form 8-K filed September 28, 2021).
Contract for the Purchase of Real Estate, dated as of September 24, 2021, by and between Nashville Acquisition,
LLC and SLC Development, LLC (incorporated by reference to Exhibit 10.1 of the Company’s Current Report
on Form 8-K filed September 28, 2021).
Agreement for Purchase and Sale of Property, dated as of September 24, 2021 by and between Lincoln Technical
Institute, Inc. and LNT Denver (Multi) LLC (incorporated by reference to Exhibit 10.2 of the Company’s Current
Report on Form 8-K filed September 28, 2021).
Form of Indemnification Agreement between the Company and each director of the Company (incorporated by
reference to Exhibit 10.4 of 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 Exhibit
10.5 of the Company’s Quarterly Report on Form 10-Q filed November 14, 2019).
Subsidiaries of the Company.
Consent of Independent Registered Public Accounting Firm.
Power of Attorney (included on the Signature page of this Annual Report on Form 10-K).
31.1 *
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 *
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 *
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*
The following financial statements from Lincoln Educational Services Corporation’s Annual Report on Form 10-
K for the year ended December 31, 2021, 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.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101*.
________________________________________________
*
Filed herewith.
50
+
Indicates management contract or compensatory plan or arrangement required to be filed or incorporated by reference as an
exhibit to this Form 10-K pursuant to Item 15(b) of Form 10-K.
**
Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
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
ITEM 16.
FORM 10-K SUMMARY
None.
51
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 3, 2022
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/ John A. Bartholdson
John A. Bartholdson
/s/ James J. Burke, Jr.
James J. Burke, Jr.
/s/ Kevin M. Carney
Kevin M. Carney
/s/ Ronald E. Harbour
Ronald E. Harbour
/s/ J. Barry Morrow
J. Barry Morrow
/s/ Michael A. Plater
Michael A. Plater
/s/ Felecia J. Pryor
Felecia J. Pryor
/s/ Carlton Rose
Carlton Rose
Chief Executive Officer and Director
Executive Vice President, Chief Financial Officer and
Treasurer (Principal Accounting and Financial Officer)
Director
Director
Director
Director
Director
Director
Director
Director
52
March 3, 2022
March 3, 2022
March 3, 2022
March 3, 2022
March 3, 2022
March 3, 2022
March 3, 2022
March 3, 2022
March 3, 2022
March 3, 2022
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm - Report of Independent Registered Public
Accounting Firm (PCAOB ID No. 34)
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Operations for the years ended December 31, 2021 and 2020
Consolidated Statements of Other Comprehensive Income for the years ended December 31, 2021 and
2020
Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders' Equity for the
years ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020
Notes to Consolidated Financial Statements
Schedule II-Valuation and Qualifying Accounts
Page Number
F-2
F-5
F-7
F-8
F-9
F-10
F-12
F-34
F-1
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, 2021 and 2020, and the related consolidated statements of operations, comprehensive income, changes
in convertible preferred stock and stockholders’ equity, and cash flows, for each of the two years in the period ended December 31,
2021, 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, 2021
and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, 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, 2021, 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 3, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to
the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical
audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the
critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Sale-Leaseback Transaction - Denver, Colorado and Grand Prairie, Texas Campuses - Refer to Note 7 to the financial statements
Critical Audit Matter Description
The Company consummated a sale leaseback transaction on October 29, 2021, whereby they sold properties in Denver, Colorado, and
Grand Prairie, Texas. Concurrently with the closing of the sale, the parties entered into a triple-net lease agreement for each of the
properties pursuant to which the properties are being leased back to a subsidiary of the Company. The leases, in each case, provide
Lincoln with a right of first offer (“ROFO”) should the purchaser wish to sell the property. This transaction resulted in a $22.5M gain
on sale of assets recognized within the Consolidated Statement of Operations for the year ended December 31, 2021.
The Company’s recognition of the leases as operating leases and the related gain on sale is premised on the transaction achieving
successful sale accounting. In making this determination, the Company evaluated factors in Accounting Standards Codification (“ASC”)
Topic 606, Revenue Recognition, to conclude that the transaction qualified as a sale. This included analyzing the ROFO clause to
determine whether it represents a repurchase agreement that would preclude the transaction from being accounted for as a successful
sale. Additionally, the Company evaluated factors in ASC Topic 842, Leases, to confirm the newly created leases met the definition an
operating lease. The Company also determined an Incremental Borrowing Rate (“IBR”) that was utilized in the new operating lease
F-2
calculations. Given the judgements necessary in evaluating this transaction, performing audit procedures to evaluate the reasonableness
of management’s position required a high degree of auditor judgment and an increased extent of effort, including the need to consult
with professionals in our firm with expertise in sale-leaseback transactions.
How the Critical Audit Matter was addressed in the Audit
Our audit procedures related to evaluating the accounting interpretation and recognition of the transaction, included the following among
others:
We tested the operating effectiveness of controls over Management’s accounting evaluation specific to the sale leaseback
transaction.
We tested the operating effectiveness of controls over the new lease measurement, including those over Management’s review
of the IBR.
We obtained the executed lease agreement and transaction closing details and evaluated the terms to evaluate whether the
transaction met the definition of an operating lease and a successful sale, which included consultation with professionals in our
firm with expertise in sale-leaseback transactions.
We inspected third party market data to determine whether the overall transaction was at fair value.
With the assistance of our fair value specialists, we evaluated the reasonableness of the Company’s IBR.
We tested the calculation of the gain on sale of assets and the measurement of the right of use (“ROU”) assets and lease
liabilities related to the operating lease.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 3, 2022
We have served as the Company’s auditor since 1999.
F-3
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, 2021, 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, 2021, 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, 2021, of the Company and our report dated March 3,
2022, expressed an unqualified opinion on those financial statements.
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 3, 2022
F-4
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable, less allowance of $26,837 and $25,174 at December 31, 2021 and
2020, respectively
Inventories
Prepaid expenses and other current assets
Asset held for sale
Total current assets
PROPERTY, EQUIPMENT AND FACILITIES - At cost, net of accumulated depreciation
and amortization of $153,335 and $176,300 at December 31, 2021 and 2020, respectively
OTHER ASSETS:
Noncurrent receivables, less allowance of $5,084 and $3,465 at December 31, 2021 and
2020, respectively
Deferred income taxes, net
Operating lease right-of-use assets
Goodwill
Other assets, net
Total other assets
TOTAL ASSETS
December 31,
2021
2020
$
83,307
$
38,026
26,159
2,721
4,881
4,559
121,627
23,119
20,028
23,708
91,487
14,536
794
150,553
30,021
2,394
3,723
-
74,164
48,388
16,463
35,718
55,187
14,536
734
122,638
See notes to consolidated financial statements.
$
295,299
$
245,190
F-5
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Continued)
LIABILITIES, SERIES A CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of credit agreement
Unearned tuition
Accounts payable
Accrued expenses
Income taxes payable
Current portion of operating lease liabilities
Other short-term liabilities
Total current liabilities
NONCURRENT LIABILITIES:
Long-term credit agreement
Pension plan liabilities
Long-term portion of operating lease liabilities
Other long-term liabilities
Total liabilities
COMMITMENTS AND CONTINGENCIES
SERIES A CONVERTIBLE PREFERRED STOCK
Preferred stock, no par value - 10,000,000 shares authorized,
Series A convertible preferred shares, 12,700 shares issued and outstanding
as of each December 31, 2021 and 2020
STOCKHOLDERS' EQUITY:
Common stock, no par value - authorized 100,000,000 shares at December 31, 2021
and 2020, issued and outstanding 27,000,687 shares at December 31, 2021 and
26,476,329 shares at December 31, 2020
Additional paid-in capital
Treasury stock at cost - 5,910,541 shares at December 31, 2021 and 2020
Retained earnings
Accumulated other comprehensive loss
Total stockholders' equity
December 31,
2021
2020
$
-
$
2,000
25,405
12,297
15,669
1,017
11,479
15
65,882
-
1,607
86,410
-
153,899
23,453
15,676
16,692
491
8,504
26
66,842
15,212
4,252
52,702
3,133
142,141
11,982
11,982
141,377
32,439
(82,860)
39,702
(1,240)
129,418
141,377
30,512
(82,860)
6,203
(4,165)
91,067
TOTAL LIABILITIES, SERIES A CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
$
295,299
$
245,190
See notes to consolidated financial statements.
F-6
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 on sale of assets
Impairment of long-lived assets
Total costs and expenses
OPERATING INCOME
OTHER:
Interest expense
INCOME BEFORE INCOME TAXES
PROVISION (BENEFIT) FOR INCOME TAXES
NET INCOME
PREFERRED STOCK DIVIDENDS
INCOME AVAILABLE TO COMMON STOCKHOLDERS
Basic and Diluted
Net income per share
Weighted average number of common shares outstanding:
Basic and Diluted
See notes to consolidated financial statements
Year Ended December 31,
2021
2020
$
335,336
$
293,095
138,931
168,923
(22,479)
700
286,075
49,261
122,196
156,199
(81)
-
278,314
14,781
(2,015)
47,246
12,528
34,718
1,219
33,499
$
(1,275)
13,506
(35,059)
48,565
1,378
47,187
$
$
1.04
$
1.49
25,081
24,748
F-7
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
(In thousands)
Net income
Other comprehensive income
Derivative qualifying as a cash flow hedge, net of taxes (nil)
Employee pension plan adjustments, net of taxes (746)
Comprehensive income
December 31,
2021
$ 34,718
2020
$ 48,565
878
2,047
37,643
$
(703)
(6)
47,856
$
See notes to consolidated financial statements
F-8
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
BALANCE - January 1, 2019
Net income
Preferred stock dividend
Employee pension plan adjustments
Derivative qualifying as cash flow hedge
Stock-based compensation expense
Restricted stock
Net share settlement for
equity-based compensation
BALANCE - December 31, 2020
Net income
Preferred stock dividend
Employee pension plan adjustments
Derivative qualifying as cash flow hedge
Stock-based compensation expense
Restricted stock
Net share settlement for
equity-based compensation
BALANCE - December 31, 2021
Stockholders' Equity
Retained
Earnings
Accumulated
Other
Treasury
(Accumulated
Comprehensive
Series A
Convertible
Preferred Stock
Stock
Deficit)
Income (Loss)
Total
Shares
Amount
Additional
Paid-in
Capital
$
30,145.0
-
$
(82,860)
-
$
(42,058)
48,565
$
(3,456)
-
$
43,148
48,565
12,700
-
11,982
-
(1,074)
-
-
1,686
(245)
30,512
-
-
-
-
2,889
(962)
-
-
-
-
-
(82,860)
-
-
-
-
-
-
(304)
-
-
-
-
6,203
34,718
(1,219)
-
-
-
-
-
(6)
(703)
-
-
(4,165)
-
-
2,047
878
-
-
(1,378)
(6)
(703)
1,686
(245)
91,067
34,718
(1,219)
2,047
878
2,889
(962)
-
-
-
-
-
-
-
-
-
-
12,700
-
11,982
-
-
-
-
-
-
-
-
-
-
-
Common Stock
Shares
25,231,710
-
Amount
$
141,377
-
-
-
-
1,319,734
(75,115)
26,476,329
-
-
-
-
679,331
(154,973)
-
-
-
-
-
141,377
-
-
-
-
-
-
27,000,687
$
141,377
$
32,439
$
(82,860)
$
39,702
$
(1,240)
$
129,418
12,700
$
11,982
See notes to consolidated financial statements.
F-9
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
Amortization of deferred finance fees
Write-off of deferred finance fees
Deferred income taxes
Gain on sale of assets
Impairment of long-lived assets
Fixed asset donation
Provision for doubtful accounts
Stock-based compensation expense
(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
Income taxes payable
Other liabilities
Total adjustments
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
Proceeds from insurance settlement
Proceeds from sale of property and equipment
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings
Payments on borrowings
Credit of deferred finance fees
Net share settlement for equity-based compensation
Dividend payment for preferred stock
Net cash used in financing activities
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of year
Year Ended December 31,
2021
2020
$
34,718
$
48,565
7,140
136
485
12,010
(22,479)
700
(2,058)
26,794
2,889
(26,497)
(327)
-
(1,235)
(487)
(3,677)
(1,023)
1,952
526
(2,120)
(7,271)
27,447
(7,531)
-
45,379
37,848
-
(17,833)
-
(962)
(1,219)
(20,014)
45,281
38,026
7,400
181
-
(35,871)
(81)
-
(334)
26,888
1,686
(37,383)
(786)
383
158
193
856
8,823
42
491
2,274
(25,080)
23,485
(5,580)
97
-
(5,483)
11,000
(28,000)
3
(245)
(1,378)
(18,620)
(618)
38,644
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—End of year
$
83,307
$
38,026
See notes to consolidated financial statements.
F-10
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,
2021
2020
$
1,532
$
1,110
$
737
$
179
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Liabilities accrued for or noncash purchases of property and equipment
$
2,649
$
975
See notes to consolidated financial statements.
F-11
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2021 AND 2020 AND FOR THE TWO YEARS ENDED DECEMBER 31, 2021
(In thousands, except share and per share amounts, schools, 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 skilled trades (which include HVAC, welding and
computerized numerical control and electrical and electronic systems technology, among other programs), automotive technology,
healthcare services (which include nursing, dental assistant and medical administrative assistant, among other programs), hospitality
services (which include culinary, therapeutic massage, cosmetology and aesthetics) and information technology. The schools operate
under Lincoln Technical Institute, Lincoln College of Technology, Lincoln Culinary Institute, 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 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 two reportable business segments: (a) Transportation and Skilled Trades, and (b) Healthcare
and Other Professions (“HOPS”).
Liquidity—As of December 31, 2021, the Company had cash and cash equivalents of $83.3 million. As of December 31, 2020, the
Company had cash and cash equivalents of $38.0 million. As of December 31, 2020, the Company had a net cash balance of $20.8
million calculated as cash and cash equivalents, less both the short-term and long-term portions of the Company’s Credit Facility (defined
below). The Company believes that its likely sources of cash should be sufficient to fund operations for the next twelve months and
thereafter for the foreseeable future.
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.
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.
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. 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.
F-12
Advertising Costs—Costs related to advertising are expensed as incurred and approximated $33.1 million and $31.2 million for the years
ended December 31, 2021 and 2020, respectively. These amounts are included in selling, general and administrative expenses in the
consolidated statements of operations.
Goodwill—Goodwill represents the excess of the cost of an acquired business (reporting unit) over the estimated carrying value, assets net
of liabilities. Lincoln tests goodwill for impairment annually, in the fourth quarter of each year, unless there are events or changes in
circumstances that indicate an impairment may have occurred. Impairment may result from deterioration in performance, adverse market
conditions, adverse changes in laws or regulations, the restriction of activities associated with the acquired business, and/or a variety of
other circumstances. If we determine that impairment has occurred, we record a write-down of the carrying value and charge the
impairment as an operating expense in the period the determination is made.
As of December 31, 2021, goodwill was approximately $14.5 million, or 4.9%, of our total assets. The goodwill is allocated among nine
reporting units within the Transportation and Skilled Trades Segment.
When Lincoln performs our annual goodwill impairment assessment we first assess a number of qualitative factors to determine whether it
is more likely than not that the fair value of a reporting unit is less than its carrying value. If we conclude based on our qualitative review
that it is more likely than not that the fair value of the reporting unit is less than the carrying value we proceed with a quantitative
impairment test.
Our qualitative assessment is subjective, it includes a review of macroeconomic and industry factors, review of the financial performance
of applicable reporting units, and assessment of adverse events that may negatively impact a reporting units carrying value. Adverse
events would include, but are not limited to, difficulty in accessing capital, a greater competitive environment, decline in market-
dependent multiples or metrics, regulatory or political developments, change in key personnel, strategy, or customers, or litigation.
When we perform the quantitative impairment test we believe the most critical assumptions and estimates in determining the estimated fair
value of our reporting units include, but are not limited to, future tuition revenues, operating costs, working capital changes, capital
expenditures and a discount rate. The assumptions used in determining our expected future cash flows consider various factors such as
historical operating trends particularly in student enrollment and pricing and long-term operating strategies and initiatives.
If Lincoln determines that quantitative tests are necessary, these tests are performed using projected future operating results and cash flows
on a weighted scale, 50% based on Discounted Cash Flows (Income Approach) and 50% on based EBITDA multipliers (Market
Approach). Management judgment is necessary in forecasting future cash flows and operating results, critical assumptions include growth
rates, changes in operating costs, capital expenditures, and changes in weighted average costs of capital. Additionally, Lincoln obtains
independent market metrics for the industry and our peers to assist in the development of these key assumptions. This process is
consistent with our internal forecasts and operating plans.
Lincoln has completed our 2021 goodwill impairment assessment and determined that it was more likely than not that the fair value of the
reporting units exceeded their carrying value. As such, we concluded that goodwill was not impaired.
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. For other
long-lived assets, including right-of-use lease assets, the Company evaluates assets for recoverability when there is an indication of
potential impairment. If the undiscounted cash flows from a group of assets being evaluated is less than the carrying value of that group of
assets, the fair value of the asset group is determined and the carrying value of the asset group is written down to fair value.
When we perform the quantitative impairment test for long-lived assets, we examine estimated future cash flows using Level 3 inputs.
These cash flows are evaluated by using weighted probability techniques as well as comparisons of past performance against projections.
Assets may also be evaluated by identifying independent market values. 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.
The Company concluded that for the year ended December 31, 2021 there was an impairment of our property in Suffield, Connecticut of
$0.7 million. The impairment was the result of an assessment of the current market value, obtained via 3rd party engagement, as compared
to the current carrying value of the assets. Lincoln had a carrying value for the Suffield, Connecticut property of approximately $2.9
million. The fair value estimate provided indicated that the current value of the property was approximately $2.2 million. As such, the
aforementioned $0.7 million impairment was recorded and the assets carrying value reduced. There were no other long-lived asset
impairments for the year ended December 31, 2021.
The Company concluded that for the year ended December 31, 2020 there were no long-lived asset impairments.
F-13
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, 2021, exceeded the balance insured by the FDIC by
approximately $82.7 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 by 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 each of December 31, 2021 and
2020.
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.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the years
ended December 31, 2021 and 2020, 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. The Company classifies the cash flows from a cash flow hedge within the same category as
the cash flows from the items being hedged.
Start-up Costs—Costs related to the start of new campuses are expensed as incurred.
F-14
New Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-
04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These
amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides
optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging
relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended
to help stakeholders during the global market-wide reference rate transition period. In January 2021, the FASB issued ASU 2021-
01, “Reference Rate Reform (Topic 848): Scope” which clarifies that certain optional expedients and exceptions in Topic 848 for contract
modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The guidance is effective for all
entities as of March 12, 2020 through December 31, 2022. The Company is implementing a transition plan to identify and modify its loans
and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Company is continuing to
assess ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.
In October 2020, the FASB issued ASU 2020-10, “Codification Improvements”, which makes minor technical corrections and
clarifications to the ASU. The amendments in Sections B and C of the ASU are effective for annual periods beginning after December 15,
2020, for public business entities. This update did not have an impact on the Company’s consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”. This
ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible
instruments and contracts on an entity’s own equity. The ASU removes separation models for (1) convertible debt with a cash conversion
feature and (2) convertible instruments with a beneficial conversion feature and hence most of the instruments will be accounted for as a
single model (either debt or equity). The ASU also states that entities must apply the if-converted method to all convertible instruments for
calculation of diluted EPS and the treasury stock method is no longer available. An entity can use either a full or modified retrospective
approach to adopt the ASU’s guidance. ASU No. 2020-06 is effective for the Company as a smaller reporting company for fiscal years
beginning after December 15, 2023, and interim periods within those fiscal years. For convertible instruments that include a down-round
feature, entities may early adopt the amendments that apply to the down-round features if they have not yet adopted the amendments in
ASU 2017-11. The Company is currently assessing the impact that this ASU will have on its consolidated financial statements and related
disclosures.
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes”, which simplifies the accounting for
income taxes by removing certain exceptions to the general principles of ASC 740, “Income Taxes”. ASU 2019-12 also clarifies and
amends GAAP for other areas of Topic 740. This ASU is effective for fiscal years beginning after December 15, 2020 and early adoption
is permitted. Depending on the amendment, adoption may be applied on a retrospective, modified retrospective or prospective basis. The
Company adopted ASU 2019-12 on January 1, 2021, which 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. The ASU and the subsequent
modifications are identified as Accounting Standards Codification (“ASC”) Topic 326. The standard requires an entity to change its
accounting approach in determining impairment of certain financial instruments, including trade receivables, from an “incurred loss” to a
“current expected credit loss” model. Further, the FASB issued ASU No. 2019-04, ASU No. 2019-05 and ASU 2019-11 to provide
additional guidance on the credit losses standard. In November 2019, FASB issued ASU No. 2019-10, “Financial Instruments – Credit
Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)”. This ASU defers the effective date of ASU 2016-13
for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15,
2022, including interim periods within those fiscal years. Additionally, in February and March 2020, the FASB issued ASU 2020-02,
“Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff
Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases
(Topic 842)” ASU 2020-02 adds a SEC paragraph pursuant to the issuance of SEC Staff Accounting Bulletin No. 119 on loan losses to
FASB Codification Topic 326 and also updates the SEC section of the Codification for the change in the effective date of Topic 842. Early
adoption is permitted. We are currently assessing the impact that these ASUs will have on our 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
for 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 DOE.
During the years ended December 31, 2021 and 2020, approximately 75% and 77%, respectively, of net revenues on a cash basis were
indirectly derived from funds distributed under Title IV Programs.
F-15
For the years ended December 31, 2021 and 2020, the Company calculated that no individual DOE reporting entity received more than
90% of its revenue, determined on a cash basis pursuant to 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% of its total
revenue 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
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.
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, or a different payment method other than the advance
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”) 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 submitted to the DOE our audited
financial statements for the 2018 fiscal year reflecting a composite score of 1.1 based upon our calculations. The DOE indicated in a
January 13, 2020 letter its determination that our institutions are “in the zone” based on our composite score for the 2018 fiscal year 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 were
F-16
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.
On February 16, 2021, we received a letter from the DOE confirming our composite score of 1.5 for fiscal year 2019 as well as removing
the Company from the Zone Alternative requirements. On August 26, 2021, the DOE sent us correspondence stating that our three
institutions had performed all of the requirements of the February 16, 2021 letter and notifying us that the DOE had returned our
institutions to advance pay on August 19, 2021.
For the 2020 and 2021 fiscal years, we calculated our composite score to be 2.7 and 3.0, respectively. These scores are subject to
determination by the DOE based on its review of our consolidated audited financial statements for the 2020 and 2021 fiscal years, but we
believe it is likely that the DOE will determine that our institutions comply with the composite score requirement.
3.
NET INCOME PER SHARE
The Company presents basic and diluted income per common share using the two-class method which requires all outstanding Series A
Preferred Stock and unvested restricted stock that contain rights to non-forfeitable dividends and therefore participate in undistributed
income with common shareholders to be included in computing income per common share. Under the two-class method, net income is
reduced by the amount of dividends declared in the period for each class of common stock and participating security. The remaining
undistributed income is then allocated to common stock and participating securities, based on their respective rights to receive dividends.
Series A Preferred Stock and unvested restricted stock contain non-forfeitable rights to dividends on an if-converted basis and on the same
basis as common shares, respectively, and are considered participating securities. The Series A Preferred Stock and unvested restricted
stock are not included in the computation of basic income per common share in periods in which we have a net loss, as the Series A
Preferred Stock and unvested restricted stock are not contractually obligated to share in our net losses. However, the cumulative dividends
on preferred stock for the period decreases the income or increases the net loss allocated to common shareholders unless the dividend is
paid in the period. Basic income per common share has been computed by dividing net income allocated to common shareholders by the
weighted-average number of common shares outstanding. The basic and diluted net income amounts are the same for the years ended
December 31, 2021 and 2020 as a result of the anti-dilutive impact of the potentially dilutive securities.
The following is a reconciliation of the numerator and denominator of the diluted net income per share computations for the periods
presented below:
(in thousands, except share data)
Numerator:
Net income
Less: preferred stock dividend
Less: allocation to preferred stockholders
Less: allocation to restricted stockholders
Net income allocated to common stockholders
Basic net income per share:
Denominator:
Weighted average common shares outstanding
Basic net income per share
Diluted net income 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 net income per share
Year Ended December 31,
2021
2020
$
$
34,718
(1,219)
(5,601)
(1,796)
26,102
48,565
(1,378)
(8,224)
(2,150)
36,813
$
$
25,080,789
$
1.04
24,748,496
$
1.49
25,080,789
24,748,496
-
-
-
-
-
-
25,080,789
$
1.04
24,748,496
$
1.49
F-17
The following table summarizes the potential weighted average shares of common stock that were excluded from the determination of our
diluted shares outstanding as they were anti-dilutive:
Series A preferred stock
Unvested restricted stock
4.
REVENUE RECOGNITION
Year Ended December 31,
2021
5,381,356
825,569
6,206,925
2020
5,381,356
632,693
6,014,049
Substantially all of our revenues are considered to be revenues from contracts with students. The related accounts receivable balances are
recorded in our balance sheets as student accounts receivable. We do not have significant revenue recognized from performance
obligations that were satisfied in prior periods, and we do not have any transaction price allocated to unsatisfied performance obligations
other than in our unearned tuition. We record revenue for students who withdraw from our schools only to the extent that it is probable
that a significant reversal in the amount of cumulative revenue recognized will not occur. Unearned tuition represents contract liabilities
primarily related to our tuition revenue. We have elected not to provide disclosure about transaction prices allocated to unsatisfied
performance obligations if original contract durations are less than one-year, or if we have the right to consideration from a student in an
amount that corresponds directly with the value provided to the student for performance obligations completed to date in accordance with
Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customer”. 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 $25.4 million and $23.5 million is recorded in the current liabilities section of the accompanying
consolidated balance sheets as of December 31, 2021 and 2020, respectively. The change in this contract liability balance during the year
ended December 31, 2021 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, 2021 that was included in the contract liability
balance at the beginning of the year was $22.8 million.
The following table depicts the timing of revenue recognition:
Year ended December 31, 2021
Transportation and
Skilled Trades
Segment
Healthcare and
Other Professions
Segment
Consolidated
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
$
$
$
17,393
223,138
240,531
5,686
89,119
94,805
23,079
312,257
335,336
$
$
$
Year ended December 31, 2020
Transportation and
Skilled Trades
Segment
Healthcare and
Other Professions
Segment
Consolidated
$
$
$
12,519
194,915
207,434
4,718
80,943
85,661
17,237
275,858
293,095
$
$
$
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 right-of-
use (“ROU”) asset represents the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation
to make lease payments arising from the lease. Operating lease ROU assets and liabilities are to be recognized at the commencement date
based on the present value of lease payments over the lease term. As all of the Company’s operating leases do not provide an implicit rate,
the Company uses an incremental borrowing rate based on the information available on the adoption date in determining the present value
of lease payments. We estimate the incremental borrowing rate based on a yield curve analysis, utilizing the interest rate derived from the
F-18
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 20 years. Lease terms may include options to extend the
lease term used in determining the lease obligation when it is reasonably certain that the Company will exercise that option. Lease
expense for lease payments are recognized on a straight-line basis over the lease term for operating leases.
Our operating lease cost for the years ended December 31, 2021 and 2020 was $15.8 million and $15.3 million, respectively. Our variable
lease cost for the years ended December 31, 2021 and 2020 was zero and $0.6 million, respectively. The net change in ROU asset
and operating lease liability are included in other assets in the consolidated cash flows for the years ended December 31, 2021 and 2020.
During the year ended December 31, 2020, the Company withheld portions of and/or delayed payments to certain of its landlords as the
Company sought to renegotiate payment terms, in order to further maintain liquidity given the temporary closures of its facilities. In some
instances, the negotiations with landlords have led to agreements for rent abatements or rental deferrals, while. Total payments withheld or
deferred as of December 31, 2020 were approximately $0.5 million and were repaid as of December 31, 2021.
In accordance with the FASB’s Staff Q&A regarding rent concessions related to the effects of the COVID-19 pandemic, the Company has
elected to account for agreed concessions by landlords that do not result in a substantial increase in the rights of the landlord or the
obligations of the Company, as lessee, as though enforceable rights and obligations for those concessions existed in the original lease
agreements and the Company has elected not to re-measure the related lease liabilities and right-of-use assets associated with rent
concessions due to COVID-19. For qualifying rent abatement concessions, the Company has recorded negative lease expense for the
amount of the concession during the period of relief, and for qualifying deferrals of rental payments, the Company has recognized a
payable in lieu of recognizing a decrease in cash for the lease payment that would have been made based on the original terms of the lease
agreement, which will be reduced when the deferred payment is made in the future. During the year ended December 31, 2020, the
Company recognized $0.6 million of negative lease expense related to rent abatement concessions.
Supplemental cash flow information and non-cash activity related to our operating leases are as follows:
December 31,
2021
2020
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
$
15,404
$
15,390
$
45,456
$
14,890
As of December 31, 2021, there were 2 new leases and 9 lease modifications that resulted in noncash re-measurements of the related ROU
asset and operating lease liability of $45.5 million. Approximately $40 million of this related to the sale leaseback transaction discussed in
Note 7 with the remaining amount related to lease re-measurements.
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,
2021
11.47 years
7.67%
2020
6.11 years
11.33%
F-19
Maturities of lease liabilities by fiscal year for our operating leases as of December 31, 2021 are as follows:
Year ending December 31,
2022
2023
2024
2025
2026
Thereafter
Total lease payments
Less: imputed interest
Present value of lease liabilities
6.
GOODWILL
$
18,353
17,408
15,047
13,074
10,600
64,031
138,513
(40,624)
97,889
$
Changes in the carrying amount of goodwill during the years ended December 31, 2021 and 2020 are as follows:
Balance as of January 1, 2020
Adjustments
Balance as of December 31, 2020
Adjustments
Balance as of December 31, 2021
Gross
Goodwill
Balance
117,176
$
-
117,176
-
117,176
$
Accumulated
Impairment
Losses
$
102,640
-
102,640
-
102,640
$
Net
Goodwill
Balance
14,536
$
-
14,536
-
14,536
$
As of each of December 31, 2021 and 2020, the goodwill balance of $14.5 million is related to the Transportation and Skilled Trades
segment.
7.
PROPERTY SALE AGREEMENTS
Property Sale Agreement - Nashville, Tennessee Campus
On September 24, 2021, Nashville Acquisition, LLC, a subsidiary of the Company (“Nashville Acquisition”), entered into a Contract for
the Purchase of Real Estate (the “Nashville Contract”) to sell the property located at 524 Gallatin Road, Nashville, Tennessee, at which the
Company operates its Nashville campus, to SLC Development, LLC, a subsidiary of Southern Land Company (“SLC”), for an aggregate
sale price of $34.5 million, subject to customary adjustments at closing. The Company intends to relocate its Nashville campus to a more
efficient and technologically advanced facility in the Nashville metropolitan area but has not yet determined a location. The closing of the
sale transaction is expected to occur in the first half of 2022 subject to various closing conditions which must be satisfied or waived including
the satisfactory completion by the buyer of its due diligence review. During the due diligence period, SLC has the right to terminate the
Nashville Contract for any reason at its discretion; therefore, there can be no assurance that the sale will be consummated on a timely basis
or at all. Upon closing, Nashville Acquisition would be permitted to occupy the property and continue to operate the Nashville campus on
a rent-free basis for a lease-back period of 12 months, and, thereafter, will have the option to extend the lease-back period for one 90-day
term and three additional 30-day terms pursuant to a lease agreement currently being negotiated by the parties. The Nashville property is
included in assets held for sale in the consolidated balance sheet as of December 31, 2021.
Sale-Leaseback Transaction - Denver, Colorado and Grand Prairie, Texas Campuses
On September 24, 2021, Lincoln Technical Institute, Inc. and LTI Holdings, LLC, each a wholly-owned subsidiary of the Company
(collectively, “Lincoln”), entered into an Agreement for Purchase and Sale of Property for the sale of the properties located at 11194 E.
45th Avenue, Denver, Colorado 80239 and 2915 Alouette Drive, Grand Prairie, Texas 75052, at which the Company operates its Denver
and Grand Prairie campuses, respectively, to LNT Denver (Multi) LLC, a subsidiary of LCN Capital Partners (“LNT”), for an aggregate
sale price of $46.5 million, subject to customary adjustments at closing. Closing of the sale occurred on October 29, 2021. Concurrently
with consummation of the sale, the parties entered into a triple-net lease agreement for each of the properties pursuant to which the
properties are being leased back to Lincoln Technical Institute, Inc. for a twenty-year term at an initial annual base rent, payable quarterly
in advance, of approximately $2.6 million for the first year with annual 2.00% increases thereafter and includes four subsequent five-year
F-20
renewal options in which the base rent is reset at the commencement of each renewal term at then current fair market rent for the first year
of each renewal term with annual 2.00% increases thereafter in each such renewal term. The lease, in each case, provides Lincoln with a
right of first offer should LNT wish to sell the property. The Company has provided a guaranty of the financial and other obligations of
Lincoln Technical Institute, Inc. under each lease. The Company evaluated factors in Accounting Standards Codification (“ASC”) Topic
606, Revenue Recognition, to conclude that the transaction qualified as a sale. This included analyzing the right of first offer clause to
determine whether it represents a repurchase agreement that would preclude the transaction from being accounted for as a successful sale.
The Company recognized a gain on sale of assets of $22.5 million. Additionally, the Company evaluated factors in ASC Topic 842,
Leases, and concluded that the newly created leases met the definition an operating lease. The Company recorded Right of Use (“ROU”)
Asset and lease liabilities of $40.1 million. The sale lease-back transaction provided the Company with net proceeds of approximately
$45.4 million with the proceeds partially used for the repayment of the Company’s outstanding term loan of $16.2 million and swap
termination fee of $0.5 million.
8.
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,
-
1-25
1-7
3
-
2021
$
645
88,060
85,441
751
1,557
176,454
(153,335)
$
23,119
2020
6,969
$
134,526
82,133
733
327
224,688
(176,300)
$
48,388
The decrease in property, equipment and facilities is mainly due to the sale lease-back transaction and the Nashville property included in
assets held for sale as of December 31, 2021 as discussed in Note 7. Depreciation and amortization expense of property, equipment and
facilities was $7.1 million and $7.4 million for the years ended December 31, 2021 and 2020, respectively.
9.
ACCRUED EXPENSES
Accrued expenses consist of the following:
Accrued compensation and benefits
Accrued real estate taxes
Other accrued expenses
10.
LONG-TERM DEBT
Long-term debt consists of the following:
Credit agreement
Deferred financing fees
Less current maturities
At December 31,
2021
11,662
1,732
2,275
15,669
$
$
2020
12,476
2,614
1,602
16,692
$
$
At December 31,
2020
17,833
(621)
17,212
(2,000)
15,212
$
$
2021
-
$
-
-
-
$
-
F-21
Credit Facility
On November 14, 2019, the Company entered into a senior secured credit agreement (the “Credit Agreement”) with its lender, Sterling
National Bank (the “Lender”), providing for borrowing in the aggregate principal amount of up to $60 million (the “Credit Facility”).
Initially, the Credit Facility was comprised of four facilities: (1) a $20 million senior secured term loan maturing on December 1, 2024
(the “Term Loan”), with monthly interest and principal payments based on 120-month amortization with the outstanding balance due on
the maturity date; (2) a $10 million senior secured delayed draw term loan maturing on December 1, 2024 (the “Delayed Draw Term
Loan”), with monthly interest payments for the first 18 months and thereafter monthly payments of interest and principal based on 120-
month amortization and all balances due on the maturity date; (3) a $15 million senior secured committed revolving line of credit
providing a sublimit of up to $10 million for standby letters of credit maturing on November 13, 2022 (the “Revolving Loan”), with
monthly payments of interest only; and (4) a $15 million senior secured non-restoring line of credit maturing on January 31, 2021 (the
“Line of Credit Loan”).
At the closing of the Credit Facility, the Company entered into a swap transaction with the Lender for 100% of the principal balance of the
Term Loan maturing on the same date as the Term Loan. Under the terms of the Credit Facility accrued interest on each loan under the
Credit Facility is payable monthly in arrears with the Term Loan and the Delayed Draw Term Loan bearing interest at a floating interest
rate based on the then one month London Interbank Offered Rate (“LIBOR”) plus 3.50% and subject to a LIBOR interest rate floor of
.25% if there is no swap agreement. Revolving Loans bear interest at a floating interest rate based on the then LIBOR plus an indicative
spread determined by the Company’s leverage as defined in the Credit Agreement or, if the borrowing of a Revolving Loan is to be repaid
within 30 days of such borrowing, the Revolving Loan will accrue interest at the Lender’s prime rate plus .50% with a floor of 4.0%. Line
of Credit Loans will bear interest at a floating interest rate based on the Lender’s prime rate of interest. Letters of credit issued under the
Revolving Loan reduce, on a dollar-for-dollar basis, the availability of borrowings under the Revolving Loan. Letters of credit are charged
an annual fee equal to (i) an applicable margin determined by the leverage ratio of the Company less (ii) .25%, paid quarterly in arrears, in
addition to the Lender’s customary fees for issuance, amendment and other standard fees. Borrowings under the Line of Credit Loan are
secured by cash collateral. The Lender receives an unused facility fee of 0.50% per annum payable quarterly in arrears on the unused
portions of the Revolving Loan and the Line of Credit Loan.
In addition to the foregoing, the Credit Agreement contains customary representations, warranties and affirmative and negative covenants
(including financial covenants that (i) restrict capital expenditures, (ii) restrict leverage, (iii) require maintaining minimum tangible net
worth, (iv) require maintaining a minimum fixed charge coverage ratio and (v) require the maintenance of a minimum of $5 million in
quarterly average aggregate balances on deposit with the Lender, which, if not maintained, will result in the assessment of a quarterly fee
of $12,500), as well as events of default customary for facilities of this type. As of December 31, 2021, the Company was in compliance
with all debt covenants. The Credit Agreement also limited the payment of cash dividends during the first twenty-four months of the
agreement to $1.7 million but an amendment to the Credit Agreement entered into on November 10, 2020 raised the cash dividend limit to
$2.3 million in such twenty-four-month period to increase the amount of permitted cash dividends that the Company can pay on its Series
A Preferred Stock.
Until recently, as further discussed below, the Credit Facility was 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.
On September 23, 2021, in connection with entry into the agreements relating to the sale leaseback transaction for the Company’s Denver,
Grand Prairie and Nashville campuses (collectively, the “Property Transactions”), the Company and certain of its subsidiaries entered into
a Consent and Waiver Letter Agreement (the “Consent Agreement”) to the Company’s Credit Agreement. The Consent Agreement
provides the Lender’s consent to the Property Transactions and waives certain covenants in the Credit Agreement, subject to certain
conditions specified therein. In addition, in connection with the consummation of the Property Transactions, the Lender released its
mortgages and other liens on the subject-properties upon the Company’s payment in full of the outstanding principal and accrued interest
of the Term Loan and any swap obligations arising from any swap transaction. No further borrowings may be made under the Term Loan
or the Delayed Draw Term Loan. Upon the consummation of the sale leaseback transaction relating to the Denver and Grand Prairie
campuses on October 29, 2021 the Company paid the Lender approximately $16.7 million in repayment of the Term Loan and the swap
termination fee.
As of December 31, 2021 and 2020, the Company had zero and $17.8 million, respectively, outstanding under the Credit Facility offset by
zero and $0.6 million of deferred finance fees, respectively. As of December 31, 2021 and December 31, 2020, letters of credit in the
aggregate outstanding principal amount of $4.0 million and $4.0 million, respectively, were outstanding under the Credit Facility.
F-22
11.
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 Convertible Preferred Stock, no par value per share (the “Series A Preferred Stock”). The Series A Preferred Stock was designated by
the Company’s Board of Directors pursuant to a certificate of amendment to the Company’s amended and restated certificate of
incorporation (the “Charter Amendment”). The liquidation preference associated with the Series A Preferred Stock was $1,000 per share at
December 31, 2021. Upon issuance each share of Series A Preferred Stock was convertible at $2.36 per share of common stock (as may
be adjusted pursuant to the Charter Amendment, the “Conversion Price”) into 423,729 shares of common stock (the number of shares into
which the Series A Preferred Stock is convertible at any time, the “Conversion Shares”). The Company incurred issuance costs of $0.7
million as part of this transaction.
The description below provides a summary of certain material terms of the Series A Preferred Stock:
Securities Purchase Agreement.
The Series A Preferred Stock was sold by the Company pursuant to a Securities Purchase Agreement dated as of November 14, 2019 (the
“SPA”) among the Company, Juniper Targeted Opportunity Fund, L.P. and Juniper Targeted Opportunities, L.P. (together, “Juniper
Purchasers”) and Talanta Investment, Inc. (“Talanta,” together with Juniper Purchasers, the “Investors”). Among other things, the SPA
includes covenants relating to the appointment of a director to the Company’s Board of Directors to be selected solely by the holders of
the Series A Preferred Stock.
Dividends. Dividends on the Series A Preferred Stock (“Series A Dividends”), at the initial annual rate of 9.6% is to be paid, in arrears,
from the date of issuance quarterly on each December 31, March 31, June 30 and September 30 with September 30, 2020 being the first
dividend payment date. The Company, at its option, may pay dividends either (a) in cash or (b) by increasing the number of Conversion
Shares by the dollar amount of the dividend divided by the Conversion Price. The dividend rate is subject to increase (a) 2.4% per annum
on the fifth anniversary of the issuance of the Series A Preferred Stock (b) by 2% per annum but in no event above 14% per annum should
the Company fail to perform certain obligations under the Charter Amendment. The Series A Preferred Stock is not currently redeemable
and may not become redeemable in the future. As a result, the Company is not required to re-measure the Series A Preferred Stock and
does not accrete changes in the redemption value. As of December 31, 2021, we have paid $1.2 million cash dividends on the outstanding
shares of Series A Preferred Stock rather than increasing the number of Conversion Shares. Dividends are included in the consolidated
balance sheets within additional paid-in-capital when the Company maintains an accumulated deficit.
Series A Preferred Stock Holders Right to Convert into Common Stock. Each share of Series A Preferred Stock, at any time, is
convertible into a number of shares of common stock equal to (i) the sum of (A) $1,000 (subject to adjustment as provided in the Charter
Amendment) plus (B) the dollar amount of any declared Series A Dividends not paid in cash divided by (ii) the Conversion Price ($2.36
per share subject to anti-dilution adjustments) as of the applicable Conversion Date (as defined in the Charter Amendment). At all times,
however, the number of Conversion Shares that can be issued to any Series A Preferred Stock Holder may not result in such holder and its
affiliates owning more than 19.99% of the total number of shares of common stock outstanding after giving effect to the conversion (the
“Hard Cap”), unless prior shareholder approval is obtained or no longer required by the rules of the principal stock exchange on which the
Company’s common stock trade.
Mandatory Conversion. If, at any time following November 14, 2022 the volume weighted average price of the Company’s common
stock equals or exceeds 2.25 times the Conversion Price (currently $5.31 per share) for a period of 20 consecutive trading days and on
each such trading day at least 20,000 shares of common stock was traded, the Company may, at its option and subject to the Hard Cap,
require that any or all of the then outstanding shares of Series A Preferred Stock be automatically converted into Conversion Shares.
Redemption. Beginning November 14, 2024, the Company may redeem all or any of the Series A Preferred Stock for a cash price equal to
the greater of (“Liquidation Preference”) (i) the sum of $1,000 (subject to adjustment as provided in the Charter Amendment) plus the
dollar amount of any declared Series A Dividends not paid in cash and (ii) the value of the Conversion Shares were such Series A
Preferred Stock converted (as determined in the Charter Amendment) without regard to the Hard Cap.
F-23
Change of Control. In the event of certain changes of control, some of which are not in the Company’s control, as defined in the Charter
Amendment as a “Fundamental Change” or a “Liquidation” (as defined in the Charter Amendment), the holders of Series A Preferred
Stock shall be entitled to receive the Liquidation Preference, unless such Fundamental Change is a stock merger in which certain value and
volume requirements are met, in which case the Series A Preferred Stock will be converted into common stock in connection with such
stock merger. The Company has classified the Series A Preferred Stock as mezzanine equity on the Consolidated Balance Sheet based
upon the terms of a change of control which could be outside the Company’s control.
Voting. Holders of shares of Series A Preferred Stock will be entitled to vote with the holders of shares of common stock and not as a
separate class, at any annual or special meeting of shareholders of the Company, on an as-converted basis, in all cases subject to the Hard
Cap. In addition, a majority of the voting power of the Series A Preferred Stock must approve certain significant actions of the Company,
including (i) declaring a dividend or otherwise redeeming or repurchasing any shares of common stock and other junior securities, if any,
subject to certain exceptions, (ii) incurring indebtedness, except for certain permitted indebtedness and (iii) creating a subsidiary other than
a wholly-owned subsidiary.
Additional Provisions. The Series A Preferred Stock is perpetual and therefore does not have a maturity date. The conversion price of the
Series A Preferred Stock is subject to anti-dilution protections if the Company affects a stock split, stock dividend, subdivision,
reclassification or combination of its common stock and certain other economically dilutive events.
Registration Rights Agreement. The Company also is a party to a Registration Rights Agreement (“RRA”) with the investors of the Series
A Preferred Stock. The RRA provides for unlimited demand registration rights, of which there can be two underwritten offerings each for
at least $5 million in gross proceeds, and piggyback registration rights, with respect to the Conversion Shares. In addition, the RRA
obligated the Company to register “for the shelf” the resale of the Conversion Shares through the filing of a registration statement to such
effect (the “Resale Shelf Registration Statement”) and have such Resale Shelf Registration Statement declared effective by the Securities
and Exchange Commission (the “SEC”). The SEC declared the Resale Shelf Registration Statement effective on October 16, 2020.
Restricted Stock
The Company currently has three stock incentive plans: a Long-Term Incentive Plan (the “LTIP”), a Non-Employee Directors Restricted
Stock Plan (the “Non-Employee Directors Plan”) and the Lincoln Educational Services Corporation 2020 Incentive Compensation Plan
(the “2020 Plan”).
2020 Plan
On March 26, 2020, the Board adopted the 2020 Plan to provide an incentive to certain directors, officers, employees and consultants of
the Company to align their interests in the Company’s success with those of its shareholders through the grant of equity-based awards. On
June 16, 2020, the shareholders of the Company approved the 2020 Plan. The 2020 Plan is administered by the Compensation Committee
of the Board, or such other qualified committee appointed by the Board, who will, among other duties, have full power and authority to
take all actions and to make all determinations required or provided for under the 2020 Plan. Pursuant to the 2020 Plan, the Company may
grant options, share appreciation rights, restricted shares, restricted share units, incentive stock options and nonqualified stock options.
The Plan has a duration of 10 years.
Subject to adjustment as described in the 2020 Plan, the aggregate number of common shares available for issuance under the 2020 Plan is
2,000,000 shares.
LTIP
Under the LTIP, certain employees have received awards of restricted shares of common stock based on service and performance. The
number of shares granted to each employee is based on the amount of the award and the fair market value of a share of common stock on
the date of grant. The 2020 Plan makes it clear that there will be no new grants under the LTIP effective as of the date of shareholder
approval, June 16, 2020. The 2020 Plan also states that the shares available under the 2020 Plan will be two million shares plus the
number of shares remaining available under the LTIP. As no shares remain available under the LTIP there can be no additional grants
under the LTIP. Grants under the LTIP remain in effect according to their terms. Therefore, those grants are subject to the particular
award agreement relating thereto and to the LTIP to the extent that the prior plan provides rules relating to those grants. The LTIP
remains in effect only to that extent.
Non-Employee Directors Plan
Pursuant to the Non-Employee Directors Plan, each non-employee director of the Company receives an annual award of restricted shares
of common stock on the date of the Company’s annual meeting of shareholders. The number of shares granted to each non-employee
director is based on the fair market value of a share of common stock on that date. The restricted shares vest on the first anniversary of the
grant date. There is no restriction on the right to vote or the right to receive dividends with respect to any of such restricted shares.
F-24
For the years ended December 31, 2021 and 2020, the Company completed a net share settlement for 154,973 and 75,115 restricted shares,
respectively, on behalf of certain employees that participate in the LTIP upon the vesting of the restricted shares pursuant to the terms of
the LTIP. The net share settlement was in connection with income taxes incurred on restricted shares that vested and were transferred to
the employees during 2021 and/or 2020, creating taxable income for the employees. At the employees’ request, the Company will pay
these taxes on behalf of the employees in exchange for the employees returning an equivalent value of restricted shares to the
Company. These transactions resulted in a decrease of $1.0 million and less than $0.2 million for each of the years ended December 31,
2021 and 2020, respectively, to equity on the consolidated balance sheets as the cash payment of the taxes effectively was a repurchase of
the restricted shares granted in previous years.
The following is a summary of transactions pertaining to restricted stock:
Nonvested restricted stock outstanding at December 31, 2019
Granted
Cancelled
Vested
Nonvested restricted stock outstanding at December 31, 2020
Granted
Cancelled
Vested
Nonvested restricted stock outstanding at December 31, 2021
Weighted
Average Grant
Date Fair Value
Per Share
$
3.15
2.68
-
3.40
2.77
5.99
-
3.30
3.89
Shares
595,426
1,319,734
-
(343,001)
1,572,159
679,331
-
(507,644)
1,743,846
The restricted stock expense for the years ended December 31, 2021 and 2020 was $2.9 million and $1.7 million, respectively. The
unrecognized restricted stock expense as of December 31, 2021 and 2020 was $4.4 million and $3.2 million, respectively. As of
December 31, 2021, outstanding restricted shares under the LTIP had aggregate intrinsic value of $13.0 million.
Stock Options
The fair value of the stock options used to compute stock-based compensation is the estimated present value at the date of grant using the
Black-Scholes option pricing model. The following is a summary of transactions pertaining to stock options:
Outstanding January 1, 2019
Cancelled
Outstanding December 31, 2019
Cancelled
Outstanding December 31, 2020
Cancelled
Outstanding December 31, 2021
Vested as of December 31, 2021
Exercisable as of December 31, 2021
Weighted
Average
Exercise Price
Per Share
$
12.14
20.15
10.56
16.95
7.79
-
7.79
7.79
7.79
Shares
139,000
(23,000)
116,000
(35,000)
81,000
-
81,000
81,000
81,000
Weighted
Average
Remaining
Contractual
Term
2.53 years
1.83 years
1.17 years
0.17 years
0.17 years
0.17 years
Aggregate
Intrinsic Value
-
$
-
-
-
-
-
-
-
As of December 31, 2021, there was no unrecognized pre-tax compensation expense.
F-25
12.
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 (gain) loss
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,
2021
2020
$
24,358
37
492
(989)
(1,341)
22,557
$
22,832
35
654
2,115
(1,278)
24,358
20,106
2,185
(1,341)
20,950
18,817
2,567
(1,278)
20,106
BENEFIT OBLIGATION IN EXCESS OF FAIR VALUE FUNDED STATUS:
$
(1,607)
$
(4,252)
For the year ended December 31, 2021, the actuarial gain of $1.0 million was due to the increase in the discount rate from 2.08% to
2.50%.
Amounts recognized in the consolidated balance sheets consist of:
At December 31,
2021
2020
Noncurrent liabilities
$
(1,607)
$
(4,252)
Amounts recognized in accumulated other comprehensive loss consist of:
Year Ended December 31,
2021
2020
Accumulated loss
Deferred income taxes
Accumulated other comprehensive loss
$
$
(2,862)
1,621
(1,241)
$
$
(5,655)
2,367
(3,288)
The accumulated benefit obligation was $22.6 million and $24.4 million at December 31, 2021 and 2020, respectively.
F-26
The following table provides the components of net periodic cost for the plan:
Year Ended December 31,
2021
2020
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost
Interest cost
Expected return on plan assets
Recognized net actuarial loss
Net periodic benefit cost
$
$
37
492
(1,021)
640
148
35
654
(1,044)
585
230
$
$
The estimated net loss and prior service cost for the plan that will be amortized from accumulated other comprehensive income into net
periodic benefit cost over the next year is $0.5 million.
The following tables present plan assets using the fair value hierarchy as of December 31, 2021 and 2020. 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.
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
$
$
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
$
6,322
7,811
5,180
900
737
20,950
6,688
6,739
4,480
1,016
1,183
20,106
$
Significant Other
Observable Inputs
(Level 2)
-
$
-
-
-
-
$
-
Significant Other
Observable Inputs
(Level 2)
$
-
-
-
-
-
$
-
Significant
Unobservable
Inputs
(Level 3)
-
$
-
-
-
-
$
-
Significant
Unobservable
Inputs
(Level 3)
$
-
-
-
-
-
$
-
Total
$
6,322
7,811
5,180
900
737
20,950
$
Total
$
6,688
6,739
4,480
1,016
1,183
20,106
$
Equity securities
Fixed income
International equities
Real estate
Cash and equivalents
Balance at December 31, 2021
Equity securities
Fixed income
International equities
Real estate
Cash and equivalents
Balance at December 31, 2020
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
2021
2020
30%
37%
25%
4%
4%
100%
33%
34%
22%
5%
6%
100%
F-27
Weighted-average assumptions used to determine benefit obligations as of December 31:
Discount rate
Rate of compensation increase
2021
2020
2.50%
2.50%
2.08%
2.75%
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
2021
2020
2.50%
2.50%
6.00%
2.08%
2.75%
5.25%
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.
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 2022. 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, 2021 and
2020, respectively.
Information about the expected benefit payments for the plan is as follows:
Year Ending December 31,
2022
2023
2024
2025
2026
Years 2027-2031
$
1,358
1,384
1,400
1,389
1,390
6,668
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, 2021 and 2020, the Company's expense for the 401(k) plan amounted to $0.7 million
and $0.4 million, respectively.
F-28
13.
INCOME TAXES
Components of the provision (benefit) for income taxes were as follows:
Current:
Federal
State
Total
Deferred:
Federal
State
Total
Year Ended December 31,
2021
2020
$
665
535
1,200
$
-
802
802
8,468
2,860
11,328
(21,743)
(14,118)
(35,861)
Total provision (benefit)
$
12,528
$
(35,059)
Effective Tax rate
The reconciliation of the effective tax rate to the U.S. Statutory Federal Income tax rate was:
Income before taxes
Expected tax
State tax benefit (net of federal)
Valuation allowance
Other
Total
Year Ended December 31,
2021
$
47,246
2020
$
13,506
$
9,922
2,682
-
(76)
12,528
$
21.0%
5.7%
0.0%
-0.2%
26.5%
$
2,836
(10,513)
(27,420)
38
(35,059)
$
21.0%
-77.8%
-203.0%
0.2%
-259.6%
Our income tax provision for the year ended December 31, 2021 was $12.5 million compared to an income tax benefit of $35.1 million in
the prior year. The tax benefit primarily related to a full release of our valuation allowance on deferred tax assets as of December 31,
2020.
Deferred Taxes and Valuation Allowance
The components of the non-current deferred tax assets (liabilities) were as follows:
Gross noncurrent deferred tax assets (liabilities)
Lease liability
Depreciation
Allowance for bad debts
Net operating loss carryforwards
Stock-based compensation
Accrued benefits
Pension plan liabilities
Other intangibles
Goodwill
Right-of-use asset
Noncurrent deferred tax assets, net
At December 31,
2021
2020
$
26,142
10,551
8,525
2,394
641
656
429
70
(1,267)
(24,433)
23,708
$
16,369
11,298
7,659
13,480
317
1,208
1,137
100
(1,091)
(14,759)
35,718
F-29
As of December 31, 2021, the Company has gross net operating losses (“NOL”) of $1.2 million and $37.6 million for federal and state tax
purposes, respectively. The federal NOLs can be carryforward indefinitely. While some states follow federal NOL which can be carried
forward indefinitely, majority of the state NOLs expires in 2033 and ending in 2037 if not utilized.
As of December 31, 2020, the Company has gross NOL of $43.1 million and $77.2 million for federal and state tax purposes, respectively.
The federal NOL of $29.1 million will expire in 2029 and ending in 2038. Remaining federal NOL of $14 million can be carryforward
indefinitely. While some states follow federal NOL which can be carried forward indefinitely, majority of the state NOLs expires in 2033
and ending in 2037 if not utilized.
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.
14.
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:
December 31, 2021
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Carrying
Amount
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
83,307
4,881
$
-
83,307
$
-
4,881
$
-
-
Total
$
83,307
4,881
$
15,669
15
$
-
-
$
15,669
15
$
-
-
$
15,669
15
December 31, 2020
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Carrying
Amount
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
38,026
3,723
$
-
38,026
$
-
3,723
-
$
-
$
16,692
26
703
17,212
-
$
-
-
-
$
16,692
26
703
15,487
-
$
-
-
-
Total
$
38,026
3,723
$
16,692
26
703
15,487
Financial Assets:
Cash and cash equivalents
Prepaid expenses and other current assets
Financial Liabilities:
Accrued expenses
Other short term liabilities
Financial Assets:
Cash and cash equivalents
Prepaid expenses and other current assets
Financial Liabilities:
Accrued expenses
Other short term liabilities
Derivative qualifying as cash flow hedge
Credit facility
As of December 31, 2020, we estimated the fair value of the Credit Facility based on a present value analysis utilizing aggregate market
yields obtained from independent pricing sources for similar financial instruments.
The carrying amounts reported on the Consolidated Balance Sheets for Cash and cash equivalents 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.
F-30
Qualifying Hedge Derivative
On November 14, 2019, the Company entered into an interest rate swap for the Term Loan with a notional amount of $20 million which
was due to expire on December 1, 2024. On October 29, 2021 the Term Loan was repaid and the interest rate swap was paid in full.
The loan had a 10-year straight line amortization. A principal amount of $0.2 million was paid monthly. This interest rate swap converted
the floating interest rate Term Loan to a fixed rate, plus a borrowing spread. The interest rate was 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 to hedge exposure resulting
from the interest rate risk. The purpose of the hedge was to reduce the variability of the interest rate based on LIBOR. The Company
managed this exposure within specified guidelines through the use of derivatives. All of our derivative instruments are utilized for risk
management purposes, and the Company does not use derivatives for speculative trading purposes.
The following summarizes the fair value of the outstanding derivative:
December 31, 2021
Liability
December 31, 2020
Liability(1)
Notional
Fair Value
Notional
Fair Value
Derivative derived as a hedging instrument:
Interest Rate Swap
$
-
$ -
$
17,800
$ 700
(1) The Company’s 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 liability is included in other long-term liabilities in the consolidated balance sheets.
The following summarizes the financial statement classification and amount of interest expense recognized on hedging instruments:
Year Ended December 31,
2021
2020
Interest expense
Interest Rate Swap
$
-
$
100
The following summarizes the effect of derivative instruments designated as hedging instruments in Other Comprehensive Income/(Loss):
Derivative qualifying as cash flow hedge
Interest rate swap loss
15.
SEGMENT REPORTING
Year Ended December 31,
2021
2020
$
-
$
700
We operate our business in two reportable operating segments: (a) the Transportation and Skilled Trades segment; and (b) the Healthcare
and Other Professions segment. Our reportable operating segments have been determined based on a method by which we now evaluate
performance and allocate resources. Each reportable operating 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).
The Company also utilizes the Transitional segment on a limited basis solely when and if it closes a school.
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.
F-31
Summary financial information by reporting segment is as follows:
For the Year Ended December 31,
Revenue
Operating Income (Loss)
Transportation and Skilled Trades
Healthcare and Other Professions
Corporate
Total
Transportation and Skilled Trades
Healthcare and Other Professions
Corporate
Total
2021
240,531
94,805
-
335,336
$
$
% of
Total
71.7%
28.3%
0.0%
100%
2020
207,434
85,661
-
293,095
$
$
% of
Total
70.8%
29.2%
0.0%
100%
2021
$
2020
$
52,055
11,845
(14,639)
49,261
34,458
11,068
(30,745)
14,781
$
$
Total Assets
December 31, 2021
$
156,531
33,959
104,809
295,299
$
December 31, 2020
$
133,078
32,753
79,359
245,190
$
16.
COMMITMENTS AND CONTINGENCIES
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.
Following a wave of hundreds of class action lawsuits being served upon colleges and universities across the country by students in
connection with transitioning from in-person to online classes due to COVID-19, a class action lawsuit, captioned John Gaviria vs.
Lincoln Educational Services Corporation, was filed against the Company in New Jersey Federal District Court and served on December
21, 2020. Like most of the other similar lawsuits across the country, the suit alleges breach of contract, unjust enrichment and
conversion. In lieu of an answer, on January 25, 2021, the Company filed a Motion to Dismiss Plaintiff’s Complaint for Failure to State a
Claim. On July 9, 2021, the court granted the Company’s Motion to Dismiss three of the four claims finding that the ruling on the claim
for student and technology fees was premature. In response to the Company’s Motion for Reconsideration as to the remaining claim, the
court granted the Company’s Motion to Dismiss the lawsuit in its entirety whereupon the Plaintiff filed an appeal to the Third Circuit
Court. On January 27, 2022, counsel for the Plaintiff contacted the Company’s counsel to request a voluntary dismissal of the case and the
Company agreed to and accepted the dismissal with prejudice.
In December 2021, we received a letter from the Consumer Financial Protection Bureau (“CFPB”) stating that the CFPB is assessing
whether we are subject to CFPB’s supervisory authority based on our activities related to certain extensions of credit to our students and
requesting certain information. The letter states that the CFPB has the authority to supervise certain entities in the private education loan
market and certain other consumer financial products and services. We have provided the requested information to the CFPB and are
waiting for the CFPB to respond.
Student Financing Plans—At December 31, 2021, the Company had outstanding net financing commitments to its students to assist them
in financing their education of approximately $30.0 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 $7.9 million at December 31, 2021.
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
F-32
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, 2021, the Company has
posted surety bonds in the total amount of approximately $12.8 million.
17.
COVID-19 PANDEMIC AND CARES ACT
The Company began seeing the impact of the global COVID-19 pandemic on its business in early March 2020 and some effects of the
pandemic have continued. The spread of COVID-19 has had an unprecedented impact on higher educational institutions across the
country, including our schools, and has led to the closure of campuses and the transition of academic programs from in-person instruction
to online, remote learning and back. The impact for the Company has primarily related to transitioning classes from in-person, hands-on
learning to online, remote learning which resulted in, among other things, additional expenses. Further, related to this transition, some
students were placed on leave of absence as they could not complete their externships and some students chose not to participate in online
learning. As a result, certain programs were extended due to restricted access to externship sites and classroom labs which did not have a
material impact on our consolidated financial statements. In accordance with phased re-opening as applied on a state-by-state basis, all of
our schools have now re-opened and the majority of the students who were on leave of absence or had deferred their programs returned to
school to finish their programs.
In response to the COVID-19 pandemic, in 2020 the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed
into law providing a $2 trillion federal economic relief package of financial assistance and other relief to individuals and businesses
impacted by the pandemic. Among other things, the CARES Act includes a $14 billion higher education emergency relief fund
(“HEERF”) for the DOE to distribute directly to institutions of higher education. The DOE has allocated funds to each institution of
higher education based on a formula contained in the CARES Act. The formula is heavily weighted toward institutions with large numbers
of Pell Grant recipients. The DOE allocated $27.4 million to our schools distributed in two equal installments and required them to be
utilized by April 30, 2021 and May 14, 2021, respectively. As of September 30, 2021, the Company had distributed the full $13.7 million
of its first installment as emergency grants to students and has utilized the full $13.7 million of its second installment. Proceeds from the
second installment for permitted expenses were primarily utilized to either offset original expenses incurred or to reduce student accounts
receivable driving a decrease in bad debt expense, both uses resulted in a decrease in our selling, general and administrative expenses.
Institutions are required to use at least half of the HEERF funds for emergency grants to students for expenses related to disruptions in
campus operations (e.g., food, housing, etc.). The law requires institutions receiving funds to continue to the greatest extent practicable to
pay its employees and contractors during the period of any disruptions or closures related to the COVID-19 emergency which the
Company has done. The Company was also permitted to defer payment of FICA payroll taxes through January 1, 2021 and did so but,
pursuant to requirements of the deferment, repaid 50% of the deferred payments by January 3, 2022, and will need to repay the remaining
50% by January 3, 2023. As of December 31, 2021, the Company had deferred payments of $2.3 million included in accrued expenses in
the Consolidated Balance Sheet.
In December 2020, the Consolidated Appropriations Act, 2021 was enacted which included the Coronavirus Response and Relief
Supplemental Appropriations Act, 2021 (“CRRSAA”). CRRSAA provided an additional $81.9 billion to the Education Stabilization Fund
including $22.7 billion for the HEERF, which were originally created by the CARES Act in March 2020. The higher education provisions
of the CRRSAA are intended in part to provide additional financial assistance benefitting students and their postsecondary institutions in
the wake of the spread of COVID-19 across the country and its impact on higher educational institutions. In March 2021, the $1.9 trillion
American Rescue Plan Act of 2021 (“ARPA”) was signed into law. Among other things, the ARPA provides $40 billion in relief funds
that will go directly to colleges and universities with $395.8 million going to for-profit institutions. The DOE has allocated a total of
$24.4 million to our schools from the funds made available under CRRSAA and ARPA. As of December 31, 2021, the Company has
drawn down and distributed to our students $14.8 million of these allocated funds. The remainder of the funds are on hold by the DOE
and will be distributed to the students upon release. Failure to comply with requirements for the usage and reporting of these funds could
result in requirements to repay some or all of the allocated funds and in other sanctions.
F-33
LINCOLN EDUCATIONAL SERVICES CORPORATION
Schedule II—Valuation and Qualifying Accounts
Description
Allowance accounts for the year ended:
December 31, 2021
Student receivable allowance
December 31, 2020
Student receivable allowance
(in thousands)
Balance at
Beginning of
Period
Charged to
Expense
Accounts
Written-off
Balance at
End of
Period
$
28,639
$
26,794
$
(23,512)
$
31,921
$
20,367
$
26,887
$
(18,615)
$
28,639
F-34
Exhibit 21.1
Subsidiaries of the Company
The following is a list of Lincoln Educational Services Corporation’s subsidiaries as of December 31, 2021:
Name
Lincoln Technical Institute, Inc. (wholly owned)
Jurisdiction
New Jersey
New England Acquisition LLC (wholly owned through Lincoln Technical Institute, Inc.)
Delaware
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.)
Delaware
Delaware
Colorado
Delaware
Delaware
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-248506, and 333-249352 on Form S-3 and 333-132749,
333-173880, 333-188240, and 333-239453 on Form S-8 of our reports dated March 3, 2022, 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, 2021.
Exhibit 23
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 3, 2022
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)
registrant’s internal control over financial reporting.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
Date: March 3, 2022
/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 3, 2022
/s/ Brian Meyers
Brian Meyers
Chief Financial Officer
EXHIBIT 32
CERTIFICATION
Pursuant to 18 U.S.C. 1350 as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002
Each of the undersigned, Scott Shaw, Chief Executive Officer of Lincoln Educational Services Corporation (the “Company”), and
Brian Meyers, Chief Financial Officer of the Company, has executed this certification in connection with the filing with the Securities and
Exchange Commission of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (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.
operations of the Company.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
Date: March 3, 2022
/s/ Scott Shaw
Scott Shaw
Chief Executive Officer
/s/ Brian Meyers
Brian Meyers
Chief Financial Officer
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.
CORPORATE INFORMATION
BOARD OF DIRECTORS
EXECUTIVE TEAM
J. Barry Morrow
Non-Executive Chairman
of the Board of Directors
Founder & CEO, BK Capital Group
Scott M. Shaw
President and
Chief Executive Officer
John A. Bartholdson (1) (2) (3)
Co-founder and Partner,
Juniper Investment Company LLC
James J. Burke, Jr. (2) (3)
Managing Partner,
J. Burke Capital Partners
Kevin M. Carney (1)
Former Executive Vice President
& Chief Financial Officer,
Web.com Group Inc.
Ronald E. Harbour (2) (3)
Senior Advisor,
Oliver Wyman Company
Michael A. Plater, Ph.D. (1) (3)
Former University President,
Strayer University
Felecia J. Pryor (2) (3)
Executive Vice President
& Chief Human Resources Officer,
BorgWarner, Inc.
Carlton E. Rose (1) (2)
President, Global Fleet Maintenance
& Engineering, UPS
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Nominating and Corporate
Governance Committee
Scott M. Shaw
President and
Chief Executive Officer
Brian K. Meyers
Executive Vice President,
Chief Financial Officer
and Treasurer
Stephen M. Buchenot
Executive Vice President
of Campus Operations
Chad D. Nyce
Executive Vice President and
Chief Innovation Officer
Alexandra M. Luster
Senior Vice President,
General Counsel and Secretary
Stephen E. Ace
Senior Vice President and
Chief Human Resources Officer
Susan L. English
Senior Vice President
of Career Services and Partnerships
Francis S. Giglio
Senior Vice President
of Compliance and Regulatory
Services
Jay A. Rasmussen, Jr.
Senior Vice President
of Admissions
Tayfun Selen
Senior Vice President
of Administration and Real Estate
Peter Tahinos
Senior Vice President
of Marketing
Valerian J. Thomas
Senior Vice President and
Chief Information Officer
CORPORATE
HEADQUARTERS
14 Sylvan Way, Suite A,
Parsippany, NJ 07054
973.736.9340
www.lincolntech.edu
AUDITORS
Deloitte & Touche LLP
Parsippany, NJ
TRANSFER AGENT
Continental Stock Transfer
& Trust Company
17 Battery Place
New York, NY 10004
212.509.4000
COMMON STOCK
Traded on the NASDAQ
Global Select Market under
the symbol “LINC”
ANNUAL MEETING OF
SHAREHOLDERS
The annual meeting of shareholders
of Lincoln Educational Services
Corporation will be held on
May 5, 2022.
REPORTS AND
PUBLICATIONS
Copies of Lincoln’s Form 10-Ks
and Form 10-Qs and other reports
filed with the Securities Exchange
Commission may be obtained without
charge by accessing the SEC’s web
site at www.sec.gov
or the company’s website at
www.lincolntech.edu.
Automotive Skilled Trades Health Sciences Hospitality Services Information Technology
THE LINCOLN GROUP OF SCHOOLS
Lincoln Technical Institute
www.lincolntech.edu
Lincoln College of Technology
www.lincolntech.edu
Allentown, PA
East Windsor, CT
Iselin, NJ
Lincoln, RI
Mahwah, NJ
Moorestown, NJ
New Britain, CT
Paramus, NJ
Philadelphia, PA
Queens, NY
Shelton, CT
Somerville, MA
South Plainfield, NJ
Union, NJ
Columbia, MD
Denver, CO
Grand Prairie, TX
Indianapolis, IN
Marietta, GA
Melrose Park, IL
Nashville, TN
Lincoln Culinary Institute
www.lincolnculinary.com
Columbia, MD
Shelton, CT
Euphoria Institute of Beauty
Arts & Sciences
www.euphoriainstitute.com
Las Vegas, NV
Lincoln Educational Services Corporation
14 Sylvan Way, Suite A
Parsippany, NJ 07054
973-736-9340