10-Q 1 form10q.htm 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


Form 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019
 
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____ to _____


Commission File Number 000-51371


LINCOLN EDUCATIONAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)

New Jersey
 
57-1150621
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)

200 Executive Drive, Suite 340
 
07052
West Orange, NJ
 
(Zip Code)
(Address of principal executive offices)
   

(973) 736-9340
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, 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 and post such files).  Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 
Large accelerated filer ☐
Accelerated filer ☐
     
 
Non-accelerated filer  (Do not check if a smaller reporting company)
Smaller reporting company ☒
     
 
Emerging growth company ☐
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, no par value per share
LINC
The NASDAQ Stock Market LLC
 
As of November 12, 2019, there were 25,231,710 shares of the registrant’s common stock outstanding.



LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019

PART I.
FINANCIAL INFORMATION
 
Item 1.
1
 
1
 
3
 
4
 
5
 
6
 
8
Item 2.
20
Item 3.
35
Item 4.
35
PART II.
35
Item 1.
35
Item 5.
36
Item 6.
39
   

PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)

   
September 30,
2019
   
December 31,
2018
 
ASSETS
           
CURRENT ASSETS:
           
Cash and cash equivalents
 
$
11,757
   
$
17,571
 
Restricted cash
   
3,997
     
16,775
 
Accounts receivable, less allowance of $17,277 and $15,590 at September 30, 2019 and December 31, 2018, respectively
   
22,094
     
18,675
 
Inventories
   
1,899
     
1,451
 
Prepaid income taxes and income taxes receivable
   
358
     
178
 
Prepaid expenses and other current assets
   
4,257
     
2,461
 
Total current assets
   
44,362
     
57,111
 
                 
PROPERTY, EQUIPMENT AND FACILITIES - At cost, net of accumulated depreciation and amortization of $172,190 and $171,109 at September 30, 2019 and December 31, 2018, respectively
   
48,209
     
49,292
 
                 
OTHER ASSETS:
               
Noncurrent restricted cash
   
-
     
11,600
 
Noncurrent receivables, less allowance of $2,156 and $1,403 at September 30, 2019 and December 31, 2018, respectively
   
14,633
     
12,175
 
Deferred income taxes, net
   
-
     
424
 
Operating lease right-of-use assets
   
38,750
     
-
 
Goodwill
   
14,536
     
14,536
 
Other assets, net
   
1,247
     
900
 
Total other assets
   
69,166
     
39,635
 
TOTAL
 
$
161,737
   
$
146,038
 

See notes to unaudited condensed consolidated financial statements.

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
(Continued)

   
September 30,
2019
   
December 31,
2018
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
           
CURRENT LIABILITIES:
           
Current portion of credit agreement
 
$
7,117
   
$
15,000
 
Unearned tuition
   
22,901
     
22,545
 
Accounts payable
   
18,899
     
14,107
 
Accrued expenses
   
9,523
     
10,605
 
Current portion of operating lease liabilities
   
9,089
     
-
 
Other short-term liabilities
   
595
     
2,324
 
Total current liabilities
   
68,124
     
64,581
 
                 
NONCURRENT LIABILITIES:
               
Long-term credit agreement and term loan
   
19,785
     
33,769
 
Pension plan liabilities
   
4,149
     
4,271
 
Deferred income taxes, net
   
93
     
-
 
Long-term portion of operating lease liabilities
   
35,942
     
-
 
Accrued rent
   
-
     
3,410
 
Other long-term liabilities
   
64
     
141
 
Total liabilities
   
128,157
     
106,172
 
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS’ EQUITY:
               
Preferred stock, no par value - 10,000,000 shares authorized, no shares issued and outstanding at September 30, 2019 and December 31, 2018
   
-
     
-
 
Common stock, no par value - authorized: 100,000,000 shares at September 30, 2019 and December 31, 2018; issued and outstanding: 31,142,251 shares at September 30, 2019 and 30,552,333 shares at December 31, 2018
   
141,377
     
141,377
 
Additional paid-in capital
   
29,927
     
29,484
 
Treasury stock at cost - 5,910,541 shares at September 30, 2019 and December 31, 2018
   
(82,860
)
   
(82,860
)
Accumulated deficit
   
(51,264
)
   
(44,073
)
Accumulated other comprehensive loss
   
(3,600
)
   
(4,062
)
Total stockholders’ equity
   
33,580
     
39,866
 
TOTAL
 
$
161,737
   
$
146,038
 

See notes to unaudited condensed consolidated financial statements.

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2019
   
2018
   
2019
   
2018
 
                         
REVENUE
 
$
72,594
   
$
70,078
   
$
199,427
   
$
193,087
 
COSTS AND EXPENSES:
                               
Educational services and facilities
   
33,211
     
33,488
     
92,940
     
94,169
 
Selling, general and administrative
   
37,451
     
36,087
     
111,512
     
108,091
 
(Gain) loss on disposition of assets
   
(211
)
   
427
     
(211
)
   
537
 
Total costs & expenses
   
70,451
     
70,002
     
204,241
     
202,797
 
OPERATING INCOME (LOSS)
   
2,143
     
76
     
(4,814
)
   
(9,710
)
OTHER:
                               
Interest income
   
1
     
6
     
7
     
25
 
Interest expense
   
(754
)
   
(632
)
   
(2,141
)
   
(1,743
)
INCOME (LOSS) BEFORE INCOME TAXES
   
1,390
     
(550
)
   
(6,948
)
   
(11,428
)
PROVISION FOR INCOME TAXES
   
50
     
50
     
244
     
150
 
NET INCOME (LOSS)
 
$
1,340
   
$
(600
)
 
$
(7,192
)
 
$
(11,578
)
Basic
                               
Net income (loss) per share
 
$
0.05
   
$
(0.02
)
 
$
(0.29
)
 
$
(0.47
)
Diluted
                               
Net income (loss) per share
 
$
0.05
   
$
(0.02
)
 
$
(0.29
)
 
$
(0.47
)
Weighted average number of common shares outstanding:
                               
Basic
   
24,563
     
24,533
     
24,551
     
24,387
 
Diluted
   
24,608
     
24,533
     
24,551
     
24,387
 

See notes to unaudited condensed consolidated financial statements.

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2019
   
2018
   
2019
   
2018
 
Net income (loss)
 
$
1,340
   
$
(600
)
 
$
(7,192
)
 
$
(11,578
)
Other comprehensive income
                               
Employee pension plan adjustments
   
154
     
162
     
462
     
485
 
Comprehensive income (loss)
 
$
1,494
   
$
(438
)
 
$
(6,730
)
 
$
(11,093
)

See notes to unaudited condensed consolidated financial statements.

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
(Unaudited)

   


Common Stock
   
Additional
Paid-in
Capital
   
Treasury
Stock
   
Accumulated
Deficit
   
Accumulated
Other
Comprehensive
Loss
   
Total
 
Shares
   
Amount
BALANCE - January 1, 2019
   
30,552,333
   
$
141,377
   
$
29,484
   
$
(82,860
)
 
$
(44,073
)
 
$
(4,062
)
 
$
39,866
 
Net loss
   
-
     
-
     
-
     
-
     
(5,467
)
   
-
     
(5,467
)
Employee pension plan adjustments
   
-
     
-
     
-
     
-
     
-
     
154
     
154
 
Stock-based compensation expense
                                                       
Restricted stock
   
478,853
     
-
     
52
     
-
     
-
     
-
     
52
 
Net share settlement for equity-based compensation
   
(5,518
)
   
-
     
(18
)
   
-
     
-
     
-
     
(18
)
BALANCE - March 31, 2019
   
31,025,668
     
141,377
     
29,518
     
(82,860
)
   
(49,540
)
   
(3,908
)
   
34,587
 
Net loss
   
-
     
-
     
-
     
-
     
(3,064
)
   
-
     
(3,064
)
Employee pension plan adjustments
   
-
     
-
     
-
     
-
     
-
     
154
     
154
 
Stock-based compensation expense
                                                       
Restricted stock
   
116,583
     
-
     
191
     
-
     
-
     
-
     
191
 
Net share settlement for equity-based compensation
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
BALANCE - June 30, 2019
   
31,142,251
     
141,377
     
29,709
     
(82,860
)
   
(52,604
)
   
(3,754
)
   
31,868
 
Net income
   
-
     
-
     
-
     
-
     
1,340
     
-
     
1,340
 
Employee pension plan adjustments
   
-
     
-
     
-
     
-
     
-
     
154
     
154
 
Stock-based compensation expense
                                                       
Restricted stock
   
-
     
-
     
218
     
-
     
-
     
-
     
218
 
Net share settlement for equity-based compensation
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
BALANCE - September 30, 2019
   
31,142,251
   
$
141,377
   
$
29,927
   
$
(82,860
)
 
$
(51,264
)
 
$
(3,600
)
 
$
33,580
 

   


Common Stock
   
Additional
Paid-in
Capital
   
Treasury
Stock
   
Accumulated
Deficit
   
Accumulated
Other
Comprehensive
Loss
   
Total
 
Shares
   
Amount
BALANCE - January 1, 2018
   
30,624,407
   
$
141,377
   
$
29,334
   
$
(82,860
)
 
$
(37,528
)
 
$
(4,510
)
 
$
45,813
 
Net loss
   
-
     
-
     
-
     
-
     
(6,874
)
   
-
     
(6,874
)
Employee pension plan adjustments
   
-
     
-
     
-
     
-
     
-
     
162
     
162
 
Stock-based compensation expense
                                                       
Restricted stock
   
113,946
     
-
     
429
     
-
     
-
     
-
     
429
 
Net share settlement for equity-based compensation
   
(168,254
)
   
-
     
(311
)
   
-
     
-
     
-
     
(311
)
BALANCE - March 31, 2018
   
30,570,099
     
141,377
     
29,452
     
(82,860
)
   
(44,402
)
   
(4,348
)
   
39,219
 
Net loss
   
-
     
-
     
-
     
-
     
(4,104
)
   
-
     
(4,104
)
Employee pension plan adjustments
   
-
     
-
     
-
     
-
     
-
     
161
     
161
 
Stock-based compensation expense
                                                       
Restricted stock
   
21,622
     
-
     
53
     
-
     
-
     
-
     
53
 
Net share settlement for equity-based compensation
   
(39,388
)
   
-
     
(61
)
   
-
     
-
     
-
     
(61
)
BALANCE - June 30, 2018
   
30,552,333
     
141,377
     
29,444
     
(82,860
)
   
(48,506
)
   
(4,187
)
   
35,268
 
Net loss
   
-
     
-
     
-
     
-
     
(600
)
   
-
     
(600
)
Employee pension plan adjustments
   
-
     
-
     
-
     
-
     
-
     
162
     
162
 
Stock-based compensation expense
                                                       
Restricted stock
   
-
     
-
     
20
     
-
     
-
     
-
     
20
 
Net share settlement for equity-based compensation
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
BALANCE - September 30, 2018
   
30,552,333
   
$
141,377
   
$
29,464
   
$
(82,860
)
 
$
(49,106
)
 
$
(4,025
)
 
$
34,850
 

See notes to unaudited condensed consolidated financial statements.

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

   
Nine Months Ended
September 30,
 
   
2019
   
2018
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
 
$
(7,192
)
 
$
(11,578
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
   
5,972
     
6,289
 
Amortization of deferred finance charges
   
354
     
275
 
Deferred income taxes
   
424
     
-
 
(Gain) loss on disposition of assets
   
(211
)
   
537
 
Fixed asset donations
   
(893
)
   
-
 
Provision for doubtful accounts
   
15,157
     
12,988
 
Stock-based compensation expense
   
460
     
502
 
Deferred rent
   
-
     
(697
)
(Increase) decrease in assets:
               
Accounts receivable
   
(21,034
)
   
(21,300
)
Inventories
   
(448
)
   
(654
)
Prepaid income taxes and income taxes receivable
   
(180
)
   
-
 
Prepaid expenses and other current assets
   
554
     
139
 
Other assets, net
   
(1,003
)
   
(83
)
Increase (decrease) in liabilities:
               
Accounts payable
   
4,197
     
9,007
 
Accrued expenses
   
(33
)
   
1,983
 
Unearned tuition
   
356
     
(3,122
)
Deferred income taxes
   
93
     
-
 
Other liabilities
   
(1,466
)
   
(102
)
Total adjustments
   
2,299
     
5,762
 
Net cash used in operating activities
   
(4,893
)
   
(5,816
)
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Capital expenditures
   
(3,272
)
   
(4,217
)
Proceeds from insurance
   
211
     
-
 
Proceeds from sale of property and equipment
   
-
     
2,348
 
Net cash used in investing activities
   
(3,061
)
   
(1,869
)
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Payments on borrowings
   
(27,167
)
   
(32,800
)
Proceeds from borrowings
   
5,045
     
4,400
 
Payment of deferred finance fees
   
(98
)
   
(94
)
Net share settlement for equity-based compensation
   
(18
)
   
(372
)
Net cash used in financing activities
   
(22,238
)
   
(28,866
)
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
   
(30,192
)
   
(36,551
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period
   
45,946
     
54,554
 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—End of period
 
$
15,754
   
$
18,003
 

See notes to unaudited condensed consolidated financial statements.

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
(Continued)

   
Nine Months Ended
September 30,
 
   
2019
   
2018
 
             
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
           
Cash paid for:
           
Interest
 
$
1,638
   
$
1,523
 
Income taxes
 
$
113
   
$
167
 
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
               
Liabilities accrued for or noncash purchases of fixed assets
 
$
1,679
   
$
392
 

See notes to unaudited condensed consolidated financial statements.

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(In thousands, except share and per share amounts and unless otherwise stated)
(Unaudited)

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Activities— Lincoln Educational Services Corporation and its subsidiaries (collectively, the “Company”, “we”, “our” and “us”, as applicable) provide diversified career-oriented post-secondary education to recent high school graduates and working adults.  The Company, which currently operates 22 schools in 14 states, offers programs in automotive technology, skilled trades (which include HVAC, welding and computerized numerical control and electrical and electronic systems technology, among other programs), healthcare services (which include nursing, dental assistant and medical administrative assistant, among other programs), hospitality services (which include culinary, therapeutic massage, cosmetology and aesthetics) and information technology programs.  The schools operate under Lincoln Technical Institute, Lincoln College of Technology, Lincoln Culinary Institute, and Euphoria Institute of Beauty Arts and Sciences and associated brand names.  Most of the campuses serve major metropolitan markets and each typically offers courses in multiple areas of study.  Five of the campuses are destination schools, which attract students from across the United States and, in some cases, from abroad. The Company’s other campuses primarily attract students from their local communities and surrounding areas.  All of the campuses are nationally or regionally accredited and are eligible to participate in federal financial aid programs managed by the U.S. Department of Education (the “DOE”) and applicable state education agencies and accrediting commissions, which allow students to apply for and access federal student loans as well as other forms of financial aid.

The Company’s business is organized into three reportable business segments:  (a) Transportation and Skilled Trades, (b) Healthcare and Other Professions (“HOPS”), and (c) Transitional, which refers to businesses that have been taught out.

In August 2018, New England Institute of Technology at Palm Beach, Inc. (“NEIT”), a wholly-owned subsidiary of the Company, sold to Elite Property Enterprise, LLC the real property owned by  NEIT located at 1126 53rd Court North, Mangonia Park, Palm Beach County, Florida and the improvements and certain personal property located thereon (the “Mangonia Park Property”), for a cash purchase price of $2,550,000.  At the closing, NEIT paid a real estate brokerage fee equal to 5% of the gross sales price and other customary closing costs and expenses.  Pursuant to the provisions of the Company’s credit agreement with its lender, Sterling National Bank, the net cash proceeds of the sale of the Mangonia Park Property were deposited into an account with the lender to serve as additional security for loans and other financial accommodations provided to the Company and its subsidiaries under the credit facility.  In December 2018, the funds were used to repay the outstanding principal balance of the loans outstanding under the credit facility and such repayment permanently reduced the loan outstanding under the credit facility designated as Facility 1 under the Company’s credit agreement to a $22.7 million term loan.

Effective December 31, 2018, the Company completed the teach-out and ceased operation of its Lincoln College of New England (“LCNE”) campus at Southington, Connecticut.  The decision to close the LCNE campus followed the previously reported placement of LCNE on probation by the college’s institutional accreditor, the New England Association of Schools and Colleges (“NEASC”).  After evaluating alternative options, the Company concluded that teaching out and closing the campus was in the best interest of the Company and its students.  Subsequent to formalizing the LCNE closure decision in August 2018, the Company partnered with Goodwin College, another NEASC- accredited institution in the region, to assist LCNE students to complete their programs of study.  The majority of the LCNE students will continue their education at Goodwin College thereby limiting some of the Company’s closing costs.  The Company recorded closing costs associated with the closure of the LCNE campus in 2018 of approximately $1.6 million in connection with the termination of the LCNE campus lease, which is the net present value of the remaining obligation, to be paid in equal monthly installments through January 2020 and approximately $0.7 million of severance payments.  LCNE results, previously reported in the HOPS segment, were included in the Transitional segment as of December 31, 2018.

Liquidity For the last several years, the Company and the proprietary school sector have faced deteriorating earnings. Government regulations have negatively impacted earnings by making it more difficult for potential students to obtain loans, which, when coupled with the overall economic environment, have discouraged potential students from enrolling in post-secondary schools. In light of these factors, for the last several years, the Company has incurred significant operating losses as a result of lower student population.  Despite these challenges, 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.  At September 30, 2019, the Company’s sources of cash primarily included cash and cash equivalents of $15.8 million (of which $4.0 million is restricted).  The Company is also continuing to take actions to improve cash flow by aligning its cost structure to its student population.

Basis of Presentation – The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements.  Certain information and footnote disclosures normally included in annual financial statements have been omitted or condensed pursuant to such regulations.  These statements, which should be read in conjunction with the December 31, 2018 consolidated financial statements and related disclosures of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, reflect all adjustments, consisting of normal recurring adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows for such periods.  The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the full fiscal year ending December 31, 2019.

The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated.

Use of Estimates in the Preparation of Financial Statements – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities 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 related to revenue recognition, bad debts, impairments, fixed assets, discount rate for lease liabilities, income taxes, benefit plans and certain accruals.  Actual results could materially differ from those estimates.

New Accounting Pronouncements – In July 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2019-07, “Codification Updates to SEC Sections,” to reflect the recently adopted amendments to the SEC final rules that were done to modernize and simplify certain reporting requirements for public companies, investment advisers and investment companies. This ASU is effective upon issuance and did not have a significant impact on our consolidated financial statements and related disclosures.
 
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and subsequently issued additional guidance that modified ASU 2016-13. ASU 2016-13 and the subsequent modifications are identified as Accounting Standards Codification (“ASC”) 326. The standard requires an entity to change its accounting approach in determining impairment of certain financial instruments, including trade receivables, from an “incurred loss” to a “current expected credit loss” model. The standard will be effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years. Early adoption is permitted. We are currently assessing the effect that ASC 326 will have on our financial position, results of operations, and disclosures.
 
In August 2018, the FASB  issued ASU  2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” This ASU adds, modifies and clarifies several disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This guidance is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The adoption of ASU 2018-14 will not have a material impact on our consolidated financial statements and related disclosures.
 
In August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement”, which eliminates, adds and modifies certain fair value measurement disclosure requirements of Accounting Standards Codification 820, Fair Value Measurement. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The adoption of ASU No. 2018-13 is not expected to have a material impact on the Company’s consolidated financial statements.
 
In June 2018, the FASB issued ASU No. 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting,” intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to nonemployees. This ASU expands the scope of Topic 718, “Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. The Company adopted ASU No. 2018-07 on January 1, 2019.  The adoption of the standard did not have a material impact on the Company’s consolidated financial statements.
 
In February 2018, the FASB issued ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220)”. The updated guidance allows entities to reclassify stranded income tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”) from accumulated other comprehensive income to retained earnings in their consolidated financial statements. Under the Tax Act, deferred taxes were adjusted to reflect the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate, which left the tax effects on items within accumulated other comprehensive income stranded at an inappropriate tax rate. The updated guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. The Company adopted ASU No. 2018-02 on January 1, 2019 and it did not have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases.”  This guidance amends the existing accounting considerations and treatments for leases through the creation of Topic 842, Leases, to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from such leases.

In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” to further clarify, correct and consolidate various areas previously discussed in ASU 2016-02. FASB also issued ASU No. 2018-11, “Leases: Targeted Improvements” to provide entities another option for transition and lessors with a practical expedient. The transition option allows entities to not apply ASU No. 2016-02 in comparative periods in the financial statements in the year of adoption. The practical expedient offers lessors an option to not separate non-lease components from the associated lease components when certain criteria are met.

The amendments in ASU No. 2016-02, ASU No. 2018-10 and ASU No. 2018-11 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and allow for modified retrospective adoption with early adoption permitted. The Company adopted ASU No. 2016-02 and the related amendments on January 1, 2019 using the modified retrospective approach and elected the transition relief package of practical expedients by applying previous accounting conclusions under ASC 840 to all leases that existed prior to the transition date. As a result, the Company did not reassess (1) whether existing or expired contracts contain leases, (2) lease classification for any existing or expired leases or (3) whether lease origination costs qualified as initial direct costs. The Company did not elect the practical expedient to use hindsight in determining a lease term and impairment of the right-of-use (“ROU”) assets at the adoption date. The Company did not separate lease components from non-lease components for the specified asset classes.  The election applies to all operating leases where fixed rent payments incorporate common area maintenance.  For leases where the election does not apply, the common area maintenance is billed by the landlord separately.  Additionally, the Company did not apply the recognition requirements under ASC 842 to short-term leases, generally defined as leases with terms of less than one year.  The Company has operating leases for its corporate office and schools.  The Company does not have any finance leases.

Stock-Based Compensation – The Company measures the value of stock options on the grant date at fair value, using the Black-Scholes option valuation model.  The Company amortizes the fair value of stock options, net of estimated forfeitures, utilizing straight-line amortization of compensation expense over the requisite service period of the grant.

The Company measures the value of service and performance-based restricted stock on the fair value of a share of common stock on the date of the grant. The Company amortizes the fair value of service-based restricted stock utilizing straight-line amortization of compensation expense over the requisite service period of the grant.

The Company amortizes the fair value of the performance-based restricted stock based on the determination of the probable outcome of the performance condition.  If the performance condition is expected to be met, then the Company amortizes the fair value of the number of shares expected to vest utilizing straight-line basis over the requisite performance period of the grant.  However, if the associated performance condition is not expected to be met, then the Company does not recognize the stock-based compensation expense.

Income Taxes – The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes”. 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.

10

During the three and nine months ended September 30, 2019 and 2018, the Company did not recognize any interest and penalties expense associated with uncertain tax positions.
 
2.
WEIGHTED AVERAGE COMMON SHARES

The weighted average number of common shares used to compute basic and diluted loss per share for the three and nine months ended September 30, 2019 and 2018 was as follows:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2019
   
2018
   
2019
   
2018
 
Basic shares outstanding
   
24,563,038
     
24,532,648
     
24,550,999
     
24,386,689
 
Dilutive effect of stock options
   
44,466
     
-
     
-
     
-
 
Diluted shares outstanding
   
24,607,504
     
24,532,648
     
24,550,999
     
24,386,689
 

For the three months ended September 30, 2018, options to acquire 26,083 shares were excluded from the above table because the Company reported a net loss for the period and, therefore, the impact on reported loss per share would have been antidilutive.  For the nine months ended September 30, 2019 and 2018, options to acquire 93,654 and 57,680 shares, respectively, were excluded from the above table because the Company reported a net loss for each period and, therefore, their impact on reported loss per share would have been antidilutive.  For the three and nine months ended September 30, 2019 and 2018, options to acquire 133,000 and 139,000 shares were excluded from the above table because they have an exercise price that is greater than the average market price of the Company’s common stock and, therefore, their impact on reported loss per share would have been antidilutive.

3.
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 contract durations are less than one-year, or if we have the right to consideration from a student in an amount that corresponds directly with the value provided to the student for performance obligations completed to date. We have assessed the costs incurred to obtain a contract with a student and determined them to be immaterial.

Unearned tuition in the amount of $22.9 million and $22.5 million is recorded in the current liabilities section of the accompanying condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018, respectively. The change in this contract liability balance during the nine month period ended September 30, 2019 is the result of payments received in advance of satisfying performance obligations, offset by revenue recognized during that period. Revenue recognized for the nine month period ended September 30, 2019 that was included in the contract liability balance at the beginning of the year was $21.5 million.

11

The following table depicts the timing of revenue recognition:

   
Three months ended September 30, 2019
   
Nine months ended September 30, 2019
 
   
Transportation
and Skilled
Trades Segment
   
Healthcare
and Other
Professions
Segment
   
Transitional
Segment
   
Consolidated
   
Transportation
and Skilled
Trades
Segment
   
Healthcare
and Other
Professions
Segment
   
Transitional
Segment
   
Consolidated
 
Timing of Revenue Recognition
                                               
Services transferred at a point in time
 
$
4,792
   
$
1,308
   
$
-
   
$
6,100
   
$
9,360
   
$
3,541
   
$
-
   
$
12,901
 
Services transferred over time
   
47,860
     
18,634
     
-
     
66,494
     
131,646
     
54,880
     
-
     
186,526
 
Total revenues
 
$
52,652
   
$
19,942
   
$
-
   
$
72,594
   
$
141,006
   
$
58,421
   
$
-
   
$
199,427
 

   
Three months ended September 30, 2018
   
Nine months ended September 30, 2018
 
   
Transportation
and Skilled
Trades Segment
   
Healthcare
and Other
Professions
Segment
   
Transitional
Segment
   
Consolidated
   
Transportation
and Skilled
Trades
Segment
   
Healthcare
and Other
Professions
Segment
   
Transitional
Segment
   
Consolidated
 
Timing of Revenue Recognition
                                               
Services transferred at a point in time
 
$
4,514
   
$
1,162
   
$
56
   
$
5,732
   
$
8,219
   
$
2,847
   
$
62
   
$
11,128
 
Services transferred over time
   
46,492
     
17,089
     
765
     
64,346
     
127,619
     
49,707
     
4,633
     
181,959
 
Total revenues
 
$
51,006
   
$
18,251
   
$
821
   
$
70,078
   
$
135,838
   
$
52,554
   
$
4,695
   
$
193,087
 

4.
LEASES

The Company determines if an arrangement is a lease at inception. The Company considers any contract where there is an identified asset and that it has the right to control the use of such asset in determining whether the contract contains a lease.  An operating lease ROU asset represents the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are to be recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s operating leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available on the adoption date in determining the present value of lease payments. We estimate the incremental borrowing rate based on a yield curve analysis, utilizing the interest rate derived from the fair value analysis of our credit facility and adjusting it for factors that appropriately reflect the profile of secured borrowing over the expected term of the lease. The operating lease ROU assets include any lease payments made prior to the rent commencement date and exclude lease incentives. Our leases have remaining lease terms of one year to 11 years. Lease terms may include options to extend the lease term used in determining the lease obligation when it is reasonably certain that the Company will exercise that option.  Lease expense for lease payments are recognized on a straight-line basis over the lease term for operating leases.

The following table present the cumulative effect of the changes made to the condensed consolidated balance sheets as of January 1, 2019, as a result of the adoption of ASC 842:

   
December 31, 2018
   
Adjustments due to
ASC 842
   
January 1, 2019
 
                   
Operating lease right-of-use asset
 
$
-
   
$
37,993
   
$
37,993
 
Current portion of operating lease liability
 
$
-
   
$
8,999
   
$
8,999
 
Other short-term liabilities
 
$
968
   
$
(968
)
 
$
-
 
Long-term portion of operating lease liability
 
$
-
   
$
33,372
   
$
33,372
 
Accrued rent
 
$
3,410
   
$
(3,410
)
 
$
-
 

Our operating lease cost for the three and nine months ended September 30, 2019 was $3.6 and $10.9 million, respectively.  The ROU asset amortization is included in other assets in the condensed consolidated cash flows for the nine months ended September 30, 2019.

12

Supplemental cash flow information and non-cash activity related to our operating leases are as follows:

   
For the Three Months Ended
September 30, 2019
   
For the Nine Months Ended
September 30, 2019
 
Operating cash flow information:
           
Cash paid for amounts included in the measurement of operating lease liabilities
 
$
3,674
   
$
11,277
 
Non-cash activity:
               
Lease liabilities arising from obtaining right-of-use assets*
 
$
2,811
   
$
51,445
 

* Includes effect of adoption of ASU 2016-02 and related amendments and a new lease entered into on January 1, 2019 of $5.6 million.

On August 1, 2019 there was a lease re-measurement of $3.0 million.

Weighted-average remaining lease term and discount rate for our operating leases is as follows:

   
Three Months Ended
September 30, 2019
 
Weighted-average remaining lease term
 
5.75 years
 
Weighted-average discount rate
   
14.34
%

Maturities of lease liabilities by fiscal year for our operating leases as of September 30, 2019 are as follows:

Year ending December 31,
     
2019 (excluding the nine months ended September 30, 2019)
 
$
3,828
 
2020
   
14,452
 
2021
   
11,804
 
2022
   
9,344
 
2023
   
6,997
 
2024
   
3,980
 
Thereafter
   
15,924
 
Total lease payments
   
66,329
 
Less: imputed interest
   
(21,298
)
Present value of lease liabilities
 
$
45,031
 

As of December 31, 2018, minimum lease payments under non-cancelable operating leases by period were expected to be as follows:

2019
 
$
16,939
 
2020
   
14,183
 
2021
   
10,708
 
2022
   
8,180
 
2023
   
5,811
 
Thereafter
   
17,610
 
   
$
73,431
 

5.
GOODWILL AND LONG-LIVED ASSETS

The Company reviews long-lived assets for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.  There were no long-lived asset impairments during the nine months ended September 30, 2019 and 2018.

The Company reviews goodwill and intangible assets for impairment when indicators of impairment exist.  Annually, or more frequently if necessary, the Company evaluates goodwill and intangible assets with indefinite lives for impairment, with any resulting impairment reflected as an operating expense.  The Company concluded that, as of September 30, 2019 and 2018, there were no indicators of potential impairment and, accordingly, the Company did not test goodwill for impairment.

13

The carrying amount of goodwill at September 30, 2019 and 2018 is as follows:

   
Gross
Goodwill
Balance
   
Accumulated
Impairment
Losses
   
Net
Goodwill
Balance
 
Balance as of January 1, 2019
 
$
117,176
   
$
(102,640
)
 
$
14,536
 
Adjustments
   
-
     
-
     
-
 
Balance as of September 30, 2019
 
$
117,176
   
$
(102,640
)
 
$
14,536
 

   
Gross
Goodwill
Balance
   
Accumulated
Impairment
Losses
   
Net
Goodwill
Balance
 
Balance as of January 1, 2018
 
$
117,176
   
$
(102,640
)
 
$
14,536
 
Adjustments
   
-
     
-
     
-
 
Balance as of September 30, 2018
 
$
117,176
   
$
(102,640
)
 
$
14,536
 

As of September 30, 2019 and 2018, the goodwill balance is related to the Transportation and Skilled Trades segment.

6.
LONG-TERM DEBT

Long-term debt consists of the following:

   
September 30,
2019
   
December 31,
2018
 
Credit agreement and term loan
 
$
27,133
   
$
49,301
 
Auto loan
   
46
     
-
 
Deferred financing fees
   
(277
)
   
(532
)
     
26,902
     
48,769
 
Less current maturities
   
(7,117
)
   
(15,000
)
   
$
19,785
   
$
33,769
 

On March 31, 2017, the Company obtained a secured credit facility (the “Credit Facility”) from Sterling National Bank (the “Bank”) pursuant to a Credit Agreement dated March 31, 2017 among the Company, the Company’s subsidiaries and the Bank, which was subsequently amended on November 29, 2017, February 23, 2018, July 11, 2018 and, most recently, on March 6, 2019 (as amended, the “Credit Agreement”).  Prior to the most recent amendment of the Credit Agreement (the “Fourth Amendment”), the financial accommodations available to the Company under the Credit Agreement consisted of (a) a $25 million revolving loan facility designated as “Facility 1”, (b) a $25 million revolving loan facility (including a sublimit amount for letters of credit of $10 million) designated as “Facility 2” and (c) a $15 million revolving credit loan designated as “Facility 3”.

Pursuant to the terms of the Fourth Amendment and upon its effectiveness, Facility 1 was converted into a term loan (the “Term Loan”) in the original principal amount of $22.7 million (such amount being the entire unpaid principal and accrued interest outstanding under Facility 1 as of the effective date of the Fourth Amendment), which matures on March 31, 2024 (the “Term Loan Maturity Date”).  The Term Loan is being repaid in monthly installments as follows:  (a) on April 1, 2019 and on the same day of each month thereafter through and including June 30, 2019, accrued interest only; (b) on July 1, 2019 and on the same day of each month thereafter through and including December 31, 2019, the principal amount of $0.2 million  plus accrued interest; (c) on January 1, 2020 and on the same day of each month thereafter through and including June 30, 2020, accrued interest only; (d) on July 1, 2020 and on the same day of each month thereafter through and including December 31, 2020, the principal amount of $0.6 million plus accrued interest; (e) on January 1, 2021 and on the same day of each month thereafter through and including June 30, 2021, accrued interest only; (f) on July 1, 2021 and on the same day of each month thereafter through and including December 31, 2021, the principal amount of $0.4 million plus accrued interest; (g) on January 1, 2022 and on the same day of each month thereafter through and including June 30, 2022, accrued interest only; (h) on July 1, 2022 and on the same day of each month thereafter through and including December 31, 2022, the principal amount of $0.4 million plus accrued interest; (i) on January 1, 2023 and on the same day of each month thereafter through and including June 30, 2023, accrued interest only; (j) on July 1, 2023 and on the same day of each month thereafter through and including December 31, 2023, the principal amount of $0.4 million plus accrued interest; (k)  on January 1, 2024 and on the same day of each month thereafter through and including the Term Loan Maturity Date, accrued interest only; and (l) on the Term Loan Maturity Date, the remaining outstanding principal amount of the Term Loan, together with accrued interest, will be due and payable.  In the event of a sale of any campus, school or business permitted under the Credit Agreement, 25% of the net proceeds of any such sale must be used to pay down the outstanding principal amount of the Term Loan in inverse order of maturity.

14

The maturity date of Facility 2 is April 30, 2020.  Facility 3 matured on May 31, 2019, unused, and is no longer available for borrowing.

Under the terms of the Credit Agreement, all draws under Facility 2 for letters of credit or revolving loans must be secured by cash collateral in an amount equal to 100% of the aggregate stated amount of the letters of credit issued and revolving loans outstanding through the proceeds of the Term Loan or other available cash of the Company.  Notwithstanding such requirement, pursuant to the terms of the Fourth Amendment, a $2.5 million revolving loan was advanced under Facility 2 at the closing of the Fourth Amendment on March 6, 2019 and an additional $1.25 million on both April 17, 2019 and July 26, 2019, respectively, without any requirement for cash collateral.  The $5 million in revolving loans advanced under Facility 2 was repaid on November 1, 2019, as required by the Credit Agreement, and, prior to their repayment, the Company made monthly payments of accrued interest only on such revolving loans.

The Term Loan bears interest at a rate per annum equal to the greater of (x) the Bank’s prime rate plus 2.85% and (y) 6.00%.  Revolving loans advanced under Facility 2 that are cash collateralized will bear interest at a rate per annum equal to the greater of (x) the Bank’s prime rate and (y) 3.50%.  Pursuant to the Fourth Amendment, revolving loans advanced under Facility 2 that are not secured by cash collateral will bear interest at a rate per annum equal to the greater of (x) the Bank’s prime rate plus 2.85% and (y) 6.00%.

The Bank is entitled to receive an unused facility fee on the average daily unused balance of Facility 2 at a rate per annum equal to 0.50%, which fee is payable quarterly in arrears.

In the event the Bank’s prime rate is greater than or equal to 6.50% while any loans are outstanding, the Company may be required to enter into a hedging contract in form and content satisfactory to the Bank.

The Company is required to give the Bank the first opportunity to provide any and all traditional banking services required by the Company, including, but not limited to, treasury management, loans and other financing services, on terms mutually acceptable to the Company and the Bank, in accordance with the terms set forth in the Fourth Amendment.  In the event that loans provided under the Credit Agreement are repaid through replacement financing, the Company must pay to the Bank an exit fee in an amount equal to 1.25% of the total amount repaid and the face amount of all letters of credit replaced in connection with the replacement financing; provided, however, that no exit fee will be required in the event the Bank or the Bank’s affiliate arranges or provides the replacement financing or the payoff of the applicable loans occurs after March 5, 2021.

In connection with the effectiveness of the Fourth Amendment, the Company paid to the Bank a one-time modification fee in the amount of $50,000.

Pursuant to the Credit Agreement, in December 2018, the net proceeds of the sale of the Mangonia Park Property, which were held in a non-interest bearing cash collateral account at and by the Bank as additional collateral for the loans outstanding under the Credit Agreement, were applied to the outstanding principal balance of revolving loans outstanding under Facility 1 and, as a result of such repayment, the loan availability under Facility 1 was permanently reduced to a $22.7 million term loan.

The Credit Facility is secured by a first priority lien in favor of the Bank on substantially all of the personal property owned by the Company and mortgages on four 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.

Each issuance of a letter of credit under Facility 2 will require the payment of a letter of credit fee to the Bank equal to a rate per annum of 1.75% on the daily amount available to be drawn under the letter of credit, which fee shall be payable in quarterly installments in arrears.  Letters of credit that were outstanding under a $9.5 million letter of credit facility previously provided to the Company by the Bank, which letter of credit facility was set to mature on April 1, 2017, are treated as letters of credit under Facility 2.

The terms of the Credit Agreement require the Company to maintain, on deposit in one or more non-interest bearing accounts, a minimum of $5 million in quarterly average aggregate balances, which, if not maintained, results in a fee of $12,500 payable to the Bank for that quarter.

In addition to the foregoing, the Credit Agreement contains customary representations and warranties, affirmative and negative covenants and events of default customary for facilities of this type.  As of September 30, 2019, the Company is in compliance with all covenants, including financial covenants that (i) restrict capital expenditures tested on a fiscal year end basis; (ii) prohibit the incurrence of a net loss commencing on December 31, 2019; and (iii) require a minimum adjusted EBITDA tested quarterly on a rolling twelve month basis.  The Fourth Amendment (i) modifies the minimum adjusted EBITDA required; (ii) eliminates the requirement for a minimum funded debt to adjusted EBITDA ratio; and (iii) requires the maintenance of a maximum funded debt to adjusted EBITDA ratio tested quarterly on a rolling twelve month basis.

15

As of September 30, 2019, the Company had $27.1 million outstanding under the Credit Facility; offset by $0.3 million of deferred finance fees.  As of December 31, 2018, the Company had $49.3 million outstanding under the Credit Facility, offset by $0.5 million of deferred finance fees, which were written-off.  As of September 30, 2019 and December 31, 2018, letters of credit in the aggregate outstanding principal amount of $4.0 million and $1.8 million, respectively, were outstanding under the Credit Facility.

Subsequent to the end of the fiscal quarter ended September 30, 2019, on November 14, 2019, the Credit Facility was replaced by a new $60 million credit facility between the Company and the Bank.  See Part II, Item 5 Other Information for details regarding the replacement credit facility.

Scheduled maturities of long-term debt including the short-term portion at September 30, 2019 are as follows:

Year ending December 31,
     
2019 (excluding the nine months ended September 30, 2019)
 
$
5,567
 
2020
   
3,451
 
2021
   
2,270
 
2022
   
2,270
 
2023
   
2,270
 
Thereafter
   
11,351
 
   
$
27,179
 

7.
STOCKHOLDERS’ EQUITY

Restricted Stock

The Company has two stock incentive plans:  a Long-Term Incentive Plan (the “LTIP”) and a Non-Employee Directors Restricted Stock Plan (the “Non-Employee Directors Plan”).

Under the LTIP, certain employees receive 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.

On February 28, 2019, restricted shares were granted to certain employees of the Company, which shares ratably vest over three years.  There is no restriction on the right to vote or the right to receive dividends with respect to any of such restricted shares.

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.

For the nine months ended September 30, 2019 and 2018, the Company completed a net share settlement for 5,518 and 207,642 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 2019 and/or 2018, 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 less than $0.1 million and $0.4 million for each of the nine months ended September 30, 2019 and 2018, respectively, to equity on the condensed consolidated balance sheets as the cash payment of the taxes effectively was a repurchase of the restricted shares granted in previous years.

16

The following is a summary of transactions pertaining to restricted stock:

   
Shares
   
Weighted
Average Grant
Date Fair Value
Per Share
 
Nonvested restricted stock outstanding at December 31, 2018
   
35,908
   
$
2.23
 
Granted
   
598,982
     
3.15
 
Canceled
   
(3,546
)
   
3.17
 
Vested
   
(35,908
)
   
2.23
 
                 
Nonvested restricted stock outstanding at September 30, 2019
   
595,436
     
3.15
 

The restricted stock expense for each of the three months ended September 30, 2019 and 2018 was $0.2 million and $0.1 million, respectively.  The restricted stock expense for each of the nine months ended September 30, 2019 and 2018 was $0.5 million and $0.5 million, respectively.  The unrecognized restricted stock expense as of September 30, 2019 and December 31, 2018 was $1.4 million and $0.1 million, respectively.  As of September 30, 2019, outstanding restricted shares under the LTIP had aggregate intrinsic value of $1.2 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:

   
Shares
   
Weighted
Average
Exercise Price
Per Share
   
Weighted
Average
Remaining
Contractual
Term
   
Aggregate
Intrinsic Value
(in thousands)
 
Outstanding at December 31, 2018
   
139,000
   
$
12.14
   
2.53 years
   
$
-
 
Canceled
   
(6,000
)
   
20.62
     
-
         
Granted/Vested
   
-
     
-
             
-
 
                                 
Outstanding at September 30, 2019
   
133,000
     
11.76
   
1.83 years
     
-
 
                                 
Vested as of September 30, 2019
   
133,000
     
11.76
   
1.83 years
     
-
 
                                 
Exercisable as of September 30, 2019
   
133,000
     
11.76
   
1.83 years
     
-
 

As of September 30, 2019, there was no unrecognized pre-tax compensation expense.

The following table presents a summary of stock options outstanding:

     
At September 30, 2019
 
     
Stock Options Outstanding
   
Stock Options Exercisable
 
Range of Exercise Prices
   
Shares
   
Contractual
Weighted
Average Life
(years)
   
Weighted
Average Price
   
Shares
   
Weighted
Average Exercise
Price
 
$ 4.00-$13.99
     
91,000
     
2.42
   
$
7.79
     
91,000
   
$
7.79
 
$ 14.00-$19.99
     
17,000
     
0.09
     
19.98
     
17,000
     
19.98
 
$ 20.00-$25.00
     
25,000
     
0.85
     
20.62
     
25,000
     
20.62
 
                                            
        
133,000
     
1.83
     
11.76
     
133,000
     
11.76
 

17

8.
INCOME TAXES

The provision for income taxes for the three months ended September 30, 2019 and 2018 was $0.1 million, or 3.6% of pretax income, and less than $0.1 million, or 9.1% of pretax loss, respectively.  The provision for income taxes for the nine months ended September 30, 2019 and 2018 was $0.2 million, or 3.5% of pretax loss, and $0.2 million, or 1.3% of pretax loss, respectively.

The Company assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to recover the existing deferred tax assets.  In this regard, a significant objective negative evidence was the cumulative losses incurred by the Company in recent years.  On the basis of this evaluation, the realization of the Company’s deferred tax assets was not deemed to be more likely than not and, thus, the Company maintained a full valuation allowance on its net deferred tax assets as of September 30, 2019 except deferred tax liability related to indefinite lived intangibles for which, the valuation allowance was reduced by $0.1 million and a corresponding deferred tax expense was recognized as of September 30, 2019.

9.
CONTINGENCIES

In the ordinary conduct of its business, the Company is subject to certain lawsuits, investigations and claims, including, but not limited to, claims involving students or graduates and routine employment matters. Although the Company cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against it, the Company does not believe that any currently pending legal proceedings to which it is a party will have a material adverse effect on the Company’s business, financial condition, and results of operations or cash flows.

Information regarding certain specific legal proceedings in which the Company is involved is contained in Part II, Item 1, and in Note 9 to the notes to the condensed consolidated financial statements included in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019.  Unless otherwise indicated in this report, all proceedings discussed in the earlier report which are not indicated therein as having been concluded, remain outstanding as of September 30, 2019.

As previously reported, on July 6, 2018, the Company received an administrative subpoena from the Office of the Attorney General of the State of New Jersey (“NJ OAG”).  Pursuant to the subpoena, the NJ OAG requested certain documents and detailed information relating to the November 21, 2012 Civil Investigative Demand letter addressed to the Company by the Massachusetts Office of the Attorney General (“MOAG”) that resulted in a previously reported Final Judgment by Consent between the Company and the MOAG dated July 13, 2015.  The Company responded to this request and, by letter dated April 11, 2019, the NJ OAG issued a supplemental subpoena requesting additional information for the time period from April 11, 2014 to the present.  The Company submitted its response to the supplemental subpoena.  Subsequently, by email dated August 20, 2019, the NJ OAG requested additional records of the Company from the years 2012 and 2013.  The Company has responded to the NJ OAG’s most recent record request and is continuing to cooperate with the NJ OAG.

10.
SEGMENTS

The for-profit education industry has been impacted by numerous regulatory changes, a changing economy and an onslaught of negative media attention. As a result of these challenges, student populations have declined and operating costs have increased.  Over the past few years, the Company has closed over ten locations and exited its online business.

In August 2018, the Company decided to cease operations, effective December 31, 2018, of its Lincoln College of New England (“LCNE”) campus at Southington, Connecticut.  The Company completed the teach-out and exited the LCNE campus on December 31, 2018.  LCNE results, which was previously reported in the HOPS segment, is now included in the Transitional segment for all periods presented.

In the past, we offered any combination of programs at any campus.  We have shifted our focus to program offerings that create greater differentiation among campuses and promote attainment of excellence to attract more students and gain market share.  Also, strategically, we began offering continuing education training to select employers who hire our graduates and this is best achieved at campuses focused on the applicable profession.

As a result of the regulatory environment, market forces and our strategic decisions, we now operate our business in three reportable segments: (a) the Transportation and Skilled Trades segment; (b) the Healthcare and Other Professions segment; and (c) the Transitional segment.  Our reportable segments have been determined based on a method by which we now evaluate performance and allocate resources.  Each reportable segment represents a group of post-secondary education providers that offer a variety of degree and non-degree academic programs.  These segments are organized by key market segments to enhance operational alignment within each segment to more effectively execute our strategic plan.  Each of the Company’s schools is a reporting unit and an operating segment.  Our operating segments are described below.

18

Transportation and Skilled Trades – The Transportation and Skilled Trades segment offers academic programs mainly in the career-oriented disciplines of transportation and skilled trades (e.g. automotive, diesel, HVAC, welding and manufacturing).

Healthcare and Other Professions – The Healthcare and Other Professions segment offers academic programs in the career-oriented disciplines of health sciences, hospitality and business and information technology (e.g. dental assistant, medical assistant, practical nursing, culinary arts and cosmetology).

Transitional – The Transitional segment refers to campuses that are being taught-out and closed and operations that are being phased out.  The schools in the Transitional segment employ a gradual teach-out process that enables the schools to continue to operate to allow their current students to complete their course of study.  These schools are no longer enrolling new students.

The Company continually evaluates each campus for profitability, earning potential, and customer satisfaction.  This evaluation takes several factors into consideration, including the campus’s geographic location and program offerings, as well as skillsets required of our students by their potential employers.  The purpose of this evaluation is to ensure that our programs provide our students with the best possible opportunity to succeed in the marketplace with the goals of attracting more students to our programs and, ultimately, to provide our shareholders with the maximum return on their investment.  Campuses in the Transitional segment have been subject to this process and have been strategically identified for closure.

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.

Summary financial information by reporting segment is as follows:

   
For the Three Months Ended September 30,
 
   
Revenue
   
Operating Income (Loss)
 
   
2019
   
% of
Total
   
2018
   
% of
Total
   
2019
   
2018
 
Transportation and Skilled Trades
 
$
52,652
     
72.5
%
 
$
51,008
     
72.8
%
 
$
6,752
   
$
6,330
 
Healthcare and Other Professions
   
19,942
     
27.5
%
   
18,249
     
26.0
%
   
1,403
     
830
 
Transitional
   
-
     
0.0
%
   
821
     
1.2
%
   
-
     
(1,863
)
Corporate
   
-
     
0.0
%
   
-
     
0.0
%
   
(6,012
)
   
(5,221
)
Total
 
$
72,594
     
100.0
%
 
$
70,078
     
100.0
%
 
$
2,143
   
$
76
 

   
For the Nine Months Ended September 30,
 
   
Revenue
   
Operating Income (Loss)
 
   
2019
   
% of
Total
   
2018
   
% of
Total
   
2019
   
2018
 
Transportation and Skilled Trades
 
$
141,005
     
70.7
%
 
$
135,838
     
70.4
%
 
$
11,051
   
$
8,747
 
Healthcare and Other Professions
   
58,422
     
29.3
%
   
52,554
     
27.2
%
   
4,214
     
2,747
 
Transitional
   
-
     
0.0
%
   
4,695
     
2.4
%
   
-
     
(2,899
)
Corporate
   
-
     
0.0
%
   
-
     
0.0
%
   
(20,079
)
   
(18,305
)
Total
 
$
199,427
     
100.0
%
 
$
193,087
     
100.0
%
 
$
(4,814
)
 
$
(9,710
)

   
Total Assets
 
   
September 30, 2019
   
December 31, 2018
 
Transportation and Skilled Trades
 
$
111,132
   
$
92,070
 
Healthcare and Other Professions
   
27,926
     
14,078
 
Transitional
   
-
     
527
 
Corporate
   
22,679
     
39,363
 
Total
 
$
161,737
   
$
146,038
 

19

11.
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 Condensed Consolidated Balance Sheet, are listed in the table below:

   
September 30, 2019
 
   
Carrying
Amount
   
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Total
 
Financial Assets:
                             
Cash and cash equivalents
 
$
11,757
   
$
11,757
   
$
-
   
$
-
   
$
11,757
 
Restricted cash
   
3,997
     
3,997
     
-
     
-
     
3,997
 
Prepaid expenses and other current assets
   
4,257
     
-
     
4,257
     
-
     
4,257
 
                                         
Financial Liabilities:
                                       
Accrued expenses
 
$
9,523
   
$
-
   
$
9,523
   
$
-
   
$
9,523
 
Other short term liabilities
   
595
     
-
     
595
     
-
     
595
 
Credit facility and term loan
   
26,902
     
-
     
20,182
     
-
     
20,182
 

We estimate 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, Restricted cash and Noncurrent restricted cash approximate fair value because they are highly liquid.

The carrying amounts reported on the Consolidated Balance Sheets for Prepaid expenses and other current assets, Accrued expenses and Other short term liabilities approximate fair value due to the short-term nature of these items.

12.
SUBSEQUENT EVENTS

(a)  Sale of Series A Convertible Preferred Stock.
On November 14, 2019, the Company raised gross proceeds of $12,700,000 from the sale of 12,700 shares of its newly-designated Series A Convertible Preferred Stock, no par value per share. See Part II, Item 5 Other Information “Sale of Series A Convertible Preferred Stock” for a description of the transaction and the rights of the Series A Preferred Stock and the holders thereof.

(b)  Replacement Credit Facility with Sterling National Bank
On November 14, 2019, the Company entered into a new senior secured credit agreement with its lender, Sterling National Bank.
See Part II, Item 5 Other Information “$60 Million Credit Facility with Sterling National Bank” for a description of the new credit facility.

Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
All references in this Quarterly Report to “we,” “our,” “us” and the “Company,” refer to Lincoln Educational Services Corporation and its subsidiaries unless the context indicates otherwise.

The following discussion may contain forward-looking statements regarding the Company, our business, prospects and our results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, those described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission (the “SEC”) and in our other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.  We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise.  Readers are urged to carefully review and consider the various disclosures made by us in this Quarterly Report and in our other reports filed with the SEC that advise interested parties of the risks and factors that may affect our business.

20

The interim financial statements and related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and the discussions contained herein should be read in conjunction with the annual financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC, which includes audited consolidated financial statements for our three fiscal years ended December 31, 2018.

General

The Company provides diversified career-oriented post-secondary education to recent high school graduates and working adults.  The Company offers programs in automotive technology, skilled trades (which include HVAC, welding and computerized numerical control and electrical and electronic systems technology, among other programs), healthcare services (which include nursing, dental assistant and medical administrative assistant, among other programs), hospitality services (which include culinary, therapeutic massage, cosmetology and aesthetics) and information technology programs.  The schools, currently consisting of 22 schools in 14 states, operate under Lincoln Technical Institute, Lincoln College of Technology, Lincoln Culinary Institute, and Euphoria Institute of Beauty Arts and Sciences and associated brand names.  Most of the campuses serve major metropolitan markets and each typically offers courses in multiple areas of study.  Five of the campuses are destination schools, which attract students from across the United States and, in some cases, from abroad. The Company’s other campuses primarily attract students from their local communities and surrounding areas.  All of the campuses are nationally or regionally accredited and are eligible to participate in federal financial aid programs by the U.S. Department of Education (the “DOE”) and applicable state education agencies and accrediting commissions, which allow students to apply for and access federal student loans as well as other forms of financial aid.

Our business is organized into three reportable business segments:  (a) Transportation and Skilled Trades, (b) Healthcare and Other Professions or “HOPS”, and (c) Transitional, which refers to businesses that have been taught out.

In August 2018, the Company’s wholly-owned subsidiary, New England Institute of Technology at Palm Beach, Inc. (“NEIT”), sold to Elite Property Enterprise, LLC real property owned by  NEIT located at 1126 53rd Court North, Mangonia Park, Palm Beach County, Florida and the improvements and certain personal property located thereon (the “Mangonia Park Property”), for a cash purchase price of $2,550,000.  At closing, NEIT paid a real estate brokerage fee equal to 5% of the gross sales price and other customary closing costs and expenses.  Pursuant to the provisions of the Company’s credit facility with its lender, Sterling National Bank, the net cash proceeds of the sale of the Mangonia Park Property were deposited into an account with the lender to serve as additional security for loans and other financial accommodations provided to the Company and its subsidiaries under the credit facility.  In December 2018, the funds were used to repay the outstanding principal balance of the loans outstanding under the credit facility and such repayment permanently reduced the revolving loan availability under the credit facility designated as Facility 1 under the Company’s Credit Agreement to $22.7 million.

Effective December 31, 2018, the Company completed the teach-out and ceased operation of its Lincoln College of New England (“LCNE”) campus at Southington, Connecticut.  The decision to close the LCNE campus followed the previously reported placement of LCNE on probation by the college’s institutional accreditor, the New England Association of Schools and Colleges (“NEASC”).  After evaluating alternative options, the Company concluded that teaching out and closing the campus was in the best interest of the Company and its students.  Subsequent to formalizing the LCNE closure decision in August 2018, the Company partnered with Goodwin College, another NEASC- accredited institution in the region, to assist LCNE students to complete their programs of study.  The majority of the LCNE students will continue their education at Goodwin College thereby limiting some of the Company’s closing costs.  The Company recorded net costs associated with the closure of the LCNE campus in 2018 of approximately $4.3 million, including (i) $1.6 million in connection with the termination of the LCNE campus lease, which is the net present value of the remaining obligation, to be paid in equal monthly installments through January 2020, (ii) approximately $700,000 of severance payments and (iii) $2.0 million of additional operating losses related to no longer enrolling additional students during 2018.  LCNE results, previously reported in the HOPS segment, were included in the Transitional segment as of December 31, 2018.

As of September 30, 2019, we had 12,015 students enrolled at 22 campuses in our programs.

Recent Developments

Subsequent to the end of the fiscal quarter ended September 30, 2019, on November 14, 2019, the Company raised $12,700,000 from the sale of 12,700 shares of its Series A Convertible Preferred Stock, no par value per share (the “Series A Preferred Stock”), authorized by its Board of Directors.  The Series A Preferred Stock was sold by the Company pursuant to a Securities Purchase Agreement dated as of November 14, 2019 among the Company, Juniper Targeted Opportunity Fund, L.P. and Junior Targeted Opportunities, L.P. (together, “Juniper”) another investor party thereto (such investor, together with Juniper, the “Investors”). The proceeds of the sale net of transaction expenses will be used for working capital or other general corporate purposes.  See the discussion of the Securities Purchase Agreement, the Series A Preferred Stock and the Registration Rights Agreement under the heading Part II. Item 5. Other Information “Sales of Series A Convertible Preferred Stock”.

Subsequent to the end of the fiscal quarter ended September 30, 2019, on November 14, 2019, the Company entered into a new $60 million credit facility with Sterling National Bank, which replaced the existing credit facility between the Company and Sterling National Bank.  Additional information regarding the terms of this replacement credit facility is included under the heading in Part II, Item 5. Other Information “$60 Million Credit Facility with Sterling National Bank”.

21

Critical Accounting Policies and Estimates

For a description of our critical accounting policies and estimates, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” and Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and Note 1 to the consolidated financial statements included in this Form 10-Q for the quarter ended September 30, 2019.

Effect of Inflation

Inflation has not had a material effect on our operations.

Results of Continuing Operations for the Three and Nine Months Ended September 30, 2019
 
The following table sets forth selected consolidated statements of continuing operations data as a percentage of revenues for each of the periods indicated:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2019
   
2018
   
2019
   
2018
 
Revenue
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%
Costs and expenses:
                               
Educational services and facilities
   
45.7
%
   
49.4
%
   
46.6
%
   
49.3
%
Selling, general and administrative
   
51.6
%
   
56.4
%
   
55.9
%
   
58.5
%
(Gain) loss on sale of assets
   
-0.3
%
   
0.0
%
   
-0.1
%
   
0.1
%
Total costs and expenses
   
97.0
%
   
105.8
%
   
102.4
%
   
107.9
%
Operating gain (loss)
   
3.0
%
   
-5.8
%
   
-2.4
%
   
-7.9
%
Interest expense, net
   
-1.1
%
   
-0.8
%
   
-1.1
%
   
-0.9
%
Loss from operations before income taxes
   
1.9
%
   
-6.6
%
   
-3.5
%
   
-8.8
%
Provision for income taxes
   
0.0
%
   
0.1
%
   
0.1
%
   
0.1
%
Net Loss
   
1.9
%
   
-6.7
%
   
-3.6
%
   
-8.9
%

Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

Consolidated Results of Operations

Revenue.   Revenue increased by $2.5 million, or 3.6%, to $72.6 million for the three months ended September 30, 2019 from $70.1 million in the prior year comparable period.  Excluding the Transitional segment, which had revenue of zero and $0.8 million for the three months ended September 30, 2019 and 2018 respectively, revenue increased by $3.3 million, or 4.8%.  The increase in revenue is due to a 3.3% increase in average student population, which is attributed to the Company’s consistent student start growth over the last two years.

Total student starts increased by 2.7% for the three months ended September 30, 2019 as compared to the prior year comparable period.  Excluding the Transitional segment student starts increased 3.4% quarter over quarter.

For a general discussion of trends in our student enrollment, see “Seasonality and Outlook” below.

22

Educational services and facilities expense.  Our educational services and facilities expense decreased by $0.3 million, or 0.8%, to $33.2 million for the three months ended September 30, 2019 from $33.5 million in the prior year comparable period.  Excluding the Transitional segment, which had expense of $1.2 million in the prior year quarter, educational services and facilities expenses increased $0.9 million.  The increase was primarily the result of increases in instructional salaries and benefits expense and books and tools expense resulting from a larger student population quarter over quarter. Educational services and facilities expense, as a percentage of revenue, decreased to 45.7% for the three months ended September 30, 2019 from 49.4% in the prior year comparable period.

Selling, general and administrative expense.   Our selling, general and administrative expense increased $1.4 million, or 3.8%, to $37.5 million for the three months ended September 30, 2019 from $36.1 million in the prior year comparable period.   Excluding the Transitional segment, which had expenses of $1.5 million, selling, general and administrative expenses increased $2.9 million. This increase was primary driven by additional bad debt expense driven in part by a larger student population, in combination with a slight deterioration of historical repayment rates.  Further contributing to increased costs were increases in salaries and benefits expense in addition to costs incurred in connection with the evaluation of strategic initiatives intended to increase shareholder value.  No additional costs pertaining to these strategic initiatives will be incurred going forward.

Net interest expense.   Net interest expense remained essentially flat at $0.7 million and $0.6 million for the three months ended September 30, 2019 and 2018, respectively.

Income taxes.    Our provision for income taxes has remained essentially flat at less than $0.1 million for the three months ended September 30, 2019 and 2018 respectively.

No federal or state income tax benefit was recognized for the current period loss due to the recognition of a full valuation allowance.  Minimal state income tax expenses were recognized during the quarter.

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Consolidated Results of Operations

Revenue.   Revenue increased by $6.3 million, or 3.3%, to $199.4 million for the nine months ended September 30, 2019 from $193.1 million in the prior year comparable period.  Excluding the Transitional segment, which had revenue of zero and $4.7 million for the nine months ended September 30, 2019 and 2018 respectively, revenue increased by $11.0 million, or 5.9%. The increase in revenue is due to a 3.3% increase in average student population, which is attributed to the Company’s consistent student start growth over the last two years.

Total student starts increased by 2.6% for the nine months ended September 30, 2019 as compared to the prior year comparable period.  Excluding the Transitional segment student starts increased 4% year over year.  We attribute this growth to our improved processes in marketing and admissions.

For a general discussion of trends in our student enrollment, see “Seasonality and Outlook” below.

Educational services and facilities expense.  Our educational services and facilities expense decreased by $1.2 million, or 1.3%, to $92.9 million for the nine months ended September 30, 2019 from $94.2 million in the prior year comparable period.  Excluding the Transitional segment, which had expense of $3.9 million in the prior year, educational services and facilities expenses increased $2.7 million.  The increase was primarily the result of increases in instructional salaries and benefits expense and books and tools expense resulting from a larger student population year over year. Educational services and facilities expense, as a percentage of revenue, decreased to 46.6% for the three months ended September 30, 2019 from 49.3% in the prior year comparable period.

Selling, general and administrative expense.   Our selling, general and administrative expense increased $3.4 million, or 3.2%, to $111.5 million for the nine months ended September 30, 2019 from $108.1 million in the prior year comparable period.   Excluding the Transitional segment, which had expense of $3.7 million in the prior year, selling, general and administrative expenses increased $7.1 million.  This increase was primary driven by additional bad debt expense driven in part by a larger student population, in combination with a slight deterioration of historical repayment rates.  Further contributing to increased costs were investments made in sales and marketing expense expected to yield continued start growth over the next several quarters in addition to increases in salaries and benefits expense. Additional costs were incurred in connection with the evaluation of strategic initiatives intended to increase shareholder value.  No additional costs pertaining to these strategic initiatives will be incurred going forward.

Net interest expense.   Net interest expense increased $0.4 million, or 24.2%, to $2.1 million for the nine months ended September 30, 2019 from $1.7 million in the prior year comparable period.  This increase in expense is a direct result of slight increases in both principal balance and interest rates in addition to the write-off of some non-cash deferred finance fees.

23

Income taxes.    Our provision for income taxes has remained essentially flat at $0.2 million for the nine months ended September 30, 2019 and 2018 respectively

As of September 30, 2019, the full valuation allowance was reduced for deferred tax liability related to indefinite lived intangibles by $0.1 million and $0.1 million of deferred tax expense was recognized.  In addition, minimal state tax expenses were recognized for the nine months ended September 30, 2019.

As of September 30, 2019, $0.4 million of deferred tax asset for refundable AMT credits was reclassified to income tax receivable as we expect to receive the refund of these credits upon future corporate income tax return filings.
 
Segment Results of Operations
 
The for-profit education industry has been impacted by numerous regulatory changes, a changing economy and an onslaught of negative media attention. As a result of these challenges, student populations have declined and operating costs have increased.  Over the past few years, the Company has closed over ten locations and exited its online business.

In the past, we offered any combination of programs at any campus.  We have shifted our focus to program offerings that create greater differentiation among campuses and promote attainment of excellence to attract more students and gain market share.  Also, strategically, we began offering continuing education training to select employers who hire our graduates and this is best achieved at campuses focused on the applicable profession.

As a result of the regulatory environment, market forces and our strategic decisions, we now operate our business in three reportable segments: (a) the Transportation and Skilled Trades segment; (b) the Healthcare and Other Professions segment; and (c) the Transitional segment.  Our reportable segments have been determined based on a method by which we now evaluate performance and allocate resources.  Each reportable segment represents a group of post-secondary education providers that offer a variety of degree and non-degree academic programs.  These segments are organized by key market segments to enhance operational alignment within each segment to more effectively execute our strategic plan.  Each of the Company’s schools is a reporting unit and an operating segment.  Our operating segments are described below.

Transportation and Skilled Trades – The Transportation and Skilled Trades segment offers academic programs mainly in the career-oriented disciplines of transportation and skilled trades (e.g. automotive, diesel, HVAC, welding and manufacturing).
 
Healthcare and Other Professions – The Healthcare and Other Professions segment offers academic programs in the career-oriented disciplines of health sciences, hospitality and business and information technology (e.g. dental assistant, medical assistant, practical nursing, culinary arts and cosmetology).
 
Transitional – The Transitional segment refers to campuses that are being taught-out and closed and operations that are being phased out.  The schools in the Transitional segment employ a gradual teach-out process that enables the schools to continue to operate to allow their current students to complete their course of study.  These schools are no longer enrolling new students.

The Company continually evaluates each campus for profitability, earning potential, and customer satisfaction.  This evaluation takes several factors into consideration, including the campus’s geographic location and program offerings, as well as skillsets required of our students by their potential employers.  The purpose of this evaluation is to ensure that our programs provide our students with the best possible opportunity to succeed in the marketplace with the goals of attracting more students to our programs and, ultimately, to provide our shareholders with the maximum return on their investment.  Campuses classified in the Transitional segment have been subject to this process and have been strategically identified for closure.  As of September 30, 2019, no campuses have been categorized in the Transitional segment.
 
We evaluate segment performance based on operating results.  Adjustments to reconcile segment results to consolidated results are included under the caption “Corporate,” which primarily includes unallocated corporate activity.

24

The following table present results for our three reportable segments for the three months ended September 30, 2019 and 2018:
 
   
Three Months Months Ended Sept 30,
 
   
2019
   
2018
   
% Change
 
Revenue:
                 
Transportation and Skilled Trades
 
$
52,652
   
$
51,008
     
3.2
%
Healthcare and Other Professions
   
19,942
     
18,249
     
9.3
%
Transitional
   
-
     
821
     
-100.0
%
Total
 
$
72,594
   
$
70,078
     
3.6
%
                         
Operating Income (Loss):
                       
Transportation and Skilled Trades
 
$
6,752
   
$
6,330
     
6.7
%
Healthcare and Other Professions
   
1,403
     
830
     
69.0
%
Transitional
   
-
     
(1,863
)
   
100.0
%
Corporate
   
(6,012
)
   
(5,221
)
   
-15.2
%
Total
 
$
2,143
   
$
76
     
2719.7
%
                         
Starts:
                       
Transportation and Skilled Trades
   
3,398
     
3,391
     
0.2
%
Healthcare and Other Professions
   
1,381
     
1,232
     
12.1
%
Transitional
   
-
     
30
     
-100.0
%
Total
   
4,779
     
4,653
     
2.7
%
                         
Average Population:
                       
Transportation and Skilled Trades
   
7,635
     
7,453
     
2.4
%
Healthcare and Other Professions
   
3,619
     
3,317
     
9.1
%
Transitional
   
-
     
127
     
-100.0
%
Total
   
11,254
     
10,897
     
3.3
%
                         
End of Period Population:
                       
Transportation and Skilled Trades
   
8,055
     
7,922
     
1.7
%
Healthcare and Other Professions
   
3,960
     
3,637
     
8.9
%
Transitional
   
-
     
173
     
-100.0
%
Total
   
12,015
     
11,732
     
2.4
%
 
Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

Transportation and Skilled Trades
 
Student starts for the quarter increased slightly for the three months ended September 30, 2019 when compared to the prior year comparable period.

Operating income increased $0.4 million, to $6.8 million for the three months ended September 30, 2019 from $6.3 million in the prior year comparable period mainly due to the following factors:


Revenue increased $1.6 million, or 3.2%, to $52.7 million for the three months ended September 30, 2019, as compared to $51.0 million in the prior year comparable period.  The increase in revenue is due to a 2.4% increase in average student population quarter over quarter.

Educational services and facilities expense increased $0.3 million, or 1.2% to $23.7 million for the three months ended September 30, 2019, as compared to $23.4 million in the prior year comparable period.  The increase quarter over quarter is primarily due to a larger student population driving a $0.6 million increase in instructional expenses and books and tools expense.  Partially offsetting the increases were cost savings of $0.3 million in facilities expense resulting from the successful negotiation of more favorable lease terms at one of our campuses.

25


Selling, general and administrative expense increased $1.1 million, or 5.4%, to $22.4 million for the three months ended September 30, 2019, from $21.3 million in the prior year comparable period.  Increased expenses were primarily the result of additional bad debt expense driven in part by a larger student population, in combination with a slight deterioration of historical repayment rates.  Further contributing to the additional expense were increases in salaries and benefits.

Healthcare and Other Professions
 
Student starts increased by 12.1% for the three months ended September 30, 2019 when compared to the prior year comparable period.

Operating income increased by $0.6 million, to $1.4 million for the three months ended September 30, 2019 from $0.8 million in the prior year comparable period mainly due to the following factors:


Revenue increased by $1.7 million, or 9.3%, to $19.9 million for the three months ended September 30, 2019, as compared to $18.3 million in the prior year comparable period.  The increase in revenue was mainly due to a 9.1% increase in average student population, which is attributed to consistent start growth over the last two years.

Educational services and facilities expense increased $0.6 million, or 7.1%, to $9.5 million for the three months ended September 30, 2019, from $8.9 million in the prior year comparable period.  The increase in expense quarter over quarter was primarily due to additional instructional expense driven by a consistently growing student population.

Selling, general and administrative expense increased by $0.5 million, or 5.7%, to $9 million for the three months ended September 30, 2019 from $8.6 million in the prior year comparable period.  Increased expense was primarily the result of additional bad debt expense driven by a larger student population in combination with a slight deterioration of historical repayment rates.

Transitional
During the year ended December 31, 2018, one campus, the LCNE campus at Southington, Connecticut was categorized in the Transitional segment.  This campus has been fully taught out of as of December 31, 2018 and financial information for this campus has been included in the Transitional segment for the period ending September 30, 2018.  As of September 30, 2019, no campuses have been categorized in the Transitional segment.

Revenue was zero and $0.8 million for the three months ended September 30, 2019 and 2018 respectively.  Operating loss was zero and $1.9 million for the three months ended September 30, 2019 and 2018, respectively.

Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire Company.  Corporate and other expenses were $6.0 million for the three months ended September 30, 2019 as compared to $5.2 million in the prior year comparable period.  Additional expense was primarily the result of increases in salaries and benefits expense and costs incurred in connection with the evaluation of strategic initiatives intended to increase shareholder value.  No additional costs pertaining to these strategic initiatives will be incurred going forward.

26

The following table present results for our three reportable segments for the nine months ended September 30, 2019 and 2018:

   
Nine Months Ended September 30,
 
   
2019
   
2018
   
% Change
 
Revenue:
                 
Transportation and Skilled Trades
 
$
141,005
   
$
135,838
     
3.8
%
Healthcare and Other Professions
   
58,422
     
52,554
     
11.2
%
Transitional
   
-
     
4,695
     
-100.0
%
Total
 
$
199,427
   
$
193,087
     
3.3
%
                         
Operating Income (Loss):
                       
Transportation and Skilled Trades
 
$
11,051
   
$
8,747
     
26.3
%
Healthcare and Other Professions
   
4,214
     
2,747
     
53.4
%
Transitional
   
-
     
(2,899
)
   
100.0
%
Corporate
   
(20,079
)
   
(18,305
)
   
-9.7
%
Total
 
$
(4,814
)
 
$
(9,710
)
   
50.4
%
                         
Starts:
                       
Transportation and Skilled Trades
   
7,247
     
7,156
     
1.3
%
Healthcare and Other Professions
   
3,368
     
3,048
     
10.5
%
Transitional
   
-
     
140
     
-100.0
%
Total
   
10,615
     
10,344
     
2.6
%
                         
Average Population:
                       
Transportation and Skilled Trades
   
7,169
     
6,891
     
4.0
%
Healthcare and Other Professions
   
3,581
     
3,245
     
10.4
%
Transitional
   
-
     
269
     
-100.0
%
Total
   
10,750
     
10,405
     
3.3
%
                         
End of Period Population:
                       
Transportation and Skilled Trades
   
8,055
     
7,922
     
1.7
%
Healthcare and Other Professions
   
3,960
     
3,637
     
8.9
%
Transitional
   
-
     
173
     
-100.0
%
Total
   
12,015
     
11,732
     
2.4
%

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Transportation and Skilled Trades
 
Student starts increased approximately 1.3% for the nine months ended September 30, 2019 when compared to the prior year comparable period.

Operating income increased by $2.3 million, or 26.3%, to $11.1 million for the nine months ended September 30, 2019 from $8.8 million in the prior year comparable period mainly due to the following factors:


Revenue increased by $5.2 million, or 3.8%, to $141 million for the nine months ended September 30, 2019, as compared to $135.8 million in the prior year comparable period.  The increase in revenue is primarily due to a 4% increase in average student population year over year.

Educational services and facilities expense increased $0.4 million, or 0.6% to $64.8 million for the nine months ended September 30, 2019, as compared to $64.4 million in the prior year comparable period.  Increased costs are primarily due to $1.4 million of additional instructional expenses and books and tools expense resulting from a higher student population.  Partially offsetting the increases were cost savings of $1.0 million in facilities expense resulting from the successful negotiation of more favorable lease terms at one of our campuses.

27


Selling, general and administrative expense increased $2.7 million, or 4.3%, to $65.4 million for the nine months ended September 30, 2019, from $62.7 million in the prior year comparable period.  Increased expenses were primarily the result of additional bad debt expense driven in part by a larger student population, in combination with a slight deterioration of historical repayment rates.  Further contributing to the additional expense were increases in salaries and benefits expense and increased sales expense and marketing expense.  Additional investment in sales expense and marketing expense are expected to yield continued start growth over the next several quarters.

Healthcare and Other Professions
 
Student starts increased 10.5% for the nine months ended September 30, 2019 when compared to the prior year comparable period.

Operating income increased by $1.5 million, or 53.4%, to $4.2 million for the nine months ended September 30, 2019 from $2.7 million in the prior year comparable period mainly due to the following factors:


Revenue increased by $5.9 million, or 11.2%, to $58.4 million for the nine months ended September 30, 2019, as compared to $52.6 million in the prior year comparable period.  The increase in revenue was mainly due to a 10.4% increase in average student population, which is attributed to consistent start growth over the last two years.

Educational services and facilities expense increased $2.3 million, or 9%, to $28.2 million for the nine months ended September 30, 2019, from $25.9 million in the prior year comparable period.  The increase in expense was primarily driven by additional instructional expense and books and tools expense due to a 10.4% increase in average student population year over year. Further contributing to the increased costs were increases in facilities expense.

Selling, general and administrative expense increased by $2.1 million, or 8.7%, to $26.0 million for the nine months ended September 30, 2019 from $23.9 million in the prior year comparable period.  Increases in expense were primarily the result of additional bad debt expense driven in part by a larger student population, in combination with a slight deterioration of historical repayment rates.

Transitional
During the year ended December 31, 2018, one campus, the LCNE campus at Southington, Connecticut was categorized in the Transitional segment.  This campus has been fully taught out as of December 31, 2018 and financial information for this campus has been included in the Transitional segment for the period ending September 30, 2018.  As of September 30, 2019, no campuses have been categorized in the Transitional segment.

Revenue was zero and $4.7 million for the nine months ended September 30, 2019 and 2018, respectively.  Operating loss was zero and $2.9 million for the nine months ended September 30, 2019 and 2018, respectively.

Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire Company.  Corporate and other expenses were $20.1 million for the nine months ended September 30, 2019 as compared to $18.3 million in the prior year comparable period.  Additional expense was primarily the result of increases in salaries and benefits expense and costs incurred in connection with the evaluation of strategic initiatives intended to increase shareholder value.  No additional costs pertaining to these strategic initiatives will be incurred going forward.

LIQUIDITY AND CAPITAL RESOURCES
Our primary capital expenditures are for facilities expansion and maintenance, 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 nine months ended September 30, 2019 and 2018:

   
Nine Months Ended
September 30,
 
   
2019
   
2018
 
Net cash used in operating activities
 
$
(4,893
)
 
$
(5,816
)
Net cash used in investing activities
   
(3,061
)
   
(1,869
)
Net cash used in financing activities
   
(22,238
)
   
(28,866
)

As of September 30, 2019, the Company had a net debt balance of $11.4 million compared to a net debt balance of $3.4 million as of December 31, 2018.  The decrease in cash position can mainly be attributed to the repayment of $27.2 million in borrowings under our line of credit facility; a net loss during the nine months ended September 30, 2019; and seasonality of the business.  Management believes that the Company has adequate resources in place to execute its 2019 operating plan.

28

For the last several years, the Company and the proprietary school sector generally have faced deteriorating earnings growth. Government regulations have negatively impacted earnings by making it more difficult for prospective students to obtain loans, which when coupled with the overall economic environment have hindered prospective students from enrolling in our schools. In light of these factors, we have incurred significant operating losses as a result of lower student population.  However, our financial and population results continue to improve as evidenced by our start growth for the last two years.  As a result, we believe that our likely sources of cash should be sufficient to fund operations for the next twelve months and thereafter for the foreseeable future.

To fund our business plans, including any anticipated future losses, purchase commitments, capital expenditures and principal and interest payments on borrowings, we leveraged our owned real estate. We are also continuing to take actions to improve cash flow by aligning our cost structure to our student population, in addition to our current sources of capital that provide short term liquidity.

Our primary source of cash is tuition collected from our students. The majority of students enrolled at our schools rely on funds received under various government-sponsored student financial aid programs to pay a substantial portion of their tuition and other education-related expenses. The most significant source of student financing is Title IV Programs, which represented approximately 78% of our cash receipts relating to revenues in 2018. 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 accre