# Lincoln Educational Services Corp: Form 10-Q for the period ended Sep 30, 2023

- Company: [Lincoln Educational Services Corp](/companies/linc.md) (CIK 1286613)
- Form: 10-Q
- Filed: 2023-11-06
- Accepted by EDGAR: Nov 6, 2023, 15:08 ET
- Period: 2023-09-30
- Accession: 0001140361-23-051555
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1286613/000114036123051555/ef20012476_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1286613/000114036123051555/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $99.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $275.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $43.1m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $121.3m | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $54.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-30 | $156.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $2.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | $24.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $21.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $74.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $789.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $7.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $2.1m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $19.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.07 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $0.63 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.07 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $0.64 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 30,698,475 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 30,455,155 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $3.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $28.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $891.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $41.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $130.7m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $315.8m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $66.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $158.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $157.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 65,527 characters.

All references in this Quarterly Report on Form 10-Q (“Form 10-Q”) 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. Such statements may be identified by the use of words such as “expect,” “estimate,” “assume,” “believe,” “anticipate,” "may," “will,” “forecast,” “outlook,” “plan,” “project,” or similar words and include, without limitation, statements relating to future enrollment, revenues, revenues per student, earnings growth, operating expenses, capital expenditures, and effect of pandemics such as the COVID-19 pandemic and its ultimate effect on the Company’s business and results. These statements are based on the Company’s current expectations and are subject to a number of assumptions, risks and uncertainties. Additional factors that could cause or contribute to differences between our actual results and those anticipated include, but are not limited to, those described in the “Risk Factors” section of our Form 10-K 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 Form 10-Q and in our other reports filed with the SEC that advise interested parties of the risks and factors that may affect our business.

As of January 1, 2023, the Company’s business is organized into two reportable business segments: (a) Campus Operations; and (b) Transitional. Based on trends in student demand and program expansion, there have been more cross-offerings of programs among the various campuses. Given this change, the Company has revised the way it manages the business, evaluates performance and allocates resources, resulting in an updated segment structure. The Campus Operations segment includes campuses that are continuing in operation and contribute to the Company’s core operations and performance. The Transitional segment refers to businesses that are marked for closure and are currently being taught-out. As of September 30, 2023, the only campus classified in the Transitional segment is the Somerville, Massachusetts campus. The campus has been fully taught-out and will continue to incur some additional closing costs until year-end 2023. Total estimated costs to close the campus will approximate $2.0 million.

We evaluate performance based on operating results. Adjustments to reconcile segment results to consolidated results are included in the caption “Corporate,” which primarily includes unallocated corporate activity. The interim financial statements and related notes thereto appearing elsewhere in this Form 10-Q and the discussions contained herein should be read in conjunction with the annual financial statements and notes thereto included in our Form 10-K, which includes audited Consolidated Financial Statements for the last two fiscal years ended December 31, 2022.

### 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, 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 campuses in 14 states, operate under Lincoln Technical Institute, Lincoln College of Technology, Lincoln Culinary Institute, 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 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.

### Purchase Transaction – Philadelphia, Pennsylvania Area Campus

On September 28, 2023, the Company purchased a 90,000 square foot property located at 311 Veterans Highway, Levittown, Pennsylvania for approximately $10.2 million. The Company expects to invest approximately $17.0 million in the buildout of new classrooms and training areas to ensure a best-in-class campus that provides a positive experience for students, faculty, and industry partners. Furthermore, the Company plans to sell the property in the coming months to recover the purchase price and simultaneously enter into a leaseback agreement for approximately 20 years. This property is currently classified as held-for-sale on the Condensed Consolidated Balance Sheet.

The Company has served the Philadelphia, Pennsylvania area at its current campus located at 9191 Torresdale Avenue for more than 60 years. The new Levittown, Pennsylvania campus is expected to open in the first quarter of 2025 and is not expected to impact the student experience at the existing campus at 9191 Torresdale Avenue, which today serves about 250 Automotive Technology students. The existing campus will continue to operate until the buildout at the new location is fully complete to ensure a seamless transition. The new and significantly larger campus is projected to have an average population of approximately 600 students providing educational opportunities for students from Philadelphia, points north in Pennsylvania, as well as neighboring Trenton and Camden, New Jersey. Additionally, the facility will have the extra capacity to accommodate several potential industry partners and future program expansions.

### Property Sale Agreement - Nashville, Tennessee Campus

On September 24, 2021, Nashville Acquisition, LLC, a subsidiary of the Company, entered into a Contract for the Purchase of Real Estate (the “Nashville Contract”) to sell the nearly 16-acre property located at 524 Gallatin Avenue, Nashville, Tennessee 37206, at which the Company operates its Nashville campus, to SLC Development, LLC, a subsidiary of Southern Land Company (“SLC”).

On June 8, 2023, the Company closed on the sale of its Nashville, Tennessee property to East Nashville Owner, LLC, an affiliate of SLC, for approximately $33.8 million pursuant to the Nashville Contract. The net proceeds from the Nashville sale, net of closing costs, are available for working capital, acquisitions, other strategic initiatives, and general corporate purposes. In connection with the sale, the parties entered into a lease agreement allowing Lincoln to continue to occupy the campus and operate it on a rent-free basis for a period of 15 months plus options to extend the lease for up to three consecutive 30-day terms at $150,000 per extension term. The carrying value of the campus is approximately $4.5 million and the estimated fair value of the rent for the 15-month rent-free period is approximately $2.3 million, which is currently included in prepaid expenses and other current assets on the Company’s balance sheet.

### 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 Form 10-K and Note 1 to the Condensed Consolidated Financial Statements included in this Form 10-Q.

### Allowance for Credit Losses

On January 1, 2023, the Company adopted ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” As a result of the adoption, the Company has revised the way in which it calculates reserves on outstanding student accounts receivable balances. Details considered by management in the estimate include the following:

We extend credit to a portion of the students who are enrolled at our academic institutions for tuition and certain other educational costs. Based upon past experience and judgment, we establish an allowance for credit losses with respect to student receivables which we estimate will ultimately not be collectible. Our standard student receivable allowance is based on an estimate of lifetime expected credit losses for student receivables that considers vintages of receivables to determine a loss rate. Our estimation methodology considers a number of quantitative and qualitative factors that, based on our collection experience, we believe have an impact on our repayment risk and ability to collect student receivables. Changes in the trends in any of these factors may impact our estimate of the allowance for credit losses. These factors include, but are not limited to: internal repayment history, changes in the current economic, legislative or regulatory environments, internal cash collection forecasts and the ability to complete the federal financial aid process with the student. These factors are monitored and assessed on a regular basis. Overall, our allowance estimation process for student receivables is validated by trending analysis and comparing estimated and actual performance.

Management makes a range of assumptions to determine what is believed to be the appropriate level of allowance for credit losses. Management determines a reasonable and supportable forecast based on the expectation of future conditions over a supportable forecast period as described above, as well as qualitative adjustments based on current and future conditions that may not be fully captured in the historical modeling factors described above. All of these estimates are susceptible to significant change.

We monitor our collections and write-off experience to assess whether or not adjustments to our allowance percentage estimates are necessary. Changes in trends in any of the factors that we believe impact the collection of our student receivables, as noted above, or modifications to our collection practices, and other related policies may impact our estimate of our allowance for credit losses and our results from operations.

Because a substantial portion of our revenue is derived from Title IV Programs, any legislative or regulatory action that significantly reduces the funding available under Title IV Programs, or the ability of our students or institutions to participate in Title IV Programs, would likely have a material impact on the realizability of our receivables.

### Effect of Inflation

Inflation has not had a material effect on our operations, except for some inflationary pressures on certain instructional expenses, including consumables, and in instances where potential students have not wanted to incur additional debt or increased travel expense.

### Results of Continuing Operations for the Three and Nine Months Ended September 30, 2023

The following table sets forth selected Condensed Consolidated Statements of Operations data as a percentage of revenues for each of the periods indicated:

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Revenue | 100.0% | 100.0% | 100.0% | 100.0% |
| Costs and expenses: |  |  |  |  |
| Educational services and facilities | 43.3% | 43.5% | 44.0% | 43.8% |
| Selling, general and administrative | 54.7% | 51.2% | 56.8% | 54.4% |
| Loss (gain) on sale of assets | 0.0% | 0.0% | -11.2% | -0.1% |
| Impairment of goodwill and long-lived assets | 0.0% | 0.0% | 1.5% | 0.0% |
| Total costs and expenses | 98.0% | 94.7% | 91.1% | 98.1% |
| Operating income | 2.0% | 5.3% | 8.9% | 1.9% |
| Interest income, net | 0.9% | 0.0% | 0.7% | 0.0% |
| Income from operations before income taxes | 2.9% | 5.3% | 9.5% | 1.9% |
| Provision for income taxes | 0.8% | 1.4% | 2.5% | 0.3% |
| Net income | 2.1% | 3.9% | 7.0% | 1.6% |

### Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

### Consolidated Results of Operations

***Revenue.*** Revenue increased $7.8 million, or 8.5% to $99.6 million for the three months ended September 30, 2023 from $91.8 million in the prior year comparable period. Excluding the Transitional segment revenue of $0.1 million and $1.7 million for the three months ended September 30, 2023 and 2022, respectively, our revenue would have increased $9.4 million, or 10.5%. The remaining increase in revenue was driven by several factors including student start growth of 7.1%, which drove a 3.0% increase in average student population, and an increase in average revenue per student of 7.3%, driven in part by the continuing rollout of the Company’s hybrid teaching model in combination with tuition increases. The Company’s hybrid teaching model increases program efficiency and delivers accelerated revenue recognition in certain evening programs.

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 increased $3.2 million, or 8.0% to $43.1 million for the three months ended September 30, 2023 from $39.9 million in the prior year comparable period. Excluding the Transitional segment educational services and facilities expense of $0.5 million and $0.8 million for the three months ended September 30, 2023 and 2022, respectively, our educational services and facilities expense would have increased $3.5 million, or 9.1%. Increased costs were primarily concentrated in instructional, facilities, and books and tools expenses.

Instructional expenses increased $1.6 million, driven primarily by higher instructional salaries resulting from higher staffing levels due to increases in our student population, merit salary increases, and the transition to the Company’s hybrid teaching model.

Facilities expense increased by approximately $1.3 million, mainly due to non-cash rent expense relating to the new Atlanta, Georgia campus, and the sale leaseback of our existing Nashville, Tennessee property. In connection with the sale of the Nashville, Tennessee property, the Company entered into a lease agreement allowing the Company to continue to occupy the campus and operate it on a rent-free basis for a period of 15-months. At the consummation of the sale, the Company took the fair value of the 15-month rent free period, valued at $2.3 million, and included the balance in prepaid expenses and other current assets on the Company’s Condensed Consolidated Balance Sheet. During the 15-month rent-free period, the Company will straight-line the expense until the rent-free period has expired. Additional increases were driven by utilities expense resulting from inflation and a higher student population in addition to routine maintenance at several campuses.

Books and tools expense increased $0.6 million, driven by a 7.1% increase in student starts quarter-over-quarter.

Educational services and facilities expense, as a percentage of revenue, decreased to 43.3% from 43.5% for the three months ended September 30, 2023 and 2022, respectively.

***Selling, general and administrative expense.*** Our selling, general and administrative expense increased $7.5 million, or 16.0% to $54.5 million for the three months ended September 30, 2023, from $47.0 million in the prior year comparable period. Excluding the Transitional segment selling, general and administrative expense of $0.4 million and $1.0 million for the three months ended September 30, 2023 and 2022, respectively, our selling general and administrative expense would have increased $8.1 million, or 17.7%. Increased costs were driven by the following:

Administrative costs increased $5.7 million, driven primarily by bad debt expense and performance-based incentives. Bad debt expense increased quarter-over-quarter primarily due to a higher accounts receivable balance driven by revenue growth, and lower collections.

Marketing investments increased $1.1 million as a result of a continuing shift in marketing strategy to include additional spending in digital channels that generate higher quality, better converting leads but which come at a higher cost-per-lead. These efforts are driven primarily through the increased investment in the paid search and paid social media channels. We continue to reduce our dependency on lower cost third-party affiliate/pay-per-lead inquiries, which convert at relatively lower levels. Additional investments in marketing have contributed to the increase in starts quarter-over-quarter while maintaining a consistent cost per start. The Company also invested incremental marketing dollars in the third quarter to support two new program launches: Medical Assistant at our Columbia, Maryland campus and Electrical & Electronic Systems Technology at our Grand Prairie, Texas campus.

Student services increased $0.7 million, primarily resulting from costs associated with an increased student population.

Selling, general and administrative expense, as a percentage of revenue, increased to 54.7% from 51.2% for the three months ended September 30, 2023 and 2022, respectively.

***Net interest income / expense.*** Net interest income was $0.9 million for the three months ended September 30, 2023 compared to net interest expense of less than $0.1 million in the prior year comparable period. The increase to net interest income was primarily driven by the Company’s investment of its cash reserves into various short-term investments.

***Income taxes.*** Our provision for income taxes was $0.8 million, or 27.7% of pre-tax income for the three months ended September 30, 2023 compared to $1.3 million, or 26.8% of pre-tax income in the prior year comparable period.

### Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

### Consolidated Results of Operations

***Revenue.*** Revenue increased $19.0 million, or 7.4% to $275.5 million for the nine months ended September 30, 2023 from $256.5 million in the prior year comparable period. Excluding the Transitional segment revenue of $1.5 million and $5.3 million for the nine months ended September 30, 2023 and 2022, respectively, our revenue would have increased $22.9 million, or 9.1%. The remaining increase in revenue was driven by several factors including student start growth of 10.3% and an increase in average revenue per student of 8.9%, driven in part by the continuing rollout of the Company’s hybrid teaching model in combination with tuition increases. The Company’s hybrid teaching model increases program efficiency and delivers accelerated revenue recognition in certain evening programs.

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 increased $9.0 million, or 8.0% to $121.2 million for the nine months ended September 30, 2023 from $112.2 million in the prior year comparable period. Excluding the Transitional segment educational services and facilities expense of $1.6 million and $2.5 million for the nine months ended September 30, 2023 and 2022, respectively, our educational services and facilities expense would have increased $9.9 million, or 9.0%. Increased costs were primarily concentrated in instructional expense, facilities expense and books and tools expense.

Instructional expenses increased $4.8 million, driven primarily by higher instructional salaries resulting from higher staffing levels due to increases in our student population, merit salary increases, and the transition to the Company’s hybrid teaching model. Also contributing to the increase were additional costs incurred for student testing primarily relating to our nursing program, increased consumables costs driven by a higher student population and inflation, and an increase in benefits expense due to increased enrollments.

Facilities expense increased by approximately $2.9 million, mainly due to non-cash rent expense relating to the new Atlanta, Georgia campus, and the sale leaseback of our existing Nashville, Tennessee property. In connection with the sale of the Nashville, Tennessee property, the Company entered into a lease agreement allowing the Company to continue to occupy the campus and operate it on a rent-free basis for a period of 15-months. At the consummation of the sale, the Company took the fair value of the 15-month rent free period valued at $2.3 million and included the balance in prepaid expenses and other current assets on the Company’s Condensed Consolidated Balance Sheet. During the 15-month rent-free period, the Company will straight-line the expense until the rent-free period has expired. Additional increases were driven by utilities expense resulting from inflation and a higher student population in addition to routine maintenance at several campuses.

Books and tools expense increased $2.2 million, driven by the 10.3% increase in student starts year-over-year.

Educational services and facilities expense, as a percentage of revenue, increased to 44.0% from 43.8% for the nine months ended September 30, 2023 and 2022, respectively.

***Selling, general and administrative expense.*** Our selling, general and administrative expense increased $17.1 million, or 12.3% to $156.6 million for the nine months ended September 30, 2023, from $139.5 million in the prior year comparable period. Excluding the Transitional segment selling, general and administrative expense of $1.3 million and $3.1 million for the nine months ended September 30, 2023 and 2022, respectively, our selling general and administrative expense would have increased $18.9 million, or 13.8%. Increased costs were driven by the following:

Administrative costs increased $14.0 million, driven by several factors including increased bad debt expense, stock-based compensation, performance-based incentives, and legal costs. Bad debt expense increased year-over-year primarily due to a higher accounts receivable balance driven by revenue growth, and lower collections.

Marketing investments increased $2.5 million as a result of a continuing shift in marketing strategy to include additional spending in digital channels that generate higher quality, better converting leads but which come at a higher cost-per-lead. These efforts are driven primarily through the increased investment in the paid search and paid social media channels. We continue to reduce our dependency on lower cost third-party affiliate/pay-per-lead inquiries, which convert at relatively lower levels. Additional investments in marketing have contributed to the increase in starts year-over-year while maintaining a consistent cost per start. The Company also invested incremental marketing dollars in the third quarter to support two new program launches: Medical Assistant at our Columbia, Maryland campus and Electrical & Electronic Systems Technology at our Grand Prairie, Texas campus.

Student services increased $1.7 million, primarily resulting from costs associated with an increased student population.

Selling, general and administrative expense, as a percentage of revenue, increased to 56.8% from 54.4% for the nine months ended September 30, 2023 and 2022, respectively.

***Gain on sale of assets.*** Gain on sale of assets was $30.9 million, resulting from the sale of the Company’s Nashville, Tennessee property during the second quarter of 2023. Net proceeds from the sale were approximately $33.3 million.

***Impairment of goodwill and long-lived assets.*** Impairment of goodwill and long-lived assets was $4.2 million as a result of the sale of the Nashville, Tennessee property on June 8, 2023. The result of the sale created a change in the trajectory of the fair value of the Nashville, Tennessee operations and as such, the Company recorded a pre-tax non-cash impairment charge of $3.8 million relating to goodwill and an additional $0.4 million impairment relating to long-lived assets. As of September 30, 2022, there were no impairments of goodwill or long-lived assets.

***Net interest income / expense.*** Net interest income was $1.8 million for the nine months ended September 30, 2023 compared to net interest expense of $0.1 million in the prior year comparable period. The increase to net interest income was primarily driven by the Company’s investment of its cash reserves into various short-term investments.

***Income taxes.*** Our provision for income taxes was $7.0 million, or 26.7% of pre-tax income for the nine months ended September 30, 2023 compared to $0.8 million, or 15.7% of pre-tax income in the prior year comparable period. The increase in provision for the nine months ended September 30, 2023 was due to the gain on the sale of the Nashville, Tennessee property during the second quarter of 2023, which drove an increase in the Company’s pre-tax income.

### Segment Results of Operations

As of January 1, 2023, the Company’s business is now organized into two reportable business segments: (a) Campus Operations; and (b) Transitional. Based on trends in student demand and our program expansions, there have been more cross-offerings of programs among the various campuses. Given this change, the Company has revised the way it manages the business, evaluates performance, and allocates resources, resulting in an updated segment structure. As a result, the Company has shifted its focus to the two new segments as defined below:

***Campus Operations –*** The Campus Operations segment includes all campuses that are continuing in operation and contribute to the Company’s core operations and performance.

***Transitional –*** The Transitional segment refers to businesses that are marked for closure and are currently being taught-out. As of September 30, 2023, the only campus classified in the Transitional segment is the Somerville, Massachusetts campus. The campus has been fully taught-out and will continue to incur some additional closing costs until year-end 2023. Total estimated costs to close the campus will approximate $2.0 million.

We evaluate performance based on operating results. Adjustments to reconcile segment results to consolidated results are included in the caption “Corporate,” which primarily includes unallocated corporate activity.

The following table presents results for our two reportable segments for the three months ended September 30, 2023 and 2022:

| Revenue: | Three Months Ended September 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: |
| Campus Operations | $99,527 | $90,085 | 10.5% |
| Transitional | 91 | 1,728 | -94.7% |
| Total | $99,618 | $91,813 | 8.5% |
| **Operating Income (loss):** |  |  |  |
| Campus Operations | $11,889 | $13,024 | -8.7% |
| Transitional | (745) | (76) | 880.3% |
| Corporate | (9,148) | (8,068) | -13.4% |
| Total | $1,996 | $4,880 | -59.1% |
| **Starts:** |  |  |  |
| Campus Operations | 5,157 | 4,815 | 7.1% |
| Transitional | - | 114 | -100.0% |
| Total | 5,157 | 4,929 | 4.6% |
| **Average Population:** |  |  |  |
| Campus Operations | 12,923 | 12,551 | 3.0% |
| Transitional | 19 | 273 | -93.0% |
| Total | 12,942 | 12,824 | 0.9% |
| **End of Period Population:** |  |  |  |
| Campus Operations | 14,027 | 13,291 | 5.5% |
| Transitional | 4 | 295 | -98.6% |
| Total | 14,031 | 13,586 | 3.3% |

### Campus Operations

Operating income was $11.9 million and $13.0 million for each of the three months ended September 30, 2023 and 2022, respectively. The change quarter-over-quarter was mainly driven by the following factors:

- Revenue increased $9.4 million, or 10.5% to $99.5 million for the three months ended September 30, 2023 from $90.1 million in the prior year comparable period. The increase in revenue was driven by several factors including student start growth of 7.1%, which drove a 3.0% increase in average student population and an increase in average revenue per student of 7.3%, driven in part by the continuing rollout of the Company’s hybrid teaching model in combination with tuition increases. The Company’s hybrid teaching model increases program efficiency and delivers accelerated revenue recognition in certain evening programs.
- Educational services and facilities expense increased $3.5 million, or 9.1% to $42.6 million for the three months ended September 30, 2023 from $39.1 million in the prior year comparable period. Increased costs were primarily concentrated in instructional, facilities expense, and books and tools expense.
- Instructional expenses increased $1.6 million, driven primarily by higher instructional salaries resulting from higher staffing levels due to increases in our student population, merit salary increases, and the transition to the Company’s hybrid teaching model.
- Facilities expense increased by approximately $1.3 million, mainly due to non-cash rent expense relating to the new Atlanta, Georgia campus and the sale leaseback of our existing Nashville, Tennessee property. In connection with the sale of the Nashville, Tennessee property, the Company entered into a lease agreement allowing the Company to continue to occupy the campus and operate it on a rent-free basis for a period of 15-months. At the consummation of the sale, the Company took the fair value of the 15-month rent free period, valued at $2.3 million, and included the balance in prepaid expenses and other current assets on the Company’s Condensed Consolidated Balance Sheet. During the 15-month rent-free period, the Company will straight-line the expense until the rent-free period has expired. Additional increases were driven by utilities expense resulting from inflation and a higher student population in addition to routine maintenance at several campuses.
- Books and tools expense increased $0.6 million, driven by a 7.1% increase in student starts quarter-over-quarter.
- Selling, general and administrative expense increased $7.0 million, or 18.6% to $44.9 million for the three months ended September 30, 2023, from $37.9 million in the prior year comparable period. The increase was primarily driven by an increase in administrative costs including bad debt expense, sales, and marketing investments and additional spending in student services, all of which are discussed above in the Consolidated Results of Operations.

### Transitional

On November 3, 2022, the Board of Directors approved a plan to close the Somerville, Massachusetts campus. The owner of the Somerville property has exercised an option to terminate the lease on December 8, 2023 and the Company has since determined not to pursue relocating the campus in this geographic region. The campus has been fully taught out, and will continue to incur some additional closing costs until year-end 2023. Total estimated costs to close the campus will approximate $2.0 million.

- Revenue decreased $1.6 million, or 94.7% to $0.1 million for the three months ended September 30, 2023, from $1.7 million in the prior year comparable period.
- Total operating expenses decreased $1.0 million, or 53.7% to $0.8 million for the three months ended September 30, 2023, from $1.8 million in the prior year comparable period.

Decreased operating performance is the result of closing the campus and no longer enrolling new students.

### Corporate and Other

This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses were $9.1 million for the three months ended September 30, 2023 compared to $8.1 million in the prior year comparable period. Increased costs were driven by performance-based initiatives.

The following table presents results for our two reportable segments for the nine months ended September 30, 2023 and 2022:

| Revenue: | Nine Months Ended September 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: |
| Campus Operations | $274,093 | $251,216 | 9.1% |
| Transitional | 1,455 | 5,294 | -72.5% |
| Total | $275,548 | $256,510 | 7.4% |
| **Operating Income (loss):** |  |  |  |
| Campus Operations | $26,167 | $30,430 | -14.0% |
| Transitional | (1,423) | (227) | 526.9% |
| Corporate | (347) | (25,252) | 98.6% |
| Total | $24,397 | $4,951 | 392.8% |
| **Starts:** |  |  |  |
| Campus Operations | 13,008 | 11,791 | 10.3% |
| Transitional | - | 343 | -100.0% |
| Total | 13,008 | 12,134 | 7.2% |
| **Average Population:** |  |  |  |
| Campus Operations | 12,506 | 12,479 | 0.2% |
| Transitional | 88 | 302 | -70.9% |
| Total | 12,594 | 12,781 | -1.5% |
| **End of Period Population:** |  |  |  |
| Campus Operations | 14,027 | 13,291 | 5.5% |
| Transitional | 4 | 295 | -98.6% |
| Total | 14,031 | 13,586 | 3.3% |

### Campus Operations

Operating income was $26.2 million and $30.4 million for each of the nine months ended September 30, 2023 and 2022, respectively. The change year-over-year was mainly driven by the following factors:

- Revenue increased $22.9 million, or 9.1% to $274.1 million for the nine months ended September 30, 2023 from $251.2 million in the prior year comparable period. The increase in revenue was driven by several factors including student start growth of 10.3% and an increase in average revenue per student of 8.9%, driven in part by the continuing rollout of the Company’s hybrid teaching model in combination with tuition increases. The Company’s hybrid teaching model increases program efficiency and delivers accelerated revenue recognition in certain evening programs.
- Educational services and facilities expense increased $9.9 million, or 9.0% to $119.7 million for the nine months ended September 30, 2023 from $109.8 million in the prior year comparable period. Increased costs were primarily concentrated in instructional, facilities expense, and books and tools expense.
- Instructional expenses increased $4.8 million, driven primarily by higher instructional salaries resulting from higher staffing levels due to increases in our student population, merit salary increases, and the transition to the Company’s hybrid teaching model. Also contributing to the increase were additional costs incurred for student testing, primarily relating to our nursing program, increased consumables costs driven by a higher student population and inflation, and an increase in benefits expense due to increased enrollments.
- Facilities expense increased by approximately $2.9 million, mainly due to non-cash rent expense relating to the new Atlanta, Georgia campus, and the sale leaseback of our existing Nashville, Tennessee property. In connection with the sale of the Nashville, Tennessee property, the Company entered into a lease agreement allowing the Company to continue to occupy the campus and operate it on a rent-free basis for a period of 15-months. At the consummation of the sale, the Company took the fair value of the 15-month rent free period, valued at $2.3 million, and included the balance in prepaid expenses and other current assets on the Company’s Condensed Consolidated Balance Sheet. During the 15-month rent-free period, the Company will straight-line the expense until the rent-free period has expired. Additional increases were driven by utilities expense resulting from inflation and a higher student population in addition to routine maintenance at several campuses.
- Books and tools expense increased $2.2 million, driven by the 10.3% increase in student starts year-over-year.
- Selling, general and administrative expense increased $13.0 million, or 11.7% to $124.0 million for the nine months ended September 30, 2023, from $111.0 million in the prior year comparable period. The increase was primarily driven by an increase in administrative costs including bad debt expense, sales, and marketing investments and additional spending in student services, all of which are discussed above in the Consolidated Results of Operations.
- Impairment of goodwill and long-lived assets was $4.2 million as a result of the sale the Nashville, Tennessee property on June 8, 2023. The result of the sale created a change in the trajectory of the fair value of the Nashville, Tennessee operations, and as such, the Company recorded a pre-tax non-cash impairment charge of $3.8 million relating to goodwill and an additional $0.4 million impairment relating to long-lived assets. As of September 30, 2022, there were no impairments of goodwill or long-lived assets.

### Transitional

On November 3, 2022, the Board of Directors approved a plan to close the Somerville, Massachusetts campus. The owner of the Somerville property has exercised an option to terminate the lease on December 8, 2023 and the Company has since determined not to pursue relocating the campus in this geographic region. The campus has been fully taught-out, and will continue to incur some additional closing costs until year-end 2023. Total estimated costs to close the campus will approximate $2.0 million.

- Revenue decreased $3.8 million, or 72.5% to $1.5 million for the nine months ended September 30, 2023, from $5.3 million in the prior year comparable period.
- Total operating expenses decreased $2.6 million, or 47.9% to $2.9 million for the nine months ended September 30, 2023, from $5.5 million in the prior year comparable period.

Decreased operating performance is the result of closing the campus and no longer enrolling new students.

### Corporate and Other

This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses were $31.3 million and $25.5 million after excluding a $30.9 million gain in the current year, resulting from the sale of our Nashville, Tennessee property and a $0.2 million gain in the prior year driven by the sale of our former campus property in Suffield, Connecticut. Increased costs were driven by several factors including additional performance-based incentives, stock-based compensation, and an increase in legal costs.

### LIQUIDITY AND CAPITAL RESOURCES

Our primary capital requirements are for the maintenance and expansion of our facilities and the development of new programs. Our principal sources of liquidity have been cash provided by operating activities and, prior to the termination thereof (as described below), 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, 2023 and 2022:

|  | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $3,612 | $612 |
| Net cash used in investing activities | (4,961) | (4,663) |
| Net cash used in financing activities | (2,945) | (9,637) |

33

As of September 30, 2023, the Company had $46.0 million in cash and cash equivalents and restricted cash, in addition to $24.3 million in short-term investments, compared to $50.3 million cash and cash equivalents and restricted cash, including $14.7 million in short-term investments as of December 31, 2022. The decrease in cash was due to several factors including investments of $28.7 million in capital expenditures primarily relating to the buildout of the new Atlanta, Georgia campus and the purchase of the new Levittown, Pennsylvania property for approximately $10.2 million on September 28, 2023. Also contributing to the decrease in cash were incentive compensation payments, share repurchases made under the share repurchase program, and one-time costs incurred in connection with the teach-out of our Somerville, Massachusetts campus. Partially offsetting the expenditures during the nine months ended September 30, 2023 was the sale of our Nashville, Tennessee property, which yielded proceeds of approximately $33.3 million. In addition, our cash position in prior years benefited from $2.4 million in net proceeds received as a result of the sale of a former campus located in Suffield, Connecticut, which was consummated during the second quarter of 2022.

On May 24, 2022, the Company announced that its Board of Directors had authorized a share repurchase program of up to $30.0 million of the Company’s outstanding Common Stock. The share repurchase program was authorized for 12 months. On February 27, 2023, the Board of Directors extended the share repurchase program for an additional 12 months and authorized the repurchase of an additional $10.0 million of the Company’s Common Stock, for an aggregate of up to $30.6 million in additional repurchases. As of September 30, 2023, the Company has approximately $29.7 million remaining for repurchases.

During the nine months ended September 30, 2023, the Company repurchased 165,064 shares at a cost of approximately $0.9 million. Total repurchases made since the inception of the share repurchase program through September 30, 2023 were 1,737,478 shares at a total cost of approximately $10.3 million.

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 74% of our cash receipts relating to revenues in 2022. Pursuant to applicable regulations, students must apply for a new loan for each academic period. Federal regulations dictate the timing of disbursements of funds under Title IV Programs and loan funds are generally provided by lenders in two disbursements for each academic year. The first disbursement is usually received approximately 31 days after the start of a student’s academic year and the second disbursement is typically received at the beginning of the sixteenth week from the start of the student's academic year. Certain types of grants and other funding are not subject to a 31-day delay. In certain instances, if a student withdraws from a program prior to a specified date, any paid but unearned tuition or prorated Title IV Program financial aid is refunded according to federal, state and accrediting agency standards.

As a result of the significant amount of Title IV Program funds received by our students, we are highly dependent on these funds to operate our business. Any reduction in the level of Title IV Program funds that our students are eligible to receive for tuition payments to us or any restriction on our eligibility to receive Title IV Program funds would have a significant impact on our operations and our financial condition. For more information, see Part I, Item 1A. “Risk Factors - Risks Related to Our Industry” of our Form 10-K.

### Operating Activities

Operating cash flow results primarily from cash received from our students, offset by changes in working capital demands. Working capital can vary at any point in time based on several factors including seasonality, timing of cash receipts and payments and vendor payment terms.

Net cash provided by operating activities was $3.6 million for the nine months ended September 30, 2023 compared to $0.6 million in the prior year comparable period. The main drivers for the cash provided by operating activities included a $2.6 million increase in accounts payable during the nine months ended September 30, 2023 resulting from the timing of cash disbursements and an increase in accrued expense of $9.6 million over the prior year resulting from a $6.1 million performance-based incentive payment made during the first quarter of 2022.

### Investing Activities

Net cash used in investing activities was $5.0 million for the nine months ended September 30, 2023 compared to net cash used in investing activities of $4.7 million in the prior year comparable period. Cash used in the current year was primarily driven by investments in capital expenditures of $28.7 million, which was primarily driven by the buildout of the new Atlanta, Georgia campus and the purchase of the new Levittown, Pennsylvania property for approximately $10.2 million, which was consummated on September 28, 2023.

Also contributing to the decrease were net purchases of short-term investment of $9.6 million in the current year. Partially offsetting the cash outflow was $33.3 million in proceeds received from the sale of our Nashville, Tennessee property during the second quarter of 2023.

We currently lease all of our campuses.

Capital expenditures were 3.0% of revenues in 2022 and are expected to approximate 11.0% of revenues in 2023. The significant increase in planned capital expenditures over the prior year will be driven by several factors that include, but are not limited to, the buildout of our new Atlanta, Georgia area campus, additional space, the planned introduction of three new programs at the Lincoln, Rhode Island campus, and the anticipated introduction of new programs at five other campuses. We expect to fund future capital expenditures with cash generated from operating activities and cash on hand.

### Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2023 and 2022 was $2.9 million and $9.6 million, respectively. The decrease in cash used of $6.7 million was primarily driven by a $5.8 million reduction in repurchases made under the Company’s share repurchase program in the current year, in addition to $0.9 million of dividends payments made in the prior year.

### Credit Facility

On November 14, 2019, the Company entered into a senior secured credit agreement (the “Credit Agreement”) with its lender, Sterling National Bank (the “Lender”), providing for borrowing in the aggregate principal amount of up to $60.0 million (the “Credit Facility”). Initially, the Credit Facility was comprised of four facilities: (1) a $20.0 million senior secured term loan maturing on December 1, 2024 (the “Term Loan”), with monthly interest and principal payments based on a 120-month amortization, with the outstanding balance due on the maturity date; (2) a $10.0 million senior secured delayed draw term loan maturing on December 1, 2024 (the “Delayed Draw Term Loan”), with monthly interest payments for the first 18 months and thereafter monthly payments of interest and principal based on a 120-month amortization and all balances due on the maturity date; (3) a $15.0 million senior secured committed revolving line of credit providing a sublimit of up to $10.0 million for standby letters of credit maturing on November 13, 2022 (the “Revolving Loan”), with monthly payments of interest only; and (4) a $15.0 million senior secured non-restoring line of credit maturing on January 31, 2021 (the “Line of Credit Loan”). The Credit Facility was secured by a first priority lien in favor of the Lender on substantially all of the personal property owned by the Company as well as a pledge of the stock and other rights in the Company’s subsidiaries and mortgages on parcels of real property owned by the Company. The Credit Agreement was amended on various occasions.

On November 4, 2022, the Company agreed with its Lender to terminate the Credit Agreement and the remaining Revolving Loan. The Lender agreed to allow the Company’s existing letters of credit to remain outstanding, provided that they are cash collateralized. As of September 30, 2023, the letters of credit, in the aggregate outstanding principal amount of $4.1 million, remained outstanding, were cash collateralized, and were classified as restricted cash on the Condensed Consolidated Balance Sheet. As of September 30, 2023, the Company did not have a credit facility and did not have any debt outstanding. The Company is continuing to consider potential lenders for its future credit needs.

### Contractual Obligations

***Current portion of Long-Term Debt, Long-Term Debt and Lease Commitments.*** As of September 30, 2023, we had no debt outstanding. We lease offices, educational facilities and various items of equipment for varying periods through the year 2041 at basic annual rentals (excluding taxes, insurance, and other expenses under certain leases).

As of September 30, 2023, we had outstanding loan principal commitments to our active students of $28.0 million. These are institutional loans and no cash is advanced to students. The full loan amount is not guaranteed unless the student completes the program. The institutional loans are considered commitments because the students are required to fund their education using these funds and they are not reported on our financial statements.

### Regulatory Updates

### Negotiated Rulemaking

The DOE initiated rulemaking on several topics in January 2022 and, after delaying the process, announced in January 2023 its intention to reinitiate the rulemaking process on topics including gainful employment, financial responsibility, administrative capability, certification procedures, ability to benefit, and improving income-driven repayment of loans. See our Form 10-K at “Business – Regulatory Environment – Negotiated Rulemaking.”

On May 19, 2023, the DOE published a notice of proposed rulemaking in the Federal Register that included proposed regulations on topics including gainful employment, financial responsibility, administrative capability, certification, and ability to benefit. See our Form 10-Q for the second quarter of the fiscal year at “Negotiated Rulemaking.”

On October 10, 2023, the DOE published the final gainful employment regulations which have a general effective date of July 1, 2024. The final regulations replace prior gainful employment regulations, rescinded by the DOE in 2019, that required each of our educational programs to achieve threshold rates in at least one of two debt measure categories. See our Form 10-K at “Business – Regulatory Environment – Gainful Employment.” The regulations establish rules for annually evaluating each of our educational programs based on the calculation of debt-to-earnings rates (an annual debt-to-earnings rate and a discretionary debt-to-earnings rate) and a median earnings measure. The DOE will calculate these rates and measures under complex regulatory formulas outlined in the regulations and using data such as student debt (including not only Title IV loans but also certain private loans and extensions of credit), student earnings data, and comparative median earnings data for young working adults with only a high school diploma or GED. If one or more of our educational programs were to yield debt-to-earnings rates or a median earnings measure that do not comply with regulatory benchmarks for two of three consecutive years, we would lose Title IV eligibility for each of the impacted educational programs. The regulations will also require us to provide warnings to current and prospective students for programs in danger of losing of Title IV eligibility (which could deter prospective students from enrolling and current students from continuing their respective programs). The regulations also include provisions for providing certifications and reporting data to the DOE and providing required student disclosures related to gainful employment.

The regulations include gainful employment rates and measures that will be based in part on data that is not readily accessible to us and other institutions, which make it difficult for us to predict with certainty how our educational programs will perform under the new gainful employment benchmarks and the extent to which certain programs could become ineligible for Title IV participation. The DOE released performance data at the time it published the proposed regulations that calculates rates for each school’s program while acknowledging that the methodology used to produce the calculations differs from the methodology in the proposed regulations due to limitations in data availability. Because neither we nor the DOE have access to all of the data that will ultimately be used under the regulations to evaluate our programs, we cannot predict whether, or the extent to which, our programs could fail to comply with the new gainful employment benchmarks. Moreover, we do not have control over some of the factors that could impact the rates and measures for our programs which will limit our ability to eliminate or mitigate the impact of the regulations on us and our educational programs.

We cannot predict how our programs will perform under the new gainful employment metrics. The implementation of the new gainful employment regulations could require us to eliminate or modify certain educational programs, could result in the loss of our students’ access to Title IV Program funds for the affected programs, and could have a significant impact on the rate at which students enroll in our programs and on our business and results of operations.

On October 31, 2023, the DOE published final regulations regarding financial responsibility, administrative capability, certification standards and procedures, and ability to benefit. The regulations have a general effective date of July 1, 2024.

- **Financial Responsibility:** The final regulations include an expanded list of mandatory and discretionary triggering events that could result in the DOE determining that an institution lacks financial responsibility and must submit to the DOE a letter of credit or other form of acceptable financial protection and accept other conditions on the institution’s Title IV Program eligibility. See our Form 10-K at “Business – Regulatory Environment – Financial Responsibility Standards.”

The final regulations would, among other things, modify and substantially expand the number of triggers and, as a result, increase the likelihood that the DOE could impose a financial protection requirement and other conditions on us and our institutions. The final rules require the institution to notify the DOE of a triggering event and provide information demonstrating why the event does not warrant the submission of a letter of credit or imposition of other requirements. The final rules state that, if the DOE requires financial protection as a result of more than one mandatory or discretionary trigger, the DOE will require separate financial protection for each individual trigger, which could substantially increase the amount of financial protection we and other institutions could be required to provide to the DOE.

Examples of mandatory triggering events under the final rules include a lawsuit by a federal or state authority or a qui tam lawsuit in which the Federal government has intervened, where the suit has been pending for 120 days as measured under the regulation; an action where the DOE seeks to recover the cost of adjudicated claims in favor of borrowers under the Borrower Defense to Repayment regulations and the claims would lower the institution’s composite score below 1.0; certain judgments, awards, or settlements in certain lawsuits, mediations, or administrative or arbitration proceedings; certain withdrawals of owner’s equity including by dividend; gainful employment issues; accreditor requirements to submit a teach-out plan for reasons related to financial concerns; certain actions taken against a publicly-traded company or failure to timely file certain annual or quarterly reports; 90/10 Rule issues; cohort default rate issues; contributions and distributions occurring near the fiscal year end that materially impact the composite score; certain defaults or other adverse events under a financing arrangement; or certain financial exigencies or receiverships.

Examples of discretionary triggering events under the final regulations include certain accrediting agency actions, certain accreditor events, fluctuations in Title IV volume, high annual dropout rates, indicators of significant change in the financial condition of the institution, the formation by DOE of a group process to consider borrower defense claims against the institution, the institution’s discontinuation of education programs affecting at least 25 percent of enrolled students receiving Title IV funds, the institution’s closure of locations that enroll more than 25 percent of its students who receive Title IV funds, certain state licensing agency actions, the loss of institutional or program eligibility in another federal educational assistance program, a requirement to disclose in a public filing that the company is under investigation for possible violations of law, or if the institution is cited and faces loss of education assistance funds from another federal agency if it does not comply with agency requirements. The final regulations also establish new rules for evaluating financial responsibility during a change in ownership.

- **Administrative Capability:** The DOE assesses the administrative capability of each institution that participates in Title IV Programs under a series of separate standards. Failure to satisfy any of the standards may lead the DOE to find the institution ineligible to participate in Title IV Programs or to place the institution on provisional certification as a condition of its participation. See our Form 10-K at “Business – Regulatory Environment – Administrative Capability.” The final rules add more standards related to topics such as the provision of adequate financial aid counseling and career services, ensuring the availability of clinical and externship opportunities, the disbursement of Title IV funds in a timely manner, compliance with high school diploma requirements, preventing substantial misrepresentations, complying with gainful employment requirements, and avoiding significant negative actions with a federal, state, or accrediting agency.
- **Certification Regulations:** The final regulations expand the grounds for placing institutions on provisional certification, expand the types of conditions the DOE may impose on provisionally certified institutions, and expand the number of requirements contained in the institution’s program participation agreement with the DOE (including, among other requirements, an obligation to comply with all state laws related to closure). The DOE typically provides provisional certification to an institution following a change in ownership resulting in a change of control and also may provisionally certify an institution for other reasons, including, but not limited to, noncompliance with certain standards of administrative capability and financial responsibility. The DOE provisionally certified all of our institutions based on findings in recent audits of each institution’s Title IV Program compliance that the DOE alleges identified deficiencies related to DOE regulations regarding an institution’s level of administrative capability. An institution that is provisionally certified receives fewer due process rights than those received by other institutions in the event the DOE takes certain adverse actions against the institution, is required to obtain prior DOE approvals of new campuses and educational programs and may be subject to heightened scrutiny by the DOE. Provisional certification makes it easier for the DOE to revoke or decline to renew our Title IV eligibility if the DOE under the current administration chooses to take such an action against us and other provisionally certified for-profit schools without undergoing a formal administrative appeal process. See our Form 10-K at “Business – Regulatory Environment – Regulation of Federal Student Financial Aid Programs.” The regulations also expand the conditions to which institutions must agree as part of their participation in the Title IV programs. For example, one of the conditions prohibits the length of certain educational programs from exceeding the required minimum number of hours established by applicable state(s) for entry-level training requirements for the occupation for which the programs train students. We are still evaluating the potential impact of this requirement, which applies to new students enrolling on or after July 1, 2024, but the new requirement could require us to modify or phase out some of our educational programs.

The final regulations, if adopted, allow the DOE to place institutions on provisional certification if, among other reasons, the institution does not meet financial responsibility factors or administrative capability standards, if the institution is required by the DOE to submit a letter of credit as a result of a mandatory or discretionary triggering event, or if the DOE deems the institution to be at risk of closure.

The final regulations also allow the DOE to determine whether to certify or impose conditions on an institution based on consideration of factors including, for example, the institution’s withdrawal rate, the amounts the institution spent on recruiting activities, advertising, and other pre-enrollment activities, and the passage rate for licensure exams for programs that are designed to meet the educational requirements for a professional license required for employment in an occupation.

The final regulations expand the types of conditions the DOE can impose on provisionally certified institutions including, for example, restrictions on the addition of new programs or locations, restrictions on the rate of growth or new enrollment of students or of Title IV volume, restrictions on the institution providing a teach-out on behalf of another institution, restrictions on the acquisition of another participating institution (including financial protection requirements), additional reporting requirements, limitations on entering into certain written arrangements with institutions or entities for providing part of an educational program, requirements to submit marketing and recruiting materials to DOE for approval (if the institution is alleged or found to have engaged in substantial misrepresentations to students, engaged in aggressive recruiting practices, or violated incentive compensation rules), reporting requirements for institutions that received a government formal inquiry such as a subpoena related to its marketing or recruitment or its federal financial aid, and other potential conditions imposed by the DOE.

We are still reviewing the final regulations and cannot predict the ultimate impact of the final regulations on gainful employment and the other topics discussed above, but the final regulations impose a broad range of additional requirements on institutions and especially on for-profit institutions like our schools, which increase the possibility that our schools could be subject to additional reporting requirements, potential liabilities and sanctions, and potential loss of Title IV eligibility if our efforts to modify our operations to comply with the new regulations are unsuccessful, which could have a significant impact on our business and results of operations.

The DOE commenced negotiated rulemaking meetings in October 2023 aimed at developing new regulations related to providing student debt relief. The meetings are scheduled to continue through December 2023 and are expected to lead to the publication of proposed regulations next year and, after a period of public notice and comment, final regulations. The rulemaking process is in its earliest stages. We cannot predict the timing, content, or potential impact of any final regulations that might emerge from this process.

### Seasonality

Our revenue and operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in total student population. Student population varies due to new student enrollments, graduations and student attrition. Historically, our schools have had lower student populations in our first and second quarters and we have experienced larger class starts in the third quarter and higher student attrition in the first half of the year. The growth that we generally experience in the second half of the year is largely dependent on a successful high school recruiting season. We recruit high school students several months ahead of their scheduled start dates and, as a consequence, while we have visibility on the number of students who have expressed interest in attending our schools, we cannot predict with certainty the actual number of new student enrollments in any given year and the related impact on revenue. Our expenses, however, typically do not vary significantly over the course of the year with changes in our student population and revenue.

## Market risk

As filed, 160 characters.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required by this item.

## Controls and procedures

As filed, 1,294 characters.

(a) *Evaluation of Disclosure Controls and Procedures.* Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)) as of the end of the quarterly period covered by this Form 10-Q, have concluded that our disclosure controls and procedures are adequate and effective to reasonably ensure that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

(b) *Changes in Internal Control Over Financial Reporting.* There were no changes made during our most recently completed fiscal quarter in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except for new internal controls related to ASC 326 and accounts payable payment processing that have been implemented.

## Risk factors

As filed, 706 characters.

In addition to the other information set forth in this Form 10-Q, you should carefully consider the risk factors discussed in Part I, Item 1A of our Form 10-K and those contained in our previously filed Form 10-Q, which could affect our business, financial condition, or operating results. The risks we describe in our periodic reports are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or operating results. For the quarter ended September 30, 2023, the Company is not aware of any specific new and additional risk factors not previously disclosed.

Filed Nov 6, 2023.
Source: SEC EDGAR, the filing index for accession 0001140361-23-051555. Last ingested by Listed: Nov 10, 2026, 03:58 ET. No prices; not investment advice.