Item 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
All references in this Quarterly Report on 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 Annual Report on Form 10-K for the year ended December 31, 2020, as filed with 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.
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 thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC, which includes audited consolidated financial statements for our two fiscal years ended December 31, 2020.
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 DOE and applicable state education agencies and accrediting commissions, which allow students to apply for and access federal student loans as well as other forms of financial aid.
Our business is organized into two reportable business segments: (a) Transportation and Skilled Trades, and (b) Healthcare and Other Professions or “HOPS”.
Impact of COVID-19 on the Company
During the first quarter of 2020, COVID-19 began to spread worldwide and has caused significant disruptions to the U.S. and world economies. In early March 2020, the Company began seeing the impact of the COVID-19 pandemic on our business. The circumstances related to COVID-19 are unprecedented, dynamic and evolving and currently, with variants of the virus arising, remain unpredictable. As the economic impact of the COVID-19 pandemic continues to evolve, we could see significant changes to our operations.
To date, the impact of COVID-19 has primarily related to transitioning classes from in-person, hands-on instruction to online, remote learning and back. As part of this transition, the Company has incurred additional expenses. Related to this transition, 102 students were placed on leave of absence as they could not complete their externships and certain programs were extended due to restricted access to externship sites and classroom labs. In response to COVID-19, we implemented initiatives to safeguard our students and our employees. Due to phased re-opening on a state-by-state basis, our schools have been reopening since May 2020. Currently, all of our schools are open and only 17 of our students on leave of absence due to COVID-19 remain on leave of absence and we expect the majority of them to complete their programs.
Student Population and Financial Results
As of June 30, 2021, the Company had 17 students on leave of absence due to COVID-19. It is expected that a majority of these students will complete their externships. Further, the Company had extended the length and graduation dates of a few programs in which distance learning could only be utilized for a small percentage of these programs.
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 Condensed Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and Note 1 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2021.
In addition, due to the impact of the COVID-19 pandemic, we have reassessed those of our accounting policies whose application places the most significant demands on management’s judgment, for instance, revenue recognition, allowance for doubtful account, goodwill, and long-lived assets, stock-based compensation, derivative instruments and hedging activity, borrowings, assumptions related to ROU assets, lease cost, income taxes and assets and obligations related to employee benefit plans. Such reassessments did not have a significant impact on our results of operations and cash flows for the periods presented.
Effect of Inflation
Inflation has not had a material effect on our operations.
Results of Continuing Operations for the Three and Six Months Ended June 30, 2021
The following table sets forth selected consolidated statements of operations data as a percentage of revenues for each of the periods indicated:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Educational services and facilities
|
|
|
41.9
|
%
|
|
|
42.0
|
%
|
|
|
41.7
|
%
|
|
|
42.6
|
%
|
Selling, general and administrative
|
|
|
53.8
|
%
|
|
|
56.3
|
%
|
|
|
52.3
|
%
|
|
|
57.6
|
%
|
Gain on sale of assets
|
|
|
0.0
|
%
|
|
|
-0.2
|
%
|
|
|
0.0
|
%
|
|
|
-0.1
|
%
|
Total costs and expenses
|
|
|
95.7
|
%
|
|
|
98.1
|
%
|
|
|
94.0
|
%
|
|
|
100.1
|
%
|
Operating income (loss)
|
|
|
4.3
|
%
|
|
|
1.9
|
%
|
|
|
6.0
|
%
|
|
|
-0.1
|
%
|
Interest expense, net
|
|
|
-0.4
|
%
|
|
|
-0.5
|
%
|
|
|
-0.4
|
%
|
|
|
-0.5
|
%
|
Income (loss) from operations before income taxes
|
|
|
3.9
|
%
|
|
|
1.4
|
%
|
|
|
5.6
|
%
|
|
|
-0.6
|
%
|
Provision for income taxes
|
|
|
0.9
|
%
|
|
|
0.1
|
%
|
|
|
1.2
|
%
|
|
|
0.1
|
%
|
Net income (loss)
|
|
|
3.0
|
%
|
|
|
1.3
|
%
|
|
|
4.4
|
%
|
|
|
-0.7
|
%
|
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
Consolidated Results of Operations
Revenue. Revenue increased $18.0 million, or 28.8% to $80.5 million for the three months ended June 30, 2021 from $62.5 million in the prior year comparable period. The increase in revenue was the result of a 16.3% increase in average population, driven by continued student start growth, which increased 8.0% for the quarter compared to the prior year in combination with starting the year with approximately 1,000 more students than in the prior year comparable period. Further contributing to the increase was the normalization of our revenue stream driven by the return to in-person instruction at all of our campuses.
The prior year financial results reflect the unprecedented impact from the COVID-19 pandemic which started in March of 2020. As a result, certain financial and operational comparisons quarter over quarter may be distorted due to the impact of COVID-19. One area impacted by the pandemic was student starts. Student start results during the second quarter of 2020 included approximately 300 students whom delayed their start date from the first quarter to the second quarter of 2020 due to the onset of the pandemic. Excluding these student from the second quarter population, resulted in a 19.1% increase in student starts. Additionally, Lincoln has experienced consistent start growth over the last three years.
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 $7.5 million, or 28.4% to $33.7 million for the three months ended June 30, 2021 from $26.2 million in the prior year comparable period. The higher costs were mainly concentrated in instructional, books and tools and facilities expenses. Instructional expense and books and tools expense increased as a result of a growing student population in addition to operating with a hybrid remote and in-person instruction in the current year compared to remote learning in the prior year. Similarly, facilities expense increased when compared to prior year due to one-time rent reductions coupled with overall facilities savings during campus closures as a result of COVID-19.
Educational services and facilities expense, as a percentage of revenue, decreased slightly to 41.9% from 42.0% for the three months ended June 30, 2021 and 2020, respectively.
Selling, general and administrative expense. Our selling, general and administrative expense increased $8.1 million, or 23.2% to $43.3 million for the three months ended June 30, 2021 from $35.2 million in the prior year comparable period. The increase in expense quarter over quarter was driven by several factors including an increased student population; the normalization of operating expenses in the current year resulting from the return to in-person instruction at all of our campuses; an improved business climate as the country begins to reopen and a $1.5 million increase in incentive compensation tied directly to improved financial performance.
Selling, general and administrative expense, as a percentage of revenue, decreased to 53.8% from 56.3% for the three months ended June 30, 2021 and 2020, respectively.
Net interest expense. Net interest expense remained essentially flat at $0.3 million for the three months ended June 30, 2021 and 2020, respectively.
Income taxes. Our provision for income taxes was $0.7 million compared to approximately $0.1 million for the three months ended June 30, 2021 and 2020, respectively. The higher provision for the second quarter of 2021 compared to prior year was due to the release of the valuation allowance as of December 31, 2020. The effective tax rate for the three months ending June 30, 2021 was 23.1%.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
Consolidated Results of Operations
Revenue. Revenue increased $26.0 million, or 19.6% to $158.5 million for the six months ended June 30, 2021 from $132.5 million in the prior year comparable period. The increase in revenue was the result of a 13.0% increase in average population, driven by continued student start growth, up 18.0% year over year in combination with starting the year with approximately 1,000 more students than in the prior year comparable period. Further contributing to the increase was the normalization of our revenue stream driven by the return to in-person instruction at all of our campuses.
The prior year financial results reflect the unprecedented impact from the COVID-19 pandemic which started in March of 2020. As a result, certain financial and operational comparisons quarter over quarter may be distorted as a result of the impact of COVID-19.
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 $9.5 million, or 16.9% to $66.0 million for the six months ended June 30, 2021 from $56.5 million in the prior year comparable period. The higher costs were mainly concentrated in instructional, books and tools and facilities expenses. Instructional expense and books and tools expense increased as a result of a growing student population in addition to operating with a hybrid remote and in-person instruction in the current year compared to remote learning in the prior year. Similarly, facilities expense increased when compared to prior year due to one-time rent reductions coupled with overall facilities savings during campus closures as a result of COVID-19.
Educational services and facilities expense, as a percentage of revenue, decreased to 41.7% from 42.6% for the six months ended June 30, 2021 and 2020, respectively.
Selling, general and administrative expense. Our selling, general and administrative expense increased $6.6 million, or 8.7% to $82.9 million for the six months ended June 30, 2021 from $76.3 million in the prior year comparable period. The increase in expense quarter over quarter was driven by several factors including an increased student population; the normalization of operating expenses in the current year resulting from the return to in-person instruction at all of our campuses; an improved business climate as the country begins to reopen and a $2.2 million increase in incentive compensation tied directly to improved financial performance. Partially offsetting the increased expenses was a reduction in bad debt expense.
Bad debt expense for the six months ended June 30, 2021 was favorable compared to the prior year period by $1.5 million, as a result of an adjustment made during the first quarter to qualifying student accounts receivables following guidance published on March 19, 2021 by the Department of Education. This new guidance clarified previous guidance on permitted institutional uses of funds from the Higher Education Emergency Relieve Funds (“HEERF”).
In accordance with this guidance, we combined applicable HEERF funding with Company’s funds to provide financial relief to students who dropped from school due to COVID-19 related circumstances with unpaid accounts receivable balances during the period from March 15, 2020 to March 31, 2021. The relief resulted in a net benefit to bad debt expense of approximately $3.0 million. Without this adjustment bad debt expense for the six months ended June 30,2021, as a percentage of total revenue, would have been comparable with prior year.
Selling, general and administrative expense, as a percentage of revenue, decreased to 52.3% from 57.6% for the six months ended June 30, 2021 and 2020, respectively.
Net interest expense. Net interest expense decreased by $0.1 million for the six months ended June 30, 2021 to $0.6 million from $0.7 million in the prior year comparable period.
Income taxes. Our provision for income taxes was $2.0 million compared to $0.1 million for the six months ended June 30, 2021 and 2020, respectively. The higher provision for the six months ended June 30, 2021 compared to prior year was due to the release of the valuation allowance as of December 31, 2020. The effective tax rate for the six months ending June 30, 2021 was 22.2%.
Segment Results of Operations
We operate our business in two reportable segments: (a) the Transportation and Skilled Trades segment; and (b) the Healthcare and Other Professions (“HOPS”) 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).
The Company also utilizes the Transitional segment solely when and if it closes a school.
We evaluate segment performance based on operating results. Adjustments to reconcile segment results to consolidated results are included under the caption “Corporate,” which primarily includes unallocated corporate activity.
The following table presents results for our two reportable segments for the three months ended June 30, 2021 and 2020:
|
|
Three Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
% Change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
$
|
56,965
|
|
|
$
|
42,915
|
|
|
|
32.7
|
%
|
HOPS
|
|
|
23,499
|
|
|
|
19,555
|
|
|
|
20.2
|
%
|
Total
|
|
$
|
80,464
|
|
|
$
|
62,470
|
|
|
|
28.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
$
|
11,256
|
|
|
$
|
4,870
|
|
|
|
131.1
|
%
|
Healthcare and Other Professions
|
|
|
2,962
|
|
|
|
2,731
|
|
|
|
8.5
|
%
|
Corporate
|
|
|
(10,766
|
)
|
|
|
(6,441
|
)
|
|
|
-67.1
|
%
|
Total
|
|
$
|
3,452
|
|
|
$
|
1,160
|
|
|
|
-197.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Starts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
2,509
|
|
|
|
2,302
|
|
|
|
9.0
|
%
|
Healthcare and Other Professions
|
|
|
1,194
|
|
|
|
1,127
|
|
|
|
5.9
|
%
|
Total
|
|
|
3,703
|
|
|
|
3,429
|
|
|
|
8.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Population:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
8,039
|
|
|
|
7,298
|
|
|
|
10.2
|
%
|
Leave of Absense - COVID-19
|
|
|
(25
|
)
|
|
|
(424
|
)
|
|
|
94.1
|
%
|
Transportation and Skilled Trades Excluding Leave of Absense - COVID-19
|
|
|
8,014
|
|
|
|
6,874
|
|
|
|
16.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare and Other Professions
|
|
|
4,508
|
|
|
|
4,254
|
|
|
|
6.0
|
%
|
Leave of Absense - COVID-19
|
|
|
(40
|
)
|
|
|
(393
|
)
|
|
|
89.8
|
%
|
Healthcare and Other Professions Excluding Leave of Absense - COVID-19
|
|
|
4,468
|
|
|
|
3,861
|
|
|
|
15.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,547
|
|
|
|
11,552
|
|
|
|
8.6
|
%
|
Total Excluding Leave of Absense - COVID-19
|
|
|
12,482
|
|
|
|
10,735
|
|
|
|
16.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of Period Population:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
8,467
|
|
|
|
7,826
|
|
|
|
8.2
|
%
|
Leave of Absense - COVID-19
|
|
|
(7
|
)
|
|
|
(463
|
)
|
|
|
98.5
|
%
|
Transportation and Skilled Trades Excluding Leave of Absense - COVID-19
|
|
|
8,460
|
|
|
|
7,363
|
|
|
|
14.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare and Other Professions
|
|
|
4,410
|
|
|
|
4,456
|
|
|
|
-1.0
|
%
|
Leave of Absense - COVID-19
|
|
|
(10
|
)
|
|
|
(233
|
)
|
|
|
95.7
|
%
|
Healthcare and Other Professions Excluding Leave of Absense - COVID-19
|
|
|
4,400
|
|
|
|
4,223
|
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,877
|
|
|
|
12,282
|
|
|
|
4.8
|
%
|
Total Excluding Leave of Absense - COVID-19
|
|
|
12,860
|
|
|
|
11,586
|
|
|
|
11.0
|
%
|
Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020
Transportation and Skilled Trades
Student starts increased 9.0%, to approximately 2,500 for the three months ended June 30, 2021 from approximately 2,300 in the prior year comparable period.
Operating income increased $6.4 million to $11.3 million for the three months ended June 30, 2021 from $4.9 million in the prior year comparable period. The increase quarter over quarter was mainly driven by the following factors.
|
•
|
Revenue increased $14.1 million, or 32.7% to $57.0 million for the three months ended June 30, 2021 from $42.9 million in the prior year comparable period. The increase in revenue was primarily driven by average student population, up 16.6% resulting from continued start growth quarter over quarter in addition to the normalization of our revenue stream with the return to in-person instruction at all of our campuses.
|
|
•
|
Educational services and facilities expense increased $5.1 million, or 29.4% to $22.7 million for the three months ended June 30, 2021 from $17.6 million in the prior year comparable period. The increase in expense was driven by additional instructional expense, books and tools expense and facilities expense resulting from an increased student population combined with the return to in-person instruction at all of our campuses in the current quarter.
|
|
•
|
Selling, general and administrative expense increased $2.4 million, or 11.7% to $23.0 million for the three months ended June 30, 2021 from $20.6 million in the prior year comparable period. Additional costs were a result of an increased student population quarter over quarter; the normalization of operating expenses in the current year resulting from the return to in-person instruction at all of our campuses and an improved business climate as the country begins to reopen.
|
Healthcare and Other Professions
Student starts increased 5.9%, to approximately 1,200 for the three months ended June 30, 2021 from approximately 1,100 in the prior year comparable period.
Operating income increased $0.2 million to $2.9 million for the three months ended June 30, 2021 from $2.7 million in the prior year comparable period. The increase quarter over quarter was mainly driven by the following factors:
|
•
|
Revenue increased $3.9 million, or 20.2% to $23.4 million for the three months ended June 30, 2021 from $19.5 million in the prior year comparable period. The increase in revenue was primarily driven by average student population, up 15.7% resulting from continued start growth quarter over quarter in addition to the normalization of our revenue stream with the return to in-person instruction at all of our campuses.
|
|
•
|
Educational services and facilities expense increased $2.3 million, or 26.4% to $11.0 million for the three months ended June 30, 2021 from $8.7 million in the prior year comparable period. The increase in expense was driven by additional instructional expense, books and tools expense and facilities expense resulting from an increased student population combined with the return to in-person instruction at all of our campuses in the current quarter.
|
|
•
|
Selling, general and administrative expense increased $1.4 million, or 17.5% to $9.5 million for the three months ended June 30, 2021 from $8.1 million in the prior year comparable period. Additional costs were a result of an increased student population quarter over quarter; the normalization of operating expenses in the current year resulting from the return to in-person instruction at all of our campuses and an improved business climate as the country begins to reopen.
|
Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses were $10.8 million and $6.4 million for each of the three months ended June 30, 2021 and 2020, respectively. The additional expenses quarter over quarter were driven by several factors including the normalization of operating expenses in the current year; an improved business climate as the country begins to reopen and a $1.5 million increase in incentive compensation tied directly to improved financial performance.
The following table present results for our two reportable segments for the six months ended June 30, 2021 and 2020:
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
% Change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
$
|
112,636
|
|
|
$
|
91,971
|
|
|
|
22.5
|
%
|
HOPS
|
|
|
45,825
|
|
|
|
40,540
|
|
|
|
13.0
|
%
|
Total
|
|
$
|
158,461
|
|
|
$
|
132,511
|
|
|
|
19.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
$
|
23,581
|
|
|
$
|
9,708
|
|
|
|
142.9
|
%
|
Healthcare and Other Professions
|
|
|
5,911
|
|
|
|
4,733
|
|
|
|
24.9
|
%
|
Corporate
|
|
|
(20,020
|
)
|
|
|
(14,626
|
)
|
|
|
-36.9
|
%
|
Total
|
|
$
|
9,472
|
|
|
$
|
(185
|
)
|
|
|
5220.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Starts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
4,848
|
|
|
|
4,022
|
|
|
|
20.5
|
%
|
Healthcare and Other Professions
|
|
|
2,403
|
|
|
|
2,123
|
|
|
|
13.2
|
%
|
Total
|
|
|
7,251
|
|
|
|
6,145
|
|
|
|
18.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Population:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
8,036
|
|
|
|
7,302
|
|
|
|
10.1
|
%
|
Leave of Absense - COVID-19
|
|
|
(20
|
)
|
|
|
(223
|
)
|
|
|
91.0
|
%
|
Transportation and Skilled Trades Excluding Leave of Absense - COVID-19
|
|
|
8,016
|
|
|
|
7,079
|
|
|
|
13.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare and Other Professions
|
|
|
4,459
|
|
|
|
4,120
|
|
|
|
8.2
|
%
|
Leave of Absense - COVID-19
|
|
|
(65
|
)
|
|
|
(213
|
)
|
|
|
69.5
|
%
|
Healthcare and Other Professions Excluding Leave of Absense - COVID-19
|
|
|
4,394
|
|
|
|
3,907
|
|
|
|
12.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,495
|
|
|
|
11,422
|
|
|
|
9.4
|
%
|
Total Excluding Leave of Absense - COVID-19
|
|
|
12,410
|
|
|
|
10,986
|
|
|
|
13.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of Period Population:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
8,467
|
|
|
|
7,826
|
|
|
|
8.2
|
%
|
Leave of Absense - COVID-19
|
|
|
(7
|
)
|
|
|
(463
|
)
|
|
|
98.5
|
%
|
Transportation and Skilled Trades Excluding Leave of Absense - COVID-19
|
|
|
8,460
|
|
|
|
7,363
|
|
|
|
14.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare and Other Professions
|
|
|
4,410
|
|
|
|
4,456
|
|
|
|
-1.0
|
%
|
Leave of Absense - COVID-19
|
|
|
(10
|
)
|
|
|
(233
|
)
|
|
|
95.7
|
%
|
Healthcare and Other Professions Excluding Leave of Absense - COVID-19
|
|
|
4,400
|
|
|
|
4,223
|
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,877
|
|
|
|
12,282
|
|
|
|
4.8
|
%
|
Total Excluding Leave of Absense - COVID-19
|
|
|
12,860
|
|
|
|
11,586
|
|
|
|
11.0
|
%
|
Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020
Transportation and Skilled Trades
Student starts increased 20.5%, to approximately 4,800 for the six months ended June 30, 2021 from approximately 4,000 in the prior year comparable period.
Operating income increased $13.9 million to $23.6 million for the six months ended June 30, 2021 from $9.7 million in the prior year comparable period. The increase year over year was mainly driven by the following factors.
|
•
|
Revenue increased $20.6 million, or 22.5% to $112.6 million for the six months ended June 30, 2021 from $92.0 million in the prior year comparable period. The increase in revenue was primarily driven by average student population, up 13.2% resulting from continued start growth quarter over quarter in addition to the normalization of our revenue stream with the return to in-person instruction at all of our campuses.
|
|
•
|
Educational services and facilities expense increased $6.5 million, or 17.0% to $44.6 million for the six months ended June 30, 2021 from $38.1 million in the prior year comparable period. The increase in expense was driven by additional instructional expense, books and tools expense and facilities expense resulting from an increased student population combined with the return to in-person instruction at all of our campuses in the current year.
|
|
•
|
Selling, general and administrative expense increased $0.2 million to $44.4 million for the six months ended June 30, 2021 from $44.2 million in the prior year comparable period.
|
Healthcare and Other Professions
Student starts increased 13.2%, to approximately 2,400 for the six months ended June 30, 2021 from approximately 2,100 in the prior year comparable period.
Operating income increased $1.2 million to $5.9 million for the six months ended June 30, 2021 from $4.7 million in the prior year comparable period. The increase year over year was mainly driven by the following factors:
|
•
|
Revenue increased $5.3 million, or 13.0% to $45.8 million for the six months ended June 30, 2021 from $40.5 million in the prior year comparable period. The increase in revenue was primarily driven by average student population, up 12.5% resulting from continued start growth quarter over quarter in addition to the normalization of our revenue stream with the return to in-person instruction at all of our campuses.
|
|
•
|
Educational services and facilities expense increased $3.0 million, or 16.7% to $21.4 million for the six months ended June 30, 2021 from $18.4 million in the prior year comparable period. The increase in expense was driven by additional instructional expense, books and tools expense and facilities expense resulting from an increased student population combined with the return to in-person instruction at all of our campuses in the current year.
|
|
•
|
Selling, general and administrative expense increased $1.0 million, or 6.0% to $18.5 million for the six months ended June 30, 2021 from $17.5 million in the prior year comparable period. Additional costs were a result of an increased student population quarter over quarter; the normalization of operating expenses in the current year resulting from the return to in-person instruction at all of our campuses and an improved business climate as the country begins to reopen.
|
Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses were $20.0 million and $14.6 million for each of the six months ended June 30, 2021 and 2020, respectively. The additional expenses quarter over quarter were driven by several factors including the normalization of operating expenses in the current year; an improved business climate as the country begins to reopen and a $2.2 million increase in incentive compensation tied directly to improved financial performance.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are for maintenance and expansion of our facilities and the development of new programs. Our principal sources of liquidity have been cash provided by operating activities and borrowings under our Credit Facility. The following chart summarizes the principal elements of our cash flow for each of the six months ended June 30, 2021 and 2020, respectively:
|
|
Three Months Ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Net cash provided by operating activities
|
|
$
|
1,067
|
|
|
$
|
6,468
|
|
Net cash used in investing activities
|
|
|
(3,516
|
)
|
|
|
(2,975
|
)
|
Net cash used in financing activities
|
|
|
(2,570
|
)
|
|
|
(16,169
|
)
|
As of June 30, 2021, the Company had a net cash balance of $16.7 million compared to a net cash balance of $20.8 million at December 31, 2020. The net cash balance is calculated as our cash, cash equivalents and restricted cash less both short and long-term portion of the credit agreement. The decrease in cash position from year end was the result of the seasonality of our business in addition to a decrease in accrued expenses driven by the payment of incentive compensation. When comparing the current quarter end net cash balance of $16.7 million to a net cash balance of $7.8 million as of June 30, 2020, the increase in cash position can mainly be attributed to net income generated by the company in addition to a decrease in net payments on borrowing in the current year.
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 77% of our cash receipts relating to revenues in 2020. Pursuant to applicable regulations, students must apply for a new loan for each academic period. Federal regulations dictate the timing of disbursements of funds under Title IV Programs and loan funds are generally provided by lenders in two disbursements for each academic year. The first disbursement is usually received approximately 31 days after the start of a student’s academic year and the second disbursement is typically received at the beginning of the sixteenth week from the start of the student's academic year. Certain types of grants and other funding are not subject to a 31-day delay. In certain instances, if a student withdraws from a program prior to a specified date, any paid but unearned tuition or prorated Title IV Program financial aid is refunded according to federal, state and accrediting agency standards.
As a result of the significant amount of Title IV Program funds received by our students, we are highly dependent on these funds to operate our business. Any reduction in the level of Title IV Program funds that our students are eligible to receive or any restriction on our eligibility to receive Title IV Program funds would have a significant impact on our operations and our financial condition. For more information, see Part I, Item 1A. “Risk Factors - Risks Related to Our Industry” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Operating Activities
Net cash provided by operating activities was $1.1 million and $6.5 million for each of the six months ended June 30, 2021 and 2020, respectively. Included in cash provided by operating activities in the six months ended June 30, 2020 was $14.5 million in federal funds received under the Cares Acts intended for reimbursement to students for expenses related to disruptions in campus operations as a direct result of the COVID-19 pandemic. Excluding these funds, we would have reported net cash used in operating activities of $8.0 million. The increase of $9.0 million in cash provided by operating activities was primarily driven by net income generated for the six months ended June 30, 2021.
Investing Activities
Net cash used in investing activities was $3.5 million for the six months ended June 30, 2021 compared to $3.0 million in the prior year comparable period.
One of our primary uses of cash in investing activities was capital expenditures associated with investments in training technology, classroom furniture, and new program buildouts.
We currently lease a majority of our campuses. We own our real property in Grand Prairie, Texas; Nashville, Tennessee; and Denver, Colorado and our former school property located in Suffield, Connecticut.
Capital expenditures were 2% of revenues in 2020 and are expected to approximate 2% of revenues in 2021. We expect to fund future capital expenditures with cash generated from operating activities and borrowings under our credit facility.
Financing Activities
Net cash used in financing activities was $2.6 million for the six months ended June 30, 2021 compared to $16.2 million in the prior year comparable period. The decrease of $13.6 million was driven by several factors including a decrease in net payments on borrowing of $15.0 million year over year, an increase of $0.8 million in equity based compensation in addition to dividends paid in the current year of $0.6 million.
Credit Facility with Sterling National Bank
On November 14, 2019, the Company entered into a new senior secured credit agreement (the “Credit Agreement”) with its lender, Sterling National Bank (the “Lender”), providing for borrowing in the aggregate principal amount of up to $60 million (the “Credit Facility”).
The Credit Facility is comprised of four facilities: (1) a $20 million senior secured term loan maturing on December 1, 2024 (the “Term Loan”), with monthly interest and principal payments based on 120-month amortization with the outstanding balance due on the maturity date; (2) a $10 million senior secured delayed draw term loan maturing on December 1, 2024 (the “Delayed Draw Term Loan”), with monthly interest payments for the first 18 months and thereafter monthly payments of interest and principal based on 120-month amortization and all balances due on the maturity date; (3) a $15 million senior secured committed revolving line of credit providing a sublimit of up to $10 million for standby letters of credit maturing on November 13, 2022 (the “Revolving Loan”), with monthly payments of interest only; and (4) a $15 million senior secured non-restoring line of credit maturing on January 31, 2021 (the “Line of Credit Loan”). The Credit Agreement gives the Company the right to permanently terminate, in its entirety, the Revolving Loan or the Line of Credit Loan or permanently reduce the amount available for borrowing under the Revolving Loan or the Line of Credit Loan. In April 2020, the Company terminated the Line of Credit Loan. On November 10, 2020, the Company entered into an amendment to its Credit Agreement to extend the Delayed Draw Availability Period by one year to May 31, 2022 and to increase the amount of permitted cash dividends that the Company can pay on its Series A Preferred Stock during the first twenty-four months of the Credit Agreement from $1.7 million to $2.3 million.
The Credit Facility is secured by a first priority lien in favor of the Lender on substantially all of the personal property owned by the Company, as well as a pledge of the stock and other equity in the Company’s subsidiaries and mortgages on parcels of real property owned by the Company in Colorado, Tennessee and Texas, at which three of the Company’s schools are located, as well as a former school property owned by the Company located in Connecticut.
At the closing of the Credit Facility, the Lender advanced the Term Loan to the Company, the net proceeds of which were $19.7 million after deduction of the Lender’s origination fee in the amount of $0.3 million and other Lender fees and reimbursements to the Lender that are customary for facilities of this type. The Company used the net proceeds of the Term Loan, together with cash on hand, to repay the existing credit facility and transaction expenses.
Pursuant to the terms of the Credit Agreement, letters of credit issued under the Revolving Loan reduce dollar for dollar the availability of borrowings under the Revolving Loan.
Accrued interest on each loan under the Credit Facility is payable monthly in arrears. The Term Loan and the Delayed Draw Term Loan bear interest at a floating interest rate based on the then one month London Interbank Offered Rate (“LIBOR”) plus 3.50%. At the closing of the Credit Facility, the Company entered into a swap transaction with the Lender for 100% of the principal balance of the Term Loan, which matures on the same date as the Term Loan. At the end of the borrowing availability period for the Delayed Draw Term Loan, the Company is required to enter into a swap transaction with the Lender for 100% of the principal balance of the Delayed Draw Term Loan, which will mature on the same date as the Delayed Draw Term Loan, pursuant to a swap agreement between the Company and the Lender or the Lender’s affiliate. The Term Loan and Delayed Draw Term Loan are subject to a LIBOR interest rate floor of .25% if there is no swap agreement.
Revolving Loans bear interest at a floating interest rate based on the then LIBOR plus an indicative spread determined by the Company’s leverage as defined in the Credit Agreement or, if the borrowing of a Revolving Loan is to be repaid within 30 days of such borrowing, the Revolving Loan will accrue interest at the Lender’s prime rate plus .50% with a floor of 4.0%. Revolving Loans are subject to a LIBOR interest rate floor of .00%.
Letters of credit are charged an annual fee equal to (i) an applicable margin determined by the leverage ratio of the Company less (ii) .25%, paid quarterly in arrears, in addition to the Lender’s customary fees for issuance, amendment and other standard fees. Letters of credit totaling $4 million that were outstanding under the existing credit facility are treated as letters of credit under the Revolving Loan.
Under the terms of the Credit Agreement, the Company may prepay the Term Loan and/or the Delayed Draw Term Loan in full or in part without penalty except for any amount required to compensate the Lender for any swap breakage or other costs incurred in connection with such prepayment. The Lender receives an unused facility fee of 0.50% per annum payable quarterly in arrears on the unused portions of the Revolving Loan.
In addition to the foregoing, the Credit Agreement contains customary representations, warranties and affirmative and negative covenants (including financial covenants that (i) restrict capital expenditures, (ii) restrict leverage, (iii) require maintaining minimum tangible net worth, (iv) require maintaining a minimum fixed charge coverage ratio and (v) require the maintenance of a minimum of $5 million in quarterly average aggregate balances on deposit with the Lender, which, if not maintained, will result in the assessment of a quarterly fee of $12,500), as well as events of default customary for facilities of this type. As of June 30, 2021, the Company was in compliance with all debt covenants. The Credit Agreement also limited the payment of cash dividends during the first twenty-four months of the agreement to $1.7 million but an amendment to the Credit Agreement entered into on November 10, 2020 raised the cash dividend limit to $2.3 million in such twenty-four-month period.
As of June 30, 2021 and December 31, 2020, the Company had $16.8 million and $17.8 million, respectively, outstanding under the Credit Facility offset by $0.5 million and $0.6 million of deferred finance fees, respectively. As of June 30, 2021 and December 31, 2020, letters of credit in the aggregate outstanding principal amount of $4.0 million were outstanding under the Credit Facility.
The following table sets forth our long-term debt (in thousands):
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Credit agreement
|
|
$
|
16,833
|
|
|
$
|
17,833
|
|
Deferred Financing Fees
|
|
|
(530
|
)
|
|
|
(621
|
)
|
|
|
|
16,303
|
|
|
|
17,212
|
|
Less current maturities
|
|
|
(2,000
|
)
|
|
|
(2,000
|
)
|
|
|
$
|
14,303
|
|
|
$
|
15,212
|
|
Contractual Obligations
Current portion of Long-Term Debt, Long-Term Debt and Lease Commitments. As of June 30, 2021, our current portion of long-term debt and long-term debt consisted of borrowings under our Credit Facility. We lease offices, educational facilities and various items of equipment for varying periods through the year 2031 at basic annual rentals (excluding taxes, insurance, and other expenses under certain leases).
As of June 30, 2021, we had outstanding loan principal commitments to our active students of $28.1 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 packaged to fund their education using these funds and they are not reported on our financials.
Regulatory Updates
Borrower Defense to Repayment Regulations.
As previously disclosed in Lincoln’s Annual Report on Form 10-K, Lincoln is subject to an extensive regulatory scheme which includes, without limitation, the Borrower Defense to Repayment regulations. On July 1, 2020, the DOE’s published final Borrower Defense to Repayment regulations became effective. Among other things, these new regulations amend the processes for borrowers to receive from DOE a discharge of the obligation to repay certain Title IV Program loans first disbursed on or after July 1, 2020 based on certain acts or omissions by the institution or a covered party. The new and existing DOE regulations establish detailed procedures and standards for the loan discharge processes for periods prior to July 1, 2017, between July 1, 2017 and June 30, 2020, and on or after July 1, 2020, including the information required for borrowers to receive a loan discharge, and the authority of the DOE to seek recovery from the institution of the amount of discharged loans. The current and future rules could have a material adverse effect on our schools’ business and results of operations, and the broad sweep of the rules may, in the future, require our schools to submit a letter of credit based on expanded standards of financial responsibility. See the Company’s disclosures in its Annual Report on Form 10-K for the fiscal year ended December 31, 2020 under the captions “Regulatory Environment – Borrower Defense to Repayment Regulations” and “Risk Factors – We could be subject to liabilities, letter of credit requirements, and other sanctions under the DOE’s Borrower Defense to Repayment Regulations.”
On April 29, 2021, Lincoln received communication from the DOE indicating that the DOE was in receipt of a number of borrower defense applications containing allegations concerning Lincoln and requiring the DOE to undertake a fact-finding process pursuant to DOE regulations. Among other things, the communication outlines a process by which the DOE will provide to Lincoln each application allowing Lincoln the opportunity to submit responses to the applications. Further, the communication outlines certain information requests, relating to the period between 2007 and 2013, in connection with the DOE’s preliminary review of the borrower defense applications. Based upon publicly available information, it appears that the DOE has undertaken similar reviews of other educational institutions which have also been the subject of various borrower defense applications. We subsequently received from the DOE one group of 175 borrower application claims in May 2021 and another group of 140 borrower application claims in July 2021. We are in the process of thoroughly reviewing and responding to each borrower application sent to us by the DOE.
Given the early stage of this matter, management is not able to predict the outcome of the DOE’s review at this time. If the DOE disagrees with our legal and factual grounds for contesting the applications, the DOE may impose liabilities on the Company based on the discharge of the loans at issue in the pending applications which could have a material adverse effect on our business and results of operations.
It is possible that we may receive from the DOE in the future borrower defense applications submitted by or on behalf of prior, current, or future Lincoln students and that the DOE could seek to recover liabilities from Lincoln for discharged loans.
If the DOE grants any pending or future borrower applications, the DOE regulations state that the DOE may initiate an appropriate proceeding to recover liabilities arising from the loans in the applications. If the DOE initiates such a proceeding, Lincoln would request reconsideration of the liabilities. We cannot predict the timing or amount of all borrower defense applications that borrowers may submit to the DOE or that the DOE may grant in the future, or the timing or amount of any possible liabilities that the DOE may seek to recover from Lincoln, if any.
The DOE has announced, generally, that it intends to establish new regulations on a variety of topics including borrower defense to repayment, that could result in regulations that would make it easier for borrowers to obtain discharges of their loans and for the DOE to recover liabilities from institutions. See “Negotiated Rulemaking.”
The ARPA and the “90/10 Rule.”
In March 2021, the $1.9 trillion American Rescue Plan Act of 2021 (the “ARPA”) was signed into law. Among other things, the ARPA provides $40 billion in relief funds that will go directly to colleges and universities with $395.8 million going to for-profit institutions. We have been allocated approximately $8 million in funds that must be used entirely for student financial aid grants. As of June 30, 2021, none of these funds have been drawn down.
In addition, the ARPA also includes a provision that amends the 90/10 Rule. A for-profit institution that derives more than 90% of its total revenue from Title IV Programs for two consecutive fiscal years becomes immediately ineligible to participate in Title IV Programs and may not reapply for eligibility until the end of at least two fiscal years. An institution with revenues exceeding 90% for a single fiscal year will be placed on provisional certification and may be subject to other enforcement measures. See the Company’s disclosures in its Annual Report on Form 10-K for the fiscal year ended December 31, 2020 under the captions “Regulatory Environment – The ‘90/10 Rule’” and “Risk Factors – Our institutions would lose eligibility to participate in Title IV Programs if the percentage of their revenues derived from those programs exceeds 90%, which could reduce our student population and revenues.” If Congress or the DOE were to amend the 90/10 Rule to treat other forms of federal financial aid as Title IV Program revenue for 90/10 Rule purposes, lower the 90% threshold, or otherwise change the calculation methodology (each of which has been proposed by some Congressional members in proposed legislation), or make other changes to the 90/10 Rule, those changes could make it more difficult for our institutions to comply with the 90/10 Rule.
The ARPA amends the 90/10 rule by treating other “Federal funds that are disbursed or delivered to or on behalf of a student to be used to attend such institution” in the same way as Title IV funds are currently treated in the 90/10 rule calculation. This means that our institutions will be required to limit the combined amount of Title IV funds and applicable “Federal funds” revenue in a fiscal year to no more than 90% in a fiscal year as calculated under the rule. Consequently, the ARPA change to the 90/10 rule is expected to increase the 90/10 rule calculations at our institutions. The ARPA does not identify the specific Federal funding programs that will be covered by this provision, but it is expected to include funding from federal student aid programs such as the veterans’ benefits programs, which include the Post-9/11 GI Bill and Veterans Readiness and Employment services and from which we derived approximately 8% of our revenues on a cash basis in 2020.
The ARPA states that the amendments to the 90/10 Rule apply to institutional fiscal years beginning on or after January 1, 2023 and are subject to the HEA’s negotiated rulemaking process which may not commence earlier than October 1, 2021. Accordingly, the ARPA change to the 90/10 rule is not expected to apply to our 90/10 Rule calculations until our 2023 fiscal year. Moreover, we cannot predict the additional changes to the 90/10 Rule or other regulations that might occur as a result of negotiated rulemaking to be conducted during 2021 and 2022 as required by the ARPA.
We expect to make changes to certain of our operations in order to address the current and future provisions in the 90/10 Rule and in order to maintain the 90/10 percentages at our institutions below the 90% threshold as calculated under DOE regulations. However, we do not have significant control over the amount of Title IV funds that our students may receive and borrow. Our institutions’ 90/10 percentages can be increased by increases in Title IV aid availability (including, for example, increases in Pell Grant funds) and be decreased by decreases in the availability of state grant program funding and other sources of student aid that do not count as Title IV funds in the 90/10 calculation. Our institutions’ 90/10 percentages also will increase when the ARPA amendments to the 90/10 Rule take effect to the extent that students eligible to receive military and veteran education assistance enroll and use their financial assistance at our institutions. We cannot be certain that the changes we make in the future will succeed in maintaining our institutions’ 90/10 percentages below required levels or that the changes will not materially impact our business operations, revenues, and operating costs.
If any of our institutions lose eligibility to participate in Title IV Programs, that loss would cause an event of default under our credit agreement, would also adversely affect our students’ access to various government-sponsored student financial aid programs, and would have a significant impact on the rate at which our students enroll in our programs and on our business and results of operations.
Negotiated Rulemaking. The DOE periodically issues new regulations and guidance that can have an adverse effect on our institutions. See the Company’s disclosures in its Annual Report on Form 10-K for the fiscal year ended December 31, 2020 under the captions “Regulatory Environment – Negotiated Rulemaking” and “Risk Factors - The DOE has changed its regulations, and may make other changes in the future, in a manner which could require us to incur additional costs in connection with our administration of the Title IV Programs, affect our ability to remain eligible to participate in the Title IV Programs, impose restrictions on our participation in the Title IV Programs, affect the rate at which students enroll in our programs, or otherwise have a significant impact on our business and results of operations.” We cannot predict the timing and content of any new regulations or guidance that the DOE may seek to impose or whether and to what extent the DOE under the new administration may issue new regulations and guidance that could adversely impact for-profit schools including our institutions. For example, the ARPA will require the DOE to initiate a process to amend its regulations regarding the 90/10 Rule. See “The ARPA and the ‘90/10 Rule.’”
In addition, in May 2021, the DOE announced its intention to establish negotiated rulemaking committees to prepare proposed regulations on an extensive range of topics including without limitation changes of ownership and change in control of institutions of higher education, certification procedures for participation in the Title IV Programs, standards of administrative capability, ability to benefit standards, borrower defense to repayment, discharges for borrowers with a total and permanent disability, closed school loan discharges, discharges for false certification of student eligibility, loan repayment plans, the public service loan forgiveness program, mandatory pre-dispute arbitration and prohibition of class action lawsuits provisions in institutional enrollment agreements, financial responsibility standards including events that indicate heightened financial risk, gainful employment, and Pell Grant eligibility for prison education programs. The DOE also could consider additional topics for proposed regulations during the negotiated rulemaking process. The negotiated rulemaking process could lead to future DOE regulations that could adversely impact for-profit schools including our institutions.
We cannot predict with certainty the ultimate combined impact of the regulatory changes which have occurred in recent years and that may occur as a result of the upcoming negotiated rulemaking, nor can we predict the effect of future legislative or regulatory action by federal, state or other agencies regulating our education programs or other aspects of our operations, how any resulting regulations will be interpreted or whether we and our institutions will be able to comply with these requirements in the future. Any such actions by legislative or regulatory bodies that affect our programs and operations could have a material adverse effect on our student population and our institutions, including the need to cease offering a number of programs.
Closed School Loan Discharges. The DOE may grant closed school loan discharges of Federal student loans based upon applications by qualified students. The DOE also may initiate discharges on its own for students who have not reenrolled in another Title IV Program eligible school within three years after the closure and who attended campuses that closed on or after November 1, 2013, as did some of our former campuses. If the DOE discharges some or all of these loans, the DOE may seek to recover the cost of the loan discharges from us. The DOE also has announced that it intends to establish new regulations on a variety of topics including closed school loan discharges, which could result in regulations that would make it easier for borrowers to obtain discharges of their loans and for the DOE to recover liabilities from institutions. See “Negotiated Rulemaking.”
We have received five separate letters from the DOE since September 3, 2020, asserting liabilities for closed school loan discharges in connection with the closure of some of our campuses. The total liability paid to the DOE since September 3, 2020, has been approximately $280,000. The most recent correspondence from the DOE on this topic was dated February 11, 2021, which asserted a liability of approximately $74,000 for two previously closed campuses. We have appealed this amount on March 2, 2021, and the DOE subsequently notified us on July 26, 2021, that based on our appeal, the liability would be reduced to $61,000. We cannot predict the timing or amount of the outcome of the DOE’s consideration of our response, nor can we predict any additional loan discharges that the DOE may approve or the liabilities that the DOE may seek from us for these campuses or other campuses that have closed in the past.
Seasonality
Our revenue and operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in total student population. Student population varies as a result of new student enrollments, graduations and student attrition. Historically, our schools have had lower student populations in our first and second quarters and we have experienced larger class starts in the third quarter and higher student attrition in the first half of the year. Our second half growth is largely dependent on a successful high school recruiting season. We recruit our high school students several months ahead of their scheduled start dates and, thus, while we have visibility on the number of students who have expressed interest in attending our schools, we cannot predict with certainty the actual number of new student enrollments and the related impact on revenue. Our expenses, however, typically do not vary significantly over the course of the year with changes in our student population and revenue.