10-Q 1 ef20038243_10q.htm 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)

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

For the quarterly period ended September 30, 2024

or

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

For the transition period from______ to______

Commission File Number 000-51371

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

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

14 Sylvan Way, Suite A
  
07054
Parsippany, NJ
  
(Zip Code)
(Address of principal executive offices)
    

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

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

Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, no par value per share
LINC
The NASDAQ Stock Market LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No ☐

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

 
Large accelerated filer ☐
Accelerated filer ☒
 
Non-accelerated filer ☐
Smaller reporting company ☒
 
Emerging growth company ☐
  

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

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

As of November 12, 2024, there were 31,479,167 shares of the registrant’s Common Stock outstanding.

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2024

PART I.
 2
Item 1.
2
 
3
 
4
 
5
 
6
 
7
 
9
Item 2.
 21
Item 3.
32
Item 4.
32
PART II.
32
Item 1.
 32
Item 1A.
 33
Item 2.
33
Item 3.
33
Item 4.
33
Item 5.
33
Item 6.
34
 
35

Forward-Looking Statements
 
This Quarterly Report on Form 10-Q and the documents incorporated by reference herein contain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation and availability of resources. These forward-looking statements include, without limitation, statements regarding proposed new programs, expectations that regulatory developments or other matters will or will not have a material adverse effect on our consolidated financial position, results of operations or liquidity, statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operating results and future economic performance; and statements of management’s goals and objectives and other similar expressions concerning matters that are not historical facts. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements.
 
Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to the following:
 

 •
compliance with the extensive existing regulatory framework applicable to our industry or our failure to timely obtain and maintain regulatory approvals and accreditation;

•
compliance with continuous changes in applicable federal laws and regulations, including pending rulemaking by the U.S. Department of Education;

•
the effect of current and future Title IV Program regulations arising out of negotiated rulemakings, including any potential reductions in funding or restrictions on the use of funds received through Title IV Programs;

•
successful updating and expansion of the content of existing programs and developing new programs in a cost-effective manner or on a timely basis;

•
uncertainties regarding our ability to comply with federal laws and regulations regarding the 90/10 Rule and cohort default rates;

•
successful implementation of our strategic plan;

•
our inability to maintain eligibility for or to process federal student financial assistance;

•
regulatory investigations of, or actions commenced against, us or other companies in our industry;

•
changes in the state regulatory environment or budgetary constraints;

•
enrollment declines or challenges in our students’ ability to find employment as a result of economic conditions;

•
maintenance and expansion of existing industry relationships and develop new industry relationships;

•
a loss of members of our senior management or other key employees;

•
uncertainties associated with opening of new campuses and closing existing campuses;

•
uncertainties associated with integration of acquired schools;

•
industry competition;

•
the effect of any cybersecurity incident;

•
the effect of public health outbreaks, epidemics and pandemics;

•
general economic conditions; and

•
other factors discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 as well as the Company’s subsequent Quarterly Reports on Form 10-Q under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as applicable.
 
Forward-looking statements speak only as of the date the statements are made.  Except as required under the federal securities laws and rules and regulations of the United States Securities and Exchange Commission, we undertake no obligation to update or revise forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information.  We caution you not to unduly rely on the forward-looking statements when evaluating the information presented herein.

1
PART I – FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
    September 30,     December 31,  
 
2024
    
2023
  
             
ASSETS
            
CURRENT ASSETS:
            
Cash and cash equivalents
  
$
53,962
    
$
75,992
  
Restricted cash
     -       4,277  
Accounts receivable, less allowance for credit losses of $40,094 and $34,441 at September 30, 2024 and December 31, 2023, respectively
    
53,121
      
35,692
  
Inventories
    
2,711
      
2,948
  
Prepaid income taxes and income taxes receivable
     2,006       -  
Prepaid expenses and other current assets
    
3,638
      
5,556
  
Assets held for sale
     -       10,198  
Total current assets
    
115,438
      
134,663
  
                 
PROPERTY, EQUIPMENT AND FACILITIES - At cost, net of accumulated depreciation and amortization of $141,357 and $140,161 at September 30, 2024 and December 31, 2023, respectively
    
75,495
      
50,857
  
                 
OTHER ASSETS:
                
Noncurrent receivables, less allowance for credit losses of $21,935 and $19,370 at September 30, 2024 and December 31, 2023, respectively
    
19,822
      
17,504
  
Deferred finance charges
     361       -  
Deferred income taxes, net
    
22,762
      
23,217
  
Operating lease right-of-use assets
    
129,838
      
89,923
  
Finance lease right-of-use assets
    27,163       15,797  
Goodwill
    
10,742
      
10,742
  
Other assets, net
    
1,365
      
1,787
  
Pension plan assets, net
    1,036       759  
Total other assets
    
213,089
      
159,729
  
TOTAL ASSETS
  
$
404,022
    
$
345,249
  

See Notes to Condensed Consolidated Financial Statements (Unaudited).
2
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
    September 30,     December 31,  
 
2024
    
2023
  
             
LIABILITIES AND STOCKHOLDERS’ EQUITY
            
CURRENT LIABILITIES:
            
Unearned tuition
  
$
22,979
    
$
26,906
  
Accounts payable
    
27,855
      
18,152
  
Accrued expenses
    
12,283
      
13,713
  
Income taxes payable
    
-
      
2,832
  
Current portion of operating lease liabilities
    
10,338
      
11,737
  
Current portion of finance lease liabilities
    
-
      
70
  
Total current liabilities
    
73,455
      
73,410
  
                 
NONCURRENT LIABILITIES:
                
Long-term portion of operating lease liabilities
    
131,245
      
88,853
  
Long-term portion of finance lease liabilities
    29,359       16,126  
Other long-term liabilities
    -       56  
Total liabilities
    
234,059
      
178,445
  
                 
STOCKHOLDERS’ EQUITY:
                
Common stock, no par value - authorized 100,000,000 shares at September 30, 2024 and December 31, 2023, issued and outstanding 31,479,167 shares at September 30, 2024 and 31,359,110 shares at December 31, 2023.
    
48,181
      
48,181
  
Additional paid-in capital
    
49,482
      
49,380
  
Retained earnings
    
72,336
      
69,279
  
Accumulated other comprehensive loss
    
(36
)
    
(36
)
Total stockholders’ equity
    
169,963
      
166,804
  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  
$
404,022
    
$
345,249
  

See Notes to Condensed Consolidated Financial Statements (Unaudited).
3
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
    Three Months Ended     Nine Months Ended  
 
September 30,
    
September 30,
  
   
2024
    
2023
    
2024
    
2023
  
                         
REVENUE
  
$
114,410
    
$
99,618
    
$
320,691
    
$
275,548
  
COSTS AND EXPENSES:
                                
Educational services and facilities
    
48,055
      
43,129
      
136,639
      
121,251
  
Selling, general and administrative
    
63,339
      
54,485
      
181,697
      
156,603
  
(Gain) loss on sale of assets
     (12 )     8       901       (30,923 )
Gain on insurance proceeds
    (2,794 )     -       (2,794 )     -  
Impairment of goodwill and long-lived assets
    -       -       -       4,220  
Total costs & expenses
    
108,588
      
97,622
      
316,443
      
251,151
  
OPERATING INCOME
   
5,822
      
1,996
      
4,248
      
24,397
  
OTHER:
                                
Interest income     464       878       1,800       1,891  
Interest expense
    
(659
)
    
(21
)
    
(1,893
)
    
(74
)
INCOME BEFORE INCOME TAXES
    
5,627
      
2,853
      
4,155
      
26,214
  
PROVISION FOR INCOME TAXES
    
1,674
      
789
      
1,098
      
7,009
  
NET INCOME
 
$
3,953
    
$
2,064
    
$
3,057
    
$
19,205
  
Basic
                               
Net income per common share
  
$
0.13
    
$
0.07
    
$
0.10
    
$
0.64
  
Diluted                                
Net income per common share
   $ 0.13     $ 0.07     $ 0.10     $ 0.63  
Weighted average number of common shares outstanding:
                                
Basic
   
30,682
      
30,164
      
30,547
      
30,115
  
Diluted
    31,042       30,698       30,806       30,455  

See Notes to Condensed Consolidated Financial Statements (Unaudited).
4
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
    Three Months Ended     Nine Months Ended  

 
September 30,
    
September 30,
  
   
2024
    
2023
    
2024
    
2023
  
Net income
  
$
3,953
 
$
2,064
    
$
3,057
 
$
19,205
  
Other comprehensive loss
                                
Employee pension plan adjustments, net of taxes (nil)
    
-
      
(26
)
    
-
      
(79
)
Comprehensive income
  
$
3,953
 
$
2,038
    
$
3,057
 
$
19,126
  

See Notes to Condensed Consolidated Financial Statements (Unaudited).
5
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
(Unaudited)
 

 
Stockholders’ Equity
  
                      Accumulated        
          Additional           Other        
   
Common Stock
    
Paid-in
    
Retained
    
Comprehensive
        
   
Shares
    
Amount
    
Capital
    
Earnings
    
Loss
    
Total
  
BALANCE - January 1, 2024
    
31,359,110
    
$
48,181
    
$
49,380
    
$
69,279
    
$
(36
)
  
$
166,804
  
Net loss     -       -       -       (214 )     -       (214 )
Stock-based compensation expense
                            
             
 
Restricted stock
    
400,212
      
-
      
1,059
      
-
      
-
      
1,059
  
Net share settlement for equity-based compensation
    
(315,611
)
    
-
      
(3,156
)
    
-
      
-
      
(3,156
)
BALANCE - March 31, 2024
    
31,443,711
      
48,181
      
47,283
      
69,065
      
(36
)
    
164,493
  
Net loss
    
-
      
-
      
-
      
(682
)
    
-
      
(682
)
Stock-based compensation expense
                                                
Restricted stock
     47,128      
-
      
1,045
      
-
      
-
      
1,045
  
BALANCE - June 30, 2024
    
31,490,839
    

48,181
    

48,328
    

68,383
    

(36
)
  

164,856
  
Net income
    -       -       -       3,953       -       3,953  
Stock-based compensation expense
                                               
Restricted stock
    (4,420 )     -       1,250       -       -       1,250  
Share repurchase
    -       -       -       -       -       -  
Net share settlement for equity-based compensation
    (7,252 )     -       (96 )     -       -       (96 )
BALANCE - September 30, 2024
    31,479,167     $ 48,181     $ 49,482     $ 72,336     $ (36 )   $ 169,963  

 
Stockholders’ Equity
  
                      Accumulated        
          Additional           Other        
   
  
Common Stock
    
Paid-in
    
Retained
   
Comprehensive
        
   
Shares
    
Amount
    
Capital
    
Earnings
   
Loss
    
Total
  
BALANCE - January 1, 2023
    
31,147,925
    
$
49,072
    
$
45,540
    
$
51,225
    
$
(960
)
  
$
144,877
  
Net cumulative effect from adoption of ASC 326 (a)
     -       -       -       (7,943 )     -       (7,943 )
Net loss
   
-
      
-
      
-
      
(109
)
    
-
      
(109
)
Employee pension plan adjustments
    
-
      
-
      
-
      
-
      
(48
)
    
(48
)
Stock-based compensation expense
                                                
Restricted stock
    
652,042
      
-
      
812
      
-
      
-
      
812
  
Share repurchase
     (104,030 )     (556 )     -       -       -       (556 )
Net share settlement for equity-based compensation
    
(297,380
)
    
-
      
(1,779
)
    
-
      
-
      
(1,779
)
BALANCE - March 31, 2023
    
31,398,557
      
48,516
      
44,573
      
43,173
      
(1,008
)
    
135,254
  
Net income
    
-
      
-
      
-
      
17,250
      
-
      
17,250
  
Employee pension plan adjustments
    
-
      
-
      
-
      
-
      
(5
)
    
(5
)
Stock-based compensation expense
                                                
Restricted stock
    
61,257
      
-
      
2,576
      
-
      
-
      
2,576
  
Share repurchase
     (61,034 )     (335 )     -       -       -       (335 )
Net share settlement for equity-based compensation
    (39,670 )     -       (275 )     -       -       (275 )
BALANCE - June 30, 2023
    
31,359,110
    

48,181
    

46,874
    

60,423
    

(1,013
)
  

154,465
  
Net income
     -       -       -       2,064       -       2,064  
Employee pension plan adjustments
     -       -       -       -       (26 )     (26 )
Stock-based compensation expense
                                                
Restricted stock
     -       -       662       -       -       662  
BALANCE - September 30, 2023
     31,359,110     $ 48,181     $ 47,536     $ 62,487     $ (1,039 )   $ 157,165  

(a) Net cumulative adjustment to equity based on the adoption of Accounting Standards Update No. 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements. See Note 12 to the Condensed Consolidated Financial Statements.

See Notes to Condensed Consolidated Financial Statements (Unaudited).

6
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
    Nine Months Ended  
 
September 30,
  
   
2024
    
2023
  
             
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net income
  
$
3,057
    
$
19,205
  
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
                
Depreciation and amortization
    
8,312
      
4,656
  
Finance lease amortization
    1,204       -  
Amortization of deferred finance charges
    95       -  
Deferred income taxes
    
455
      
-
  
Loss (gain) on sale of assets
    901       (30,923 )
Gain on insurance proceeds
    (2,794 )     -  
Proceeds from insurance
    2,794       -  
Impairment of goodwill and long-lived assets
    -       4,220  
Fixed asset donations
    
(245
)
    
(239
)
Provision for credit losses
   
40,823
      
31,347
  
Stock-based compensation expense
    
3,354
      
4,050
  
(Increase) decrease in assets:
                
Accounts receivable
    
(60,542
)
    
(39,240
)
Inventories
    
237
      
(317
)
Prepaid income taxes and income taxes payable
    
(2,006
)
    
997
  
Prepaid expenses and current assets
    
1,580
      
(124
)
Other assets, net
    
1,159
      
2,023
  
Increase (decrease) in liabilities:
                
Accounts payable
    
8,868
      
6,374
  
Accrued expenses
    
(1,397
)
    
4,017
  
Unearned tuition
    
(3,927
)
    
(2,310
)
Income taxes payable
    (2,832 )     -
  
Other liabilities
    
(89
)
    
(124
)
Total adjustments
    
(4,050
)
    
(15,593
)
Net cash (used in) provided by operating activities
    
(993
)
    
3,612
  
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Capital expenditures
    
(32,094
)
    
(28,685
)
Proceeds from sale of property and equipment
   
9,895
      
33,310
  
Proceeds from short-term investment
    -       14,758  
Purchase of short-term investment
    -       (24,344 )
Net cash used in investing activities
    
(22,199
)
    
(4,961
)
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Payment of deferred finance fees
    
(456
)
    
-
  
Finance lease principal paid
    (169 )     -  
Tenant allowance finance leases
    762
          
Share repurchase
    -       (891 )
Net share settlement for equity-based compensation
    
(3,252
)
    
(2,054
)
Net cash used in financing activities
    
(3,115
)
    
(2,945
)
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
   
(26,307
)
    
(4,294
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period
    
80,269
      
50,287
  
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—End of period
  
$
53,962
    
$
45,993
  

See Notes to Condensed Consolidated Financial Statements (Unaudited).
7
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
(Continued)
    Nine Months Ended  

 
September 30,
  
   
2024
    
2023
  
             
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
            
Cash paid for:
            
Interest
  
$
1,731
    
$
94
  
Income taxes
  
$
5,480
    
$
6,002
  
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
                
Liabilities accrued for or noncash additions of fixed assets
  
$
1,515
    
$
1,126
  
                 

See Notes to Condensed Consolidated Financial Statements (Unaudited).
8
LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
(In thousands, except share and per share amounts and unless otherwise stated)
(Unaudited)

1.
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Business Activities— Lincoln Educational Services Corporation and its subsidiaries (collectively, the “Company”, “we”, “our”, and “us”, as applicable) provide diversified career-oriented post-secondary education to recent high school graduates and working adults.  The Company, which currently operates 22 campuses in 13 states, offers programs in skilled trades (which include HVAC, welding, computerized numerical control and electrical and electronic systems technology, among other programs), automotive technology, healthcare services (which include nursing, dental assistant, and medical administrative assistant, among other programs), hospitality services (which include culinary, therapeutic massage, cosmetology, and aesthetics), and information technology.  The schools operate under Lincoln Technical Institute, Lincoln College of Technology, Lincoln Culinary Institute, Euphoria Institute of Beauty Arts & Sciences, and associated brand names.  Most of the campuses serve major metropolitan markets and each typically offers courses in multiple areas of study.  Five of the campuses are destination schools, which attract students from across the United States and, in some cases, from abroad. The Company’s other campuses primarily attract students from their local communities and surrounding areas.  All of the campuses are nationally accredited and are eligible to participate in federal financial aid programs by the U.S. Department of Education (“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.

Basis of Presentation – The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements.  Certain information and footnote disclosures normally included in annual financial statements have been omitted or condensed pursuant to such regulations.  These financial statements, which should be read in conjunction with the December 31, 2023 audited Consolidated Financial Statements and notes thereto and related disclosures of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (“Form 10-K”), reflect all adjustments, consisting of normal recurring adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows for such periods.  The results of operations for the nine months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the full fiscal year ending December 31, 2024.

Since January 1, 2023, the Company’s business has been organized into two reportable business segments: (a) Campus Operations; and (b) Transitional.  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 campuses that have been marked for closure and are being taught-out.  As of September 30, 2024, no campuses were classified in the Transitional segment.  During the prior year, the Company’s Somerville, Massachusetts campus was classified in the Transitional segment.  The campus was fully taught out as of December 31, 2023.

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

The unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated.

Use of Estimates in the Preparation of Financial Statements – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period.  On an ongoing basis, the Company evaluates the estimates and assumptions, including those used to determine the incremental borrowing rate to calculate lease liabilities and right-of-use (“ROU”) assets, lease term to calculate lease cost, revenue recognition, bad debts, impairments, useful lives of fixed assets, income taxes, benefit plans and certain accruals.  Actual results could differ from those estimates.

New Accounting Pronouncements – In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which provides updates to qualitative and quantitative reportable segment disclosure requirements, including enhanced disclosures about significant segment expenses and increased interim disclosure requirements, among others. The amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted, and the amendments should be applied retrospectively.  The Company will adopt this ASU in its Form 10-K for the year-ending December 31, 2024.

9
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASC 740”). The amendments in this ASU require that public business entities on an annual basis 1) disclose specific categories in the rate reconciliation, and 2) provide additional information for reconciling items that meet a quantitative threshold. The amendments require disclosure about the amount of income taxes paid disaggregated (1) by federal, state and foreign taxes, and (2) by individual jurisdictions in which income taxes paid is equal or greater than five percent of total income taxes paid. The amendment also requires entities to disclose income or loss from continuing operations before income tax expense disaggregated between domestic and foreign and income tax expense or benefit from continuing operations disaggregated by federal, state and foreign. For all public business entities, ASC 740 is effective for annual periods beginning after December 15, 2024; early adoption is permitted.  We do not expect ASC 740 will have a material impact on our Condensed Consolidated Financial Statements.

Income Taxes— The Company accounts for income taxes in accordance with ASC 740. This statement requires an asset and a liability approach for measuring deferred taxes based on temporary differences between the financial statement and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for years in which taxes are expected to be paid or recovered.

In accordance with ASC 740, the Company assesses our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable.  A valuation allowance is required to be established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. In accordance with ASC 740, our assessment considers whether there has been sufficient income in recent years and whether sufficient income is expected in future years in order to utilize the deferred tax asset. In evaluating the realizability of deferred income tax assets, the Company considers, among other things, historical levels of income, expected future income, the expected timing of the reversals of existing temporary reporting differences, and the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future income tax benefits. Significant judgment is required in determining the future tax consequences of events that have been recognized in our Condensed Consolidated Financial Statements and/or tax returns.  Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on the Company’s consolidated financial position, results of operations or liquidity.  Changes in, among other things, income tax legislation, statutory income tax rates or future income levels could materially impact the Company’s valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods.

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense.  During the nine months ended September 30, 2024 and 2023, we did not record any interest and penalties expense associated with uncertain tax positions, as we did not have any uncertain tax positions.

2.
NET EARNINGS PER COMMON SHARE

Basic and diluted earnings per share (“EPS”) are determined in accordance with ASU No. 2015-06, Earnings per Share (Topic 260): Effects on historical earnings per unit of master limited partnership dropdown transactions, which specifies the computation, presentation and disclosure requirements for EPS. Basic EPS excludes all dilutive Common Stock equivalents. It is based upon the weighted average number of common shares outstanding during the period. Diluted EPS, as calculated using the treasury stock method, reflects the potential dilution that would occur if our dilutive outstanding stock options and stock awards were issued.

The weighted average number of common shares used to compute basic and diluted earnings per share for the three and nine months ended September 30, 2024 and 2023 was as follows:
 

Three Months Ended         Nine Months Ended  

September 30,
         September 30,  

2024
  
2023
      2024  
2023
 
Basic shares outstanding
    
30,681,594
      
30,163,745
    
30,547,187    
30,114,926  
Dilutive effect of stock options
    
359,998
      
534,730
       259,060       340,229  
Diluted shares outstanding
    
31,041,592
      
30,698,475
       30,806,247       30,455,155  

10
3.
REVENUE RECOGNITION

Substantially all of our revenues are considered to be revenues from our contracts with students.  The related accounts receivable balances are recorded on our Condensed Consolidated Balance Sheets as student accounts receivable.  We do not have significant revenue recognized from performance obligations that were satisfied in prior periods, and we do not have any transaction price allocated to unsatisfied performance obligations other than in our unearned tuition.  We record revenue for students who withdraw from our schools only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.  Unearned tuition represents contract liabilities primarily related to our tuition revenue. We have elected not to provide disclosure about transaction prices allocated to unsatisfied performance obligations if original contract durations are less than one year, or if we have the right to consideration from a student in an amount that corresponds directly with the value provided to the student for performance obligations completed to date in accordance with ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). We have assessed the costs incurred to obtain a contract with a student and determined them to be immaterial.

Unearned tuition in the amounts of $23.0 million and $26.9 million are recorded as current liabilities in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023, respectively. The change in this contract liability balance during the nine-month period ended September 30, 2024 is the result of payments received in advance of satisfying performance obligations, offset by revenue recognized during that period. Revenue recognized for the nine-month period ended September 30, 2024 that was included in the contract liability balance at the beginning of the year was $26.0 million.

The following table depicts the timing of revenue recognition:

 
Three Months Ended September 30, 2024
    
Nine months ended September 30, 2024
  
   
Campus
Operations
     Transitional    
Consolidated
    
Campus
Operations
     Transitional    
Consolidated
  
Timing of Revenue Recognition
                                    
Services transferred at a point in time
  
$
9,320
    
$
-
    
$
9,320
    
$
22,074
    
$
-
    
$
22,074
  
Services transferred over time
    
105,090
      
-
      
105,090
      
298,617
      
-
      
298,617
  
Total revenues
  
$
114,410
    
$
-
    
$
114,410
    
$
320,691
    
$
-
    
$
320,691
  


 
Three Months Ended September 30, 2023
    
Nine months ended September 30, 2023
  
   
Campus
Operations
     Transitional    
Consolidated
    
Campus
Operations
     Transitional    
Consolidated
  
Timing of Revenue Recognition
                                    
Services transferred at a point in time
  
$
7,489
    
$
5
    
$
7,494
    
$
18,084
    
$
17
    
$
18,101
  
Services transferred over time
    
92,038
      
86
      
92,124
      
256,009
      
1,438
      
257,447
  
Total revenues
  
$
99,527
    
$
91
    
$
99,618
    
$
274,093
    
$
1,455
    
$
275,548
  

4.
LEASES

The Company determines if an arrangement is a lease at its inception. The Company considers any contract where there is an identified asset as to which the Company has the right to control its use in determining whether the contract contains a lease.  An operating lease ROU asset represents the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are to be recognized at the commencement date based on the present value of lease payments over the lease term. As all of the Company’s operating leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available on the commencement date in determining the present value of lease payments. We estimate the incremental borrowing rate based on a yield curve analysis, utilizing the interest rate derived from the fair value analysis of our credit facility and adjusting it for factors that appropriately reflect the profile of secured borrowing over the expected term of the lease. The operating lease ROU assets include any lease payments made prior to the rent commencement date and exclude lease incentives. Our leases have remaining lease terms of one year to 21 years. Lease terms may include options to extend the lease term used in determining the lease obligation when it is reasonably certain that the Company will exercise that option.  Lease expense for lease payments are recognized on a straight-line basis over the lease term for operating leases.

11
During the three months ended September 30, 2024, the Company received gross insurance proceeds in the amount of $2.8 million relating to hail damage at one of our campuses.  The proceeds related to the incident have been reported as a gain on insurance proceeds on the statement of operations and disclosed in the operating activities section of the statement of cash flows.  Work related to the incident is currently underway.  The new asset is expected to be classified as leasehold improvements and amortized over the remining term of the lease.

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 and subsequently on January 30, 2024 entered into a sale-leaseback transaction for this property. As of December 31, 2023, this property was classified as held-for-sale on the Condensed Consolidated Balance Sheets. However, the sale was consummated in the first quarter of the current year.

On October 18, 2023, the Company entered into a lease for approximately 120,000 square feet of space to serve as the Company’s new campus in Nashville, Tennessee. The lease term commenced on November 1, 2023, with an initial lease term of 15 years. The lease contains two five-year renewal options.

On October 31, 2023, the Company entered into a lease for approximately 100,000 square feet of space to serve as the Company’s new campus in Houston, Texas, which is expected to open in the second half of 2025.  The lease term commenced on January 2, 2024, with an initial lease term of 21 years and 6 months. The lease contains three five-year renewal options.
 
The following table presents components of lease cost and classification on the Condensed Consolidated Statements of Operations:

   
Three Months Ended
  September 30,
    
Nine Months Ended
  September 30,
  
in thousands
  
 Consolidated Statement of Operations Classification
  
2024
    
2023
      2024      2023  
Operating Lease Cost
  
 Selling, general and administrative
  
$
4,924
    
$
4,824
     $ 14,543     $ 14,560  
Finance lease cost
  
 
                    
         
Amortization of leased assets
  
 Depreciation and amortization
    
418
      
-
       1,204       -  
Interest on lease Liabilities
  
 Interest expense
    
554
      
-
       1,594       -  
Variable lease cost
  
 Selling, general and administrative
    
117
      
170
       292       303  
 
  
       
  
$
6,013
    
$
4,994
      $ 17,633      $ 14,863  

The net change in ROU asset and finance lease liability is split between principal payments, interest expense and amortization expense. Principal payments are classified in the financing section, interest expense and amortization expense are broken out separately in the operating section of the Condensed Consolidated Statements of Cash Flows.

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

   
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
   
2024
    
2023
     2024     2023  
Cash flow information:
                        
Cash paid for amounts included in the measurement of lease liabilities
                        
Operating Cash Flows - operating leases
   $ 4,456     $ 3,977     $ 13,465     $ 12,155  
Operating Cash Flows - finance leases
   $ 554     $ -     $ 1,594     $ -  
Financing Cash Flows - finance leases
   $ 657     $ -     $ 593     $ -  
                                 
Non-cash activity:
                                
Lease liabilities arising from obtaining right-of-use assets
                                
Operating leases
   $ 26,014     $ 8,349     $ 48,409     $ 10,491  
Finance leases
   $ -     $ -     $ 12,570     $ -  

During the nine months ended September 30, 2024, the Company entered into one new operating, one new finance lease and nine lease modifications. The Company obtained the operating and finance ROU asset in exchange for an operating and finance lease liability of $15.7 million and $12.6 million, respectively. In addition, the nine lease modifications resulted in a noncash re-measurement of the related ROU asset and operating lease liability of $32.7 million.

12
Weighted-average remaining lease term and discount rate for our leases are as follows:  


 
As of
September 30,
  
   
2024
    
2023
  
Weighted-average remaining lease term
  

   

 
Operating leases
   13.06 years
     11.22 years
  
Finance leases
   16.65 years
       -
  

             
Weighted-average discount rate
  
         
Operating leases
     6.69 %     6.94 %
Finance leases
     7.69 %     -  
 
Maturities of lease liabilities by fiscal year for our leases as of September 30, 2024, are as follows: