10-Q 1 ef20012476_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, 2023

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 6, 2023, there were 31,359,110 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, 2023

PART I.
2
Item 1.
2
 
2
 
4
 
5
 
6
 
7
 
9
Item 2.
24
Item 3.
38
Item 4.
38
PART II.
 39
Item 1.
 39
Item 1A.
 39
Item 2.
 39
Item 3.
 40
Item 4.
 40
Item 5.
 40
Item 6.
 41
  SIGNATURES 42

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:

•
our failure to comply with the extensive existing regulatory framework applicable to our industry or our failure to obtain timely regulatory approvals in connection with a change of control of our company or acquisitions;
•
the promulgation of new regulations in our industry as to which we may find compliance challenging;
•
our success in updating and expanding the content of existing programs and developing new programs in a cost-effective manner or on a timely basis;
•
our ability to implement our strategic plan;
•
risks associated with changes in applicable federal laws and regulations including pending rulemaking by the U.S. Department of Education;
•
uncertainties regarding our ability to comply with federal laws and regulations regarding the 90/10 Rule and cohort January 1 rates;
•
risks associated with maintaining accreditation;
•
risks associated with opening new campuses and closing existing campuses;
•
risks associated with integration of acquired schools;
•
industry competition;
•
the effect of public health outbreaks, epidemics and pandemics including, without limitation, COVID-19
conditions and trends in our industry;
•
general economic conditions; and
•
risks related to other factors discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

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,  
 
2023
    
2022
  
ASSETS
            
CURRENT ASSETS:
            
Cash and cash equivalents
  
$
41,717
    
$
46,074
  
Restricted cash
     4,276       4,213  
Short-term investments
     24,344       14,758  
Accounts receivable, less allowance for credit losses of $34,677 and $28,560 at September 30, 2023 and December 31, 2022, respectively
    
40,261
      
37,175
  
Inventories
    
2,935
      
2,618
  
Prepaid expenses and other current assets
    
6,945
      
4,738
  
Assets held for sale
     10,198       4,559  
Total current assets
    
130,676
      
114,135
  
                 
PROPERTY, EQUIPMENT AND FACILITIES - At cost, net of accumulated depreciation and amortization of $139,697 and $146,367 at September 30, 2023 and December 31, 2022, respectively
    
38,402
      
23,940
  
                 
OTHER ASSETS:
                
Noncurrent receivables, less allowance for credit losses of $17,274 and $6,810 at September 30, 2023 and December 31, 2022, respectively
    
16,703
      
22,734
  
Deferred income taxes, net
    
25,210
      
22,312
  
Operating lease right-of-use assets
    
92,866
      
93,097
  
Goodwill
    
10,742
      
14,536
  
Other assets, net
    
1,179
      
812
  
Total other assets
    
146,700
      
153,491
  
TOTAL ASSETS
  
$
315,778
    
$
291,566
  

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,  
 
2023
    
2022
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
            
CURRENT LIABILITIES:
            
Unearned tuition
  
$
21,844
    
$
24,154
  
Accounts payable
    
17,582
      
10,496
  
Accrued expenses
    
12,670
      
8,653
  
Income taxes payable
    
3,052
      
2,055
  
Current portion of operating lease liabilities
    
10,917
      
9,631
  
Other short-term liabilities
    
35
      
31
  
Total current liabilities
    
66,100
      
55,020
  
                 
NONCURRENT LIABILITIES:
                
Pension plan liabilities
    
622
      
668
  
Long-term portion of operating lease liabilities
    
91,891
      
91,001
  
Total liabilities
    
158,613
      
146,689
  
                 
STOCKHOLDERS’ EQUITY:
                
Common stock, no par value - authorized 100,000,000 shares at September 30, 2023 and December 31, 2022, issued and outstanding 31,359,110 shares at September 30, 2023 and 31,147,925 shares at December 31, 2022.
    
48,181
      
49,072
  
Additional paid-in capital
    
47,536
      
45,540
  
Retained earnings
    
62,487
      
51,225
  
Accumulated other comprehensive loss
    
(1,039
)
    
(960
)
Total stockholders’ equity
    
157,165
      
144,877
  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  
$
315,778
    
$
291,566
  

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,
  
   
2023
    
2022
    
2023
    
2022
  
                         
REVENUE
  
$
99,618
    
$
91,813
    
$
275,548
    
$
256,510
  
COSTS AND EXPENSES:
                                
Educational services and facilities
    
43,129
      
39,933
      
121,251
      
112,234
  
Selling, general and administrative
    
54,485
      
46,984
      
156,603
      
139,503
  
Loss (gain) on sale of assets
     8     16     (30,923 )     (178 )
Impairment of goodwill and long-lived assets
     -       -       4,220       -  
Total costs & expenses
    
97,622
      
86,933
      
251,151
      
251,559
  
OPERATING INCOME
   
1,996
      
4,880
      
24,397
      
4,951
  
OTHER:
                                
Interest income     878       -       1,891       -  
Interest expense
    
(21
)
    
(36
)
    
(74
)
    
(114
)
INCOME BEFORE INCOME TAXES
    
2,853
      
4,844
      
26,214
      
4,837
PROVISION FOR INCOME TAXES
    
789
      
1,300
      
7,009
      
761
NET INCOME
 
$
2,064
    
$
3,544
    
$
19,205
    
$
4,076
  
PREFERRED STOCK DIVIDENDS
    
-
      
304
      
-
      
912
  
INCOME AVAILABLE TO COMMON SHAREHOLDERS
  
$
2,064
    
$
3,240
 
$
19,205
    
$
3,164
Basic
                               
Net income per common share
  
$
0.07
    
$
0.10
  
$
0.64
    
$
0.10
Diluted                                
Net income per common share
   $ 0.07     $ 0.10     $ 0.63     $ 0.10  
Weighted average number of common shares outstanding:
                                
Basic
   
30,164
      
25,381
      
30,115
      
25,692
  
Diluted
    30,698       25,381       30,455       25,692  

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,
  
   
2023
    
2022
    
2023
    
2022
  
Net income
  
$
2,064
 
$
3,544
    
$
19,205
    
$
4,076
  
Other comprehensive loss
                                
Employee pension plan adjustments, net of taxes (nil)
    
(26
)
    
(21
)
    
(79
)
    
(61
)
Comprehensive income
  
$
2,038
 
$
3,523
    
$
19,126
    
$
4,015
  

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

 
Stockholders’ Equity
        
                            Accumulated           Series A  
          Additional                 Other           Convertible  
   
Common Stock
    
Paid-in
    
Treasury
    
Retained
    
Comprehensive
          
Preferred Stock
  
   
Shares
    
Amount
    
Capital
    
Stock
    
Earnings
    
Loss
    
Total
    
Shares
    
Amount
  
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.  See Note 14 to the Condensed Consolidated Financial Statements.

 
Stockholders’ Equity
        
                            Accumulated           Series A  
          Additional                 Other           Convertible  
   
  
Common Stock
    
Paid-in
    
Treasury
    
Retained
    
Comprehensive
          
Preferred Stock
  
   
Shares
    
Amount
    
Capital
    
Stock
    
Earnings
    
Loss
    
Total
    
Shares
    
Amount
  
BALANCE - January 1, 2022
    
27,000,687
    
$
141,377
    
$
32,439
    
$
(82,860
)
  
$
39,702
    
$
(1,240
)
  
$
129,418
      
12,700
    
$
11,982
  
Net income
    
-
      
-
      
-
      
-
      
272
      
-
      
272
      
-
      
-
  
Preferred stock dividend     -       -       -       -       (304 )     -       (304 )     -       -  
Employee pension plan adjustments
    
-
      
-
      
-
      
-
      
-
      
(30
)
    
(30
)
    
-
      
-
  
Stock-based compensation expense
                                                                        
Restricted stock
    
528,121
      
-
      
1,239
      
-
      
-
      
-
      
1,239
      
-
      
-
  
Net share settlement for equity-based compensation
    
(268,654
)
    
-
      
(1,992
)
    
-
      
-
      
-
      
(1,992
)
    
-
      
-
  
BALANCE - March 31, 2022
    
27,260,154
      
141,377
      
31,686
      
(82,860
)
    
39,670
      
(1,270
)
    
128,603
      
12,700
     $
11,982
  
Net income     -       -       -       -       259       -       259       -       -  
Preferred stock dividend
     -       -       -       -       (304 )     -       (304 )     -       -  
Employee pension plan adjustments     -       -       -       -       -       (10 )     (10 )     -       -  
Stock-based compensation expense                                                                        
  Restricted stock     78,829       -       491       -       -       -       491       -       -  
Treasury stock cancellation
    -       (82,860 )     -       82,860       -       -       -       -       -  
Share repurchase
    (414,963 )     (2,538 )     -       -       -       -       (2,538 )     -       -  
BALANCE - June 30, 2022     26,924,020       55,979       32,177       -       39,625       (1,280 )     126,501       12,700     $ 11,982  
Net income
    
-
       -      
-
      
-
      
3,544
      
-
      
3,544
      
-
      
-
  
Preferred stock dividends     -       -       -       -       (304 )     -       (304 )     -       -  
Employee pension plan adjustments
    
-
       -      
-
      
-
      
-
      
(21
)
    
(21
)
    
-
      
-
  
Stock-based compensation expense
                                                                        
Restricted stock
    
-
       -      
637
      
-
      
-
      
-
      
637
      
-
      
-
  
Share Repurchase
    (668,440 )     (4,195 )     -
       -
       -
       -
       (4,195 )     -
       -
  
BALANCE - September 30, 2022
    
26,255,580
    
$
51,784
    
$
32,814
    
$
-
    
$
42,865
    
$
(1,301
)
  
$
126,162
      
12,700
    
$
11,982
  
 
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,
  
   
2023
    
2022
  
             
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net income
  
$
19,205
    
$
4,076
  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    
4,656
      
4,618
  
Deferred income taxes
    
-
      
64
  
Gain on sale of assets
    (30,923 )     (178 )
Impairment of goodwill and long-lived assets
    4,220       -  
Fixed asset donations
    
(239
)
    
(245
)
Provision for credit losses
    
31,347
      
24,888
  
Stock-based compensation expense
    
4,050
      
2,367
  
(Increase) decrease in assets:
                
Accounts receivable
    
(39,240
)
    
(32,467
)
Inventories
    
(317
)
    
7
  
Prepaid income taxes and income taxes payable
    
997
      
(503
)
Prepaid expenses and current assets
    
(124
)
    
2,550
  
Other assets, net
    
2,023
      
329
  
Increase (decrease) in liabilities:
                
Accounts payable
    
6,374
      
3,800
  
Accrued expenses
    
4,017
      
(5,631
)
Unearned tuition
    
(2,310
)
    
(2,661
)
Other liabilities
    
(124
)
    
(402
)
Total adjustments
    
(15,593
)
    
(3,464
)
Net cash provided by operating activities
    
3,612
      
612
  
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Capital expenditures
    
(28,685
)
    
(7,053
)
Proceeds from sale of property and equipment
    
33,310
      
2,390
  
Proceeds from short-term investment
     14,758       -  
Purchase of short-term investment
     (24,344 )     -  
Net cash used in investing activities
    
(4,961
)
    
(4,663
)
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Dividend payment for preferred stock
    
-
      
(912
)
Share repurchase
     (891 )     (6,733 )
Net share settlement for equity-based compensation
    
(2,054
)
    
(1,992
)
Net cash used in financing activities
    
(2,945
)
    
(9,637
)
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
    
(4,294
)
    
(13,688
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period
    
50,287
      
83,307
  
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—End of period
  
$
45,993
    
$
69,619
  

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,
  
   
2023
    
2022
  
             
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
            
Cash paid for:
            
Interest
  
$
94
    
$
132
  
Income taxes
  
$
6,002
    
$
1,216
  
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
            
 
Liabilities accrued for or noncash additions of fixed assets
  
$
1,126
    
$
501
  

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, 2023 AND 2022
(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 14 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 and Sciences, and associated brand names.  Most of the campuses serve major metropolitan markets and each typically offers courses in multiple areas of study.  Five of the campuses are destination schools, which attract students from across the United States and, in some cases, from abroad. The Company’s other campuses primarily attract students from their local communities and surrounding areas.  All of the campuses are nationally accredited and are eligible to participate in federal financial aid programs by the U.S. Department of Education (“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 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, 2022 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, 2022 (“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 three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the full fiscal year ending December 31, 2023.

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

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

The 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.

9
New Accounting Pronouncements – In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and subsequently issued additional guidance that modified ASU 2016-13. The ASU and the subsequent modifications were identified as ASC Topic 326. The standard requires an entity to change its accounting approach in determining impairment of certain financial instruments, including trade receivables, from an “incurred loss” methodology to a “current expected credit loss” methodology (the “CECL methodology”).  The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses on financial assets measured at amortized cost at the time the financial asset is originated or acquired. The allowance is adjusted each period for changes in expected lifetime credit losses. The CECL methodology represents a significant change from prior U.S. GAAP, which generally required that a loss be incurred before it was recognized.  Further, the FASB issued ASU No. 2019-04, ASU No. 2019-05, ASU No. 2019-11 and ASU No. 2022-02 to provide additional guidance on the credit losses standard. In November 2019, FASB issued ASU No. 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)”.  This ASU deferred the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.  Additionally, in February and March 2020, the FASB issued ASU 2020-02, “Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842)”. ASU 2020-02 added an SEC paragraph pursuant to the issuance of SEC Staff Accounting Bulletin No. 119 on loan losses to FASB Codification Topic 326 and also updated the SEC section of the codification for the change in the effective date of Topic 842. As of the January 1, 2023 date of adoption, based on forecasts of macroeconomic conditions and exposures at that time, the aggregate impact to the Company resulted in an opening balance sheet adjustment increasing the allowance for credit losses related to the Company’s accounts receivables of approximately $10.8 million, a decrease in retained earnings of $7.9 million, after-tax and a deferred tax asset increase of $2.9 million.

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

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

On August 16, 2022, the Inflation Reduction Act was enacted and signed into law. The Inflation Reduction Act is a budget reconciliation package that includes significant changes relating to tax, climate change, energy and health care. The income tax provision of the act includes, among other items, a corporate alternative minimum tax of 15.0%, an excise tax of 1.0% on corporate stock buybacks, energy-related tax credits and additional IRS funding. The Company does not expect the tax provisions of the Inflation Reduction Act to have a material impact to our Condensed Consolidated Financial Statements.

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the nine months ended September 30, 2023 and 2022, we did not record any interest and penalties expense associated with uncertain tax positions, as we did not have any uncertain tax positions.

10
2.
NET INCOME PER COMMON SHARE

Basic and diluted earnings per share (“EPS”) are determined in accordance with ASC Topic 260,” Earnings per Share”, 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.

During the three and nine months ended September 30, 2022, the Company presented its basic and diluted income per common share using the two-class method, which requires all outstanding Series A Preferred Stock (“Series A Preferred Stock”) and unvested shares of Restricted Stock that contain rights to non-forfeitable dividends and therefore participate in undistributed income with common shareholders to be included in computing income per common share. Under the two-class method, net income is reduced by the amount of dividends declared in the period for each class of Common Stock and participating security. The remaining undistributed income is then allocated to Common Stock and participating securities based on their respective rights to receive dividends. Series A Preferred Stock and shares of unvested Restricted Stock contain non-forfeitable rights to dividends on an if-converted basis and on the same basis as shares of the Company’s Common Stock, respectively, and are considered participating securities. The Series A Preferred Stock and unvested Restricted Stock are not included in the computation of basic income per common share in periods in which we have a net loss, as the Series A Preferred Stock and unvested Restricted Stock are not contractually obligated to share in our net losses. However, the cumulative dividends on Series A Preferred Stock for the period decreases the income or increases the net loss allocated to common shareholders unless the dividend is paid in the period. Basic income per common share has been computed by dividing net income allocated to common shareholders by the weighted-average number of common shares outstanding.

On November 30, 2022, the Company exercised in full its right of mandatory conversion of the Company’s Series A Preferred Stock. In connection with the conversion, each share of Series A Preferred Stock was cancelled and converted into 423,729 shares of the Company’s Common Stock, no par value per share (the “Common Stock”). No shares of Series A Preferred Stock remain outstanding and all rights of the holders to receive future dividends have been terminated. As a result of the conversion, the aggregate 12,700 shares of Series A Preferred Stock outstanding were converted into 5,381,358 shares of Common Stock. As of September 30, 2023, the Company still maintains Restricted Stock, but these shares do not participate in the disbursement of dividends.

The following is a reconciliation of the numerator and denominator of the net income per share computations for the three and nine months ended September 30, 2023 and 2022:

    Three Months Ended     Nine Months Ended  
 
September 30,
    
September 30,
  
(in thousands, except share data)
  
2023
    
2022
    
2023
    
2022
  
Numerator:
                        
Net income
  
$
2,064
    
$
3,544
    
$
19,205
    
$
4,076
  
Less: preferred stock dividend
    
-
      
(304
)