LINCOLN EDUCATIONAL SERVICES CORP 10-Q

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 the ultimate effect of the COVID-19 pandemic 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, 2019, 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 included in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC, which includes audited consolidated financial statements for our three fiscal years ended December 31, 2019. 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 three reportable business segments: (a) Transportation and Skilled Trades, (b) Healthcare and Other Professions or “HOPS”, and (c) Transitional, which refers to campus operations that have been closed. 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. On March 11, 2020, the World Health Organization declared the COVID-19 outbreak to be a pandemic. On March 13, 2020, a national emergency was declared, which made federal funds available to respond to the crisis. Beginning on March 15, 2020, many businesses closed or reduced hours throughout the U.S. to combat the spread of COVID-19. All 50 states have reported cases of COVID-19 and the states have implemented various containment efforts, including lockdowns on non-essential businesses. The circumstances related to COVID-19 are unprecedented, dynamic and evolving and currently unpredictable. As the economic impact of the COVID-19 pandemic continues to change, 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 learning to online, remote learning. As part of this transition, the Company has incurred additional expenses. Related to this transition, some students have been placed on leave of absence as they could not complete their externships and some students chose not to participate in online learning. 25 Index Additionally, certain programs were extended due to restricted access to externship sites and classroom labs. In response to COVID-19, we have also implemented initiatives to safeguard our students and our employees in this time of crisis. Due to phased re-opening on a state-by-state basis, our schools have been reopening since May 2020. As of September 30, 2020, all of our schools have re-opened and we now expect the majority of the students who were placed on leave or otherwise deferred their programs to finish their programs. The following discussion highlights how we are responding to the changing circumstances and the currently anticipated impacts of COVID-19 on our business. Due to the evolving landscape relating to COVID-19 and the unpredictability of the circumstances, the information below should be read in conjunction with our COVID-19 Pandemic risk factor. See Part II, Item 1A. “Risk Factors — COVID-19 Pandemic” in this Quarterly Report on Form 10-Q for risks to our business arising as a consequence of COVID-19. See also Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”) for additional risk factors relating to our Company and the industry. In addition, see the forward-looking and cautionary statements discussion above. Forward-looking statements are subject to risks, uncertainties, assumptions, and other factors that may cause actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in Item 1A. “Risk Factors” and elsewhere in the 2019 Form 10-K and this Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2020. Transition to Distance Learning In the first and second quarters, the Company quickly transitioned all of its programs from in-person, hands-on learning to online, remote learning. The Company obtained approvals from the DOE, certain states and agencies to transition to distance learning. The Company worked with its book vendors to obtain e-books for the students. The Company has ensured that all students have either received laptops or tablets or that they already owned a device. The Company has enhanced its education platform for online learning through a software program. As schools have reopened, we are adhering to social distancing protocols which may differ from school-to-school depending on physical circumstances as well as other factors and we are limiting the number of students on campus at one time. The schools continue to teach a portion of each program through distance learning and labs are generally taught in-person. Employees Our employees have been affected by COVID-19 in many ways, including disruptions due to unexpected school and day-care closings, family underemployment or unemployment, and learning how to work remotely and, in some cases, with new tools and technology to learn and to support that work. Our goal has been to support our employees during the present uncertainty while remaining focused on meeting the needs of our students and business continuity. Early in the crisis, we provided employees with information about best practices to prevent the spread of COVID-19 and other viruses and illnesses. We recommended that non-student interfacing employees work from home and we reduced the density and provided physical space for us to implement social distancing protocols for the employees who were required to work in our offices. Later, we enabled substantially all of our workforce to work remotely. In addition, we have limited in-person meetings, non-employee visits to our locations, and non-essential business travel. To further protect the health and welfare of our employees we have also encouraged employees who potentially have been exposed to COVID-19 to self-quarantine for 14 days while we continue to pay them. To ease access to medical assistance, we are waiving co-payments for COVID-19 testing and telemedicine for those employees enrolled in our health insurance plans . The Company’s vacation policy was enhanced in the second quarter of 2020 to include up to two weeks of payments for unused vacation days for instructors. Community We understand that the communities in which our employees live, work, and serve are also suffering distress as a result of COVID-19. Due to the growing needs of our neighbors, healthcare providers and many of the organizations in place to provide assistance are overburdened. In March 2020, several campuses in the Tri-State (NY, NJ & CT) area donated medical supplies and personal protective equipment to major medical facilities throughout the region. Operations We have robust pandemic and business continuity plans that include our business units and technology environments. When COVID-19 advanced to a pandemic, we activated our business continuity plan (the “Continuity Plan”). As an element of the Continuity Plan, we activated our Health Communications Response Team (“HCRT”), a group of the corporate senior managers, who directed a series of activities to address the health and safety of our workforce, to assist students, to sustain business operations, to coordinate communication and to address our management of other ongoing pandemic activities. 26 Index In response to a growing infected population across the United States, as noted above, we executed plans for social-distancing in our facilities and implemented work-from-home contingencies. As the virus spread, we created remote-working capabilities for our employees. We also completed a series of additional steps to appropriately ensure compliance with our telecommuting policy . The policy is designed to create a secure at-home work environment that protects our students’ information and transactions while also providing the necessary technology capabilities to enable effective remote-working for our staff. There has been a modest decline in productivity for certain departments as our personnel have been adjusting to this significant change in work environment. We currently believe our technology infrastructure is sufficient to maintain a remote-working environment for the vast majority of our workforce for the foreseeable future and that productivity should improve as our staff adjust to this significant change in work environment. The level and ability of our employees to continue working from home could change, however, as conditions surrounding COVID-19 evolve and should infections increase, or if there are interruptions in the internet infrastructure where our employees live or if our internet service providers are otherwise adversely affected. Return to In-Person Operations Due to the phase-in of reopening which has been addressed on a state-by-state basis, we reopened our schools and we continue to follow the guidelines released by each state and city in which our schools are located . The HCRT is continuing to closely monitor the guidelines released by each state and city in which our schools are located for any change. As part of reopening our schools, we purchased personal protective equipment, are limiting the number of students in classrooms, have separated students by at least 6 feet, have closed/limited all common areas, have increased the sanitation of our facilities, require everyone at the schools to wear a cloth face mask and maintain a daily log of anyone at the school and monitor body temperatures of those at the school through non-contact thermometers. In a similar way, we are also rotating employees’ schedules to limit/control the number of employees in spaces. Student Population and Financial Results As of September 30, 2020, the Company had 104 students on leave of absence due to COVID-19. The number of students on leave of absence due to COVID-19 has continued to drop as it was almost 700 on June 30, 2020. The majority of these students were at the end of their programs and were on externship which they were not able to complete. The Company expects a majority of these students will return to school or an externship by the end of the year. The Company has extended the length and graduation dates of a few programs as there is only a small percentage of these programs that can be taught through distance learning. The Company has campuses where students live in dorms that are operated by either the Company itself, Collegiate Housing or other housing options. The majority of the students had returned home and their dorm charges have been reversed. In addition, at campuses where students have meal plans, the Company’s cafeterias have been closed and all charges for meal plans have been reversed. For students that remain in dorms, the Company has given the students gift cards to assist in replacing their meal plans. As the students are returning to campus the dorms have reopened and the schools have limited the number of students in dorms to adhere to social distancing. Institutional Student Loans COVID-19 is having far reaching, negative impact on individuals, businesses, and, consequently, the overall economy. Specifically, COVID-19 has materially disrupted business operations resulting in significantly higher levels of unemployment or underemployment. As a consequence, we expect many of our individual students will experience financial hardship, making it difficult, if not impossible, to meet their payment obligations to us without temporary assistance. As a result of the negative impact on employment from COVID-19, we are observing higher levels of financial hardship for our students, which we expect will lead to higher levels of forbearance, delinquency and defaults. We expect that, left unabated, this deterioration in forbearance, delinquency and default rates will persist until such time as the economy and employment return to relatively normal levels. We expect that, as the economic impact of COVID-19 evolves, we will continue to evaluate the measures we have put in place to assist our students during this unprecedented challenge. We continue to adapt and evolve our collections practices to meet the needs of our students. 27 Index Liquidity As previously reported, over the course of 2019, we significantly increased our overall liquidity position. As a result of these efforts, we currently believe our liquidity position is stable and we expect to be able to fund our business operations for the remainder of 2020 and we believe that we have sufficient capital to withstand the potential downturn in our business. Regulatory agencies have also provided regulatory capital relief to institutions as a result of the crisis as discussed below. However, i f circ umstances surrounding COVID-19 change in a significantly adverse way, it is possible our liquidity could be materially and adversely affected, which could materially and adversely impact our business operations and our overall financial condition. Regulatory On March 27, 2020, the CARES Act was signed into law, which includes a $2 trillion federal economic relief package providing financial assistance and other relief to individuals and business impacted by the spread of COVID-19. The spread of COVID-19 has had an unprecedented impact on higher educational institutions across the country, including our schools, and has led to the closure of campuses and the transition of academic programs from on-ground to online delivery. The CARES Act includes provisions for financial assistance and other regulatory relief benefitting students and their postsecondary institutions. Among other things, the CARES Act includes a $14 billion higher education emergency relief fund (“HEERF”) for the DOE to distribute directly to institutions of higher education. Institutions are required to use at least half of the HEERF funds for emergency grants to students for expenses related to disruptions in campus operations (e.g., food, housing, etc.). Institutions are permitted to use the remainder of the funds for additional emergency grants to students or to cover institutional costs associated with significant changes to the delivery of instruction due to the COVID-19 emergency, provided that those costs do not include payment to contractors for the provision of pre-enrollment recruitment activities, endowments, or capital outlays associated with facilities related to athletics, sectarian instruction, or religious worship. The law requires institutions receiving funds to continue to the greatest extent practicable to pay its employees and contractors during the period of any disruptions or closures related to the COVID-19 emergency. The DOE has allocated funds to each institution of higher education based on a formula contained in the CARES Act. The formula is heavily weighted toward institutions with large numbers of Pell Grant recipients. The DOE allocated $27.4 million to our schools to be distributed in two equal installments. The Company received $13.7 million in the first installment which was intended for emergency grants to students. The Company has distributed $12.6 million to the students and expects to distribute the remainder over the next few months. The $1.1 million remaining to be distributed is included in restricted cash on the Company’s Condensed Consolidated Balance Sheets. As of September 30, 2020, the Company had received $13.7 million from the second installment which is intended for institutional costs and additional emergency grants to students. As of September 30, 2020, the Company has utilized $3.3 million of these funds for permitted expenses which was netted against the original expenses included in selling, general and administrative on the Condensed Consolidated Statement of Operations. The DOE also has published guidance regarding permitted and prohibited use of these funds and requirements for reporting the use of these funds. If the funds are not spent or accounted for in accordance with applicable requirements, we could be required to return funds or be subject to other sanctions. The CARES Act also contains separate educational provisions that relieve both institutions and students from complying with the requirement to repay Title IV funds following a student’s withdrawal as a result of the COVID-19 emergency. Ordinarily, when a student withdraws, the institution (and, in some cases, the student) may be required to return unearned portions of the Title IV grant and loan funds awarded for the period. Institutions will be required to report to the DOE the total amount of grant and loan funds the institution has not returned due to the waiver. For federal loan borrowers, the CARES Act also directs the DOE to cancel the borrower’s obligation to repay any Direct Loan associated with the relevant period. The law also expands the options to avoid student withdrawals due to a cessation of attendance by placing students on an approved leave of absence and waives certain requirements normally applicable to a leave of absence. The CARES Act also allows institutions to exclude from the calculation of a student’s satisfactory academic progress any attempted credits not completed due to the COVID-19 emergency. The Company is also permitted to delay payment of FICA payroll taxes until January 1, 2021. The Company will have to repay 50 percent of the deferred payments by December 31, 2021, and the remaining 50 percent by December 31, 2022. As of September 30, 2020, the Company had deferred payments of $3.0 million. Other Based on analysis of ASC 350 and ASC 360, during the three and nine months ended September 30, 2020, we are currently not aware of any material impairments of our goodwill, indefinite-lived intangible assets or finite-lived assets. The Company will continue to assess the relevant criteria on a quarterly basis based on updated cash flow and market assumptions. Unfavorable changes in cash flow or market assumptions could result in impairment of these assets in future periods. 28 Index 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, 2019 and Note 1 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020. In addition, due to outbreak of COVID-19, 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 Nine Months Ended September 30, 2020 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 September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenue 100.0 % 100.0 % 100.0 % 100.0 % Costs and expenses: Educational services and facilities 43.5 % 45.7 % 42.9 % 46.6 % Selling, general and administrative 51.7 % 51.6 % 55.4 % 55.9 % (Gain) loss on sale of assets 0.0 % -0.3 % 0.0 % -0.1 % Total costs and expenses 95.2 % 97.0 % 98.3 % 102.4 % Operating income (loss) 4.8 % 3.0 % 1.7 % -2.4 % Interest expense, net -0.4 % -1.1 % -0.5 % -1.1 % Income (loss) from operations before income taxes 4.4 % 1.9 % 1.2 % -3.5 % Provision for income taxes 0.1 % 0.0 % 0.1 % 0.1 % Net income (loss) 4.3 % 1.9 % 1.1 % -3.6 % Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019 Consolidated Results of Operations Revenue. Revenue was up $6.2 million, or 8.5% to $78.8 million for the three months ended September 30, 2020 from $72.6 million in the prior year comparable period. The increase year over year is primarily due to an 8.1% increase in average student population, driven by a 15.3% increase in student starts. Revenue growth was less than student population growth due to the continued impact of COVID-19 during the quarter. Restricted access to externship sites and classroom labs extended graduation dates for certain programs which deferred $0.4 million of revenue to the fourth quarter along with a $0.5 million decrease in non-tuition revenue Student start growth of 15.3% benefitted from our ongoing investments in marketing as well as continuous evaluation and improvement of the admissions process. Increased efficiency is evidenced by a decline in the overall cost to obtain student starts while continuing growth. Lincoln has now experienced three years of consistent growth in student starts, with the only exception being the first quarter of 2020 which was impacted by COVID-19. For a general discussion of trends in our student enrollment, see “Seasonality and Outlook” below. 29 Index Educational services and facilities expense . Our educational services and facilities expense increased $1.0 million, or 3.1% to $34.2 million for the three months ended September 30, 2020 from $33.2 million in the prior year comparable period. The increase in expense year over year was driven by additional instructional expense and books and tools expense resulting from an increased student population combined with the return to in person instruction at all of our campuses either at the end of the second quarter or during the third quarter. Educational services and facilities expense, as a percentage of revenue, decreased to 43.5% from 45.7% for the three months ended September 30, 2020 and 2019, respectively. Selling, general and administrative expense. Our selling, general and administrative expense increased $3.2 million, or 8.5% to $40.7 million for the three months ended September 30, 2020 from $37.5 million in the prior year comparable period. The increase was primarily driven by additional bad debt expense and marketing investments, partially offset by cost savings in sales and student services. Bad debt expense increased mainly due to a higher reserve amount for doubtful accounts related to higher accounts receivable and lower historical repayment rates. Factors which contributed to the increase in accounts receivable include the increase in new start volume and challenges we faced in reaching students during campus closures due to COVID-19 and following the campus re-opening due to reduced student on-ground hours. Furthermore, during the initial transition to remote learning certain students experienced difficulty adapting to the new learning environment, which led to an uptick of the failure rate. As a result, these students did not meet the Title IV grade standards thus delaying their Title IV disbursements. However, our team is focused on driving improvement in the fourth quarter. Marketing investments increased year over year to continue to capitalize on cost effective lead-generating opportunities in higher converting channels while also investing to drive greater brand awareness. Despite the increased investment in marketing, our cost per start in the third quarter and for the full year decreased compared to the prior year, demonstrating that we are achieving a strong return on our investment as evidenced by a 15.3% increase in starts year over year. Also contributing to the increase in marketing spend was a shift in advertising production costs of approximately $0.6 million from the second quarter to the third quarter as a result of COVID-19. Reductions in sales expense was the result of travel restrictions imposed by the COVID-19 pandemic, while lower student services expense was the result of suspended busing and transportation services for students. Selling, general and administrative expense, as a percentage of revenue, increased slightly to 51.7% from 51.6% for the three months ended September 30, 2020 and 2019, respectively. Net interest expense. Net interest expense for the three months ended September 30, 2020 decreased by $0.5 million, or 63.1% to $0.3 million from $0.8 million in the prior year comparable period. The reduction in expense year over year is due to more favorable terms from the refinance of our previous credit facility which occurred in November 2019 as well as a lower loan balance outstanding in the current year. Income taxes. Our provision for income taxes has remained essentially flat at less than $0.1 million for the three months ended September 30, 2020 and 2019. No federal or state income tax benefit was recognized for either period loss due to the recognition of a full valuation allowance. Income tax expense resulted from various minimum state taxes. Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 Consolidated Results of Operations Revenue. Revenue increased $11.9 million, or 6.0% to $211.3 million for the nine months ended September 30, 2020 from $199.4 million in the prior year comparable period. The increase year over year is primarily due to a 5.9% increase in average student population, driven by a 9.8% increase in student starts. Revenue growth was less than student population growth due to the continued impact of COVID-19 during the quarter. Restricted access to externship sites and classroom labs extended graduation dates for certain programs which deferred $0.4 million of revenue to the fourth quarter along with a $1.2 million decrease in non-tuition revenue Student start growth of 9.8% benefitted from our ongoing investments in marketing as well as continuous evaluation and improvement of the admissions process. Increased efficiency is evidenced by a decline in the overall cost to obtain student starts while continuing growth. Lincoln has now experienced three years of consistent growth in student starts, with the only exception being the first quarter of 2020 which was impacted by COVID-19. 30 Index For a general discussion of trends in our student enrollment, see “Seasonality and Outlook” below. Educational services and facilities expense. Our educational services and facilities expense decreased $2.2 million, or 2.4% to $90.7 million for the nine months ended September 30, 2020 from $92.9 million in the prior year comparable period. Reduced costs were driven by costs savings in facilities expense due to facility closures during the first and second quarter as a result of COVID-19 and successful renegotiations of lease terms at certain campuses reducing rent expense during campus closures. Partially offsetting the cost reductions were additional instructional expense and books and tools expense resulting from an increased student population combined with the return to in person instruction at all of our campuses either at the end of the second quarter or during the third quarter. Educational services and facilities expense, as a percentage of revenue, decreased to 42.9% from 46.6% for the nine months ended September 30, 2020 and 2019, respectively. Selling, general and administrative expense. Our selling, general and administrative expense increased $5.5 million, or 4.9% to $117.0 million for the nine months ended September 30, 2020 from $111.5 million in the prior year comparable period. The increase was primarily driven by additional bad debt expense and marketing investments, partially offset by cost savings in sales and student services. Bad debt expense increased mainly due to a higher reserve amount for doubtful accounts related to higher accounts receivable and lower historical repayment rates. Factors which contributed to the increase in accounts receivable include the increase in new start volume and challenges we faced in reaching students during campus closures due to COVID-19 and following the campus re-opening due to reduced student on-ground hours. Furthermore, during the initial transition to remote learning certain students experienced difficulty adapting to the new learning environment, which led to an uptick of the failure rate. As a result, these students did not meet the Title IV grade standards thus delaying their Title IV disbursements. However, our team is focused on driving improvement in the fourth quarter. Marketing investments increased year over year to continue to capitalize on cost effective lead generating opportunities in higher converting channels while also investing to drive greater brand awareness. Despite the increased investment in marketing, our cost per start for the full year decreased compared to the prior year, demonstrating that we are achieving a strong return on our investment as evidenced by a 9.8% increase in starts year over year. Reductions in sales expense were the result of travel restrictions imposed by the COVID-19 pandemic, while lower student services expense was the result of suspended busing and transportation services for students. Selling, general and administrative expense, as a percentage of revenue, decreased to 55.4% from 55.9% for the nine months ended September 30, 2020 and 2019, respectively. Net interest expense. Net interest expense for the nine months ended September 30, 2020 decreased by $1.2 million, or 55.0%, to $0.9 million from $2.1 million in the prior year comparable period. The decrease year over year is due to several factors including more favorable terms from the refinance of our previous credit facility, a lower loan balance outstanding in the current year and the write-off of some non-cash deferred finance fees in the prior year. Income taxes. Our provision for income taxes has remained essentially flat at $0.2 million for the nine months ended September 30, 2020 and 2019, respectively. No federal or state income tax benefit was recognized for either period loss due to the recognition of a full valuation allowance. Income tax expense resulted from various minimal state tax expenses. Segment Results of Operations We operate our business in three reportable segments: (a) the Transportation and Skilled Trades segment; (b) the Healthcare and Other Professions (“HOPS”) segment; and (c) the Transitional segment. Our reportable segments have been determined based on a method by which we now evaluate performance and allocate resources. Each reportable segment represents a group of post-secondary education providers that offer a variety of degree and non-degree academic programs. These segments are organized by key market segments to enhance operational alignment within each segment to more effectively execute our strategic plan. Each of the Company’s schools is a reporting unit and an operating segment. Our operating segments are described below. Transportation and Skilled Trades – The Transportation and Skilled Trades segment offers academic programs mainly in the career-oriented disciplines of transportation and skilled trades (e.g. automotive, diesel, HVAC, welding and manufacturing). Healthcare and Other Professions – The Healthcare and Other Professions segment offers academic programs in the career-oriented disciplines of health sciences, hospitality and business and information technology (e.g. dental assistant, medical assistant, practical nursing, culinary arts and cosmetology). Transitional – The Transitional segment refers to campus operations which have been closed. The Company continually evaluates each campus for profitability, earning potential, and customer satisfaction. This evaluation takes several factors into consideration, including the campus’ geographic location and program offerings, as well as skillsets required of our students by their potential employers. The purpose of this evaluation is to ensure that our programs provide our students with the best possible opportunity to succeed in the marketplace with the goals of attracting more students to our programs and, ultimately, to provide our shareholders with the maximum return on their investment. As of September 30, 2020, no campuses have been categorized in the Transitional segment. We evaluate segment performance based on operating results. Adjustments to reconcile segment results to consolidated results are included under the caption “Corporate,” which primarily includes unallocated corporate activity. 31 Index The following table presents results for our two reportable segments (as no campuses have been categorized in the Transitional segment) for the three months ended September 30, 2020 and 2019: Three Months Ended September 30, 2020 2019 % Change Revenue: Transportation and Skilled Trades $ 56,828 $ 52,652 7.9 % HOPS 21,964 19,942 10.1 % Total $ 78,792 $ 72,594 8.5 % Operating Income (Loss): Transportation and Skilled Trades $ 9,138 $ 6,752 35.3 % Healthcare and Other Professions 1,654 1,403 17.9 % Corporate (6,952 ) (6,012 ) -15.6 % Total $ 3,840 $ 2,143 -79.2 % Starts: Transportation and Skilled Trades 3,982 3,398 17.2 % Healthcare and Other Professions 1,528 1,381 10.6 % Total 5,510 4,779 15.3 % Average Population: Transportation and Skilled Trades 8,349 7,635 9.4 % Leave of Absense - COVID-19 (333 ) - 100.0 % Transportation and Skilled Trades Excluding Leave of Absense - COVID-19 8,016 7,635 5.0 % Healthcare and Other Professions 4,286 3,619 18.4 % Leave of Absense - COVID-19 (137 ) - 100.0 % Healthcare and Other Professions Excluding Leave of Absense - COVID-19 4,149 3,619 14.6 % Total 12,635 11,254 12.3 % Total Excluding Leave of Absense - COVID-19 12,165 11,254 8.1 % End of Period Population: Transportation and Skilled Trades 8,811 8,055 9.4 % Leave of Absense - COVID-19 (67 ) - 100.0 % Transportation and Skilled Trades Excluding Leave of Absense - COVID-19 8,744 8,055 8.6 % Healthcare and Other Professions 4,462 3,960 12.7 % Leave of Absense - COVID-19 (37 ) - 100.0 % Healthcare and Other Professions Excluding Leave of Absense - COVID-19 4,425 3,960 11.7 % Total 13,273 12,015 10.5 % Total Excluding Leave of Absense - COVID-19 13,169 12,015 9.6 % 32 Index Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019 Transportation and Skilled Trades Operating income increased $2.3 million to $9.1 million for the three months ended September 30, 2020 from $6.8 million in the prior year comparable period. The increase year over year was mainly driven by the following factors: ● Revenue increased $4.1 million, or 7.9%, to $56.8 million from $52.7 million in the prior year. The increase is due primarily to a 5.0% increase in average student population, driven by a 17.2% increase in student starts. The revenue increase was despite the continued impact of COVID-19, which caused a $0.4 million decrease in non-tuition revenue. ● Educational services and facilities expense remained essentially flat at $23.9 million and $23.7 million for the three months ended September 30, 2020 and 2019, respectively. ● Selling, general and administrative expense increased $1.4 million, or 6.4% to $23.8 million for the three months ended September 30, 2020 from $22.4 million in the prior year comparable period. The increase was due to several factors including increased bad debt expense and marketing investments, partially offset by savings realized in sales expense and student services, all of which are discussed in the consolidated results of operations. Healthcare and Other Professions Operating income increased $0.3 million to $1.7 million for the three months ended September 30, 2020 from $1.4 million in the prior year comparable period. The increase year over year was mainly driven by the following factors: ● Revenue increased $2.1 million, or 10.1%, to $22.0 million from $19.9 million in the prior year. The increase quarter over quarter is due primarily to a 14.6% increase in average student population, driven by a 10.6% increase in student starts. The increases in revenue was despite the continued impact of COVID-19 during the third quarter that deferred $0.4 million of revenue to the fourth quarter as a result of extended graduation dates for certain programs and a $0.1 million decrease in non-tuition revenue. ● Educational services and facilities expense increased $0.9 million, or 9.4%, to $10.4 million for the three months ended September 30, 2020 from $9.5 million in the prior year comparable period. The increase in expense was driven by additional instructional expense and books and tools expense resulting from an increased student population combined with the return to in person instruction at all of our campuses either at the end of the second quarter or during the third quarter. ● Selling, general and administrative expenses increased $0.9 million, or 9.8%, to $9.9 million for the three months ended September 30, 2020 from $9.0 million in the prior year comparable period. The increase was due to increased bad debt expense in combination with increased marketing expense, both of which are discussed above in the consolidated results of operations. Transitional No campuses have been classified in the Transitional segment for the three months ending September 30, 2020 and 2019, respectively. Corporate and Other This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses were $6.9 million, a $0.9 million increase compared to $6.0 in the prior year. Additional expenses were the result of several factors including increases in incentive compensation accrual due to financial performance, stipends provided to all employees due to the COVID-19 pandemic and increase in non-cash stock expense 33 Index The following table presents results for our two reportable segments for the nine months ended September 30, 2020 and 2019: Nine Months Ended September 30, 2020 2019 % Change Revenue: Transportation and Skilled Trades $ 148,799 $ 141,005 5.5 % HOPS 62,504 58,422 7.0 % Total $ 211,303 $ 199,427 6.0 % Operating Income (Loss): Transportation and Skilled Trades $ 18,848 $ 11,051 70.6 % Healthcare and Other Professions 6,388 4,214 51.6 % Corporate (21,581 ) (20,079 ) -7.5 % Total $ 3,655 $ (4,814 ) 175.9 % Starts: Transportation and Skilled Trades 8,004 7,247 10.4 % Healthcare and Other Professions 3,651 3,368 8.4 % Total 11,655 10,615 9.8 % Average Population: Transportation and Skilled Trades 7,651 7,169 6.7 % Leave of Absense - COVID-19 (260 ) - 100.0 % Transportation and Skilled Trades Excluding Leave of Absense - COVID-19 7,391 7,169 3.1 % Healthcare and Other Professions 4,176 3,581 16.6 % Leave of Absense - COVID-19 (188 ) - 100.0 % Healthcare and Other Professions Excluding Leave of Absense - COVID-19 3,988 3,581 11.4 % Total 11,827 10,750 10.0 % Total Excluding Leave of Absense - COVID-19 11,379 10,750 5.9 % End of Period Population: Transportation and Skilled Trades 8,811 8,055 9.4 % Leave of Absense - COVID-19 (67 ) - 100.0 % Transportation and Skilled Trades Excluding Leave of Absense - COVID-19 8,744 8,055 8.6 % Healthcare and Other Professions 4,462 3,960 12.7 % Leave of Absense - COVID-19 (37 ) - 100.0 % Healthcare and Other Professions Excluding Leave of Absense - COVID-19 4,425 3,960 11.7 % Total 13,273 12,015 10.5 % Total Excluding Leave of Absense - COVID-19 13,169 12,015 9.6 % 34 Index Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019 Transportation and Skilled Trades Operating income increased $7.8 million, or 70.6% to $18.8 million for the nine months ended September 30, 2020 from $11.0 million in the prior year comparable period. The increase year over year was primarily driven by the following factors: ● Revenue increased $7.8 million, or 5.5%, to $148.8 million from $141.0 million in the prior year. The increase is due primarily to a 3.1% increase in average student population, driven by a 10.4% increase in student starts. The revenue increase was despite the continued impact of COVID-19, which caused a $0.9 million decrease in non-tuition revenue. ● Educational services and facilities expense decreased $2.8 million, or 4.3% to $62.0 million for the nine months ended September 30, 2020 from $64.8 million in the prior year comparable period. Reduced costs were a primarily driven by savings in facilities expense due to facility closures during the first and second quarter as a result of COVID-19. In addition, during the temporary campus closures management successfully negotiated more favorable lease terms at certain campuses reducing rent expense during facility closures. ● Selling, general and administrative expense increased $2.6 million, or 4.0% to $68.0 million for the nine months ended September 30, 2020 from $65.4 million in the prior year comparable period. The increase year over year was primarily due to bad debt expense and additional marketing investments, partially offset by cost savings realized in sales expense and student services expense discussed above in the consolidated results of operations. Healthcare and Other Professions Operating income increased $2.2 million, or 51.6% to $6.4 million for the nine months ended September 30, 2020 from $4.2 million in the prior year comparable period. The increase was mainly driven by the following factors: ● Revenue increased $4.1 million, or 7.0%, to $62.5 million from $58.4 million in the prior year. The increase year over year is due primarily to a 11.4% increase in average student population, driven by a 8.4% increase in student starts. The increases in revenue was despite the continued impact of COVID-19 during the third quarter that deferred $0.4 million of revenue to the fourth quarter as a result of extended graduation dates for certain programs and a $0.3 million decrease in non-tuition revenue. ● Educational services and facilities expense increased $0.5 million, or 2.0% to $28.7 million for the nine months ending September 30, 2020 from $28.2 million in the prior year comparable period. The increase in expense year over year was driven by additional instructional expense and books and tools expense resulting from an increased student population combined with the return to in person instruction at all of our campuses either at the end of the second quarter or during the third quarter. Partially offsetting these increases were costs savings in facilities expense due to facility closures during the first and second quarter as a result of COVID-19 and successful renegotiations of lease terms at certain campuses reducing rent expense during campus closures. ● Selling, general and administrative expense increased $1.4 million, or 5.2% to $27.4 million for the nine months ended September 30, 2020 from $26.0 million in the prior year comparable period. The increase was primarily driven by bad debt expense, which was discussed previously in the consolidated results of operations. Transitional No campuses have been classified in the Transitional segment for the nine months ending September 30, 2020 and 2019, respectively. Corporate and Other This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses were $21.6 million, a $1.5 million increase compared to $20.1 in the prior year. Additional expenses were the result of several factors including increases in incentive compensation accrual due to financial performance, stipends provided to all employees due to the COVID-19 pandemic and increase in non-cash stock expense 35 Index 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 nine months ended September 30, 2020 and 2019, respectively: Nine Months Ended September 30, 2020 2019 Net cash provided by (used in) operating activities $ 10,222 $ (4,893 ) Net cash used in investing activities (3,457 ) (3,061 ) Net cash used in financing activities (17,816 ) (22,238 ) As of September 30, 2020, the Company had cash, cash equivalents and restricted cash of $27.6 million, which includes cash received under the CARES Act of $11.5 million. As of September 30, 2020, the Company had a net cash balance of $9.9 million calculated as cash, cash equivalents and restricted cash, less both the short-term and long-term portion of the Company’s Credit Facility. Excluding cash deposits from the CARES Act of $11.5 million, the Company had a reconciled net debt balance of $1.5 million. As of September 30, 2020, the Company also can borrow an additional $21.0 million under its Credit Facility. The increase in cash position can mainly be attributed to the net income generated in the second and third quarter of 2020 During the third quarter, the Company paid a $1.1 million cash dividend to its Series A preferred shareholders pursuant to the Securities Purchase Agreement entered into on November 14, 2019 and the Company’s Amended and Restated Certificate of Incorporation. This dividend covered the period from November 14, 2019 through September 30, 2020. The Company has the option to pay the preferred stock dividends in cash or through an increase in the stated value of the preferred shares. The company elected to pay the dividend in cash given its strengthened liquidity position and the significantly higher stock price over the conversion price at the time of the payment. To fund our business plans, including any anticipated future losses, purchase commitments, capital expenditures and principal and interest payments on borrowings, we leveraged our owned real estate. We are also continuing to take actions to improve cash flow by aligning our cost structure to our student population, in addition to our current sources of capital that provide short term liquidity. Our primary source of cash is tuition collected from our students. The majority of students enrolled at our schools rely on funds received under various government-sponsored student financial aid programs to pay a substantial portion of their tuition and other education-related expenses. The most significant source of student financing is Title IV Programs, which represented approximately 78% of our cash receipts relating to revenues in 2019. 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. See “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Operating Activities Net cash provided by operating activities was $10.2 million for the nine months ended September 30, 2020 compared to net cash used in operating activities of $4.9 million in the prior year comparable period. Included in the September 30, 2020 net cash balance is $11.5 million in federal funds remaining from subsidy received under the CARES Act which is intended for reimbursement to students for expenses related to disruptions in campus operations (e.g., food, housing, etc.) and as permitted to use the funds to cover institutional costs associated with significant changes to the delivery of instruction due to the COVID-19 emergency, provided that those costs do not include payment to contractors for the provision of pre-enrollment recruitment activities, endowments, or capital outlays associated with facilities related to athletics, sectarian instruction, or religious worship. Excluding the federal funds received, we would have reported net cash used by operations of $1.2 million. T he decrease in net cash used in operating activities for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 is primarily due to net income generated in the second and third quarter of 2020. 36 Index Investing Activities Net cash used in investing activities increased $0.4 million to $3.5 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. 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 2019 and are expected to approximate 2% of revenues in 2020. 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 $17.8 million for the nine months ended September 30, 2020 compared to $22.2 million in the prior year comparable period. The decrease of $4.4 million was primarily due to decreased net payments on borrowings of $16.5 million for the nine months ended September 30, 2020 as compared to $22.1 million in the prior year comparable period. Net payments on borrowings consisted of: (a) total borrowing to date under our secured credit facility of $11.0 million; and (b) $27.5 million in total repayments made by the Company. See Part II, Item 1A. “Risk Factors — COVID-19 Pandemic” in this Quarterly Report on Form 10-Q for risks associated with COVID-19. 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”), pursuant to which the Company obtained a new credit facility 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. 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 was $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. Borrowings under the Line of Credit Loan are to be secured by cash collateral. Under the Credit Agreement, borrowing under the Delayed Draw Term Loan was available through May 31, 2021 but an amendment to the Credit Agreement entered into on November 10, 2020 extended the period through May 31. 2022. 37 Index 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. pursuant to a swap agreement between the Company and the Lender. 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%. Line of Credit Loans will bear interest at a floating interest rate based on the Lender’s prime rate of interest. Revolving Loans are subject to a LIBOR interest rate floor of .00%. Letters of credit will be 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 and the Line of Credit 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 September 30, 2020 the Company was in compliance with all debt covenants. As of September 30, 2020 and December 31, 2019, the Company had $18.3 million and $34.8 million, respectively, outstanding under the Credit Facility; offset by $0.7 million and $0.8 million of deferred finance fees, respectively. In January 2020, the Company repaid the $15.0 million outstanding on the Line of Credit Loan. As of September 30, 2020 and December 31, 2019, letters of credit in the aggregate outstanding principal amount of $4.0 million and $4.0 million, respectively, were outstanding under the Credit Facility. 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. The following table sets forth our long-term debt (in thousands): September 30, 2020 December 31, 2019 Credit agreement $ 18,333 $ 34,833 Deferred Financing Fees (666 ) (805 ) 17,667 34,028 Less current maturities (2,000 ) (2,000 ) $ 15,667 $ 32,028 38 Index Contractual Obligations Current portion of Long-Term Debt, Long-Term Debt and Lease Commitments. As of September 30, 2020, 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). The following table contains supplemental information regarding our total contractual obligations as of September 30, 2020 (in thousands): Payments Due by Period Total Less than 1 year 1-3 years 3-5 years More than 5 years Credit facility* $ 18,333 $ 2,000 $ 4,000 $ 12,333 $ - Operating leases 90,230 15,276 29,632 23,850 21,472 Interest on term loan** 3,273 946 1,567 760 - Total contractual cash obligations $ 111,836 $ 18,222 $ 35,199 $ 36,943 $ 21,472 * Excludes deferred finance fees of $0.7 million. ** Includes fixed rate interest payment resulting from the cash flow hedge. As of September 30, 2020, we had outstanding loan principal commitments to our active students of $20.0 million. These are institutional loans and no cash is advanced to students. The full loan amount is not guaranteed unless the student completes the program. The institutional loans are considered commitments because the students are packaged to fund their education using these funds and they are not reported on our financials. Off-Balance Sheet Arrangements We had no off-balance sheet arrangements as of September 30, 2020, except for surety bonds. As of September 30, 2020, we posted surety bonds in the total amount of approximately $12.4 million. We are required to post surety bonds on behalf of our campuses and education representatives with multiple states to maintain authorization to conduct our business. These off-balance sheet arrangements do not adversely impact our liquidity or capital resources. 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. This year, due to COVID-19 and not a seasonality issue, it has not been a typical year and expenses have varied more significantly. During the first half of the year, we make significant investments in marketing, staff, programs and facilities to meet our targets for the second half of the year and, as a result, such expenses do not fluctuate significantly on a quarterly basis. To the extent new student enrollments, and related revenue, in the second half of the year fall short of our estimates, our operating results could be negatively impacted. We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns. Such patterns may change as a result of new school openings, new program introductions, and increased enrollments of adult students and/or acquisitions. Financial Responsibility Update All institutions participating in the Title IV Programs must satisfy specific standards of financial responsibility. The DOE evaluates institutions for compliance with these standards each year based on the institution’s annual audited financial statements, as well as following a change in ownership resulting in a change of control of the institution. The most significant financial responsibility measurement is the institution’s composite score, which is calculated by the DOE. See the Company’s disclosures in its Annual Report on Form 10-K for the fiscal year ended December 31, 2019 under the caption “Regulatory Environment – Financial Responsibility Standards.” 39 Index We originally were required to submit to the DOE our audited financial statements for the 2019 fiscal year by June 30, 2020, but the DOE extended the deadline for institutions to submit audited financial statements by six months in published guidance prompted by the impact of the COVID-19 pandemic. We originally anticipated that our composite score for the 2019 fiscal year would be 1.6, subject to determination by the DOE based on its review of our consolidated audited financial statements for the 2019 fiscal year. We submitted to the DOE our audited financial statements for the 2019 fiscal year on July 2, 2020, which was after the normal submission deadline of June 30, 2020 but nearly six months in advance of the amended deadline under DOE guidance published on May 15, 2020. Subsequently, t he DOE issued a notice on October 1, 2020, indicating that the submission was incomplete because it did not include a required supplemental schedule, did not comply with generally accepted accounting principles for recognizing lease assets and lease liabilities, and did not adhere to the proper treatment of long-term debt in its composite score calculations under the regulations. Each of these requirements are related to technical revisions to the composite score calculation that took effect on July 1, 2020. We did not believe these revisions were expected to apply to the 2019 financial statements because the revisions did not take effect until July 1, 2020 and the original deadline for submission of the 2019 financials was June 30, 2020. However, the financials were submitted two days after June 30, 2020, and the DOE has taken the position that its extension of the submission deadline did not also result in an extension of the then-existing procedures for calculating the composite score. The DOE requested that we review and correct our submission within 45 calendar days. We prepared an updated submission and composite score calculation in response to the Department’s notice and resubmitted our financial statements for the 2019 fiscal year on November 13, 2020. We recalculated our composite score at 1.3, which would result in our institutions remaining in the zone requirements under the financial responsibility regulations. See the Company’s disclosures in its Annual Report on Form 10-K for the fiscal year ended December 31, 2019 under the caption “ Regulatory Environment – Financial Responsibility.” We are currently operating under the “Zone Alternative” and expect to elect to continue participating under the Zone Alternative if the Department determines that we are in the zone. Our final composite score is subject to determination by the Department. Our composite score also is subject to reduction under the regulations if a triggering event occurs and results in circumstances that require recalculation of the composite score under the regulations. If an institution’s composite score is below 1.0, the institution is considered by the DOE to lack financial responsibility. If the DOE determines that an institution does not satisfy the DOE’s financial responsibility standards, depending on its composite score and other factors, that institution may establish its eligibility to participate in the Title IV Programs on an alternative basis by, among other things, submitting a letter of credit or other form of financial protection in an amount to be determined by the DOE, comply with the zone requirements and potentially accept other conditions or restrictions. See the Company’s disclosures in its Annual Report on Form 10-K for the fiscal year ended December 31, 2019 under the caption “ Regulatory Environment – Financial Responsibility.” 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. On September 3, 2020, we received final audit determination letters asserting liabilities for closed school loan discharges in connection with the closure of certain campuses. We subsequently provided additional documentation to the Department that support reductions in the liability amount and await the final determination by the Department. We cannot predict the timing or amount of any additional loan discharges that the DOE may approve or the liabilities that the DOE may seek from us. We have the right to appeal any asserted liabilities under an administrative appeal process within the DOE. We also cannot predict the timing or potential outcome of any administrative appeals of any such liabilities. Regulations Update – Negotiated Rulemaking On April 2, 2020, the DOE published proposed regulations related primarily to distance education and to topics addressed during negotiated rulemaking committee meetings that took place in early 2019. See the Company’s disclosures in its Annual Report on Form 10-K for the fiscal year ended December 31, 2019 under the caption “Regulatory Environment – Negotiated Rulemaking.” The proposed regulations address topics including, among other things, correspondence courses, direct assessment programs, foreign institutions, written arrangements with ineligible institutions or organizations to provide a portion of an educational program, requirements for prompt action by the DOE on certain Title IV eligibility applications, requirements related to the length of educational programs and entry level requirements for the occupation, the clock to credit hour conversion formula, the requirements for returning unearned Title IV Program funds received for students who withdraw before completing their educational programs, and the requirements for measuring a student’s satisfactory academic progress. On September 2, 2020, the DOE published the final regulations with some amendments and a general effective date of July 1, 2021. We are in the process of analyzing the proposed regulations and their potential impact on us and our institutions. 40 Index