LINCOLN EDUCATIONAL SERVICES CORP 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures Our Chief Executive Officer and Chief Financial Officer, after evaluating, together with management, the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)) as of December 31, 2020 have concluded that our disclosure controls and procedures are effective to reasonably ensure that material information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by Securities and Exchange Commissions’ Rules and Forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Internal Control Over Financial Reporting During the quarter ended December 31, 2020, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 47 Index Management’s Annual Report on Internal Control over Financial Reporting and Attestation Report of Independent Registered Public Accounting Firm The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013) . Based on its assessment, management believes that, as of December 31, 2020, the Company’s internal control over financial reporting is effective. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company’s independent auditors, Deloitte & Touche LLP, an independent registered public accounting firm, audited the Company’s internal control over financial reporting as of December 31, 2020, as stated in their report included in this Form 10-K that follows. ITEM 9B. OTHER INFORMATION None. 48 Index PART III. Certain information required by this item will be included in a definitive proxy statement for the Company’s annual meeting of shareholders or an amendment to this Annual Report on Form 10-K, in either case filed with the Securities and Exchange Commission within 120 days after December 31, 2020, and is incorporated by reference herein. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Directors and Executive Officers Certain information required by this Item 10 of Part III is incorporated by reference from a definitive proxy statement or an amendment to this Annual Report on Form 10-K that will be filed with the Securities and Exchange Commission within 120 days after December 31, 2020. Code of Ethics We have adopted a Code of Conduct and Ethics applicable to our directors, officers and employees and certain other persons, including our Chief Executive Officer and Chief Financial Officer. A copy of our Code of Ethics is available on our website at www.lincolntech.edu . If any amendments to or waivers from the Code of Conduct are made, we will disclose such amendments or waivers on our website. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 of Part III is incorporated by reference from a definitive proxy statement or an amendment to this Annual Report on Form 10-K that will be filed with the Securities and Exchange Commission within 120 days after December 31, 2020. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this Item 12 of Part III is incorporated by reference from a definitive proxy statement or an amendment to this Annual Report on Form 10-K that will be filed with the Securities and Exchange Commission within 120 days after December 31, 2020. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this Item 13 of Part III is incorporated by reference from a definitive proxy statement or an amendment to this Annual Report on Form 10-K that will be filed with the Securities and Exchange Commission within 120 days after December 31, 2020. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this Item 14 of Part III is incorporated by reference from a definitive proxy statement or an amendment to this Annual Report on Form 10-K that will be filed with the Securities and Exchange Commission within 120 days after December 31, 2020. 49 Index PART IV. ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 1. Financial Statements See “Index to Consolidated Financial Statements” on page F-1 of this Annual Report on Form 10-K. 2. Financial Statement Schedule See “Index to Consolidated Financial Statements” on page F-1 of this Annual Report on Form 10-K. 3. Exhibits Required by Securities and Exchange Commission Regulation S-K Exhibit Number Description 3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to the Company’s Registration Statement on Form S-1/A (Registration No. 333-123644) filed June 7, 2005. 3.2 Certificate of Amendment, dated November 14, 2019, to the Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-3 filed October 6, 2020). 3.3 Bylaws of the Company, as amended on March 8, 2019 (incorporated by reference to the Company’s Form 8-K filed June 28 2005). 4.1 Specimen Stock Certificate evidencing shares of common stock (incorporated by reference to the Company’s Registration Statement on Form S-1/A (Registration No. 333-123644) filed June 21, 2005). 4.2 Registration Rights Agreement, dated as of November 14, 2019, between the Company and the investors parties thereto (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 14, 2019). 4.3* Description of Securities of the Company 10.1 + Employment Agreement, dated as of December 10, 2020, between the Company and Scott M. Shaw (incorporated by reference to the Company’s Current Report on Form 8-K filed December 11, 2020). 10.2+ Employment Agreement, dated as of November 7, 2018, between the Company and Scott M. Shaw (i ncorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 9, 2018). 10.3+ Employment Agreement, dated as of December 10, 2020, between the Company and Brian K. Meyers (incorporated by reference to the Company’s Current Report on Form 8-K filed December 11, 2020). 10.4+ Employment Agreement, dated as of November 7, 2018, between the Company and Brian K. Meyers (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 9, 2018). 10.5+ Employment Agreement, dated as of December 10, 2020, between the Company and Stephen M. Buchenot (incorporated by reference to the Company’s Current Report on Form 8-K filed December 11, 2020). 10.6+ Employment Agreement dated April 3, 2019 between the Company and Stephen M. Buchenot (incorporated by reference to the Company’s Current Report on Form 8-K filed April 5, 2019) . 10.7+ Lincoln Educational Services Corporation 2020 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.16 of the Current Report on Form 8-K dated June 5, 2020). 50 Index 10.11 Securities Purchase Agreement, dated as of November 14, 2019, between the Company and the investors parties thereto (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 14, 2019). 10.12 Credit Agreement, dated as of November 14, 2019, among the Company, Lincoln Technical Institute, Inc. and its subsidiaries, and Sterling National Bank (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 14, 2019). 10.13 First Amendment to Credit Agreement, dated as of November 10, 2020, among the Company, Lincoln Technical Institute, Inc. and its subsidiaries, and Sterling National Bank (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 12, 2020). 10.14 Form of Indemnification Agreement between the Company and each director of the Company (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 14, 2019). 10.15 Indemnification Agreement between the Company and John A. Bartholdson (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 14, 2019). 21* Subsidiaries of the Company. 23* Consent of Independent Registered Public Accounting Firm. 24* Power of Attorney (included on the Signatures page of the Company’s Annual Report on Form 10-K filed March 6, 2021). 31.1 * Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 * Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 * Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101* The following financial statements from Lincoln Educational Services Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020, formatted in XBRL: (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Comprehensive (Loss) Income, (v) Consolidated Statement of Changes in Stockholders’ Equity and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail. * Filed herewith. + Indicates management contract or compensatory plan or arrangement required to be filed or incorporated by reference as an exhibit to this Form 10-K pursuant to Item 15(b) of Form 10-K. ** As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. 51 Index SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 8, 2020 LINCOLN EDUCATIONAL SERVICES CORPORATION By: /s/ Brian Meyers Brian Meyers Executive Vice President, Chief Financial Officer and Treasurer (Principal Accounting and Financial Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned constitutes and appoints Scott M. Shaw and Brian K. Meyers, and each of them, as attorneys-in-fact and agents, with full power of substitution and re-substitution, for and in the name, place and stead of the undersigned, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that each of said attorney-in-fact or substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Scott M. Shaw Scott M. Shaw Chief Executive Officer and Director March 8, 2021 /s/ Brian K. Meyers Executive Vice President, Chief Financial Officer and Treasurer (Principal Accounting and Financial Officer) March 8, 2021 Brian K. Meyers /s/ John A. Bartholdson Director March 8, 2021 John A. Bartholdson /s/ Peter S. Burgess Director March 8, 2021 Peter S. Burgess /s/ James J. Burke, Jr. Director March 8, 2021 James J. Burke, Jr. /s/ Kevin M. Carney Director March 8, 2021 Kevin M. Carney /s/ Celia H. Currin Director March 8, 2021 Celia H. Currin /s/ Ronald E. Harbour Director March 8, 2021 Ronald E. Harbour /s/ J. Barry Morrow Director March 8, 2021 J. Barry Morrow /s/ Michael A. Plater Director March 8, 2021 Michael A. Plater /s/ Carlton Rose Director March 8, 2021 Carlton Rose 52 Index INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Number Reports of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2020 and 2019 F-5 Consolidated Statements of Operations for the years ended December 31, 2020 and 2019 F-7 Consolidated Statements of Other Comprehensive Income for the years ended December 31, 2020 and 2019 F-8 Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity for the years ended December 31, 2020 and 2019 F-9 Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019 F-10 Notes to Consolidated Financial Statements F-12 Schedule II-Valuation and Qualifying Accounts F-38 F-1 Index REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of Lincoln Educational Services Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Lincoln Educational Services Corporation and subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income, changes in convertible preferred stock and stockholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2021 , expressed an unqualified opinion on the Company’s internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Goodwill - Two Reporting Units within the Transportation and Skilled Trades Segment - Refer to Note 6 to the financial statements Critical Audit Matter Description The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company determines the fair value of its reporting units using an equal weighting of the discounted cash flow model and the market approach. The determination of fair value using the discounted cash flow model requires management to make significant estimates and assumptions related to forecasts of future revenues, which is driven by student start growth, EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization) margins, the long-term growth rate used in the calculation of the terminal value, and the discount rate to apply against the reporting unit’s financial metrics. The determination of fair value using the market approach requires management to make significant estimates and assumptions related to the selection of EBITDA multiples and the control premiums. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. The Company’s consolidated goodwill balance was $14.5 million as of December 31, 2020, of which $11.6 million was attributable to two reporting units within the Transportation and Skilled Trades Segment. F-2 Index Given the significant judgments made by management to estimate the fair value of the reporting units, including management’s judgments in selecting significant assumptions to forecast future revenues, student start growth, EBITDA margins, the long-term growth rate used in the calculation of the terminal value, and the discount rate to apply against the reporting units financial metrics, as well as the selection of the EBITDA multiples and control premiums, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the forecasts of future revenue, student start growth, EBITDA margins, the long-term growth rate used in the calculation of the terminal value, and the selection of the discount rate to apply against the reporting units financial metrics used within the income approach, and selection of the EBITDA multiples and control premiums used in the market approach for the two reporting units within the Transportation and Skilled Trades Segment included the following, among others: • We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the reporting units within the Transportation and Skilled Trades Segment such as controls related to management’s selection of the long-term growth rate, discount rate, EBITDA multiples and control premiums, as well as forecasts of future revenue, student start growth and EBITDA margins. • We evaluated management’s ability to accurately forecast future revenues and EBITDA margins by comparing actual results to management’s historical forecasts. • We evaluated the reasonableness of management’s revenue and EBITDA margin forecasts by comparing the forecasts to: o Historical revenues and EBITDA margins. o Internal communications to management and the Board of Directors. o Forecasted information included in Company press releases, as well as in analyst and industry reports for the Company and certain peer companies. • With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodologies (2) EBITDA multiples (3) control premiums (4) long-term growth rate and (5) the discount rate by: o Testing the source information underlying the determination of the discount rate, the selection of the EBITDA multiples, control premiums, long-term growth rates and the discount rate and the mathematical accuracy of the calculations. o Developing a range of independent estimates and comparing those to the EBITDA multiples, control premiums, long-term growth rates and the discount rate selected by management. /s/ Deloitte & Touche LLP Parsippany, New Jersey March 8, 2021 We have served as the Company’s auditor since 1999. F-3 Index REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of Lincoln Educational Services Corporation Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Lincoln Educational Services Corporation and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated March 8, 2021, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP Parsippany, New Jersey March 8, 2021 F-4 Index LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) December 31, 2020 2019 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 38,026 $ 23,644 Accounts receivable, less allowance of $25,174 and $18,107 at December 31, 2020 and 2019, respectively 30,021 20,652 Inventories 2,394 1,608 Prepaid income taxes and income taxes receivable - 383 Prepaid expenses and other current assets 3,723 4,190 Total current assets 74,164 50,477 PROPERTY, EQUIPMENT AND FACILITIES - At cost, net of accumulated depreciation and amortization of $176,300 and $172,408 at December 31, 2020 and 2019, respectively 48,388 49,345 OTHER ASSETS: Noncurrent restricted cash - 15,000 Noncurrent receivables, less allowance of $3,465 and $2,260 at December 31, 2020 and 2019, respectively 16,463 15,337 Deferred income taxes, net 35,718 - Operating lease right-of-use assets 55,187 49,065 Goodwill 14,536 14,536 Other assets, net 734 1,003 Total other assets 122,638 94,941 TOTAL ASSETS $ 245,190 $ 194,763 See notes to consolidated financial statements. F-5 Index LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) (Continued) December 31, 2020 2019 LIABILITIES, SERIES A CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Current portion of credit agreement $ 2,000 $ 2,000 Unearned tuition 23,453 23,411 Accounts payable 15,676 14,584 Accrued expenses 16,692 7,869 Income taxes payable 491 - Current portion of operating lease liabilities 8,504 9,142 Other short-term liabilities 26 199 Total current liabilities 66,842 57,205 NONCURRENT LIABILITIES: Long-term credit agreement 15,212 32,028 Pension plan liabilities 4,252 4,015 Deferred income taxes, net - 153 Long-term portion of operating lease liabilities 52,702 46,018 Other long-term liabilities 3,133 214 Total liabilities 142,141 139,633 COMMITMENTS AND CONTINGENCIES SERIES A CONVERTIBLE PREFERRED STOCK Preferred stock, no par value - 10,000,000 shares authorized, Series A convertible preferred shares, 12,700 shares issued and outstanding at December 31, 2020 and no shares issued and outstanding at December 31, 2019 11,982 11,982 STOCKHOLDERS’ EQUITY: Common stock, no par value - authorized 100,000,000 shares at December 31, 2020 and 2019, issued and outstanding 26,476,329 shares at December 31, 2020 and 25,231,710 shares at December 31, 2019 141,377 141,377 Additional paid-in capital 30,512 30,145 Treasury stock at cost - 5,910,541 shares at December 31, 2020 and 2019 (82,860 ) (82,860 ) Retained earnings (accumulated deficit) 6,203 (42,058 ) Accumulated other comprehensive loss (4,165 ) (3,456 ) Total stockholders’ equity 91,067 43,148 TOTAL LIABILITIES, SERIES A CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY $ 245,190 $ 194,763 See notes to consolidated financial statements. F-6 Index LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Year Ended December 31, 2020 2019 REVENUE $ 293,095 $ 273,342 COSTS AND EXPENSES: Educational services and facilities 122,196 123,495 Selling, general and administrative 156,199 145,176 Gain on sale of assets (81 ) (567 ) Total costs and expenses 278,314 268,104 OPERATING INCOME 14,781 5,238 OTHER: Interest income - 8 Interest expense (1,275 ) (2,963 ) INCOME BEFORE INCOME TAXES 13,506 2,283 (BENEFIT) PROVISION FOR INCOME TAXES (35,059 ) 268 NET INCOME 48,565 2,015 PREFERRED STOCK DIVIDENDS 1,378 - INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 47,187 $ 2,015 Basic Net income per share $ 1.49 $ 0.08 Diluted Net income per share $ 1.49 $ 0.08 Weighted average number of common shares outstanding: Basic 24,748 24,554 Diluted 24,748 24,554 See notes to consolidated financial statements F-7 Index LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (In thousands) December 31, 2020 2019 Net income $ 48,565 $ 2,015 Other comprehensive income Derivative qualifying as a cash flow hedge, net of taxes (nil) (703 ) (174 ) Employee pension plan adjustments, net of taxes (1) (6 ) 780 Comprehensive income $ 47,856 $ 2,621 See notes to consolidated financial statements F-8 Index LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (In thousands, except share amounts) Stockholders’ Equity Additional Paid-in Capital Treasury Stock Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Total Series A Convertible Preferred Stock Common Stock Shares Amount Shares Amount BALANCE - January 1, 2018 24,641,792 $ 141,377 $ 29,484.0 $ (82,860 ) $ (44,073 ) $ (4,062 ) $ 39,866 - - Net income - - - - 2,015 - 2,015 - - Employee pension plan adjustments - - - - - 780 780 - - Derivative qualifying as cash flow hedge - - - - - (174 ) (174 ) - - Issuance of series A convertible preferred stock, net of issuance costs - - - - - - - 12,700 11,982 Stock-based compensation expense Restricted stock 595,436 - 679 - - - 679 - - Net share settlement for equity-based compensation (5,518 ) - (18 ) - - - (18 ) - - BALANCE - December 31, 2019 25,231,710 141,377 30,145 (82,860 ) (42,058 ) (3,456 ) 43,148 12,700 11,982 Net income - - - - 48,565 - 48,565 - - Preferred stock dividend - - (1,074 ) - (304 ) - (1,378 ) - - Employee pension plan adjustments - - - - - (6 ) (6 ) - - Derivative qualifying as cash flow hedge - - - - - (703 ) (703 ) - - Stock-based compensation expense Restricted stock 1,319,734 - 1,686 - - - 1,686 - - Net share settlement for equity-based compensation (75,115 ) - (245 ) - - - (245 ) - - BALANCE - December 31, 2020 26,476,329 $ 141,377 $ 30,512 $ (82,860 ) $ 6,203 $ (4,165 ) $ 91,067 12,700 $ 11,982 See notes to consolidated financial statements. F-9 Index LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 48,565 $ 2,015 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,400 8,116 Amortization of deferred finance fees 181 190 Write-off of deferred finance fees - 512 Deferred income taxes (35,871 ) 153 Gain on disposition of assets (81 ) (567 ) Fixed asset donation (334 ) (1,084 ) Provision for doubtful accounts 26,888 20,847 Stock-based compensation expense 1,686 679 (Increase) decrease in assets: Accounts receivable (37,383 ) (25,986 ) Inventories (786 ) (157 ) Prepaid income taxes and income taxes receivable 383 219 Prepaid expenses and current assets 158 (502 ) Other assets 193 (1,368 ) Increase (decrease) in liabilities: Accounts payable 856 444 Accrued expenses 8,823 (1,687 ) Unearned tuition 42 866 Income taxes payable 491 - Other liabilities 2,274 (1,702 ) Total adjustments (25,080 ) (1,027 ) Net cash provided by operating activities 23,485 988 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (5,580 ) (5,385 ) Proceeds from insurance settlement 97 575 Net cash used in investing activities (5,483 ) (4,810 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings 11,000 40,045 Payments on borrowings (28,000 ) (54,514 ) Credit (payment) of deferred finance fees 3 (975 ) Net share settlement for equity-based compensation (245 ) (18 ) Dividend payment for preferred stock (1,378 ) - Proceeds from sale of convertible preferred stock - 12,700 Payment of convertible preferred stock issuance costs - (718 ) Net cash used in financing activities (18,620 ) (3,480 ) NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (618 ) (7,302 ) CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of year 38,644 45,946 CASH, CASH EQUIVALENTS AND RESTRICTED CASH—End of year $ 38,026 $ 38,644 See notes to consolidated financial statements. F-10 Index LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Continued) Year Ended December 31, 2020 2019 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 1,110 $ 2,155 Income taxes $ 179 $ 118 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Liabilities accrued for or noncash purchases of property and equipment $ 975 $ 2,852 See notes to consolidated financial statements. F-11 Index LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 AND FOR THE TWO YEARS ENDED DECEMBER 31, 2020 (In thousands, except share and per share amounts, schools, training sites, campuses and unless otherwise stated) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 schools in 14 states, offers programs in automotive technology, skilled trades (which include HVAC, welding and computerized numerical control 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. The schools 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 U.S. Department of Education (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. The Company’s business is organized into three reportable business segments: (a) Transportation and Skilled Trades, (b) Healthcare and Other Professions (“HOPS”), and (c) Transitional, which refers to our campus operations which have been closed. COVID-19 Pandemic — During the first quarter of 2020, the coronavirus disease (“COVID-19”) began to spread worldwide and has caused significant disruptions to the U.S. and world economies. In early March 2020, the Company began seeing the impact of the COVID-19 pandemic on our business. The impact was 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. In addition, some students were placed on leave of absence as they could not complete their externships and some students chose not to participate in online learning. Additionally, certain programs were extended due to restricted access to externship sites and classroom labs. Due to state and local provisions, our schools reopened on a phased basis from May through August 2020. Currently, all of our schools have re-opened and the majority of the students who were placed on leave or otherwise deferred their programs are actively working to finish their programs over the next few months. As COVID-19 continues to affect many states and its course is unpredictable, the full impact on the Company’s consolidated financial statements remains uncertain. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (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 businesses impacted by the spread of COVID-19. The CARES Act includes provisions for financial assistance and other regulatory relief benefitting students and their postsecondary institutions. The Company has and will continue to evaluate the impact of the CARES Act on the Company’s results of operations and cash flows. See Note 16 – COVID-19 Pandemic and CARES Act for additional discussion about the CARES Act. Liquidity — As of December 31, 2020, the Company had cash and cash equivalents of $38.0 million. As of December 31, 2020, the Company had a net cash balance of $20.8 million calculated as cash and cash equivalents, less both the short-term and long-term portions of the Company’s Credit Facility (defined below). As of December 31, 2020, the Company also can borrow an additional $21.0 million under its Credit Facility. As of December 31, 2019, the Company had a net cash balance of $4.6 million. The Company believes that its likely sources of cash should be sufficient to fund operations for the next twelve months and thereafter for the foreseeable future. However, the circumstances relating to COVID-19 and its evolution are unpredictable and, if circumstances surrounding COVID-19 should evolve in a significantly adverse manner it is possible our liquidity could be materially and adversely affected. Principles of Consolidation —The accompanying consolidated financial statements include the accounts of Lincoln Educational Services Corporation and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents —Cash and cash equivalents include all cash balances and highly liquid short-term investments, which contain original maturities within three months of purchase. Pursuant to the DOE’s cash management requirements, the Company retains funds from financial aid programs under Title IV of the Higher Education Act in segregated cash management accounts. The segregated accounts do not require a restriction on use of the cash and, as such, these amounts are classified as cash and cash equivalents on the consolidated balance sheet. F-12 Index Restricted Cash —Restricted cash consists of deposits that were maintained at financial institutions under a cash collateral agreement pursuant to the Company’s prior credit facility. The amounts of zero and $15.0 million as of December 31, 2020 and 2019, respectively, of restricted cash is included in long-term assets in the consolidated balance sheets as the restrictions were greater than one year, respectively. Refer to Note 9 for more information on the Company’s credit facility. Accounts Receivable —The Company reports accounts receivable at net realizable value, which is equal to the gross receivable less an estimated allowance for uncollectible accounts. Noncurrent accounts receivable represent amounts due from graduates in excess of 12 months from the balance sheet date. Allowance for Uncollectible Accounts —Based upon experience and judgment, an allowance is established for uncollectible accounts with respect to tuition receivables. In establishing the allowance for uncollectible accounts, the Company considers, among other things, current and expected economic conditions, a student’s status (in-school or out-of-school), whether or not a student is currently making payments, and overall collection history. Changes in trends in any of these areas may impact the allowance for uncollectible accounts. The receivables balances of withdrawn students with delinquent obligations are reserved for based on our collection history. Inventories —Inventories consist mainly of textbooks, computers, tools and supplies. Inventories are valued at the lower of cost or market on a first-in, first-out basis. Property, Equipment and Facilities — Depreciation and Amortization —Property, equipment and facilities are stated at cost. Major renewals and improvements are capitalized, while repairs and maintenance are expensed when incurred. Upon the retirement, sale or other disposition of assets, costs and related accumulated depreciation are eliminated from the accounts and any gain or loss is reflected in operating income (loss). For financial statement purposes, depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets, and amortization of leasehold improvements is computed over the lesser of the term of the lease or its estimated useful life. Advertising Costs —Costs related to advertising are expensed as incurred and approximated $31.2 million and $29.8 million for the years ended December 31, 2020 and 2019, respectively. These amounts are included in selling, general and administrative expenses in the consolidated statements of operations. Goodwill and Other Intangible Assets — The Company tests its goodwill for impairment annually, or whenever events or changes in circumstances indicate an impairment may have occurred, by comparing its reporting unit’s carrying value to its implied fair value. Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations, reductions in market value of the Company, and changes that restrict the activities of the acquired business, and a variety of other circumstances. If the Company determines that an impairment has occurred, it is required to record a write-down of the carrying value and charge the impairment as an operating expense in the period the determination is made. In evaluating the recoverability of the carrying value of goodwill and other indefinite-lived intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the acquired assets. Changes in strategy or market conditions could significantly impact these judgments in the future and require an adjustment to the recorded balances. The goodwill is allocated among nine reporting units within the Transportation and Skilled Trades Segment. When we test goodwill balances for impairment, we determine the fair value of each of our reporting units using an equal weighting of the discounted cash flow model and the market approach. The determination of fair value using the discounted cash flow model requires significant estimates and assumptions related to forecasts of future revenues, which is driven by student start growth, EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization) margins, the long-term growth rate used in the calculation of the terminal value, and the discount rate to apply against each reporting unit’s financial metrics. The determination of fair value using the market approach requires significant estimates and assumptions related to the selection of EBITDA multiples and the control premiums. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. Although we believe our projected future operating results and cash flows and related estimates regarding fair values are based on reasonable assumptions, historically projected operating results and cash flows have not always been achieved. The failure of one of our reporting units to achieve projected operating results and cash flows in the near term or long term may reduce the estimated fair value of the reporting unit below its carrying value and result in the recognition of a goodwill impairment charge. Significant management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows. Assumptions used in our impairment evaluations, such as forecasted growth rates and our cost of capital, are based on the best available market information and are consistent with our internal forecasts and operating plans. In addition to cash flow estimates, our valuations are sensitive to the rate used to discount cash flows and future growth assumptions. At December 31, 2020 and 2019, we conducted our annual test for goodwill impairment and determined we did not have an impairment. F-13 Index Impairment of Long-Lived Assets — The Company reviews the carrying value of its long-lived assets and identifiable intangibles for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company evaluates long-lived assets for impairment by examining estimated future cash flows using Level 3 inputs. These cash flows are evaluated by using weighted probability techniques as well as comparisons of past performance against projections. Assets may also be evaluated by identifying independent market values. If the Company determines that an asset’s carrying value is impaired, it will record a write-down of the carrying value of the asset and charge the impairment as an operating expense in the period in which the determination is made. The Company concluded that for the years ended December 31, 2020 and 2019, there were no long-lived asset impairments. Concentration of Credit Risk —Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments. The Company places its cash and cash equivalents with high credit quality financial institutions. The Company’s cash balances with financial institutions typically exceed the Federal Deposit Insurance Corporation (“FDIC”) limit of $0.25 million. The Company’s cash balances on deposit at December 31, 2020, exceeded the balance insured by the FDIC by approximately $37.75 million. The Company has not experienced any losses to date on its invested cash. The Company extends credit for tuition and fees to many of its students. The credit risk with respect to these accounts receivable is mitigated through the students’ participation in federally funded financial aid programs unless students withdraw prior to the receipt of federal funds for those students. In addition, the remaining tuition receivables are primarily comprised of smaller individual amounts due from students. With respect to student receivables, the Company had no significant concentrations of credit risk as of December 31, 2020 and 2019. Use of Estimates in the Preparation of Financial Statements —The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“GAAP’) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at 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, fixed assets, income taxes, benefit plans and certain accruals. Actual results could differ from those estimates. Income Taxes — The Company accounts for income taxes in accordance with Accounting Standards Codification (“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 considered, 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. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2020 and 2019, we did not record any interest and penalties expense associated with uncertain tax positions. Derivative Instruments — The Company records the fair value of derivative instruments as either assets or liabilities on the balance sheet. The accounting for gains and losses resulting from changes in fair value is dependent on the use of the derivative and whether it is designated and qualifies for hedge accounting. All qualifying hedging activities are documented at the inception of the hedge and must meet the definition of highly effective in offsetting changes to future cash. The Company utilizes the change in variable cash flows method to evaluate hedge effectiveness quarterly. We record the fair value of the qualifying hedges in other long-term liabilities (for derivative liabilities) and other assets (for derivative assets). All unrealized gains and losses on derivatives that are designated and qualify for hedge accounting are reported in other comprehensive income (loss) and recognized when the underlying hedged transaction affects earnings. Changes in the fair value of these derivatives are recognized in other comprehensive income. The Company classifies the cash flows from a cash flow hedge within the same category as the cash flows from the items being hedged. F-14 Index Start-up Costs — Costs related to the start of new campuses are expensed as incurred. New Accounting Pronouncements In October 2020, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2020-10, “ Codification Improvements” , which makes minor technical corrections and clarifications to the ASU. The amendments in Sections B and C of the ASU are effective for annual periods beginning after December 15, 2020, for public business entities. For all other entities, the amendments are effective for annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. This Update is not expected to have a significant impact on the Company’s consolidated financial statements. In August 2020, the FASB issued ASU 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” . This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU removes separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature and hence most of the instruments will be accounted for as a single model (either debt or equity). The ASU also states that entities must apply the if-converted method to all convertible instruments for calculation of diluted EPS and the treasury stock method is no longer available. An entity can use either a full or modified retrospective approach to adopt the ASU’s guidance. ASU No. 2020-06 is effective for the Company as a smaller reporting company for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. For convertible instruments that include a down-round feature, entities may early adopt the amendments that apply to the down-round features if they have not yet adopted the amendments in ASU 2017-11. The Company is currently assessing the impact that this ASU will have on its consolidated financial statements and related disclosures. In March 2020, the FASB issued ASU 2020-03, “ Codification Improvements to Financial Instruments ” (“ASU 2020-03”). ASU 2020-03 improves and clarifies various financial instruments topics. ASU 2020-03 includes seven different issues that describe the areas of improvement and the related amendments to GAAP. The Company adopted ASU 2020-03 upon issuance, which did not have a material effect on the Company’s consolidated financial statements and related disclosures. In December 2019, the FASB issued ASU 2019-12, “ Simplifying the Accounting for Income Taxes” , which simplifies the accounting for income taxes by removing certain exceptions to the general principles of ASC 740, “Income Taxes” . ASU 2019-12 also clarifies and amends GAAP for other areas of Topic 740. This ASU is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. Depending on the amendment, adoption may be applied on a retrospective, modified retrospective or prospective basis. The Company is currently assessing the impact that this ASU will have on its consolidated financial statements and related disclosures. In August 2018, the FASB issued ASU 2018-14, “ Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans ”. This ASU adds, modifies and clarifies several disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This guidance is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company is currently assessing the impact that this ASU will have on its consolidated financial statements and related disclosures. The Company adopted ASU 2018-14 on January 1, 2020, which did not have a material effect on the Company’s consolidated financial statements and related disclosures In June 2016, the FASB issued 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. ASU 2016-13 and the subsequent modifications are identified as Accounting Standards Codification (“ASC”) 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” to a “current expected credit loss” model. Further, the FASB issued ASU No. 2019-04, ASU No. 2019-05 and ASU 2019-11 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 defers 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 adds a SEC paragraph pursuant to the issuance of SEC Staff Accounting Bulletin No. 119 on loan losses to FASB Codification Topic 326 and also updates the SEC section of the Codification for the change in the effective date of Topic 842. Early adoption is permitted. We are currently assessing the impact that these ASUs will have on our consolidated financial statements and related disclosures. F-15 Index 2. FINANCIAL AID AND REGULATORY COMPLIANCE Financial Aid The Company’s schools and students participate in a variety of government-sponsored financial aid programs that assist students in paying the cost of their education. The largest source of such support is the federal programs of student financial assistance under Title IV of the Higher Education Act of 1965, as amended, commonly referred to as the Title IV Programs, which are administered by the U.S. Department of Education (the “DOE”). During the years ended December 31, 2020 and 2019, approximately 77% and 78%, respectively, of net revenues on a cash basis were indirectly derived from funds distributed under Title IV Programs. For the years ended December 31, 2020 and 2019, the Company calculated that no individual DOE reporting entity received more than 90% of its revenue, determined on a cash basis under DOE regulations, from the Title IV Program funds. The Company’s calculations may be subject to review by the DOE. Under DOE regulations, a proprietary institution that derives more than 90% of its total revenue from the Title IV Programs for two consecutive fiscal years becomes immediately ineligible to participate in the Title IV Programs and may not reapply for eligibility until the end of two fiscal years. An institution with revenues exceeding 90% for a single fiscal year, will be placed on provisional certification and may be subject to other enforcement measures. If one of the Company’s institutions violated the 90/10 Rule and became ineligible to participate in Title IV Programs but continued to disburse Title IV Program funds, the DOE would require the institution to repay all Title IV Program funds received by the institution after the effective date of the loss of eligibility. Regulatory Compliance To participate in Title IV Programs, a school must be authorized to offer its programs of instruction by relevant state education agencies, be accredited by an accrediting commission recognized by the DOE and be certified as an eligible institution by the DOE. For this reason, the schools are subject to extensive regulatory requirements imposed by all of these entities. After the schools receive the required certifications by the appropriate entities, the schools must demonstrate their compliance with the DOE regulations of the Title IV Programs on an ongoing basis. Included in these regulations is the requirement that the institution must satisfy specific standards of financial responsibility. The DOE evaluates institutions for compliance with these standards each year, based upon 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 DOE calculates the institution’s composite score for financial responsibility based on its (i) equity ratio, which measures the institution’s capital resources, ability to borrow and financial viability; (ii) primary reserve ratio, which measures the institution’s ability to support current operations from expendable resources; and (iii) net income ratio, which measures the institution’s ability to operate at a profit. This composite score can range from -1 to +3. The composite score must be at least 1.5 for the institution to be deemed financially responsible without the need for further oversight. If an institution’s composite score is below 1.5, but is at least 1.0, it is in a category denominated by the DOE as “the zone.” Under the DOE regulations, institutions that are in the zone typically may be permitted by the DOE to continue to participate in the Title IV Programs by choosing one of two alternatives: 1) the “Zone Alternative” under which an institution is required to make disbursements to students under the Heightened Cash Monitoring 1 (“HCM1”) payment method, or a different payment method other than the advance payment method, and to notify the DOE within 10 days after the occurrence of certain oversight and financial events or 2) submit a letter of credit to the DOE equal to 50 percent of the Title IV Program funds received by the institution during its most recent fiscal year. The DOE permits an institution to participate under the “Zone Alternative” for a period of up to three consecutive fiscal years. Under the HCM1 payment method, the institution is required to make Title IV Program disbursements to eligible students and parents before it requests or receives funds for the amount of those disbursements from the DOE. As long as the student accounts are credited before the funding requests are initiated, an institution is permitted to draw down funds through the DOE’s electronic system for grants management and payments for the amount of disbursements made to eligible students. Unlike the Heightened Cash Monitoring 2 (“HCM2”) and the reimbursement payment methods, the HCM1 payment method typically does not require schools to submit documentation to the DOE and wait for DOE approval before drawing down Title IV Program funds. Effective July 1, 2016, a school under HCM1, HCM2 or reimbursement payment methods must also pay any credit balances due to a student before drawing down funds for the amount of those disbursements from the DOE, even if the student or parent provides written authorization for the school to hold the credit balance. 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: • Posting a letter of credit in an amount equal to at least 50% of the total Title IV Program funds received by the institution during the institution’s most recently completed fiscal year; or • Posting a letter of credit in an amount equal to at least 10% of the Title IV Program funds received by the institution during its most recently completed fiscal year accepting provisional certification; complying with additional DOE monitoring requirements and agreeing to receive Title IV Program funds under an arrangement other than the DOE’s standard advance funding arrangement. F-16 Index The DOE has evaluated the financial responsibility of our institutions on a consolidated basis. We submitted to the DOE our audited financial statements for the 2018 fiscal years reflecting a composite score of 1.1, respectively, based upon our calculations. The DOE indicated in a January 13, 2020 letter its determination that our institutions are “in the zone” based on our composite scores for the 2018 fiscal year and that we are required to operate under the Zone Alternative requirements, including the requirement to make disbursements under the HCM1 payment method and to notify the DOE within 10 days of the occurrence of certain oversight and financial events. We also are required to submit to the DOE bi-weekly cash balance submissions outlining our available cash on hand, monthly actual and projected cash flow statements, and monthly student rosters. Because of the impact of the COVID-19 pandemic, the DOE extended the deadline for institutions to submit audited financial statements. We initially submitted to the DOE our audited financial statements for the 2019 fiscal year on July 2, 2020 and anticipated that our composite score for the year would be 1.6. The DOE requested that we resubmit 2019 audited financials and composite score calculation utilizing new technical revisions to the composite score calculation that took effect on July 1, 2020. We prepared an updated submission and composite score calculation in response to the DOE’s notice and resubmitted our financial statements for the 2019 fiscal year on November 13, 2020 with a recalculated composite score of 1.5. Subsequently, on February 16, 2021, we received a letter from the DOE confirming our composite score of 1.5 for fiscal year 2019 as well as removing the Company from the Zone Alternative requirements. However, the Company will remain on HCM1 until we meet certain requirements outlined by the DOE in its letter which we are hopeful will be complete within the next few months. For the 2020 fiscal year, we calculated our composite score to be 2.7. This score is subject to determination by the DOE based on its review of our consolidated audited financial statements for the 2020 fiscal year, but we believe it is likely that the DOE will determine that our institutions comply with the composite score requirement. On September 23, 2019, the DOE published final regulations with a general effective date of July 1, 2020 that, among other things, modified the list of triggering events that could result in the DOE determining that the institution lacks financial responsibility and must submit to the DOE a letter of credit or other form of acceptable financial protection and accept other conditions on the institution’s Title IV Program eligibility. The regulations create lists of mandatory triggering events and discretionary triggering events. An institution is not able to meet its financial or administrative obligations if a mandatory triggering event occurs. The mandatory triggering events include: • the institution’s recalculated composite score is less than 1.0 as determined by the DOE as a result of an institutional liability from a settlement, final judgment, or final determination in an administrative or judicial action or proceeding brought by a federal or state entity; • the institution’s recalculated composite score goes from less than 1.5 to less than 1.0 as determined by the DOE as a result of a withdrawal of owner’s equity from the institution; • the SEC takes certain actions against the institution or the institution fails to comply with certain filing requirements; or • the occurrence of two or more discretionary triggering events (as described below) within a certain time period. The DOE also may determine that an institution lacks financial responsibility if one of the following discretionary triggering events occurs and the event is likely to have a material adverse effect on the financial condition of the institution: • a show cause or similar order from the institution’s accrediting agency that could result in the withdrawal, revocation or suspension of institutional accreditation; • a notice from the institution’s state licensing agency of an intent to withdraw or terminate the institution’s state licensure if the institution does not take steps to comply with state requirements; • a default, delinquency, or other event occurs as a result of an institutional violation of a security or loan agreement that enables the creditor to require an increase in collateral, a change in contractual obligations, an increase in interest rates or payment, or other sanctions, penalties or fees; • a failure to comply with the 90/10 Rule during the institution’s most recently completed fiscal year; • high annual drop-out rates from the institution as determined by the DOE; or • official cohort default rates of at least 30 percent for the two most recent years unless a pending appeal could sufficiently reduce one of the rates. The regulations require the institution to notify the DOE of the occurrence of a mandatory or discretionary triggering event and to provide certain information to the DOE to demonstrate why the event does not establish the institution’s lack of financial responsibility or require the submission of a letter of credit or imposition of other requirements. F-17 Index The expanded financial responsibility regulations could result in the DOE recalculating and reducing our composite score to account for DOE estimates of potential losses under one or more of the extensive list of triggering circumstances and also could result in the imposition of conditions and requirements including a requirement to provide a letter of credit or other form of financial protection. It is difficult to predict the amount or duration of any letter of credit requirement that the DOE might impose under the regulation. The requirement to submit a letter of credit or to accept other conditions or restrictions could have a material adverse effect on our schools’ business and results of operations. 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 determination letters asserting liabilities for closed school loan discharges in connection with the closure of three campuses. We subsequently provided additional documentation to the DOE that support reductions in the liability amounts. The DOE subsequently issued letters reducing the liabilities for two of the campuses to approximately $81,000 and $46,000, respectively. We have paid these amounts to the DOE. We are currently waiting for the DOE to respond to our response for the third campus. The DOE asserted liabilities of $412,000, but we provided documentation demonstrating that the liabilities should be reduced to $104,000. On February 11, 2021, we received a determination letter from the DOE for closed school loan discharges for the closure of a fourth campus in the amount of approximately $74,000. We expect to provide documentation demonstrating that the liabilities should be reduced to approximately $64,000. We cannot predict the timing or amount of the outcome of the DOE’s consideration of our response for the third and fourth campuses, not can we predict any additional loan discharges that the DOE may approve or the liabilities that the DOE may seek from us for these campuses or other campuses that have closed in the past. We have the right to appeal any asserted liabilities under an administrative appeal process within the DOE. We cannot predict the timing or potential outcome of any administrative appeals of any such liabilities. 3. NET INCOME PER SHARE The Company presents basic and diluted income per common share using the two-class method which requires all outstanding Series A Preferred Stock and unvested 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 unvested restricted stock contain non-forfeitable rights to dividends on an if-converted basis and on the same basis as common shares, 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 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. The basic and diluted net income amounts are the same for the years ended December 31, 2020 and 2019 as a result of the anti-dilutive impact of the potentially dilutive securities. Net income (loss) per common share was calculated using the treasury stock method for September 30, 2019, June 30, 2019 and March 31, 2019. Dilutive potential common shares include outstanding stock options, unvested restricted stock and Series A Preferred Stock. The Company uses the more dilutive method of calculating the diluted income per share by applying the more dilutive of either (a) the treasury stock method, if-converted method, or (b) the two-class method in its diluted income (loss) per common share calculation. Potentially dilutive shares are determined by applying the treasury stock method to the assumed exercise of outstanding stock options and the assumed vesting of restricted stock. Potentially dilutive shares issuable upon conversion of the Series A Preferred Stock are calculated using the if-converted method. F-18 Index The following is a reconciliation of the numerator and denominator of the diluted net income per share computations for the periods presented below: Year Ended December 31, (in thousands, except share data) 2020 2019 Numerator: Net income $ 48,565 $ 2,015 Less: preferred stock dividend (1,378 ) - Less: allocation to preferred stockholders (8,224 ) (54 ) Less: allocation to restricted stockholders (2,150 ) (38 ) Net income allocated to common stockholders $ 36,813 $ 1,923 Basic net income per share: Denominator: Weighted average common shares outstanding 24,748,496 24,554,033 Basic net income per share $ 1.49 $ 0.08 Diluted net income per share: Denominator: Weighted average number of: Common shares outstanding 24,748,496 24,554,033 Dilutive potential common shares outstanding: Series A Preferred Stocck - - Unvested restricted stock - - Stock options - - Dilutive shares outstanding 24,748,496 24,554,033 Diluted net income per share $ 1.49 $ 0.08 The following table summarizes the potential weighted average shares of common stock that were excluded from the determination of our diluted shares outstanding as they were anti-dilutive: Year Ended December 31, 2020 2019 Series A preferred stock - - Unvested restricted stock 632,693 88,848 632,693 88,848 4. REVENUE RECOGNITION Substantially all of our revenues are considered to be revenues from contracts with students. The related accounts receivable balances are recorded in our balance sheets as student accounts receivable. We do not have significant revenue recognized from performance obligations that were satisfied in prior periods, and we do not have any transaction price allocated to unsatisfied performance obligations other than in our unearned tuition. We record revenue for students who withdraw from our schools only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Unearned tuition represents contract liabilities primarily related to our tuition revenue. We have elected not to provide disclosure about transaction prices allocated to unsatisfied performance obligations if original contract durations are less than one-year, or if we have the right to consideration from a student in an amount that corresponds directly with the value provided to the student for performance obligations completed to date in accordance with ASC 606. We have assessed the costs incurred to obtain a contract with a student and determined them to be immaterial. Unearned tuition in the amount of $23.5 million and $23.4 million is recorded in the current liabilities section of the accompanying consolidated balance sheets as of December 31, 2020 and 2019, respectively. The change in this contract liability balance during the year ended December 31, 2020 is the result of payments received in advance of satisfying performance obligations, offset by revenue recognized during that period. Revenue recognized for the year ended December 31, 2020 that was included in the contract liability balance at the beginning of the year was $23.4 million. F-19 Index The following table depicts the timing of revenue recognition: Year ended December 31, 2020 Transportation and Skilled Trades Segment Healthcare and Other Professions Segment Consolidated Timing of Revenue Recognition Services transferred at a point in time $ 12,519 $ 4,718 $ 17,237 Services transferred over time 194,915 80,943 275,858 Total revenues $ 207,434 $ 85,661 $ 293,095 Year ended December 31, 2019 Transportation and Skilled Trades Segment Healthcare and Other Professions Segment Consolidated Timing of Revenue Recognition Services transferred at a point in time $ 11,881 $ 4,521 $ 16,402 Services transferred over time 181,841 75,099 256,940 Total revenues $ 193,722 $ 79,620 $ 273,342 5. LEASES The Company determines if an arrangement is a lease at inception. The Company considers any contract where there is an identified asset and that it has the right to control the use of such asset in determining whether the contract contains a lease. An operating lease right-of-use (“ROU”) asset represents the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are to be recognized at the commencement date based on the present value of lease payments over the lease term. As all of the Company’s operating leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available on the adoption date in determining the present value of lease payments. We estimate the incremental borrowing rate based on a yield curve analysis, utilizing the interest rate derived from the fair value analysis of our credit facility and adjusting it for factors that appropriately reflect the profile of secured borrowing over the expected term of the lease. The operating lease ROU assets include any lease payments made prior to the rent commencement date and exclude lease incentives. Our leases have remaining lease terms of one year to 11 years. Lease terms may include options to extend the lease term used in determining the lease obligation when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments are recognized on a straight-line basis over the lease term for operating leases. Our operating lease cost for the years ended December 31, 2020 and 2019 was $15.3 and $14.5 million, respectively. Our variable lease cost for the years ended December 31, 2020 and 2019 was $0.6 and $2.9 million, respectively. The net change in ROU asset and operating lease liability are included in other assets in the consolidated cash flows for the years ended December 31, 2020 and 2019. During the year ended December 31, 2020, the Company has withheld portions of and/or delayed payments to certain of its landlords as the Company sought to renegotiate payment terms, in order to further maintain liquidity given the temporary closures of its facilities. In some instances, the negotiations with landlords have led to agreements with landlords for rent abatements or rental deferrals, while, in other cases, negotiations are ongoing. Total payments withheld or deferred as of December 31, 2020 were approximately $0.5 million and are included in current liabilities. In accordance with the FASB’s recent Staff Q&A regarding rent concessions related to the effects of the COVID-19 pandemic, the Company has elected to account for agreed concessions by landlords that do not result in a substantial increase in the rights of the landlord or the obligations of the Company, as lessee, as though enforceable rights and obligations for those concessions existed in the original lease agreements and the Company has elected not to re-measure the related lease liabilities and right-of-use assets associated with rent concessions due to COVID-19. For qualifying rent abatement concessions, the Company has recorded negative lease expense for the amount of the concession during the period of relief, and for qualifying deferrals of rental payments, the Company has recognized a payable in lieu of recognizing a decrease in cash for the lease payment that would have been made based on the original terms of the lease agreement, which will be reduced when the deferred payment is made in the future. During the year ended December 31, 2020, the Company recognized $0.6 million of negative lease expense related to rent abatement concessions. F-20 Index Supplemental cash flow information and non-cash activity related to our operating leases are as follows: December 31, 2020 2019 Operating cash flow information: Cash paid for amounts included in the measurement of operating lease liabilities $ 15,390 $ 12,926 Non-cash activity: Lease liabilities arising from obtaining right-of-use assets* $ 14,890 $ 63,911 * Includes effect of adoption of ASU 2016-02 and related amendments and a new lease entered into on January 1, 2019 of $5.6 million. As of December 31, 2020, there were four lease modifications that resulted in noncash re-measurements of the related ROU asset and operating lease liability of $14.9 million. Weighted-average remaining lease term and discount rate for our operating leases is as follows: Year Ended December 31, 2020 2019 Weighted-average remaining lease term 6.11 years 6.22 years Weighted-average discount rate 11.33 % 12.86 % Maturities of lease liabilities by fiscal year for our operating leases as of December 31, 2020 are as follows: Year ending December 31, 2021 14,705 2022 14,750 2023 13,451 2024 12,306 2025 10,748 Thereafter 18,380 Total lease payments 84,340 Less: imputed interest (23,133 ) Present value of lease liabilities $ 61,207 6. GOODWILL Changes in the carrying amount of goodwill during the years ended December 31, 2020 and 2019 are as follows: Gross Goodwill Balance Accumulated Impairment Losses Net Goodwill Balance Balance as of January 1, 2019 $ 117,176 $ 102,640 $ 14,536 Adjustments - - - Balance as of December 31, 2019 117,176 102,640 14,536 Adjustments - - - Balance as of December 31, 2020 $ 117,176 $ 102,640 $ 14,536 As of December 31, 2020 and 2019, the goodwill balance of $14.5 million is related to the Transportation and Skilled Trades segment. F-21 Index 7. PROPERTY, EQUIPMENT AND FACILITIES Property, equipment and facilities consist of the following: Useful life (years) At December 31, 2020 2019 Land - $ 6,969 $ 6,969 Buildings and improvements 1-25 134,526 131,739 Equipment, furniture and fixtures 1-7 82,133 81,900 Vehicles 3 733 825 Construction in progress - 327 320 224,688 221,753 Less accumulated depreciation and amortization (176,300 ) (172,408 ) $ 48,388 $ 49,345 Depreciation and amortization expense of property, equipment and facilities was $7.4 million and $8.1 million for the years ended December 31, 2020 and 2019, respectively. 8. ACCRUED EXPENSES Accrued expenses consist of the following: At December 31, 2020 2019 Accrued compensation and benefits $ 12,476 $ 3,785 Accrued real estate taxes 2,614 1,763 Other accrued expenses 1,602 2,321 $ 16,692 $ 7,869 9. LONG-TERM DEBT Long-term debt consists of the following: At December 31, 2020 2019 Credit agreement $ 17,833 $ 34,833 Deferred financing fees (621 ) (805 ) 17,212 34,028 Less current maturities (2,000 ) (2,000 ) $ 15,212 $ 32,028 Credit Facility with Sterling National Bank On November 14, 2019, the Company entered into a new senior secured credit agreement (the “Credit Agreement”) with its lender, Sterling National Bank (the “Lender”), providing for borrowing in the aggregate principal amount of up to $60 million (the “Credit Facility”). The Credit Facility is comprised of four facilities: (1) a $20 million senior secured term loan maturing on December 1, 2024 (the “Term Loan”), with monthly interest and principal payments based on 120-month amortization with the outstanding balance due on the maturity date; (2) a $10 million senior secured delayed draw term loan maturing on December 1, 2024 (the “Delayed Draw Term Loan”), with monthly interest payments for the first 18 months and thereafter monthly payments of interest and principal based on 120-month amortization and all balances due on the maturity date; (3) a $15 million senior secured committed revolving line of credit providing a sublimit of up to $10 million for standby letters of credit maturing on November 13, 2022 (the “Revolving Loan”), with monthly payments of interest only; and (4) a $15 million senior secured non-restoring line of credit maturing on January 31, 2021 (the “Line of Credit Loan”). The Credit Agreement gives the Company the right to permanently terminate, in its entirety, the Revolving Loan or the Line of Credit Loan or permanently reduce the amount available for borrowing under the Revolving Loan or the Line of Credit Loan. In April 2020, the Company terminated the Line of Credit Loan. On November 10, 2020, the Company entered into an amendment to its Credit Agreement to extend the Delayed Draw Availability Period by one year to May 31, 2022 and to increase the amount of permitted cash dividends that the Company can pay on its Series A Preferred Stock during the first twenty-four months of the Credit Agreement from $1.7 million to $2.3 million. F-22 Index The Credit Facility is secured by a first priority lien in favor of the Lender on substantially all of the personal property owned by the Company, as well as a pledge of the stock and other equity in the Company’s subsidiaries and mortgages on parcels of real property owned by the Company in Colorado, Tennessee and Texas, at which three of the Company’s schools are located, as well as a former school property owned by the Company located in Connecticut. At the closing of the Credit Facility, the Lender advanced the Term Loan to the Company, the net proceeds of which were $19.7 million after deduction of the Lender’s origination fee in the amount of $0.3 million and other Lender fees and reimbursements to the Lender that are customary for facilities of this type. The Company used the net proceeds of the Term Loan, together with cash on hand, to repay the existing credit facility and transaction expenses. Pursuant to the terms of the Credit Agreement, letters of credit issued under the Revolving Loan reduce dollar for dollar the availability of borrowings under the Revolving Loan. 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. Accrued interest on each loan under the Credit Facility will be payable monthly in arrears. The Term Loan and the Delayed Draw Term Loan bear interest at a floating interest rate based on the then one month London Interbank Offered Rate (“LIBOR”) plus 3.50%. At the closing of the Credit Facility, the Company entered into a swap transaction with the Lender for 100% of the principal balance of the Term Loan, which matures on the same date as the Term Loan. At the end of the borrowing availability period for the Delayed Draw Term Loan, the Company is required to enter into a swap transaction with the Lender for 100% of the principal balance of the Delayed Draw Term Loan, which will mature on the same date as the Delayed Draw Term Loan, pursuant to a swap agreement between the Company and the Lender or the Lender’s affiliate. The Term Loan and Delayed Draw Term Loan are subject to a LIBOR interest rate floor of .25% if there is no swap agreement. Revolving Loans bear interest at a floating interest rate based on the then LIBOR plus an indicative spread determined by the Company’s leverage as defined in the Credit Agreement or, if the borrowing of a Revolving Loan is to be repaid within 30 days of such borrowing, the Revolving Loan will accrue interest at the Lender’s prime rate plus .50% with a floor of 4.0%. 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 are charged an annual fee equal to (i) an applicable margin determined by the leverage ratio of the Company less (ii) .25%, paid quarterly in arrears, in addition to the Lender’s customary fees for issuance, amendment and other standard fees. Letters of credit totaling $4 million that were outstanding under the existing credit facility are treated as letters of credit under the Revolving Loan. Under the terms of the Credit Agreement, the Company may prepay the Term Loan and/or the Delayed Draw Term Loan in full or in part without penalty except for any amount required to compensate the Lender for any swap breakage or other costs incurred in connection with such prepayment. The Lender receives an unused facility fee of 0.50% per annum payable quarterly in arrears on the unused portions of the Revolving Loan 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 December 31, 2020, the Company was in compliance with all debt covenants. The Credit Agreement also limited the payment of cash dividends during the first twenty-four months of the agreement to $1.7 million but an amendment to the Credit Agreement entered into on November 10, 2020 raised the cash dividend limit to $2.3 million in such twenty-four-month period. As of December 31, 2020 and 2019, the Company had $17.8 million and $34.8 million, respectively, outstanding under the Credit Facility offset by $0.6 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 December 31, 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. F-23 Index Scheduled maturities of long-term debt at December 31, 2020 are as follows: Year ending December 31, 2021 $ 2,000 2022 2,000 2023 2,000 2024 11,833 $ 17,833 10. STOCKHOLDERS’ EQUITY Common Stock Holders of our common stock are entitled to receive dividends when and as declared by our Board of Directors and have the right to one vote per share on all matters requiring shareholder approval. The Company has not declared or paid any cash dividends on our common stock since the Company’s Board of Directors discontinued our quarterly cash dividend program in February 2015. The Company has no current intentions to resume the payment of cash dividends in the foreseeable future. Preferred Stock On November 14, 2019, the Company raised gross proceeds of $12.7 million from the sale of 12,700 shares of its newly designated Series A Convertible Preferred Stock, no par value per share (the “Series A Preferred Stock”). The Series A Preferred Stock was designated by the Company’s Board of Directors pursuant to a certificate of amendment to the Company’s amended and restated certificate of incorporation (the “Charter Amendment”). The liquidation preference associated with the Series A Preferred Stock was $1,000 per share at December 31, 2020. Upon issuance each share of Series A Preferred Stock was convertible at $2.36 per share of common stock (as may be adjusted pursuant to the Charter Amendment, the “Conversion Price”) into 423,729 shares of common stock (the number of shares into which the Series A Preferred Stock is convertible at any time, the “Conversion Shares”). The Company incurred issuance costs of $0.7 million as part of this transaction. The description below provides a summary of certain material terms of the Series A Preferred Stock: Securities Purchase Agreement. The Series A Preferred Stock was sold by the Company pursuant to a Securities Purchase Agreement dated as of November 14, 2019 (the “SPA”) among the Company, Juniper Targeted Opportunity Fund, L.P. and Juniper Targeted Opportunities, L.P. (together, “Juniper Purchasers”) and Talanta Investment, Inc. (“Talanta,” together with Juniper Purchasers, the “Investors”). Among other things, the SPA includes covenants relating to the appointment of a director to the Company’s Board of Directors to be selected solely by the holders of the Series A Preferred Stock. Dividends. Dividends on the Series A Preferred Stock (“Series A Dividends”), at the initial annual rate of 9.6% is to be paid, in arrears, from the date of issuance quarterly on each December 31, March 31, June 30 and September 30 with September 30, 2020 being the first dividend payment date. The Company, at its option, may pay dividends either (a) in cash or (b) by increasing the number of Conversion Shares by the dollar amount of the dividend divided by the Conversion Price. The dividend rate is subject to increase (a) 2.4% per annum on the fifth anniversary of the issuance of the Series A Preferred Stock (b) by 2% per annum but in no event above 14% per annum should the Company fail to perform certain obligations under the Charter Amendment. The Series A Preferred Stock is not currently redeemable and may not become redeemable in the future. As a result, the Company is not required to re-measure the Series A Preferred Stock and does not accrete changes in the redemption value. As of December 31, 2020, we paid a $1.4 million cash dividend on the outstanding shares of Series A Preferred Stock rather than increasing the number of Conversion Shares. Dividends are included in the consolidated balance sheets within additional paid-in-capital when the Company maintains an accumulated deficit. Series A Preferred Stock Holders Right to Convert into Common Stock. Each share of Series A Preferred Stock, at any time, is convertible into a number of shares of common stock equal to (i) the sum of (A) $1,000 (subject to adjustment as provided in the Charter Amendment) plus (B) the dollar amount of any declared Series A Dividends not paid in cash divided by (ii) the Conversion Price ($2.36 per share subject to anti-dilution adjustments) as of the applicable Conversion Date (as defined in the Charter Amendment). At all times, however, the number of Conversion Shares that can be issued to any Series A Preferred Stock Holder may not result in such holder and its affiliates owning more than 19.99% of the total number of shares of common stock outstanding after giving effect to the conversion (the “Hard Cap”), unless prior shareholder approval is obtained or no longer required by the rules of the principal stock exchange on which the Company’s common stock trade. F-24 Index Mandatory Conversion. If, at any time following November 14, 2022 the volume weighted average price of the Company’s common stock equals or exceeds 2.25 times the Conversion Price (currently $5.31 per share) for a period of 20 consecutive trading days and on each such trading day at least 20,000 shares of common stock was traded, the Company may, at its option and subject to the Hard Cap, require that any or all of the then outstanding shares of Series A Preferred Stock be automatically converted into Conversion Shares. Redemption. Beginning November 14, 2024, the Company may redeem all or any of the Series A Preferred Stock for a cash price equal to the greater of (“Liquidation Preference”) (i) the sum of $1,000 (subject to adjustment as provided in the Charter Amendment) plus the dollar amount of any declared Series A Dividends not paid in cash and (ii) the value of the Conversion Shares were such Series A Preferred Stock converted (as determined in the Charter Amendment) without regard to the Hard Cap. Change of Control. In the event of certain changes of control, some of which are not in the Company’s control, as defined in the Charter Amendment as a “Fundamental Change” or a “Liquidation” (as defined in the Charter Amendment), the holders of Series A Preferred Stock shall be entitled to receive the Liquidation Preference, unless such Fundamental Change is a stock merger in which certain value and volume requirements are met, in which case the Series A Preferred Stock will be converted into common stock in connection with such stock merger. The Company has classified the Series A Preferred Stock as mezzanine equity on the Consolidated Balance Sheet based upon the terms of a change of control which could be outside the Company’s control. Voting. Holders of shares of Series A Preferred Stock will be entitled to vote with the holders of shares of common stock and not as a separate class, at any annual or special meeting of shareholders of the Company, on an as-converted basis, in all cases subject to the Hard Cap. In addition, a majority of the voting power of the Series A Preferred Stock must approve certain significant actions of the Company, including (i) declaring a dividend or otherwise redeeming or repurchasing any shares of common stock and other junior securities, if any, subject to certain exceptions, (ii) incurring indebtedness, except for certain permitted indebtedness and (iii) creating a subsidiary other than a wholly-owned subsidiary. Additional Provisions. The Series A Preferred Stock is perpetual and therefore does not have a maturity date. The conversion price of the Series A Preferred Stock is subject to anti-dilution protections if the Company affects a stock split, stock dividend, subdivision, reclassification or combination of its common stock and certain other economically dilutive events. Registration Rights Agreement. The Company also is a party to a Registration Rights Agreement (“RRA”) with the investors of the Series A Preferred Stock. The RRA provides for unlimited demand registration rights, of which there can be two underwritten offerings each for at least $5 million in gross proceeds, and piggyback registration rights, with respect to the Conversion Shares. In addition, the RRA obligated the Company to register “for the shelf” the resale of the Conversion Shares through the filing of a registration statement to such effect (the “Resale Shelf Registration Statement”) and have such Resale Shelf Registration Statement declared effective by the Securities and Exchange Commission (the “SEC”). The SEC declared the Resale Shelf Registration Statement effective on October 16, 2020. Restricted Stock The Company currently has three stock incentive plans: a Long-Term Incentive Plan (the “LTIP”), a Non-Employee Directors Restricted Stock Plan (the “Non-Employee Directors Plan”) and the Lincoln Educational Services Corporation 2020 Incentive Compensation Plan (the “2020 Plan”). 2020 Plan On March 26, 2020, the Board adopted the 2020 Plan to provide an incentive to certain directors, officers, employees and consultants of the Company to align their interests in the Company’s success with those of its shareholders through the grant of equity-based awards. On June 16, 2020, the shareholders of the Company approved the 2020 Plan. The 2020 Plan is administered by the Compensation Committee of the Board, or such other qualified committee appointed by the Board, who will, among other duties, have full power and authority to take all actions and to make all determinations required or provided for under the 2020 Plan. Pursuant to the 2020 Plan, the Company may grant options, share appreciation rights, restricted shares, restricted share units, incentive stock options and nonqualified stock options. The Plan has a duration of 10 years. Subject to adjustment as described in the 2020 Plan, the aggregate number of common shares available for issuance under the 2020 Plan is 2,000,000 shares. As of December 31, 2020, 111,376 restricted shares have been issued to non-employee directors which vest on the first anniversary of the grant date. On August 7, 2020, two non-employee directors were appointed to the Company’s Board of Directors and 17,096 restricted shares were granted to each non-employee director. The restricted shares vest on June 16, 2021. Also on August 7, 2020, a non-employee director retired from his position on the Company’s Board of Directors. Accordingly, 12,762 shares were accelerated to vest effective August 7, 2020. F-25 Index LTIP Under the LTIP, certain employees have received awards of restricted shares of common stock based on service and performance. The number of shares granted to each employee is based on the amount of the award and the fair market value of a share of common stock on the date of grant. The 2020 Plan makes it clear that there will be no new grants under the LTIP effective as of the date of shareholder approval, June 16, 2020. The 2020 Plan also states that the shares available under the 2020 Plan will be two million shares plus the number of shares remaining available under the LTIP. As no shares remain available under the LTIP there can be no additional grants under the LTIP. Grants under the LTIP remain in effect according to their terms. Therefore, those grants are subject to the particular award agreement relating thereto and to the LTIP to the extent that the prior plan provides rules relating to those grants. The LTIP remains in effect only to that extent. On February 20, 2020, performance-based restricted shares were granted to certain employees of the Company. The shares vest 20%, 30% and 50% on the first, second and third anniversary dates, respectively, based upon the attainment of a financial target during each fiscal years ending December 31, 2020, 2021 and 2022, respectively, except in extraordinary circumstances. There is no restriction on the right to vote or the right to receive dividends with respect to any of such restricted shares. For the year ended December 31, 2020 the Company recorded expense of $0.5 million as the expectation of attainment of the target is probable. On February 28, 2019, restricted shares were granted to certain employees of the Company, which shares ratably vest over three years. There is no restriction on the right to vote or the right to receive dividends with respect to any of such restricted shares. For the years ending December 31, 2020 and 2019, the Company recorded expense of $0.5 million and $0.4 million, respectively, in connection with this grant. Non-Employee Directors Plan Pursuant to the Non-Employee Directors Plan, each non-employee director of the Company receives an annual award of restricted shares of common stock on the date of the Company’s annual meeting of shareholders. The number of shares granted to each non-employee director is based on the fair market value of a share of common stock on that date. The restricted shares vest on the first anniversary of the grant date. There is no restriction on the right to vote or the right to receive dividends with respect to any of such restricted shares. For the years ended December 31, 2020 and 2019, the Company completed a net share settlement for 75,115 and 5,518 restricted shares, respectively, on behalf of certain employees that participate in the LTIP upon the vesting of the restricted shares pursuant to the terms of the LTIP. The net share settlement was in connection with income taxes incurred on restricted shares that vested and were transferred to the employees during 2019 and/or 2018, creating taxable income for the employees. At the employees’ request, the Company will pay these taxes on behalf of the employees in exchange for the employees returning an equivalent value of restricted shares to the Company. These transactions resulted in a decrease of $0.2 million and less than $0.1 million for each of the years ended December 31, 2020 and 2019, respectively, to equity on the consolidated balance sheets as the cash payment of the taxes effectively was a repurchase of the restricted shares granted in previous years. The following is a summary of transactions pertaining to restricted stock: Shares Weighted Average Grant Date Fair Value Per Share Nonvested restricted stock outstanding at December 31, 2018 35,908 $ 2.23 Granted 598,982 3.15 Cancelled (3,546 ) 3.17 Vested (35,908 ) 2.23 Nonvested restricted stock outstanding at December 31, 2019 595,436 3.15 Granted 1,319,734 2.68 Cancelled - - Vested (343,011 ) 3.40 Nonvested restricted stock outstanding at December 31, 2020 1,572,159 2.77 The restricted stock expense for the years ended December 31, 2020 and 2019 was $1.7 million and $0.7 million, respectively. The unrecognized restricted stock expense as of December 31, 2020 and 2019 was $3.2 million and $1.2 million, respectively. As of December 31, 2020, outstanding restricted shares under the LTIP had aggregate intrinsic value of $10.2 million. F-26 Index Stock Options The fair value of the stock options used to compute stock-based compensation is the estimated present value at the date of grant using the Black-Scholes option pricing model. The following is a summary of transactions pertaining to stock options: Shares Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding January 1, 2018 167,667 $ 12.11 2.97 years $ - Cancelled (28,667 ) 11.98 - Outstanding December 31, 2018 139,000 12.14 2.53 years - Cancelled (23,000 ) 20.15 - Outstanding December 31, 2019 116,000 10.56 1.83 years - Cancelled (35,000 ) 16.95 Outstanding December 31, 2020 81,000 7.79 1.17 years - Vested as of December 31, 2020 81,000 7.79 1.17 years - Exercisable as of December 31, 2020 81,000 7.79 1.17 years - As of December 31, 2020, there was no unrecognized pre-tax compensation expense. 11. PENSION PLAN The Company sponsors a noncontributory defined benefit pension plan covering substantially all of the Company’s union employees. Benefits are provided based on employees’ years of service and earnings. This plan was frozen on December 31, 1994 for non-union employees. The following table sets forth the plan’s funded status and amounts recognized in the consolidated financial statements: Year Ended December 31, 2020 2019 CHANGES IN BENEFIT OBLIGATIONS: Benefit obligation-beginning of year $ 22,832 $ 21,105 Service cost 35 33 Interest cost 654 812 Actuarial loss 2,115 2,103 Benefits paid (1,278 ) (1,221 ) Benefit obligation at end of year 24,358 22,832 CHANGE IN PLAN ASSETS: Fair value of plan assets-beginning of year 18,817 16,835 Actual return on plan assets 2,567 3,203 Benefits paid (1,278 ) (1,221 ) Fair value of plan assets-end of year 20,106 18,817 BENEFIT OBLIGATION IN EXCESS OF FAIR VALUE FUNDED STATUS: $ (4,252 ) $ (4,015 ) For the year ended December 31, 2020, the actuarial loss of $2.1 million was due to the decrease in the discount rate from 2.93% to 2.08%. F-27 Index Amounts recognized in the consolidated balance sheets consist of: At December 31, 2020 2019 Noncurrent liabilities $ (4,252 ) $ (4,015 ) Amounts recognized in accumulated other comprehensive loss consist of: Year Ended December 31, 2020 2019 Accumulated loss $ (5,655 ) $ (5,648 ) Deferred income taxes 2,367 2,366 Accumulated other comprehensive loss $ (3,288 ) $ (3,282 ) The accumulated benefit obligation was $24.4 million and $22.8 million at December 31, 2020 and 2019, respectively. The following table provides the components of net periodic cost for the plan: Year Ended December 31, 2020 2019 COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 35 $ 33 Interest cost 654 812 Expected return on plan assets (1,044 ) (1,011 ) Recognized net actuarial loss 585 691 Net periodic benefit cost $ 230 $ 525 The estimated net loss and prior service cost for the plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next year is $0.5 million. F-28 Index The following tables present plan assets using the fair value hierarchy as of December 31, 2020 and 2019. The fair value hierarchy has three levels based on the reliability of inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using observable prices that are based on inputs not quoted in active markets but observable by market data, while Level 3 includes the fair values estimated using significant non-observable inputs. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Total Equity securities $ 6,688 $ - $ - $ 6,688 Fixed income 6,739 - - 6,739 International equities 4,480 - - 4,480 Real estate 1,016 - - 1,016 Cash and equivalents 1,183 - - 1,183 Balance at December 31, 2020 $ 20,106 $ - $ - $ 20,106 Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Total Equity securities $ 6,259 $ - $ - $ 6,259 Fixed income 6,313 - - 6,313 International equities 4,165 - - 4,165 Real estate 964 - - 964 Cash and equivalents 1,116 - - 1,116 Balance at December 31, 2019 $ 18,817 $ - $ - $ 18,817 Fair value of total plan assets by major asset category as of December 31: 2020 2019 Equity securities 33 % 33 % Fixed income 34 % 34 % International equities 22 % 22 % Real estate 5 % 5 % Cash and equivalents 6 % 6 % Total 100 % 100 % Weighted-average assumptions used to determine benefit obligations as of December 31: 2020 2019 Discount rate 2.08 % 2.93 % Rate of compensation increase 2.75 % 2.75 % Weighted-average assumptions used to determine net periodic pension cost for years ended December 31: 2020 2019 Discount rate 2.08 % 2.93 % Rate of compensation increase 2.75 % 2.75 % Long-term rate of return 5.25 % 5.75 % F-29 Index As this plan was frozen to non-union employees on December 31, 1994, the difference between the projected benefit obligation and accumulated benefit obligation is not significant in any year. The Company invests plan assets based on a total return on investment approach, pursuant to which the plan assets include a diversified blend of equity and fixed income investments toward a goal of maximizing the long-term rate of return without assuming an unreasonable level of investment risk. The Company determines the level of risk based on an analysis of plan liabilities, the extent to which the value of the plan assets satisfies the plan liabilities and the plan’s financial condition. The investment policy includes target allocations ranging from 30% to 70% for equity investments, 20% to 60% for fixed income investments and 0% to 10% for cash equivalents. The equity portion of the plan assets represents growth and value stocks of small, medium and large companies. The Company measures and monitors the investment risk of the plan assets both on a quarterly basis and annually when the Company assesses plan liabilities. The Company uses a building block approach to estimate the long-term rate of return on plan assets. This approach is based on the capital markets assumption that the greater the volatility, the greater the return over the long term. An analysis of the historical performance of equity and fixed income investments, together with current market factors such as the inflation and interest rates, are used to help make the assumptions necessary to estimate a long-term rate of return on plan assets. Once this estimate is made, the Company reviews the portfolio of plan assets and makes adjustments thereto that the Company believes are necessary to reflect a diversified blend of equity and fixed income investments that is capable of achieving the estimated long-term rate of return without assuming an unreasonable level of investment risk. The Company also compares the portfolio of plan assets to those of other pension plans to help assess the suitability and appropriateness of the plan’s investments. The Company does not expect to make contributions to the plan in 2021. However, after considering the funded status of the plan, movements in the discount rate, investment performance and related tax consequences, the Company may choose to make additional contributions to the plan in any given year. The total amount of the Company’s contributions paid under its pension plan was zero for each of the years ended December 31, 2020 and 2019, respectively. Information about the expected benefit payments for the plan is as follows: Year Ending December 31, 2021 $ 1,336 2022 1,356 2023 1,385 2024 1,401 2025 1,388 Years 2026-2030 6,743 The Company has a 401(k) defined contribution plan for all eligible employees. Employees may contribute up to 25% of their compensation into the plan. The Company may contribute up to an additional 30% of the employee’s contributed amount up to 6% of compensation. For the years ended December 31, 2020 and 2019, the Company’s expense for the 401(k) plan amounted to $0.4 million and $0.1 million, respectively. F-30 Index 12. INCOME TAXES Components of the (benefit) provision for income taxes were as follows: Year Ended December 31, 2020 2019 Current: Federal $ - $ - State 802 115 Total 802 115 Deferred: Federal (21,743 ) 120 State (14,118 ) 33 Total (35,861 ) 153 Total (benefit) provision $ (35,059 ) $ 268 Effective Tax rate The reconciliation of the effective tax rate to the U.S. Statutory Federal Income tax rate was: Year Ended December 31, 2020 2019 Income before taxes $ 13,506 $ 2,283 Expected tax $ 2,836 21.0 % $ 479 21.0 % State tax benefit (net of federal) (10,513 ) -77.8 % 148 6.5 Valuation allowance (27,420 ) -203.0 % (428 ) (18.8 ) Other 38 0.2 % 69 3.0 Total $ (35,059 ) -259.6 % $ 268 11.7 % Our income tax benefit for the year ended December 31, 2020 was $35.1 million compared to an income tax provision of $0.3 million in the prior year. The 2020 tax benefit primarily relates to a release of the valuation allowance on deferred tax assets. After weighing all the evidence, management determined that it was more likely than not that the deferred tax assets were realizable and, therefore, the valuation allowance was no longer required. As a result, the Company released the full valuation allowance as of December 31, 2020. F-31 Index Deferred Taxes and Valuation Allowance The components of the non-current deferred tax assets/(liabilities) were as follows: At December 31, 2020 2019 Gross noncurrent deferred tax assets (liabilities) Allowance for bad debts $ 7,659 $ 5,461 Accrued benefits 1,208 - Stock-based compensation 317 178 Lease liability 16,369 14,822 Right-of-use asset (14,759 ) (13,156 ) Depreciation 11,298 10,981 Goodwill (1,091 ) (766 ) Other intangibles 100 135 Pension plan liabilities 1,137 1,286 Net operating loss carryforwards 13,480 18,261 Gross noncurrent deferred tax assets, net 35,718 37,202 Less valuation allowance - (37,355 ) Noncurrent deferred tax assets (liabilities), net $ 35,718 $ (153 ) Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. As of December 31, 2019, the Company recorded a valuation allowance of $37.4 million against its net deferred tax assets. As of December 31, 2020, the Company has net operating loss (“NOL”) carryforwards of $43.1 million. Of the $43.1 million NOL carryforwards, $29.3 million will start expiring in 2034 and ending in 2037 if unused. The net operating losses generated in 2018 and beyond can be carried over indefinitely under the Tax Act. Utilization of the NOL carryforwards may be subject to a substantial limitation due to ownership change limitations that may occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and tax credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain shareholders or public groups. As of December 31, 2020 and 2019, the Company no longer has any liability for uncertain tax positions. The Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense. The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states. The Company is no longer subject to U.S. federal income tax examinations for years before 2017 and, generally, is no longer subject to state and local income tax examinations by tax authorities for years before 2017 with few exceptions. F-32 Index 13. FAIR VALUE The carrying amount and estimated fair value of the Company’s financial instrument assets and liabilities, which are not measured at fair value on the Consolidated Balance Sheets, are listed in the table below: December 31, 2020 Carrying Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Amount (Level 1) (Level 2) (Level 3) Total Financial Assets: Cash and cash equivalents $ 38,026 $ 38,026 $ - $ - $ 38,026 Prepaid expenses and other current assets 3,723 - 3,723 - 3,723 Financial Liabilities: Accrued expenses $ 16,692 $ - $ 16,692 $ - $ 16,692 Other short term liabilities 26 - 26 - 26 Derivative qualifying as cash flow hedge 703 - 703 - 703 Credit facility 17,212 - 15,487 - 15,487 December 31, 2019 Carrying Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Amount (Level 1) (Level 2) (Level 3) Total Financial Assets: Cash and cash equivalents $ 23,644 $ 23,644 $ - $ - $ 23,644 Restricted cash 15,000 15,000 - - 15,000 Prepaid expenses and other current assets 4,190 - 4,190 - 4,190 Financial Liabilities: Accrued expenses $ 7,869 $ - $ 7,869 $ - $ 7,869 Other short term liabilities 199 - 199 - 199 Derivative qualifying as cash flow hedge 174 - 174 - 174 Credit facility 34,028 - 34,028 - 34,028 As of December 31, 2020, we estimated the fair value of the Credit Facility based on a present value analysis utilizing aggregate market yields obtained from independent pricing sources for similar financial instruments. As of December 31, 2019, we estimated that the carrying value of the Credit Facility approximates the fair value due to the fact that the Credit Facility was entered into in close proximity to December 31, 2019. The carrying amounts reported on the Consolidated Balance Sheets for Cash and cash equivalents, Restricted cash and Noncurrent restricted cash approximate fair value because they are highly liquid. The carrying amounts reported on the Consolidated Balance Sheets for Prepaid expenses and Other current assets, Accrued expenses and Other short term liabilities approximate fair value due to the short-term nature of these items. Qualifying Hedge Derivative On November 14, 2019, the Company entered into an interest rate swap for the Term Loan with a notional amount of $20 million which expires on December 1, 2024. The loan has a 10-year straight line amortization. A principal amount of $0.2 million is paid monthly. This interest rate swap converts the floating interest rate Term Loan to a fixed rate, plus a borrowing spread. The interest rate is variable based on LIBOR plus 3.50% and the Company’s fixed rate is 5.36%. The Company designated this interest rate swap as a cash flow hedge. The Company entered into this interest rate swap to hedge exposure resulting from the interest rate risk. The purpose of this hedge is to reduce the variability of the interest rate based on LIBOR. The Company manages these exposures within specified guidelines through the use of derivatives. All of our derivative instruments are utilized for risk management purposes, and the Company does not use derivatives for speculative trading purposes. F-33 Index The following summarizes the fair value of the outstanding derivative: December 31, 2020 December 31, 2019 Liability (1) Liability (1) Notional Fair Value Notional Fair Value Derivative derived as a hedging instrument: Interest Rate Swap $ 17,800 $ 700 $ 19,800 $ 100 (1) The Company’s derivative liability is measured at fair value using observable market inputs such as interest rates and our own credit risk as well as an evaluation of our counterparty’s credit risk. Based on these inputs the derivative liability is classified within Level 2 of the valuation hierarchy. The liability is included in other long-term liabilities in the consolidated balance sheets. The following summarizes the financial statement classification and amount of interest expense recognized on hedging instruments: Year Ended December 31, 2020 2019 Interest expense Interest Rate Swap $ 100 $ 100 The following summarizes the effect of derivative instruments designated as hedging instruments in Other Comprehensive Income/(Loss): Year Ended December 31, 2020 2019 Derivative qualifying as cash flow hedge Interest rate swap loss $ 700 $ 200 14. SEGMENT REPORTING We operate our business in three reportable segments: (a) the Transportation and Skilled Trades segment; (b) the Healthcare and Other Professions 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 our campus operations which have been closed. The schools in the Transitional segment employed a gradual teach-out process that enabled the schools to continue to operate to allow their current students to complete their course of study. The Company continually evaluates each campus for profitability, earning potential, and customer satisfaction. This evaluation takes several factors into consideration, including the campus’s 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. Campuses classified in the Transitional segment have been subject to this process and have been strategically identified for closure. As of December 31 of each of 2020 and 2019, no campuses were categorized in the Transitional segment. F-34 Index 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. Summary financial information by reporting segment is as follows: For the Year Ended December 31, Revenue Operating Income (Loss) 2020 % of Total 2019 % of Total 2020 2019 Transportation and Skilled Trades $ 207,434 70.8 % $ 193,722 70.9 % $ 34,458 $ 21,979 Healthcare and Other Professions 85,661 29.2 % 79,620 29.1 % 11,068 7,588 Corporate - 0.0 % - 0.0 % (30,745 ) (24,329 ) Total $ 293,095 100 % $ 273,342 100 % $ 14,781 $ 5,238 Total Assets December 31, 2020 December 31, 2019 Transportation and Skilled Trades $ 133,078 $ 121,611 Healthcare and Other Professions 32,753 27,945 Corporate 79,359 45,207 Total $ 245,190 $ 194,763 15. COMMITMENTS AND CONTINGENCIES Litigation and Regulatory Matters — In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations and claims, including, but not limited to, claims involving students or graduates and routine employment matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party will have a material effect on our business, financial condition, results of operations or cash flows. Following a wave of hundreds of class action lawsuits being served upon colleges and universities across the country in connection with transitioning from in-person to online classes due to COVID-19, a class action lawsuit was filed against the Company in New Jersey Federal District Court and served on December 21, 2020. Like most of the other lawsuits across the country, the suit alleges breach of contract, unjust enrichment and conversion. In lieu of an answer, on January 25, 2021 the Company filed a Motion to Dismiss Plaintiff’s Complaint for Failure to State a Claim. The Motion remains pending before the Court. On February 17, 2021, Plaintiff’s counsel notified the Company that it would be amending its complaint to address deficiencies the Company outlined in its Motion to Dismiss. As previously reported, on July 6, 2018, the Company received an administrative subpoena from the Office of the Attorney General of the State of New Jersey (“NJ OAG”). Pursuant to the subpoena, the NJ OAG requested certain documents and detailed information relating to the November 21, 2012 Civil Investigative Demand letter addressed to the Company by the Massachusetts Office of the Attorney General (“MOAG”) that resulted in a previously reported Final Judgment by Consent between the Company and the MOAG dated July 13, 2015. The Company responded to this request and, the NJ OAG issued two supplemental subpoenas requesting additional information. The Company has responded to these requests and has received no further communications from the NJ OAG to date. Student Financing Plans — At December 31, 2020, the Company had outstanding net financing commitments to its students to assist them in financing their education of approximately $21.7 million, net of interest. Executive Employment Agreements —The Company entered into employment contracts with key executives that provide for continued salary payments if the executives are terminated for reasons other than cause, as defined in the agreements. The future employment contract commitments for such employees were approximately $7.6 million at December 31, 2020. Change in Control Agreements —In the event of a change of control several key executives will receive continued salary payments based on their employment agreements. Surety Bonds —Each of the Company’s campuses must be authorized by the applicable state education agency in which the campus is located to operate and to grant degrees, diplomas or certificates to its students. The campuses are subject to extensive, ongoing regulation by each of these states. In addition, the Company’s campuses are required to be authorized by the applicable state education agencies of certain other states in which the campuses recruit students. The Company is required to post surety bonds on behalf of its campuses and education representatives with multiple states to maintain authorization to conduct its business. At December 31, 2020, the Company has posted surety bonds in the total amount of approximately $12.3 million. F-35 Index 16. COVID-19 PANDEMIC AND CARES ACT The Company began seeing the impact of the global COVID-19 pandemic on its business in early March and some effects of the pandemic have continued. 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 in-person to online delivery. The impact for the Company was 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. Additionally, certain programs were extended due to restricted access to externship sites and classroom labs which did not have a material impact on our consolidated financial statements. In accordance with phased re-opening as applied on a state-by-state basis, all of our schools have now re-opened and the majority of the students who were on leave of absence or have deferred their programs returned to school to finish their programs. The Company expects to continue to be impacted by COVID-19 as the situation remains dynamic and evolving and subject to rapid and possibly material change. Additional impacts may arise of which the Company is not currently aware. The nature and extent of such impacts will depend on future developments, which are highly uncertain and cannot be predicted. 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 businesses impacted by the spread of COVID-19. 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 and must be utilized by April 30, 2021. The Company had available $13.7 million in the first installment which was intended for emergency grants to students. As of December 31, 2020, the Company has distributed $13.3 million to the students and remainder was distributed in January 2021. As of December 31, 2020, the Company had available $13.7 million from the second installment which is intended for institutional costs and additional emergency grants to students . As of December 31, 2020, the Company has utilized $5.8 million of these funds for permitted expenses which was netted against the original expenses included in selling, general and administrative on the Consolidated Statement of Operations. As of December 31, 2020, the remaining funds are held by the DOE and the Company receives them as they are utilized. 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% of the deferred payments by December 31, 2021, and the remaining 50% by December 31, 2022. As of December 31, 2020, the Company had deferred payments of $4.5 million. On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law. This annual appropriations bill contained the Coronavirus Response and Relief Supplemental Appropriations Act, 2021 (“CRRSAA”). CRRSAA provided an additional $81.9 billion to the Education Stabilization Fund including $22.7 billion for the HEERF, which were originally created by the CARES Act in March 2020. The higher education provisions of the CRRSAA are intended in part to provide additional financial assistance benefitting students and their postsecondary institutions in the wake of the spread of COVID-19 across the country and its impact on higher educational institutions. F-36 Index Like the CARES Act, the CRRSAA directs the majority of HEERF funds to a general program providing direct grants to institutions. Institutions generally must designate “at least the same amount” of the funds for direct grants to students as was required under the CARES Act. However, for-profit institutions may only use the new HEERF funds for grants to students. The student grants must prioritize students with exceptional need and may be used for any component of the student’s cost of attendance or for emergency costs that arise due to coronavirus, such as tuition, food, housing, health care (including mental health care), or child care. Public and nonprofit institutions may use the remaining HEERF funds to (1) defray expenses associated with coronavirus (including lost revenue, reimbursement for expenses already incurred, technology costs associated with a transition to distance education, faculty and staff trainings, and payroll); (2) carry out student support activities authorized by the Higher Education Act that address needs related to coronavirus; or (3) for additional financial aid grants to students. Upon the passage of the CRRSAA, DOE began allocating the funds to each institution of higher education based on a formula contained in the law. The DOE has allocated a total of $15.4 million to our schools and the funds became available in February 2021. The DOE has begun releasing guidance relating to the use of these funds and is expected to provide additional information in the coming weeks. Failure to comply with requirements for the usage and reporting of these funds could result in requirements to repay some or all of the allocated funds and in other sanctions. F-37 Index LINCOLN EDUCATIONAL SERVICES CORPORATION Schedule II—Valuation and Qualifying Accounts (in thousands) Description Balance at Beginning of Period Charged to Expense Accounts Written-off Balance at End of Period Allowance accounts for the year ended: December 31, 2020 Student receivable allowance $ 20,367 $ 26,887 $ (18,615 ) $ 28,639 December 31, 2019 Student receivable allowance $ 16,993 $ 20,847 $ (17,473 ) $ 20,367 F-38