What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-09 compared with 2021-05-10 · 214 added, 115 removed, 175 unchanged (65% of the section changed)

23 unchanged sentences

The circumstances related to COVID-19 are unprecedented, dynamic and evolving and currently, with variants of the virus arising, remain unpredictable.

As the economic impact of the COVID-19 pandemic continues to change, we could see significant changes to our operations.

To date, the impact of COVID-19 has primarily related to transitioning classes from in-person, hands-on learning to online, remote learning and back.

As the economic impact of the COVID-19 pandemic continues to evolve, we could see significant changes to our operations.

To date, the impact of COVID-19 has primarily related to transitioning classes from in-person, hands-on instruction to online, remote learning and back.

As part of this transition, the Company has incurred additional expenses.

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Due to phased re-opening on a state-by-state basis, our schools have been reopening since May 2020.

Currently, all of our schools are open and we expect the majority of the students who were placed on leave or otherwise deferred their programs to finish their programs .

Currently, all of our schools are open and only 17 of our students on leave of absence due to COVID-19 remain on leave of absence and we expect the majority of them to complete their programs .

Student Population and Financial Results

As of March 31, 2021, the Company had placed 98 students on leave of absence due to COVID-19.

As of June 30, 2021, the Company had 17 students on leave of absence due to COVID-19.

It is expected that a majority of these students will complete their externships.

Further, the Company had extended the length and graduation dates of a few programs in which distance learning could only be utilized for a small percentage of these programs.

The Company has campuses where students live in dorms that are operated by either the Company itself, Collegiate Housing or other housing options.

The majority of the students had returned home and their dorm charges have been reversed.

In addition, at campuses where students have meal plans, the Company’s cafeterias have been closed and all charges for meal plans have been reversed.

For students that remained in dorms, the Company has given the students gift cards to assist in replacing their meal plans.

As the students are returning to campus the dorms have reopened and the schools have limited the number of students in dorms to adhere to social distancing.

Extended Student Financing Programs

COVID-19 is having far reaching, negative impacts on individuals, businesses, and, consequently, the overall economy.

Specifically, COVID-19 has materially disrupted business operations resulting in significantly higher levels of unemployment or underemployment.

As a consequence, we expect many of our individual students will experience financial hardship, making it difficult, if not impossible, to meet their payment obligations to us without temporary assistance.

As a result of the negative impact on employment from COVID-19, we are observing higher levels of financial hardship for our students, which we expect will lead to higher levels of forbearance, delinquency and defaults.

We expect that, left unabated, this deterioration in forbearance, delinquency and default rates will persist until such time as the economy and employment return to relatively normal levels.

We expect that, as the economic impact of COVID-19 evolves, we will continue to evaluate the measures we have put in place to assist our students during this unprecedented challenge.

We continue to adapt and evolve our collections practices to meet the needs of our students.

Critical Accounting Policies and Estimates

For a description of our critical accounting policies and estimates, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” and Note 1 to the Condensed Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and Note 1 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021.

In addition, due to the impact of the COVID-19 pandemic, we have reassessed those of our accounting policies whose application places the most significant demands on management’s judgment, for instance, revenue recognition, allowance for doubtful account, goodwill, and long-lived assets, stock-based compensation, derivative instruments and hedging activity, borrowings, assumptions related to ROU assets, lease cost, income taxes and assets and obligations related to employee benefit plans.

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Inflation has not had a material effect on our operations.

Results of Continuing Operations for the Three Months Ended March 31, 2021

Results of Continuing Operations for the Three and Six Months Ended June 30, 2021

The following table sets forth selected consolidated statements of operations data as a percentage of revenues for each of the periods indicated:

Three Months Ended

Six Months Ended

Costs and expenses:

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Selling, general and administrative

Gain on sale of assets

Total costs and expenses

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Interest expense, net

Income (loss) from opeartions before income taxes

Income (loss) from operations before income taxes

Provision for income taxes

Net income (loss)

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Consolidated Results of Operations

Revenue increased $8.0 million, or 11.4% to $78.0 million for the three months ended March 31, 2021 from $70.0 million in the prior year comparable period.

The increase was mainly due to student population growth resulting from a 9.8% increase in average student population compared to prior year.

The two primary revenue drivers were beginning the year with approximately 1,000 students more students than in the prior year comparable period, coupled with an increase in student starts.

Student start growth increased 30.6% or by approximately 800 students for the three months ended March 31, 2021 as compared to the prior year comparable period.

Contributing to the favorable comparison quarter over quarter were approximately 300 students, which due to the onset of the pandemic last year were scheduled to start in prior year’s first quarter and delayed to the second quarter.

Increased student starts we believe is attributable to prior and current marketing initiatives driving both brand awareness and contributing to our success in obtaining new student starts.

As of March 31, 2021, Lincoln has experienced over three years of consistent start growth .

Revenue increased $ 18.0 million , or 28.8% to $80.5 million for the three months ended June 30, 2021 from $62.5 million in the prior year comparable period.

The increase in revenue was the result of a 16.3% increase in average population, driven by continued student start growth, which increased 8.0% for the quarter compared to the prior year in combination with starting the year with approximately 1,000 more students than in the prior year comparable period.

Further contributing to the increase was the normalization of our revenue stream driven by the return to in-person instruction at all of our campuses.

The prior year financial results reflect the unprecedented impact from the COVID-19 pandemic which started in March of 2020.

As a result, certain financial and operational comparisons quarter over quarter may be distorted due to the impact of COVID-19.

One area impacted by the pandemic was student starts.

Student start results during the second quarter of 2020 included approximately 300 students whom delayed their start date from the first quarter to the second quarter of 2020 due to the onset of the pandemic.

Excluding these student from the second quarter population, resulted in a 19.1% increase in student starts.

Additionally, Lincoln has experienced consistent start growth over the last three years.

For a general discussion of trends in our student enrollment, see “Seasonality and Outlook” below.

Educational services and facilities expense.

Our educational services and facilities expense increased $2.1 million, or 7.0% to $32.3 million for the three months ended March 31, 2021 from $30.2 million in the prior year comparable period.

The increase was primarily driven by increases in instructional expense and books and tools expense as a result of a larger student population quarter over quarter.

Educational services and facilities expense, as a percentage of revenue, decreased to 41.5% from 43.2% for the three months ended March 31, 2021 and 2020, respectively.

Our educational services and facilities expense increased $7.5 million, or 28.4% to $33.7 million for the three months ended June 30, 2021 from $26.2 million in the prior year comparable period.

The higher costs were mainly concentrated in instructional, books and tools and facilities expenses.

Instructional expense and books and tools expense increased as a result of a growing student population in addition to operating with a hybrid remote and in-person instruction in the current year compared to remote learning in the prior year.

Similarly, facilities expense increased when compared to prior year due to one-time rent reductions coupled with overall facilities savings during campus closures as a result of COVID-19.

Educational services and facilities expense, as a percentage of revenue, decreased slightly to 41.9% from 42.0% for the three months ended June 30, 2021 and 2020, respectively.

Selling, general and administrative expense.

Our selling general and administrative expense decreased $1.5 million, or 3.7% to $39.6 million for the three months ended March 31, 2021 from $41.1 million in the prior year comparable period.

The decrease quarter over quarter was primarily driven by reductions in bad debt expense and sales expense, partially offset by increases in administrative expense.

Bad debt expense for the first quarter of 2021 was favorable compared to the prior year period by $2.4 million, as a result of an adjustment to qualifying student accounts receivables following guidance published on March 19, 2021 by the Department of Education.

Our selling, general and administrative expense increased $8.1 million, or 23.2% to $43.3 million for the three months ended June 30, 2021 from $35.2 million in the prior year comparable period.

The increase in expense quarter over quarter was driven by several factors including an increased student population;

the normalization of operating expenses in the current year resulting from the return to in-person instruction at all of our campuses;

an improved business climate as the country begins to reopen and a $1.5 million increase in incentive compensation tied directly to improved financial performance.

Selling, general and administrative expense, as a percentage of revenue, decreased to 53.8% from 56.3% for the three months ended June 30, 2021 and 2020, respectively.

Net interest expense.

Net interest expense remained essentially flat at $0.3 million for the three months ended June 30, 2021 and 2020, respectively.

Income taxes.

Our provision for income taxes was $0.7 million compared to approximately $0.1 million for the three months ended June 30, 2021 and 2020, respectively.

The higher provision for the second quarter of 2021 compared to prior year was due to the release of the valuation allowance as of December 31, 2020.

The effective tax rate for the three months ending June 30, 2021 was 23.1%.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Consolidated Results of Operations

Revenue increased $ 26.0 million , or 19.6% to $158.5 million for the six months ended June 30, 2021 from $132.5 million in the prior year comparable period.

The increase in revenue was the result of a 13.0% increase in average population, driven by continued student start growth, up 18.0% year over year in combination with starting the year with approximately 1,000 more students than in the prior year comparable period.

Further contributing to the increase was the normalization of our revenue stream driven by the return to in-person instruction at all of our campuses.

The prior year financial results reflect the unprecedented impact from the COVID-19 pandemic which started in March of 2020.

As a result, certain financial and operational comparisons quarter over quarter may be distorted as a result of the impact of COVID-19.

For a general discussion of trends in our student enrollment, see “Seasonality and Outlook” below.

Educational services and facilities expense.

Our educational services and facilities expense increased $9.5 million, or 16.9% to $66.0 million for the six months ended June 30, 2021 from $56.5 million in the prior year comparable period.

The higher costs were mainly concentrated in instructional, books and tools and facilities expenses.

Similarly, facilities expense increased when compared to prior year due to one-time rent reductions coupled with overall facilities savings during campus closures as a result of COVID-19.

Educational services and facilities expense, as a percentage of revenue, decreased to 41.7% from 42.6% for the six months ended June 30, 2021 and 2020, respectively.

Selling, general and administrative expense.

Our selling, general and administrative expense increased $6.6 million, or 8.7% to $82.9 million for the six months ended June 30, 2021 from $76.3 million in the prior year comparable period.

The increase in expense quarter over quarter was driven by several factors including an increased student population;

the normalization of operating expenses in the current year resulting from the return to in-person instruction at all of our campuses;

an improved business climate as the country begins to reopen and a $2.2 million increase in incentive compensation tied directly to improved financial performance.

Partially offsetting the increased expenses was a reduction in bad debt expense.

Bad debt expense for the six months ended June 30, 2021 was favorable compared to the prior year period by $1.5 million, as a result of an adjustment made during the first quarter to qualifying student accounts receivables following guidance published on March 19, 2021 by the Department of Education.

This new guidance clarified previous guidance on permitted institutional uses of funds from the Higher Education Emergency Relieve Funds (“HEERF”).

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The relief resulted in a net benefit to bad debt expense of approximately $3.0 million.

Without this adjustment bad debt expense for the first quarter of 2021, as a percentage of total revenue, would have been comparable with prior year.

Reductions in sales expense was the result of continued travel restrictions imposed by the COVID-19 pandemic in the current quarter, while travel restrictions in the prior year comparable period did not occur until the middle of March, at the onset of COVID-19.

Increased administrative expense was resulting from incentive plans tied to improved financial performance quarter over quarter.

Marketing investments continued in the first quarter of 2021 in an effort to drive prospective students to our website via paid search marketing in addition to increasing investments on paid social media channels.

Despite the continued investments in marketing, the overall cost per student continued to decrease, a trend we have been experiencing over the past several years.

Selling, general and administrative expense, as a percentage of revenue, decreased to 50.8% from 58.7% for the three months ended March 31, 2021 and 2020, respectively.

Without this adjustment bad debt expense for the six months ended June 30,2021, as a percentage of total revenue, would have been comparable with prior year.

Selling, general and administrative expense, as a percentage of revenue, decreased to 52.3% from 57.6% for the six months ended June 30, 2021 and 2020, respectively.

Net interest expense.

Net interest expense decreased less than $0.1 million, or 19.5% to $0.3 million for the three months ended March 31, 2021 from $0.4 million in the prior year comparable period.

Net interest expense decreased by $0.1 million for the six months ended June 30, 2021 to $0.6 million from $0.7 million in the prior year comparable period.

Income taxes.

Our provision for income taxes was $1.2 million compared to less than $0.1 million for the three months ended March 31, 2021 and 2020, respectively.

The higher provision for the first quarter of 2021 compared to prior year was due to the release of the valuation allowance as of December 31, 2020.

The effective tax rate for the month ending March 31, 2021 was 21.7%.

The increase quarter over quarter was due to the reversal of a full valuation allowance at December 31, 2020, resulting in an effective tax rate of 21.7% in the current quarter.

Due to our federal net operating loss (“NOL”) of $43 million and our state NOL of $77 million we do not anticipate paying any federal income taxes and only paying nominal state income taxes this year.

Our provision for income taxes was $2.0 million compared to $0.1 million for the six months ended June 30, 2021 and 2020, respectively.

The higher provision for the six months ended June 30, 2021 compared to prior year was due to the release of the valuation allowance as of December 31, 2020.

The effective tax rate for the six months ending June 30, 2021 was 22.2%.

Segment Results of Operations

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dental assistant, medical assistant, practical nursing, culinary arts and cosmetology).

The Company also utilizes the Transitional segment when and if it closes a school.

The Company also utilizes the Transitional segment solely when and if it closes a school.

We evaluate segment performance based on operating results.

Adjustments to reconcile segment results to consolidated results are included under the caption “Corporate,” which primarily includes unallocated corporate activity.

The following table presents results for our two reportable segments for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

The following table presents results for our two reportable segments for the three months ended June 30, 2021 and 2020:

Three Months Ended June 30,

Transportation and Skilled Trades

Healthcare and Other Professions

Operating Income (Loss):

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Transportation and Skilled Trades

Leave of Absence - COVID-19

Transportation and Skilled Trades Excluding Leave of Absence - COVID-19

Leave of Absense - COVID-19

Transportation and Skilled Trades Excluding Leave of Absense - COVID-19

Healthcare and Other Professions

Leave of Absence - COVID-19

Healthcare and Other Professions Excluding Leave of Absence - COVID-19

Total Excluding Leave of Absence - COVID-19

Leave of Absense - COVID-19

Healthcare and Other Professions Excluding Leave of Absense - COVID-19

Total Excluding Leave of Absense - COVID-19

End of Period Population:

Transportation and Skilled Trades

Leave of Absence - COVID-19

Transportation and Skilled Trades Excluding Leave of Absence - COVID-19

Leave of Absense - COVID-19

Transportation and Skilled Trades Excluding Leave of Absense - COVID-19

Healthcare and Other Professions

Leave of Absence - COVID-19

Healthcare and Other Professions Excluding Leave of Absence - COVID-19

Total Excluding Leave of Absence - COVID-19

Leave of Absense - COVID-19

Healthcare and Other Professions Excluding Leave of Absense - COVID-19

Total Excluding Leave of Absense - COVID-19

Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020

Transportation and Skilled Trades

Student start results increased 36.0% to 2,339 for the three months ended March 31, 2021 from 1,720 in the prior year comparable period.

Operating income increased $7.5 million to $12.3 million for the three months ended March 31, 2021 from $4.8 million in the prior year comparable period.

Student starts increased 9.0%, to approximately 2,500 for the three months ended June 30, 2021 from approximately 2,300 in the prior year comparable period.

Operating income increased $6.4 million to $11.3 million for the three months ended June 30, 2021 from $4.9 million in the prior year comparable period.

The increase quarter over quarter was mainly driven by the following factors.

Revenue increased $6.6 million, or 13.5% to $55.7 million for the three months ended March 31, 2021 from $49.1 million in the prior year comparable period.

The increase in revenue was primarily due to a 10.2% increase in average student population, driven by starting the year with approximately 570 more students, coupled with a 36.0% increase in student starts quarter over quarter.

Educational services and facilities expense increased $1.3 million, or 6.5% to $21.9 million for the three months ended March 31, 2021 from $20.6 million in the prior year comparable period.

The increase was primarily driven by increases in instructional expense and books and tools expense as a result of a larger student population year over year.

Selling general and administrative expense decreased $2.2 million, or 9.3% to $21.4 million for the three months ended March 31, 2021 from $23.6 million in the prior year comparable period.

The decrease was primarily due to reductions in bad debt expense and sales expense, which is discussed in detail above in the consolidated results of operations.

Revenue increased $14.1 million, or 32.7% to $57.0 million for the three months ended June 30, 2021 from $42.9 million in the prior year comparable period.

The increase in revenue was primarily driven by average student population, up 16.6% resulting from continued start growth quarter over quarter in addition to the normalization of our revenue stream with the return to in-person instruction at all of our campuses.

Educational services and facilities expense increased $5.1 million, or 29.4% to $22.7 million for the three months ended June 30, 2021 from $17.6 million in the prior year comparable period.

The increase in expense was driven by additional instructional expense, books and tools expense and facilities expense resulting from an increased student population combined with the return to in-person instruction at all of our campuses in the current quarter.

Selling, general and administrative expense increased $2.4 million, or 11.7% to $23.0 million for the three months ended June 30, 2021 from $20.6 million in the prior year comparable period.

Additional costs were a result of an increased student population quarter over quarter;

the normalization of operating expenses in the current year resulting from the return to in-person instruction at all of our campuses and an improved business climate as the country begins to reopen.

Healthcare and Other Professions

Student start results increased 21.4% to 1,209 for the three months ended March 31, 2021 from 996 in the prior year comparable period.

Operating income increased $0.9 million to $2.9 million for the three months ended March 31, 2021 from $2.0 million in the prior year comparable period.

Student starts increased 5.9%, to approximately 1,200 for the three months ended June 30, 2021 from approximately 1,100 in the prior year comparable period.

Operating income increased $0.2 million to $2.9 million for the three months ended June 30, 2021 from $2.7 million in the prior year comparable period.

The increase quarter over quarter was mainly driven by the following factors:

Revenue increased by $1.3 million, or 6.4% to $22.3 million for the three months ended March 31, 2021 from $21.0 million in the prior year comparable period.

The increase in revenue was primarily due to a 8.9% increase in average student population, driven by starting the year with approximately 470 more students coupled with a 21.4% increase in student starts quarter over quarter.

Educational services and facilities expense increased $0.7 million, or 8.0% to $10.4 million for the three months ended March 31, 2021 from $9.7 million in the prior year comparable period.

The increase was primarily driven by increases in instructional expense and books and tools expense as a result of a larger student population year over year.

Selling general and administrative expense decreased $0.4 million, or 4.1% to $8.9 million for the three months ended March 31, 2021 from $9.3 million in the prior year comparable period.

The decrease was primarily driven by bad debt expense, which is discussed in detail in the consolidated results of operations.

Revenue increased $3.9 million, or 20.2% to $23.4 million for the three months ended June 30, 2021 from $19.5 million in the prior year comparable period.

The increase in revenue was primarily driven by average student population, up 15.7% resulting from continued start growth quarter over quarter in addition to the normalization of our revenue stream with the return to in-person instruction at all of our campuses.

Educational services and facilities expense increased $2.3 million, or 26.4% to $11.0 million for the three months ended June 30, 2021 from $8.7 million in the prior year comparable period.

Selling, general and administrative expense increased $1.4 million, or 17.5% to $9.5 million for the three months ended June 30, 2021 from $8.1 million in the prior year comparable period.

Additional costs were a result of an increased student population quarter over quarter;

the normalization of operating expenses in the current year resulting from the return to in-person instruction at all of our campuses and an improved business climate as the country begins to reopen.

Corporate and Other

This category includes unallocated expenses incurred on behalf of the entire Company.

Corporate and other expenses were $9.3 million and $8.2 million for each of the three months ended March 31, 2021 and 2020, respectively.

The increase is resulting from incentive plans tied to improved financial performance quarter over quarter.

Corporate and other expenses were $10.8 million and $6.4 million for each of the three months ended June 30, 2021 and 2020, respectively.

The additional expenses quarter over quarter were driven by several factors including the normalization of operating expenses in the current year;

an improved business climate as the country begins to reopen and a $1.5 million increase in incentive compensation tied directly to improved financial performance.

The following table present results for our two reportable segments for the six months ended June 30, 2021 and 2020:

Six Months Ended June 30,

Transportation and Skilled Trades

Operating Income (Loss):

Transportation and Skilled Trades

Healthcare and Other Professions

Transportation and Skilled Trades

Healthcare and Other Professions

Average Population:

Transportation and Skilled Trades

Leave of Absense - COVID-19

Transportation and Skilled Trades Excluding Leave of Absense - COVID-19

Healthcare and Other Professions

Leave of Absense - COVID-19

Healthcare and Other Professions Excluding Leave of Absense - COVID-19

Total Excluding Leave of Absense - COVID-19

End of Period Population:

Transportation and Skilled Trades

Leave of Absense - COVID-19

Transportation and Skilled Trades Excluding Leave of Absense - COVID-19

Healthcare and Other Professions

Leave of Absense - COVID-19

Healthcare and Other Professions Excluding Leave of Absense - COVID-19

Total Excluding Leave of Absense - COVID-19

Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020

Transportation and Skilled Trades

Student starts increased 20.5%, to approximately 4,800 for the six months ended June 30, 2021 from approximately 4,000 in the prior year comparable period.

Operating income increased $13.9 million to $23.6 million for the six months ended June 30, 2021 from $9.7 million in the prior year comparable period.

The increase year over year was mainly driven by the following factors.

Revenue increased $20.6 million, or 22.5% to $112.6 million for the six months ended June 30, 2021 from $92.0 million in the prior year comparable period.

The increase in revenue was primarily driven by average student population, up 13.2% resulting from continued start growth quarter over quarter in addition to the normalization of our revenue stream with the return to in-person instruction at all of our campuses.

Educational services and facilities expense increased $6.5 million, or 17.0% to $44.6 million for the six months ended June 30, 2021 from $38.1 million in the prior year comparable period.

Selling, general and administrative expense increased $0.2 million to $44.4 million for the six months ended June 30, 2021 from $44.2 million in the prior year comparable period.

Healthcare and Other Professions

Student starts increased 13.2%, to approximately 2,400 for the six months ended June 30, 2021 from approximately 2,100 in the prior year comparable period.

Operating income increased $1.2 million to $5.9 million for the six months ended June 30, 2021 from $4.7 million in the prior year comparable period.

The increase year over year was mainly driven by the following factors:

Revenue increased $5.3 million, or 13.0% to $45.8 million for the six months ended June 30, 2021 from $40.5 million in the prior year comparable period.

The increase in revenue was primarily driven by average student population, up 12.5% resulting from continued start growth quarter over quarter in addition to the normalization of our revenue stream with the return to in-person instruction at all of our campuses.

Educational services and facilities expense increased $3.0 million, or 16.7% to $21.4 million for the six months ended June 30, 2021 from $18.4 million in the prior year comparable period.

Selling, general and administrative expense increased $1.0 million, or 6.0% to $18.5 million for the six months ended June 30, 2021 from $17.5 million in the prior year comparable period.

Additional costs were a result of an increased student population quarter over quarter;

the normalization of operating expenses in the current year resulting from the return to in-person instruction at all of our campuses and an improved business climate as the country begins to reopen.

Corporate and Other

This category includes unallocated expenses incurred on behalf of the entire Company.

Corporate and other expenses were $20.0 million and $14.6 million for each of the six months ended June 30, 2021 and 2020, respectively.

The additional expenses quarter over quarter were driven by several factors including the normalization of operating expenses in the current year;

an improved business climate as the country begins to reopen and a $2.2 million increase in incentive compensation tied directly to improved financial performance.

LIQUIDITY AND CAPITAL RESOURCES

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Our principal sources of liquidity have been cash provided by operating activities and borrowings under our Credit Facility.

The following chart summarizes the principal elements of our cash flow for each of the three months ended March 31, 2021 and 2020, respectively:

The following chart summarizes the principal elements of our cash flow for each of the six months ended June 30, 2021 and 2020, respectively:

Three Months Ended

Net cash used in operating activities

Net cash provided by operating activities

Net cash used in investing activities

Net cash used in financing activities

As of March 31, 2021, the Company had a net cash balance of $10.0 million compared to a net cash balance of $20.8 million at December 31, 2020.

As of June 30, 2021, the Company had a net cash balance of $16.7 million compared to a net cash balance of $20.8 million at December 31, 2020.

The net cash balance is calculated as our cash, cash equivalents and restricted cash less both short and long-term portion of the credit agreement.

The decrease in cash position from year end was the result of several factors including the seasonality of our business, a decrease in the accrued expenses driven by the payment of incentive compensation and increased receivables in the current quarter that will be reimbursed in the second quarter.

When comparing the current quarter end net cash balance of $10.0 million to a net debt balance of $8.8 million as of March 31, 2020, the increase in cash position can mainly be attributed to net income generated by the company in addition to decrease in net payments on borrowing in the current quarter.

The decrease in cash position from year end was the result of the seasonality of our business in addition to a decrease in accrued expenses driven by the payment of incentive compensation.

When comparing the current quarter end net cash balance of $16.7 million to a net cash balance of $7.8 million as of June 30, 2020, the increase in cash position can mainly be attributed to net income generated by the company in addition to a decrease in net payments on borrowing in the current year.

Our primary source of cash is tuition collected from our students.

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Operating Activities

Net cash used in operating activities was $8.3 million and $11.9 million for each of the fiscal quarters ended March 31, 2021 and 2020, respectively.

For the three months ended March 31, 2021, changes in our operating assets and liabilities resulted in cash outflows of $12.8 million, primarily attributable to a $7.1 million increase in prepaid expenses and current assets coupled with a decrease in accrued expenses of approximately $6.0 million related to the payment of prior year incentive compensation accruals.

Net cash provided by operating activities was $1.1 million and $6.5 million for each of the six months ended June 30, 2021 and 2020, respectively.

Included in cash provided by operating activities in the six months ended June 30, 2020 was $14.5 million in federal funds received under the Cares Acts intended for reimbursement to students for expenses related to disruptions in campus operations as a direct result of the COVID-19 pandemic.

Excluding these funds, we would have reported net cash used in operating activities of $8.0 million.

The increase of $9.0 million in cash provided by operating activities was primarily driven by net income generated for the six months ended June 30, 2021.

Investing Activities

Net cash used in investing activities was $1.2 million for the three months ended March 31, 2021 compared to $1.3 million in the prior year comparable period.

Net cash used in investing activities was $3.5 million for the six months ended June 30, 2021 compared to $3.0 million in the prior year comparable period.

One of our primary uses of cash in investing activities was capital expenditures associated with investments in training technology, classroom furniture, and new program buildouts.

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Financing Activities

Net cash used in financing activities was $1.8 million for the three months ended March 31, 2021 compared to $15.7 million in the prior year comparable period.

The decrease of $13.9 million was driven by several factors including a decrease in net payments on borrowing of $15.0 million quarter over quarter, an increase of $0.8 million in equity based compensation in addition to dividends paid in the current year of $0.3 million.

Net cash used in financing activities was $2.6 million for the six months ended June 30, 2021 compared to $16.2 million in the prior year comparable period.

The decrease of $13.6 million was driven by several factors including a decrease in net payments on borrowing of $15.0 million year over year, an increase of $0.8 million in equity based compensation in addition to dividends paid in the current year of $0.6 million.

Credit Facility with Sterling National Bank

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Pursuant to the terms of the Credit Agreement, letters of credit issued under the Revolving Loan reduce dollar for dollar the availability of borrowings under the Revolving Loan.

Accrued interest on each loan under the Credit Facility will be payable monthly in arrears.

Accrued interest on each loan under the Credit Facility is payable monthly in arrears.

The Term Loan and the Delayed Draw Term Loan bear interest at a floating interest rate based on the then one month London Interbank Offered Rate (“LIBOR”) plus 3.50%.

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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 March 31, 2021, the Company was in compliance with all debt covenants.

As of June 30, 2021, the Company was in compliance with all debt covenants.

The Credit Agreement also limited the payment of cash dividends during the first twenty-four months of the agreement to $1.7 million but an amendment to the Credit Agreement entered into on November 10, 2020 raised the cash dividend limit to $2.3 million in such twenty-four-month period.

As of March 31, 2021 and December 31, 2020, the Company had $17.3 million and $17.8 million, respectively, outstanding under the Credit Facility offset by $0.6 million and $0.6 million of deferred finance fees, respectively.

As of March 31, 2021 and December 31, 2020, letters of credit in the aggregate outstanding principal amount of $4.0 million and $4.0 million, respectively, were outstanding under the Credit Facility.

As of June 30, 2021 and December 31, 2020, the Company had $16.8 million and $17.8 million, respectively, outstanding under the Credit Facility offset by $0.5 million and $0.6 million of deferred finance fees, respectively.

As of June 30, 2021 and December 31, 2020, letters of credit in the aggregate outstanding principal amount of $4.0 million were outstanding under the Credit Facility.

The following table sets forth our long-term debt (in thousands):

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Current portion of Long-Term Debt, Long-Term Debt and Lease Commitments.

As of March 31, 2021, our current portion of long-term debt and long-term debt consisted of borrowings under our Credit Facility.

As of June 30, 2021, our current portion of long-term debt and long-term debt consisted of borrowings under our Credit Facility.

We lease offices, educational facilities and various items of equipment for varying periods through the year 2031 at basic annual rentals (excluding taxes, insurance, and other expenses under certain leases).

As of March 31, 2021, we had outstanding loan principal commitments to our active students of $25.9 million.

As of June 30, 2021, we had outstanding loan principal commitments to our active students of $28.1 million.

These are institutional loans and no cash is advanced to students.

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Regulatory Updates

Borrower Defense to Repayment Regulations.

As previously disclosed in Lincoln’s Annual Report on Form 10-K, Lincoln is subject to an extensive regulatory scheme which includes, without limitation, the Borrower Defense to Repayment regulations.

On July 1, 2020, the DOE’s published final Borrower Defense to Repayment regulations became effective.

Among other things, these new regulations amend the processes for borrowers to receive from DOE a discharge of the obligation to repay certain Title IV Program loans first disbursed on or after July 1, 2020 based on certain acts or omissions by the institution or a covered party.

The new and existing DOE regulations establish detailed procedures and standards for the loan discharge processes for periods prior to July 1, 2017, between July 1, 2017 and June 30, 2020, and on or after July 1, 2020, including the information required for borrowers to receive a loan discharge, and the authority of the DOE to seek recovery from the institution of the amount of discharged loans.

The current and future rules could have a material adverse effect on our schools’ business and results of operations, and the broad sweep of the rules may, in the future, require our schools to submit a letter of credit based on expanded standards of financial responsibility.

See the Company’s disclosures in its Annual Report on Form 10-K for the fiscal year ended December 31, 2020 under the captions “Regulatory Environment – Borrower Defense to Repayment Regulations” and “Risk Factors – We could be subject to liabilities, letter of credit requirements, and other sanctions under the DOE’s Borrower Defense to Repayment Regulations.”

On April 29, 2021, Lincoln received communication from the DOE indicating that the DOE was in receipt of a number of borrower defense applications containing allegations concerning Lincoln and requiring the DOE to undertake a fact-finding process pursuant to DOE regulations.

Among other things, the communication outlines a process by which the DOE will provide to Lincoln each application allowing Lincoln the opportunity to submit responses to the applications.

Further, the communication outlines certain information requests, relating to the period between 2007 and 2013, in connection with the DOE’s preliminary review of the borrower defense applications.

Based upon publicly available information, it appears that the DOE has undertaken similar reviews of other educational institutions which have also been the subject of various borrower defense applications.

We subsequently received from the DOE one group of 175 borrower application claims in May 2021 and another group of 140 borrower application claims in July 2021.

We are in the process of thoroughly reviewing and responding to each borrower application sent to us by the DOE.

Given the early stage of this matter, management is not able to predict the outcome of the DOE’s review at this time.

If the DOE disagrees with our legal and factual grounds for contesting the applications, the DOE may impose liabilities on the Company based on the discharge of the loans at issue in the pending applications which could have a material adverse effect on our business and results of operations.

It is possible that we may receive from the DOE in the future borrower defense applications submitted by or on behalf of prior, current, or future Lincoln students and that the DOE could seek to recover liabilities from Lincoln for discharged loans.

If the DOE grants any pending or future borrower applications, the DOE regulations state that the DOE may initiate an appropriate proceeding to recover liabilities arising from the loans in the applications.

If the DOE initiates such a proceeding, Lincoln would request reconsideration of the liabilities.

We cannot predict the timing or amount of all borrower defense applications that borrowers may submit to the DOE or that the DOE may grant in the future, or the timing or amount of any possible liabilities that the DOE may seek to recover from Lincoln, if any.

The DOE has announced, generally, that it intends to establish new regulations on a variety of topics including borrower defense to repayment, that could result in regulations that would make it easier for borrowers to obtain discharges of their loans and for the DOE to recover liabilities from institutions.

See “Negotiated Rulemaking.”

The ARPA and the “90/10 Rule.”

In March 2021, the $1.9 trillion American Rescue Plan Act of 2021 (“ARPA”) was signed into law.

In March 2021, the $1.9 trillion American Rescue Plan Act of 2021 (the “ARPA”) was signed into law.

Among other things, the ARPA provides $40 billion in relief funds that will go directly to colleges and universities with $395.8 million going to for-profit institutions.

Institutions will be required to spend at least half of their allocations on emergency financial aid grants to students.

We anticipate that a portion of these funds will be allocated to our institutions but have not yet received notification of the precise amounts that will be allocated to our institutions.

We have been allocated approximately $8 million in funds that must be used entirely for student financial aid grants.

As of June 30, 2021, none of these funds have been drawn down.

In addition, the ARPA also includes a provision that amends the 90/10 Rule.

A proprietary institution that derives more than 90% of its total revenue from Title IV Programs for two consecutive fiscal years becomes immediately ineligible to participate in Title IV Programs and may not reapply for eligibility until the end of at least two fiscal years.

A for-profit institution that derives more than 90% of its total revenue from Title IV Programs for two consecutive fiscal years becomes immediately ineligible to participate in Title IV Programs and may not reapply for eligibility until the end of at least two fiscal years.

An institution with revenues exceeding 90% for a single fiscal year will be placed on provisional certification and may be subject to other enforcement measures.

If Congress or the DOE were to amend the 90/10 Rule to treat other forms of federal financial aid as Title IV Program revenue for 90/10 Rule purposes, lower the 90% threshold, or otherwise change the calculation methodology, or make other changes to the 90/10 Rule, those changes could make it more difficult for our institutions to comply with the 90/10 Rule.

See the Company’s disclosures in its Annual Report on Form 10-K for the fiscal year ended December 31, 2020 under the captions “Regulatory Environment – The ‘90/10 Rule’” and “Risk Factors – Our institutions would lose eligibility to participate in Title IV Programs if the percentage of their revenues derived from those programs exceeds 90%, which could reduce our student population and revenues.” If Congress or the DOE were to amend the 90/10 Rule to treat other forms of federal financial aid as Title IV Program revenue for 90/10 Rule purposes, lower the 90% threshold, or otherwise change the calculation methodology (each of which has been proposed by some Congressional members in proposed legislation), or make other changes to the 90/10 Rule, those changes could make it more difficult for our institutions to comply with the 90/10 Rule.

The ARPA amends the 90/10 rule by treating other “Federal funds that are disbursed or delivered to or on behalf of a student to be used to attend such institution” in the same way as Title IV funds are currently treated in the 90/10 rule calculation.

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Moreover, we cannot predict the additional changes to the 90/10 Rule or other regulations that might occur as a result of negotiated rulemaking to be conducted during 2021 and 2022 as required by the ARPA.

We expect to make changes to our operations in order to address the current and future provisions in the 90/10 rule and in order to maintain the 90/10 percentages at our institutions below the 90% threshold as calculated under DOE regulations.

We expect to make changes to certain of our operations in order to address the current and future provisions in the 90/10 Rule and in order to maintain the 90/10 percentages at our institutions below the 90% threshold as calculated under DOE regulations.

However, we do not have significant control over the amount of Title IV funds that our students may receive and borrow.

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If any of our institutions lose eligibility to participate in Title IV Programs, that loss would cause an event of default under our credit agreement, would also adversely affect our students’ access to various government-sponsored student financial aid programs, and would have a significant impact on the rate at which our students enroll in our programs and on our business and results of operations.

Borrower Defense to Repayment Regulations.

On July 1, 2020, the DOE’s published final Borrower Defense to Repayment regulations became effective.

see the Company’s disclosures in its Annual Report on Form 10-K for the fiscal year ended December 31, 2020 under the captions “Regulatory Environment – Borrower Defense to Repayment Regulations” and “Risk Factors—We could be subject to liabilities, letter of credit requirements and other sanctions under the DOE’s Borrower Defense to Repayment Regulations.” On April 29, 2021, Lincoln received communication from the DOE indicating that the DOE was in receipt of a number of borrower defense applications containing allegations concerning Lincoln and requiring the DOE to undertake a fact-finding process pursuant to DOE regulations.

Among other things, the communication outlines a process by which the DOE will provide to Lincoln each application allowing Lincoln the opportunity to submit responses to the applications.

Further, the communication outlines certain information requests, relating to the period between 2007 and 2013, in connection with the DOE’s preliminary review of the borrower defense applications.

The DOE’s communication does not specify a precise number of applications that are the subject of the review nor the aggregate dollar amount of the loans that could be at issue and which the DOE could seek to recover from Lincoln.

Given the very recent receipt of the communication, the limited information contained therein and the early stage of Lincoln’s internal review, management is not able to predict the outcome of the DOE’s review at this time.

Lincoln is assessing the requests made in the DOE communication and expects to timely respond to the inquiries.

Additionally, while the Company has not yet begun to receive any borrower defense applications from the DOE, it expects to thoroughly review and respond to each application.

Negotiated Rulemaking.

The DOE periodically issues new regulations and guidance that can have an adverse effect on our institutions.

See the Company’s disclosures in its Annual Report on Form 10-K for the fiscal year ended December 31, 2020 under the captions “Regulatory Environment – Negotiated Rulemaking” and “Risk Factors - The DOE has changed its regulations, and may make other changes in the future, in a manner which could require us to incur additional costs in connection with our administration of the Title IV Programs, affect our ability to remain eligible to participate in the Title IV Programs, impose restrictions on our participation in the Title IV Programs, affect the rate at which students enroll in our programs, or otherwise have a significant impact on our business and results of operations.” We cannot predict the timing and content of any new regulations or guidance that the DOE may seek to impose or whether and to what extent the DOE under the new administration may issue new regulations and guidance that could adversely impact for-profit schools including our institutions.

For example, the ARPA will require the DOE to initiate a process to amend its regulations regarding the 90/10 Rule.

See “The ARPA and the ‘90/10 Rule.’”

In addition, in May 2021, the DOE announced its intention to establish negotiated rulemaking committees to prepare proposed regulations on an extensive range of topics including without limitation changes of ownership and change in control of institutions of higher education, certification procedures for participation in the Title IV Programs, standards of administrative capability, ability to benefit standards, borrower defense to repayment, discharges for borrowers with a total and permanent disability, closed school loan discharges, discharges for false certification of student eligibility, loan repayment plans, the public service loan forgiveness program, mandatory pre-dispute arbitration and prohibition of class action lawsuits provisions in institutional enrollment agreements, financial responsibility standards including events that indicate heightened financial risk, gainful employment, and Pell Grant eligibility for prison education programs.

The DOE also could consider additional topics for proposed regulations during the negotiated rulemaking process.

The negotiated rulemaking process could lead to future DOE regulations that could adversely impact for-profit schools including our institutions.

We cannot predict with certainty the ultimate combined impact of the regulatory changes which have occurred in recent years and that may occur as a result of the upcoming negotiated rulemaking, nor can we predict the effect of future legislative or regulatory action by federal, state or other agencies regulating our education programs or other aspects of our operations, how any resulting regulations will be interpreted or whether we and our institutions will be able to comply with these requirements in the future.

Any such actions by legislative or regulatory bodies that affect our programs and operations could have a material adverse effect on our student population and our institutions, including the need to cease offering a number of programs.

Closed School Loan Discharges.

The DOE may grant closed school loan discharges of Federal student loans based upon applications by qualified students.

The DOE also may initiate discharges on its own for students who have not reenrolled in another Title IV Program eligible school within three years after the closure and who attended campuses that closed on or after November 1, 2013, as did some of our former campuses.

If the DOE discharges some or all of these loans, the DOE may seek to recover the cost of the loan discharges from us.

The DOE also has announced that it intends to establish new regulations on a variety of topics including closed school loan discharges, which could result in regulations that would make it easier for borrowers to obtain discharges of their loans and for the DOE to recover liabilities from institutions.

See “Negotiated Rulemaking.”

We have received five separate letters from the DOE since September 3, 2020, asserting liabilities for closed school loan discharges in connection with the closure of some of our campuses.

The total liability paid to the DOE since September 3, 2020, has been approximately $280,000.

The most recent correspondence from the DOE on this topic was dated February 11, 2021, which asserted a liability of approximately $74,000 for two previously closed campuses.

We have appealed this amount on March 2, 2021, and the DOE subsequently notified us on July 26, 2021, that based on our appeal, the liability would be reduced to $61,000.

We cannot predict the timing or amount of the outcome of the DOE’s consideration of our response, nor can we predict any additional loan discharges that the DOE may approve or the liabilities that the DOE may seek from us for these campuses or other campuses that have closed in the past.

Our revenue and operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in total student population.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis