LINCOLN EDUCATIONAL SERVICES CORP 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All references in this Quarterly Report on Form 10-Q to “we,” “our,” “us” and the “Company,” refer to Lincoln Educational Services Corporation and its subsidiaries unless the context indicates otherwise. The following discussion may contain forward-looking statements regarding the Company, our business, prospects and our results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Such statements may be identified by the use of words such as “expect,” “estimate,” “assume,” “believe,” “anticipate,” “may,” “will,” “forecast,” “outlook,” “plan,” “project,” or similar words, and include, without limitation, statements relating to future enrollment, revenues, revenues per student, earnings growth, operating expenses, capital expenditures and effect of pandemics such as the COVID-19 pandemic and its ultimate effect on the Company’s business and results. These statements are based on the Company’s current expectations and are subject to a number of assumptions, risks and uncertainties. Additional factors that could cause or contribute to differences between our actual results and those anticipated include, but are not limited to, those described in the “Risk Factors” section of our Form 10-K and in our other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by us in this Quarterly Report and in our other reports filed with the SEC that advise interested parties of the risks and factors that may affect our business. The interim financial statements and related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and the discussions contained herein should be read in conjunction with the annual financial statements and notes thereto included in our Form 10-K which includes audited consolidated financial statements for our two fiscal years ended December 31, 2020. General The Company provides diversified career-oriented post-secondary education to recent high school graduates and working adults. The Company offers programs in automotive technology, skilled trades (which include HVAC, welding and computerized numerical control and electrical and electronic systems technology, among other programs), healthcare services (which include nursing, dental assistant and medical administrative assistant, among other programs), hospitality services (which include culinary, therapeutic massage, cosmetology and aesthetics) and information technology programs. The schools , currently consisting of 22 schools in 14 states, operate under Lincoln Technical Institute, Lincoln College of Technology, Lincoln Culinary Institute, and Euphoria Institute of Beauty Arts and Sciences and associated brand names. Most of the campuses serve major metropolitan markets and each typically offers courses in multiple areas of study. Five of the campuses are destination schools, which attract students from across the United States and, in some cases, from abroad. The Company’s other campuses primarily attract students from their local communities and surrounding areas. All of the campuses are nationally or regionally accredited and are eligible to participate in federal financial aid programs by the DOE and applicable state education agencies and accrediting commissions, which allow students to apply for and access federal student loans as well as other forms of financial aid. Our business is organized into two reportable business segments: (a) Transportation and Skilled Trades, and (b) Healthcare and Other Professions or “HOPS”. Impact of COVID-19 on the Company During the first quarter of 2020, COVID-19 began to spread worldwide and has caused significant disruptions to the U.S. and world economies. In early March 2020, the Company began seeing the impact of the COVID-19 pandemic on our business. 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 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. Related to this transition, 102 students were placed on leave of absence as they could not complete their externships and certain programs were extended due to restricted access to externship sites and classroom labs. In response to COVID-19, we implemented initiatives to safeguard our students and our employees. 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 following applicable guidelines . 25 Index Critical Accounting Policies and Estimates For a description of our critical accounting policies and estimates, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” and Note 1 to the Condensed Consolidated Financial Statements included in our Form 10-K and Note 1 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended September 30, 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. Such reassessments did not have a significant impact on our results of operations and cash flows for the periods presented. Effect of Inflation Inflation has not had a material effect on our operations except for some inflationary pressures on certain instructor salaries. Results of Continuing Operations for the Three and Nine Months Ended September 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 Sept 30, Nine Months Ended Sept 30, 2021 2020 2021 2020 Revenue 100.0 % 100.0 % 100.0 % 100.0 % Costs and expenses: Educational services and facilities 42.8 % 43.5 % 42.1 % 42.9 % Selling, general and administrative 50.8 % 51.7 % 51.8 % 55.4 % Total costs and expenses 93.6 % 95.2 % 93.9 % 98.3 % Operating income 6.4 % 4.8 % 6.1 % 1.7 % Interest expense, net -0.3 % -0.4 % -0.4 % -0.5 % Income before income taxes 6.1 % 4.4 % 5.8 % 1.2 % Provision for income taxes 1.8 % 0.1 % 1.4 % 0.1 % Net Income 4.3 % 4.3 % 4.3 % 1.1 % Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020 Consolidated Results of Operations Revenue. Revenue increased $ 10.3 million , or 13.0% to $89.1 million for the three months ended September 30, 2021 from $78.8 million in the prior year comparable period. The increase in revenue was the result of an 8.3% increase in average population driven by the nine month start growth of 8.8% in addition to a 4.3% increase in average revenue per student in the current quarter. 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 $3.9 million, or 11.3% to $38.1 million for the three months ended September 30, 2021 from $34.2 million in the prior year comparable period. Additional costs were concentrated in instruction expense, books and tools expense and facilities expense. Instructional increases were driven in part by inflationary pressures on instructor salaries due to widespread instructor shortages in addition to a larger student population, which also drove additional books and tools expense. Facilities expense increased from the normalization of housing expenses for students during the quarter. Educational services and facilities expense, as a percentage of revenue, decreased slightly to 42.8% from 43.5% for the three months ended September 30, 2021 and 2020, respectively. 26 Index Selling, general and administrative expense. Our selling, general and administrative expense increased $4.5 million, or 11.1% to $45.2 million for the three months ended September 30, 2021 from $40.7 million in the prior year comparable period. The increase quarter over quarter was driven primarily by incentive and stock based compensation due to our improved financial performance in addition to increased marketing investments. Marketing investments increased as we continue to test, evaluate and adjust spending to optimize our results in an effort to increase both lead generation and brand awareness. The majority of our marketing spend today is invested in digital channels driven primarily by search engine marketing which is focused on our core student demographics and the geographic areas surrounding our campuses. We have gradually, but steadily, expanded our presence in various paid social media channels as well as both digital display and video advertising. While we continue to maintain a presence in traditional media such as television and radio, we are now utilizing a mix of broadcast, cable and streaming media to effectively reach prospective students. Selling, general and administrative expense, as a percentage of revenue, decreased to 50.8% from 51.7% for the three months ended September 30, 2021 and 2020, respectively. Net interest expense. Net interest expense remained essentially flat at $0.3 million for the three months ended September 30, 2021 and 2020, respectively. Income taxes. Our provision for income taxes was $1.6 million compared to approximately $0.1 million for the three months ended September 30, 2021 and 2020, respectively. The higher provision for the third 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 September 30, 2021 was 29.6%. Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020 Consolidated Results of Operations Revenue. Revenue increased $ 36.2 million , or 17.1% to $247.5 million for the nine months ended September 30, 2021 from $211.3 million in the prior year comparable period. The increase in revenue was the result of an 11.3% increase in average population, driven by continued student start growth, up 8.8% 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 average revenue per student, up 5.2% and 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 year over year 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 $13.4 million, or 14.8% to $104.1 million for the nine months ended September 30, 2021 from $90.7 million in the prior year comparable period. The higher costs were mainly concentrated in instructional, books and tools and facilities expenses. Instructional increases were driven in part by inflationary pressures on instructor salaries due to widespread instructor shortages in addition to a larger student population, which also drove additional books and tools expense. Further contributing to the increase was operating with a hybrid remote and in-person instruction in the current year compared to remote learning in the prior year. Additional facilities costs were driven by one-time rent reductions in the prior year 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 42.1% from 42.9% for the nine months ended September 30, 2021 and 2020, respectively. Selling, general and administrative expense. Our selling, general and administrative expense increased $11.2 million, or 9.5% to $128.2 million for the nine months ended September 30, 2021 from $117.0 million in the prior year comparable period. The increase year over year was driven by several factors including a $3.1 million increase in incentive and stock based compensation tied in part to a larger student population and improved financial performance, 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 reopens and lastly, increased marketing investments year over year. Marketing investments increased as we continue to test, evaluate and adjust spending to optimize our results in an effort to increase both lead generation and brand awareness. The majority of our marketing spend today is invested in digital channels driven primarily by search engine marketing which is focused on our core student demographics and the geographic areas surrounding our campuses. We have gradually, but steadily, expanded our presence in various paid social media channels as well as both digital display and video advertising. While we continue to maintain a presence in traditional media such as television and radio, we are now utilizing a mix of broadcast, cable and streaming media to effectively reach prospective students 27 Index Selling, general and administrative expense, as a percentage of revenue, decreased to 51.8% from 55.4% for the nine months ended September 30, 2021 and 2020, respectively. Net interest expense. Net interest expense remained essentially flat at $0.9 million for the nine months ended September 30, 2021 and 2020, respectively. Income taxes. Our provision for income taxes was $3.6 million compared to $0.2 million for the nine months ended September 30, 2021 and 2020, respectively. The higher provision for the nine months ended September 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 nine months ending September 30, 2021 was 25.0%. Segment Results of Operations We operate our business in two reportable segments: (a) the Transportation and Skilled Trades segment; and (b) the Healthcare and Other Professions (“HOPS”) 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). 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. 28 Index The following table presents results for our two reportable segments for the three months ended September 30, 2021 and 2020: Three Months Ended September 30, 2021 2020 % Change Revenue: Transportation and Skilled Trades $ 64,950 $ 56,828 14.3 % HOPS 24,109 21,964 9.8 % Total $ 89,059 $ 78,792 13.0 % Operating Income (Loss): Transportation and Skilled Trades $ 11,842 $ 9,138 29.6 % Healthcare and Other Professions 1,833 1,654 10.8 % Corporate (7,930 ) (6,952 ) -14.1 % Total $ 5,745 $ 3,840 49.6 % Starts: Transportation and Skilled Trades 3,976 3,982 -0.2 % Healthcare and Other Professions 1,454 1,528 -4.8 % Total 5,430 5,510 -1.5 % Average Population: Transportation and Skilled Trades 8,863 8,349 6.2 % Leave of Absence - COVID-19 (9 ) (333 ) 97.3 % Transportation and Skilled Trades Excluding Leave of Absence - COVID-19 8,854 8,016 10.5 % Healthcare and Other Professions 4,326 4,286 0.9 % Leave of Absence - COVID-19 (2 ) (137 ) 98.5 % Healthcare and Other Professions Excluding Leave of Absence - COVID-19 4,324 4,149 4.2 % Total 13,189 12,635 4.4 % Total Excluding Leave of Absence - COVID-19 13,178 12,165 8.3 % End of Period Population: Transportation and Skilled Trades 9,473 8,811 7.5 % Leave of Absence - COVID-19 - (67 ) 100.0 % Transportation and Skilled Trades Excluding Leave of Absence - COVID-19 9,473 8,744 8.3 % Healthcare and Other Professions 4,533 4,462 1.6 % Leave of Absence - COVID-19 - (37 ) 100.0 % Healthcare and Other Professions Excluding Leave of Absence - COVID-19 4,533 4,425 2.4 % Total 14,006 13,273 5.5 % Total Excluding Leave of Absence - COVID-19 14,006 13,169 6.4 % 29 Index Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020 Transportation and Skilled Trades Student starts remained essentially flat at approximately 4,000 for the three months ended September 30, 2021 and 2020, respectively. Operating income increased $2.7 million to $11.8 million for the three months ended September 30, 2021 from $9.1 million in the prior year comparable period. The increase quarter over quarter was mainly driven by the following factors: • Revenue increased $8.1 million, or 14.3% to $64.9 million for the three months ended September 30, 2021 from $56.8 million in the prior year comparable period. The increase in revenue was the result of average student population, up 10.5%, driven by a 10.2% increase in student starts for the nine months in addition to a 3.5% increase in average revenue per student in the current quarter. • Educational services and facilities expense increased $2.9 million, or 12.1% to $26.8 million for the three months ended September 30, 2021 from $23.9 million in the prior year comparable period. The increase was driven by additional instructional expense, books and tools expense and facilities expense. Instructional increases were driven in part by inflationary pressures on instructor salaries due to widespread instructor shortages in addition to a larger student population, which also drove books and tools expense. Facilities expense increased from the normalization of housing expenses for students during the quarter. • Selling, general and administrative expense increased $2.5 million, or 10.6% to $26.4 million for the three months ended September 30, 2021 from $23.8 million in the prior year comparable period. The increase in costs were the result of a larger student population in combination with additional investments in marketing initiatives during the quarter. Healthcare and Other Professions Student starts remained essentially flat at approximately 1,500 for the three month ended September 30, 2021 and 2020, respectively. Operating income increased $0.1 million to $1.8 million for the three months ended September 30, 2021 from $1.7 million in the prior year comparable period. The increase quarter over quarter was mainly driven by the following factors: • Revenue increased $2.1 million, or 9.8% to $24.1 million for the three months ended September 30, 2021 from $22.0 million in the prior year comparable period. The increase in revenue was the result of average student population, up 4.2%, driven by a 5.6% increase in student starts for the nine months in addition to a 5.3% increase in average revenue per student in the current quarter. • Educational services and facilities expense increased $0.9 million, or 9.2% to $11.3 million for the three months ended September 30, 2021 from $10.4 million in the prior year comparable period. The increase was primarily driven by additional instructional expense and books and tools expense Instructional increases were driven in part by inflationary pressures on instructor salaries due to widespread instructor shortages, especially in the nursing field in addition to a larger student population, which also drove books and tools expense. • Selling, general and administrative expense increased $1.0 million, or 10.2% to $10.9 million for the three months ended September 30, 2021 from $9.9 million in the prior year comparable period. Additional costs were the result of an increased student population in combination with a slight increase in bad debt. Corporate and Other This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses were $7.9 million and $6.9 million for each of the three months ended September 30, 2021 and 2020, respectively. The additional expense quarter over quarter was primarily due to incentive and stock based compensation tied in part to improved financial performance. 30 Index The following table present results for our two reportable segments for the nine months ended September 30, 2021 and 2020: Nine Months Ended September 30, 2021 2020 % Change Revenue: Transportation and Skilled Trades $ 177,586 $ 148,799 19.3 % HOPS 69,934 62,504 11.9 % Total $ 247,520 $ 211,303 17.1 % Operating Income (Loss): Transportation and Skilled Trades $ 35,423 $ 18,848 87.9 % Healthcare and Other Professions 7,743 6,388 21.2 % Corporate (27,949 ) (21,581 ) -29.5 % Total $ 15,217 $ 3,655 316.3 % Starts: Transportation and Skilled Trades 8,824 8,004 10.2 % Healthcare and Other Professions 3,857 3,651 5.6 % Total 12,681 11,655 8.8 % Average Population: Transportation and Skilled Trades 8,312 7,651 8.6 % Leave of Absence - COVID-19 (16 ) (260 ) 93.8 % Transportation and Skilled Trades Excluding Leave of Absence - COVID-19 8,296 7,391 12.2 % Healthcare and Other Professions 4,414 4,176 5.7 % Leave of Absence - COVID-19 (44 ) (188 ) 76.6 % Healthcare and Other Professions Excluding Leave of Absence - COVID-19 4,370 3,988 9.6 % Total 12,726 11,827 7.6 % Total Excluding Leave of Absence - COVID-19 12,666 11,379 11.3 % End of Period Population: Transportation and Skilled Trades 9,473 8,811 7.5 % Leave of Absence - COVID-19 - (67 ) 100.0 % Transportation and Skilled Trades Excluding Leave of Absence - COVID-19 9,473 8,744 8.3 % Healthcare and Other Professions 4,533 4,462 1.6 % Leave of Absence - COVID-19 - (37 ) 100.0 % Healthcare and Other Professions Excluding Leave of Absence - COVID-19 4,533 4,425 2.4 % Total 14,006 13,273 5.5 % Total Excluding Leave of Absence - COVID-19 14,006 13,169 6.4 % Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020 Transportation and Skilled Trades Student starts increased 10.2%, to approximately 8,800 for the nine months ended September 30, 2021 from approximately 8,000 in the prior year comparable period. Operating income increased $16.6 million to $35.4 million for the nine months ended September 30, 2021 from $18.8 million in the prior year comparable period. The increase year over year was mainly driven by the following factors: 31 Index • Revenue increased $28.8 million, or 19.3% to $177.6 million for the nine months ended September 30, 2021 from $148.8 million in the prior year comparable period. The increase in revenue was driven by several factors including average student population, up 12.2%, driven by a 10.2% increase in student starts, a 6.3% increase in average revenue per student and the normalization of our revenue stream with the return to in-person instruction at all of our campuses. • Educational services and facilities expense increased $9.4 million, or 15.1% to $71.4 million for the nine months ended September 30, 2021 from $62.0 million in the prior year comparable period. The higher costs were mainly concentrated in instructional, books and tools and facilities expenses. Instructional increases were driven in part by inflationary pressures on instructor salaries due to widespread instructor shortages in addition to a larger student population, which also drove books and tools expense. Additional facilities costs were driven by one-time rent reductions in the prior year coupled with overall facilities savings during campus closures as a result of COVID-19. • Selling, general and administrative expense increased $2.7 million, or 4.0% to $70.7 million for the nine months ended September 30, 2021 from $68.0 million in the prior year comparable period. The increase in costs were the result of several factors including a larger student population, additional investments in marketing initiatives during the quarter and the return to in-person instruction at all of our campuses. Healthcare and Other Professions Student starts increased 5.6%, to approximately 3,900 for the nine months ended September 30, 2021 from approximately 3,700 in the prior year comparable period. Operating income increased $1.4 million to $7.7 million for the nine months ended September 30, 2021 from $6.4 million in the prior year comparable period. The increase year over year was mainly driven by the following factors: • Revenue increased $7.4 million, or 11.9% to $69.9 million for the nine months ended September 30, 2021 from $62.5 million in the prior year comparable period. The increase in revenue was driven by several factors including average student population, up 9.6%, driven by a 5.6% increase in student starts, a 2.1% increase in average revenue per student and the normalization of our revenue stream with the return to in-person instruction at all of our campuses. • Educational services and facilities expense increased $4.0 million, or 14.0% to $32.7 million for the nine months ended September 30, 2021 from $28.7 million in the prior year comparable period. The higher costs were mainly concentrated in instructional, books and tools and facilities expenses. Instructional increases were driven in part by inflationary pressures on instructor salaries due to widespread instructor shortages, especially in the nursing field in addition to a larger student population, which also drove books and tools expense. Additional facilities costs were driven by one-time rent reductions in the prior year coupled with overall facilities savings during campus closures as a result of COVID-19. • Selling, general and administrative expense increased $2.0 million, or 7.5% to $29.4 million for the nine months ended September 30, 2021 from $27.4 million in the prior year comparable period. The increase in costs was the result of several factors including a larger student population, additional investments in marketing initiatives during the quarter and the return to in-person instruction at all of our campuses. Corporate and Other This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses were $27.9 million and $21.6 million for each of the nine months ended September 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 $3.1 million increase in to incentive and stock based compensation tied in part to improved financial performance. 32 Index LIQUIDITY AND CAPITAL RESOURCES Our primary capital requirements are for maintenance and expansion of our facilities and the development of new programs. Our principal sources of liquidity have been cash provided by operating activities and borrowings under our Credit Facility. The following chart summarizes the principal elements of our cash flow for each of the nine months ended September 30, 2021 and 2020, respectively: Nine Months Ended September 30, 2021 2020 Net cash provided by operating activities $ 17,750 $ 10,222 Net cash used in investing activities (5,252 ) (3,457 ) Net cash used in financing activities (3,374 ) (17,816 ) As of September 30, 2021, the Company had a net cash balance of $31.3 million compared to a net cash balance of $20.8 million at December 31, 2020. The net cash balance is calculated as our cash and cash equivalents less both short and long-term portion of the credit agreement. The increase in cash position from year-end can mainly be attributed to net income generated during the current year. Our primary source of cash is tuition collected from our students. The majority of students enrolled at our schools rely on funds received under various government-sponsored student financial aid programs to pay a substantial portion of their tuition and other education-related expenses. The most significant source of student financing is Title IV Programs, which represented approximately 77% of our cash receipts relating to revenues in 2020. Pursuant to applicable regulations, students must apply for a new loan for each academic period. Federal regulations dictate the timing of disbursements of funds under Title IV Programs and loan funds are generally provided by lenders in two disbursements for each academic year. The first disbursement is usually received approximately 31 days after the start of a student’s academic year and the second disbursement is typically received at the beginning of the sixteenth week from the start of the student’s academic year. Certain types of grants and other funding are not subject to a 31-day delay. In certain instances, if a student withdraws from a program prior to a specified date, any paid but unearned tuition or prorated Title IV Program financial aid is refunded according to federal, state and accrediting agency standards. As a result of the significant amount of Title IV Program funds received by our students, we are highly dependent on these funds to operate our business. Any reduction in the level of Title IV Program funds that our students are eligible to receive or any restriction on our eligibility to receive Title IV Program funds would have a significant impact on our operations and our financial condition. For more information, see Part I, Item 1A. “Risk Factors - Risks Related to Our Industry” in our Form 10-K. Operating Activities Net cash provided by operating activities was $17.8 million and $10.2 million for each of the nine months ended September 30, 2021 and 2020, respectively. Included in cash provided by operating activities in the nine months ended September 30, 2020 was $11.5 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 $1.2 million. The increase of $19.0 million in cash provided by operating activities was primarily driven by net income generated for the nine months ended September 30, 2021. Investing Activities Net cash used in investing activities was $5.3 million for the nine months ended September 30, 2021 compared to $3.5 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. We currently lease a majority of our campuses. We own our real property in Grand Prairie, Texas; Nashville, Tennessee; and Denver, Colorado and our former school property located in Suffield, Connecticut. Capital expenditures were 2% of revenues in 2020 and are expected to approximate 2% of revenues in 2021. We expect to fund future capital expenditures with cash generated from operating activities and borrowings under our credit facility. 33 Index Financing Activities Net cash used in financing activities was $3.4 million for the nine months ended September 30, 2021 compared to $17.8 million in the prior year comparable period. The decrease of $14.4 million was primarily driven by a decrease in net payments on borrowings of $15.0 million year over year, partially offset by an increase of $0.7 million in equity based compensation. 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. 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. Accrued interest on each loan under the Credit Facility is payable monthly in arrears. The Term Loan and the Delayed Draw Term Loan bear interest at a floating interest rate based on the then one month London Interbank Offered Rate (“LIBOR”) plus 3.50%. At the closing of the Credit Facility, the Company entered into a swap transaction with the Lender for 100% of the principal balance of the Term Loan, which matures on the same date as the Term Loan. 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%. 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. 34 Index 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. In addition to the foregoing, the Credit Agreement contains customary representations, warranties and affirmative and negative covenants (including financial covenants that (i) restrict capital expenditures, (ii) restrict leverage, (iii) require maintaining minimum tangible net worth, (iv) require maintaining a minimum fixed charge coverage ratio and (v) require the maintenance of a minimum of $5 million in quarterly average aggregate balances on deposit with the Lender, which, if not maintained, will result in the assessment of a quarterly fee of $12,500), as well as events of default customary for facilities of this type. As of September 30, 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. On September 23, 2021, the Company and certain of its subsidiaries entered into a Consent and Waiver Letter Agreement (the “Consent Agreement”) to the Company’s existing Credit Agreement. The Consent Agreement consents to certain real estate transactions with respect to the Nashville, Denver and Grand Prairie campuses (collectively, the “Property Transactions”) and waives certain covenants in the Credit Agreement, subject to certain conditions specified therein. In addition, in connection with the consummation of the Property Transactions, the Lender has agreed to release its mortgages and other liens on the subject-properties. In connection with the Consent Agreement, at the closing of the Property Transactions, the Company is required to pay in full the outstanding principal and accrued interest of the Term Loan and any swap obligations arising from any swap transaction entered into in connection with the Term Loan and no further borrowings may be made under the Term Loan or the Delayed Draw Term Loan. On October 29, 2021, the sale lease-back of the Denver and Grand Prairie campuses was consummated which provided the Company with net proceeds of approximately $28.5 million after deduction of transaction-related expenses of approximately $1.2 million and repayment of the Company’s outstanding term loan and swap termination fee of approximately $16.8 million. The Company is exploring alternatives regarding a future credit facility. As of September 30, 2021 and December 31, 2020, the Company had $16.3 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 September 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): September 30, 2021 December 31, 2020 Credit agreement $ 16,333 $ 17,833 Deferred Financing Fees (485 ) (621 ) 15,848 17,212 Less current maturities (2,000 ) (2,000 ) $ 13,848 $ 15,212 Contractual Obligations Current portion of Long-Term Debt, Long-Term Debt and Lease Commitments. As of September 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 September 30, 2021, we had outstanding loan principal commitments to our active students of $30.3 million. These are institutional loans and no cash is advanced to students. The full loan amount is not guaranteed unless the student completes the program. The institutional loans are considered commitments because the students are packaged to fund their education using these funds and they are not reported on our financials. 35 Index Regulatory Updates DOE and OIG Audit Findings. Our schools are subject to audits, program reviews, site visits, and other reviews by various federal and state regulatory agencies, including, but not limited to, the DOE, the DOE’s Office of Inspector General (“OIG”), state education agencies and other state regulators, the U.S. Department of Veterans Affairs and other federal agencies, and by our accrediting commissions. In addition, each of our institutions must retain an independent certified public accountant to conduct an annual audit of the institution’s administration of Title IV Program funds. The institution must submit the resulting audit report to the DOE for review. See our Form 10-K at “Business – Regulatory Environment – Compliance with Regulatory Standards and Effect of Regulatory Violations.” Some of the findings in the annual Title IV Program compliance audits for some of our institutions resulted in the DOE placing those institutions on provisional certification. See Form 10-K at “Business - Regulatory Environment – Regulation of Federal Student Financial Aid Programs.” On October 5, 2021, our New Britain institution received a final audit determination letter from the DOE in connection with the Title IV compliance audit for the 2020 fiscal year. The letter contained 8 findings of alleged noncompliance with certain Title IV requirements. The letter noted that several of the findings were repeat findings that had appeared in prior audit reports. The total amount of questioned funds in the report totaled approximately $16,000, all of which had been repaid prior to the issuance of the final audit determination. The letter requires that the institution correct all of the deficiencies noted in the audit report and requires the auditor to comment in the 2021 fiscal year audit on the actions taken by the institution in response to the findings and required actions. The letter indicates that repeat findings in future audits or failure to satisfactorily resolve the findings of the audit could lead to an adverse action. The letter also notes that, due to the seriousness of one or more of the findings, the letter has been referred to a separate office within the DOE for consideration of possible adverse action. The letter states that an adverse action may include the imposition of a fine; the limitation, suspension, or termination of the institution’s Title IV eligibility; the revocation of the institution’s provisional program participation agreement; or the denial of a future application for renewal of the institution’s Title IV certification. The letter indicates that the DOE will notify the institution if the DOE initiates an adverse action and will notify the institution of its appeal rights and procedures on how to contest the action if any is taken. We are continuing to cooperate with the audit process and to respond to the DOE’s requests for information in connection with the audits. Our other two institutions had findings of noncompliance in their respective Title IV compliance audits for the 2020 fiscal year. The DOE requested that, in connection with some of the findings in the audit reports, the institutions conduct a file review of all student files from the 2020 fiscal year in order to determine the extent of alleged noncompliance related to those findings. We are in the process of conducting those reviews, preparing our responses to the findings, and ultimately submitting them to the DOE. Once we have submitted our responses, the DOE will issue a final audit determination letter to each institution after it completes its review and consideration of our responses. We cannot predict whether some of the findings may be referred to a separate office within the DOE for consideration of a possible adverse action. We cannot predict the outcome of these audits, any action the DOE might initiate in response to the audit findings, or the outcome of any appeal that might result in response to a DOE action related to the findings. We are continuing to cooperate with the audit process and to respond to the DOE’s requests for information in connection with the audits. On December 16, 2020, the OIG began an audit of our Indianapolis institution to ensure we used the funds provided under the Higher Education Emergency Relief Fund (“HEERF”) for allowable and intended purposes and to perform limited work on the institution’s cash management practices and HEERF reporting. We have been cooperating with the OIG during its audit of the institution. On September 24, 2021, the OIG issued a final audit report containing 3 findings of alleged non-compliance and 2 additional topics that were each classified as an “other matter.” The final report is inclusive of our response to the findings and other matters. The final audit report has been sent to the DOE for further consideration. We cannot predict the outcome of the audit, any liabilities or other actions the DOE might initiate in response to the audit findings, or the outcome of any appeal that might result in response to a DOE action related to the findings. We are continuing to cooperate with the ongoing audit process. FTC and FSA Office of Enforcement. In recent years, Congress, the DOE, states, accrediting agencies, the Consumer Financial Protection Bureau (“CFPB”), the Federal Trade Commission (“FTC”), state attorneys general and the media have scrutinized the for-profit postsecondary education sector. Under the current leadership of the DOE, there is an increased likelihood of scrutiny of our institutions by federal agencies. See our Form 10-K at “Business – Regulatory Environment – Scrutiny of the For-Profit Postsecondary Education Sector.” On October 6, 2021, the FTC issued an announcement regarding its plan to target false claims by for-profit colleges on topics such as promises about graduates’ job and earnings prospects and other outcomes, its intent to impose “significant financial penalties” on violators, and its intent to monitor the market carefully with federal and state partners. The FTC indicated in the announcement that it had put 70 for-profit higher education institutions on notice that the agency would be “cracking down” on any such false promises. All of our institutions were among the 70 institutions who received this notice. Although the FTC stated that a school’s presence on the list of 70 institutions does not reflect any assessment as to whether they have engaged in deceptive or unfair conduct, the FTC’s announcement and its issuance of notices to schools could lead to further scrutiny, investigations, and potential attempted enforcement actions by the FTC and other regulators against for-profit schools, including our schools. 36 Index On October 8, 2021, the DOE announced the establishment of an Office of Enforcement within the Federal Student Aid office that oversees institutions participating in the Title IV programs. The action restored an office that previously was established in 2016 but deprioritized during the prior presidential administration. The office will comprise four existing divisions including the Administrative Actions and Appeals Services Group (which among other things initiates adverse actions against institutions), the Borrower Defense Group (which analyzes borrower defense to repayment claims), the Investigations Group (which evaluates and investigations potential institutional noncompliance and collaborates with other federal and state regulators), and the Resolution and Referral Management Group (which tracks and resolves referrals, allegations and complaints about institutions and other parties that participate in the Title IV programs). The establishment of the Office of Enforcement could result in an increase in enforcement actions and other activities against for-profit schools and school companies, including us. 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. 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. We have been allocated approximately $8 million in funds that must be used entirely for student financial aid grants. As of September 30, 2021, none of these funds have been drawn down. We expect to distribute a majority of the funds in the fourth quarter of 2021. 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. 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. See our Form 10-K at “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, 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. This means that our institutions will be required to limit the combined amount of Title IV funds and applicable “Federal funds” revenue in a fiscal year to no more than 90% in a fiscal year as calculated under the rule. Consequently, the ARPA change to the 90/10 rule is expected to increase the 90/10 rule calculations at our institutions. The ARPA does not identify the specific Federal funding programs that will be covered by this provision, but it is expected to include funding from federal student aid programs such as the veterans’ benefits programs, which include the Post-9/11 GI Bill and Veterans Readiness and Employment services and from which we derived approximately 8% of our revenues on a cash basis in 2020. For the year ended December 31, 2020, approximately 77% (calculated based on cash receipts) of our revenues were derived from the Title IV Programs. The ARPA states that the amendments to the 90/10 rule apply to institutional fiscal years beginning on or after January 1, 2023 and are subject to the HEA’s negotiated rulemaking process which may not commence earlier than October 1, 2021. Accordingly, the ARPA change to the 90/10 rule is not expected to apply to our 90/10 rule calculations until our 2023 fiscal year. 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. On October 4, 2021, the DOE published a notice in the Federal Register announcing its intention to establish a negotiated rulemaking committee to prepare proposed regulations affecting institutional and programmatic eligibility, including the 90/10 rule and the changes made by the ARPA. The DOE stated that it anticipated that the negotiations would begin no earlier than January 2022, that negotiations would occur during three sessions of five days each with approximately 4 weeks between sessions, and that the DOE would announce the topics and schedule of committee meetings in a subsequent Federal Register notice. We cannot predict the number and scope of regulations that the DOE may propose, but future regulations on 90/10 or other topics could have a materially adverse effect on us and other schools like ours. We expect to make changes to our operations in order to address the 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. Our institutions’ 90/10 percentages can be increased by increases in Title IV aid availability (including, for example, increases in Pell Grant funds) and be decreased by decreases in the availability of state grant program funding and other sources of student aid that do not count as Title IV funds in the 90/10 calculation. Our institutions’ 90/10 percentages also will increase when the ARPA amendments to the 90/10 rule take effect to the extent that students eligible to receive military and veteran education assistance enroll and use their financial assistance at our institutions. We cannot be certain that the changes we make in the future will succeed in maintaining our institutions’ 90/10 percentages below required levels or that the changes will not materially impact our business operations, revenues, and operating costs. 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. 37 Index Borrower Defense to Repayment Regulations. As previously disclosed in our Form 10-K, the Company 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 our Form 10-K at “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.” The DOE is currently conducting a negotiated rulemaking process 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” section below. On April 29, 2021, the Company received communication from the DOE indicating that the DOE was in receipt of a number of borrower defense applications containing allegations concerning us 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 us each application allowing the Company 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 have completed the process of thoroughly reviewing and responding to each borrower application sent to us by the DOE as well as providing information in response to the DOE’s information requests in the April 29, 2021 communication. 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 us 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, we 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 the Company, if any. Negotiated Rulemaking. The DOE periodically issues new regulations and guidance that can have an adverse effect on our institutions. See our Form 10-K at “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. On October 4, 2021, the DOE published a notice in the Federal Register announcing its intention to establish a negotiated rulemaking committee to prepare proposed regulations affecting institutional and programmatic eligibility, including the 90/10 rule and the changes made by the ARPA. See “The ARPA and the ‘90/10 Rule.’” 38 Index 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. The negotiated rulemaking sessions began on October 4, 2021. The topics have included total and permanent disability discharges, closed school discharges, public student loan forgiveness, borrower defense to repayment, pre-dispute arbitration and class action waivers, income driven repayment, interest capitalization, false certification discharges, and prison exchange programs and could include other issues that the DOE might add to the agenda. The remaining sessions are scheduled to occur periodically through mid-December 2021. The DOE is expected to publish proposed regulations in the Federal Register for public comment during the period after the conclusion of the negotiated rulemaking sessions. If the final regulations are published by or before November 1, 2022, then the regulations typically would not take effect until July 1, 2023. However, we cannot predict the ultimate timing and content of any final regulations following the conclusion of the rulemaking process. We also 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 is currently conducting a negotiated rulemaking process 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” section above. 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 $345,000. We previously operated four other campuses that closed in the past and that could be subject to closed school loan discharges in the future, including automatic closed school loan discharges that could be granted by the DOE. We cannot 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. Financial Responsibility Standards. As previously disclosed (see our Form 10-K at “Financial Responsibility Standards”), the DOE indicated in a January 13, 2020 letter its determination that our institutions were “in the zone” based on our composite score 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 Heightened Cash Monitoring 1 Payment Method (HCM1) payment method and to notify the DOE within 10 days of the occurrence of certain oversight and financial events. We also were 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. 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 us from the Zone Alternative requirements but indicating that we would remain on HCM1 until we met certain requirements outlined by the DOE in its letter. On August 26, 2021, the DOE sent us correspondence stating that our three institutions had performed all of the requirements of the February 16, 2021, letter and notifying us that the DOE had returned our institutions to advance pay on August 19, 2021. Accreditation. Accreditation by an accrediting agency recognized by the DOE is required for an institution to be certified to participate in the Title IV Programs. All of our institutions are accredited by ACCSC, which is a DOE-recognized accrediting agency. See our Form 10-K at “Regulation – Accreditation.” Accrediting agencies are required to apply to the DOE on a periodic basis for continued recognition by the DOE. ACCSC is in the process of applying for continued recognition by the DOE. On October 28, 2021, the DOE announced that it had notified ACCSC that a decision on its recognition by the DOE was deferred pending the submission of additional information about ACCSC’s monitoring, evaluation, and actions related to high-risk institutions. ACCSC reportedly will receive a period until January 10, 2022, to provide a written response to the DOE. DOE staff reportedly will receive a period of up to 75 days after receipt of the written response to the DOE to provide a written response. A designated senior DOE official is expected to make a decision regarding the continued recognition of ACCSC after the receipt and review of the responses. The DOE regulations indicate that ACCSC may appeal an adverse decision to the DOE Secretary and potentially to federal court. 39 Index If the DOE withdraws the recognition of an accrediting agency, the HEA indicates that the DOE may continue the eligibility of qualified institutions accredited by the accrediting agency for a period of up to 18 months from the date of the withdrawal of the DOE’s recognition of the accrediting agency. If provided, this period would provide time for institutions to apply for accreditation from another DOE-recognized accrediting body. The DOE could impose provisional certification and other conditions and restrictions on such institutions during this time period. If the DOE declines to continue its recognition of ACCSC and if the subsequent period for obtaining accreditation from another DOE-recognized accrediting agency lapses before we obtain accreditation from another DOE-recognize accrediting agency (or if the DOE does not provide such a period for institutions to obtain other accreditation), our schools could lose our Title IV eligibility. We cannot predict the timing and outcome of the DOE’s decision on the continuation of its recognition of ACCSC, the timing and outcome of any appeal that ACCSC might pursue in the event of an adverse decision, or the duration and conditions of any period the DOE may elect to provide to institutions to obtain accreditation from another DOE-recognized accrediting agency. Seasonality Our revenue and operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in total student population. Student population varies as a result of new student enrollments, graduations and student attrition. Historically, our schools have had lower student populations in our first and second quarters and we have experienced larger class starts in the third quarter and higher student attrition in the first half of the year. Our second half growth is largely dependent on a successful high school recruiting season. We recruit our high school students several months ahead of their scheduled start dates and, thus, while we have visibility on the number of students who have expressed interest in attending our schools, we cannot predict with certainty the actual number of new student enrollments and the related impact on revenue. Our expenses, however, typically do not vary significantly over the course of the year with changes in our student population and revenue.