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 (“Form 10Q”) 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 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, 2021. 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”. 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 Form 10-Q for the quarter ended June 30, 2022. 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 accounts, 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 instructional expenses and in instances where potential students have not wanted to incur additional debt or increased travel expense. 23 Index Results of Continuing Operations for the Three and Six Months Ended June 30, 2022 The following table sets forth selected condensed consolidated statements of operations data as a percentage of revenues for each of the periods indicated: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Revenue 100.0 % 100.0 % 100.0 % 100.0 % Costs and expenses: Educational services and facilities 44.0 % 41.9 % 43.9 % 41.7 % Selling, general and administrative 55.8 % 53.8 % 56.2 % 52.3 % (Gain) loss on sale of assets -0.2 % 0.0 % -0.1 % 0.0 % Total costs and expenses 99.5 % 95.7 % 100.0 % 94.0 % Operating income 0.5 % 4.3 % 0.0 % 6.0 % Interest expense, net 0.0 % -0.4 % 0.0 % -0.4 % Income (loss) from operations before income taxes 0.4 % 3.9 % 0.0 % 5.6 % Provision (benefit) for income taxes 0.1 % 0.9 % -0.3 % 1.2 % Net income 0.3 % 3.0 % 0.3 % 4.4 % Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021 Consolidated Results of Operations Revenue. Revenue increased $1.6 million, or 2.1% to $82.1 million for the three months ended June 30, 2022 from $80.5 million in the prior year comparable period. The increase was mainly driven by a higher beginning of period population of approximately 230 more students at the start of 2022 than in 2021 in addition to a 1.2% increase in average student population over the prior year comparable period. 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 $2.4 million, or 7.2% to $36.1 million for the three months ended June 30, 2022 from $33.7 million in the prior year comparable period. Increased costs were primarily concentrated in instructional expense and facilities expense. Instructional salaries increased mainly due to current market conditions and higher staffing levels, as a result of population growth and program expansion. In addition, consumables prices rose sharply driven by on-going inflation and supply-chain shortages. Facility expenses increased as a result of approximately $0.8 million of additional rent expense from the sale leaseback transaction relating to our Denver and Grand Prairie campuses consummated in the fourth quarter of 2021. Partially offsetting these costs were cost savings in utilities expense. Educational services and facilities expense, as a percentage of revenue, increased to 44.0% from 41.9% for the three months ended June 30, 2022 and 2021, respectively. Selling, general and administrative expense. Our selling, general and administrative expense increased $2.5 million, or 5.8% to $45.8 million for the three months ended June 30, 2022 from $43.3 million in the prior year comparable period. The increase was primarily driven by additional bad debt expense driven by a decrease in our historical repayment rates, an increase in medical expenses due to additional claims and one-time expenses in connection with growth initiatives of approximately $0.2 million. Selling, general and administrative expense, as a percentage of revenue, increased to 55.8% from 53.8% for the three months ended June 30, 2022 and 2021, respectively. Gain on sale of asset . Gain on sale of assets was $0.2 million for the three months ended June 30, 2022 as a result of the sale of our Suffield, Connecticut property, which was previously a former campus. Net proceeds received from the sale were approximately $2.4 million resulting in a $0.2 million gain in the current year. Net interest expense. Net interest expense decreased by approximately $0.3 million, or 88.2% to less than $0.1 million for the three months ended June 30, 2022 from $0.3 million in the prior year comparable period. The decrease in expense was due to the payoff of all outstanding debt during the fourth quarter of prior year in connection with the sale leaseback transaction. 24 Index Income taxes. Our provision for income taxes was $0.1 million for the three months ended June 30, 2022 compared to a provision for income taxes of $0.7 million in the prior year comparable period. The decrease in income tax provision quarter over quarter was mainly due to reduced pre-tax income. Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021 Consolidated Results of Operations Revenue. Revenue increased $6.2 million, or 3.9% to $164.7 million for the six months ended June 30, 2022 from $158.5 million in the prior year comparable period. The increase in revenue was mainly due to a 2.8% increase in average student population driven by a higher beginning of period population of approximately 740 more students at the start of 2022 than in 2021. 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 $6.3 million, or 9.5% to $72.3 million for the six months ended June 30, 2022 from $66.0 million in the prior year comparable period. Increased costs were primarily concentrated in instructional expense and facilities expense. Instructional salaries increased mainly due to current market conditions and higher staffing levels as a result of population growth, program expansion and the return to normalized levels of in-person instruction post COVID-19 restrictions. In addition, consumables prices rose sharply driven by on-going inflation and supply-chain shortages. Facility expenses increased as a result of approximately $1.6 million of additional rent expense from the sale leaseback transaction relating to our Denver and Grand Prairie campuses consummated in the fourth quarter of 2021 and higher maintenance costs. Educational services and facilities expense, as a percentage of revenue, increased to 43.9% from 41.7% for the six months ended June 30, 2022 and 2021, respectively. Selling, general and administrative expense. Our selling, general and administrative expense increased $9.6 million, or 11.5% to $92.5 million for the six months ended June 30, 2022 from $82.9 million in the prior year comparable period. The increase was primarily driven by additional bad debt expense, an increase in medical expenses due to additional claims, $0.9 million of additional stock compensation expense and severance and one-time expenses in connection with growth initiatives of approximately $1.0 million. Bad debt expense for the six months ended June 30, 2021 was lower than historical amounts due to an adjustment made in the first quarter of 2021 to qualifying student accounts receivables as permitted by the Higher Education Emergency Relieve Funds (“HEERF”). In accordance with the applicable guidance, the Company combined HEERF funding with Company funds to provide financial relief to students who dropped from school due to COVID-19 related circumstances with unpaid accounts receivable balances during the period from March 15, 2020 to March 31, 2021. The relief resulted in a net benefit to bad debt expense of approximately $3.0 million. Without this adjustment bad debt expense for the six months ended June 30, 2022 as a percentage of total revenue, would have been comparable to that reported in the prior year comparable period. Selling, general and administrative expense, as a percentage of revenue, increased to 56.2% from 52.3% for the six months ended June 30, 2022 and 2021, respectively. Gain on sale of asset . Gain on sale of assets increased to $0.2 million for the six months ended June 30, 2022 from less than $0.1 million in the prior year comparable period. The increase year over year was the result of the sale of our Suffield, Connecticut property, which was previously a former campus. Net proceeds received from the sale were approximately $2.4 million resulting in a $0.2 million gain in the current year. Net interest expense. Net interest expense decreased by approximately $0.5 million, or 86.8% to less than $0.1 million for the six months ended June 30, 2022 from $0.6 million in the prior year comparable period. The decrease in expense was due to the payoff of all outstanding debt during the fourth quarter of last year in connection with the sale leaseback transaction. Income taxes. Our benefit for income taxes was $0.5 million for the six months ended June 30, 2022 compared to a provision for income taxes of $2.0 million in the prior year comparable period. The benefit for the six months ended June 30, 2022 was due primarily to a pre-tax book loss and a discrete item relating to restricted stock vesting, while the provision in the prior year was due primarily to pre-tax income position. 25 Index 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. The Company also utilizes the Transitional segment solely when and if it closes a school. 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). 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. 26 Index The following table presents results for our two reportable segments for the three months ended June 30, 2022 and 2021: Three Months Ended June 30, 2022 2021 % Change Revenue: Transportation and Skilled Trades $ 57,973 $ 56,965 1.8 % Healthcare and Other Professions 24,169 23,499 2.9 % Total $ 82,142 $ 80,464 2.1 % Operating Income (loss): Transportation and Skilled Trades $ 7,094 $ 11,256 -37.0 % Healthcare and Other Professions 1,609 2,962 -45.7 % Corporate (8,307 ) (10,766 ) 22.8 % Total $ 396 $ 3,452 -88.5 % Starts: Transportation and Skilled Trades 2,583 2,509 2.9 % Healthcare and Other Professions 1,269 1,194 6.3 % Total 3,852 3,703 4.0 % Average Population: Transportation and Skilled Trades 8,315 8,039 3.4 % Leave of Absence - COVID-19 - (25 ) 100.0 % Transportation and Skilled Trades Excluding Leave of Absence - COVID-19 8,315 8,014 3.8 % Healthcare and Other Professions 4,322 4,508 -4.1 % Leave of Absence - COVID-19 - (40 ) 100.0 % Healthcare and Other Professions Excluding Leave of Absence - COVID-19 4,322 4,468 -3.3 % Total 12,637 12,547 0.7 % Total Excluding Leave of Absence - COVID-19 12,637 12,482 1.2 % End of Period Population: Transportation and Skilled Trades 8,765 8,467 3.5 % Leave of Absence - COVID-19 - (7 ) 100.0 % Transportation and Skilled Trades Excluding Leave of Absence - COVID-19 8,765 8,460 3.6 % Healthcare and Other Professions 4,237 4,410 -3.9 % Leave of Absence - COVID-19 - (10 ) 100.0 % Healthcare and Other Professions Excluding Leave of Absence - COVID-19 4,237 4,400 -3.7 % Total 13,002 12,877 1.0 % Total Excluding Leave of Absence - COVID-19 13,002 12,860 1.1 % 27 Index Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021 Transportation and Skilled Trades Operating income was $7.1 million for the three months ended June 30, 2022 compared to $11.3 million in the prior year comparable period. The change quarter over quarter was driven by the following factors: • Revenue increased $1.0 million, or 1.8% to $58.0 million for the three months ended June 30, 2022 from $57.0 million in the prior year comparable period. The increase in revenue was primarily due to a 3.8% increase in average student population driven by a higher beginning of period population in the current quarter of approximately 350 students. • Educational services and facilities expense increased $1.6 million, or 6.8% to $24.3 million for the three months ended June 30, 2022 from $22.7 million in the prior year comparable period. Increased costs were primarily concentrated in instructional expense and facilities expense. Instructional increases were primarily driven by salary increases mainly due to market adjustments and larger staffing levels as a result of population growth and program expansion. Facility expense increases were the result of approximately $0.8 million of additional rent expense from the sale leaseback transaction relating to our Denver and Grand Prairie campuses consummated in the fourth quarter of 2021. Partially offsetting the additional facility costs are reductions in depreciation expense. • Selling, general and administrative expense increased $3.6 million, or 15.7% to $26.6 million for the three months ended June 30, 2022 from $23.0 million in the prior year comparable period. The increase was primarily driven additional bad debt expense driven by a decrease in our historical repayment rates. Healthcare and Other Professions Operating income was $1.6 million for the three months ended June 30, 2022 compared to $2.9 million in the prior year comparable period. The change quarter over quarter was driven by the following factors: • Revenue increased by $0.7 million, or 2.9% to $24.1 million for the three months ended June 30, 2022 from $23.4 million in the prior year comparable period. The increase in revenue was primarily the result of a 6.3% increase in average revenue per student. • Educational services and facilities expense increased $0.9 million, or 7.8% to $11.8 million for the three months ended June 30, 2022 from 11.0 million in the prior year comparable period. Increased costs were primarily concentrated in instructional expense and facilities expense. Additional instructional expenses were primarily driven by salary increases due to market adjustments and larger staffing levels. Facility expense increases were primarily due to additional spending for common area maintenance quarter over quarter. • Selling, general and administrative expenses increased $1.2 million, or 12.2% to $10.7 million for the three months ended June 30, 2022 from $9.5 million in the prior year comparable period. The increase was primarily driven by additional bad debt expense driven by a decrease in our historical repayment rates. Corporate and Other This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses were $8.3 million and $10.8 million for the three months ended June 30, 2022 and 2021, respectively. The decrease in expense quarter over quarter was primarily driven by a reduction in incentive compensation and a gain resulting from the sale of our Suffield, Connecticut property, which was previously a former campus. Net proceeds received from the sale were approximately $2.4 million resulting in a $0.2 million gain in the current quarter. 28 Index The following table presents results for our two reportable segments for the six months ended June 30, 2022 and 2021: Six Months Ended June 30, 2022 2021 % Change Revenue: Transportation and Skilled Trades $ 116,758 $ 112,636 3.7 % Healthcare and Other Professions 47,939 45,825 4.6 % Total $ 164,697 $ 158,461 3.9 % Operating Income (loss): Transportation and Skilled Trades $ 14,340 $ 23,581 -39.2 % Healthcare and Other Professions 2,916 5,911 -50.7 % Corporate (17,186 ) (20,020 ) 14.2 % Total $ 70 $ 9,472 -99.3 % Starts: Transportation and Skilled Trades 4,761 4,848 -1.8 % Healthcare and Other Professions 2,444 2,403 1.7 % Total 7,205 7,251 -0.6 % Average Population: Transportation and Skilled Trades 8,417 8,036 4.7 % Leave of Absence - COVID-19 - (20 ) 100.0 % Transportation and Skilled Trades Excluding Leave of Absence - COVID-19 8,417 8,016 5.0 % Healthcare and Other Professions 4,344 4,459 -2.6 % Leave of Absence - COVID-19 - (65 ) 100.0 % Healthcare and Other Professions Excluding Leave of Absence - COVID-19 4,344 4,394 -1.1 % Total 12,761 12,495 2.1 % Total Excluding Leave of Absence - COVID-19 12,761 12,410 2.8 % End of Period Population: Transportation and Skilled Trades 8,765 8,467 3.5 % Leave of Absence - COVID-19 - (7 ) 100.0 % Transportation and Skilled Trades Excluding Leave of Absence - COVID-19 8,765 8,460 3.6 % Healthcare and Other Professions 4,237 4,410 -3.9 % Leave of Absence - COVID-19 - (10 ) 100.0 % Healthcare and Other Professions Excluding Leave of Absence - COVID-19 4,237 4,400 -3.7 % Total 13,002 12,877 1.0 % Total Excluding Leave of Absence - COVID-19 13,002 12,860 1.1 % 29 Index Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021 Transportation and Skilled Trades Operating income was $14.3 million for the six months ended June 30, 2022 compared to $23.6 million in the prior year comparable period. The change year over year was driven by the following factors: • Revenue increased $4.1 million, or 3.7% to $116.7 million for the six months ended June 30, 2022 from $112.6 million in the prior year comparable period. The increase in revenue was primarily driven by a 5.0% increase in average student population mainly driven by a higher beginning of period population in the current year of approximately 730 students. • Educational services and facilities expense increased $4.2 million, or 9.4% to $48.8 million for the six months ended June 30, 2022 from $44.6 million in the prior year comparable period. Increased costs were primarily concentrated in instructional expense and facilities expense. Instructional increases were primarily driven by salary increases mainly due to market adjustments and larger staffing levels as a result of population growth, program expansion and the return to normalized levels of in-person instruction post COVID-19 restrictions. In addition, consumable costs increased year over year, driven by on-going inflation in addition to supply chain shortages. Facility expense increases were the result of approximately $1.6 million of additional rent expense from the sale leaseback transaction relating to our Denver and Grand Prairie campuses consummated in the fourth quarter of 2021. Partially offsetting the additional facility costs are reductions in depreciation expense. • Selling, general and administrative expense increased $9.2 million, or 20.6% to $53.6 million for the six months ended June 30, 2022 from $44.4 million in the prior year comparable period. The increase was primarily driven by additional bad debt expense driven by a decrease in our historical repayment rates. Healthcare and Other Professions Operating income was $2.9 million for the six months ended June 30, 2022 compared to $5.9 million in the prior year comparable period. The change quarter over quarter was driven by the following factors: • Revenue increased $2.1 million, or 4.6% to $47.9 million for the six months ended June 30, 2022 from $45.8 million in the prior year comparable period. The increase in revenue was primarily the result of a 5.8% increase in average revenue per student. • Educational services and facilities expense increased $2.1 million, or 9.7% to $23.5 million for the six months ended June 30, 2022 from $21.4 million in the prior year comparable period. Increased costs were primarily concentrated in instructional expense and facilities expense. Additional instructional expenses were primarily driven by salary increases mainly due to market adjustments and larger staffing levels in addition to the return to normalized levels of in-person instruction post COVID-19 restrictions. Facility expense increases were primarily due to additional spending for common area maintenance year over year. • Selling, general and administrative expense increased $3.0 million, or 16.3% to 21.5 million for the six months ended June 30, 2022 from $18.5 million in the prior year comparable period. The increase was primarily driven by additional bad debt expense driven by a decrease in our historical repayment rates. Corporate and Other This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses were $17.2 million and $20.0 million for the six months ended June 30, 2022 and 2021, respectively. The decrease in expense year over year was primarily driven by a reduction in incentive compensation and a gain resulting from the sale of our Suffield, Connecticut property, which was previously a former campus. Net proceeds received from the sale were approximately $2.4 million resulting in a $0.2 million gain in the current year. Partially offsetting these cost savings is an increase in stock-based compensation and severance. 30 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 six months ended June 30, 2022 and 2021, respectively: Six Months Ended June 30, 2022 2022 2021 Net cash (used in) provided by operating activities $ (9,992 ) $ 1,067 Net cash used in investing activities (1,192 ) (3,516 ) Net cash used in financing activities (5,138 ) (2,570 ) As of June 30, 2022, the Company had cash and cash equivalents of $67.0 million compared to $83.3 million at December 31, 2021. The decrease in cash position from year end was the result of several factors including the seasonality of our business, incentive compensation payments, share repurchases made under the share repurchase plan and a decrease in net income. Partially offsetting the decrease in cash and cash equivalents was $2.4 million in net proceeds received as a result of the sale of a former campus located in Suffield, Connecticut. On May 24, 2022, the Company announced that its Board of Directors has authorized a share repurchase program of up to $30.0 million of the Company’s outstanding common stock. The repurchase program has been authorized for twelve months. As of June 30, 2022, the Company repurchased 414,963 shares at a cost of approximately $2.5 million. 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 75% of our cash receipts relating to revenues in 2021. 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 of the 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” of our Form 10-K. Operating Activities Net cash used in operating activities was $10.0 million for the six months ended June 30, 2022 compared to cash provided by operating activities of $1.1 million in the prior year comparable period. The cash used in or provided by operating activities is subject to changes in working capital, which at any point in time is subject to many variables including the seasonality of our business, timing of cash receipts and cash payments and vendor payments terms. For the six months ended June 30, 2022 net cash used in operating activities was driven by changes in working capital in addition to a decrease in net earnings year over year. Investing Activities Net cash used in investing activities was $1.2 million for the six months ended June 30, 2022 compared to $3.5 million in the prior year comparable period. The decrease in net cash used was driven by an increase in liquidity resulting from $2.4 million in net proceeds received from the sale of our former campus located in Suffield, Connecticut executed during the second quarter of the current year. 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. 31 Index We currently lease a majority of our campuses. We own our campus in Nashville, Tennessee, which currently is subject to a sale leaseback agreement (described elsewhere in this Form 10-Q) for the sale of the property which is currently expected to be consummated within the next fifteen months. Capital expenditures were 2% of revenues in 2021 and are expected to approximate 3% of revenues in 2022. We expect to fund future capital expenditures with cash generated from operating activities and cash on hand. Financing Activities Net cash used in financing activities was $5.1 million for the six months ended June 30, 2022 compared to $2.6 million in the prior year comparable period. The increase in net cash used of $2.5 million was driven by the implementation of a share repurchase program during the second quarter of the current year. Credit Facility On November 14, 2019, the Company entered into a 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”). Initially, the Credit Facility was 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”). 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 maturing on the same date as the Term Loan. Under the terms of the Credit Facility accrued interest on each loan is payable monthly in arrears with the Term Loan and the Delayed Draw Term Loan bearing interest at a floating interest rate based on the then one-month London Interbank Offered Rate (“LIBOR”) plus 3.50% and subject to a LIBOR interest rate floor of 0.25% 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 0.50% with a floor of 4.0%. Line of Credit Loans will bear interest at a floating interest rate based on the Lender’s prime rate of interest. Letters of credit issued under the Revolving Loan reduce, on a dollar-for-dollar basis, the availability of borrowings under the Revolving Loan. Letters of credit are charged an annual fee equal to (i) an applicable margin determined by the leverage ratio of the Company less (ii) 0.25%, paid quarterly in arrears, in addition to the Lender’s customary fees for issuance, amendment and other standard fees. Borrowings under the Line of Credit Loan are secured by cash collateral. The Lender receives an unused facility fee of 0.50% per annum payable quarterly in arrears on the unused portions of the Revolving Loan and the Line of Credit Loan. In addition to the foregoing, the Credit Agreement contains customary representations, warranties and affirmative and negative covenants (including financial covenants that (i) restrict capital expenditures, (ii) restrict leverage, (iii) require maintaining minimum tangible net worth, (iv) require maintaining a minimum fixed charge coverage ratio and (v) require the maintenance of a minimum of $5 million in quarterly average aggregate balances on deposit with the Lender, which, if not maintained, will result in the assessment of a quarterly fee of $12,500), as well as events of default customary for facilities of this type. 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 to increase the amount of permitted cash dividends that the Company can pay on its Series A Preferred Stock. As further discussed below, the Credit Facility was 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. 32 Index On September 23, 2021, in connection with entering into the agreements relating to the sale leaseback transaction for the Company’s Denver, Grand Prairie and Nashville campuses (collectively, the “Property Transactions”), the Company and certain of its subsidiaries entered into a Consent and Waiver Letter Agreement (the “Consent Agreement”) to the Company’s Credit Agreement with its lender. The Consent Agreement provides the Lender’s consent to the Property Transactions and waives certain covenants in the Credit Agreement, subject to certain specified conditions. In addition, in connection with the consummation of the Property Transactions, the Lender released its mortgages and other liens on the subject-properties upon the Company’s payment in full of the outstanding principal and accrued interest on the Term Loan and any swap obligations arising from any swap transaction. Upon the consummation of the Property Transaction on October 29, 2021 the Company paid the Lender approximately $16.7 million in repayment of the Term Loan and the swap termination fee and no further borrowings may be made under the Term Loan or the Delayed Draw Term Loan. Further, during the second quarter of 2022, the Company sold a property located in Suffield, Connecticut for net proceeds of approximately $2.4 million. Prior to the consummation of the transaction, Lincoln obtained consent from the Lender to enter into the sale of this property. As of June 30, 2022, and December 31, 2021, the Company had zero debt outstanding under the Credit Facility for both periods and was in compliance with all debt covenants. As of June 30, 2022, and December 31, 2021, letters of credit in the aggregate outstanding principal amount of $4.0 million and $4.0 million, respectively, were outstanding under the Credit Facility. On August 5, 2022, the Company entered into a third amendment to its Credit Agreement with its lender (the “Third Amendment”), in order to extend the maturity date of the revolving loan thereunder through November 14, 2023. The foregoing description of the Third Amendment is not complete and is qualified in its entirety by reference to the Third Amendment which is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q and is incorporated herein by reference. Contractual Obligations Current portion of Long-Term Debt, Long-Term Debt and Lease Commitments. As of June 30, 2022, we have no debt outstanding. We lease offices, educational facilities and various items of equipment for varying periods through the year 2041 at basic annual rentals (excluding taxes, insurance, and other expenses under certain leases). As of June 30, 2022, we had outstanding loan principal commitments to our active students of $30.0 million. These are institutional loans and no cash is advanced to students. The full loan amount is not guaranteed unless the student completes the program. The institutional loans are considered commitments because the students are packaged to fund their education using these funds and they are not reported on our financial statements. Regulatory Updates Borrower Defense to Repayment Regulations . On July 1, 2020, the DOE’s previously published final Borrower Defense to Repayment regulations became effective. Among other things, these regulations amended the processes for borrowers to receive from the 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 regulations also modify certain components of the financial responsibility regulations, including the list of triggering events that could result in the DOE determining that the institution lacks financial responsibility and must submit to the DOE a letter of credit or other form of acceptable financial protection and accept other conditions on the institution’s Title IV Program eligibility. See Form 10-K at Part I, Item 1. “Business - Regulatory Environment – Financial Responsibility Standards.” The final regulations also generally permit the use of arbitration clauses and class action waivers while requiring institutions to make certain disclosures to students. 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 Form 10-K at Part I, Item 1. “Business - Regulatory Environment – Financial Responsibility Standards.” Moreover, Congress or the DOE could enact or establish new laws or regulations that could restore prior versions of the borrower defense to repayment requirements or similar and potentially stricter requirements. On July 13, 2022, the DOE published proposed regulations on borrower defense to repayment and other topics. The proposed regulations are subject to a notice and comment period during which the public may comment on the proposed regulations and the DOE may respond to such comments and ultimately publish final regulations. The proposed regulations regarding borrower defense to repayment and regarding closed school loan discharges are extensive and generally make it easier for borrowers to obtain discharges of student loans and for the DOE to assess liabilities and other sanctions on institutions based on the loan discharges. Among other things, the proposed borrower defense to repayment regulations if adopted would establish a new process for evaluating borrower applications for loan discharges that would apply to all claims submitted or pending as of the anticipated July 1, 2023 effective date of the regulations. The proposed regulations would make it easier for borrowers to obtain loan discharges and for the DOE to recoup the costs of the discharges from the institutions. The new process would differ from the current regulations that establish a separate process for each of 3 categories of loans depending on the date the loans were disbursed to students (i.e., prior to July 1, 2017, between July 1, 2017 and June 30, 2020, and on or after July 1, 2020). As a result, the proposed new process would apply not just to loans disbursed on or after July 1, 2023, but also to older loans as long as the discharge requests are still pending as of July 1, 2023 or are submitted on or after July 1, 2023. 33 Index The proposed regulations expand the types of conduct that could result in a discharge of student loans including: 1) an expanded list of substantial misrepresentations, 2) a new section regarding substantial omissions of fact, 3) breaches of contract, 4) a new section regarding aggressive and deceptive recruitment, or 5) state or federal judgments or final DOE actions that could result in a borrower defense claim. Some of these forms of conduct also could result in other sanctions against the institutions. See Form 10-K at Part I, Item 1. “Business – Regulatory Environment – Substantial Misrepresentation.” The proposed regulations also make it easier for borrowers to qualify for loan discharges by establishing a presumption that borrowers reasonably relied on misrepresentations or omissions of fact, in some cases to establish a borrower defense to repayment claim based on a separate state law standard if the DOE does not approve their claims based on one of the other types of conduct, and it provides the DOE with the discretion to reopen its decisions at any time in accordance with regulatory requirements. The DOE generally is required to publish final regulations by November 1 in order for the regulations to become effective on July 1 of the following year. We cannot predict the ultimate timing or content of the regulations that are anticipated to emerge from this process. The final regulations could result in new requirements that would make it easier for borrowers to obtain discharges of their loans and for the DOE to recover liabilities from institutions and impose other sanctions. The implementation of new borrower defense to repayment regulations by the DOE and the enforcement of the existing borrower defense to repayment regulations could have a material adverse effect on our business and results of operations. See Form 10-K at Part I, Item 1. “Business – Regulatory Environment – Negotiated Rulemaking.” 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 would provide to us the applications and allow us the opportunity to submit responses to them. 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 have received the borrower application claims and have completed the process of thoroughly reviewing and responding to each borrower application as well as providing information in response to the DOE’s requests. 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. If the proposed borrower defense to repayment regulations take effect on July 1, 2023 and if any or all of the borrower defense to repayment applications remain pending, the DOE could attempt to apply the new regulations to the pending applications which could increase the likelihood of the DOE granting the applications because the proposed regulations are more favorable to borrowers. 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 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. On June 22, 2022, the DOE and plaintiffs in a lawsuit before a federal court in California submitted a proposed settlement agreement to the court. The plaintiffs contend, among other things, that the DOE has failed to timely decide and resolve borrower defense to repayment applications submitted to the DOE. If approved, the settlement would result in full discharge and refund payments to covered student borrowers who have asserted a borrower defense to repayment to the DOE and whose borrower defense claims have not yet been granted or denied on the merits. The lawsuit is a class action against the DOE submitted by a group of students, none of whom attended any of our institutions. We were not a party to the lawsuit. The plaintiffs requested the court to compel the DOE to start approving or denying the pending applications. The court granted class certification and defined the class of plaintiffs generally to include all people who borrowed a Title IV Direct loan or FFEL loan, who have asserted a borrower defense to repayment claim to the DOE, and whose borrower defense claim has not been granted or denied on the merits. This includes an unidentified number of student borrowers who attended one of our institutions. 34 Index The proposed settlement agreement includes a long list of institutions including each of our institutions. The DOE would agree under the proposed settlement agreement to discharge loans and refund all prior loan payments to each class member with loan debt associated with an institution on the list (including our institutions), including borrowers whose applications the DOE previously denied after October 30, 2019. The DOE and the plaintiffs stated in a court filing that this provision is intended to provide for automatic relief for students at the listed schools which they estimate to total 200,000 class members. We anticipate that the DOE believes that the class includes the borrowers with claims to which we submitted responses to the DOE. The parties also stated that the DOE has determined that attendance at one of the institutions on the list justifies presumptive relief based on strong indicia regarding substantial misconduct by the institutions, whether credibly alleged or in some instances proven, and the high rate of class members with applications related to the listed schools. The proposed settlement agreement provides a separate process for reviewing claims associated with schools not on the list. It is unclear whether the DOE would seek to impose liabilities on us or other schools – or take other actions or impose other sanctions on us or other schools based on relief provided to students under the proposed settlement agreement (particularly if the DOE provides relief without evaluating or accounting for legal and factual information provided to the DOE by us and other schools). On July 13, 2022, we and one other company submitted a motion to intervene in the lawsuit. Certain other school companies submitted separate motions to intervene in the lawsuit. We submitted the motion in order to protect our interests in the finalization and implementation of any settlement agreement the court might approve. We noted in the motion that the proposed settlement agreement introduced, for the first time, the prospect that the DOE would “automatically” and fully discharge loans and refund payments to student borrowers without adjudication of the merits of the students’ borrower-defense applications in accordance with the DOE’s borrower-defense regulations and without ensuring that we and other institutions can defend against allegations asserted in individual borrower-defense applications. In addition, we also asserted that it would be unlawful and inappropriate if the DOE sought recoupment against us based on loans that were forgiven under the proposed settlement agreement without providing us an opportunity to address the claims and accounting for our responses to the claims as we believe is required by the regulations. We also asserted that the lawsuit and the potential loan discharges could result in reputational harm to us and our institutions and could result in other actions against us by other federal and state agencies or by current and former students. The court granted preliminary approval of the proposed settlement agreement on August 4, 2022, and also tentatively granted our motion for permissive intervention. The proposed settlement agreement is subject to further review by the court before final approval of the proposed settlement agreement. We likely will have an opportunity to file a brief opposing the final approval. The court has scheduled a final approval hearing for November 3, 2022, and we intend to participate in the hearing and present arguments. We cannot predict whether the court will provide final approval of the proposed settlement agreement or whether the DOE and plaintiffs will make amendments to the proposed settlement agreement. If the proposed settlement agreement as it is currently drafted receives final approval by the court, the DOE is expected to discharge all of the pending borrower defense applications concerning us without evaluating or accounting for any of the legal or factual grounds that we provided for contesting the applications that were provided to us. If the DOE discharges the loans and attempts to recoup from us the discharged loan amounts, we would consider options for challenging the legal and factual basis for attempting to recoup these 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. The “90/10 Rule.” Under the Higher Education Act, a proprietary institution that derives more than 90% of its total revenue from Title IV Programs (its “90/10 Rule percentage”) 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. See Form 10K at Part I, Item 1. “Business – Regulatory Environment – The 90/10 Rule.” 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, including a potential requirement to submit a letter of credit. See Form 10K at Part I, Item 1. “Business - Regulatory Environment – Financial Responsibility Standards.” If an institution violated the 90/10 Rule and became ineligible to participate in Title IV Programs but continued to disburse Title IV Program funds, the DOE would require the institution to repay all Title IV Program funds received by the institution after the effective date of the loss of eligibility. In March 2021, the American Rescue Plan Act of 2021 (“ARPA”) was signed into law. Among other provisions, the ARPA includes a provision that 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 Program 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 Program funds and applicable “Federal funds” revenue in a fiscal year to no more than 90% 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 from which we derived approximately 7% of our revenues on a cash basis in 2021. 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. Accordingly, the ARPA change to the 90/10 rule is not expected to apply to our 90/10 rule calculations until 2024 relating to our fiscal year ended 2023. Beginning in January 2022, the DOE convened negotiated rulemaking committee meetings on a variety of topics including the 90/10 rule. The committee reached consensus on proposed 90/10 rule regulations during meetings in March 2022. 35 Index On July 28, 2022, the DOE published proposed regulations regarding the 90/10 rule among other topics. See 10-Q at “Negotiated Rulemaking.” The proposed 90/10 rule regulations contain several new and amended provisions on a variety of topics including, among other things, confirming that the rules apply to fiscal years ending on or after January 1, 2023; noting that the DOE plans to identify the types of Federal funds to be included in the 90/10 rule in a notice in the Federal Register (which we anticipate will include a wide range of Federal student aid programs such as the veterans’ benefits programs); requiring institutions to disburse funds that students are eligible to receive for a fiscal year before the end of the fiscal year rather than delaying disbursements until a subsequent fiscal year; updating requirements for counting revenues generated from certain educational activities associated with institutional programs, from certain non-Title IV eligible educational programs, and from institutional aid programs such as institutional loans, scholarships, and income share agreements; updating technical rules for the 90/10 rule calculation; including rules for sanctions for noncompliance with the 90/10 rule and for required notifications to students and the DOE by the institution of noncompliance with the 90/10 rule. The proposed regulations are subject to a notice and comment period before the DOE publishes final regulations after consideration of public comment. The comments are due by August 26, 2022. The DOE has stated that it intends to consider the comments and publish the final regulations in time for them to take effect on July 1, 2023. We cannot predict the ultimate timing and content of the final regulations, but the future regulations on 90/10 rule could have a material adverse effect on us and other schools like ours. Negotiated Rulemaking . The DOE periodically issues new regulations and guidance that can have an adverse effect on our institutions. 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. See Form 10-K, at Part I, Item 1. at “Business – Regulatory Environment – Negotiated Rulemaking.” The DOE initiated two additional negotiated rulemaking processes in 2021 and 2022, respectively. The first of the two negotiated rulemaking sessions took place during the last quarter of 2021 and resulted in proposed regulations published on July 13, 2022. See Form 10-K, at Part I, Item 1. “Business – Regulatory Environment - Borrower Defense to Repayment Regulations.” The second of the two negotiated rulemaking sessions began in January 2022 and finished during March 2022. The topics included the 90/10 rule, gainful employment, administrative capability standards, financial responsibility standards, eligibility certification procedures, changes in ownership, and ability to benefit. The DOE was expected to publish proposed regulations on each of these topics in the Federal Register for public comment during 2022. On June 22, 2022, the Office of Management and Budget (OMB) published a 2022 Spring Agenda with regulatory updates that indicated that specific Notices of Proposed Rulemaking (NPRMs) will be delayed until April 2023 for the following topics: gainful employment, administrative capability standards, financial responsibility standards, eligibility certification procedures, and ability to benefit. If the DOE does not publish proposed regulations until April 2023, the earliest general effective date for the final versions of regulations on these topics would be July 1, 2024. We cannot predict the ultimate timing and content of any final regulations on these topics. The regulatory updates published by the OMB indicate that proposed regulations regarding 90/10 and changes in ownership are expected to be published in 2022. See Form 10-K, at Part I, Item 1. “Business – Regulatory Environment – The 90/10 Rule” and at Form 10K, at Part I, Item 1. “Business – Regulatory Environment – Change of Control.” The proposed regulations would be subject to a notice and comment period before the DOE publishes the regulations in final. If the final regulations are published by or before November 1, 2022, then the regulations typically would not take effect until July 1, 2023. The new regulations that the DOE ultimately will publish and implement are expected to impose a broad range of additional requirements on institutions and especially on for-profit institutions like our schools. In turn, the new regulations are likely to increase the possibility that our schools could be subject to additional reporting requirements, to potential liabilities and sanctions such as letter of credit amounts, and to potential loss of Title IV eligibility if our efforts to modify our operations to comply with the new regulations are unsuccessful. 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 ongoing rulemaking process, 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. 36 Index Compliance with Regulatory Standards and Effect of Regulatory Violations . 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 (such as, for example, the Federal Trade Commission or the Consumer Financial Protection Board ), and by our accrediting commissions. See Form 10-K, at Part I, Item1. “Business – Regulatory Environment - Compliance with Regulatory Standards and Effect of Regulatory Violations” and at Form 10K, at Part I, Item 1. “Business – Regulatory Environment - Scrutiny of the For-Profit Postsecondary Education Sector.” In 2021, our New Britain, Iselin and Indianapolis institutions received final audit determination letters from the DOE in connection with the Title IV Program compliance audits conducted for the 2020 fiscal year. The letters contain findings of alleged noncompliance with certain Title IV Program requirements for each institution. The total amount of questioned funds in the reports were immaterial and had been repaid prior to the issuance of the final audit determination letters. In addition to the payment of the questioned amounts, the letters require the institutions to correct all of the deficiencies noted in the audit reports and require the auditor to comment in the 2021 fiscal year audit on the actions taken by the institutions in response to the findings and required actions. The letters indicate that repeat findings in future audits or failure to satisfactorily resolve the findings of the audit could lead to an adverse action. Each 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 including the possible imposition of a fine; the limitation, suspension, or termination of the institution’s Title IV Program 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 Program certification. Each 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. On December 16, 2020, the OIG began an audit of our Indianapolis institution to ensure that 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 cooperated with the OIG during its audit of the institution. In September 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 was inclusive of our response to the findings and other matters. The final audit report was sent to the DOE for further consideration. On May 3, 2022, the DOE issued a determination letter in connection with the 3 findings in the OIG final audit report. The DOE accepted our responses to each of the three findings and indicated in the letter that it considers each of the findings resolved and did not contain any further discussion of the 2 additional topics that were each classified as an “other matter.” The DOE is not seeking recovery of funds in connection with any of the 3 findings and did not impose any liabilities or other sanctions in the May 3, 2022 determination letter. On June 22, 2022, each of our three institutions received a separate letter from the DOE in connection with findings contained in our fiscal year 2020 compliance audit in connection with funds provided under HEERF. The DOE letters addressed two findings in the audits for our Iselin and New Britain institutions and three findings for our New Britain institution. Each DOE letter acknowledged our responses to the findings and deemed the findings to be resolved and closed. The DOE letters did not impose any liabilities or other sanctions. School Acquisitions. When a company acquires a school that is eligible to participate in Title IV Programs, that school undergoes a change of ownership resulting in a change of control as defined by the DOE. Upon such a change of control, a school’s eligibility to participate in Title IV Programs is generally suspended until it has applied for recertification by the DOE as an eligible school under its new ownership, which requires that the school also re-establish its state authorization and accreditation. See Form 10-K at Part I, Item 1. “Business – Regulatory Environment – School Acquisitions.” Thus, any plans to expand our business through acquisition of additional schools and have them certified by the DOE to participate in Title IV Programs must take into account the approval requirements of the DOE and the relevant state education agencies and accrediting commissions. On July 28, 2022, the DOE published proposed regulations on topics including changes in ownership that, among other things, may expand the requirements applicable to school acquisitions in ways that could make it more difficult to acquire additional schools. The DOE has stated that it intends to publish final regulations following a notice and comment period in time for the final regulations to take effect on July 1, 2023. We cannot predict the ultimate timing and content of new regulations that the DOE may publish and implement. See “Negotiated Rulemaking.” 37 Index Change of Control. In addition to school acquisitions, other types of transactions can also cause a change of control. The DOE, most state education agencies and our accrediting commissions have standards pertaining to the change of control of schools, but these standards are not uniform. See Form 10-K at Part 1, Item 1. “Business – Regulatory Environment – Change of Control.” A change of control could occur as a result of future transactions in which the Company or our schools are involved. Some corporate reorganizations and some changes in the board of directors of the Company are examples of such transactions. Moreover, the potential adverse effects of a change of control could influence future decisions by us and our shareholders regarding the sale, purchase, transfer, issuance or redemption of our stock. In addition, the adverse regulatory effect of a change of control also could discourage bids for shares of our common stock and could have an adverse effect on the market price of our shares. On July 28, 2022, the DOE published proposed regulations on topics including regulations associated with the ownership and control of Title IV participating schools in ways that could further influence future decisions by us or by current or prospective shareholders regarding the sale, purchase, transfer, issuance or redemption of our stock, or that could impact our ability or willingness to make certain organizational changes. The DOE has stated that it intends to publish final regulations following a notice and comment period in time for the final regulations to take effect on July 1, 2023. We cannot predict the ultimate timing and content of new regulations that the DOE may publish and implement. See “Negotiated Rulemaking.” 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 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 in any given year 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. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required by this item.