LINCOLN EDUCATIONAL SERVICES CORP 10-Q

Item 1. Financial Statements LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) (Unaudited) September 30, December 31, 2022 2021 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 69,619 $ 83,307 Accounts receivable, less allowance of $ 27,364 and $ 26,837 at September 30 , 2022 and December 31, 2021, respectively 31,902 26,159 Inventories 2,714 2,721 Prepaid expenses and other current assets 2,255 4,881 Assets held for sale 4,559 4,559 Total current assets 111,049 121,627 PROPERTY, EQUIPMENT AND FACILITIES - At cost, net of accumulated depreciation and amortization of $ 147,843 and $ 153,335 at September 30 , 2022 and December 31, 2021 , respectively 23,842 23,119 OTHER ASSETS: Noncurrent receivables, less allowance of $ 6,438 and $ 5,084 at September 30 , 2022 and December 31, 2021 , respectively 21,864 20,028 Deferred income taxes, net 23,644 23,708 Operating lease right-of-use assets 95,522 91,487 Goodwill 14,536 14,536 Other assets, net 819 794 Total other assets 156,385 150,553 TOTAL ASSETS $ 291,276 $ 295,299 See notes to unaudited condensed consolidated financial statements. 1 Index LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) (Unaudited) (Continued) September 30, December 31, 2022 2021 LIABILITIES, SERIES A CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Unearned tuition $ 22,744 $ 25,405 Accounts payable 16,242 12,297 Accrued expenses 10,038 15,669 Income taxes payable 514 1,017 Current portion of operating lease liabilities 10,313 11,479 Other short-term liabilities 32 15 Total current liabilities 59,883 65,882 NONCURRENT LIABILITIES: Pension plan liabilities 1,250 1,607 Long-term portion of operating lease liabilities 91,999 86,410 Total liabilities 153,132 153,899 COMMITMENTS AND CONTINGENCIES SERIES A CONVERTIBLE PREFERRED STOCK Preferred stock, no par value - 10,000,000 shares authorized, Series A convertible preferred shares, 12,700 shares issued and outstanding at September 30 , 2022 and December 31, 2021 11,982 11,982 STOCKHOLDERS’ EQUITY: Common stock, no par value - authorized: 100,000,000 shares at September 30 , 2022 and December 31, 2021 ; issued and outstanding: 26,255,580 shares at September 30 , 2022 and 27,000,687 shares at December 31, 2021 51,784 141,377 Additional paid-in capital 32,814 32,439 Treasury stock at cost - 0 and 5,910,541 shares at September 30 , 2022 and December 31, 2021 , respectively - ( 82,860 ) Retained earnings 42,865 39,702 Accumulated other comprehensive loss ( 1,301 ) ( 1,240 ) Total stockholders’ equity 126,162 129,418 TOTAL LIABILITIES, SERIES A CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITY $ 291,276 $ 295,299 See notes to unaudited condensed consolidated financial statements. 2 Index LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 REVENUE $ 91,813 $ 89,059 $ 256,510 $ 247,520 COSTS AND EXPENSES: Educational services and facilities 39,933 38,105 112,234 104,143 Selling, general and administrative 46,984 45,209 139,503 128,159 Loss (gain) on disposition of assets 16 - ( 178 ) 1 Total costs & expenses 86,933 83,314 251,559 232,303 OPERATING INCOME 4,880 5,745 4,951 15,217 OTHER: Interest expense ( 36 ) ( 292 ) ( 114 ) ( 874 ) INCOME BEFORE INCOME TAXES 4,844 5,453 4,837 14,343 PROVISION FOR INCOME TAXES 1,300 1,614 761 3,589 NET INCOME $ 3,544 $ 3,839 $ 4,076 $ 10,754 PREFERRED STOCK DIVIDENDS 304 304 912 912 INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 3,240 $ 3,535 $ 3,164 $ 9,842 Basic and diluted Net income per common share $ 0.10 $ 0.11 $ 0.10 $ 0.30 Weighted average number of common shares outstanding: Basic and diluted 25,381 25,135 25,692 25,043 See notes to unaudited condensed consolidated financial statements. 3 Index LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Net income $ 3,544 $ 3,839 $ 4,076 $ 10,754 Other comprehensive income (loss) Derivative qualifying as a cash flow hedge, net of taxes ( nil ) - 65 - 326 Employee pension plan adjustments, net of taxes ( nil ) ( 21 ) ( 134 ) ( 61 ) ( 403 ) Comprehensive income $ 3,523 $ 3,770 $ 4,015 $ 10,677 See notes to unaudited condensed consolidated financial statements. 4 Index LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (In thousands, except share amounts) (Unaudited) Stockholders’ Equity Accumulated Series A Additional Other Convertible Common Stock Paid-in Treasury Retained Comprehensive Preferred Stock Shares Amount Capital Stock Earnings Loss Total Shares Amount BALANCE - January 1, 2022 27,000,687 $ 141,377 $ 32,439 $ ( 82,860 ) $ 39,702 $ ( 1,240 ) $ 129,418 12,700 $ 11,982 Net income - - - - 272 - 272 - - Preferred stock dividend - - - - ( 304 ) - ( 304 ) - - Employee pension plan adjustments - - - - - ( 30 ) ( 30 ) - - Stock-based compensation expense Restricted stock 528,121 - 1,239 - - - 1,239 - - Net share settlement for equity-based compensation ( 268,654 ) - ( 1,992 ) - - - ( 1,992 ) - - BALANCE - March 31, 2022 27,260,154 141,377 31,686 ( 82,860 ) 39,670 ( 1,270 ) 128,603 12,700 11,982 Net income - - - - 259 - 259 - - Preferred stock dividend - - - - ( 304 ) - ( 304 ) - - Employee pension plan adjustments - - - - - ( 10 ) ( 10 ) - - Stock-based compensation expense Restricted stock 78,829 - 491 - - - 491 - - Treasury stock cancellation - ( 82,860 ) - 82,860 - - - - - Share repurchase ( 414,963 ) ( 2,538 ) - - - - ( 2,538 ) - - BALANCE - June 30, 2022 26,924,020 55,979 32,177 - 39,625 ( 1,280 ) 126,501 12,700 11,982 Net income - - - - 3,544 - 3,544 - - Preferred stock dividends - - - - ( 304 ) - ( 304 ) - - Employee pension plan adjustments - - - - - ( 21 ) ( 21 ) - - Stock-based compensation expense Restricted stock - - 637 - - - 637 - - Share repurchase ( 668,440 ) ( 4,195 ) - - - - ( 4,195 ) - - BALANCE - September 30, 2022 26,255,580 $ 51,784 $ 32,814 $ - $ 42,865 $ ( 1,301 ) $ 126,162 12,700 $ 11,982 Stockholders’ Equity Accumulated Series A Additional Other Convertible Common Stock Paid-in Treasury Retained Comprehensive Preferred Stock Shares Amount Capital Stock Earnings Loss Total Shares Amount BALANCE - January 1, 2021 26,476,329 $ 141,377 $ 30,512 $ ( 82,860 ) $ 6,203 $ ( 4,165 ) $ 91,067 12,700 $ 11,982 Net income - - - - 4,489 - 4,489 - - Preferred stock dividend - - - - ( 304 ) - ( 304 ) - - Employee pension plan adjustments - - - - - ( 134 ) ( 134 ) - - Derivative qualifying as cash flow hedge - - - - - 211 211 - - Stock-based compensation expense Restricted stock 574,614 - 493 - - - 493 - - Net share settlement for equity-based compensation ( 154,973 ) - ( 962 ) - - - ( 962 ) - - BALANCE - March 31, 2021 26,895,970 141,377 30,043 ( 82,860 ) 10,388 ( 4,088 ) 94,860 12,700 11,982 Net income - - - - 2,426 - 2,426 - - Preferred stock dividend - - - - ( 304 ) - ( 304 ) - - Employee pension plan adjustments - - - - - ( 134 ) ( 134 ) - - Derivative qualifying as cash flow hedge - - - - - 49 49 - - Stock-based compensation expense Restricted stock 76,195 - 844 - - - 844 - - BALANCE - June 30, 2021 26,972,165 141,377 30,887 ( 82,860 ) 12,510 ( 4,173 ) 97,741 12,700 11,982 Net income - - - - 3,839 - 3,839 - - Preferred stock dividends - - - - ( 304 ) - ( 304 ) - - Employee pension plan adjustments - - - - - ( 134 ) ( 134 ) - - Derivative qualifying as cash flow hedge - - - - - 65 65 - - Stock-based compensation expense Restricted stock 6,267 - 756 - - - 756 - - BALANCE - September 30, 2021 26,978,432 $ 141,377 $ 31,643 $ ( 82,860 ) $ 16,045 $ ( 4,242 ) $ 101,963 12,700 $ 11,982 See notes to unaudited condensed consolidated financial statements. 5 Index LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 30, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,076 $ 10,754 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,618 5,620 Amortization of deferred finance charges - 136 Deferred income taxes 64 3,636 (Gain) loss on disposition of assets ( 178 ) 1 Fixed asset donations ( 245 ) ( 2,050 ) Provision for doubtful accounts 24,888 19,816 Stock-based compensation expense 2,367 2,093 (Increase) decrease in assets: Accounts receivable ( 32,467 ) ( 22,122 ) Inventories 7 ( 761 ) Prepaid income taxes and income taxes payable ( 503 ) ( 729 ) Prepaid expenses and current assets 2,550 725 Other assets, net 329 274 Increase (decrease) in liabilities: Accounts payable 3,800 ( 186 ) Accrued expenses ( 5,631 ) ( 914 ) Unearned tuition ( 2,661 ) 1,238 Other liabilities ( 402 ) 219 Total adjustments ( 3,464 ) 6,996 Net cash provided by operating activities 612 17,750 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 7,053 ) ( 5,252 ) Proceeds from sale of property and equipment 2,390 - Net cash used in investing activities ( 4,663 ) ( 5,252 ) CASH FLOWS FROM FINANCING ACTIVITIES: Payments on borrowings - ( 1,500 ) Dividend payment for preferred stock ( 912 ) ( 912 ) Share repurchase ( 6,733 ) - Net share settlement for equity-based compensation ( 1,992 ) ( 962 ) Net cash used in financing activities ( 9,637 ) ( 3,374 ) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ( 13,688 ) 9,124 CASH AND CASH EQUIVALENTS —Beginning of period 83,307 38,026 CASH AND CASH EQUIVALENTS—End of period $ 69,619 $ 47,150 See notes to unaudited condensed consolidated financial statements. 6 Index LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) (Continued) Nine Months Ended September 30, 2022 2021 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for: Interest $ 132 $ 795 Income taxes $ 1,216 $ 681 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Liabilities accrued for or noncash additions of fixed assets $ 501 $ 2,684 See notes to unaudited condensed consolidated financial statements. 7 Index LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 (In thousands, except share and per share amounts and unless otherwise stated) 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Business Activities - Lincoln Educational Services Corporation and its subsidiaries (collectively, the “Company”, “we”, “our” and “us”, as applicable) provide diversified career-oriented post-secondary education to recent high school graduates and working adults. The Company, which currently operates 22 schools in 14 states, offers programs in automotive technology, skilled trades (which include HVAC, welding and computerized numerical control and electronic systems technology, among other programs), healthcare services (which include nursing, dental assistant and medical administrative assistant, among other programs), hospitality services (which include culinary, therapeutic massage, cosmetology and aesthetics) and information technology. The schools operate under Lincoln Technical Institute, Lincoln College of Technology, Lincoln Culinary Institute, and Euphoria Institute of Beauty Arts and Sciences and associated brand names. Most of the campuses serve major metropolitan markets and each typically offers courses in multiple areas of study. Five of the campuses are destination schools, which attract students from across the United States and, in some cases, from abroad. The Company’s other campuses primarily attract students from their local communities and surrounding areas. All of the campuses are nationally or regionally accredited and are eligible to participate in federal financial aid programs by the U.S. Department of Education (the “DOE” or the “Department”) and applicable state education agencies and accrediting commissions which allow students to apply for and access federal student loans as well as other forms of financial aid. The Company’s business is organized into two reportable business segments: (a) Transportation and Skilled Trades, and (b) Healthcare and Other Professions (“HOPS”). Basis of Presentation – The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements. Certain information and footnote disclosures normally included in annual financial statements have been omitted or condensed pursuant to such regulations. These financial statements, which should be read in conjunction with the December 31, 2021 audited consolidated financial statements and notes thereto and related disclosures of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 ( “ Form 10-K ” ), reflect all adjustments, consisting of normal recurring adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows for such periods. The results of operations for the nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the full fiscal year ending December 31, 2022. The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Use of Estimates in the Preparation of Financial Statements – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. On an ongoing basis, the Company evaluates the estimates and assumptions, including those used to determine the incremental borrowing rate to calculate lease liabilities and right-of-use (“ROU”) assets, lease term to calculate lease cost, revenue recognition, bad debts, impairments, useful lives of fixed assets, income taxes, benefit plans and certain accruals. Actual results could differ from those estimates. New Accounting Pronouncements – In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08, “Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”. This amendment introduced the requirement for an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with the requirements of FASB Accounting Standards Codification (“ASC”) “Topic 606, Revenue from Contracts with Customers”, rather than at fair value. The Company has evaluated the ASU and has determined that there is no impact on its condensed consolidated financial statements and related disclosures. In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provided temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provided optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It was intended to help stakeholders during the global market-wide reference rate transition period. In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope” which clarified that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company has evaluated the ASU and has determined that there is no impact on its condensed consolidated financial statements and related disclosure s. 8 Index In August 2020, the FASB issued ASU 2020-06, “ Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ”. This ASU simplified the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU removed separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature and hence most of the instruments will be accounted for as a single model (either debt or equity). The ASU also states that entities must apply the if-converted method to all convertible instruments for calculation of diluted EPS and the treasury stock method is no longer available. An entity can use either a full or modified retrospective approach to adopt the ASU’s guidance. ASU No. 2020-06 is effective for the Company as a smaller reporting company for fiscal years beginning after December 15, 2023, and for interim periods within those fiscal years. For convertible instruments that include a down-round feature, entities may early adopt the amendments that apply to the down-round features if they have not yet adopted the amendments in ASU 2017-11. The Company has evaluated the ASU and has determined that there is no impact on its condensed consolidated financial statements and related disclosures. In June 2016, the FASB issued ASU 2016-13, “ Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ” and subsequently issued additional guidance that modified ASU 2016-13. The ASU and the subsequent modifications were identified as ASC Topic 326. The standard requires an entity to change its accounting approach in determining impairment of certain financial instruments, including trade receivables, from an “incurred loss” to a “current expected credit loss” model. Further, the FASB issued ASU No. 2019-04, ASU No. 2019-05 and ASU 2019-11 to provide additional guidance on the credit losses standard. In November 2019, FASB issued ASU No. 2019-10, “ Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) ”. This ASU deferred the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Additionally, in February and March 2020, the FASB issued ASU 2020-02, “F inancial Instruments—Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) ” ASU 2020-02 added a SEC paragraph pursuant to the issuance of SEC Staff Accounting Bulletin No. 119 on loan losses to FASB Codification Topic 326 and also updated the SEC section of the Codification for the change in the effective date of Topic 842. Early adoption is permitted. We are currently assessing the impact that these ASUs will have on our condensed consolidated financial statements and related disclosures. Income Taxes – The Company accounts for income taxes in accordance with ASC Topic 740, “ Income Taxes ” (“ASC 740”). This statement requires an asset and a liability approach for measuring deferred taxes based on temporary differences between the financial statement and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for years in which taxes are expected to be paid or recovered. In accordance with ASC 740, the Company assesses our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable. A valuation allowance is required to be established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. In accordance with ASC 740, our assessment considers whether there has been sufficient income in recent years and whether sufficient income is expected in future years in order to utilize the deferred tax asset. In evaluating the realizability of deferred income tax assets, the Company considers, among other things, historical levels of income, expected future income, the expected timing of the reversals of existing temporary reporting differences, and the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future income tax benefits. Significant judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on the Company’s consolidated financial position or results of operations. Changes in, among other things, income tax legislation, statutory income tax rates, or future income levels could materially impact the Company’s valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods. On August 16, 2022, the Inflation Reduction Act was enacted and signed into law. The act is a budget reconciliation package that includes significant changes relating to tax, climate change, energy, and health care. The tax provisions include, among other items, a corporate alternative minimum tax of 15%, an excise tax of 1% on corporate stock buy-backs, energy-related tax credits, and additional IRS funding. The Company does not expect the tax provisions of the act to have a material impact to our condensed consolidated financial statements. 9 Index During the three and nine months ended September 30, 2022 and 2021, the Company did no t recognize any interest or penalties expense associated with uncertain tax positions. Derivative Instruments - The Company records the fair value of derivative instruments as either assets or liabilities on the condensed consolidated balance sheet. The accounting for gains and losses resulting from changes in fair value is dependent on the use of the derivative and whether it is designated and qualifies for hedge accounting. All qualifying hedging activities are documented at the inception of the hedge and must meet the definition of highly effective in offsetting changes to future cash. The Company utilizes the change in variable cash flows method to evaluate hedge effectiveness quarterly. We record the fair value of the qualifying hedges in other long-term liabilities (for derivative liabilities) and other assets (for derivative assets). All unrealized gains and losses on derivatives that are designated and qualify for hedge accounting are reported in other comprehensive income (loss) and recognized when the underlying hedged transaction affects earnings. Changes in the fair value of these derivatives are recognized in other comprehensive income. The Company classifies the cash flows from a cash flow hedge within the same category as the cash flows from the items being hedged. 2. NET INCOME PER COMMON SHARE The Company presents basic and diluted income per common share using the two-class method which requires all outstanding Series A Preferred Stock and unvested restricted stock that contain rights to non-forfeitable dividends and therefore participate in undistributed income with common shareholders to be included in computing income per common share. Under the two-class method, net income is reduced by the amount of dividends declared in the period for each class of common stock and participating security. The remaining undistributed income is then allocated to common stock and participating securities, based on their respective rights to receive dividends. Series A Preferred Stock and unvested restricted stock contain non-forfeitable rights to dividends on an if-converted basis and on the same basis as common shares, respectively, and are considered participating securities. The Series A Preferred Stock and unvested restricted stock are not included in the computation of basic income per common share in periods in which we have a net loss, as the Series A Preferred Stock and unvested restricted stock are not contractually obligated to share in our net losses. However, the cumulative dividends on Series A Preferred Stock for the period decreases the income or increases the net loss allocated to common shareholders unless the dividend is paid in the period. Basic income per common share has been computed by dividing net income allocated to common shareholders by the weighted-average number of common shares outstanding. The basic and diluted net income amounts are the same for the three and nine months ended September 30, 2022 and 2021 as a result of the anti-dilutive impact of the potentially dilutive securities . The Company uses the more dilutive method of calculating the diluted income per share by applying the more dilutive of either (a) the treasury stock method, if-converted method, or (b) the two-class method in its diluted income per common share calculation. Potentially dilutive shares are determined by applying the treasury stock method to the assumed exercise of outstanding stock options and the assumed vesting of restricted stock. Potentially dilutive shares issuable upon conversion of the Series A Preferred Stock are calculated using the if-converted method. 10 Index The following is a reconciliation of the numerator and denominator of the diluted net income per share computations for the periods presented below: Three Months Ended Nine Months Ended September 30, September 30, (in thousands, except share data) 2022 2021 2022 2021 Numerator: Net income $ 3,544 $ 3,839 $ 4,076 $ 10,754 Less: preferred stock dividend ( 304 ) ( 304 ) ( 912 ) ( 912 ) Less: allocation to preferred stockholders ( 540 ) ( 582 ) ( 522 ) ( 1,629 ) Less: allocation to restricted stockholders ( 155 ) ( 232 ) ( 153 ) ( 634 ) Net income allocated to common stockholders $ 2,545 $ 2,721 $ 2,489 $ 7,579 Basic income per share: Denominator: Weighted average common shares outstanding 25,381,447 25,135,381 25,692,094 25,043,357 Basic income per share $ 0.10 $ 0.11 $ 0.10 $ 0.30 Diluted income per share: Denominator: Weighted average number of: Common shares outstanding 25,381,447 25,135,381 25,692,094 25,043,357 Dilutive potential common shares outstanding: Series A Preferred Stock - - - - Unvested restricted stock - - - - Dilutive shares outstanding 25,381,447 25,135,381 25,692,094 25,043,357 Diluted income per share $ 0.10 $ 0.11 $ 0.10 $ 0.30 The following table summarizes the potential weighted average shares of common stock that were excluded from the determination of our diluted shares outstanding as they were anti-dilutive: Three Months Ended Nine Months Ended September 30, September 30, (in thousands, except share data) 2022 2021 2022 2021 Series A Preferred Stock 5,381,356 5,381,356 5,381,356 5,381,356 Unvested restricted stock 1,548,265 815,383 1,582,493 823,662 6,929,621 6,196,739 6,963,849 6,205,018 3. REVENUE RECOGNITION Substantially all of our revenues are considered to be revenues from our contracts with students. The related accounts receivable balances are recorded in our condensed consolidated balance sheets as student accounts receivable. We do not have significant revenue recognized from performance obligations that were satisfied in prior periods, and we do not have any transaction price allocated to unsatisfied performance obligations other than in our unearned tuition. We record revenue for students who withdraw from our schools only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Unearned tuition represents contract liabilities primarily related to our tuition revenue. We have elected not to provide disclosure about transaction prices allocated to unsatisfied performance obligations if original contract durations are less than one-year, or if we have the right to consideration from a student in an amount that corresponds directly with the value provided to the student for performance obligations completed to date in accordance with ASU No. 2014-09, “ Revenue from Contracts with Customers (Topic 606)” . We have assessed the costs incurred to obtain a contract with a student and determined them to be immaterial. 11 Index Unearned tuition in the amount of $ 22.7 million and $ 25.4 million is recorded in the current liabilities section of the accompanying condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively. The change in this contract liability balance during the nine-month period ended September 30, 2022 is the result of payments received in advance of satisfying performance obligations, offset by revenue recognized during that period. Revenue recognized for the nine-month period ended September 30, 2022 that was included in the contract liability balance at the beginning of the year was $ 24.6 million. The following table depicts the timing of revenue recognition: Three months ended September 30, 2022 Nine months ended September 30, 2022 Transportation and Skilled Trades Segment Healthcare and Other Professions Segment Consolidated Transportation and Skilled Trades Segment Healthcare and Other Professions Segment Consolidated Timing of Revenue Recognition Services transferred at a point in time $ 6,059 $ 1,651 $ 7,710 $ 12,904 $ 4,570 $ 17,474 Services transferred over time 61,270 22,833 84,103 171,183 67,853 239,036 Total revenues $ 67,329 $ 24,484 $ 91,813 $ 184,087 $ 72,423 $ 256,510 Three months ended September 30, 2021 Nine months ended September 30, 2021 Transportation and Skilled Trades Segment Healthcare and Other Professions Segment Consolidated Transportation and Skilled Trades Segment Healthcare and Other Professions Segment Consolidated Timing of Revenue Recognition Services transferred at a point in time $ 6,203 $ 1,618 $ 7,821 $ 14,788 $ 4,234 $ 19,022 Services transferred over time 58,747 22,491 81,238 162,798 65,700 228,498 Total revenues $ 64,950 $ 24,109 $ 89,059 $ 177,586 $ 69,934 $ 247,520 4. LEASES The Company determines if an arrangement is a lease at inception. The Company considers any contract where there is an identified asset as to which the Company has the right to control its use in determining whether the contract contains a lease. An operating lease right-of-use (“ROU”) asset represents the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are to be recognized at the commencement date based on the present value of lease payments over the lease term. As all of the Company’s operating leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available on the commencement date in determining the present value of lease payments. We estimate the incremental borrowing rate based on a yield curve analysis, utilizing the interest rate derived from the fair value analysis of our credit facility and adjusting it for factors that appropriately reflect the profile of secured borrowing over the expected term of the lease. The operating lease ROU assets include any lease payments made prior to the rent commencement date and exclude lease incentives. Our leases have remaining lease terms of one year to 19 years . Lease terms may include options to extend the lease term used in determining the lease obligation when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments are recognized on a straight-line basis over the lease term for operating leases. See Note 13 which discusses the sale leaseback transaction relating to the Company’s Denver and Grand Prairie campuses which closed on October 29, 2021. On June 30, 2022, the Company executed a lease for approximately 55,000 square feet of space to serve as the Company’s new campus, in Atlanta, Georgia. The lease commenced on August 2022 with total payments due over the lease term, on an undiscounted basis of $ 12.2 million over the 12-year lease term. The lease contains two five-year renewal options that may be exercised by the Company at the end of the initial lease term. The Company had no involvement in the construction or design of the underlying asset and were not deemed to be in control of the asset prior to the lease commencement date. During the three months ended September 30, 2022, the Company incurred approximately $ 0.1 million in capital expenditures, mostly relating to architectural fees and approximately $ 0.1 million in rent. Our o perati ng lease cost for the three months ended September 30, 2022 and 2021 was $ 4.8 million and $ 3.8 million, respectively. Our operating lease cost for the nine months ended September 30, 2022 and 2021 was $ 14.1 million and $ 11.4 million, respectively. Our variable lease cost for the three and nine months ended September 30, 2022 was less than $ 0.1 million. The net change in ROU asset and operating lease liability is included in other assets in the condensed consolidated cash flows for the nine months ended September 30, 2022 and 2021. 12 Index Supplemental cash flow information and non-cash activity related to our operating leases are as follows: Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Operating cash flow information: Cash paid for amounts included in the measurement of operating lease liabilities $ 4,382 $ 3,972 $ 13,702 $ 11,009 Non-cash activity: Lease liabilities arising from obtaining right-of-use assets $ 5,844 $ 1,220 $ 12,561 $ 4,421 During the nine months ended September 30, 2022, the Company entered into two new leases and one lease modification that resulted in noncash re-measurement of the related ROU asset and operating lease liability of $ 12.6 million. This re-measurement includes the Atlanta, Georgia location, the lease of which commenced in August 2022. Weighted-average remaining lease term and discount rate for our operating leases is as follows: As of September 30, 2022 2021 Weighted-average remaining lease term 11.36 years 5.49 years Weighted-average discount rate 7.21 % 10.77 % Maturities of lease liabilities by fiscal year for our operating leases as of September 30, 2022 are as follows: Year ending December 31, 2022 (excluding the nine months ended September 30, 2022) $ 4,741 2023 16,167 2024 16,780 2025 14,841 2026 12,416 2027 9,532 Thereafter 69,499 Total lease payments 143,976 Less: imputed interest ( 41,664 ) Present value of lease liabilities $ 102,312 5. GOODWILL AND LONG-LIVED ASSETS The Company reviews the carrying value of its long-lived assets and identifiable intangibles for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. For other long-lived assets, including right-of-use lease assets, the Company evaluates assets for recoverability when there is an indication of potential impairment. If the undiscounted cash flows from a group of assets being evaluated is less than the carrying value of that group of assets, the fair value of the asset group is determined and the carrying value of the asset group is written down to fair value. When we perform the quantitative impairment test for long-lived assets, we examine estimated future cash flows using Level 3 inputs. These cash flows are evaluated by using weighted probability techniques as well as comparisons of past performance against projections. Assets may also be evaluated by identifying independent market values. If the Company determines that an asset’s carrying value is impaired, it will record a write-down of the carrying value of the asset and charge the impairment as an operating expense in the period in which the determination is made. As of September 30, 2022 and 2021 there were no long-lived asset impairments. 13 Index On December 31, 2021, as a result of impairment testing it was determined that there was an i mpairment of our property in Suffield, Connecticut of $ 0.7 million. The impairment was the result of an assessment of the current market value, obtained via third-party engagement, as compared to the current carrying value of the assets. The carrying value for the Suffield, Connecticut property was approximately $ 2.9 million. The fair value estimate provided indicated that the current value of the property was approximately $ 2.2 million. As such, the aforementioned $ 0.7 million impairment was recorded and the assets carrying value reduced. This property was sold during the second quarter of 2022, generating net proceeds of approximately $ 2.4 million and resulting in a gain on sale of asset of $ 0.2 million. The carrying amount of goodwill at September 30 , 2022 and 2021 is as follows: Gross Goodwill Balance Accumulated Impairment Losses Net Goodwill Balance Balance as of January 1, 2022 $ 117,176 $ ( 102,640 ) $ 14,536 Adjustments - - - Balance as of September 30 , 2022 $ 117,176 $ ( 102,640 ) $ 14,536 Gross Goodwill Balance Accumulated Impairment Losses Net Goodwill Balance Balance as of January 1, 2021 $ 117,176 $ ( 102,640 ) $ 14,536 Adjustments - - - Balance as of September 30 , 2021 $ 117,176 $ ( 102,640 ) $ 14,536 As of each of September 30 , 2022 and 2021, the goodwill balance of $ 14.5 million is related to the Transportation and Skilled Trades segment. 6. LONG-TERM DEBT 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 a 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 a 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 was 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 was no swap agreement. Revolving Loans bore 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 was to be repaid within 30 days of such borrowing, the Revolving Loan accrued interest at the Lender’s prime rate plus 0.50 % with a floor of 4.0 %. Line of Credit Loans bore interest at a floating interest rate based on the Lender’s prime rate of interest. Letters of credit issued under the Revolving Loan reduced, on a dollar-for-dollar basis, the availability of borrowings under the Revolving Loan. Letters of credit were 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 were secured by cash collateral. The Lender received 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. 14 Index In addition to the foregoing, the Credit Agreement contained customary representations, warranties, and affirmative and negative covenants (including financial covenants that (i) restricted capital expenditures, (ii) restricted leverage, (iii) required maintaining minimum tangible net worth, (iv) required maintaining a minimum fixed charge coverage ratio and (v) required the maintenance of a minimum of $ 5 million in quarterly average aggregate balances on deposit with the Lender, which, if not maintained, would 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 24-month s 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 24-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. 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 sec ond 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. Pursuant to certain amendments and modifications to the Credit Agreement and other loan documents, the Term Loan and the Delayed Draw Term Loan were paid off in full and on January 21, 2021, the Line of Credit expired by the terms, conditions and provisions of the Credit Agreement and the Credit Agreement was extended and would have matured on November 14, 2023. As of September 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 September 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. Subsequent to the end of the quarter, on November 4, 2022, the Company agreed with its Lender to terminate the Credit Agreement and the remaining Revolving Loan. The Lender has agreed to allow the Company’s existing letters of credit to remain outstanding provided that they are cash collateralized. 7. STOCKHOLDERS’ EQUITY Common Stock Holders of our common stock are entitled to receive dividends when and as declared by our Board of Directors and have the right to one vote per share on all matters requiring shareholder approval. The Company has no t declared or paid any cash dividends on our common stock since the Company’s Board of Directors discontinued our quarterly cash dividend program in February 2015. The Company has no current intentions to resume the payment of cash dividends to holders of common stock in the foreseeable future. Preferred Stock On November 14, 2019, the Company raised gross proceeds of $ 12.7 million from the sale of 12,700 shares of its newly designated Series A Convertible Preferred Stock, no par value per share (the “Series A Preferred Stock”). The Series A Preferred Stock was designated by the Company’s Board of Directors pursuant to a certificate of amendment to the Company’s amended and restated certificate of incorporation (the “Charter Amendment”). The liquidation preference associated with the Series A Preferred Stock was $ 1,000 per share as of December 31, 2021. Upon issuance each share of Series A Preferred Stock was convertible at $ 2.36 per share of common stock (as may be adjusted pursuant to the Charter Amendment, the “Conversion Price”) into 423,729 shares of common stock (the number of shares into which the Series A Preferred Stock is convertible at any time, the “Conversion Shares”). The Company incurred issuance costs of $ 0.7 million as part of this transaction. 15 Index The description below provides a summary of certain material terms of the Series A Preferred Stock: Securities Purchase Agreement. The Series A Preferred Stock was sold by the Company pursuant to a Securities Purchase Agreement dated as of November 14, 2019 (the “SPA”) among the Company, Juniper Targeted Opportunity Fund, L.P. and Juniper Targeted Opportunities, L.P. (together, the “Juniper Purchasers”) and Talanta Investment, Inc. (“Talanta,” together with the Juniper Purchasers, the “Investors”). Among other things, the SPA includes covenants relating to the appointment of a director to the Company’s Board of Directors to be selected solely by the holders of the Series A Preferred Stock. Dividends. Dividends on the Series A Preferred Stock (“Series A Dividends”), at the initial annual rate of 9.6 % is to be paid, in arrears, from the date of issuance quarterly on each December 31, March 31, June 30 and September 30 with September 30, 2020 being the first dividend payment date. The Company, at its option, may pay dividends either (a) in cash or (b) by increasing the number of Conversion Shares by the dollar amount of the dividend divided by the Conversion Price. The dividend rate is subject to increase (a) 2.4 % per annum on the fifth anniversary of the issuance of the Series A Preferred Stock and (b) by 2 % per annum but in no event above 14 % per annum should the Company fail to perform certain obligations under the Charter Amendment. The Series A Preferred Stock is not currently redeemable and may not become redeemable in the future. As a result, the Company is not required to re-measure the Series A Preferred Stock and does not accrete changes in the redemption value. As of September 30, 2022, and December 31, 2021, we paid $ 0.9 million and $ 1.2 million, respectively, in cash dividends on the outstanding shares of Series A Preferred Stock rather than increasing the number of Conversion Shares. Dividends are included in the condensed consolidated balance sheets within additional paid-in-capital when the Company maintains an accumulated deficit. Holders of Series A Preferred Stock Right to Convert into Common Stock. Each share of Series A Preferred Stock, at any time, is convertible into a number of shares of common stock equal to (i) the sum of (A) $ 1,000 (subject to adjustment as provided in the Charter Amendment) plus (B) the dollar amount of any declared Series A Dividends not paid in cash divided by (ii) the Conversion Price ($ 2.36 per share subject to anti-dilution adjustments) as of the applicable Conversion Date (as defined in the Charter Amendment). At all times, however, the number of Conversion Shares that can be issued to any holder of Series A Preferred Stock may not result in such holder and its affiliates owning more than 19.99 % of the total number of shares of common stock outstanding after giving effect to the conversion (the “Hard Cap”), unless prior shareholder approval is obtained or no longer required by the rules of the principal stock exchange on which the Company’s common stock trades. Mandatory Conversion. If, at any time following November 14, 2022, the volume weighted average price of the Company’s common stock equals or exceeds 2.25 times the Conversion Price (currently $ 5.31 per share) for a period of 20 consecutive trading days and during this period the average trading volume exceeds 20,000 shares of common stock, the Company may, at its option and subject to the Hard Cap, require that any or all of the then outstanding shares of Series A Preferred Stock be automatically converted into Conversion Shares. Redemption. Beginning November 14, 2024, the Company may redeem all or any of the Series A Preferred Stock for a cash price equal to the greater of (“Liquidation Preference”) (i) the sum of $ 1,000 (subject to adjustment as provided in the Charter Amendment) plus the dollar amount of any declared Series A Dividends not paid in cash and (ii) the value of the Conversion Shares were such Series A Preferred Stock converted (as determined in the Charter Amendment) without regard to the Hard Cap. Change of Control. In the event of certain changes of control, some of which are not in the Company’s control, as defined in the Charter Amendment as a “Fundamental Change” or a “Liquidation” (as defined in the Charter Amendment), the holders of Series A Preferred Stock shall be entitled to receive the Liquidation Preference, unless such Fundamental Change is a stock merger in which certain value and volume requirements are met, in which case the Series A Preferred Stock will be converted into common stock in connection with such stock merger. The Company has classified the Series A Preferred Stock as mezzanine equity on the condensed consolidated balance sheet based upon the terms of a change of control which could be outside the Company’s control. Voting. Holders of shares of Series A Preferred Stock are entitled to vote with the holders of shares of common stock and not as a separate class, at any annual or special meeting of shareholders of the Company, on an as-converted basis, in all cases subject to the Hard Cap. In addition, a majority of the voting power of the Series A Preferred Stock must approve certain significant actions of the Company, including (i) declaring a dividend or otherwise redeeming or repurchasing any shares of common stock and other junior securities, if any, subject to certain exceptions, (ii) incurring indebtedness, except for certain permitted indebtedness and (iii) creating a subsidiary other than a wholly-owned subsidiary. Additional Provisions. The Series A Preferred Stock is perpetual and, therefore, does not have a maturity date. The conversion price of the Series A Preferred Stock is subject to anti-dilution protections if the Company affects a stock split, stock dividend, subdivision, reclassification or combination of its common stock and certain other economically dilutive events. 16 Index Registration Rights Agreement. The Company also is a party to a Registration Rights Agreement (“RRA”) with the holders of the Series A Preferred Stock. The RRA provides for unlimited demand registration rights, of which there can be two underwritten offerings each for at least $ 5 million in gross proceeds, and piggyback registration rights, with respect to the Conversion Shares. In addition, the RRA obligated the Company to register “for the shelf” the resale of the Conversion Shares through the filing of a registration statement to such effect (the “Resale Shelf Registration Statement”) and have such Resale Shelf Registration Statement declared effective by the Securities and Exchange Commission (the “SEC”). The SEC declared the Resale Shelf Registration Statement effective on October 16, 2020. Restricted Stock The Company currently has three stock incentive plans: a Long-Term Incentive Plan (the “LTIP”), a Non-Employee Directors Restricted Stock Plan (the “Non-Employee Directors Plan”) and the Lincoln Educational Services Corporation 2020 Incentive Compensation Plan (the “2020 Plan”). 2020 Plan On March 26, 2020, the Board adopted the 2020 Plan to provide an incentive to certain directors, officers, employees and consultants of the Company to align their interests in the Company’s success with those of its shareholders through the grant of equity-based awards. On June 16, 2020, the shareholders of the Company approved the 2020 Plan. The 2020 Plan is administered by the Compensation Committee of the Board, or such other qualified committee appointed by the Board, who will, among other duties, have full power and authority to take all actions and to make all determinations required or provided for under the 2020 Plan. Pursuant to the 2020 Plan, the Company may grant options, share appreciation rights, restricted shares, restricted share units, incentive stock options and nonqualified stock options. Under the 2020 Plan, employees may surrender shares as payment of applicable income tax withholding on the vested restricted stock. The Plan has a duration of 10 years. Subject to adjustment as described in the 2020 Plan, the aggregate number of common shares available for issuance under the 2020 Plan was 2,000,000 shares. LTIP Under the LTIP, certain employees have received awards of restricted shares of common stock based on service and performance. The number of shares granted to each employee is based on the amount of the award and the fair market value of a share of common stock on the date of grant. The 2020 Plan makes it clear that there will be no new grants under the LTIP effective as of the date of shareholder approval, June 16, 2020. The 2020 Plan also states that the shares available under the 2020 Plan will be two million shares plus the number of shares remaining available under the LTIP. As no shares remain available under the LTIP there can be no additional grants under the LTIP. Grants under the LTIP remain in effect according to their terms. Therefore, those grants are subject to the particular award agreement relating thereto and to the LTIP to the extent that the prior plan provides rules relating to those grants. The LTIP remains in effect only to that extent. Non-Employee Directors Plan Pursuant to the Non-Employee Directors Plan, each non-employee director of the Company receives an annual award of restricted shares of common stock on the date of the Company’s annual meeting of shareholders. The number of shares granted to each non-employee director is based on the fair market value of a share of common stock on that date. The restricted shares vest on the first anniversary of the grant date. There is no restriction on the right to vote or the right to receive dividends with respect to any of such restricted shares. For the nine months ended September 30, 2022 and 2021, the Company completed a net share settlement for 268,654 and 154,973 restricted shares, respectively, on behalf of certain employees that participate in the LTIP upon the vesting of the restricted shares pursuant to the terms of the LTIP. The net share settlement was in connection with income taxes incurred on restricted shares that vested and were transferred to the employees during 2021 and/or 2020, creating taxable income for the employees. At the employees’ request, the Company has paid these taxes on behalf of the employees in exchange for the employees returning an equivalent value of restricted shares to the Company. These transactions resulted in a decrease of $ 2.0 million and less than $ 1.0 million for each of the three and nine months ended September 30, 2022 and 2021, respectively, to equity on the condensed consolidated balance sheets as the cash payment of the taxes effectively was a repurchase of the restricted shares granted in previous years. 17 Index The following is a summary of transactions pertaining to restricted stock: Shares Weighted Average Grant Date Fair Value Per Share Nonvested restricted stock outstanding at December 31, 2021 1,743,846 $ 3.89 Granted 606,950 7.21 Canceled - - Vested ( 802,530 ) 4.18 Nonvested restricted stock outstanding at September 30 , 2022 1,548,266 5.18 The restricted stock expense for the three months ended September 30, 2022 and 2021 was $ 0.6 million and $ 0.8 million, respectively. The restricted stock expense for the nine months ended September 30, 2022 and 2021 was $ 2.4 million and $ 2.1 million, respectively. The unrecognized restricted stock expense as of September 30, 2022 and December 31, 2021 was $ 8.0 million and $ 4.4 million, respectively. As of September 30, 2022, outstanding restricted shares under the Prior Plan had aggregate intrinsic value of $ 8.4 million. Stock Options The fair value of the stock options used to compute stock-based compensation is the estimated present value at the date of grant using the Black-Scholes option pricing model. The following is a summary of transactions pertaining to stock options: Shares Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term Aggregate Intrinsic Value (in thousands) Outstanding at December 31, 2021 81,000 $ 7.79 0.17 $ - Granted/Vested - - - - Canceled ( 81,000 ) 7.79 - - Outstanding at September 30 , 2022 - - - - Vested as of September 30 , 2022 - - - - Exercisable as of September 30 , 2022 - - - - As of September 30 , 2022 , there was no unrecognized pre-tax compensation expense. Share Repurchase Plan 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 . Purchases may be made, from time to time, in open-market transactions at prevailing market prices, in privately negotiated transactions or by other means as determined by the Company’s management and in accordance with applicable federal securities laws. The timing of purchases and the number of shares repurchased under the program will depend on a variety of factors including price, trading volume, corporate and regulatory requirements and market conditions. The Company retains the right to limit, terminate or extend the share repurchase program at any time without prior notice. During the three months ended September 30, 2022, the Company repurchased 668,440 shares of its common stock at an aggregate cost of approximately $ 4.2 million. During the nine months ended September 30, 2022, the Company repurchased 1,083,403 shares of its common stock at an aggregate cost of approximately $ 6.7 million. These shares were subsequently canceled and recorded as a reduction of common stock. 18 Index 8. INCOME TAXES The income tax provision for the three months ended September 30, 2022 and 2021 was $ 1.3 million, or 26.8 % of pre-tax income, compared to $ 1.6 million, or 29.6 % of pre-tax income, respectively. The income tax provision for the nine months ended September 30, 2022 and 2021 was approximately $ 0.8 million, or 15.7 % of pre-tax income, and approximately $ 3.6 million, or 25.0 % of pre-tax income, respectively. The decrease in effective tax rate was due to a higher discrete benefit relating to restricted stock vesting. 9. COMMITMENTS AND CONTINGENCIES In the ordinary conduct of its business, the Company is subject to certain lawsuits, investigations and claims, including, but not limited to, claims involving students or graduates and routine employment matters. Although the Company cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against it, the Company does not believe that any currently pending legal proceedings to which it is a party will have a material adverse effect on the Company’s business, financial condition, and results of operations or cash flows. 10. SEGMENTS We operate our business in two reportable segments: (a) the Transportation and Skilled Trades segment; and (b) the Healthcare and Other Professions 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 on a limited basis 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. 19 Index Summary financial information by reporting segment is as follows: For the Three Months Ended September 30, Revenue Operating income (Loss) 2022 % of Total 2021 % of Total 2022 2021 Transportation and Skilled Trades $ 67,329 73.3 % $ 64,950 72.9 % $ 11,768 $ 11,842 Healthcare and Other Professions 24,484 26.7 % 24,109 27.1 % 1,180 1,833 Corporate - - ( 8,068 ) ( 7,930 ) Total $ 91,813 100.0 % $ 89,059 100.0 % $ 4,880 $ 5,745 For the Nine Months Ended September 30, Revenue Operating income (Loss) 2022 % of Total 2021 % of Total 2022 2021 Transportation and Skilled Trades $ 184,087 71.8 % $ 177,586 71.7 % $ 26,108 $ 35,423 Healthcare and Other Professions 72,423 28.2 % 69,934 28.3 % 4,095 7,743 Corporate - - ( 25,252 ) ( 27,949 ) Total $ 256,510 100.0 % $ 247,520 100.0 % $ 4,951 $ 15,217 Total Assets September 30, 2022 December 31, 2021 Transportation and Skilled Trades $ 150,715 $ 156,531 Healthcare and Other Professions 36,263 33,959 Corporate 104,298 104,809 Total $ 291,276 $ 295,299 11. FAIR VALUE The accounting framework for determining fair value includes a hierarchy for ranking the quality and reliability of the information used to measure fair value, which enables the reader of the financial statements to assess the inputs used to develop those measurements. The fair value hierarchy consists of three tiers: Level 1: Defined as quoted market prices in active markets for identical assets or liabilities. Level 2: Defined as inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, model-based valuation techniques for which all significant assumptions are observable in the market or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3: Defined as unobservable inputs that are not corroborated by market data. The carrying amounts reported on the condensed consolidated balance sheet for Cash and cash equivalents approximate fair value because they are highly liquid. The carrying amounts reported on the condensed consolidated balance sheet for Prepaid expenses and other current assets, Accrued expenses and Other short-term liabilities approximate fair value due to the short-term nature of these items. Qualifying Hedge Derivative On November 14, 2019, in connection with its Credit Facility, the Company entered into an interest rate swap for the Term Loan with a notional amount of $ 20 million which expires on December 1, 2024. On October 29, 2021 the Term Loan was repaid and the interest rate swap was paid in full. 20 Index The loan had a 10 -year straight line amortization. A principal amount of $ 0.2 million was paid monthly. This interest rate swap converted the floating interest rate Term Loan to a fixed rate, plus a borrowing spread. The interest rate was variable based on LIBOR plus 3.50 % and the Company’s fixed rate is 5.36 %. The Company designated this interest rate swap as a cash flow hedge to hedge exposure resulting from the interest rate risk. The purpose of the hedge was to reduce the variability of the interest rate based on LIBOR. The Company managed this exposure within specified guidelines through the use of derivatives. All of our derivative instruments are utilized for risk management purposes, and the Company does not use derivatives for speculative trading purposes. The following summarizes the financial statement classification and amount of interest expense recognized on hedging instruments: Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Interest Expense Interest Rate Swap $ - $ 100 $ - $ 200 The following summarizes the effect of derivative instruments designated as hedging instruments in Other Comprehensive Income: Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Derivative qualifying as cash flow hedge Interest rate swap income $ - $ 65 $ - $ 326 12. COVID-19 PANDEMIC AND CARES ACT The Company began seeing the impact of the global COVID-19 pandemic on its business in early March 2020 and some effects of the pandemic have continued. The spread of COVID-19 has had an unprecedented impact on higher educational institutions across the country, including our schools, and has led to the closure of campuses and the transition of academic programs from in-person instruction to online, remote learning and back. The impact for the Company primarily related to transitioning classes from in-person, hands-on learning to online, remote learning which resulted in, among other things, additional expenses. Further, related to this transition, some students were placed on leave of absence as they could not complete their externships and some students chose not to participate in online learning. As a result, certain programs were extended due to restricted access to externship sites and classroom labs which did not have a material impact on our consolidated financial statements. In accordance with phased re-opening as applied on a state-by-state basis, all of our schools have now re-opened and the majority of the students who were on leave of absence or had deferred their programs returned to school to finish their programs. In response to the COVID-19 pandemic, in 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law, providing a $2 trillion federal economic relief package of financial assistance and other relief to individuals and businesses impacted by the pandemic. Among other things, the CARES Act includes a $14 billion higher education emergency relief fund (“HEERF”) for the DOE to distribute directly to institutions of higher education. The DOE has allocated funds to each institution of higher education based on a formula contained in the CARES Act. The formula is heavily weighted toward institutions with large numbers of Pell Grant recipients. The DOE allocated $ 27.4 million to our schools distributed in two equal installments and required them to be utilized by April 30, 2021 and May 14, 2021, respectively. As of September 30, 2021, the Company had distributed the full $ 13.7 million of its first installment as emergency grants to students and has utilized the full $ 13.7 million of its second installment . Proceeds from the second installment for permitted expenses were primarily utilized to either offset original expenses incurred or to reduce student accounts receivable, driving a decrease in bad debt expense. Both uses resulted in a decrease in our selling, general and administrative expenses . Institutions are required to use at least half of the HEERF funds for emergency grants to students for expenses related to disruptions in campus operations (e.g., food, housing, etc.). The law requires institutions receiving funds to continue to the greatest extent practicable to pay its employees and contractors during the period of any disruptions or closures related to the COVID-19 emergency which the Company has done. The Company was also permitted to defer payment of FICA payroll taxes through January 1, 2021 and did so but, pursuant to requirements of the deferment, repaid 50% of the deferred payments by January 3, 2022, and will need to repay the remaining 50% by January 3, 2023. As of September 30, 2022, the Company had deferred payments of $ 2.3 million included in accrued expenses in the condensed consolidated balance sheet. 21 Index In December 2020, the Consolidated Appropriations Act, 2021 was enacted which included the Coronavirus Response and Relief Supplemental Appropriations Act, 2021 (“CRRSAA”). CRRSAA provided an additional $81.9 billion to the Education Stabilization Fund including $22.7 billion for the HEERF, which were originally created by the CARES Act in March 2020. The higher education provisions of the CRRSAA are intended in part to provide additional financial assistance benefitting students and their postsecondary institutions in the wake of the spread of COVID-19 across the country and its impact on higher educational institutions. 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. The DOE has allocated a total of $ 24.4 million to our schools from the funds made available under CRRSAA and ARPA. As of September 30, 2022, the Company has drawn down and distributed to our students $ 14.8 million of these allocated funds. The remainder of the funds are on hold by the DOE and will be distributed to the students upon release. Failure to comply with requirements for the usage and reporting of these funds could result in requirements to repay some or all of the allocated funds and in other sanctions. 13. Property Sale Agreements Property Sale Agreement - Nashville, Tennessee Campus On September 24, 2021, Nashville Acquisition, LLC, a subsidiary of the Company (“Nashville Acquisition”), entered into a Contract for the Purchase of Real Estate (the “Nashville Contract”) to sell the property located at 524 Gallatin Avenue, Nashville, Tennessee 37206, at which the Company operates its Nashville campus, to SLC Development, LLC, a subsidiary of Southern Land Company (“SLC”), for an aggregate sale price of $ 34.5 million, subject to customary adjustments at closing. The Company intends to relocate its Nashville campus to a more efficient and technologically advanced facility in the Nashville metropolitan area but has not yet determined a location. The Company and SLC have agreed to an extension of the due diligence period under the Nashville Contract. Consequently, this transaction is expected to close during the second quarter of 2023. During this time, non-refundable payments will be made to the Company by SLC totaling $ 1.1 million in the aggregate through March 2023. The payments will be applied towards the purchase price assuming a closing does occur. As of September 30, 2022, the Company has received approximately $ 0.2 million in non-refundable payments from SLC. The Nashville, Tennessee property is currently classified as assets held for sale in the condensed consolidated balance sheet as of September 30, 2022. Sale Leaseback Transaction - Denver, Colorado and Grand Prairie, Texas Campuses On September 24, 2021, Lincoln Technical Institute, Inc. and LTI Holdings, LLC, each a wholly-owned subsidiary of the Company (collectively, “Lincoln”), entered into an Agreement for Purchase and Sale of Property for the sale of the properties located at 11194 E. 45th Avenue, Denver, Colorado 80239 and 2915 Alouette Drive, Grand Prairie, Texas 75052, at which the Company operates its Denver and Grand Prairie campuses, respectively, to LNT Denver (Multi) LLC, a subsidiary of LCN Capital Partners (“LNT”), for an aggregate sale price of $ 46.5 million, subject to customary adjustments at closing. Closing of the sale occurred on October 29, 2021. Concurrently with consummation of the sale, the parties entered into a triple-net lease agreement for each of the properties pursuant to which the properties are being leased back to Lincoln Technical Institute, Inc. for a twenty-year term at an initial annual base rent, payable quarterly in advance, of approximately $ 2.6 million for the first year with annual 2.00 % increases thereafter and includes four subsequent five-year renewal options in which the base rent is reset at the commencement of each renewal term at then current fair market rent for the first year of each renewal term with annual 2.00 % increases thereafter in each such renewal term. The lease, in each case, provides Lincoln with a right of first offer should LNT wish to sell the property. The Company has provided a guaranty of the financial and other obligations of Lincoln Technical Institute, Inc. under each lease. The Company evaluated factors in ASC Topic 606, Revenue Recognition , to conclude that the transaction qualified as a sale. This included analyzing the right of first offer clause to determine whether it represents a repurchase agreement that would preclude the transaction from being accounted for as a successful sale. At the consummation of the sale, the Company recognized a gain on sale of assets of $ 22.5 million. Additionally, the Company evaluated factors in ASC Topic 842, Leases , and concluded that the newly created leases met the definition of an operating lease. The Company also recorded ROU Asset and lease liabilities of $ 40.1 million. The sale leaseback transaction provided the Company with net proceeds of approximately $ 45.4 million, with the proceeds partially used for the repayment of the Company’s outstanding term loan of $ 16.2 million and swap termination fee of $ 0.5 million. 22 Index 14. Subsequent EventS On November 3, 2022, the Board of Directors approved a plan to close the Somerville, Massachusetts campus. The owner of the Somerville property has exercised an option to terminate the l ease on December 8, 2023 and t he Company has since determined not to pursue relocating the campus in this geographic region. For the nine months ended September 30, 2022, campus revenues were $ 5.3 million, representing 2.1 % of total revenues, with an operating loss of $ 0.2 million. The Company has developed a plan to deliver instruction for the approximately 300 students at the Somerville campus, which will be reported in the Transitional Segment beginning in the fourth quarter. Total costs to close the campus including the teach-out will be approximately $ 2.0 million and should be completed by the end of 2023. Additionally, subsequent to the end of the quarter, on November 4, 2022, the Company agreed with its Lender to terminate the Credit Agreement and the remaining Revolving Loan. The Lender has agreed to allow the Company’s existing letters of credit to remain outstanding provided that they are cash collateralized. 23 Index