# LINCOLN EDUCATIONAL SERVICES CORP (LINC) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from LINCOLN EDUCATIONAL SERVICES CORP's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1286613/000114036124011175/ef20015362_10k.htm
Accession: 0001140361-24-011175
Filing date: 2024-03-05
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/LINC/
All MD&A years: /company/LINC/mda/
Previous year: /company/LINC/mda/fy2022/ (FY 2022)
Next year: /company/LINC/mda/fy2024/ (FY 2024)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with the “Forward-Looking Statements” and the Consolidated Financial Statements and the related notes thereto included elsewhere in this Annual Report
on Form 10-K. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently
anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under “Risk Factors” and “Forward-Looking Statements” and elsewhere in this Annual Report on Form 10-K.

GENERAL

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 21 campuses, in 13 states has added two additional campuses, one located in East Point, Georgia and the other in Houston, Texas.  As of December 31, 2023, these campuses were
not operational however, the East Point, Georgia campus is expected to hold its first class in March of 2024 and the Houston, Texas campus is expected to become operational in the first quarter of 2026.  Lincoln Educational Services Corporation offers

programs in skilled trades (which include HVAC, welding and computerized numerical control and electrical and electronic systems technology, among other programs), automotive technology, healthcare services (which include nursing, dental assistant
and medical administrative assistant, among other programs) and hospitality services and information technology (which include culinary, therapeutic massage, cosmetology and aesthetics and information technology programs).  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 accredited and are eligible to participate in federal financial aid programs administered by the U.S. Department of Education (the “DOE”) and applicable state education agencies
and accrediting commissions which allow students to apply for and access federal student loans as well as other forms of financial aid. The Company was incorporated in New Jersey in 2003 as the successor-in-interest to various acquired schools
including Lincoln Technical Institute, Inc. which opened its first campus in Newark, New Jersey in 1946.

As of January 1, 2023, the Company’s business has been organized into two reportable business segments: (a) Campus Operations; and (b) Transitional.  Based on trends in student demand and program expansion, there have been more cross-offerings
of programs among the various campuses. Given this change, the Company has revised the way it manages the business, evaluates performance and allocates resources, resulting in an updated segment structure.  The Campus Operations segment includes
campuses that are in operation and contribute to the Company’s core operations and performance.  The Transitional segment refers to campuses that are marked for closure and are currently being taught-out. In
November, 2022, the Board of Directors approved a plan to close the Somerville, Massachusetts campus which has now been fully taught-out.  As of December 31, 2023, the only campus classified in the Transitional segment is the Somerville,
Massachusetts campus.

As of December 31, 2023, we had 13,270 students enrolled at 21 campuses.  Our average enrollment for the fiscal year ended December 31, 2023 was 12,941 students and our revenues were $378.1 million, which represented an
increase of 8.6% over the prior fiscal year.  For more information relating to our revenues, profits and financial condition, please refer to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

We believe that we provide our students with the highest quality career-oriented training available for our areas of study in our markets thereby serving students, local employers and their
communities. The skills gap continues to expand as talent retires faster than new employees are hired and as the need for education and training increases in all careers with the accelerating pace of technological change. We offer
programs in areas of study that we believe are typically underserved by traditional providers of post-secondary education and for which we believe there exists significant demand among students and employers. Furthermore, we believe our convenient
class scheduling, career-focused curricula and emphasis on job placement offer our students valuable advantages that have been previously unaddressed by the traditional academic sector. By combining virtual training with traditional classroom-based
training led by experienced instructors, we believe we offer our students a unique opportunity to develop practical job skills in many of the key areas of expected job demand. We believe these job skills enable our students to compete effectively
for employment opportunities and to pursue salary and career advancement.

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In the last two years, we have further implemented our plan of improving the student experience by, among other things, further improving our campuses.  In October 2023, the Company entered into a lease for approximately 100,000 square feet of
space to serve as the Company’s new campus in Houston, Texas.  The lease term commenced on January 2, 2024, with an initial lease term of 21 years and 6 months and three five-year renewal options.  Also, in October 2023, the Company entered into a
lease for approximately 120,000 square feet of space to serve as the Company’s new Nashville, Tennessee campus. The lease term commenced on November 1, 2023, with an initial lease term of 15 years and two five-year renewal options. In September 2023, the Company closed on the purchase of a 90,000 square foot property located at 311 Veterans Highway, Levittown, Pennsylvania for approximately $10.2 million and, subsequently on January 30, 2024
closed on a sale-leaseback transaction of this property.  As of December 31, 2023, this property is classified as held-for-sale on the Consolidated Balance Sheets. In June, 2022, the Company
executed a lease for approximately 55,000 square feet of space to serve as the Company’s new campus in East Point, Georgia. The lease term commenced in August 2022, with an initial lease term of 12 years and two five-year renewal options. For the
year ended December 31, 2023, the Company incurred approximately $0.8 million in rent expenses. See Part II. Item 8. “Financial Statements and Supplemental Data - Notes to Consolidated Financial Statements – Note
6 Leases and Note 8 Real Estate Transactions.”

Our revenues consist primarily of student tuition and fees derived from the programs we offer.  Our revenues are reduced by scholarships granted by us to some of our students. We recognize revenues from tuition and
one-time fees, such as application fees, ratably over the length of a program, including internships or externships that take place prior to graduation. We also earn revenues from our bookstores, dormitories, cafeterias and contract training
services. These non-tuition revenues are recognized upon delivery of goods or as services are performed and represent less than 10% of our revenues.

Our revenues are directly dependent on the average number of students enrolled in our schools and the courses in which they are enrolled. Our average enrollment is impacted by the number of new students starting,
re-entering, graduating and withdrawing from our schools. Our diploma/certificate programs range in duration from 19 to 104 weeks, our associate’s degree programs range in duration from 69 to 92 weeks, and students attend classes for different
amounts of time per week depending on the school and program in which they are enrolled. Because we start new students every month, our total student population changes monthly. The number of students enrolling or re-entering our programs each
month is driven by the demand for our programs, the effectiveness of our marketing and advertising, the availability of financial aid and other sources of funding, the number of recent high school graduates, the job market and seasonality. Our
retention and graduation rates are influenced by the quality and commitment of our teachers and student services personnel, the effectiveness of our programs, the placement rate and success of our graduates and the availability of financial aid and
other sources of funding. Although similar courses have comparable tuition rates, the tuition rates vary among our numerous programs.

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 largest of these programs are Title IV Programs which represented approximately 81% and 74% of our revenue on a cash basis while the remainder is primarily derived from state grants and cash payments made by students during fiscal
years 2023 and 2022, respectively.  The HEA requires institutions to use the cash basis of accounting when determining its compliance with the 90/10 Rule.  See Part I, Item 1. “Business - Regulatory Environment.”

We extend credit for tuition and fees to many of our students that attend our campuses. Our credit risk is mitigated by the students’ participation in federally funded financial aid programs unless students withdraw prior
to the receipt by us of Title IV Program funds for those students. Under Title IV Programs, the government funds a certain portion of a student’s tuition, with the remainder, referred to as “the gap,” financed by the students themselves under third
party private party loans and once these financial options have been fully exhausted, the Company may offer extended payment plans. The gap amount has continued to increase over the last several years as we have raised tuition on average for the
last several years by 2-3% per year.

The additional extension of credit that we are providing to students may expose us to greater credit risk and can impact our liquidity. However, we believe that these risks are somewhat mitigated by the following:

[[GREPCENT_TABLE]]
[["","\u2022","our internal extension of credit is provided to students only after all other funding resources have been exhausted; thus, by the time this funding is available, students have completed approximately two-thirds of their curriculum and are more likely to graduate and, as a consequence, more likely to pay outstanding tuition amounts;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","funding for students who interrupt their education is typically covered by Title IV Program funds as long as they have been properly packaged for financial aid."]]
[[/GREPCENT_TABLE]]

The operating expenses associated with an existing school do not increase or decrease proportionally as the number of students enrolled at the school increases or decreases. We categorize our operating expenses as:

[[GREPCENT_TABLE]]
[["","\u2022","Educational services and facilities. Major components of educational services and facilities expenses include faculty compensation and benefits, expenses of books and tools, facility rent, maintenance, utilities, depreciation and amortization of property and equipment used in the provision of education services and other costs directly associated with teaching our programs excluding student services which is included in selling, general and administrative expenses."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Selling, general and administrative. Selling, general and administrative expenses include compensation and benefits of employees who are not directly associated with the provision of educational services (such as executive management and school management, finance and central accounting, legal, human resources and business development), marketing and student enrollment expenses (including compensation and benefits of personnel employed in sales and marketing and student admissions), costs to develop curriculum, costs of professional services, bad debt expense, rent for our corporate headquarters, depreciation and amortization of property and equipment that is not used in the provision of educational services and other costs that are incidental to our operations. Selling, general and administrative expenses also includes the cost of all student services including financial aid and career services. All marketing and student enrollment expenses are recognized in the period incurred."]]
[[/GREPCENT_TABLE]]

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Real Estate Transactions

Purchase and Sale-leaseback Transaction – Philadelphia, Pennsylvania Area Campus

On September 28, 2023, the Company purchased a 90,000 square foot property located at 311 Veterans Highway, Levittown, Pennsylvania for approximately $10.2 million and on January 30, 2024, the Company has subsequently
entered into a sale-leaseback transaction for this property. The Company plans to invest approximately $15.0 million, net of the tenant improvement allowance, in the buildout of new classrooms and training areas. As of December 31, 2023, the new
campus is classified as held-for-sale on the Consolidated Balance Sheets. See Part II. Item 8. “Financial Statements and Supplemental Data - Notes to Consolidated Financial Statements – Note 19 Subsequent Events”.

Property Sale Agreement - Nashville, Tennessee Campus

On September 24, 2021, Nashville Acquisition, L.L.C., a subsidiary of the Company, entered into a Contract for the Purchase of Real Estate (the “Nashville Contract”) to sell the nearly 16-acre
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”).

On June 8, 2023, the Company closed on the sale of its Nashville, Tennessee property to East Nashville Owner, LLC, an affiliate of SLC, for approximately $33.8 million pursuant to the Nashville Contract. The net proceeds
from the Nashville sale, net of closing costs, are available for working capital, acquisitions, other strategic initiatives, and general corporate purposes.  In connection with the sale, the parties entered into a lease agreement allowing Lincoln
to continue to occupy the campus and operate it on a rent-free basis for a period of 15 months plus options to extend the lease for up to three consecutive 30-day terms at $150,000 per extension term.  The carrying value of the campus is
approximately $4.5 million and the estimated fair value of the rent for the 15-month rent-free period was approximately $2.3 million at the consummation of the lease.  As of December 31, 2023, approximately $1.3 million remains and is included in
prepaid expenses and other current assets on the Company’s Consolidated Balance Sheets.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussions of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United
States of America, or GAAP. 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, we evaluate our estimates and assumptions, including those related to revenue recognition,
bad debts, goodwill and impairment of long-lived assets and income taxes. Actual results could differ from those estimates. The critical accounting policies discussed herein are not intended to be a comprehensive list of all of our accounting
policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not result in significant management judgment in the application of such principles. We believe that the following accounting
policies are most critical to us in that they represent the primary areas where financial information is subject to the application of management's estimates, assumptions and judgment in the preparation of our Consolidated Financial Statements.

Revenue recognition.  Substantially all of our revenues are considered to be revenues from contracts with students.  The related accounts receivable balances are
recorded in our balance sheets as student accounts receivable.  We do not have significant revenue recognized from performance obligations that were satisfied in prior periods, and we do not have any transaction price allocated to unsatisfied
performance obligations other than in our unearned tuition.  We record revenue for students who withdraw from our schools only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not
occur.  Unearned tuition represents contract liabilities primarily related to our tuition revenue. We have elected not to provide disclosure about transaction prices allocated to unsatisfied performance obligations if original contract durations
are less than one-year, or if we have the right to consideration from a student in an amount that corresponds directly with the value provided to the student for performance obligations completed to date in accordance with Accounting Standards
Codification (“ASC”) Topic 606, Revenue from Contract with Customers. We have assessed the costs incurred to obtain a contract with a student and determined them to be immaterial.

Allowance for Credit Losses.  On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial

Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  As a result of the adoption, the Company has revised the way in which it calculates reserves on outstanding student accounts receivable
balances.  Details considered by management in the estimate include the following:

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We extend credit to a portion of the students who are enrolled at our academic institutions for tuition and certain other educational costs. Based upon past experience and judgment, we establish an allowance for credit
losses with respect to student receivables which we estimate will ultimately not be collectible. Our standard student receivable allowance is based on an estimate of lifetime expected credit losses for student receivables that considers vintages
of receivables to determine a loss rate.  Our estimation methodology considers a number of quantitative and qualitative factors that, based on our collection experience, we believe have an impact on our repayment risk and ability to collect
student receivables. Changes in the trends in any of these factors may impact our estimate of the allowance for credit losses. These factors include, but are not limited to: internal repayment history, changes in the current economic, legislative
or regulatory environments, internal cash collection forecasts and the ability to complete the federal financial aid process with the student. These factors are monitored and assessed on a regular basis. Overall, our allowance estimation process
for student receivables is validated by trending analysis and comparing estimated and actual performance.

Management makes a series of assumptions to determine what is believed to be the appropriate level of allowance for credit losses. Management determines a reasonable and supportable forecast based on the expectation of
future conditions over a supportable forecast period as described above, as well as qualitative adjustments based on current and future conditions that may not be fully captured in the historical modeling factors described above. All of these
estimates are susceptible to significant change.

We monitor our collections and write-off experience to assess whether or not adjustments to our allowance percentage estimates are necessary. Changes in trends in any of the factors that we believe impact the collection
of our student receivables, as noted above, or modifications to our collection practices, and other related policies may impact our estimate of our allowance for credit losses and our results from operations.

Because a substantial portion of our revenue is derived from Title IV Programs, any legislative or regulatory action that significantly reduces the funding available under Title IV Programs, or the ability of our
students or institutions to participate in Title IV Programs, would likely have a material impact on the realizability of our receivables.

Our bad debt expense as a percentage of revenues for the fiscal years ended December 31, 2023 and 2022 was 11.0% and 10.0%, respectively.  A 1% increase in our bad debt expense as a percentage of revenues for the fiscal
years ended December 31, 2023 and 2022 would have resulted in an increase in bad debt expense of $3.8 million and $3.5 million, respectively.

We do not believe that there is any direct correlation between tuition increases, the credit we extend to students and our financing commitments.  The extended financing plans we offer to our students are made on a
student-by-student basis and are predominantly a function of the specific student’s financial condition.   We only extend credit to the extent there is a financing gap between the tuition and fees charged for the program and the amount of grants,
loans and parental loans each student receives.  Each student’s funding requirements are unique.  Factors that determine the amount of aid available to a student include whether they are dependent or independent students, Pell Grants awarded,
federal Direct Loans awarded, PLUS loans awarded to parents and the student’s personal resources and family contributions. As a result, it is extremely difficult to predict the number of students that will need us to extend credit to them.

Because a substantial portion of our revenues is derived from Title IV Programs, any legislative or regulatory action that significantly reduces the funding available under Title IV Programs or the ability of our students
or schools to participate in Title IV Programs could have a material effect on the realizability of our receivables.

Goodwill.  Goodwill represents the excess of purchase price over the fair value of tangible net assets and identifiable intangible assets of the businesses
acquired.  Lincoln tests goodwill for impairment annually, in the fourth quarter of each year, unless there are events or changes in circumstances that indicate an impairment may have occurred. Impairment may result from deterioration in
performance, adverse market conditions, adverse changes in laws or regulations, the restriction of activities associated with the acquired business, and/or a variety of other circumstances. If we determine that impairment has occurred, we record a
write-down of the carrying value and charge the impairment as an operating expense in the period the determination is made.

As of December 31, 2023, goodwill was approximately $10.7 million, or 3.1%, of our total assets.

When we perform our annual goodwill impairment assessment we have the option to perform a qualitative assessment based on a number of factors impacting our reporting units (Step 0).  When a qualitative assessment is performed, a number of
factors are evaluated to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Our qualitative assessment is subjective.  It includes a review of
macroeconomic and industry factors, review of financial and non-financial performance measures, including projected student starts and assessment of adverse events that may negatively impact a reporting units carrying value. Adverse events would
include, but are not limited to, difficulty in accessing capital, a greater competitive environment, decline in market-dependent multiples or metrics, regulatory or political developments, change in key personnel, strategy, or customers, or
litigation. If we conclude based on our qualitative review that it is more likely than not that the fair value of the reporting unit is less than the carrying value, we proceed with a quantitative impairment test.

44

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When we perform our quantitative impairment test we believe the most critical assumptions and estimates in determining the estimated fair value of our reporting units include, but are not limited to, future tuition
revenues, operating costs, working capital changes, capital expenditures and a discount rate. The assumptions used in determining our expected future cash flows consider various factors such as historical operating trends particularly in student
enrollment and pricing and long-term operating strategies and initiatives.

If we determine that quantitative tests are necessary, we determine the fair value of each reporting unit using an equal weighting of the discounted cash flow model and the market approach, or if required, we will
evaluate other asset value-based approaches.  Our judgment is necessary in forecasting future cash flows and operating results, critical assumptions include growth rates, changes in operating costs, capital expenditures, changes in weighted average
costs of capital, and the fair value of an asset based on the price that would be received in a current transaction to sell the asset.  Additionally, we obtain independent market metrics for the industry and our peers to assist in the development
of these key assumptions.  This process is consistent with our internal forecasts and operating plans.

On June 8, 2023, the Company consummated the sale of its Nashville, Tennessee property (see Part II. Item 8. “Financial Statements and Supplemental Data” - Notes to Consolidated Financial Statements – Note 8 Real Estate
Transactions”).  The result of the sale created a change in the trajectory of the fair value of the Nashville, Tennessee operations and as such, the Company recorded a pre-tax non-cash impairment charge of $3.8 million relating to goodwill.  For
the year ended December 31, 2022, there were no impairments related to goodwill.

Impairment of Long-Lived Assets.  The Company reviews the carrying value of its long-lived assets and identifiable
intangibles for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. For other long-lived assets, including right-of-use (“ROU”) lease assets, the Company evaluates assets for
recoverability when there is an indication of potential impairment. Factors the Company considers important, which could trigger an impairment review, include significant changes in the manner of the use of the asset, significant changes in
historical trends in operating performance, significant changes in projected operating performance, and significant negative economic trends.  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 a result of the Nashville sale discussed above, the Company also recorded a pre-tax non-cash impairment charge of $0.4 million relating to long-lived assets.

On December 31, 2022, as a result of impairment testing it was determined that there was a long-lived asset impairment of $1.0 million.  The impairment was the result of an assessment of the current market value, as
compared to the carrying value of the assets.

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.

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense.  During the fiscal years ended December 31, 2023 and 2022, we did not record any interest and penalties expense associated with uncertain tax
positions, as we do not have any uncertain tax positions.

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Index

Results of Operations for the Two Years Ended December 31, 2023 and December 31, 2022

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

[[GREPCENT_TABLE]]
[["","","Year Ended Dec 31,"],["","","2023","","","2022"],["Revenue","","","100.0","%","","","100.0","%"],["Costs and expenses:"],["Educational services and facilities","","","42.9","%","","","42.7","%"],["Selling, general and administrative","","","55.3","%","","","52.4","%"],["Gain on sale of assets","","","-8.2","%","","","-0.1","%"],["Impairment of goodwill and long-lived assets","","","1.1","%","","","0.3","%"],["Total costs and expenses","","","91.2","%","","","95.3","%"],["Operating income","","","8.8","%","","","4.7","%"],["Interest expense, net","","","0.6","%","","","0.0","%"],["Income from operations before income taxes","","","9.4","%","","","4.7","%"],["Provision for income taxes","","","2.6","%","","","1.1","%"],["Net income","","","6.8","%","","","3.6","%"]]
[[/GREPCENT_TABLE]]

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Consolidated Results of Operations

Revenue.  Revenue increased $29.8 million, or 8.6% to $378.1 million for the fiscal year ended December 31, 2023 from $348.3 million in the prior year
comparable period.  Excluding the Transitional segment revenue of $1.5 million and $6.8 million for the fiscal year ended December 31, 2023 and 2022, respectively, our revenue would have increased $35.2 million, or 10.3%. The remaining increase in
revenue was driven by several factors including student start growth of 11.4% and an increase in average revenue per student of 8.0%, driven in part by the continuing rollout of the Company’s hybrid teaching model in combination with tuition
increases.  The Company’s hybrid teaching model increases program efficiency and delivers accelerated revenue recognition in certain evening programs.

Educational services and facilities expense.  Our educational services and facilities expense increased $13.5 million, or 9.1% to $162.3 million for the fiscal
year ended December 31, 2023 from $148.7 million in the prior year comparable period.  Excluding the Transitional segment educational services and facilities expense of $1.9 million and $3.2 million for the fiscal year ended December 31, 2023 and
2022, respectively, our educational services and facilities expense would have increased $14.9 million, or 10.2%.   Increased costs were primarily concentrated in instructional expense, facilities expense and books and tools expense.

Instructional expenses increased $7.0 million, driven primarily by higher instructional salaries resulting from higher staffing levels due to increases in our student population and merit salary increases.  In addition,
the Company is experiencing higher staffing levels at several campuses that have launched the hybrid teaching model as the Company is providing instruction through both the new and traditional learning models for an interim period of time.  Further
increases resulted from student testing, primarily relating to our nursing program and increased consumables costs driven by a higher student population and inflation.

Facilities expense increased by approximately $4.5 million, driven primarily by a $2.4 million increase in rent expense relating to lease extensions at several campuses, additional space taken at one of our campuses, and
non-cash rent expense relating to the new East Point, Georgia campus and the sale-leaseback of our existing Nashville, Tennessee property.  In connection with the sale of the Nashville, Tennessee property, the Company entered into a lease agreement
allowing the Company to continue to occupy the campus and operate it on a rent-free basis for a period of 15 months.  At the consummation of the sale, the Company took the fair value of the 15 month rent free period, valued at $2.3 million, and
included the balance in prepaid expenses and other current assets on the Company’s Consolidated Balance Sheets.  During the 15-month rent-free period, the Company will straight-line the expense until the rent-free period has expired.  Also
contributing to the increased costs were higher utility expense driven by inflation and an increase in repairs and maintenance at several campuses.

Books and tools expense increased $3.0 million, driven by a 11.4% increase in student starts year-over-year and vendor price increases.

Educational services and facilities expense, as a percentage of revenue, increased to 42.9% from 42.7% for the fiscal years ended December 31, 2023 and 2022, respectively.

46

Index

Selling, general and administrative expense.  Our selling, general and administrative expense increased $26.7 million, or 14.7% to $209.1 million for the fiscal
year ended December 31, 2023, from $182.4 million in the prior year comparable period.  Excluding the Transitional segment selling, general and administrative expense of $1.5 million and $4.1 million for the fiscal year ended December 31, 2023 and
2022, respectively, our selling general and administrative expense would have increased $29.3 million, or 16.4%.   Increased costs were driven by the following:

Administrative costs increased $20.8 million, driven by several factors including a) an increase in performance-based incentives driven by improved financial performance above plan, b) increased stock-based compensation
due to achieving financial targets, c) additional bad debt expense driven by revenue growth of $35.2 million and a slight deterioration in collection rates and d) higher legal costs.  In addition, in December of the current year, the Company
provided all employees, who are not part of the Company’s bonus incentive plan with a holiday bonus.

Marketing investments increased $4.4 million, helping drive additional student starts, up 11.4% year-over-year.  Increased investments were driven in part by continued incremental marketing support for the
two new programs that were launched in the third quarter, which included Medical Assistant at our Columbia, MD campus and Electrical & Electronic Systems Technology at our Grand Prairie, TX campus.  Marketing investment in the fourth quarter
also included the start of an awareness building media campaign for the new East Point, GA campus that is projecting to hold its initial program start in the first quarter of 2024.  Despite additional investments in marketing for the year, the
total cost to obtain a student remained flat demonstrating the effectiveness of the current marketing campaign.

Student services increased $2.7 million, primarily resulting from costs associated with an increased student population.

Selling, general and administrative expense, as a percentage of revenue, increased to 55.3% from 52.4% for the fiscal year ended December 31, 2023 and 2022, respectively.

Gain on sale of assets. Gain on sale of assets was $30.9 million, for the fiscal year ended December 31, 2023 resulting from the sale of the Company’s
Nashville, Tennessee property during the second quarter of 2023.  Net proceeds from the sale were approximately $33.3 million.

Gain on sale of assets was $0.2 million for the fiscal year ended December 31, 2022, resulting from the sale of the Suffield, Connecticut campus during the second quarter of 2022.  Net proceeds from the sale were
approximately $2.4 million.

Impairment of goodwill and long-lived assets.  Impairment of goodwill and long-lived assets was $4.2 million for the
fiscal year ended December 31, 2023 driven by the sale the Nashville, Tennessee property on June 8, 2023.  The result of the sale created a change in the trajectory of the fair value of the Nashville, Tennessee operations, and as such, the Company
recorded a pre-tax non-cash impairment charge of $3.8 million relating to goodwill and an additional $0.4 million impairment relating to long-lived assets.

For the fiscal year ended December 31, 2022, as a result of the Company’s annual test of goodwill and long-lived assets, it was determined that there was sufficient evidence to conclude that a $1.0 million impairment
existed.  The impairment was the result of an assessment of the current market value, as compared to the current carrying value of the assets.  Approximately $0.6 million of the Company’s ROU asset was impaired in addition to $0.4 million of
long-lived assets.

Net interest income.  Net interest income was $2.3 million for the fiscal year ended December 31, 2023 compared to $0.2 million in the prior year comparable
period.  The increase in net interest income was primarily driven by the Company’s investment of its cash reserves into various short-term investments for the full fiscal year ended December 31, 2023, compared to investing cash reserves in the
fourth quarter of the prior year.  The current year net interest income is partially offset by approximately $0.2 million of additional interest expense relating to a finance lease obligation for our new Nashville, Tennessee property.

Income taxes.  Our income tax provision for the year ended December 31, 2023 was $9.6 million, or 27.1% of pre-tax income compared to $3.8 million,
or 23.1% of pre-tax income in the prior year.  During the year ended December 31, 2023, the increase in effective tax rate was mainly due to a lesser tax benefit derived from restricted stock vesting and higher pre-tax income.

Segment Results of Operations

As of January 1, 2023, the Company’s business is now organized into two reportable business segments: (a) Campus Operations; and (b) Transitional.  Based on trends in student demand and our program expansions, there have
been more cross-offerings of programs among the various campuses. Given this change, the Company has revised the way it manages the business, evaluates performance, and allocates resources, resulting in an updated segment structure.  As a result,
the Company has shifted its focus to the two new segments as defined below:

Campus Operations – The Campus Operations segment includes all campuses that are continuing in operation and contribute to the Company’s core operations and
performance.

47

Index

Transitional – The Transitional segment refers to businesses that are marked for closure and are currently being taught-out.  As of December 31, 2023, the only
campus classified in the Transitional segment is the Somerville, Massachusetts campus.  The campus has been fully taught-out and total costs to close the campus were approximately $2.0 million.

We evaluate performance based on operating results.  Adjustments to reconcile segment results to consolidated results are included in the caption “Corporate,” which primarily includes unallocated corporate activity.

The following table presents results for the activity for our reportable operating segments for the fiscal years ended December 31, 2023 and 2022:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","","2022","","","% Change"],["Revenue:"],["Campus Operations","","$","376,602","","","$","341,440","","","","10.3","%"],["Transitional","","","1,468","","","","6,847","","","","-78.6","%"],["Total","","$","378,070","","","$","348,287","","","","8.6","%"],["Operating Income (Loss):"],["Campus Operations","","$","47,579","","","$","49,524","","","","-3.9","%"],["Transitional","","","(1,914",")","","","(430",")","","","-345.1","%"],["Corporate","","","(12,307",")","","","(32,816",")","","","62.5","%"],["Total","","$","33,358","","","$","16,278","","","","104.9","%"],["Starts:"],["Campus Operations","","","16,199","","","","14,541","","","","11.4","%"],["Transitional","","","-","","","","379","","","","-100.0","%"],["Total","","","16,199","","","","14,920","","","","8.6","%"],["Average Population:"],["Campus Operations","","","12,875","","","","12,602","","","","2.2","%"],["Transitional","","","66","","","","292","","","","-77.4","%"],["Total","","","12,941","","","","12,894","","","","0.4","%"],["End of Period Population:"],["Campus Operations","","","13,270","","","","12,196","","","","8.8","%"],["Transitional","","","-","","","","192","","","","-100.0","%"],["Total","","","13,270","","","","12,388","","","","7.1","%"]]
[[/GREPCENT_TABLE]]

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Campus Operations

Operating income was $47.6 million and $49.5 million for the fiscal years ended December 31, 2023 and 2022, respectively.  The change year-over-year was mainly driven by the following factors:

[[GREPCENT_TABLE]]
[["","\u2022","Revenue increased $35.2 million, or 10.3% to $376.6 million for the fiscal year ended December 31, 2023 from $341.4 million in the prior year comparable period. The increase in revenue was driven by several factors including student start growth of 11.4% and an increase in average revenue per student of 8.0%, driven in part by the continuing rollout of the Company\u2019s hybrid teaching model in combination with tuition increases. The Company\u2019s hybrid teaching model increases program efficiency and delivers accelerated revenue recognition in certain evening programs."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Educational services and facilities expense increased $14.8 million, or 10.2% to $160.4 million for the fiscal year ended December 31, 2023 from $145.6 million in the prior year comparable period. Increased costs were primarily concentrated in instructional, facilities expense, and books and tools expense."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Instructional expenses increased $7.0 million, driven primarily by higher instructional salaries resulting from higher staffing levels due to increases in our student population and merit salary increases. In addition, the Company is experiencing higher staffing levels at several campuses that have launched the hybrid teaching model as the Company is providing instruction through both the new and traditional learning models for an interim period of time. Further increases resulted from student testing, primarily relating to our nursing program and increased consumables costs driven by a higher student population and inflation."]]
[[/GREPCENT_TABLE]]

48

Index

[[GREPCENT_TABLE]]
[["","o","Facilities expense increased by approximately $4.5 million, driven primarily by a $2.4 million increase in rent expense relating to lease extensions at several campuses, additional space taken at one of our campuses, and non-cash rent expense relating to the new East Point, Georgia campus and the sale-leaseback of our existing Nashville, Tennessee property. In connection with the sale of the Nashville, Tennessee property, the Company entered into a lease agreement allowing the Company to continue to occupy the campus and operate it on a rent-free basis for a period of 15 months. At the consummation of the sale, the Company took the fair value of the 15-month rent free period, valued at $2.3 million, and included the balance in prepaid expenses and other current assets on the Company\u2019s Consolidated Balance Sheets. During the 15-month rent-free period, the Company will straight-line the expense until the rent-free period has expired. Also contributing to the increased costs were higher utility expense driven by inflation and an increase in repairs and maintenance at several campuses."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Books and tools expense increased $3.0 million, driven by a 11.4% increase in student starts year-over-year."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Selling, general and administrative expense increased $19.1 million, or 13.1% to $164.4 million for the fiscal year ended December 31, 2023, from $145.3 million in the prior year comparable period. The increase was primarily driven by an increase in administrative costs, marketing investments and student services, all of which are discussed above in the Consolidated Results of Operations."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Impairment of goodwill and long-lived assets was $4.2 million and $1.0 million for the fiscal years ended December 31, 2023 and 2022, respectively, as discussed above in the Consolidated Results of Operations."]]
[[/GREPCENT_TABLE]]

Transitional

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 lease on December 8, 2023 and the
Company has since determined not to pursue relocating the campus in this geographic region.  The campus has been fully taught-out, and total costs to close the campus were approximately $2.0 million.

[[GREPCENT_TABLE]]
[["","\u2022","Revenue decreased $5.3 million, or 78.6% to $1.5 million for the fiscal year ended December 31, 2023, from $6.8 million in the prior year comparable period."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Total operating expenses decreased $3.9 million, or 53.6% to $3.4 million for the fiscal year ended December 31, 2023, from $7.3 million in the prior year comparable period."]]
[[/GREPCENT_TABLE]]

Corporate and Other

This category includes unallocated expenses incurred on behalf of the entire Company.  Corporate and other expenses were $43.2 million and $33.0 million after excluding a $30.9 million gain in the current year, resulting
from the sale of our Nashville, Tennessee property and a $0.2 million gain in the prior year driven by the sale of our former campus property in Suffield, Connecticut.  Increased costs were driven by several factors including additional
performance-based incentives, stock-based compensation, and an increase in legal costs.

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, prior to the
termination thereof (described below), borrowings under our credit facility.  The following chart summarizes the principal elements of our cash flow for each of the two fiscal years in the period ended December 31, 2023:

[[GREPCENT_TABLE]]
[["","","Cash Flow Summary"],["","","Year Ended December 31,"],["","","2023","","","2022"],["","","(In thousands)"],["Net cash provided by operating activities","","$","25,558","","","$","882"],["Net cash provided by (used in) investing activities","","$","7,369","","","$","(21,354",")"],["Net cash used in financing activities","","$","(2,945",")","","$","(12,548",")"]]
[[/GREPCENT_TABLE]]

49

Index

As of December 31, 2023, the Company had $80.3 million in cash and cash equivalents and restricted cash, compared to $50.3 million in cash and cash equivalents and restricted cash, including $14.7 million in short-term
investments as of December 31, 2022.  The change in cash position from prior year was primarily driven by several factors including the sale of our Nashville, Tennessee property, which yielded approximately $33.3 million in proceeds, cashflow
generated from operations of $25.9 million, and an increase of $2.1 million relating to additional interest income driven by the investment of cash reserves into various short-term investment vehicles during the year ended December 31, 2023. 
Partially offsetting the increase in cash position were investments of $41.2 million in capital expenditures, which includes the buildout of the new East Point, Georgia campus and the purchase of the new Levittown, Pennsylvania property for
approximately $10.2 million on September 28, 2023.   Also contributing to the change in cash year-over-year were incentive compensation payments, share repurchases made under the share repurchase program, and one-time costs incurred in connection
with the teach-out of our Somerville, Massachusetts campus.

On May 24, 2022, the Company announced that its Board of Directors had authorized a share repurchase program of up to $30.0 million of the Company’s outstanding Common Stock.  The share repurchase program was authorized
for 12 months.   On February 27, 2023, the Board of Directors extended the share repurchase program for an additional 12 months and authorized the repurchase of an additional $10.0 million of the Company’s Common Stock, for an aggregate of up to
$30.6 million in additional repurchases.  As of December 31, 2023, the Company has approximately $29.7 million remaining for repurchases.

During the fiscal year ended December 31, 2023, the Company repurchased 165,064 shares at a cost of approximately $0.9 million.  Total repurchases made since the inception of the share repurchase program through December
31, 2023 were 1,737,478 shares at a total cost of approximately $10.3 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 81% of our cash receipts relating to revenues in 2023. Pursuant to
applicable regulations, students must apply for a new loan for each academic period. Federal regulations dictate the timing of disbursements of funds under Title IV Programs and loan funds are generally provided by lenders in two disbursements for
each academic year. The first disbursement is usually received approximately 31 days after the start of a student’s academic year and the second disbursement is typically received at the beginning of the sixteenth week from the start of the
student's academic year. Certain types of grants and other funding are not subject to a 31-day delay.  In certain instances, if a student withdraws from a program prior to a specified date, any paid but unearned tuition or prorated Title IV Program
financial aid is refunded according to federal, state and accrediting agency standards.

As a result of the significant amount of Title IV Program funds received by our students, we are highly dependent on these funds to operate our business. Any reduction in the level of Title IV Program funds that our
students are eligible to receive for tuition payment to us 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”.

Operating Activities

Operating cash flow results primarily from cash received from our students, offset by changes in working capital demands.  Working capital can vary at any point in time based on several factors including seasonality,
timing of cash receipts and payments and vendor payment terms.

Net cash provided by operating activities was $25.5 million for the fiscal year ended December 31, 2023 compared to $0.8 million in the prior year comparable period.  The $24.7 million increase was driven by several
factors including a $12.0 million increase in accrued expenses primarily driven by additional performance-based incentives in the current year as a result of improved financial performance in addition to a $13.6 million change in accounts
receivable, also considering the provision for credit losses and unearned tuition.  Increases in accounts receivable were primarily driven by a $29.8 million increase in revenue year-over-year.

Investing Activities

Net cash provided by investing activities was $7.3 million for the fiscal year ended December 31, 2023 compared to net cash used in investing activities of $21.4 million in the prior year comparable period.  The increase
of $28.7 million was driven by several factors including a $30.9 million increase in proceeds from the sale of property and equipment driven by the sale of our Nashville, Tennessee property during the second quarter of 2023, in addition to an
increase in net proceeds from investments of $29.5 million.  Partially offsetting the cash inflows was an increase in investments in capital expenditures of $31.7 million, which was primarily driven by the buildout of the new East Point, Georgia
campus and the purchase of the new Levittown, Pennsylvania property for approximately $10.2 million, which was consummated on September 28, 2023.

We currently lease the majority of all our campuses, except for our Levittown, Pennsylvania property.  This property was purchased in September of 2023 for approximately $10.2 million and as of December 31, 2023
has been classified on the Consolidated Balance Sheets as held for sale.  Subsequently, on January 30, 2024, the Company closed on a sale-leaseback for this property.

Capital expenditures were 11.0% of revenues in 2023 and are expected to be approximately 15% of revenues in 2024.  The significant increase in planned capital expenditures over the prior year will be driven by several
factors that include, but are not limited to, the buildout of our new East Point, Georgia area campus, additional space, the planned introduction of three new programs at the Lincoln, Rhode Island campus, and the anticipated introduction of new
programs at five other campuses.  We expect to fund future capital expenditures with cash generated from operating activities and cash on hand.

50

Index

Financing Activities

Net cash used in financing activities for the fiscal year ended December 31, 2023 and 2022 was $2.9 million and $12.5 million, respectively. The decrease in cash used of $9.6 million was primarily driven by a $8.5 million
reduction in repurchases made under the Company’s share repurchase program in the current year, in addition to $1.1 million of dividend payments made in the prior year.

Credit Facility

On November 14, 2019, the Company entered into a senior secured credit agreement (the “Sterling Credit Agreement”) with its lender, Sterling National
Bank (the “Lender”), providing for borrowing in the aggregate principal amount of up to $60.0 million (the “Credit Facility”). Initially, the Credit Facility was comprised of four facilities: (1) a $20.0 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 $10.0 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 $15.0 million senior secured committed revolving line of credit providing a sublimit of up to $10.0 million for standby letters of credit maturing on November 13, 2022 (the “Revolving Loan”), with monthly payments of interest only; and (4) a
$15.0 million senior secured non-restoring line of credit maturing on January 31, 2021 (the “Line of Credit Loan”). 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 rights in the Company’s subsidiaries and mortgages on parcels of real property owned by the Company.  The Sterling Credit Agreement was amended on various occasions.

On November 4, 2022, the Company agreed with its Lender to terminate the Sterling Credit Agreement and the remaining Revolving Loan.  The Lender
agreed to allow the Company’s existing letters of credit to remain outstanding, provided that they are cash collateralized. As of December 31, 2023, the letters of credit, in the aggregate outstanding principal amount of $4.1 million, remained
outstanding, were cash collateralized, and were classified as restricted cash on the Consolidated Balance Sheets.  As of December 31, 2023, the Company did not have a credit facility and did not have any debt outstanding.

On February 16, 2024, the Company entered into a secured credit agreement (the “Fifth Third Credit Agreement”) with Fifth Third Bank, National
Association (the “Bank”), pursuant to which the Company, as borrower, has obtained a revolving credit facility in the aggregate principal amount of $40.0 million including a $10.0 million letter of credit sublimit and a $20.0 million accordion
feature (the “Facility”), the proceeds of which are to be used for working capital, general corporate and certain other permitted purposes. See Part II. Item 8. “Financial Statements and Supplemental Data - Notes to Consolidated Financial
Statements – Note 19 Subsequent Events”.

51

Index

Climate Change

Climate change has not had and is not expected to have a significant impact on our operations.

Contractual Obligations

Current portion of Long-Term Debt, Long-Term Debt and Lease Commitments.    As of December 31,
2023, we have no debt outstanding.  We lease offices, educational facilities and various items of equipment for varying periods through the year 2045 under basic annual rentals.

As of December 31, 2023, there were three new leases and five lease modifications that resulted in noncash re-measurements of the related right-of-use asset and operating lease liability of $10.5 million.  In addition,
during the fourth quarter of 2023, the Company entered into a finance lease and recorded a $16.0 million Right of Use (“ROU”) Asset and liability.

We had no off-balance sheet arrangements as of December 31, 2023, except for existing surety bonds.  We are required to post surety bonds on behalf of our campuses and education representatives with multiple states to
maintain authorization to conduct our business. At December 31, 2023, we posted surety bonds in the aggregate amount of approximately $16.0 million.  These off-balance sheet arrangements do not adversely impact our liquidity or capital resources.

As of the fiscal year ended December 31, 2023 and 2022, we had outstanding extensions of credit commitments to our active students of $33.6 million and $30.5 million, respectively.  These are institutional extensions of
credit and no cash is advanced to students.  The full extension of credit amount is not guaranteed unless the student completes the program. The institutional extensions of credit are considered commitments because the students are required to fund
their education using these funds and they are not reported in our Consolidated Financial Statements.

SEASONALITY AND OUTLOOK

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 due to 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. The growth that we generally experience in the second half of the year is largely dependent on a successful high school recruiting season. We recruit high school students several months ahead of their scheduled start
dates and, as a consequence, 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.

Effect of Inflation

Inflation has not had a material effect on our operations except for some inflationary pressures on certain instructional expenses including consumables and in instances where potential students have not wanted to incur
additional debt or increased travel expense.