UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


Form 10-Q
(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from______ to______


Commission File Number 000-51371


LINCOLN EDUCATIONAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)

New Jersey
 
57-1150621
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)

14 Sylvan Way, Suite A
 
07054
Parsippany, NJ
 
(Zip Code)
(Address of principal executive offices)
   

(973) 736-9340
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, no par value per share
LINC
The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 
Large accelerated filer
Accelerated filer 
 
Non-accelerated filer
Smaller reporting company
 
Emerging growth company
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No

As of August 8, 2022, there were 26,819,501 shares of the registrant’s common stock outstanding.



LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2022

PART I.
 
Item 1.
1
 
1
 
3
 
4
 
5
 
6
 
8
Item 2.
23
Item 3.
38
Item 4.
38
PART II.
38
Item 1.
38
Item 1A.
39
Item 2.
39
Item 3.
39
Item 4.
39
Item 5.
39
Item 6.
40
 
41


PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)


 
June 30,
2022
   
December 31,
2021
 
ASSETS
           
CURRENT ASSETS:
           
Cash and cash equivalents
 
$
66,985
   
$
83,307
 
Accounts receivable, less allowance of $25,987 and $26,837 at June 30, 2022 and December 31, 2021, respectively
   
31,592
     
26,159
 
Inventories
   
3,082
     
2,721
 
Prepaid income taxes and income tax receivable
    776       -  
Prepaid expenses and other current assets
   
4,470
     
4,881
 
Assets held for sale
    4,559       4,559  
Total current assets
   
111,464
     
121,627
 
                 
PROPERTY, EQUIPMENT AND FACILITIES - At cost, net of accumulated depreciation and amortization of $148,132 and $153,335 at June 30, 2022 and December 31, 2021, respectively
   
22,039
     
23,119
 
                 
OTHER ASSETS:
               
Noncurrent receivables, less allowance of $5,591 and $5,084 at June 30, 2022 and December 31, 2021, respectively
   
20,268
     
20,028
 
Deferred income taxes, net
   
23,644
     
23,708
 
Operating lease right-of-use assets
   
92,630
     
91,487
 
Goodwill
   
14,536
     
14,536
 
Other assets, net
   
835
     
794
 
Total other assets
   
151,913
     
150,553
 
TOTAL ASSETS
 
$
285,416
   
$
295,299
 

See notes to unaudited condensed consolidated financial statements.

1

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
(Continued)


 
June 30,
2022
   
December 31,
2021
 
LIABILITIES, SERIES A CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
           
CURRENT LIABILITIES:
           
Unearned tuition
  $
21,682
    $
25,405
 
Accounts payable
   
13,943
     
12,297
 
Accrued expenses
   
10,887
     
15,669
 
Income taxes payable
   
-
     
1,017
 
Current portion of operating lease liabilities
   
11,643
     
11,479
 
Other short-term liabilities
   
35
     
15
 
Total current liabilities
   
58,190
     
65,882
 
                 
NONCURRENT LIABILITIES:
               
Pension plan liabilities
   
1,369
     
1,607
 
Long-term portion of operating lease liabilities
   
87,374
     
86,410
 
Total liabilities
   
146,933
     
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 June 30, 2022 and December 31, 2021
   
11,982
     
11,982
 
                 
STOCKHOLDERS’ EQUITY:
               
Common stock, no par value - authorized: 100,000,000 shares at June 30, 2022 and December 31, 2021; issued and outstanding: 26,924,020 shares at June 30, 2022 and 27,000,687 shares at December 31, 2021
   
55,979
     
141,377
 
Additional paid-in capital
   
32,177
     
32,439
 
Treasury stock at cost - 0 and 5,910,541 shares at June 30, 2022 and December 31, 2021, respectively
   
-
   
(82,860
)
Retained earnings
   
39,625
     
39,702
 
Accumulated other comprehensive loss
   
(1,280
)
   
(1,240
)
Total stockholders’ equity
   
126,501
     
129,418
 
TOTAL LIABILITIES, SERIES A CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITY
 
$
285,416
   
$
295,299
 

See notes to unaudited condensed consolidated financial statements.

2

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)


 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2022
   
2021
   
2022
   
2021
 
                         
REVENUE
 
$
82,142
   
$
80,464
   
$
164,697
   
$
158,461
 
COSTS AND EXPENSES:
                               
Educational services and facilities
   
36,106
     
33,694
     
72,302
     
66,037
 
Selling, general and administrative
   
45,835
     
43,318
     
92,520
     
82,951
 
(Gain) loss on disposition of assets
    (195 )     -       (195 )     1  
Total costs & expenses
   
81,746
     
77,012
     
164,627
     
148,989
 
OPERATING INCOME
   
396
     
3,452
     
70
     
9,472
 
OTHER:
                               
Interest expense
   
(35
)
   
(297
)
   
(77
)
   
(582
)
INCOME (LOSS) BEFORE INCOME TAXES
   
361
     
3,155
     
(7
)
   
8,890
 
PROVISION (BENEFIT) FOR INCOME TAXES
   
102
     
729
     
(539
)
   
1,975
 
NET INCOME
 
$
259
   
$
2,426
   
$
532
   
$
6,915
 
PREFERRED STOCK DIVIDENDS
   
304
     
304
     
608
     
608
 
(LOSS) INCOME AVAILABLE TO COMMON SHAREHOLDERS
 
$
(45
)
 
$
2,122
   
$
(76
)
 
$
6,307
 
Basic and diluted
                               
Net (loss) income per common share
 
$
(0.00
)
 
$
0.06
   
$
(0.00
)
 
$
0.19
 
Weighted average number of common shares outstanding:
                               
Basic and diluted
   
25,963
     
25,105
     
25,842
     
24,997
 

See notes to unaudited condensed consolidated financial statements.

3

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)


 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2022
   
2021
   
2022
   
2021
 
Net income
 
$
259
   
$
2,426
   
$
532
   
$
6,915
 
Other comprehensive income (loss)
                               
Derivative qualifying as a cash flow hedge, net of taxes (nil)
   
-
     
49
     
-
     
260
 
Employee pension plan adjustments, net of taxes (nil)
   
(10
)
   
(134
)
   
(40
)
   
(268
)
Comprehensive income
 
$
249
   
$
2,341
   
$
492
   
$
6,907
 

See notes to unaudited condensed consolidated financial statements.

4

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
       
   
Common Stock
   
Additional
Paid-in
   
Treasury
   
Retained
   
Accumulated
Other
Comprehensive
         
Series A
Convertible
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
 


 
Stockholders’ Equity
       
   
 
Common Stock
   
Additional
Paid-in
   
Treasury
   
Retained
   
Accumulated
Other
Comprehensive
         
Series A
Convertible
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
 

See notes to unaudited condensed consolidated financial statements.

5

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


 
Six Months Ended
June 30,
 
   
2022
   
2021
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
 
$
532
   
$
6,915
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
3,057
     
3,693
 
Amortization of deferred finance charges
   
-
     
91
 
Deferred income taxes
   
64
     
2,022
 
Gain on disposition of assets
    (195 )     -  
Fixed asset donations
   
(145
)
   
(2,050
)
Provision for doubtful accounts
   
16,165
     
11,108
 
Stock-based compensation expense
   
1,730
     
1,337
 
(Increase) decrease in assets:
               
Accounts receivable
   
(21,838
)
   
(13,878
)
Inventories
   
(361
)
   
(933
)
Prepaid income taxes and income taxes payable
   
(1,793
)
   
(700
)
Prepaid expenses and current assets
   
345
     
(529
)
Other assets, net
   
(84
)
   
384
 
Increase (decrease) in liabilities:
               
Accounts payable
   
1,301
     
(3,425
)
Accrued expenses
   
(4,782
)
   
(1,856
)
Unearned tuition
   
(3,723
)
   
(1,270
)
Other liabilities
   
(265
)
   
158
 
Total adjustments
   
(10,524
)
   
(5,848
)
Net cash (used in) provided by operating activities
   
(9,992
)
   
1,067
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Capital expenditures
   
(3,582
)
   
(3,516
)
Proceeds from sale of property and equipment
   
2,390
     
-
 
Net cash used in investing activities
   
(1,192
)
   
(3,516
)
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Payments on borrowings
   
-
     
(1,000
)
Proceeds from borrowings
    -       -  
Dividend payment for preferred stock
   
(608
)
   
(608
)
Share repurchase
    (2,538 )     -  
Net share settlement for equity-based compensation
   
(1,992
)
   
(962
)
Net cash used in financing activities
   
(5,138
)
   
(2,570
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
   
(16,322
)
   
(5,019
)
CASH AND CASH EQUIVALENTS —Beginning of period
   
83,307
     
38,026
 
CASH AND CASH EQUIVALENTS—End of period
 
$
66,985
   
$
33,007
 

See notes to unaudited condensed consolidated financial statements.

6

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
(Continued)


 
Six Months Ended
June 30,
 
   
2022
   
2021
 
             
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
           
Cash paid for:
           
Interest
 
$
118
   
$
566
 
Income taxes
 
$
1,206
   
$
652
 
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
               
Liabilities accrued for or noncash additions of fixed assets
 
$
591
   
$
3,362
 

See notes to unaudited condensed consolidated financial statements.

7

LINCOLN EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(In thousands, except share and per share amounts and unless otherwise stated)
(Unaudited)

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 six months ended June 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 PronouncementsIn 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 introduces 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 is currently assessing the impact that this ASU will have 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 provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides 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 is 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 clarifies 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 disclosures.

8

In August 2020, the FASB issued ASU 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”. This ASU simplifies 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 removes 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 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 is currently assessing the impact that this ASU will have 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 are 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 defers 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, “Financial 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 adds a SEC paragraph pursuant to the issuance of SEC Staff Accounting Bulletin No. 119 on loan losses to FASB Codification Topic 326 and also updates 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.

During the three and six months ended June 30, 2022 and 2021, the Company did not recognize any interest and 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 (LOSS) INCOME PER COMMON SHARE

The Company presents basic and diluted (loss) 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 (loss) income per common share. Under the two-class method, net (loss) income is reduced by the amount of dividends declared in the period for each class of common stock and participating security. The remaining undistributed (loss) 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 (loss) 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 (loss) income per common share has been computed by dividing net (loss) 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 six months ended June 30, 2022 and 2021 as a result of the anti-dilutive impact of the potentially dilutive securities.

10

The following is a reconciliation of the numerator and denominator of the diluted net (loss) income per share computations for the periods presented below:


 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
(in thousands, except share data)
 
2022
   
2021
   
2022
   
2021
 
Numerator:
                       
Net income
 
$
259
   
$
2,426
   
$
532
   
$
6,915
 
Less: preferred stock dividend
   
(304
)
   
(304
)
   
(608
)
   
(608
)
Less: allocation to preferred stockholders
   
-
     
(349
)
   
-
     
(1,046
)
Less: allocation to restricted stockholders
   
-
     
(143
)
   
-
     
(403
)
Net (loss) income allocated to common stockholders
 
$
(45
)
 
$
1,630
   
$
(76
)
 
$
4,858
 
                                 
Basic (loss) income per share:
                               
Denominator:
                               
Weighted average common shares outstanding
   
25,962,617
     
25,105,238
     
25,842,456
     
24,996,583
 
Basic (loss) income per share
 
$
(0.00
)
 
$
0.06
   
$
(0.00
)
 
$
0.19
 
                                 
Diluted (loss) income per share:
                               
Denominator:
                               
Weighted average number of:
                               
Common shares outstanding
   
25,962,617
     
25,105,238
     
25,842,456
     
24,996,583
 
Dilutive potential common shares outstanding:
                               
Series A Preferred Stock
   
-
     
-
     
-
     
-
 
Unvested restricted stock
   
-
     
-
     
-
     
-
 
Dilutive shares outstanding
   
25,962,617
     
25,105,238
     
25,842,456
     
24,996,583
 
Diluted (loss) income per share
 
$
(0.00
)
 
$
0.06
   
$
(0.00
)
 
$
0.19
 

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
June 30,
   
Six Months Ended
June 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
   
1,547,124
     
960,877
     
1,599,891
     
828,564
 
     
6,928,480
     
6,342,233
     
6,981,247
     
6,209,920
 

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

Unearned tuition in the amount of $21.7 million and $25.4 million is recorded in the current liabilities section of the accompanying condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021, respectively. The change in this contract liability balance during the six-month period ended June 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 six-month period ended June 30, 2022 that was included in the contract liability balance at the beginning of the year was $24.4 million.

The following table depicts the timing of revenue recognition:


 
Three months ended June 30, 2022
   
Six months ended June 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
 
$
3,434
   
$
1,539
   
$
4,973
   
$
6,845
   
$
2,918
   
$
9,763
 
Services transferred over time
   
54,539
     
22,630
     
77,169
     
109,913
     
45,021
     
154,934
 
Total revenues
 
$
57,973
   
$
24,169
   
$
82,142
   
$
116,758
   
$
47,939
   
$
164,697
 


 
Three months ended June 30, 2021
   
Six months ended June 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
 
$
5,065
   
$
1,283
   
$
6,348
   
$
8,585
   
$
2,615
   
$
11,200
 
Services transferred over time
   
51,900
     
22,216
     
74,116
     
104,051
     
43,210
     
147,261
 
Total revenues
 
$
56,965
   
$
23,499
   
$
80,464
   
$
112,636
   
$
45,825
   
$
158,461
 

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 20 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 that will be used as a new school, located in Atlanta, Georgia. The lease is expected to commence in the third quarter of this year with the total payments due over the lease term on an undiscounted basis being $12.2 million over the 12-year lease term. There was no involvement in the construction or design of the underlying asset on behalf of the landlord and we are not deemed to be in control of the asset prior to the lease commencement date.

Our operating lease cost for the three months ended June 30, 2022 and 2021 was $4.7 million and $3.8 million, respectively. Our operating lease cost for the six months ended June 30, 2022 and 2021 was $9.3 million and $7.6 million, respectively. Our variable lease cost for the three and six months ended June 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 six months ended June 30, 2022 and 2021.

12

Supplemental cash flow information and non-cash activity related to our operating leases are as follows: