STOCKHOLDERS' EQUITY

9 Months Ended

Sep. 30, 2021

STOCKHOLDERS' EQUITY [Abstract]

STOCKHOLDERS' EQUITY

7. STOCKHOLDERS’ EQUITY

Common Stock

Holders of our common stock are entitled to receive dividends when and as declared by our Board of Directors and have the right to one vote per share on all matters requiring shareholder approval. The Company has not declared or paid any cash dividends on our common stock since the Company’s Board of Directors discontinued our quarterly cash dividend program in February 2015. The Company has no current intentions to resume the payment of cash dividends to holders of common stock in the foreseeable future.

Preferred Stock

On November 14, 2019, the Company raised gross proceeds of $12.7 million from the sale of 12,700 shares of its newly designated Series A Convertible Preferred Stock, no par value per share (the “Series A Preferred Stock”). The Series A Preferred Stock was designated by the Company’s Board of Directors pursuant to a certificate of amendment to the Company’s amended and restated certificate of incorporation (the “Charter Amendment”). The liquidation preference associated with the Series A Preferred Stock was $1,000 per share at December 31, 2020. Upon issuance each share of Series A Preferred Stock was convertible at $2.36 per share of common stock (as may be adjusted pursuant to the Charter Amendment, the “Conversion Price”) into 423,729 shares of common stock (the number of shares into which the Series A Preferred Stock is convertible at any time, the “Conversion Shares”). The Company incurred issuance costs of $0.7 million as part of this transaction.

The description below provides a summary of certain material terms of the Series A Preferred Stock:

Securities Purchase Agreement.

The Series A Preferred Stock was sold by the Company pursuant to a Securities Purchase Agreement dated as of November 14, 2019 (the “SPA”) among the Company, Juniper Targeted Opportunity Fund, L.P. and Juniper Targeted Opportunities, L.P. (together, “Juniper Purchasers”) and Talanta Investment, Inc. (“Talanta,” together with Juniper Purchasers, the “Investors”). Among other things, the SPA includes covenants relating to the appointment of a director to the Company’s Board of Directors to be selected solely by the holders of the Series A Preferred Stock.

Dividends. Dividends on the Series A Preferred Stock (“Series A Dividends”), at the initial annual rate of 9.6% is to be paid, in arrears, from the date of issuance quarterly on each December 31, March 31, June 30 and September 30 with September 30, 2020 being the first dividend payment date.  The Company, at its option, may pay dividends either (a) in cash or (b) by increasing the number of Conversion Shares by the dollar amount of the dividend divided by the Conversion Price.  The dividend rate is subject to increase (a) 2.4% per annum on the fifth anniversary of the issuance of the Series A Preferred Stock and (b) by 2% per annum but in no event above 14% per annum should the Company fail to perform certain obligations under the Charter Amendment.  The Series A Preferred Stock is not currently redeemable and may not become redeemable in the future. As a result, the Company is not required to re-measure the Series A Preferred Stock and does not accrete changes in the redemption value. As of September 30, 2021 and December 31, 2020, we paid $0.9 million and $1.4 million, respectively, in cash dividends on the outstanding shares of Series A Preferred Stock rather than increasing the number of Conversion Shares. Dividends are included in the consolidated balance sheets within additional paid-in-capital when the Company maintains an accumulated deficit.

Holders of Series A Preferred Stock Right to Convert into Common Stock. Each share of Series A Preferred Stock, at any time, is convertible into a number of shares of common stock equal to (i) the sum of (A) $1,000 (subject to adjustment as provided in the Charter Amendment) plus (B) the dollar amount of any declared Series A Dividends not paid in cash divided by (ii) the Conversion Price ($2.36 per share subject to anti-dilution adjustments) as of the applicable Conversion Date (as defined in the Charter Amendment). At all times, however, the number of Conversion Shares that can be issued to any holder of Series A Preferred Stock may not result in such holder and its affiliates owning more than 19.99% of the total number of shares of common stock outstanding after giving effect to the conversion (the “Hard Cap”), unless prior shareholder approval is obtained or no longer required by the rules of the principal stock exchange on which the Company’s common stock trades.

Mandatory Conversion. If, at any time following November 14, 2022, the volume weighted average price of the Company’s common stock equals or exceeds 2.25 times the Conversion Price (currently $5.31 per share) for a period of 20 consecutive trading days and on each such trading day at least 20,000 shares of common stock was traded, the Company may, at its option and subject to the Hard Cap, require that any or all of the then outstanding shares of Series A Preferred Stock be automatically converted into Conversion Shares.

Redemption. Beginning November 14, 2024, the Company may redeem all or any of the Series A Preferred Stock for a cash price equal to the greater of (“Liquidation Preference”) (i) the sum of $1,000 (subject to adjustment as provided in the Charter Amendment) plus the dollar amount of any declared Series A Dividends not paid in cash and (ii) the value of the Conversion Shares were such Series A Preferred Stock converted (as determined in the Charter Amendment) without regard to the Hard Cap.

Change of Control.  In the event of certain changes of control, some of which are not in the Company’s control, as defined in the Charter Amendment as a “Fundamental Change” or a “Liquidation” (as defined in the Charter Amendment), the holders of Series A Preferred Stock shall be entitled to receive the Liquidation Preference, unless such Fundamental Change is a stock merger in which certain value and volume requirements are met, in which case the Series A Preferred Stock will be converted into common stock in connection with such stock merger.  The Company has classified the Series A Preferred Stock as mezzanine equity on the Consolidated Balance Sheet based upon the terms of a change of control which could be outside the Company’s control.

Voting. Holders of shares of Series A Preferred Stock will be entitled to vote with the holders of shares of common stock and not as a separate class, at any annual or special meeting of shareholders of the Company, on an as-converted basis, in all cases subject to the Hard Cap.  In addition, a majority of the voting power of the Series A Preferred Stock must approve certain significant actions of the Company, including (i) declaring a dividend or otherwise redeeming or repurchasing any shares of common stock and other junior securities, if any, subject to certain exceptions, (ii) incurring indebtedness, except for certain permitted indebtedness and (iii) creating a subsidiary other than a wholly-owned subsidiary.

Additional Provisions.  The Series A Preferred Stock is perpetual and, therefore, does not have a maturity date.  The conversion price of the Series A Preferred Stock is subject to anti-dilution protections if the Company affects a stock split, stock dividend, subdivision, reclassification or combination of its common stock and certain other economically dilutive events.

Registration Rights Agreement. The Company also is a party to a Registration Rights Agreement (“RRA”) with the holders of the Series A Preferred Stock. The RRA provides for unlimited demand registration rights, of which there can be two underwritten offerings each for at least $5 million in gross proceeds, and piggyback registration rights, with respect to the Conversion Shares. In addition, the RRA obligated the Company to register “for the shelf” the resale of the Conversion Shares through the filing of a registration statement to such effect (the “Resale Shelf Registration Statement”) and have such Resale Shelf Registration Statement declared effective by the Securities and Exchange Commission (the “SEC”). The SEC declared the Resale Shelf Registration Statement effective on October 16, 2020.

Restricted Stock

The Company currently issues restricted stock awards under the Lincoln Educational Services Corporation 2020 Long-Term Incentive Plan (the “2020 Plan”). As more fully described below, the Company continues to maintain the Lincoln Educational Services Corporation 2005 Long Term Incentive Plan, as amended and amended and restated (the “Prior Plan”) only with respect to awards made thereunder, but, as no shares remain available under the Prior Plan, the Company no longer makes grants under such plan.

2020 Plan

On March 26, 2020, the Board adopted the 2020 Plan to provide an incentive to certain directors, officers, employees and consultants of the Company to align their interests in the Company’s success with those of its shareholders through the grant of equity-based awards. On June 16, 2020, the shareholders of the Company approved the 2020 Plan. The 2020 Plan is administered by the Compensation Committee of the Board, or such other qualified committee appointed by the Board, who will, among other duties, have full power and authority to take all actions and to make all determinations required or provided for under the 2020 Plan. Pursuant to the 2020 Plan, the Company may grant options, share appreciation rights, restricted shares, restricted share units, incentive stock options and nonqualified stock options.  The 2020 Plan has a duration of 10 years.

Subject to adjustment as described in the 2020 Plan, the aggregate number of shares of common stock available for issuance under the 2020 Plan is 2,000,000 shares.

On August 5, 2021, 6,267 restricted shares of common stock were issued to a non-employee director which vest on May 6, 2022.

On May 6, 2021, 76,195 restricted shares of common stock were issued to non-employee directors which vest on the first anniversary of the grant date.

On June 16, 2020, 111,376 restricted shares of common stock were issued to non-employee directors which are fully vested on June 16, 2021.

On August 7, 2020, two non-employee directors were appointed to the Company’s Board of Directors and 17,096 restricted shares of common stock were granted to each of those individuals. These shares vested on June 16, 2021.

Also on August 7, 2020, a non-employee director retired from his position on the Company’s Board of Directors and 12,762 restricted shares of common stock held by him which were unvested were accelerated to vest effective August 7, 2020.

On February 25, 2021, performance-based restricted shares were granted to certain employees of the Company. The shares vest ratably on the first, second and third anniversary dates of the grant based upon the attainment of a financial target during each of the fiscal years ending December 31, 2021, 2022 and 2023, respectively, except in extraordinary circumstances. There is no restriction on the right to vote or the right to receive dividends with respect to any of such restricted shares. For the three and nine months ended September 30, 2021, the Company recorded expense of $0.3 million and $0.7 million, respectively, as the expectation of attainment of the target is probable.

On February 20, 2020, performance-based restricted shares were granted to certain employees of the Company. The shares vest 20%, 30% and 50% on the first, second and third anniversary dates of the grant, respectively, based upon the attainment of a financial target during each fiscal years ending December 31, 2020, 2021 and 2022, respectively, except in extraordinary circumstances. There is no restriction on the right to vote or the right to receive dividends with respect to any of such restricted shares. For the three months ended September 30, 2021 and 2020, the Company recorded expense of $0.2 million and $0.2 million, respectively, as the expectation of attainment of the target is probable. For the nine months ended September 30, 2021 and 2020, the Company recorded expense of $0.6 million and $0.4 million, respectively, as the expectation of attainment of the target is probable.

Prior Plan

Under the Prior Plan, certain employees received awards of restricted shares of common stock based on service and performance. The number of shares granted to each employee was based on the amount of the award and the fair market value of a share of common stock on the date of grant. The 2020 Plan provides that there will be no new grants under the Prior Plan effective as of the date of shareholder approval, June 16, 2020, of the 2020 Plan. The 2020 Plan also states that the shares available under the 2020 Plan will be two million shares plus the number of shares remaining available under the Prior Plan.  As no shares remain available under the Prior Plan, there can be no additional grants thereunder. Outstanding grants under the Prior Plan remain in effect according to their terms. Therefore, those grants are subject to the particular award agreement relating thereto and to the Prior Plan to the extent that the plan addresses those grants. The Prior Plan remains in effect only to that extent.

On February 28, 2019, restricted shares were granted to certain employees of the Company under the Prior Plan, which shares ratably vest over three years. There is no restriction on the right to vote or the right to receive dividends with respect to any of such restricted shares. For each of the three months ended September 30, 2021 and 2020, the Company recorded expense of $0.1 million in connection with that grant. For the nine months ended September 30, 2021 and 2020, the Company recorded expense of $0.4 million and $0.4 million, respectively, in connection with that grant.

For the three months ended September 30, 2021 and 2020, respectively, the Company completed a net share settlement for zero and 16,664 shares and for the nine month ended September 30, 2021 and 2020, respectively, the Company completed a net share settlement for 154,973 and 75,115 shares on behalf of certain employees who participate in the Prior Plan upon the vesting of the restricted shares pursuant to the terms of the Prior Plan. The net share settlement was in connection with income taxes incurred on restricted shares that vested and were transferred to the employees during 2021 and/or 2020, creating taxable income for the employees. At the employees’ request, the Company will pay those taxes on behalf of the employees in exchange for the employees’ returning an equivalent value of restricted shares to the Company. Those transactions resulted in a decrease of zero and $0.1 million for each of the three months ended September 30, 2021 and 2020 and a decrease of $1.0 million and $0.2 million for the nine months ended September 30, 2021 and 2020, respectively, to equity on the condensed consolidated balance sheets, as the cash payment of the taxes effectively was a repurchase of the restricted shares granted in previous years.

The following is a summary of transactions pertaining to restricted stock:

	Shares			Weighted Average Grant Date Fair Value Per Share
Nonvested restricted stock outstanding at December 31, 2020		1,572,159		$	2.77
Granted		657,076			5.97
Canceled		-			-
Vested		(498,936	)		3.04
Nonvested restricted stock outstanding at September 30, 2021		1,730,299			3.87

The restricted stock expense for the three months ended September 30, 2021 and 2020 was $0.8 million and $0.7 million, respectively. The restricted stock expense for the nine months ended September 30, 2021 and 2020 was $2.1 million and $1.3 million, respectively. The unrecognized restricted stock expense as of September 30, 2021 and December 31, 2020 was $6.7 million and $3.2 million, respectively.  As of September 30, 2021, outstanding restricted shares under the Prior Plan had aggregate intrinsic value of $11.6 million.

Stock Options

The fair value of the stock options used to compute stock-based compensation is the estimated present value at the date of grant using the Black-Scholes option pricing model. The following is a summary of transactions pertaining to stock options:

	Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2020		81,000	$	7.79	1.17 years	$	-
Granted/Vested		-		-			-
Canceled		-		-			-
Outstanding at September 30, 2021		81,000		7.79	0.42 years		-
Vested as of September 30, 2021		81,000		7.79	0.42 years		-
Exercisable as of September 30, 2021		81,000		7.79	0.42 years		-

As of September 30, 2021, there was no unrecognized pre-tax compensation expense.