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 xý  No o☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes xý  No o☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 o☐  No xý

As of November 5, 2014,May 6, 2015, there were 24,052,48624,076,823 shares of the registrant’s common stock outstanding.

 

 

 

Business Activities – Lincoln Educational Services Corporation and Subsidiaries (theits subsidiaries (collectively, the “Company”) is a provider of diversified career-oriented post-secondary education. The Company reorganized its operations in the first quarter of 2015 into three reportable segments:  a) Transportation and Skilled Trades, b) Healthcare and Other Professions, and c) Transitional.  The Company offers recent high school graduates and working adults career-oriented programs in five areas of study: Automotive Technology, Health Sciences, Skilled Trades, Hospitality Services and Business and Information Technology.these segments.  The Company currently has 31 campuses and five training sites in 15 states across the United States.

Liquidity—For the last several years, the Company and the proprietary school sector hashave faced various forms of adversity which have contributed to deteriorating earnings growth.earnings. Government regulations have negatively impacted earnings by making it more difficult for potential students to obtain loans, which, when coupled with the overall economic environment, have hindered potential students from enrolling in ourits post-secondary schools. In light of these factors, the Company has incurred significant operating losses as a result of lower student population. The Company also experiencedrecorded a pre-tax goodwill impairment charge of $39.0 million for the year ended December 31, 2014 as a result of a significant decline in market capitalization during the quarter ended September 30, 2014.capitalization. Despite these events, managementthe Company believes that its likely sources of cash should be sufficient to fund operations for the next twelve months. The Company’s available sources of cash primarily include results ofcash from operations, cash and cash equivalents on hand of $5.2 million at March 31, 2015 and available borrowingsthe ability to draw up to $20 million (less letters of credit) under theits revolving line of credit. The Company’s revolving credit facility expires inthat was extended through April 2015.5, 2016. To fund the Company'sCompany’s business plans, including any anticipated future losses, purchase commitments, capital expenditures, and principal and interest payments on borrowings and to satisfy the Department of Education (the “DOE”) financial responsibility standards, the Company has the ability to leverage up to $50 million of its existing properties. In addition, theowned real estate that is not classified as held for sale. The Company is also continuing to take actions to improve cash flow by aligning its cost structure to its student population. However, if

In addition to the current sources of capital discussed above that will provide short term liquidity, the Company plans to sell approximately $51.7 million in assets which are currently classified as held for sale and are expected to be sold within one year from the date of classification.  The Company also is unable to leverage certain of its propertiescurrently exploring various other alternatives including debt financing vehicles and improve operating performance, the Company's business plans may be adversely affected andstrategic partnerships. However, at this time the Company has no commitments to obtain any additional funds, and there can be no assurance such funds will have to modify its business plans to conservebe available cash.on acceptable terms or at all.

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 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 statements, which should be read in conjunction with the December 31, 20132014 consolidated financial statements and related disclosures of the Company included in the Annual Report on Form 10-K filed with the SEC on March 16, 2015, reflect all adjustments, consisting of normal recurring adjustments and impairments necessary to present fairly the consolidated financial position, results of operations and cash flows for such periods.  The results of operations for the three and nine months ended September 30, 2014March 31, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2014.2015.

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 related to revenue recognition, bad debts, fixed assets, goodwill and other intangible assets, stock-based compensation, income taxes, benefit plans and certain accruals and contingencies.  Actual results could differ from those estimates.

New Accounting Pronouncements –In July 2013,May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in this ASU provide guidance on the financial statement presentation of unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this ASU did not materially impact the presentation of the Company’s financial condition, results of operation and disclosures.

Stock-Based Compensation – The Company measures the value of stock options on the grant date at fair value, using the Black-Scholes option valuation model.  The Company amortizes the fair value of stock options, net of estimated forfeitures, utilizing straight-line amortization of compensation expense over the requisite service period of the grant.

The Company measures the value of service and performance-based restricted stock on the fair value of a share of common stock on the date of the grant. The Company amortizes the fair value of service-based restricted stock utilizing straight-line amortization of compensation expense over the requisite service period of the grant.

The Company amortizes the fair value of the performance-based restricted stock based on the determination of the probable outcome of the performance condition.  If the performance condition is expected to be met, then the Company amortizes the fair value of the number of shares expected to vest utilizing straight-line basis over the requisite performance period of the grant.  However, if the associated performance condition is not expected to be met, then the Company does not recognize the stock-based compensation expense.

Income Taxes – The Company accounts for income taxes in accordance with FASB ASCAccounting Standards Code (“ASC”) Topic 740, “Income Taxes” (“ASC 740”). This statement requires an asset and 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 its 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, the Company’s 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 considered, 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 the Company’s 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 the Company’s income tax provision to vary significantly among financial reporting periods.

 

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense.  During the three and nine months ended September 30,March 31, 2015 and 2014, and 2013, the Company did not have any interest and penalties expense associated with uncertain tax positions did not materially impact the Company’s results of operations or financial position.

 

The weighted average number of common shares used to compute basic and diluted loss per share for the three and nine months ended September 30,March 31, 2015 and 2014 and 2013 was as follows:

In 2011, 2013 and 2013,2014, the Company issued performance shares that vest when certain performance conditions are satisfied.  As of September 30, 2014,March 31, 2015, these performance conditions were not met.  As a result, the Company has determined these shares to be contingently issuable.  Accordingly, 398,250226,106 shares of outstanding performance shares have been excluded from the computation of diluted earnings per share for the three and nine months ended September 30, 2014,March 31, 2015, and 441,552386,063 shares have been excluded for the three and nine months ended September 30, 2013.March 31, 2014.  Refer to Note 6 for more information on performance shares.

On June 18, 2013,December 3, 2014, the Company’s Board of Directors approved a plan to cease operations at four campusesfive training sites in OhioFlorida.  The Company performed a cost benefit analysis on several schools and one campus in Kentucky consisting ofconcluded that the Company’s Dayton institutiontraining sites contained a high fixed cost component and its branch campuses.  Federal legislation implemented on July 1, 2012 that prohibits “abilityhad difficulty attracting enough students due to benefit” students from participating in federal student financial aid programs ledhigh competition to maintain a dramatic decrease in the number of students attending these five campuses.stable profit margin. Accordingly, the Company ceased operations at these campuses as of December 31, 2013.2014.  This was a strategic shift to close all of the Company’s training sites and all locations that do not accept Title IV payments.  The results of operations of these campuses are reflected as discontinued operations in the condensed consolidated financial statements.

The Company reviews long-lived assets for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.

The Company reviews goodwill and intangible assets for impairment when indicators of impairment exist.  Annually, or more frequently if necessary, the Company evaluates goodwill and intangible assets with indefinite lives for impairment, with any resulting impairment reflected as an operating expense.   The Company concluded that as of September 30,March 31, 2015 and 2014 there was an indicator of potential impairment as a result of a decrease in market capitalization and, accordingly, the Company tested goodwill for impairment.  The test indicated that 10 of the Company’s reporting units were impaired, which resulted in a pre-tax non-cash charge of $39.0 million for the three months ended September 30, 2014.

The carrying amount of goodwill at September 30, 2014March 31, 2015 is as follows:

Intangible assets, which are included in other assets in the accompanying condensed consolidated balance sheets, consist of the following:

		Indefinite Trade Name				Trade Name				Accreditation				Curriculum				Non-compete				Total
Gross carrying amount at December 31, 2013		$	180			$	335			$	1,166			$	1,124			$	200			$	3,005
Impairment			(180	)			(25	)			(102	)			(574	)			(200	)			(1,081	)
Gross carrying amount at September 30, 2014			-				310				1,064				550				-				1,924
Accumulated amortization at December 31, 2013			-				228				-				828				68				1,124
Amortization			-				37				-				78				27				142
Impairment							(12	)							(448	)			(95	)			(555	)
Accumulated amortization at September 30, 2014			-				253				-				458				-				711
Net carrying amount at September 30, 2014		$	-			$	57			$	1,064			$	92			$	-			$	1,213
Weighted average amortization period (years)			-				7			Indefinite					10				-

Amortization of intangible assets was less than $0.1 million and $0.1 million for each of the three months ended September 30, 2014March 31, 2015 and 2013, and approximately $0.1 million and $0.2 million for the nine months ended September 30, 2014 and 2013.2014.

The following table summarizes the estimated future amortization expense:

Long-term debt and lease obligations consist of the following:

During the three months ended September 30, 2014March 31, 2015, the Company had net repayments of $7.5$30.0 million under the Credit Facility.  The Company had $7.5 millionno amounts outstanding under the Credit Facility as of September 30, 2014.March 31, 2015.  The interest rates on these borrowings ranged from 4.2%7.25% to 7.3%14.25%.  The Company had $54.5$30.0 million outstanding under the Credit Agreement as of December 31, 20132014 which was repaid on January 3, 2014.2015.  The interest rate on this borrowing was 7.3%7.25%.

(b) The Company completed a sale and a leaseback of several facilities on December 28, 2001. The Company retains a continuing involvement in the lease and, as a result, it is prohibited from utilizing sale-leaseback accounting. Accordingly, the Company has treated this transaction as a finance lease. The lease expires on December 31, 2016.

(c) In 2009, the Company assumed real estate capital leases in Fern Park, Florida and Hartford, Connecticut.  These leases bear interest at 8% and expire in 2032 and 2031, respectively.

Scheduled maturities of long-term debt and lease obligations at September 30, 2014March 31, 2015 are as follows:

The Company has two stock incentive plans:  a Long-Term Incentive Plan (the “LTIP”) and a Non-Employee Directors Restricted Stock Plan (the “Non-Employee Directors Plan”).

Under the LTIP, certain employees received awards of restricted shares of common stock based on service and performance.  The number of shares granted to each employee is based on the fair market value of a share of common stock on the date of grant.

On April 29, 2013, performance-based shares were granted which vest over four years based upon the attainment of (i) a specified operating income margin during any one or more of the fiscal years in the period beginning January 1, 2013 and ending December 31, 2016 and (ii) the attainment of earnings before interest, taxes, depreciation and amortization targets during each of the fiscal years ended December 31, 2013 through 2016.  There is no vesting period on the right to vote or the right to receive dividends on any of the restricted shares.

Pursuant to the Non-Employee Directors Plan, each non-employee director of the Company receives an annual award of restricted shares of common stock on the date of the Company’s annual meeting of shareholders.  The number of shares granted to each non-employee director is based on the fair market value of a share of common stock on that date.  The restricted shares vest on the first anniversary of the grant date; however, there is no vesting period on the right to vote or the right to receive dividends on these restricted shares.

For the ninethree months ended September 30,March 31, 2015 and 2014, and 2013, the Company completed a net share settlement for 27,6829,208 and 60,55215,209 restricted shares, respectively, on behalf of certain employees that participate in the LTIP upon the vesting of the restricted shares pursuant to the terms of the LTIP.  The net share settlement was in connection with income taxes incurred on restricted shares that vested and were transferred to the employee during 20142015 and/or 2013,2014, creating taxable income for the employee.   At the employees’ request, the Company will pay these taxes on behalf of the employees in exchange for the employees returning an equivalent value of restricted shares to the Company.  These transactions resulted in a decrease of approximatelyless than $0.1 million and $0.4 million for each of the ninethree months ended September 30,March 31, 2015 and 2014, and 2013, respectively, to equity on the 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:

The restricted stock expense for the three months ended September 30,March 31, 2015 and 2014 and 2013 was $0.8$0.3 million and $0.1 million, respectively. The restricted stock expense for the nine months ended September 30, 2014 and 2013 was $2.4 million and $2.3$1.0 million, respectively. The unrecognized restricted stock expense as of September 30, 2014March 31, 2015 and December 31, 20132014 was $4.5$2.5 million and $6.8$4.2 million, respectively.  As of September 30, 2014,March 31, 2015, outstanding restricted shares under the LTIP had aggregate intrinsic value of $3.3$1.6 million.

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:

As of September 30, 2014, theMarch 31, 2015, there was no unrecognized pre-tax compensation expense for all unvested stock option awards was less than $0.1 million.  This amount will be expensed over the weighted-average period of approximately 1.26 years.expense.

The following table presents a summary of stock options outstanding:

The Company assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets.  A significant piece of objective negative evidence was the cumulative losses incurred by the Company in recent years.  On the basis of this evaluation the realization of the Company’s deferred tax assets was not deemed to be more likely than not and thus the Company maintained a valuation allowance on its net deferred tax assets as of September 30, 2014.March 31, 2015.

In the ordinary conduct of its business, the Company is subject to lawsuits, investigations and claims, including, but not limited to, claims involving students or graduates and routine employment matters. Although the Company cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against it, the Company does not believe that any currently pending legal proceedings to which it is a party will have a material adverse effect on the Company’s business, financial condition, and results of operations or cash flows.

The Company sponsors a noncontributory defined benefit pension plan covering some of the Company’s employees who were employed by the Company prior to 1995.  Benefits are provided based on employees’ years of service and earnings.  This plan was frozen on December 31, 1994.  The total amount of the Company’s contributions paid under its pension plan was $0.2 millionzero for the ninethree months ended September 30, 2014March 31, 2015 and $0.7 million for the nine months ended September 30, 2013.2014.  The net periodic benefit cost was less than $0.1 million and $0.2 million for the three months ended September 30, 2014March 31, 2015 and 2013, respectively, and $0.1 million and $0.5 million for the nine months ended September 30, 2014 and 2013 respectively.2014.

In August 2014, the Company’s Boardpast, the Company offered any combination of Directors declaredprograms in any market and at any campus.  The Company is changing its focus to program offerings that create greater differentiation and attain excellence to attract more students and gain market share.  Also strategically, the Company wants to offer continuing education training to employers who hire its students and this is best achieved at campuses focused on their profession.

As a quarterly cash dividendresult of $0.02 per sharethese environmental, market forces and strategic decisions, the Company now operates in three reportable segments: a) Transportation and Skilled Trades, b) Healthcare and Other Professions and c) Transitional.

Our reportable segments have been determined based on the method by which our chief operating decision maker now evaluates performance and allocates resources.  Each reportable segment represents a group of common stock outstanding, which was paid on September 30, 2014postsecondary education providers that offer a variety of degree and non-degree academic programs.  These segments are organized by key market segments to shareholders of record on September 12, 2014.enhance operational alignment within each segment to more effectively execute our strategic plan.  The establishment of future record and payment dates is subject to the final determinationEach of the Company’s Boardschools is a reporting unit and an operating segment.  The Company’s operating segments have been aggregated into three reportable segments because, in the Company’s judgment, the reporting units have similar products, production processes, types of Directors.customers, methods of distribution, regulatory environment and economic characteristics.  Our reporting segments are described below.

 

The following discussion may contain forward-looking statements regarding us,the Company, our business, prospects and our results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, those described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2013,2014, as filed with the Securities and Exchange Commission (“SEC”(the “SEC”) and in our other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.  We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise.  Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that advise interested parties of the risks and factors that may affect our business.

The interim financial statements and related notes thereto filed onin this Form 10-Q and the discussions contained herein should be read in conjunction with the annual financial statements and notes included in our Form 10-K for the year ended December 31, 2013,2014, as filed with the SEC, which includes audited consolidated financial statements for our three fiscal years ended December 31, 2013.2014.

We are a leading provider of diversified career-oriented post-secondary education. We reorganized our operations in the first quarter of 2015 into three reportable segments:  a) Transportation and Skilled Trades, b) Healthcare and Other Professions, and c) Transitional.  We offer recent high school graduates and working adults career-oriented programs in five areas of study: automotive technology, health sciences, skilled trades, hospitality services and business and information technology.programs. Each area of study is specifically designed to appeal to and meet the educational objectives of our student population, while also satisfying the criteria established by industry and employers. The resulting diversification limits dependence on any one industry for enrollment growth or placement opportunities and broadens potential branches for introducing new programs. As of September 30, 2014,March 31, 2015, we enrolled 15,36413,404 students in diploma and degree programs and 181 in short programs at our 31 campuses and five training sites in 15 states. Our campuses primarily attract students from their local communities and surrounding areas, although our five destination campuses attract students from across the United States, and in some cases, from abroad.

Our discussions of our financial condition and results of operations are based upon our condensed 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, fixed assets, goodwill and other intangible assets, income taxes and certain accruals and contingencies.  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.  Revenues are derived primarily from programs taught at our schools.  Tuition revenues, textbook sales and one-time fees, such as nonrefundable application fees and course material fees, are recognized on a straight-line basis over the length of the applicable program, which is the period of time from a student’s start date through his or her graduation date, including internships or externships that take place prior to graduation.  If a student withdraws from a program prior to a specified date, any paid but unearned tuition is refunded.  Refunds are calculated and paid in accordance with federal, state and accrediting agency standards.  Other revenues, such as tool sales and contract training revenues are recognized as services are performed or goods are delivered.  On an individual student basis, tuition earned in excess of cash received is recorded as accounts receivable, and cash received in excess of tuition earned is recorded as unearned tuition.

Allowance for uncollectible accounts.  Based upon our experience and judgment, we establish an allowance for uncollectible accounts with respect to tuition receivables.  We use an internal group of collectors, augmented by third-party collectors as deemed appropriate, in our collection efforts.  In establishing our allowance for uncollectible accounts, we consider, among other things, current and expected economic conditions, a student’s status (in-school or out-of-school), whether or not a student is currently making payments and overall collection history.  Changes in trends in any of these areas may impact the allowance for uncollectible accounts.  The receivables balances of withdrawn students with delinquent obligations are reserved based on our collection history.  Although we believe that our reserves are adequate, if the financial condition of our students deteriorates, resulting in an impairment of their ability to make payments, additional allowances may be necessary, which will result in increased selling, general and administrative expenses in the period such determination is made.

Our bad debt expense as a percentage of revenue for the three months ended September 30,March 31, 2015 and 2014 was 4.3% and 2013 was 5.1% and 4.7%, respectively.  Our bad debt expense as a percentage of revenue for the nine months ended September 30, 2014 and 2013 was 4.9% and 4.0%3.9%, respectively.  Bad debt was negatively impacted for the three and nine months ended September 30, 2014 due toMarch 31, 2015 by a combination of a slight deterioration in our collection history coupled withand a realignmentsmall increase in day’s sales outstanding.  We are in the process of effortscentralizing various aspects of the financial aid process to accelerateenhance the packaging of third quarter starts.student customer service experience, improve quality control and reduce bad debt expense.    Our exposure to changes in our bad debt expense could impact our operations.  A 1% increase in our bad debt expense as a percentage of revenues for the ninethree months ended September 30,March 31, 2015 and 2014 and 2013 would have resulted in an increase in bad debt expense of $2.4$0.8 million and $2.6$0.8 million, respectively.

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 schools to participate in Title IV programs could have a material effect on the realizability of our receivables.

Goodwill.  We test our goodwill for impairment annually, or whenever events or changes in circumstances indicate an impairment may have occurred, by comparing its fair value to its carrying value. Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of the acquired business, and a variety of other circumstances. If we determine that impairment has occurred, we are required to record a write-down of the carrying value and charge the impairment as an operating expense in the period the determination is made. In evaluating the recoverability of the carrying value of goodwill and other indefinite-lived intangible assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the acquired assets. Changes in strategy or market conditions could significantly impact these judgments in the future and require an adjustment to the recorded balances.

Goodwill represents a significant portion of our total assets. As of September 30, 2014,March 31, 2015, goodwill represented approximately $23.5$22.2 million, or 12.0%12.6%, of our total assets.

 

Long-lived assets.  We review the carrying value of our long-lived assets and identifiable intangibles for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. We evaluate long-lived assets for impairment by examining estimated future cash flows. 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 we determine that an asset’s carrying value is impaired, we 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.

We concluded as of September 30, 2014, thereThere was sufficient evidence to conclude that there were impairments of certainno long-lived assets at six of our campuses.  Long lived assets had been tested at these campuses as a result of certain financial indicators such as our history of losses, our current respective period losses, as well as future projected losses at these campuses.  The long-lived assetsasset impairment resulted in a pre-tax charge of $1.9 million for leasehold improvements and $0.5 million for intangibles asets.

Bonus costs.  We accrue the estimated cost of our bonus programs using current financial information as compared to target financial achievements and key performance objectives.  Although our recorded liability for bonuses is based on our best estimate of the obligation, actual results could differ and require adjustment of the recorded balance.

Income taxes. We account for income taxes in accordance with FASB ASC Topic 740, “Income Taxes” (“ASC 740”). This statement requires an asset and 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, we assess 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, we considered, 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 our 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 our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods.  On the basis of this evaluation the realization of our deferred tax assets was not deemed to be more likely than not and thus we have provided a valuation allowance on our net deferred tax assets.

 

Inflation has not had a material effect on our operations.

Certain reported amounts in our analysis have been rounded for presentation purposes.

We began 20142015 with approximately 1,800300, or 11.4%2.1%, fewer students than we had on January 1, 2013.2014; however, excluding the merged campuses, student population was essentially flat for the respective periods.

Average revenue perWe believe we have successfully executed our strategy to improve student decreased 0.4%population.  We continue to face countercyclical challenges from a low unemployment rate, which is also affecting our industry peers as well as community colleges.  We remain focused on our strategy including the implementation of sales software to provide process improvement in a new operating environment for the quarter ended September 30, 2014 compared to the quarter ended September 30, 2013 primarily due to an increase in institutional scholarships. education sales.

For a general discussion of trends in our student enrollment, see “- Seasonality and Trends”Outlook” below.

Our facilities expenses decreased by $1.9 million, or 11.0%, primarily due to lower depreciation expense as a result of discontinued depreciation expense in connection with two campuses classified as assets held for sale and prior long-lived asset impairment expenses.  In addition, rent and utilities expense decreased as a result of the quarter ended September 30, 2014 compared to the quarter ended September 30, 2013.merged campuses partially offset by higher insurance costs.

Our educational expenses contain a high fixed cost component and are not as scalable as some of our other expenses.  As our student population decreases, we typically experience a reduction in average class size and, therefore, are not always able to align these expenses with the corresponding decrease in population.  Educational services and facilities expenses, as a percentage of revenue, decreased to 49.8% from 52.7%.