The Offer

Company Overview

Legacy Education operates a network of career-focused institutions, including High Desert Medical College (HDMC), Central Coast College (CCC), and Integrity College of Health (Integrity). These institutions offer diverse certificate and degree programs designed to provide practical training in healthcare, veterinary services, and medical information technology. HDMC, with campuses in Lancaster, Bakersfield, and Temecula, offers programs ranging from vocational nursing to ultrasound technician and plans to introduce an emergency medical technician (EMT) program by October 2024.

Key Highlights

Primary Offering:

Legacy Education issued 2,000,000 shares of common stock, with an option for underwriters to purchase up to an additional 300,000 shares within 30 days, generating net proceeds of approximately USD 10.28 million, or up to USD 11.95 million if the over-allotment option is fully exercised, based on an initial public offering price of USD 6.00 per share.

Use of proceeds:

The estimated net proceeds from the sale of 2,000,000 shares of common stock in this offering are expected to be approximately USD 10.28 million, or USD 11.95 million if the underwriters fully exercise their over-allotment option, based on an assumed public offering price of USD 6.00 per share (the midpoint of the price range) after deducting estimatesd underwriting discounts, commissions, and expenses. The company intends to utilize the proceeds for investments in its facilities, development of new programs, and general working capital purposes, with potential allocations for future acquisitions of complementary businesses or assets, although no such commitments exist at present. A USD 1.00 increase or decrease in the offering price would result in an approximate USD 1.86 million change in net proceeds, while an adjustment of 1,000,000 shares would alter the proceeds by USD 5.58 million, assuming no change in the price per share and after accounting for underwriting deductions.

Industry Overview

• The U.S. post-secondary education sector is large, fragmented, and competitive.
• As of 2022, degree-granting career colleges served approximately 1.2 million undergraduate students, representing 6.3% of the total 19.0 million undergraduates in degree programs.
• Enrollment in post-secondary institutions has declined due to the COVID-19 pandemic, with overall enrollment dropping by 0.7% in 2022 and 2.5% in 2021.
• Proprietary colleges saw a 2.6% enrollment increase in 2022 but experienced a 2.1% decline in 2021.
• The industry heavily relies on federal student financial assistance through Title IV Programs, and potential reductions in such funding may negatively impact demand for higher education.
• Long-term demand for post-secondary education in the U.S. is expected to grow due to demographic, economic, and social trends.

Market Opportunity and Strategic Focus

• LGCY sees a gap in the California community college system, which struggles with low completion rates, unclear career pathways, and poor job placement.
• Students are caught between expensive four-year universities and underperforming community colleges.
• LGCY addresses this need by offering focused, high-quality programs designed to meet employment demands.
• LGCY's campuses are strategically located near hospitals and clinics to provide students with externship and full-time employment opportunities.
• The geographic reach spans Southern to Central California, serving 24 million people, including an aging population with growing healthcare needs.
• LGCY targets individuals in their early to mid-20s seeking to improve their economic prospects through quick, career-oriented training.
• The healthcare industry, a key focus for LGCY, is projected to grow by 16% from 2020 to 2030, adding 2.6 million new jobs, per the Bureau of Labor Statistics.

Dividend policy:

In 2023, LGCY distributed cash dividends on its capital stock; however, the company does not anticipate paying any cash dividends on common stock in the foreseeable future. LGCY intends to retain future earnings to fund ongoing operations and future capital requirements. Any future decision regarding the payment of cash dividends will be at the discretion of the board of directors and will depend on the company's financial condition, operating results, capital needs, and other factors deemed relevant by the board.

Financial Highlights (Results of Operations) (Expressed in USD)

• Revenue Growth and Operational Performance: For the nine months ending March 31, 2024, LGCY reported significant revenue growth of approximately 28.1%, with total revenue reaching USD 33.2 million compared to USD 25.9 million during the same period in 2023. This increase of approximately USD 7.3 million was driven by a 20.2% rise in student enrollment, reflecting the company’s ability to attract more students to its educational programs. The growth in revenue underscores LGCY’s strong market positioning and effective expansion strategies across its campuses and program offerings.
• Rising Educational Services and Administrative Costs: LGCY’s educational services expenses rose to approximately USD 17.8 million for the nine-month period ending March 31, 2024, up from USD 15.2 million for the same period in 2023, representing a 17.2% increase. This was primarily due to additional instructional resources and staffing to support the increased student population. Similarly, general and administrative expenses increased by approximately USD 1.8 million, or 22.9%, totaling USD 9.7 million for the period. The rise in these costs was mainly driven by increased marketing efforts and bad debt expenses, demonstrating the company’s investment in both student acquisition and maintaining operational infrastructure.
• Net Income and Financial Outlook: LGCY’s net income for the nine months ending March 31, 2024, was approximately USD 4.2 million, reflecting a 121.9% increase compared to USD 1.9 million in the same period in 2023. This substantial rise in profitability was primarily attributed to revenue growth and effective management of expenses. Depreciation, amortization, and interest expenses remained relatively stable, contributing to a solid financial performance. The company expects general and administrative expenses to continue increasing as it decentralizes operations, adds management staff, and incurs professional fees related to potential acquisitions of new institutions.
• Liquidity and Capital Expenditure Management: LGCY reported an improvement in liquidity, with cash and cash equivalents increasing to USD 11.4 million as of March 31, 2024, compared to USD 9.3 million on June 30, 2023. Capital expenditures for the nine months ending March 31, 2024, were approximately USD 0.4 million, compared to USD 0.1 million for the same period in 2023, reflecting increased investments in infrastructure and campus improvements. The company believes its current cash flow from operations, alongside other liquidity sources, will be sufficient to meet operational, capital expenditure, and working capital needs for at least the next 12 months.
• Title IV Funding and Cash Flow Dynamics: LGCY derives a substantial portion of its revenue from student tuition funded through Title IV Programs, which are disbursed based on federal regulations and the successful arrangement of financial aid for students. This funding structure impacts the company’s operating cash flow as Title IV disbursements occur before the full tuition and fees are earned. For fiscal year 2023, net cash provided by operating activities was approximately USD 1.8 million, up from USD 1.1 million in 2022, primarily due to reduced income tax payments. For the nine months ending March 31, 2024, net cash from operations increased to USD 2.7 million, driven by higher earnings, with ongoing investments into capital improvements.

Key Management Highlights

Risk Associated (High)

Investment in the IPO of “LGCY” is exposed to a variety of risks such as:

Regulatory Compliance Risks: LGCY faces significant risks related to its adherence to extensive educational regulations. Non-compliance with these regulations could lead to severe consequences such as financial penalties, restrictions on operational activities, loss of accreditation, or revocation of authorizations to operate educational programs. Such outcomes would not only incur financial costs but could also damage the company's reputation, leading to a potential loss of federal and state financial aid funding, which many students rely on to attend LGCY institutions.

Impact of Regulatory Changes: The regulatory landscape for educational institutions is subject to frequent changes and new interpretations, which pose a risk to LGCY’s operations. Alterations in laws, regulations, and standards could adversely affect the institution’s eligibility for Title IV funding and other financial aid programs. These changes might result in increased operational costs, restrictions on business activities, or legal sanctions. Such developments could materially impact LGCY’s financial stability and its ability to conduct business effectively.

State and Federal Legislation Risks: LGCY is also at risk from new or amended state and federal legislation that could impose additional compliance requirements or operational constraints. Changes in state laws, particularly those governing marketing practices, financial aid, and operational approvals, could lead to higher costs and challenges in maintaining necessary authorizations. Furthermore, legislative developments could affect student enrollment and revenue, potentially leading to adverse impacts on the company's overall financial performance and operational capacity.

Conclusion

Legacy Education Inc. (LGCY) is offering 2,000,000 shares of common stock, with a possible additional 300,000 shares through an over-allotment option, generating estimated net proceeds of approximately USD 10.28 million, or up to USD 11.95 million if the over-allotment is fully exercised. The company plans to use these funds for facility investments, program development, and general working capital, with potential allocations for future acquisitions. LGCY operates a network of career-focused institutions, including High Desert Medical College, Central Coast College, and Integrity College of Health, offering various healthcare and medical technology programs. The company has reported a revenue increase of 28.1% for the nine months ending March 31, 2024, driven by higher student enrollment, though operational costs have also risen. The IPO involves risks such as potential non-compliance with educational regulations, which could lead to financial penalties and loss of funding, and uncertainties from regulatory and legislative changes that may affect the company’s operations and financial stability.

Hence, given the financial performance of the company, use of proceeds, and associated risks “Legacy Education Inc. (LGCY)” IPO seems “Neutral" at the IPO price.