AMERICAN PUBLIC EDUCATION INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations In this Quarterly Report on Form 10-Q, or Quarterly Report, “we,” “our,” “us,” “the Company” and similar terms refer to American Public Education, Inc., or “APEI,” and its subsidiary institutions collectively unless the context indicates otherwise. All quarterly information in this Management’s Discussion and Analysis is unaudited. The following discussion of our historical results of operations and our liquidity and capital resources should be read in conjunction with the Consolidated Financial Statements and related notes that appear elsewhere in this Quarterly Report and the audited financial information and related notes, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations and other disclosures, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, or our Annual Report. Forward-Looking Statements This Quarterly Report contains forward-looking statements intended to be covered by the safe harbor provisions for forward-looking statements in Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We may use words such as “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “potentially,” “will,” or “may,” or other words that convey uncertainty of future events, conditions, circumstances, or outcomes to identify these forward-looking statements. Forward-looking statements in this Quarterly Report include, without limitation, statements regarding: • our expectations regarding the effects of and our response to the COVID-19 pandemic, including the demand environment for online education or nursing education as the pandemic abates, impacts on business operations and our financial results, and our ability to comply with regulations related to emergency relief; • integration of Rasmussen University, or RU, and Graduate School USA, or GSUSA; • changes to and expectations regarding our student enrollment, net course registrations, and the composition of our student body, including the pace of such changes; • our ability to maintain, develop, and grow our technology infrastructure to support our student body; • our conversion of prospective students to enrolled students and our retention of active students; • our ability to update and expand the content of existing programs and develop new programs to meet emerging student needs and marketplace demands, and our ability to do so in a cost-effective manner or on a timely basis; • our plans for, marketing of, and initiatives at, our institutions; • our ability to leverage our investments in support of our initiatives, students, and institutions; • our maintenance and expansion of our relationships and partnerships and the development of new relationships and partnerships; • actions by the Department of Defense, or DoD, or branches of the United States Armed Forces, including actions related to the disruption and suspension of DoD tuition assistance, or TA, programs, and ArmyIgnitED, and expectations regarding the effects of those actions; • changes in and our ability to comply with the extensive regulatory framework applicable to our industry, as well as state law and regulations and accrediting agency requirements; • our ability to undertake initiatives to improve the learning experience and attract students who are likely to persist; • changes in enrollment in postsecondary degree-granting institutions and workforce needs; • the competitive environment in which we operate; • our cash needs and expectations regarding cash flow from operations; • our ability to manage and influence our bad debt expense; • our ability to manage, grow, and diversify our business and execute our business initiatives and strategy; and • our financial performance generally. Forward-looking statements are based on our beliefs, assumptions, and expectations of our future performance, taking into account information currently available to us and are not guarantees of future results. There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. Risks and uncertainties involved in forward-looking statements include, among others: • the effects, duration and severity of the ongoing COVID-19 pandemic and the adverse effects on demand for online education or nursing education as impacts of the pandemic abate, and the actions we have taken or may take in response, particularly at Hondros College of Nursing, or HCN, and RU and as a result of working remotely; • the impacts of inflation, increases in labor costs, and enrollment trends, including on our operating margins; • our dependence on the effectiveness of our ability to attract students who persist in our institutions’ programs; • changing market demands; • our inability to effectively market our programs; 26 • our inability to maintain strong relationships with the military and maintain enrollments from military students; • the loss of our ability to receive funds under TA programs or the reduction, elimination, or suspension of TA; • adverse effects of changes our institutions make to improve the student experience and enhance their ability to identify and enroll students who are likely to succeed; • our need to successfully adjust to future market demands by updating existing programs and developing new programs; • our failure to comply with regulatory and accrediting agency requirements or to maintain institutional accreditation; • our loss of eligibility to participate in Title IV programs or ability to process Title IV financial aid; • risks related to business combinations and acquisitions, including integration challenges, business disruption, dilution of stockholder value, and diversion of management attention; • risks related to the acquisition of RU, or the Rasmussen Acquisition, including regulatory approvals, limitations on growth and expansion at RU, effective integration of RU’s business, and our ability to realize the expected benefits of the acquisition; • risks related to incurring substantial debt under the debt facilities that we have entered into in connection with financing the Rasmussen Acquisition, the cost of servicing that debt, and our ability in the future to service that debt; and • our dependence on and need to continue to invest in our technology infrastructure. Forward-looking statements should be considered in light of these factors and the factors described elsewhere in this Quarterly Report, including in the “Risk Factors” section, in the “Risk Factors” section of our Annual Report, and in our various filings with the Securities and Exchange Commission, or the SEC. It is important that you read these factors and the other cautionary statements made in this Quarterly Report as being applicable to all related forward-looking statements wherever they appear in this Quarterly Report. If any of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance, or achievements may differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. You should also read the more detailed description of our business in our Annual Report when considering forward-looking statements. We caution readers not to place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report. We undertake no obligation to publicly update any forward-looking statements except as required by law. Overview Background American Public Education, Inc., or APEI, is a provider of online and campus-based postsecondary education, and with the acquisition of Graduate School USA, career learning, to approximately 107,100 students through four subsidiary institutions. Our subsidiary institutions offer education programs and career learning designed to prepare individuals for productive contributions to their professions and society, and to offer opportunities designed to advance students in their current professions or to help them prepare for their next career. Our subsidiary institutions are licensed or otherwise authorized by state authorities to offer postsecondary education programs to the extent the institutions believe such licenses or authorizations are required, and APUS, RU, and HCN are certified by the United States Department of Education, or ED, to participate in student financial aid programs authorized under Title IV of the Higher Education Act of 1965, as amended, or Title IV programs. Acquisitions On September 1, 2021, or the RU Closing Date, we completed the Rasmussen Acquisition for an adjusted aggregate purchase price, subject to post-closing working capital adjustments of $325.5 million in cash, net of cash acquired. Upon completion of the Rasmussen Acquisition, RU, became a wholly owned subsidiary of APEI. On September 9, 2021, RU timely submitted a change in ownership and control application to ED seeking approval to participate in the Title IV programs under our ownership. ED and RU entered into a Temporary Provisional Program Participation Agreement, effective as of October 14, 2021, that allows RU to continue disbursing Title IV funds while ED reviews the change in ownership application. We relied on debt financing pursuant to a Credit Agreement with Macquarie Capital Funding LLC, or the Credit Agreement, as administrative agent and collateral agent, Macquarie Capital USA Inc. and Truist Securities, Inc., as lead arrangers and joint bookrunners, and certain lenders party thereto, or the Lenders, to fund a portion of the consideration for the Rasmussen Acquisition. For more information on this financing, please refer to “– Liquidity and Capital Resources – Liquidity – Acquisition of Rasmussen University” below and “Note 8. Long-Term Debt” included on the Consolidated Financial Statements in this Quarterly Report. 27 On January 1, 2022, or the GSUSA Closing Date, we completed our acquisition of substantially all the assets of American Public Training LLC, which is referred to herein as Graduate School USA, or GSUSA for $1.0 million, subject to working capital adjustments. At closing, the Company received approximately $1.9 million from the Seller, which represents the estimated net working capital at closing net of the initial cash payment to the Seller of $0.5 million which is the purchase price less $0.5 million retained by the Company to secure the indemnification obligations of the Seller. The purchase price reflects the $0.5 million due to Seller post-closing and additional adjustments to the estimated net working capital at closing. Our consolidated results for the three months March 31, 2021 do not reflect the operations of RU and GSUSA. We did not consolidate the RU Segment or GSUSA results prior to the respective acquisition closing dates. Adjustments to reconcile segment results to the Consolidated Financial Statements are included in “Corporate and Other”, which includes unallocated corporate activity and eliminations, and for the three months ended March 31, 2022, the operational activities of GSUSA. Our results for the three months ended March 31, 2022, included approximately $0.9 million of acquisition-related expenses related to RU and GSUSA, and our results for the three months ended March 31, 2021, include approximately $0.6 million of acquisition-related expenses related to RU, respectively. These expenses are included in general and administrative expenses on the Consolidated Statements of Income. For more information on the Rasmussen and GSUSA Acquisitions, please refer to, “Note 3. Acquisition Activity” included on the Consolidated Financial Statements in this Quarterly Report. We have continued to monitor the impact of the COVID-19 pandemic and adjust our operations as appropriate in light of state and federal guidance. The COVID-19 pandemic did not materially impact our results of operations during the three month period ended March 31, 2022. For more information on the potential risks related to COVID-19, please refer to our Annual Report and the sections entitled “Results of Operations”, and “Risk Factors”. Our wholly-owned operating subsidiary institutions include the following: • American Public University System, Inc., referred to herein as APUS, provides online postsecondary education to approximately 88,400 adult learners, directed primarily at the needs of the military, military-affiliated, public service and service-minded communities through two brands: American Military University, or AMU, and American Public University, or APU. As of March 31, 2022, approximately 64% of APUS students self-reported that they served in the military on active duty at the time of initial enrollment. • Rasmussen College, LLC, referred to herein as Rasmussen University, or RU, provides nursing- and health sciences-focused postsecondary education to over 16,200 students at its 23 campuses in six states and online. As of March 31, 2022, approximately 8,400 students are pursuing nursing degrees at RU, approximately 90% of whom are enrolled in RU’s pre-licensure degree programs. We did not consolidate the financial results of the RU Segment prior to the RU Closing Date. • National Education Seminars, Inc., referred to herein as Hondros College of Nursing, or HCN, provides nursing education to approximately 2,500 students at six campuses in Ohio and a campus in Indianapolis, Indiana. A campus in Detroit, Michigan is expected to open in Fall of 2022. All of HCN’s students are enrolled in its pre-licensure degree programs. • American Public Training LLC, referred to herein as Graduate School USA, or GSUSA, provides career learning to the federal government workforce through a catalog of over 300 courses specializing in foundational and continuing professional development, as well as leadership training to advance the performance of government agencies through the competency and career advancement of their employees. GSUSA operational activities are presented within “Corporate and Other”. 28 Cost and Expense Reductions On January 14, 2022, RU completed a reduction in force that resulted in the termination of nine full-time faculty members and 19 non-faculty employees across a variety of roles and departments at RU, representing approximately 3.0% of RU’s full-time faculty workforce, and 2.1% of RU’s non-faculty workforce. We incurred an aggregate of approximately $0.4 million of pre-tax cash expenses associated with employee severance benefits. The reduction in force is expected to result in pre-tax labor and benefit savings in the range of $2.5 million to $3.5 million in 2022. These cost savings do not include expenses associated with employee severance benefits. Regulatory and Legislative Activity ED recently engaged in negotiated rulemaking processes to develop regulations related to participation in the student financial aid programs authorized under Title IV of the Higher Education Act of 1965, as amended, or the HEA. Topics addressed include modifications to what is commonly referred to as the 90/10 Rule, which imposes sanctions on institutions that derive more than 90% of their total revenue on a cash accounting basis from Title IV programs, as calculated under ED’s regulations, gainful employment requirements, public service student loan forgiveness programs, mandatory pre-dispute arbitration, prohibition of class-action lawsuits, ability to benefit provisions, certification procedures for participation in Title IV programs, change of ownership and change in control rules and procedures, financial responsibility standards, and standards of administrative capability, among others. Any final regulations adopted by ED are not expected to go into effect until July 1, 2023 at the earliest. Please refer to “Risk Factors - Recent ED negotiated rulemakings could result in regulations that materially and adversely affect our business.” Reportable Segments Our operations are organized into three reportable segments: • American Public University System Segment, or APUS Segment. This segment reflects the operational activities of APUS. • Rasmussen University Segment, or RU Segment . This segment reflects the operational activities of RU. • Hondros College of Nursing Segment, or HCN Segment. This segment reflects the operational activities of HCN. Prior to the Rasmussen Acquisition, we had two reportable segments: the American Public Education, Inc. Segment, or APEI Segment, and the Hondros College of Nursing, or HCN Segment. Post-acquisition, we have three reportable segments: the APUS Segment, which was previously included within the APEI Segment; the RU Segment; and the HCN Segment. The APEI Segment previously reported the results of both APUS and unallocated Company expenses. GSUSA does not meet the quantitative thresholds to qualify as a reportable segment; therefore, its operational activities are presented below within “Corporate and Other”. Additionally, adjustments to reconcile segment results to the Consolidated Financial Statements are included in “Corporate and Other”, which primarily includes unallocated corporate activity and eliminations, which generally were previously reported within the APEI Segment. Prior periods have been updated to conform to the revised presentation. Summary of Results As discussed above, we completed the Rasmussen and GSUSA Acquisitions on September 1, 2021, and January 1, 2022, respectively. We did not consolidate the financial results of these companies prior to their respective acquisition closing dates. Accordingly, the financial results for the three months ended March 31, 2021 do not include the results of operations of RU and GSUSA, and therefore the prior year period presented is not directly comparable to the current period. For the three months ended March 31, 2022, our consolidated revenue increased to $154.7 million from $88.5 million, or by 74.8%, compared to the prior year period. Our operating margins decreased to 3.4% from 12.0% for the three months ended March 31, 2022, compared to the prior year period. Net income decreased to $5.3 million from $8.1 million, a decrease of $2.8 million compared to the prior year period. We expect our operating margins to remain below prior year levels for the remainder of 2022, including as a result of the impacts of inflation, increases in labor costs, particularly at Rasmussen and HCN, and enrollment trends, particularly at Rasmussen. For the three months ended March 31, 2022, while net course registrations at APUS increased to approximately 94,000 from approximately 92,900, or approximately 1.2%, compared to the prior year period, APUS Segment revenue decreased to $73.1 million from $77.5 million, or by 5.7%, compared to the prior year period. The increase in net course registrations was 29 primarily due to an increase in military-related registrations from students utilizing TA. We believe the decrease in APUS Segment revenue was a result of two key factors: the difference in timing of registrations within the quarter as compared with the prior year and lower revenue per net course registration due to an increase in TA registrations which have a lower revenue per net course registration than other funding sources. Net course registrations represent the total number of courses for which students remain enrolled after the date by which they may drop a course without financial penalty. APUS Segment operating margins decreased to 18.0% from 18.1% for the three months ended March 31, 2022, compared to the prior year period. For the three months ended March 31, 2022, HCN Segment revenue increased to $11.5 million from $11.1 million, or by 3.7%, compared to the prior year period. Total enrollment at HCN for the three months ended March 31, 2022 increased to approximately 2,500 from approximately 2,300, or approximately 8.1%, as compared to the prior year period. We believe that the increase in total student enrollment at HCN was due in part to an increase in marketing expenditures and the continued impact of initiatives implemented in 2019 and 2020, such as the direct entry ADN Program and the institutional affordability grant. HCN total student enrollment represents the total number of students enrolled in a course immediately after the date by which students may drop a course without financial penalty. HCN Segment operating margins decreased to a negative 8.6% from 7.0% for the three months ended March 31, 2022, compared to the prior year period. The decrease in the operating margin is due to increases in nursing faculty compensation costs and other employee costs, an increase in marketing expenditures as compared to the prior year period, and costs associated with the ongoing start-up of the new campus in Akron, Ohio, which opened in April 2021. RU enrollment was approximately 16,200 during the three months ended March 31, 2022, which compares to 17,300 during the three months ended March 31, 2021. We believe this decline in enrollment, which also reflects year over year declines in total nursing enrollment and enrollment from new nursing students, may have been caused, in part, due to a moderation in near-term demand for RU’s programs due to the abatement of the COVID-19 pandemic, record low unemployment in some RU local markets, and increasing pay for nurses resulting in fewer available nursing faculty to educate and oversee clinicals. The factors adversely impacting RU enrollments, including nursing enrollments, are expected to continue to negatively impact RU’s results, and we are unable to predict when we will return to enrollment growth at RU. RU Segment revenue totaled approximately $67.1 million for the three months ended March 31, 2022. Critical Accounting Policies and Use of Estimates For information regarding our Critical Accounting Policies and Use of Estimates, see the “Critical Accounting Policies and Use of Estimates” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report. Results of Operations Below we have included a discussion of our operating results and material changes in our operating results during the three months ended March 31, 2022 compared to the three months ended March 31, 2021. Our revenue and operating results normally fluctuate as a result of seasonal or other variations in our enrollments and the level of expenses in our reportable segments. Our student population varies as a result of new enrollments, graduations, student attrition, the success of our marketing programs, and other reasons that we cannot always anticipate. We expect quarterly fluctuations in operating results to continue as a result of various enrollment patterns and changes in revenue and expenses, including as a result of the Rasmussen and GSUSA Acquisitions. We believe the increase in net registrations at APUS for the three months ended March 31, 2022, was due to increases in military-related registrations from students utilizing TA at APUS and as a result of improvements made by the Army to the ArmyIgnitED system. For more information on the impacts of the Army TA program delays on the Company and the risks related to these impacts, please refer to “Overview” in this Management’s Discussion and Analysis of Financial Condition and Results of Operation and the section entitled “Risk Factors” in our Annual Report. We believe that the increase in enrollment at HCN for the three months ended March 31, 2022 as compared to the prior year period is due in part to an increase in marketing expenditures and the continued impact of initiatives implemented in 2019 and 2020, such as the direct entry ADN Program and the institutional affordability grant. Our consolidated results for the three months ended March 31, 2022 and 2021 reflect the operations of our APUS and HCN Segments only and include the results for our RU Segment and GSUSA for the three months ended March 31, 2022. We did not consolidate the RU Segment or GSUSA prior to the respective acquisition closing dates. RU enrollment was 30 approximately 16,200 during the three months ended March 31, 2022, which compares to 17,300 during the three months ended March 31, 2021. We believe this decline in enrollment may have been caused, in part, due to a moderation in near-term demand for RU’s programs due to the abatement of the COVID-19 pandemic, record low unemployment, and challenges in filling open nursing faculty positions. For a more detailed discussion of our results by reportable segment, refer to “Analysis of Operating Results by Reportable Segment” below. 31 Analysis of Consolidated Statements of Income The following table sets forth statements of income data as a percentage of revenue for each of the periods indicated: Three Months Ended March 31, 2022 2021 (Unaudited) Revenue 100.0 % 100.0 % Costs and expenses: Instructional costs and services 46.3 36.5 Selling and promotional 25.4 21.9 General and administrative 19.1 26.6 Loss on disposals of long-lived assets 0.5 — Depreciation and amortization 5.3 3.0 Total costs and expenses 96.6 88.0 Income from operations before interest and income taxes 3.4 12.0 Gain on acquisition 2.9 — Interest (expense) income (2.2) 0.1 Income from operations before income taxes 4.1 12.1 Income tax expense 0.7 3.0 Equity investment loss — — Net income 3.4 % 9.1 % Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021 Revenue. Our consolidated revenue for the three months ended March 31, 2022 was $154.7 million, an increase of $66.2 million, or 74.8%, compared to $88.5 million for the three months ended March 31, 2021. The increase in revenue was primarily due to the inclusion of RU Segment revenue and GSUSA revenue for the three months ended March 31, 2022 of $67.1 million and $3.1 million, respectively, and a $0.4 million, or 3.7% increase, in revenue in our HCN Segment, partially offset by a $4.4 million, or 5.7% decrease, in our APUS Segment revenue. The HCN Segment revenue increase was primarily due to an 8.1% increase in total student enrollment as compared to the prior year period. The APUS Segment revenue decrease was primarily due to the timing of registrations within the quarter and lower revenue per net course registrations due to a change in the mix of registrations toward a greater percentage of military registrations, which generate lower revenue per registration than non-military registrations. Costs and expenses. Costs and expenses for the three months ended March 31, 2022 were $149.5 million, an increase of $71.6 million, or 92.0%, compared to $77.9 million for the three months ended March 31, 2021. The increase in costs and expenses as compared to the prior year period was primarily due to the inclusion of our RU Segment costs and expenses, and GSUSA costs and expenses for the three months ended March 31, 2022 of $66.2 million and $4.7 million, respectively, as well as increases in faculty and employee compensation costs in our HCN Segment and increased employee compensation costs in Corporate and Other, advertising costs in our APUS and HCN Segments, and professional fees in Corporate and Other, partially offset by decreases in employee compensation costs, professional fees, and legal costs in our APUS Segment. Results for the three months ended March 31, 2022 include the following costs on a pre-tax basis: $0.9 million in professional fees associated with the Rasmussen and GSUSA Acquisitions in Corporate and Other; and $0.8 million in information technology costs related to our multi-year technology transformation program in our APUS Segment. Results for the three months ended March 31, 2021 included the following costs on a pre-tax basis: $1.8 million in information technology costs related to our multi-year technology transformation program in our APUS Segment; and $0.6 million in professional fees associated with the Rasmussen Acquisition in Corporate and Other. Costs and expenses as a percentage of revenue increased to 96.6% for the three months ended March 31, 2022, from 88.0% for the three months ended March 31, 2021. 32 Instructional costs and services expenses. Our instructional costs and services expenses for the three months ended March 31, 2022 were $71.7 million, an increase of $39.4 million, or 121.8%, compared to $32.3 million for the three months ended March 31, 2021. The increase in instructional costs and services expenses was primarily due to the inclusion of RU Segment instructional costs and services expenses and GSUSA instructional costs and services expenses of $35.9 million and $2.9 million, respectively, as well as increases in faculty costs in our HCN Segment. Instructional costs and services expenses as a percentage of revenue increased to 46.3% for the three months ended March 31, 2022, from 36.5% for the three months ended March 31, 2021. Selling and promotional expenses. Our selling and promotional expenses for the three months ended March 31, 2022 were $39.3 million, an increase of $19.9 million, or 102.7%, compared to $19.4 million for the three months ended March 31, 2021. The increase in selling and promotional expenses was primarily due to the inclusion of RU Segment selling and promotional expenses and GSUSA selling and promotional expenses of $18.1 million and $0.8 million, respectively, as well as increases in advertising costs in our APUS and HCN Segments and an increase in employee compensation costs in our HCN Segment partially offset by decreases in employee compensation costs in our APUS Segment. Advertising costs increased $0.9 million in our APUS and HCN Segments compared to the prior year period. Selling and promotional expenses as a percentage of revenue increased to 25.4% for the three months ended March 31, 2022, from 21.9% for the three months ended March 31, 2021. General and administrative expenses. Our general and administrative expenses for the three months ended March 31, 2022 were $29.6 million, an increase of $6.1 million, or 25.8%, compared to $23.5 million for the three months ended March 31, 2021. The increase in general and administrative expenses for the three months ended March 31, 2022 as compared to the prior year period was primarily due to the inclusion of RU Segment general and administrative expenses and GSUSA general and administrative expenses of $6.2 million and $0.9 million, respectively, as well as an increase in employee compensation costs and professional fees in Corporate and Other, partially offset by decreases in employee compensation costs, professional fees, and legal costs in our APUS Segment. For the three months ended March 31, 2022, APUS Segment general and administrative expenses include the following costs on a pre-tax basis: $0.9 million in professional fees associated with the Rasmussen and GSUSA Acquisitions, included in Corporate and Other; and $0.8 million of information technology costs related to our multi-year technology transformation program in our APUS Segment. For the three months ended March 31, 2021, general and administrative expenses include the following costs on a pre-tax basis: $1.8 million in information technology costs related to our multi-year technology transformation program in our APUS Segment; and $0.6 million in professional fees associated with the Rasmussen Acquisition in Corporate and Other. Consolidated bad debt expense for the three months ended March 31, 2022 was $2.8 million, or 1.8% of revenue, compared to $1.5 million, or 1.7% of revenue in the prior year period. General and administrative expenses as a percentage of revenue decreased to 19.1% for the three months ended March 31, 2022, from 26.6% for the three months ended March 31, 2021. As we continue to evaluate strategic growth opportunities and enhancements to our business capabilities, we expect to incur additional costs and that our general and administrative expenses related to professional fees will vary from time to t ime. Loss on disposals of long-lived assets. The loss on disposals of long-lived assets were $0.8 million and $8,000 for the three months ended March 31, 2022 and 2021, respectively. The loss on disposals for long-lived assets for the three months ended March 31, 2022 was primarily related to the sale of excess facilities located in Charles Town, West Virginia. Depreciation and amortization expenses. Depreciation and amortization expenses were $8.1 million and $2.7 million for the three months ended March 31, 2022 and 2021, respectively. The increase in depreciation and amortization expenses for the three months ended March 31, 2022 as compared to the prior year period was primarily due to the inclusion of the RU Segment depreciation and amortization expenses of $6.1 million. Depreciation and amortization as a percentage of revenue increased to 5.3% for the three months ended March 31, 2022, from 3.0% for the three months ended March 31, 2021. Stock-based compensation expenses. Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses were $2.4 million and $2.2 million for the three months ended March 31, 2022 and 2021, respectively. Stock-based compensation costs include accelerated expense for retirement-eligible employees and performance stock unit incentive costs. Gain on acquisition. The $4.5 million gain on acquisition resulted from the GSUSA Acquisition and represents the excess of the fair value of net assets acquired over consideration paid. Interest (expense) income. Interest expense was $3.4 million for the three months ended March 31, 2022, compared to interest income of $0.1 million for the three months ended March 31, 2021. The increase in interest expense was due to a senior secured term loan facility in an aggregate original principal amount of $175.0 million, or the Term Loan, issued in connection with the Rasmussen Acquisition. 33 Income tax expense. We recognized income tax expense of $1.0 million and $2.6 million for the three months ended March 31, 2022 and 2021, respectively, or effective tax rates of 16.3% and 24.6%, respectively. In 2022, the gain on acquisition resulting from the GSUSA Acquisition is not included in taxable income resulting in a lower effective tax rate. Excluding the non-recurring gain on acquisition, the effective tax rate was 56.4%, which increased from the three months ended March 31, 2021 due primarily to the impact of non-deductible stock compensation and shortfalls from vesting of restricted stock units recorded in the period. Equity investment loss. Equity investment loss was $5,000 for the three months ended March 31, 2022 and 2021, respectively. Net income. Our net income was $5.3 million for the three months ended March 31, 2022, compared to net income of $8.1 million for the three months ended March 31, 2021, a decrease of $2.8 million. This decrease was related to the factors discussed above. Analysis of Operating Results by Reportable Segment The following table provides details on our operating results by reportable segment for the respective periods (in thousands): Three Months Ended March 31, 2022 2021 (Unaudited) Revenue: APUS Segment $ 73,090 $ 77,476 RU Segment 67,099 — HCN Segment 11,541 11,132 Corporate and Other 3,017 (67) Total Revenue $ 154,747 $ 88,541 Income (loss) from operations before interest and income taxes: APUS Segment $ 13,182 $ 14,031 RU Segment 891 — HCN Segment (995) 783 Corporate and Other (7,878) $ (4,177) Total income from operations before interest and income taxes $ 5,200 $ 10,637 APUS Segment For the three months ended March 31, 2022, while net course registrations at APUS increased 1.2% to approximately 94,000 from approximately 92,900 as compared to the same period in 2021, the $4.4 million, or 5.7%, decrease to approximately $73.1 million in revenue in our APUS Segment was attributable to the timing of registrations within the quarter and lower revenue per net course registration due to a change in mix to a greater percentage of military registrations. Income from operations before interest and income taxes decreased to $13.2 million during the three months ended March 31, 2022, from $14.0 million, a decrease of $0.8 million compared to the prior year as a result of the decrease in revenue. RU Segment For the three months ended March 31, 2022, RU Segment revenue was $67.1 million and RU Segment income from operations before interest and income taxes was $0.9 million for the period. RU enrollment was approximately 16,200 during the three months ended March 31, 2022, which compares to 17,300 during the three months ended March 31, 2021. We believe this decline in enrollment may have been caused, in part, due to a moderation in near-term demand for RU’s programs due to the abatement of the COVID-19 pandemic, record low unemployment in local RU markets, and challenges in filling open 34 nursing faculty and clinical positions. HCN Segment For the three months ended March 31, 2022 the $0.4 million, or 3.7%, increase to approximately $11.5 million in revenue in our HCN Segment was attributable to an increase in total student enrollment. HCN total student enrollment increased 8.1% to approximately 2,500 from approximately 2,300 students during the three months ended March 31, 2022 compared to the same period in 2021, due in part to an increase in marketing expenditures and the continued impact of initiatives implemented in 2019 and 2020, such as the direct entry ADN Program and the institutional affordability grant. The loss from operations before interest and income taxes in our HCN Segment was $0.9 million during the three months ended March 31, 2022, compared to income from operations of $0.8 million in the same period in 2021, a decrease of $1.8 million, primarily due to increases in nursing faculty compensation costs and other employee costs, an increase in marketing expenditures as compared to the prior year period, and costs associated with the ongoing start-up of the new campus in Akron, Ohio, which opened in April 2021. Liquidity and Capital Resources Liquidity Cash and cash equivalents were $170.9 million and $149.6 million at March 31, 2022 and December 31, 2021, respectively, representing an increase of $21.3 million, or 14.2%. The increase in cash was due to cash provided by operating activities and $1.9 million of net cash received as a result of the GSUSA Acquisition, partially offset by increases in capital expenditures and payments of principal and interest on our debt obligations. We have historically financed operating activities and capital expenditures with cash provided by operating activities. We anticipate that our cash flow from operations and our existing cash and cash equivalents will provide adequate funds for our working capital needs, capital expenditures, lease commitments, and debt interest and principal obligations for at least the next 12 months and the foreseeable future. We derive a significant portion of our revenue from our participation in ED’s Title IV programs, for which disbursements are governed by federal regulations. We have typically received disbursements under Title IV programs within 30 days of the start of the applicable course or term. Another significant source of revenue is derived from TA from DoD and programs from the U.S. Department of Veterans Affairs, or the VA. Generally, these funds are received within 60 days of the start of the courses to which they relate. In 2021, disruptions related to the Army’s transition to a new system for soldiers to use to request TA adversely impacted APUS’s ability to invoice the Army for Army registrations and adversely impacted accounts receivable balances and cash flow from operations. During the three months ended March 31, 2022 we saw improvement in Army’s processing of invoices and payments to APUS. During the period Army paid approximately $20.6 million to APUS. As of March 31, 2022, approximately $19.4 million in accounts receivable, of which $10.5 million is older than 60 days from the course start date, was due from the Army as a result of the disruption associated with the transition to ArmyIgnitED. This improvement may not continue, and therefore we cannot predict when this disruption will be resolved with the Army’s systems fully operational or the timing of expected cash receipts from the Army. We have historically financed operating activities and capital expenditures with cash provided by operating activities. We expect to continue to fund our costs and expenses through cash generated from operations. We believe that our cash flow from operations and our existing cash and cash equivalents will provide adequate funds for ongoing operations, debt and interest obligations, and planned capital expenditures for the foreseeable future. For more on our material cash requirements from known contractual and other obligations, please refer to our Annual Report and to the section entitled “Contractual Obligations”. Capital expenditures could be higher in the future as a result of, among other things, additional expenditures for technology or other business capabilities, the maintenance or relocation of existing campuses at RU and HCN and GSUSA’s classroom and administrative facility, the opening of new campuses at HCN, the acquisition or lease of existing structures or potential new construction projects, and necessary tenant improvements that arise as a result of our ongoing evaluation of our space needs and opportunities for physical growth. Professional fees may continue to be elevated or increase as we continue the integration of RU and GSUSA, and continue to evaluate investments in strategic growth opportunities and enhancements to our business capabilities. We also expect to continue to explore opportunities to invest in the education industry, which could include purchasing or investing in other education-related companies or companies developing new technologies. For the three months ended March 31, 2022 and 2021, we incurred $0.9 million and $0.6 million, respectively, of acquisition-related expenses which are included in general and administrative expenses on the Consolidated Statements of Income. 35 RU currently relies on Collegis LLC, or Collegis, for a variety of outsourced information technology functions and marketing services under one contract for information technology functions and another for marketing services. In April 2022, we notified Collegis that we intend to permit both contracts to expire by their terms on September 30, 2024. We plan to transition all of the services currently outsourced to Collegis back to our operations or to one or more other third-party vendors, and we have already begun work on the transition of certain marketing services. As we are presently preparing transition plans, at this time we are unable to predict the full costs of the transition, in which periods we will incur those costs, or the impact on our financial results, but the transition may cause us to incur significant costs, which could adversely affect our financial condition, results of operations, and cash flows. Acquisition of Rasmussen University In connection with the completion of the Rasmussen Acquisition, on the Closing Date, we entered into the Credit Agreement and, pursuant thereto, the Lenders provided us with (i) the $175.0 million Term Loan, and (ii) a senior secured revolving loan facility in an aggregate commitment amount of $20.0 million, or together with the Term Loan, the Facilities. We paid a portion of the consideration for the Rasmussen Acquisition with proceeds from the Term Loan. For more information on the Facilities and their terms, please refer to “Note 8. Long-Term Debt” included on the Consolidated Financial Statements in this Quarterly Report. Our future capital requirements will depend on a number of factors. There can be no guarantee that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. In addition, upon the occurrence of certain events, such as a change of control, we could be required to repay or refinance our indebtedness. There can be no assurance that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. Operating Activities Net cash provided by operating activities was $25.3 million and $11.2 million for the three months ended March 31, 2022 and 2021, respectively. The increase in cash from operating activities is primarily due to payments received from the Army and other changes in working capital due to the timing of receipts and payments. Accounts receivable at March 31, 2022, decreased approximately $2.4 million compared to December 31, 2021. Accounts payable, accrued compensation and benefits, and accrued liabilities at March 31, 2022 were approximately $2.4 million higher than December 31, 2021, primarily due to the inclusion of the RU Segment in 2022. Investing Activities Net cash used in investing activities was $0.3 million and $1.5 million for the three months ended March 31, 2022 and 2021, respectively. Capital expenditures of $3.0 million for the three months March 31, 2022 were partially offset by net proceeds from the GSUSA Acquisition and the sale of real property of $1.9 million and $0.8 million, respectively. For the three months ended March 31, 2021, capital expenditures were $1.5 million. Financing Activities Net cash used in financing activities was $3.7 million for the three months ended March 31, 2022, compared to $83.4 million of net cash provided by financing activities for the three months ended March 31, 2021, respectively. This decrease in cash used in financing activities was largely due to principal payments made on our debt borrowings for the three months ended March 31, 2022. During the three months ended March 31, 2021, we received net proceeds of approximately $86.2 as a result of our underwritten public offering of common stock. Contractual Commitments We have various contractual obligations consisting of operating leases and purchase obligations. Purchase obligations include agreements with consultants, contracts with third-party service providers, and other future contracts or agreements. For a summary of our contractual obligations, please refer to Item 7 of Part II of the Annual Report. RU is a party to service agreements with a third party, Collegis, to provide marketing and IT services. The agreements expire September 30, 2024. The total minimum value of the service contracts over the remaining period is approximately $47.9 million. Notices of the non-renewal of the marketing and IT services agreements were issued to Collegis in April 2022. 36 In connection with the GSUSA Acquisition, we have also assumed an operating lease obligation in the aggregate of $50.0 million over 15 years for GSUSA’s Washington, D.C., headquarters facility. For more information on the timing and amount of our future lease obligations, please refer to “Note 5. Leases” included on the Consolidated Financial Statements.