What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-08 compared with 2022-08-09 · 269 added, 240 removed, 234 unchanged (69% of the section changed)

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Forward-looking statements in this Quarterly Report include, without limitation, statements regarding:

• our expectations regarding the effects of and our response to the ongoing COVID-19 pandemic, including the demand environment for online education or nursing education as the pandemic abates and impacts on business operations and our financial results;

• 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;

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• our cash needs and expectations regarding cash flow from operations;

• our ability to recognize the benefits of our cost savings efforts;

• our ability to manage and influence our bad debt expense;

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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;

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• 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;

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• 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;

• risks related to incurring substantial debt under the debt facilities that we 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;

• our dependence on and need to continue to invest in our technology infrastructure.

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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 in the Consolidated Financial Statements in this Quarterly Report.

Long-Term Debt” included in the Notes to the Consolidated Financial Statements in this Quarterly Report.

On January 1, 2022, or the GSUSA Closing Date, our wholly owned subsidiary, American Public Training, LLC, completed our acquisition of substantially all the assets of GSUSA, or the Seller, for $1.0 million, subject to working capital adjustments.

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The purchase price reflects the $0.5 million due to the Seller post-closing and additional adjustments to the estimated net working capital at closing.

Our consolidated results for the three and six months ended June 30, 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 and six months ended June 30, 2022, the operational activities of GSUSA.

Our results for the three and six months ended June 30, 2022 respectively, include approximately $0.4 million and $1.3 million of acquisition-related expenses related to RU and GSUSA, and our results for the three and six months ended June 30, 2021 included approximately $3.1 million and $3.6 million of acquisition-related expenses related to RU, respectively.

Our financial results do not include the RU Segment or GSUSA results prior to the respective acquisition closing dates.

Therefore, our consolidated results for the three and nine months ended September 30, 2021 include the operations of RU for the month of September 2021 only, and the consolidated results do not reflect the operations of GSUSA in the 2021 periods.

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 and nine months ended September 30, 2022, the operational activities of GSUSA.

Our results for the three and nine months ended September 30, 2022 include approximately $0.3 million and $1.6 million, respectively, of acquisition-related expenses related to RU and GSUSA, and our results for the three and nine months ended September 30, 2021 included approximately $1.5 million and $5.0 million, respectively, of acquisition-related expenses related to RU.

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 in the Consolidated Financial Statements in this Quarterly Report.

Acquisition Activity” included in the Notes to 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 and six months ended June 30, 2022.

The COVID-19 pandemic did not materially impact our results of operations during the three and nine months ended September 30, 2022.

For more information on the potential risks related to COVID-19, please refer to our Annual Report, “Results of Operations” below, and the section of this Quarterly Report entitled “Risk Factors”.

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American Military University, or AMU, and American Public University, or APU.

As of June 30, 2022, approximately 64% of APUS students self-reported that they served in the military on active duty at the time of initial enrollment.

As of September 30, 2022, approximately 65% 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 15,000 students at its 23 campuses in six states and online.

As of June 30, 2022, approximately 8,200 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.

As of September 30, 2022, approximately 7,700 students are pursuing nursing degrees at RU, approximately 90% of whom are enrolled in RU’s pre-licensure degree programs.

• National Education Seminars, Inc., referred to herein as Hondros College of Nursing, or HCN, provides nursing education to approximately 2,400 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, and HCN has received initial regulatory approvals for the Diploma in Practical Nursing Program at the campus.

A campus in suburban Detroit, Michigan opened in October 2022, and HCN has received initial regulatory approvals for the Diploma in Practical Nursing Program at the campus.

All of HCN’s students are enrolled in its pre-licensure degree programs.

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GSUSA operational activities are presented within “Corporate and Other”.

Cost and Expense Reductions

On November 2, 2022, we completed a reduction in force that resulted in the termination of 98 non-faculty employees and the elimination of 78 open positions across a variety of roles and departments.

The reductions represent approximately 5.8% of our non-faculty workforce.

We incurred an aggregate of approximately $3.1 million of pre-tax cash expenses associated with employee severance benefits, all of which we expect will be incurred in the fourth quarter of 2022.

The reduction in force is expected to result in pre-tax labor and benefit savings in 2022 of approximately $2.3 million, and

approximately $13.5 million on an annualized basis.

These cost savings do not include expenses associated with employee severance benefits.

The headcount reductions reflect ongoing efforts focused on realigning our organizational structure, eliminating redundancies, and optimizing certain functions.

There can be no assurance that we will be successful or recognize the benefits we anticipate.

Furthermore, the savings anticipated in 2022 will be offset in the short-term by severance and other related costs, and over the long-term may be offset by increases to wages and salaries necessary to remain competitive.

Regulatory and Legislative Activity

ED recently engaged in negotiated rulemaking processes to develop proposed 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.

arbitration, prohibition of class-action lawsuits, ability to benefit provisions, certification procedures for participation in Title IV programs, change in 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 (assuming ED publishes the final regulations by November 1, 2022).

ED already has published some proposed regulations relating to these topics for public notice and comment, and ED has indicated that it will release other proposed regulations at later dates.

Topics included modifications to what is commonly referred to as the 90/10 Rule, which imposes sanctions on for-profit 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, borrower defenses to repayment, or BDTR, mandatory pre-dispute arbitration, prohibition of class-action lawsuits, closed school discharges, ability to benefit provisions, certification procedures for participation in Title IV programs, change in ownership and change in control rules and procedures, financial responsibility standards, and standards of administrative capability, among others.

In October 2022, ED published final regulations relating to the 90/10 Rule, BDTR, mandatory pre-dispute arbitration, prohibition of class-action lawsuits, and change in ownership and change in control rules and procedures.

ED has also published for public notice and comment proposed regulations relating to some of the other topics that were the subject of the negotiated rulemaking processes, and ED has indicated that it will release other proposed regulations at later dates.

Please refer to “Risk Factors - Recent ED negotiated rulemakings could result in regulations that materially and adversely affect our business.”

In July 2022, HCN received a final program review determination from ED closing the previously disclosed open program review from July 2021.

ED made final determinations with respect to all outstanding findings, resulting in total liabilities of approximately $12,000.

Program Reviews

In July 2022, HCN received a final program review determination from ED closing the previously disclosed open program review from July 2021, and in September 2022, RU received a program review report from ED with respect to the previously disclosed open program review for the 2015-2016 and 2016-2017 award years.

Please refer to “Risk Factors - ED has conducted and may in the future conduct compliance reviews of our institutions, which could disrupt our institutions’ operations and adversely affect their performance.

Cohort Default Rate

To remain eligible to participate in Title IV programs, an educational institution’s student loan cohort default rates must remain below certain levels.

Pursuant to requirements of the Higher Education Act, as amended, if the cohort default rate for any year exceeds 40% in any single year, or exceeds 30% for three consecutive years, an institution loses eligibility to participate in Title IV programs.

If an institution’s cohort default rate is equal to or greater than 30% in any year, it must establish a default prevention task force.

In September 2022, ED released final official cohort default rates for institutions for federal fiscal year 2019, with ED reporting a 2.4% cohort default rate for APUS, a 1.6% cohort default rate for RU, and a 1.1% cohort default rate for HCN.

Additional information regarding student loan default rates, prior year default rates, and potential risks associated with them is available in our Annual Report.

Reportable Segments

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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 and six months ended June 30, 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 June 30, 2022, our consolidated revenue increased to $149.6 million from $78.0 million, or by 91.8%, compared to the prior year period.

Our operating margins decreased to negative 94.4% for the three months ended June 30, 2022 from 2.6% in the prior year period.

The net loss for the three months ended June 30, 2022 was $110.0 million compared to net income of $0.5 million during the three months ended June 30, 2021.

Results for the three months ended June 30, 2022 include a non-cash impairment charge of $144.9 million in our RU Segment to reduce the carrying value of RU Segment goodwill and intangible assets, and to reflect the corresponding tax impact.

Excluding the impact of the non-cash impairment charge, for the three months ended June 30, 2022, our operating margin was 2.4% and our net loss was $1.1 million.

For the six months ended June 30, 2022, our consolidated revenue increased to $304.4 million from $166.6 million, or 82.7%, compared to the prior year period.

Our operating margins decreased to negative 44.7% for the six months ended June 30, 2022 from 7.5% in the prior year period.

The net loss for the six months ended June 30, 2022 was $104.7 million compared to net income of $8.6 million during the six months ended June 30, 2021.

Results for the six months ended June 30, 2022 include a non-cash impairment charge of $144.9 million in our RU Segment to reduce the carrying value of RU Segment goodwill and intangible assets and the corresponding tax impact.

Excluding the non-cash impairment charge for the six months ended June 30, 2022, our operating margin was 2.9% and our net income was $4.2 million.

Excluding the impact of the impairment charge, 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 RU and HCN, and enrollment trends, particularly at

Our financial results do not include the financial results of these companies prior to their respective acquisition closing dates.

Accordingly, the financial results for the three and nine months ended September 30, 2021 include results of operations of RU for the month of September 2021 and do not include the results of operations of GSUSA.

Therefore, the prior year period presented is not directly comparable to the current period.

For the three months ended September 30, 2022, our consolidated revenue increased to $149.5 million from $98.2 million, or by 52.2%, compared to the prior year period.

Our operating margins decreased to negative 0.7% for the three months ended September 30, 2022 from 1.2% in the prior year period.

The net loss for the three months ended September 30, 2022 was $3.8 million compared to net loss of $0.3 million during the three months ended September 30, 2021.

For the nine months ended September 30, 2022, our consolidated revenue increased to $453.9 million from $264.8 million, or 71.4%, compared to the prior year period.

Our operating margins decreased to negative 30.1% for the nine months ended September 30, 2022 from 5.3% in the prior year period.

The net loss for the nine months ended September 30, 2022 was $108.5 million compared to net income of $8.4 million during the nine months ended September 30, 2021.

Results for the nine months ended September 30, 2022 include a non-cash impairment charge of $144.9 million in our RU Segment to reduce the carrying value of RU Segment goodwill and intangible assets and the corresponding tax impact.

Excluding the non-cash impairment charge for the nine months ended September 30, 2022, our operating margin was 1.7% and our net income was $0.4 million.

Even to the extent that we take efforts to control our labor costs, we expect to continue to evaluate and may implement increases to wages and salaries to be more competitive with the market.

For the three months ended June 30, 2022, net course registrations at APUS increased to approximately 83,500 from approximately 82,600, or approximately 1.1%, compared to the prior year period.

For the three months ended September 30, 2022, net course registrations at APUS increased to approximately 85,800 from approximately 83,100, or approximately 3.2%, compared to the prior year period.

APUS Segment revenue increased to $68.7 million from $65.9 million, or by 4.3%, compared to the prior year period.

For the six months ended June 30, 2022, net course registrations at APUS increased to approximately 177,400 from approximately 175,600, or approximately 1.0%, compared to the prior year period, APUS Segment revenue decreased to $143.0 million from $144.4 million, or by 1.0%, compared to the prior year period.

In both the three and six months ended June 30, 2022, the increase in net course registrations was primarily due to an increase in military-related registrations from students utilizing TA.

We believe the difference in the change in net course registrations as compared to the change in APUS Segment revenue was a result of two key factors:

the difference in timing of registrations during the three and six months ended June 30, 2022, as compared with the prior year;

and lower revenue per net course registration 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.

For the nine months ended September 30, 2022, net course registrations at APUS increased to approximately 263,200 from approximately 258,700, or approximately 1.7%, compared to the prior year period, and APUS Segment revenue increased to $211.7 million from $210.3 million, or by 0.7%, compared to the prior year period.

We believe the difference in the change in net course registrations as compared to the change in APUS Segment revenue for the nine months ended September 30, 2022, was primarily due to an increase in military related registrations from students utilizing TA, which generate a lower revenue per registration.

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.

For the three months ended June 30, 2022, APUS Segment operating margins increased to 19.5% from 13.6% in the prior year period.

For the six months ended June 30, 2022, APUS Segment operating margins increased to 18.7% from 16.0% in the prior year period.

The increase in the operating margin was due to decreases in employee compensation costs, advertising costs and professional services costs.

For the three months ended June 30, 2022, HCN Segment revenue increased to $11.5 million from $11.1 million, or by 3.2%, compared to the prior year period.

Total enrollment at HCN was approximately 2,400 for both the three months ended June 30, 2022 and 2021.

For the six months ended June 30, 2022, HCN Segment revenue increased to $23.0 million from $22.3 million, or by 3.4%, compared to the prior year period.

Total enrollment at HCN for the six months ended June 30, 2022 increased approximately 5.4% as compared to the prior year period.

We believe that the increase in total student enrollment at HCN was due primarily to the opening of the Akron campus in April 2021 and to the Indianapolis campus, which effective for the 2022 calendar year can enroll up to 200 students per calendar year compared to 30 students in 2021.

For the three months ended September 30, 2022, APUS Segment operating margins increased to 18.2% from 11.9% in the prior year period.

For the nine months ended September 30, 2022, APUS Segment operating margins increased to 18.6% from 14.7% in the prior year period.

The increase in the operating margin was due to decreases in professional fees and employee compensation costs during the three months ended September 30, 2022.

For the nine months ended September 30, 2022, the increase in the operating margin was due to decreases in professional fees, employee compensation costs, and advertising costs, partially offset by increases in graduation event costs after returning to an in-person graduation ceremony.

For the three months ended September 30, 2022, HCN Segment revenue increased to $11.4 million from $11.2 million, or by 1.5%, compared to the prior year period.

Total enrollment at HCN increased to approximately 2,400 from approximately 2,300, or approximately 3.7%, compared to prior year period.

For the nine months ended September 30, 2022, HCN Segment revenue increased to $34.4 million from $33.5 million, or by 2.8%, compared to the prior year period.

Total enrollment at HCN for the nine months ended September 30, 2022 increased approximately 4.8% as compared to the prior year period.

We believe that the increase in total student enrollment at HCN was due primarily to the opening of the Akron campus in April 2021 and to the Indiana State Board of Nursing, or IBN, action to increase maximum enrollment at the Indianapolis campus, which effective for the 2022 calendar year can enroll up to 200 students per calendar year compared to 30 students in 2021.

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.

For the three months ended June 30, 2022, HCN Segment operating margins decreased to negative 5.5% from 1.1% in the prior year period.

For the six months ended June 30, 2022, HCN Segment operating margins decreased to negative 7.1% from 4.0% in the prior year period.

The decrease in the operating margin is due to increases in nursing faculty compensation costs and other employee costs and an increase in marketing expenditures as compared to the prior year period.

RU Segment revenue totaled approximately $63.9 million and $131.0 million for the three and six months ended June 30, 2022, respectively.

RU enrollment was approximately 15,900 during the three months ended June 30, 2022, which compares to 17,000 during the three months ended June 30, 2021.

We believe this decline in enrollment, which 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.

In July 2022, we implemented a voluntary enrollment reduction in RU’s Bloomington, Minnesota ADN Program as part of an effort to meet desired faculty to student ratios and improve student performance.

In addition, as described in “Risk Factors” below, RU is now required to maintain a specified faculty to student ratio in 2023 for the Bloomington ADN Program, which constrains our ability to increase enrollments for that program based on our ability to attract and retain qualified faculty.

The various 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.

During the three months ended June 30, 2022, RU completed an interim goodwill and intangible asset impairment test as a result of circumstances that included RU’s continued performance against revised 2022 internal targets and overall 2022 financial performance.

The test determined the fair value was less than the carrying value and as a result, we recorded a non-cash impairment charge of $144.9 million to reduce the carrying value of our RU Segment goodwill and intangible assets during the period, and to reflect the corresponding tax impact.

For the three months ended September 30, 2022, HCN Segment operating margins decreased to negative 12.2% from 4.0% in the prior year period.

For the nine months ended September 30, 2022, HCN Segment operating margins decreased to negative 8.8% from 4.0% in the prior year period.

The decrease in the operating margin is due to increases in nursing faculty compensation costs and other employee compensation costs, technology costs, advertising costs, and Title IV costs, as compared to the prior year period.

RU Segment revenue totaled approximately $61.5 million and $192.5 million for the three and nine months ended September 30, 2022, respectively.

RU full-term enrollment was approximately 15,000 during the three months ended September 30, 2022, which compares to 16,300 during the three months ended September 30, 2021.

We believe this decline in enrollment, which reflects year-over-year declines in total nursing enrollment and enrollment from new nursing students, as well as enrollment declines in non-nursing programs including online enrollments, 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 markets, and increasing pay for nurses resulting in fewer available nursing faculty to educate and oversee clinicals.

Further, in February 2022, the Illinois ADN Program was placed on probationary status by the Illinois Department of Professional Regulation, or IDPR, as a result of which RU is required to temporarily reduce enrollment in the program by 25% and has two years to demonstrate evidence of implementing strategies to correct deficiencies and satisfy the required NCLEX pass rate.

Additionally, in July 2022, we implemented a voluntary enrollment reduction in RU’s Bloomington, Minnesota ADN Program as part of an effort to meet desired faculty to student ratios and improve student performance.

As described in “Risk Factors” below, RU is now required to maintain a specified faculty to student ratio in 2023 for the Bloomington ADN Program, which constrains our ability to increase enrollments for that program based on our ability to attract and retain qualified faculty.

Finally, based on the first-time NCLEX pass rate in the Bloomington ADN Program in the third quarter of 2022, RU has informed the Minnesota Board of Nursing, or MBN, that RU will voluntarily further reduce enrollments in the program starting with the quarterly cohort in January.

The various factors adversely impacting RU enrollments, including nursing enrollments, are expected to continue to negatively impact RU’s results.

Critical Accounting Policies and Use of Estimates

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Actual results may differ and have a material impact or our results of operations and financial position, and subsequent events are not necessarily indicative of the reasonableness of the original assumptions or estimates.

During the three months ended June 30, 2022, in connection with preparation of this Quarterly Report, the Company completed a qualitative assessment to determine if an interim goodwill impairment test was necessary.

The Company concluded it was more likely than not the fair value of the Company’s RU Segment was less than its carrying amount as a result of circumstances that included RU’s performance to date against 2022 internal targets and overall 2022 financial performance to date.

There were no indicators of impairment at HCN.

Therefore, the Company proceeded with a quantitative impairment test as of May 31, 2022.

The implied fair value of goodwill was calculated and compared to the recorded goodwill.

As a result, the Company recorded a non-cash impairment charge of $131.4 million, and to reflect the corresponding tax impact, to reduce the carrying value of RU Segment goodwill.

During the three months ended June 30, 2022, the Company also evaluated events and circumstances related to the valuation of its intangibles recorded within the RU and HCN Segments to determine if there were indicators of impairment.

In the second quarter of 2022, the Company completed a qualitative assessment to determine if an interim goodwill impairment test was necessary.

The Company concluded it was more likely than not the fair value of the Company’s RU Segment was less than its carrying amount as a result of RU’s under performance in the second quarter of 2022 compared to projections at the time of acquisition, along with the decline in market value of the Company and comparable companies.

Therefore, the Company proceeded with a quantitative impairment test of RU Segment goodwill as of May 31, 2022.

The implied fair value of RU Segment goodwill was calculated and compared to the recorded goodwill.

As a result, the Company recorded a non-cash impairment charge of $131.4 million, and to reflect the corresponding tax impact of $36.0 million, to reduce the carrying value of RU Segment goodwill.

There were no indicators of goodwill impairment at HCN.

In the second quarter of 2022, the Company also evaluated events and circumstances related to the valuation of its intangibles recorded within the RU and HCN Segments to determine if there were indicators of impairment.

This evaluation included consideration of enrollment trends and financial performance, as well as industry and market conditions, and the impact of the COVID-19 pandemic.

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As a result, the Company recorded a non-cash impairment charge of $13.5 million to reduce the carrying value of RU Segment indefinite-lived intangible assets.

In total, the Company recorded non-cash impairment charges of $144.9 million during the three months ended June 30, 2022 related to RU Segment goodwill and intangible assets, and the corresponding tax impact.

The Company utilized an independent valuation firm to determine the fair value of RU.

The independent valuation firm weighted the results of two different valuation methods:

discounted cash flow and guideline public company.

Under the discounted cash flow method, fair value was determined by discounting the estimated future cash flows of RU at RU’s estimated weighted-average cost of capital.

Under the guideline public company method, pricing multiples from other public companies in the public higher education market were used to determine the value of RU.

Values derived under the two valuation methods were then weighted to estimate RU’s enterprise value.

The goodwill impairment charge recorded in the quarter ended June 30, 2022 eliminated the difference between the fair value of goodwill and the book value of goodwill.

There we no indicators of intangible asset impairment at HCN.

The goodwill impairment charge recorded in the quarter ended June 30, 2022 eliminated the difference between the fair value of RU Segment goodwill and the book value of goodwill.

Future changes, including minor changes in revenue, operating income, valuation multiples, discount rates, and other inputs to the valuation process may result in future impairment charges, and those charges could be material.

We evaluated events and circumstances related to the valuation of goodwill of HCN for the three months ended June 30, 2022 and determined there were no indicators of impairment.

This evaluation included consideration of enrollment trends and financial performance, as well as industry and market conditions, and the impact of the COVID-19 pandemic.

Our October 31, 2021 annual assessment concluded that the fair value of HCN exceeded the carrying value by approximately $20.1 million, or 51.8%.

Determining fair value of goodwill and intangible assets requires judgment and the use of significant estimates and assumptions, including, but not limited to, fluctuations in enrollments, revenue growth rates, operating margins, discount rates, and future market conditions.

Given the current competitive and regulatory environment, the impact of COVID-19, and the uncertainties regarding the related impact on the business, there can be no assurance that the estimates and assumptions made for purposes of the Company’s interim and annual goodwill and intangible asset impairment tests will prove to be accurate predictions of the future.

We evaluated events and circumstances related to the valuation of goodwill and intangible assets of RU and HCN for the three months ended September 30, 2022 and determined there were no indicators of impairment.

This evaluation included consideration of enrollment trends and financial performance, as well as industry and market conditions, and the impact of the COVID-19 pandemic.

Given the current competitive and regulatory environment, the impact of COVID-19, and the uncertainties regarding the related impact on the business, as well as the market price for our stock, there can be no assurance that the estimates and assumptions made for purposes of the Company’s interim and annual goodwill and intangible asset impairment tests will prove to be accurate predictions of the future.

If the Company’s assumptions are not realized, the Company may record goodwill and intangible asset impairment charges in future periods.

It is not possible at this time to determine if any such future impairment charge would

result or whether such charge would be material.

It is not possible at this time to determine if any such future impairment charge would result or whether such charge would be material.

Estimates are subjective and are not intended to predict actual future events, and subsequent events are not indicative of the reasonableness of the original estimates of fair value.

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Results of Operations

Below we have included a discussion of our operating results and material changes in our operating results during the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021.

Below we have included a discussion of our operating results and material changes in our operating results during the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 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.

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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 and six months ended June 30, 2022, was due to increases in military-related registrations from students utilizing TA 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 “Liquidity and Capital Resources – Liquidity” in this Management’s Discussion and Analysis of Financial Condition and Results of Operation and the section entitled “Risk Factors.”

We believe that the increase in enrollment at HCN for the six months ended June 30, 2022 as compared to the prior year period is due primarily to the opening of the Akron campus in April 2021 and to the Indianapolis campus, which effective for the 2022 calendar year can enroll up to 200 students per calendar year compared to 30 students in 2021.

Our consolidated results for the three and six months ended June 30, 2022 and 2021 reflect the operations of our APUS and HCN Segments and only include the results for our RU Segment and GSUSA for the three and six months ended June 30, 2022.

We did not consolidate the RU Segment or GSUSA prior to the respective acquisition closing dates.

RU enrollment was approximately 15,900 during the three months ended June 30, 2022, which compares to 17,000 during the three months ended June 30, 2021.

We believe the increase in net registrations at APUS for the three and nine months ended September 30, 2022 was due to increases in military-related registrations from students utilizing TA and as a result of improvements made by the Army to the ArmyIgnitED system.

For information on the impacts of the recent Army TA program disruption on the Company and the risks related to these impacts, please refer to “Liquidity and Capital Resources – Liquidity” in this Management’s Discussion and Analysis of Financial Condition and Results of Operation and the section entitled “Risk Factors”.

We believe that the increase in enrollment at HCN for the nine months ended September 30, 2022 as compared to the prior year period is due primarily to the opening of the Akron campus in April 2021 and to IBN action to increase maximum enrollment at the Indianapolis campus, which effective for the 2022 calendar year can enroll up to 200 students per calendar year compared to 30 students in 2021.

RU full-term enrollment was approximately 15,000 during the three months ended September 30, 2022, which compares to 16,300 during the three months ended September 30, 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.

Finally, based on the first-time NCLEX pass rate in the Bloomington ADN Program in the third quarter of 2022, RU has informed the MBN that RU will voluntarily further reduce enrollments in the program starting with the quarterly cohort in January.

For a more detailed discussion of our results by reportable segment, refer to “Analysis of Operating Results by Reportable Segment” below.

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The following table sets forth statements of income data as a percentage of revenue for each of the periods indicated:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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Gain on acquisition — — 0.8 —

Interest (expense) income (2.3) — (2.2) 0.1

Interest expense (2.4) (1.3) (2.3) (0.4)

Income (loss) from operations before income taxes (3.1) (0.1) (31.6) 4.9

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Net (loss) income (2.5) % (0.3) % (23.9) % 3.3 %

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Our consolidated revenue for the three months ended June 30, 2022 was $149.6 million, an increase of $71.6 million, or 91.8%, compared to $78.0 million for the three months ended June 30, 2021.

The increase in revenue was primarily due to the inclusion of RU Segment and GSUSA revenue for the three months ended June 30, 2022 of $63.9 million and $4.4 million, respectively.

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Our consolidated revenue for the three months ended September 30, 2022 was $149.5 million, an increase of $51.3 million, or 52.2%, compared to $98.2 million for the three months ended September 30, 2021.

The increase in revenue was primarily due to the inclusion of RU Segment and GSUSA revenue for the three months ended September 30, 2022 of $40.4 million and $7.9 million, respectively, compared to one month of RU Segment revenue and no GSUSA revenue in the prior year period.

In addition, APUS and HCN Segment revenue increased $2.8 million, or 4.3%, and $0.2 million, or 1.5%, respectively.

The APUS Segment revenue increase was primarily due to an 1.1% increase in net course registrations as compared to the prior year period.

The HCN Segment revenue increase was primarily due to an 2.7% increase in total student enrollment as compared to the prior year period.

The APUS Segment revenue increase was primarily due to a 3.2% increase in net course registrations as compared to the prior year period.

The HCN Segment revenue increase was primarily due to a 3.7% increase in total student enrollment as compared to the prior year period.

Costs and expenses.

Costs and expenses for the three months ended June 30, 2022 were $290.9 million, an increase of $214.8 million, or 282.5%, compared to $76.0 million for the three months ended June 30, 2021, and include a non-cash impairment charge of $144.9 million to reduce the carrying value of RU segment goodwill and intangible assets, and to reflect the corresponding tax impact.

The increase in costs and expenses for the three months ended June 30, 2022, was also the result of the inclusion of RU Segment and GSUSA costs and expenses of $65.5 million and $6.1 million, respectively, excluding the goodwill and intangible assets impairment charge in our RU Segment.

Other increases in costs and expenses include increases in employee compensation costs in our HCN Segment and Corporate and Other, an increase in faculty compensation costs in our HCN Segment, and an increase in graduation event costs in our APUS Segment, partially offset by decreases in professional fees in Corporate and Other and advertising costs, employee compensation costs, and professional fees in our APUS Segment.

Results for the three months ended June 30, 2022 include the following costs on a pre-tax basis:

a $144.9 million non-cash impairment charge to reduce the carrying value of RU Segment goodwill and intangible assets, and the corresponding tax impact;

Costs and expenses for the three months ended September 30, 2022 were $150.6 million, an increase of $53.6 million, or 55.2%, compared to $97.0 million for the three months ended September 30, 2021.

The increase in costs and expenses for the three months ended September 30, 2022, was primarily the result of the inclusion of our RU Segment and GSUSA costs and expenses of $47.3 million and $6.3 million, respectively, for the three months ended September 30, 2022, compared to one month of RU Segment costs and expenses and no GSUSA costs and expenses in the prior year period.

Other increases in costs and expenses include increases in employee compensation costs in our HCN Segment and Corporate and Other, increases in marketing support costs and advertising costs in our APUS Segment, as well as increases in faculty compensation costs in our APUS and HCN Segments, and Title IV costs, and bad debt expense in our HCN Segment.

The increase in expenses was partially offset by a decrease in professional fees in our APUS Segment and decreases in advertising costs, marketing support costs, and legal costs in Corporate and Other.

Results for the three months ended September 30, 2022 include the following costs on a pre-tax basis:

$0.9 million in information technology costs related to our multi-year technology transformation program in our APUS Segment;

and $0.3 million in professional fees associated with the Rasmussen and GSUSA acquisitions in Corporate and Other.

Results for the three months ended June 30, 2021 included the following costs on a pre-tax basis:

$3.3 million in professional fees primarily related to the Rasmussen Acquisition in Corporate and Other;

and $1.6 million in information technology costs related to our multi-year technology transformation program in our APUS Segment.

Costs and expenses as a percentage of revenue increased to 194.4% for the three months ended June 30, 2022 from 97.4% for the three months ended June 30, 2021.

Results for the three months ended September 30, 2021 included the following costs on a pre-tax basis:

$1.8 million in professional fees primarily related to the Rasmussen Acquisition in Corporate and Other and $1.7 million in information technology costs related to our multi-year technology transformation program in our APUS

Costs and expenses as a percentage of revenue increased to 100.7% for the three months ended September 30, 2022 from 98.8% for the three months ended September 30, 2021.

Instructional costs and services expenses.

Our instructional costs and services expenses for the three months ended June 30, 2022 were $72.1 million, an increase of $41.7 million, or 137.2%, compared to $30.4 million for the three months ended June 30, 2021.

The increase in instructional costs and services expenses was primarily due to the inclusion of RU Segment and GSUSA instructional costs and services expenses of $35.6 million and $3.6 million, respectively, as well as an increase in graduation event costs in our APUS Segment and an increase in faculty compensation costs in our HCN Segment.

Instructional costs and services expenses as a percentage of revenue increased to 48.2% for the three months ended June 30, 2022 from 39.0% for the three months ended June 30, 2021.

Our instructional costs and services expenses for the three months ended September 30, 2022 were $71.8 million, an increase of $29.3 million, or 68.8%, compared to $42.5 million for the three months ended September 30, 2021.

The increase in instructional costs and services expenses was primarily due to the inclusion of our RU Segment and GSUSA instructional costs and services expenses of $23.0 million and $3.9 million, respectively, for the three months ended September 30, 2022, compared to one month of RU Segment instructional costs and services expenses and no GSUSA instructional costs and services expenses in the prior year period.

In addition, there were increases in faculty compensation costs and course materials costs in our APUS and HCN Segments and an increase in other costs in our APUS Segment.

Instructional costs and services expenses as a percentage of revenue increased to 48.0% for the three months ended September 30, 2022 from 43.3% for the three months ended September 30, 2021.

Selling and promotional expenses.

Our selling and promotional expenses for the three months ended June 30, 2022 were $35.8 million, an increase of $18.4 million, or 105.0%, compared to $17.5 million for the three months ended June 30, 2021.

The increase in selling and promotional expenses was primarily due to the inclusion of RU Segment and GSUSA selling and promotional expenses of $17.7 million and $1.2 million, respectively, partially offset by a decrease in advertising costs in our APUS Segment.

Selling and promotional expenses as a percentage of revenue increased to 24.0% for the three months ended June 30, 2022 from 22.4% for the three months ended June 30, 2021.

Our selling and promotional expenses for the three months ended September 30, 2022 were $40.9 million, an increase of $17.5 million, or 74.4%, compared to $23.5 million for the three months ended September 30, 2021.

The increase in selling and promotional expenses was primarily due to the inclusion of our RU Segment and GSUSA selling and promotional expenses of $16.0 million and $1.1 million, respectively, for the three months ended September 30, 2022, compared to one month of RU Segment selling and promotional expenses and no GSUSA selling and promotional expenses in the prior year period.

In addition, there were increases in marketing support costs, advertising costs, and professional fees in our APUS Segment, partially offset by decreases in advertising costs and marketing support materials costs in Corporate and Other.

Selling and promotional expenses as a percentage of revenue increased to 27.4% for the three months ended September 30, 2022 from 23.9% for the three months ended September 30, 2021.

General and administrative expenses.

Our general and administrative expenses for the three months ended June 30, 2022 were $29.9 million, an increase of $4.4 million, or 17.5%, compared to $25.5 million for the three months ended June 30, 2021.

The increase in general and administrative expenses for the three months ended June 30, 2022 as compared to the prior year period was primarily due to the inclusion of RU Segment and GSUSA general and administrative expenses of $6.2 million and $1.2 million, respectively, as well as an increase in employee compensation costs in Corporate and Other, partially offset by decreases in employee compensation costs and professional fees in our APUS Segment.

For the three months ended June 30, 2022, APUS Segment general and administrative expenses include the following costs on a pre-tax basis:

Our general and administrative expenses for the three months ended September 30, 2022 were $29.7 million, an increase of $3.1 million, or 11.5%, compared to $26.6 million for the three months ended September 30, 2021.

The increase in general and administrative expenses was primarily due to the inclusion of our RU Segment and GSUSA general and administrative expenses of $4.1 million and $1.2 million, respectively, for the three months ended September 30, 2022, compared to one month of RU Segment general and administrative expenses and no GSUSA general and administrative expenses in the prior year period.

In addition, there was an increase employee compensation costs in our HCN Segment and Corporate and Other, and increases in Title IV costs and bad debt expense in our HCN Segment.

The increase in expenses was partially offset by decreases in professional fees in our APUS Segment and Corporate and Other and a decrease in legal costs in Corporate and Other.

For the three months ended September 30, 2022, APUS Segment general and administrative expenses include the following costs on a pre-tax basis:

$0.9 million of information technology costs related to our multi-year technology transformation program in our APUS Segment;

and $0.4 million in professional fees associated with the Rasmussen and GSUSA acquisitions included in Corporate and Other.

For the three months ended June 30, 2021, general and administrative expenses include the following costs on a pre-tax basis:

$3.3 million in professional fees primarily related to the Rasmussen Acquisition in Corporate and Other, and approximately $1.6 million of information technology costs related to our multi-year technology transformation program in our APUS Segment.

Consolidated bad debt expense for the three months ended June 30, 2022 was $2.9 million, or 2.0% of revenue, compared to $1.4 million, or 1.8% of revenue in the prior year period.

General and administrative expenses as a percentage of revenue decreased to 20.0% for the three months ended June 30, 2022 from 32.6% for the three months ended June 30, 2021.

and $0.3 million in professional fees associated with the Rasmussen and GSUSA acquisitions in Corporate and Other.

For the three months ended September 30, 2021, general and administrative expenses include the following costs on a pre-tax basis:

$1.8 million in professional fees primarily related to the Rasmussen Acquisition in Corporate and Other and $1.7 million of information technology costs related to our multi-year technology transformation program in our APUS Segment.

Consolidated bad debt expense for the three months ended September 30, 2022 was $3.7 million, or 2.5% of revenue, compared to $1.6 million, or 1.6% of revenue in the prior year period.

General and administrative expenses as a percentage of revenue decreased to 19.8% for the three months ended September 30, 2022 from 27.1% for the three months ended September 30, 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.

(Gain) loss on disposals of long-lived assets.

The gain on disposals of long-lived assets was $9,000 for the three months ended June 30, 2022 compared to a loss of $0.2 million for the three months ended June 30, 2021.

Impairment of goodwill and intangible assets.

For the three months ended June 30, 2022, the non-cash impairment of goodwill of $144.9 million resulted from the reduction of the carrying value of goodwill and intangible assets in our RU Segment, and the corresponding tax impact.

For additional information regarding the impairment of goodwill and intangible assets, and a discussion of the potential for future impairment charges for goodwill and intangible assets, please refer to the discussion in “Note 6.

Goodwill and Intangible Assets” included in the Consolidated Financial Statements in this Quarterly Report.

Loss on disposals of long-lived assets.

The loss on disposals of long-lived assets was $0.2 million for the three months ended September 30, 2022.

There was no loss on disposal of long-lived assets for the three months ended September 30, 2021 .

Depreciation and amortization expenses.

Depreciation and amortization expenses were $8.1 million and $2.5 million for the three months ended June 30, 2022 and 2021, respectively.

The increase in depreciation and amortization expenses for the three months ended June 30, 2022 as compared to the prior year period was primarily due to the inclusion of the RU Segment depreciation and amortization expenses of $6.2 million.

Depreciation and amortization as a percentage of revenue increased to 5.3% for the three months ended June 30, 2022 from 3.2% for the three months ended June 30, 2021.

Depreciation and amortization expenses were $8.0 million and $4.4 million for the three months ended September 30, 2022 and 2021, respectively.

The increase in depreciation and amortization expenses for the three months ended September 30, 2022 was primarily due to the inclusion of our RU Segment and GSUSA depreciation and amortization expenses of $4.1 million and $0.1 million, respectively, for the three months ended September 30, 2022, compared to one month of RU Segment depreciation and amortization expenses and no GSUSA depreciation and amortization expenses in the prior year period.

Depreciation and amortization expenses as a percentage of revenue increased to 5.3% for the three months ended September 30, 2022 from 4.5% for the three months ended September 30, 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 $2.0 million for the three months ended June 30, 2022 and 2021, respectively.

Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses were $2.0 million and $1.8 million for the three months ended September 30, 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 $0.7 million decrease in the gain on acquisition during the three months ended June 30, 2022 was due to the final working capital adjustment in connection with the GSUSA Acquisition.

Interest (expense) income.

Interest expense was $3.4 million for the three months ended June 30, 2022, compared to interest income of $24,000 for the three months ended June 30, 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.

Interest expense.

Interest expense was $3.6 million for the three months ended September 30, 2022, compared to $1.3 million for the three months ended September 30, 2021.

The increase in interest expense was due to the inclusion of three months of interest expense related to the senior secured term loan facility in an aggregate original principal amount of $175.0 million issued in connection with the Rasmussen Acquisition, compared to one month of interest expense in the prior year period.

Income tax (benefit) expense.

We recognized an income tax benefit of $35.3 million for the three months ended June 30, 2022, compared to income tax expense of $0.6 million for the three months ended June 30, 2021, or an effective tax rate benefit of 24.3% in 2022 compared to an income tax expense rate of 54.9% in 2021.

The three months ended June 30, 2022 includes a $36.0 million income tax benefit related to the impairment of goodwill and intangible assets.

Excluding the $36.0 million tax benefit, tax expense for the three months ended June 30, 2022 was $0.7 million, or a negative effective tax rate of 144.9%.

The higher effective tax rate in 2022, excluding the impairment charge and the corresponding tax impact, is due to higher non-deductible expenses in relation to the pre-tax loss for the period.

Equity investment loss.

Equity investment loss was $6,000 for the three months ended June 30, 2022 compared to $0.8 million for the three months ended June 30, 2021.

The equity investment loss for the three months ended June 30, 2021 includes an impairment loss of $0.8 million on one of our cost method investments.

We recognized an income tax benefit of $0.9 million for the three months ended September 30, 2022, compared to income tax expense of $0.2 million for the three months ended September 30, 2021, or an effective tax rate benefit of 18.6% in 2022 compared to a negative tax rate in 2021.

Net (loss) income.

Our net loss was $110.0 million for the three months ended June 30, 2022, compared to net income of $0.5 million for the three months ended June 30, 2021, a decrease of $110.6 million.

This decrease was related to the factors discussed above.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Our consolidated revenue for the six months ended June 30, 2022 was $304.4 million, an increase of $137.8 million, or 82.7%, compared to $166.6 million for the six months ended June 30, 2021.

The increase in revenue was primarily due to the inclusion of RU Segment and GSUSA revenue for the six months ended June 30, 2022 of $131.0 million and $7.5 million, respectively.

In addition, HCN Segment revenue increased $0.8 million, or 3.4%, and APUS Segment revenue decreased $1.4 million, or 1.0%.

Our net loss was $3.8 million for the three months ended September 30, 2022, compared to a net loss of $0.3 million for the three months ended September 30, 2021, an increase in the net loss of $3.5 million.

This increase in the net loss was related to the factors discussed above.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Our consolidated revenue for the nine months ended September 30, 2022 was $453.9 million, an increase of $189.1 million, or 71.4%, compared to $264.8 million for the nine months ended September 30, 2021.

The increase in revenue was primarily due to the inclusion of our RU Segment and GSUSA revenue for the nine months ended September 30, 2022 of $171.4 million and $15.2 million, respectively, compared to one month of RU Segment revenue and no GSUSA revenue in the prior year period.

In addition, APUS Segment revenue increased $1.4 million, or 0.7% and HCN Segment revenue increased $0.9 million, or 2.8%.

The APUS Segment revenue increase was primarily due to a 1.7% increase in net course registrations as compared to the prior year period.

The HCN Segment revenue increase was primarily due to an 4.8% 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 six months ended June 30, 2022 were $440.4 million, an increase of $286.5 million, or 186.1%, compared to $153.9 million for the six months ended June 30, 2021, and include a non-cash impairment charge of $144.9 million to reduce the carrying value of RU segment goodwill and intangible assets, and to reflect the corresponding tax impact.

The increase in costs and expenses for the six months ended June 30, 2022, was also the result of the inclusion of our RU Segment and GSUSA costs and expenses of $131.8 million and $10.8 million, respectively, excluding the goodwill and intangible assets impairment charge in the RU Segment.

Other increases in costs and expenses include increases in employee compensation costs in our HCN Segment and Corporate and Other, increases in faculty compensation costs and advertising costs in our HCN Segment, and an increase in graduation event costs in our APUS Segment, partially offset by decreases in employee compensation costs, professional fees, and advertising costs in our APUS Segment.

Results for the six months ended June 30, 2022 include the following costs on a pre-tax basis:

Costs and expenses for the nine months ended September 30, 2022 were $591.0 million, an increase of $340.0 million, or 135.5%, compared to $250.9 million for the nine months ended September 30, 2021, and include a non-cash impairment charge of $144.9 million to reduce the carrying value of RU segment goodwill and intangible assets, and to reflect the corresponding tax impact.

The increase in costs and expenses was also the result of the inclusion of our RU Segment and GSUSA costs and expenses of $179.1 million and $17.1 million, respectively, excluding the goodwill and intangible assets impairment charge in the RU Segment, for the nine months ended September 30, 2022, compared to one month of RU Segment costs and expenses and no GSUSA costs and expenses in the prior year period.

Other increases in costs and expenses include increases in employee compensation costs in our HCN Segment and Corporate and Other, increases in graduation event costs and marketing support costs in our APUS Segment, increases in faculty compensation costs, advertising costs, Title IV costs, and bad debt expense in our HCN Segment, partially offset by decreases in professional fees and employee compensation costs in our APUS Segment and decreases in legal costs and advertising costs in Corporate and Other.

Results for the nine months ended September 30, 2022 include the following costs on a pre-tax basis:

a $144.9 million non-cash impairment charge to reduce the carrying value of RU Segment goodwill and intangible assets, and the corresponding tax impact;

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and $1.6 million in professional fees associated with the Rasmussen and GSUSA acquisitions in Corporate and Other.

Results for the six months ended June 30, 2021 included the following costs on a pre-tax basis:

Results for the nine months ended September 30, 2021 included the following costs on a pre-tax basis:

$5.8 million in professional fees associated with the Rasmussen Acquisition in Corporate and Other, and $5.0 million in information technology costs related to our multi-year technology transformation program in our APUS Segment.

Costs and expenses as a percentage of revenue increased to 144.7% for the six months ended June 30, 2022 from 92.5% for the six months ended June 30, 2021.

Costs and expenses as a percentage of revenue increased to 130.1% for the nine months ended September 30, 2022 from 94.7% for the nine months ended September 30, 2021.

Instructional costs and services expenses.

Our instructional costs and services expenses for the six months ended June 30, 2022 were $143.8 million, an increase of $81.1 million, or 129.3%, compared to $62.7 million for the six months ended June 30, 2021.

The increase in instructional costs and services expenses was primarily due to the inclusion of RU Segment and GSUSA instructional costs and services expenses of $71.4 million and $6.4 million, respectively, as well as an increase in faculty costs in our HCN Segment and an increase in graduation event costs in our APUS Segment, partially offset by a decrease in employee compensation costs in our APUS Segment.

Instructional costs and services expenses as a percentage of revenue increased to 47.2% for the six months ended June 30, 2022 from 37.7% for the six months ended June 30, 2021.

Our instructional costs and services expenses for the nine months ended September 30, 2022 were $215.6 million, an increase of $110.3 million, or 104.8%, compared to $105.3 million for the nine months ended September 30, 2021.

The increase in instructional costs and services expenses was primarily due to the inclusion of our RU Segment and GSUSA instructional costs and services expenses for the nine months ended September 30, 2022, of $94.5 million and $10.3 million, respectively, compared to one month of RU Segment instructional costs and services expenses and no GSUSA instructional services costs and expenses in the prior year period.

In addition, there was an increase in faculty compensation costs and in our HCN Segment and increases in graduation event costs and other costs in our APUS Segment.

The increases in expenses were partially offset by a decrease in employee compensation costs in our APUS Segment.

Instructional costs and services expenses as a percentage of revenue increased to 47.5% for the nine months ended September 30, 2022 from 39.7% for the nine months ended September 30, 2021.

Selling and promotional expenses.

Our selling and promotional expenses for the six months ended June 30, 2022 were $75.2 million, an increase of $38.3 million, or 103.7%, compared to $36.9 million for the six months ended June 30, 2021.

The increase in selling and promotional expenses was primarily due to the inclusion of RU Segment and GSUSA selling and

promotional expenses of $35.7 million and $2.0 million, respectively, as well as increases in employee compensation costs in our HCN Segment and Corporate and Other and an increase in advertising costs in our HCN Segments, partially offset by decreases in advertising costs and employee compensation costs in our APUS Segment.

Selling and promotional expenses as a percentage of revenue increased to 24.7% for the six months ended June 30, 2022 from 22.2% for the six months ended June 30, 2021.

Our selling and promotional expenses for the nine months ended September 30, 2022 were $116.1 million, an increase of $55.7 million, or 92.3%, compared to $60.4 million for the nine months ended

September 30, 2021.

The increase in selling and promotional expenses was primarily due to the inclusion of our RU Segment and GSUSA selling and promotional expenses, for the nine months ended September 30, 2022, of $51.6 million and $3.1 million, respectively, compared to one month of RU Segment selling and promotional expenses and no GSUSA selling and promotional expenses in the prior year period.

In addition, there was an increase in marketing support costs in our APUS Segment, an increase in employee compensation costs in our HCN Segment and Corporate and Other, and an increase in advertising costs in our HCN Segments.

The increase in expenses was partially offset by a decrease in employee compensation costs in our APUS Segment, and a decrease in advertising costs in our APUS Segment and Corporate and Other.

Selling and promotional expenses as a percentage of revenue increased to 25.6% for the nine months ended September 30, 2022 from 22.8% for the nine months ended September 30, 2021.

General and administrative expenses.

Our general and administrative expenses for the six months ended June 30, 2022 were $59.5 million, an increase of $10.5 million, or 21.5%, compared to $49.0 million for the six months ended June 30, 2021.

The increase in general and administrative expenses for the six months ended June 30, 2022 as compared to the prior year period was primarily due to the inclusion of RU Segment and GSUSA general and administrative expenses of $12.4 million and $2.1 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 and professional fees in our APUS Segment and a decrease in professional fees in Corporate and Other.

For the six months ended June 30, 2022, APUS Segment general and administrative expenses include the following costs on a pre-tax basis:

Our general and administrative expenses for the nine months ended September 30, 2022 were $89.2 million, an increase of $13.6 million, or 18.0%, compared to $75.6 million for the nine months ended September 30, 2021.

The increase in general and administrative expenses for the nine months ended September 30, 2022 as compared to the prior year period was primarily due to the inclusion of our RU Segment and GSUSA general and administrative expenses, for the nine months ended September 30, 2022, of $16.5 million and $3.2 million, respectively, compared to one month of RU Segment general and administrative expenses and no GSUSA general and administrative expenses in the prior year period.

In addition, there was an increase in employee compensation costs in Corporate and Other and our HCN Segment.

The increase in expenses was partially offset by a decrease in professional fees in our APUS Segment, our HCN Segment and Corporate and Other, a decrease in employee compensation costs in our APUS Segment, and a decrease in legal costs in Corporate and Other.

For the nine months ended September 30, 2022, APUS Segment general and administrative expenses include the following costs on a pre-tax basis:

$2.6 million of information technology costs related to our multi-year technology transformation program in our APUS Segment;

and $1.6 million in professional fees associated with the Rasmussen and GSUSA acquisitions, included in Corporate and Other.

For the six months ended June 30, 2021, general and administrative expenses include the following costs on a pre-tax basis:

For the nine months ended September 30, 2021, general and administrative expenses include the following costs on a pre-tax basis:

$5.8 million in professional fees primarily related to the Rasmussen Acquisition in Corporate and Other;

and $5.0 million of information technology costs related to our multi-year technology transformation program in our APUS Segment.

Consolidated bad debt expense for the six months ended June 30, 2022 was $5.7 million, or 1.9% of revenue, compared to $2.9 million, or 1.7% of revenue in the prior year period.

General and administrative expenses as a percentage of revenue decreased to 19.6% for the six months ended June 30, 2022 from 29.4% for the six months ended June 30, 2021.

Consolidated bad debt expense for the nine months ended September 30, 2022 was $9.4 million, or 2.1% of revenue, compared to $4.4 million, or 1.7% of revenue in the prior year period.

General and administrative expenses as a percentage of revenue decreased to 19.6% for the nine months ended September 30, 2022 from 28.5% for the nine months ended September 30, 2021.

Loss on disposals of long-lived assets.

The loss on disposals of long-lived assets was $0.8 million and $0.2 million for the six months ended June 30, 2022 and 2021, respectively.

The loss on disposals for long-lived assets for the six months ended June 30, 2022 was primarily related to the sale of excess facilities located in Charles Town, West Virginia.

The loss on disposals of long-lived assets was $1.0 million and $0.2 million for the nine months ended September 30, 2022 and 2021, respectively.

The loss on disposals of long-lived assets for the nine months ended September 30, 2022 was primarily related to the sale of excess facilities located in Charles Town, West Virginia.

Impairment of goodwill and intangible assets.

For the six months ended June 30, 2022, the non-cash impairment of goodwill and intangible assets of $144.9 million resulted from the reduction of the carrying value of goodwill and intangible assets in our RU Segment, and the corresponding tax impact.

For the nine months ended September 30, 2022, the non-cash impairment of goodwill and intangible assets of $144.9 million resulted from the reduction of the carrying value of goodwill and intangible assets in our RU Segment, and the corresponding tax impact.

Goodwill and Intangible Assets” included in the Consolidated Financial Statements in this Quarterly Report.

Goodwill and Intangible Assets” included in the Notes to the Consolidated Financial Statements in this Quarterly Report.

Depreciation and amortization expenses.

Depreciation and amortization expenses were $16.3 million and $5.2 million for the six months ended June 30, 2022 and 2021, respectively.

The increase in depreciation and amortization expenses for the six months ended June 30, 2022 as compared to the prior year period was primarily due to the inclusion of the RU Segment depreciation and amortization expenses of $12.2 million.

Depreciation and amortization as a percentage of revenue increased to 5.3% for the six months ended June 30, 2022 from 3.1% for the six months ended June 30, 2021.

Depreciation and amortization expenses were $24.2 million and $9.6 million for the nine months ended September 30, 2022 and 2021, respectively.

The increase in depreciation and amortization expenses for was primarily due to the inclusion of our RU Segment and GSUSA depreciation and amortization expenses for the nine months ended September 30, 2022 of $16.3 million and $0.4 million, respectively, compared to one month of RU Segment depreciation and amortization expenses and no GSUSA depreciation and amortization expenses in the prior year period.

Depreciation and amortization expenses as a percentage of revenue increased to 5.3% for the nine months ended September 30, 2022 from 3.6% for the nine months ended September 30, 2021.

Stock-based compensation expenses.

Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses were $4.7 million and $4.2 million for the six months ended June 30, 2022 and 2021, respectively.

Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses were $6.7 million and $6.0 million for the nine months ended September 30, 2022 and 2021, respectively.

Stock-based compensation costs include accelerated expense for retirement-eligible employees and performance stock unit incentive costs.

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The $3.8 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 $6.7 million for the six months ended June 30, 2022, compared to interest income of $0.1 million for the six months ended June 30, 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.

Interest expense.

Interest expense was $10.3 million for the nine months ended September 30, 2022, compared to $1.2 million for the nine months ended September 30, 2021.

The increase in interest expense was due to the inclusion of nine months of interest expense related to the senior secured term loan facility in an aggregate original principal amount of $175.0 million issued in connection with the Rasmussen Acquisition, compared to one month of interest expense in the prior year period.

Income tax expense.

We recognized an income tax benefit of $34.3 million for the six months ended June 30, 2022, compared to income tax expense of $3.3 million for the six months ended June 30, 2021, or an effective tax rate benefit of 24.7% in 2022 compared to an income tax rate expense of 27.6% in 2021.

The six months ended June 30, 2022, includes a $36.0 million income tax benefit related to the impairment of goodwill and intangible assets.

Excluding the $36.0 million tax

benefit, the tax expense for the six months ended June 30, 2022 was $1.7 million, or an effective tax rate of 28.9%.

We recognized an income tax benefit of $35.2 million for the nine months ended September 30, 2022, compared to income tax expense of $3.5 million for the nine months ended September 30, 2021, or an effective tax rate benefit of 24.5% in 2022 compared to an income tax rate expense of 29.5% in 2021.

The nine months ended September 30, 2022, includes a $36.0 million income tax benefit related to the impairment of goodwill and intangible assets.

Excluding the $36.0 million tax benefit, the tax expense for the nine months ended September 30, 2022 was $0.8 million, or an effective tax rate of 65.7%.

The higher effective tax rate in 2022, excluding the impairment charge and the corresponding tax impact, is due to higher non-deductible expenses in relation to the pre-tax income for the period.

Equity investment loss.

Equity investment loss was $11,000 for the six months ended June 30, 2022 compared to $0.8 million for the six months ended June 30, 2021.

The equity investment loss for the six months ended June 30, 2021 includes an impairment loss of $0.8 million on one of our cost method investments.

Our net loss was $104.7 million for the six months ended June 30, 2022, compared to net income of $8.6 million for the six months ended June 30, 2021, a decrease of $113.3 million.

Equity investment loss was $13,000 for the nine months ended September 30, 2022 compared to $0.8 million for the nine months ended September 30, 2021.

The equity investment loss for the nine months ended September 30, 2021 includes an impairment loss of $0.8 million on one of our cost method investments.

Net (loss) income.

Our net loss was $108.5 million for the nine months ended September 30, 2022, compared to net income of $8.4 million for the nine months ended September 30, 2021, a decrease in net income of $116.8 million.

This decrease was related to the factors discussed above.

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The following table provides details on our operating results by reportable segment for the respective periods (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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Total income (loss) from operations before interest and income taxes $ (1,026) $ 1,262 $ (137,086) $ 13,874

For the three months ended June 30, 2022, the $3.0 million, or 4.4%, increase to approximately $69.9 million in revenue in our APUS Segment was attributable to the timing of registrations within the quarter and higher net course registrations, primarily as a result of military-related registrations from students utilizing TA.

For the three months ended September 30, 2022, the $2.8 million, or 4.3%, increase to approximately $68.7 million in revenue in our APUS Segment was primarily attributable to the timing of registrations within the quarter.

Net course registrations at APUS increased 3.2% to approximately 85,800 from approximately 83,100 as compared to the same period in 2021.

Income from operations before interest and income taxes increased to $13.6 million, or 49.5%, during the three months ended June 30, 2022 from $9.1 million in the prior year period as a result of the increase in revenue and an overall decrease in expenses as compared to the same period in 2021.

For the six months ended June 30, 2022, the $1.4 million, or 1.0%, decrease to approximately $143.0 million in revenue in our APUS Segment was primarily due to the timing of registrations within the quarter and lower revenue per net course registration due to a change in the mix of registrations toward a greater percentage of military-related registrations from students utilizing TA, which generate lower revenue per registration than non-military registrations.

Net course registrations at APUS increased 1.0% to approximately 177,400 for the six months ended June 30, 2022 from approximately 175,600 during the same period in 2021.

Income from operations before interest income and income taxes in our APUS Segment was $26.8 million during the six months ended June 30, 2022, an increase of $3.7 million, or 15.8%, compared to the same period in 2021, as a result of decreases in costs and expenses including employee compensation costs, professional fees, and advertising costs.

For the three and six months ended June 30, 2022, RU Segment revenue was $63.9 million and $131.0 million, respectively.

The RU Segment loss from operations before interest and income taxes was $146.6 million and $145.7 million for the three and six months ended June 30, 2022, respectively, primarily due to a goodwill and intangible asset impairment charge, and the corresponding tax impact, of $144.9 million.

RU enrollment was approximately 15,900 during the three months ended June 30, 2022, which compares to 17,000 during the three months ended June 30, 2021.

RU total student enrollment decreased 6.4% during the six months ended June 30, 2022 compared to the same period in 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 nursing faculty and clinical positions.

For the three months ended June 30, 2022, the $0.4 million, or 3.2%, 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 2.7% during the three months ended June 30, 2022 compared to the same period in 2021, due primarily to the opening of the Akron campus in April 2021 and to the Indianapolis campus which, effective for the 2022 calendar year can enroll up to 200 students per calendar year compared to 30 students in 2021.

The HCN Segment loss from operations before interest and income taxes was $0.6 million during the three months ended June 30, 2022, compared to income from operations before interest and income taxes of $0.1 million in the same period in 2021, a decrease of $0.7 million, primarily due to increases in faculty and employee compensation costs and an increase in marketing expenditures as compared to the prior year period.

For the six months ended June 30, 2022, the $0.8 million, or 3.4%, increase to approximately $23.0 million in revenue in our HCN Segment was primarily attributable to an increase in student enrollment.

HCN total student enrollment increased 5.4% during the six months ended June 30, 2022 compared to the same period in 2021.

The HCN Segment loss from operations before interest and income taxes was $1.6 million during the six months ended June 30, 2022, compared to income from operations before interest and income taxes of $0.9 million in the same period in 2021, a decrease of $2.5 million, primarily as a result of increases in expenses as discussed above.

Income from operations before interest and income taxes increased to $12.5 million, or 60.2%, during the three months ended September 30, 2022 from $7.8 million in the prior year period as a result of the increase in revenue and an overall decrease in expenses as compared to the same period in 2021.

For the nine months ended September 30, 2022, the $1.4 million, or 0.7%, increase to approximately $211.7 million in

revenue in our APUS Segment was primarily due to the timing of registrations within the period and lower revenue per net course registration due to a change in the mix of registrations toward a greater percentage of military related registrations from students utilizing TA, which generate lower revenue per registration than non-military registrations.

Net course registrations at APUS increased 1.7% to approximately 263,200 for the nine months ended September 30, 2022 from approximately 258,700 during the same period in 2021.

Income from operations before interest income and income taxes in our APUS Segment was $39.3 million during the nine months ended September 30, 2022, an increase of $8.4 million, or 27.0%, compared to the same period in 2021, as a result of decreases in costs and expenses including employee compensation costs, professional fees, and advertising costs.

For the three and nine months ended September 30, 2022, RU Segment revenue was $61.5 million and $192.5 million, respectively.

The RU Segment loss from operations before interest and income taxes was $7.9 million and $153.6 million for the three and nine months ended September 30, 2022, respectively, and includes a $144.9 million non-cash impairment charge of goodwill and intangible assets in the nine month period, and the corresponding tax impact.

RU full-term enrollment was approximately 15,000 during the three months ended September 30, 2022, which compares to 16,300 during the three months ended September 30, 2021.

RU total student enrollment decreased 7.0% during the nine months ended September 30, 2022 compared to the same period in 2021.

For the three months ended September 30, 2022, the $0.2 million, or 1.5%, increase in revenue to $11.4 million in our HCN Segment was primarily attributable to an increase in total student enrollment of 3.7% during the three months ended September 30, 2022 compared to the same period in 2021, due primarily to the opening of the Akron campus in April 2021 and to IBN action to increase maximum enrollment at the Indianapolis campus, which effective for the 2022 calendar year can enroll up to 200 students per calendar year compared to 30 students in 2021.

The HCN Segment loss from operations before interest and income taxes was $1.4 million during the three months ended September 30, 2022, compared to income from operations before interest and income taxes of $0.4 million in the same period in 2021, a decrease of $1.8 million, primarily due to increases in employee compensation costs as compared to the prior year period.

For the nine months ended September 30, 2022, the $0.9 million, or 2.8%, increase to approximately $34.4 million in revenue in our HCN Segment was primarily attributable to an increase in student enrollment.

HCN total student enrollment increased 4.8% during the nine months ended September 30, 2022 compared to the same period in 2021.

The HCN Segment loss from operations before interest and income taxes was $3.0 million during the nine months ended September 30, 2022, compared to income from operations before interest and income taxes of $1.3 million in the same period in 2021, a decrease of $4.4 million, primarily due to increases in employee compensation costs and advertising costs as compared to the prior year period.

Liquidity and Capital Resources

Cash and cash equivalents were $184.5 million and $149.6 million at June 30, 2022 and December 31, 2021, respectively, representing an increase of $34.9 million, or 23.3%.

The increase in cash was due to cash provided by operating activities, partially offset by increases in capital expenditures and payments of principal and interest on our debt obligations.

Cash and cash equivalents were $185.5 million and $149.6 million at September 30, 2022 and December 31, 2021, respectively, representing an increase of $35.9 million, or 24.0%.

The increase in cash was due to an increase in net cash provided by operating activities, 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.

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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.

Another significant source of revenue is derived from TA from the DoD and programs from the U.S.

Department of Veterans Affairs, or the VA.

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In 2021, disruptions related to the Army’s transition to ArmyIgnitED, 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 six months ended June 30, 2022 we saw improvement in Army’s processing of invoices and payments.

APUS received approximately $38.8 million in payments from the Army during the six months ended June 30, 2022.

As of June 30, 2022, approximately $12.5 million in accounts receivable, of which $6.9 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.

The 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.

While the Army established alternative processes for soldiers to seek reimbursement for out-of-pocket costs incurred as a result of the disruption and related processes for institutions, in July 2022, the Army ended the alternative process for institutions, meaning that students now need to

retroactively seek and obtain TA on their own, and the student process will expire on August 26, 2022.

Failure to submit a TA request by that date for courses that would have been covered by the alternative process may result in no TA funding being provided.

We believe that the expiration of the alternative process for institutions will adversely impact APUS enrollments in the third quarter of 2022.

The Army has also announced that it will soon transition to an upgraded ArmyIgnitED 2.0, that all TA requests for courses beginning on or after October 1, 2022 will be required to be submitted via ArmyIgnitED 2.0, and that the Army will be transitioning to a new third-party service provider for ArmyIgnitED.

As part of this change, the Army stopped allowing institutions to submit invoices until ArmyIgnitED 2.0 is implemented, which could impact our ability to collect on our accounts receivable and could cause our accounts receivable to increase, and, as a result, we could incur additional bad debt expense.

While we are taking efforts to mitigate the impact of this change in policy, we believe it will not be remedied in full until ArmyIgnitED 2.0 is successfully implemented.

However, there can be no assurance that ArmyIgnitED 2.0 will work as expected or at all or will not cause further disruption to soldiers’ ability to seek and obtain TA or to the Army’s processing of invoices and payments to APUS.

In 2022, prior to the Army’s upgrade from the initial version of ArmyIgnitED to ArmyIgnitED 2.0, we saw an improvement in Army’s processing of invoices and payments.

During the nine months ended September 30, 2022, APUS received approximately $47.7 million in payments from the Army.

While the Army had established alternative processes for soldiers to seek reimbursement for out-of-pocket costs incurred as a result of the disruption and related processes for institutions, in July 2022, the Army ended the alternative process for institutions, meaning that students needed to retroactively seek and obtain TA directly through ArmyIgnitED, and the student process expired on August 26, 2022.

Failure to submit a TA request for courses that would have been covered by the alternative process may result in no TA funding being provided.

As a result of the previous alternative process for institutions, ArmyIgnitED does not currently reflect all courses previously taken by soldiers at APUS in the relevant period, and ArmyIgnitED therefore understates the amounts due to APUS.

We are working with the Army to resolve these discrepancies.

During the third quarter, the Army transitioned from the initial version of ArmyIgnitED to ArmyIgnitED 2.0, with a new third-party service provider, and announced that all TA requests for courses beginning on or after October 1, 2022 must be submitted via ArmyIgnitED 2.0.

As part of this change, the Army stopped allowing institutions to submit invoices July 30, 2022 until August 29, 2022, which has impacted our ability to collect on our accounts receivable and caused our accounts receivable to increase.

As of September 30, 2022, approximately $13.8 million, of which $6.3 million is older than 60 days from the course start date, was due from the Army.

While we are taking efforts to mitigate any adverse impact of the transition to ArmyIgnitED 2.0 on accounts receivable, bad debt, and cash flow, there can be no assurance that these efforts will be successful or ArmyIgnitED 2.0 will work as expected.

Difficulties associated with the upgrade or transition to a new service provider, including the related data migration, could cause further disruption to soldiers’ ability to seek and obtain TA and to the Army’s processing of invoices and payments to APUS.

See the section entitled “Risk Factors”.

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.

Capital expenditures could be higher in the future as a result of, among other things, additional expenditures for technology or other business capabilities, including as a result of insourcing of information technology functions and marketing services from Collegis, LLC, or Collegis, 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 and six months ended June 30, 2022, we incurred $0.4 million and $1.3 million, respectively, of acquisition-related expenses which are included in general and administrative expenses on the Consolidated Statements of Income.

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 transitioned some services and continue work on the transition of certain marketing services.

For the three and nine months ended September 30, 2022, we incurred $0.3 million and $1.6 million, respectively, of acquisition-related expenses which are included in general and administrative expenses on the Consolidated Statements of Income.

RU currently relies on 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 intended to permit both contracts to expire by their terms on September 30, 2024.

In October 2022, RU and Collegis mutually agreed to the termination of the marketing services contract effective January 31, 2023, rather than having the contract expire by its terms in September 2024.

Approximately $6.5 million in transition related fees will be due to Collegis as specific transition obligations are completed, a portion of which is expected to be incurred in the fourth quarter of 2022 with the remainder expected to be incurred in the first quarter of 2023.

Outsourced information technology services under the Collegis information technology contract will continue until September 30, 2024.

The total minimum value for marketing and information technology services over the remaining periods, excluding the transition-related fees in connection with the termination of the marketing services, are approximately $4.5 million and $18.1 million, respectively.

Additionally, we plan to transition all of the information technology services currently outsourced to Collegis back to our operations or to one or more other third-party vendors.

We have already transitioned some services and continue work on the transition of marketing services.

As we continue to develop our 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.

Given recent operating results, we have begun to identify certain cost savings efforts focused on realigning our organizational structure, eliminating redundancies, and optimizing certain functions.

While we are working toward implementing these efforts by the end of 2022, there can be no assurance that we will be successful or recognize the benefits we anticipate.

Furthermore, some of the savings that we anticipate would be offset in the short-term by severance and other related costs, and over the long-term may be offset by increases to wages and salaries necessary to remain competitive.

On November 2, 2022, we completed a reduction in force that resulted in the termination of 98 non-faculty employees and the elimination of 78 open positions across a variety of roles and departments.

The reductions represent approximately 5.8% of our non-faculty workforce.

We incurred an aggregate of approximately $3.1 million of pre-tax cash expenses associated with employee severance benefits, all of which we expect will be incurred in the fourth quarter of 2022.

The reduction in force is expected to result in pre-tax labor and benefit savings in 2022 of approximately $2.3 million, and approximately $13.5 million on an annualized basis.

These cost savings do not include expenses associated with employee severance benefits.

The headcount reductions reflect ongoing efforts focused on realigning our organizational structure, eliminating redundancies, and optimizing certain functions.

There can be no assurance that we will be successful or recognize the benefits we anticipate.

Acquisition of Rasmussen University

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For more information on the Facilities and their terms, please refer to “Note 8.

Long-Term Debt” included in the Consolidated Financial Statements in this Quarterly Report.

Long-Term Debt” included in the Notes to the Consolidated Financial Statements in this Quarterly Report.

Our future capital requirements will depend on a number of factors.

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Operating Activities

Net cash provided by operating activities was $45.4 million and $8.9 million for the six months ended June 30, 2022 and 2021, respectively.

Net cash provided by operating activities was $52.2 million and $0.6 million for the nine months ended September 30, 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 June 30, 2022, decreased approximately $9.2 million compared to December 31, 2021, primarily as a result of improvement in Army’s processing of invoices and payments to APUS.

Accounts payable and accrued liabilities, and accrued compensation and benefits at June 30, 2022 were approximately $4.8 million higher than December 31, 2021, primarily due to the timing of payment processing.

Cash flow from operations for the nine months ended September 30, 2021 was negatively impacted by the timing of the Rasmussen Acquisition.

RU receives the majority of its cash receipts during the first month of each fiscal quarter while disbursements occur throughout the quarter.

Pursuant to the terms of the Rasmussen Acquisition, the Seller in the transaction retained substantially all of the cash held by RU on the Closing Date.

Accordingly, from the Closing Date through September 30, 2021, and continuing through mid-October when RU received its TPPPA, the majority of RU’s operations were funded by APEI.

Accounts receivable at September 30, 2022, decreased approximately $8.5 million compared to December 31, 2021, primarily as a result of improvement in Army’s processing of invoices and payments to APUS.

Accounts payable and accrued liabilities, and accrued compensation and benefits at September 30, 2022 were approximately $5.7 million higher than December 31, 2021, primarily due to the timing of payment processing.

Investing Activities

Net cash used in investing activities was $4.6 million and $3.0 million for the six months ended June 30, 2022 and 2021, respectively.

Capital expenditures of $7.3 million for the six months June 30, 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 six months ended June 30, 2021, capital expenditures were $3.0 million.

Net cash used in investing activities was $8.2 million and $331.3 million for the nine months ended September 30, 2022 and 2021, respectively.

Investing activities for the nine months ended September 30, 2021 include the Rasmussen Acquisition.

Capital expenditures of $10.9 million for the nine months September 30, 2022 were partially offset by net proceeds from the GSUSA Acquisition and the sale of real property of $2.0 million and $0.8 million, respectively.

For the nine months ended September 30, 2021, capital expenditures were $5.8 million.

The increase in capital expenditures in 2022 as compared to the 2021 period was primarily due to the inclusion of RU Segment capital expenditures of $6.9 million in the 2022 period.

Financing Activities

Net cash used in financing activities was $5.9 million for the six months ended June 30, 2022, compared to $83.4 million of net cash provided by financing activities for the six months ended June 30, 2021.

This increase in cash used in financing activities was largely due to principal payments made on our debt borrowings for the six months ended June 30, 2022.

During the six months ended June 30, 2021, we received net proceeds of approximately $86.2 million as a result of our underwritten public offering of common stock.

Net cash used in financing activities was $8.2 million for the nine months ended September 30, 2022, compared to $244.5 million of net cash provided by financing activities for the nine months ended September 30, 2021.

For the nine months ended September 30, 2022, the cash used in financing activities was largely due to principal payments made on our debt borrowings.

For the nine months ended September 30, 2021, the cash provided by financing activities was due to our underwritten public offering of common stock and the long-term debt issuance.

Contractual Commitments

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For a summary of our contractual obligations, please refer to Item 7 of Part II of our Annual Report.

RU is a party to service agreements with a third party, Collegis, to provide marketing and IT services.

RU is a party to service contracts with a third party, Collegis, to provide marketing and information technology services.

The agreements expire September 30, 2024.

The total minimum value of the service contracts over the remaining period is approximately $43.1 million.

Notices of the non-renewal of the marketing and IT services agreements were issued to Collegis in April 2022.

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.

We have already transitioned some services and continue work on the transition of certain marketing services.

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.

Notices of the non-renewal of the marketing and information technology services contracts were issued to Collegis in April 2022.

On October 17, 2022, RU and Collegis mutually agreed to the termination of the marketing services contract effective January 31, 2023, rather than having the contract expire by its terms in September 2024.

Outsourced information technology services under the Collegis information technology contract will continue until September 30, 2024.

Additionally, we plan to transition all of the information technology services currently outsourced to Collegis back to our operations or to one or more other third-party vendors.

We have already transitioned some services and continue work on the transition of marketing services.

In connection with the GSUSA Acquisition, we assumed an operating lease obligation in the aggregate amount 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 in the Consolidated Financial Statements in this Quarterly Report.

Leases” included in the Notes to the Consolidated Financial Statements in this Quarterly Report.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis