AMERICAN PUBLIC EDUCATION INC 10-Q

Item 1. Financial Statements AMERICAN PUBLIC EDUCATION, INC. Consolidated Balance Sheets (In thousands) As of September 30, 2022 As of December 31, 2021 ASSETS (Unaudited) Current assets: Cash, cash equivalents, and restricted cash (Note 2) $ 185,500 $ 149,627 Accounts receivable, net of allowance of $ 12,342 in 2022 and $ 11,396 in 2021 27,527 36,026 Prepaid expenses 11,484 11,681 Income tax receivable 4,162 5,303 Total current assets 228,673 202,637 Property and equipment, net 99,546 102,417 Operating lease assets, net 110,096 77,943 Deferred income taxes 32,361 — Goodwill 112,593 243,486 Intangible assets, net 60,687 85,082 Other assets, net 16,871 14,043 Total assets $ 660,827 $ 725,608 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities $ 26,577 $ 24,316 Accrued compensation and benefits 18,588 15,131 Deferred revenue and student deposits 27,585 21,776 Lease liabilities, current 14,338 13,705 Long-term debt, current 8,750 8,750 Total current liabilities 95,838 83,678 Lease liabilities, long-term 102,567 69,488 Deferred income taxes — 5,059 Long-term debt, net 147,070 151,771 Total liabilities 345,475 309,996 Commitments and contingencies (Note 10) Stockholders’ equity: Preferred stock, $ .01 par value; 10,000 shares authorized; no shares issued or outstanding — — Common stock, $ .01 par value; 100,000 shares authorized; 18,892 issued and outstanding in 2022; 18,709 issued and outstanding in 2021 189 187 Additional paid-in capital 291,552 286,385 Accumulated other comprehensive income 3,137 108 Retained earnings 20,474 128,932 Total stockholders’ equity 315,352 415,612 Total liabilities and stockholders’ equity $ 660,827 $ 725,608 The accompanying notes are an integral part of these Consolidated Financial Statements. 3 AMERICAN PUBLIC EDUCATION, INC. Consolidated Statements of Income (In thousands, except per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Unaudited) (Unaudited) Revenue $ 149,535 $ 98,248 $ 453,890 $ 264,803 Costs and expenses: Instructional costs and services 71,817 42,544 215,604 105,257 Selling and promotional 40,917 23,458 116,082 60,350 General and administrative 29,667 26,598 89,179 75,579 Impairment of goodwill and intangible assets (Note 6) — — 144,900 — Loss on disposals of long-lived assets 178 — 962 182 Depreciation and amortization 7,982 4,386 24,249 9,561 Total costs and expenses 150,561 96,986 590,976 250,929 (Loss) income from operations before interest and income taxes ( 1,026 ) 1,262 ( 137,086 ) 13,874 Gain on acquisition (Note 3) — — 3,828 — Interest expense ( 3,594 ) ( 1,305 ) ( 10,339 ) ( 1,167 ) (Loss) income before income taxes ( 4,620 ) ( 43 ) ( 143,597 ) 12,707 Income tax (benefit) expense ( 860 ) 224 ( 35,152 ) 3,509 Equity investment loss ( 2 ) — ( 13 ) ( 827 ) Net (loss) income $ ( 3,762 ) $ ( 267 ) $ ( 108,458 ) $ 8,371 Net (loss) income per common share: Basic $ ( 0.20 ) $ ( 0.01 ) $ ( 5.75 ) $ 0.47 Diluted $ ( 0.20 ) $ ( 0.01 ) $ ( 5.74 ) $ 0.46 Weighted average number of common shares: Basic 18,885 18,700 18,854 17,874 Diluted 18,927 18,855 18,906 18,048 The accompanying notes are an integral part of these Consolidated Financial Statements. 4 AMERICAN PUBLIC EDUCATION, INC. Consolidated Statements of Comprehensive Income (Loss) (In thousands) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Unaudited) (Unaudited) Net (loss) income $ ( 3,762 ) $ ( 267 ) $ ( 108,458 ) $ 8,371 Other comprehensive (loss) income, net of tax: Unrealized gain on hedging derivatives, net of taxes 1,195 — 3,029 — Comprehensive (loss) income $ ( 2,567 ) $ ( 267 ) $ ( 105,429 ) $ 8,371 The accompanying notes are an integral part of these Consolidated Financial Statements. 5 AMERICAN PUBLIC EDUCATION, INC. Consolidated Statements of Stockholders’ Equity (Unaudited) (In thousands) Additional Paid-in Capital Accumulated Other Comprehensive Income (loss) Retained Earnings Total Stockholders’ Equity Common Stock Shares Amount Balance as of December 31, 2020 14,809 $ 148 $ 195,597 $ — $ 111,180 $ 306,925 Issuance of common stock in public offering 3,680 37 86,168 — — 86,205 Issuance of common stock under employee benefit plans 319 3 ( 3 ) — — — Deemed repurchased shares of common and restricted stock for tax withholding ( 99 ) ( 1 ) ( 3,031 ) — — ( 3,032 ) Stock-based compensation — — 5,969 — — 5,969 Net income — — — — 8,371 8,371 Balance as of September 30, 2021 18,709 $ 187 $ 284,700 $ — $ 119,551 $ 404,438 Additional Paid-in Capital Accumulated Other Comprehensive Income (loss) Retained Earnings Total Stockholders’ Equity Common Stock Shares Amount Balance as of December 31, 2021 18,709 $ 187 $ 286,385 $ 108 $ 128,932 $ 415,612 Issuance of common stock under employee benefit plans 263 3 ( 3 ) — — — Deemed repurchased shares of common and restricted stock for tax withholding ( 80 ) ( 1 ) ( 1,533 ) — — ( 1,534 ) Stock-based compensation — — 6,703 — — 6,703 Unrealized gain on hedging derivatives, net of taxes — — — 3,029 — 3,029 Net loss — — — — ( 108,458 ) ( 108,458 ) Balance as of September 30, 2022 18,892 $ 189 $ 291,552 $ 3,137 $ 20,474 $ 315,352 The accompanying notes are an integral part of these Consolidated Financial Statements. 6 AMERICAN PUBLIC EDUCATION, INC. Consolidated Statements of Cash Flows (In thousands) Nine Months Ended September 30, 2022 2021 (Unaudited) Operating activities Net (loss) income $ ( 108,458 ) $ 8,371 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 24,249 9,561 Amortization of debt issuance costs 1,937 223 Stock-based compensation 6,703 5,969 Equity investment loss 13 827 Deferred income taxes ( 38,916 ) 2,489 Loss on disposals of long-lived assets 962 182 Impairment of goodwill and intangible assets 144,900 — Gain on acquisition ( 3,828 ) — Other 16 6 Changes in operating assets and liabilities: Accounts receivable, net of allowance for bad debt 12,781 ( 1,058 ) Prepaid expenses 279 ( 2,076 ) Income tax receivable/payable 1,141 ( 6,000 ) Operating leases, net 1,236 766 Other assets 210 ( 1,594 ) Accounts payable and accrued liabilities 1,743 2,573 Accrued compensation and benefits 3,437 ( 813 ) Deferred revenue and student deposits 3,840 ( 18,847 ) Net cash provided by operating activities 52,245 579 Investing activities Cash received from acquisition, net of cash paid 1,951 ( 325,509 ) Capital expenditures ( 10,905 ) ( 5,813 ) Proceeds from the sale of real property 765 — Net cash used in investing activities ( 8,189 ) ( 331,322 ) Financing activities Cash paid for repurchase of common stock ( 1,534 ) ( 3,032 ) Cash received from issuance of common stock — 86,205 Cash paid for principal on borrowings and finance leases ( 6,649 ) — Cash received from borrowings — 175,000 Cash paid for debt issuance costs — ( 13,629 ) Net cash (used in) provided by financing activities ( 8,183 ) 244,544 Net increase in cash, cash equivalents, and restricted cash 35,873 ( 86,199 ) Cash, cash equivalents, and restricted cash at beginning of period 149,627 227,686 Cash, cash equivalents, and restricted cash at end of period $ 185,500 $ 141,487 Supplemental disclosure of cash flow information Interest paid $ 8,747 $ — Income taxes paid $ 3,392 $ 6,983 The accompanying notes are an integral part of these Consolidated Financial Statements. 7 AMERICAN PUBLIC EDUCATION, INC. Notes to Consolidated Financial Statements Note 1. Nature of the Business American Public Education, Inc., or APEI, which together with its subsidiaries is referred to as the “Company,” is a provider of online and campus-based postsecondary education and, with the acquisition of Graduate School USA, career learning to students through the following subsidiary institutions: • American Public University System, Inc., or APUS, provides online postsecondary education directed primarily at the needs of the military, military-affiliated, public service and service-minded communities through American Military University, or AMU, and American Public University, or APU. APUS is institutionally accredited by the Higher Learning Commission, or HLC. • Rasmussen College, LLC, which is referred to herein as Rasmussen University, or RU, a nursing- and health sciences-focused institution, provides postsecondary education to students at its 23 campuses in six states and online. The Company completed the acquisition of RU, or the Rasmussen Acquisition, on September 1, 2021, or the RU Closing Date. Please refer to “Note 3. Acquisition Activity” included in the Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q, or this Quarterly Report, for more information on this acquisition. The Consolidated Financial Statements do not include the operating results or financial position of RU for any periods prior to the RU Closing Date. RU is institutionally accredited by HLC. • National Education Seminars, Inc., which is referred to herein as Hondros College of Nursing, or HCN, provides nursing education to students enrolled at six campuses in Ohio, one campus in Indianapolis, Indiana, and one campus in suburban Detroit, Michigan that opened in October 2022, to serve the needs of the nursing and healthcare communities. HCN is institutionally accredited by the Accrediting Bureau for Health Education Schools, or ABHES. • American Public Training LLC, which is referred to herein as Graduate School USA, or GSUSA, provides career learning in-person and online to the federal workforce through a catalog of over 300 courses specializing in foundational and continuing professional development, as well as leadership training to advance the performance of government agencies through the competency and career advancement of their employees. The Company completed the acquisition of substantially all the assets of GSUSA, or the GSUSA Acquisition, on January 1, 2022, or the GSUSA Closing Date. Please refer to “Note 3. Acquisition Activity” for more information on this acquisition. The Consolidated Financial Statements do not include the operating results or financial position of GSUSA for any periods prior to the GSUSA Closing Date. GSUSA is accredited by the Accrediting Council for Continuing Education and Training, or ACCET. GSUSA operates as a stand-alone subsidiary of APEI but does not meet the quantitative thresholds to qualify as a reportable segment. Therefore, GSUSA’s results are combined and presented within “Corporate and Other”. Please refer to “Note 9. Segment Information” for more information on the Company’s reporting segments. The Company’s subsidiary institutions are licensed or otherwise authorized by state authorities to offer postsecondary education programs to the extent the institutions believe such licenses or authorizations are required, and APUS, RU, and HCN are certified by the United States Department of Education, or ED, to participate in student financial aid programs authorized under Title IV of the Higher Education Act of 1965, as amended, or Title IV programs. During the third quarter of 2021, the Company revised its reportable segments, as discussed further in “Note 9. Segment Information”. Prior period segment disclosures have been restated to conform to the current period presentation. The Company’s operations are organized into the following three reportable segments: • American Public University System Segment, or APUS Segment. This segment reflects the operational activities of APUS. • Rasmussen University Segment, or RU Segment . This segment reflects the operational activities of RU. • Hondros College of Nursing Segment, or HCN Segment. This segment reflects the operational activities of HCN. Adjustments to reconcile segment results to the Consolidated Financial Statements are included in “Corporate and Other”. These adjustments include unallocated corporate activity and eliminations, which generally were previously reported within the APEI Segment, and, effective January 1, 2022, the operational activities of GSUSA. 8 Note 2. Summary of Significant Accounting Policies A summary of the Company’s significant accounting policies follows: Basis of Presentation and Accounting The accompanying unaudited, interim Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. Business Combinations The Company accounts for business combinations in accordance with Financial Accounting Standards Bureau, or FASB, Accounting Standards Codification 805, Business Combinations , or ASC 805, which requires the acquisition method to be used for all business combinations. Under ASC 805, the assets and liabilities of an acquired company are reported at business fair value along with the fair value of acquired intangible assets at the date of acquisition. Goodwill represents the excess of the purchase price of an acquired business over the amount assigned to the assets acquired and liabilities assumed, and the fair value assigned to identifiable intangible assets. Principles of Consolidation The accompanying unaudited interim Consolidated Financial Statements include the accounts of APEI and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. Unaudited Interim Financial Information The unaudited interim Consolidated Financial Statements do not include all of the information and notes required by GAAP for audited annual financial statement presentations. In the opinion of management, these statements include all adjustments (consisting of normal recurring adjustments) considered necessary to present a fair statement of the Company’s financial position, results of operations, and cash flows. Operating results for any interim period are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. This Quarterly Report should be read in conjunction with the Consolidated Financial Statements and accompanying notes in its audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, or the Annual Report. Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. Specifically, at September 30, 2022, accounts payable and accrued liabilities have been combined into a single line item on the Consolidated Balance Sheets. Use of Estimates In preparing financial statements in conformity with GAAP, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The Company evaluates these estimates and judgments on an ongoing basis and bases its estimates on experience, current and expected future conditions, and various other assumptions that the Company believes are reasonable under the circumstances. Actual results may differ from those estimates under different assumptions or conditions, and the impact of such differences may be material to the Consolidated Financial Statements. Cash and Cash Equivalents The Company considers all short-term highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of demand deposits with financial institutions, money market funds, and U.S. Treasury bills. Cash and cash equivalents are Level 1 assets in the fair value reporting hierarchy. Restricted Cash Restricted cash includes funds held for students for unbilled educational services that were received from Title IV programs. As a trustee of these Title IV program funds, the Company is required to maintain and restrict these funds pursuant to the terms of the program participation agreement with ED. Restricted cash also includes amounts to secure letters of credit, 9 including $ 24.2 million in a restricted certificate of deposit account to secure a letter of credit for the benefit of ED on behalf of RU in connection with RU’s 2020 composite score, which is used by ED for determining compliance with financial responsibility standards, being below the minimum required, and a $ 0.7 million restricted certificate of deposit to secure a letter of credit in lieu of a security deposit for a RU leased campus. Restricted cash on the Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021, excluding the restricted certificates of deposit, was $ 1.8 million and $ 2.2 million, respectively. Total restricted cash as of September 30, 2022 and December 31, 2021 was $ 26.7 million and $ 27.0 million, respectively. Goodwill and Intangible Assets Goodwill represents the excess of the purchase price of an acquired business over the amount assigned to the assets acquired and liabilities assumed. Goodwill is not amortized. Intangible assets are recorded at their estimated fair value as of the acquisition date and are classified as either indefinite-lived or definite-lived. Goodwill and indefinite-lived intangible assets are assessed at least annually for impairment or more frequently if circumstances indicate potential impairment. Definite-lived intangible assets are amortized on a straight-line basis over the estimated useful life of the asset. Stock-based Compensation Stock-based payments may include incentive stock options or non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, performance shares, performance units, cash-based awards, other stock-based awards, including unrestricted shares, or any combination of the foregoing. Stock-based compensation cost is recognized as expense, generally over a three-year vesting period, using the straight-line method for Company employees and the graded-vesting method for members of the Company’s Board of Directors, or the Board, and is measured using the Company’s closing stock price on the date of the grant. An accelerated one-year period is used to recognize stock-based compensation cost for employees who have reached certain service and retirement eligibility criteria on the date of grant. The fair value of each option award is estimated at the date of grant using a Black-Scholes option-pricing model that uses certain assumptions, including assumptions with respect to expected stock price volatility and the risk-free interest rate. Judgment is required in estimating the percentage of share-based awards that are expected to vest, and in the case of performance stock units, or PSUs, the level of performance that will be achieved and the number of shares that will be earned. The Company estimates forfeitures of share-based awards at the time of grant and revises such estimates in subsequent periods if actual forfeitures differ from original estimates. The forfeiture assumption is ultimately adjusted to the actual forfeiture rate. If actual results differ significantly from these estimates, stock-based compensation expense could be higher and have a material impact on the Consolidated Financial Statements. 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. Stock-based compensation expense for the nine months ended September 30, 2022 and 2021 was as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Unaudited) (Unaudited) Instructional costs and services $ 229 $ 274 $ 1,096 $ 1,129 Selling and promotional 302 142 814 706 General and administrative 1,466 1,388 4,793 4,134 Total stock-based compensation expense $ 1,997 $ 1,804 $ 6,703 $ 5,969 Incentive-based Compensation The Company provides incentive-based compensation opportunities to certain employees through cash incentive and equity awards. The expense associated with these awards is reflected within the Company’s operating expenses. For the years ending December 31, 2022 and 2021, the Management Development and Compensation Committee of the Board approved an annual incentive arrangement for senior management employees. The aggregate amount of any awards payable is dependent upon the achievement of certain Company financial and operational goals, as well as the satisfaction of individual performance goals. Given that the awards are generally contingent upon achieving annual objectives, final determination of the current year incentive awards cannot be made until after the results for the year are finalized. The Company recognizes the estimated fair 10 value of performance-based restricted stock units by assuming the satisfaction of any performance-based objectives at the “target” level, which is the most probable outcome determined for accounting purposes at the time of grant and multiplying the corresponding number of shares earned based upon such achievement by the closing price of the Company’s stock on the date of grant. To the extent performance goals are not met, compensation cost is not ultimately recognized against the goals and, to the extent previously recognized, compensation cost is reversed. Amounts accrued are subject to change in future interim periods if actual future financial results or operational performance are better or worse than expected. The Company recognized an aggregate expense associated with the Company’s current year annual incentive-based compensation plans of approximately $ 0.4 million and $ 2.9 million during the three and nine months ended September 30, 2022, respectively, compared to an aggregate expense of approximately $ 0.1 million and $ 2.6 million during the three and nine months ended September 30, 2021, respectively. Income Taxes The Company determines its interim tax provision by applying the estimated income tax rate expected for the full calendar year to income before income taxes for the period adjusted for discrete items. Recent Accounting Pronouncements The Company considers the applicability and impact of all Accounting Standards Updates, or ASUs, issued by the FASB. All ASUs issued subsequent to the filing of the Annual Report on March 2, 2022 were assessed and determined to be either inapplicable or not expected to have a material impact on the Company’s consolidated financial position and/or results of operations. Note 3. Acquisition Activity Acquisition of Rasmussen University On the RU Closing Date, the Company completed the Rasmussen Acquisition pursuant to a membership interest purchase agreement dated October 28, 2020, or the Purchase Agreement, acquiring RU for an adjusted aggregate purchase price, subject to post-closing working capital adjustments, and net of cash acquired, of $ 325.5 million in cash. The Company applied the acquisition method of accounting to the Rasmussen Acquisition, whereby the excess of the acquisition date fair value of consideration transferred over the fair value of identifiable net assets was allocated to goodwill. Goodwill reflects the fair value associated with the RU workforce and synergies expected from cost savings, operations, and revenue enhancements of the combined company that are expected to result from the acquisition. The goodwill recorded as part of the acquisition was allocated to the RU Segment in the amount of $ 217.4 million and is deductible for tax purposes. The preliminary opening balance sheet was subject to adjustment based on a final assessment of the fair values of certain acquired assets and liabilities, primarily intangible assets and goodwill. The Company had up to one year from the RU Closing Date, or the measurement period, to complete the allocation of the purchase price. As the Company finalizes its assessment of the fair values of certain acquired assets and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period. The Company reflected measurement period adjustments in the period in which the adjustments occurred. During the three months ended March 31, 2022, the Company recorded a $ 0.5 million increase in goodwill recorded in connection with the Rasmussen Acquisition based on the final working capital adjustment. During the three months ended June 30, 2022, the Company recorded a non-cash impairment charge of $ 131.4 million to reduce the carrying value of RU Segment goodwill, as discussed further in “Note 6. Goodwill and Intangible Assets”. 11 The following table summarizes the components of the estimated consideration along with the purchase price allocation (in thousands): Purchase Price Allocation Amount Cash and cash equivalents $ 329,000 Working capital adjustment and additional cash contributions 2,333 Total consideration 331,333 Assets acquired: Cash and cash equivalents 5,200 Accounts receivable 10,700 Prepaid expenses 4,600 Property and equipment, net 36,996 Operating lease assets 75,800 Deferred tax asset 3,049 Intangible assets 86,500 Other assets 600 Total assets acquired 223,445 Liabilities assumed: Accounts payable and accrued liabilities 7,342 Deferred revenue 22,700 Operating lease liabilities, current 11,200 Operating lease liabilities, long-term 67,000 Other liabilities 1,300 Total liabilities assumed 109,542 Net assets acquired 113,903 Goodwill $ 217,430 The fair value of the trade name, student roster, and lead conversions identified intangible assets were determined using the income-based approach. The fair value of the curricula and accreditation, licensing, and Title IV identified intangible assets were determined using the cost approach. The table below presents a summary of intangible assets acquired and the useful lives of these assets (in thousands): Intangible Assets Useful life Amount Trade name Indefinite $ 26,500 Accreditation, licensing, and Title IV Indefinite 24,500 Student roster 2 years 20,000 Curricula 3 years 14,000 Lead conversions 2 years 1,500 $ 86,500 During the three months ended June 30, 2022, the Company recorded a non-cash impairment charge of $ 13.5 million to reduce the carrying value of RU Segment accreditation, licensing, and Title IV indefinite lived intangible assets, as discussed further in “Note 6. Goodwill and Intangible Assets”. 12 Pro Forma Financial Information The following unaudited pro forma information is presented as if the Rasmussen Acquisition occurred at the beginning of the earliest period presented. In preparing the pro forma results, the Company is required to make estimates and assumption including with respect to underlying financial performance, purchase accounting, appropriate depreciation and amortization methods, effective tax rate, and future interest rates, among other estimates and assumptions. The Company believes that these estimates and assumptions are reasonable under the circumstances. The pro forma results do not represent what may occur in the future as actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to the Company’s Consolidated Financial Statements. Pro forma results for the three and nine months ended September 30, 2022 are not presented below because the results of Rasmussen are included in the Company’s September 30, 2022 unaudited Consolidated Statements of Income. The table below presents the Company’s pro forma combined revenue and net income (in thousands): Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021 (Unaudited) Revenue $ 143,082 $ 446,984 Net (loss) income ( 1,131 ) 12,232 Acquisition of Graduate School USA On the GSUSA Closing Date, the Company completed the GSUSA Acquisition pursuant to an Asset Purchase Agreement dated August 10, 2021 by and among American Public Training LLC, and Graduate School USA, or the Seller, for an aggregate purchase price of $ 1.0 million, subject to working capital adjustments. At closing, the Company received approximately $ 1.9 million from the Seller, which represents the estimated net working capital at closing net of the initial cash payment to the Seller of $ 0.5 million, which is the purchase price less $ 0.5 million retained by the Company to secure the indemnification obligations of the Seller. The Company applied the acquisition method of accounting to the GSUSA Acquisition, whereby the assets acquired and liabilities assumed were recognized at fair value on the GSUSA Closing Date. There was no goodwill recorded as a result of the GSUSA Acquisition, but an approximate $ 3.8 million noncash, non-taxable gain on the acquisition was recorded and is included as a separate line item on the Consolidated Statements of Income for the nine months ended September 30, 2022. The preliminary opening balance sheet is subject to adjustment based on a final assessment of the fair values of certain acquired assets and liabilities assumed. The Company has up to one year from the GSUSA Closing Date, or the measurement period, to complete the allocation of the purchase price. As the Company finalizes its assessment of the fair values of certain acquired assets and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period. The Company will reflect measurement period adjustments in the period in which the adjustments occur. During the three months ended June 30, 2022, the Company recorded a $ 0.7 million decrease in the gain on acquisition in connection with the GSUSA Acquisition based on the final working capital adjustment. The following table summarizes the components of the estimated consideration along with the purchase price allocation (in thousands): 13 Purchase Price Allocation (Unaudited) Amount Cash and cash equivalents $ 1,000 Working capital adjustment ( 2,450 ) Total consideration ( 1,450 ) Assets acquired: Accounts receivable 4,282 Prepaid expenses 1,096 Property and equipment, net 400 Operating lease assets 31,635 Intangible assets 965 Total assets acquired 38,378 Liabilities assumed: Accounts payable and accrued liabilities 810 Deferred revenue 1,969 Lease liabilities, current 1,179 Lease liabilities, long-term 30,779 Deferred income taxes 1,263 Total liabilities assumed 36,000 Net assets acquired 2,378 Gain on acquisition $ 3,828 The gain on acquisition represents the excess of the fair value of net assets acquired over consideration paid. The consideration paid represents a substantial discount to the book value of GSUSA’s net assets at the GSUSA Closing Date, primarily due to the fair value adjustments related to the trade name, fixed assets, and right-of-use, or ROU, lease assets and liabilities compared to book value. The gain on acquisition was primarily the result of the impact of the COVID-19 pandemic on GSUSA’s revenue and earnings, and a lack of access to capital by the Seller. The agreed upon purchase price reflected the fact that GSUSA may need additional capital to fund operating losses. The fair value of the identified intangible assets, including customer contracts and relationships and trade name were determined using the income-based approach. The fair value of curricula and accreditation and licensing identified intangible assets were determined using the cost approach. The table below presents a summary of intangible assets acquired and the useful lives of these assets (in thousands): Intangible Assets (Unaudited) Useful life Amount Customer contracts and relationships 2.5 years $ 744 Curricula 3 years 158 Trade name 1 year 35 Accreditation and licenses 2.5 years 28 $ 965 Pro forma financial information relating to the GSUSA Acquisition is not presented because the GSUSA Acquisition did not represent a significant business acquisition for the Company. 14 For the three and nine months ended September 30, 2022, respectively, the Company incurred approximately $ 0.3 million and $ 1.6 million of acquisition-related expenses related to RU and GSUSA, and for the three and nine months ended September 30, 2021, respectively, the Company incurred approximately $ 1.5 million and $ 5.0 million of acquisition-related expenses related to RU. These expenses are included in general and administrative expenses on the Consolidated Statements of Income. Note 4. Revenue Disaggregation of Revenue In the following table, revenue, shown net of grants and scholarships, is disaggregated by type of service provided. The table also includes a reconciliation of the disaggregated revenue with the reportable segments (in thousands): Three Months Ended September 30, 2022 (Unaudited) APUS RU HCN Corporate and Other Consolidated Instructional services, net of grants and scholarships $ 68,173 $ 50,973 $ 9,619 $ 7,843 $ 136,608 Graduation fees 374 — — — 374 Textbook and other course materials — 9,814 1,631 — 11,445 Other fees 188 761 159 — 1,108 Total Revenue $ 68,735 $ 61,548 $ 11,409 $ 7,843 $ 149,535 Three Months Ended September 30, 2021 (Unaudited) APUS RU HCN Corporate and Other Consolidated Instructional services, net of grants and scholarships $ 65,321 $ 17,838 $ 9,534 $ ( 30 ) $ 92,663 Graduation fees 397 — — — 397 Textbook and other course materials — 3,282 1,556 — 4,838 Other fees 188 12 150 — 350 Total Revenue $ 65,906 $ 21,132 $ 11,240 $ ( 30 ) $ 98,248 Nine Months Ended September 30, 2022 (Unaudited) APUS RU HCN Corporate and Other Consolidated Instructional services, net of grants and scholarships $ 210,094 $ 160,213 $ 29,082 $ 15,187 $ 414,576 Graduation fees 1,089 — — — 1,089 Textbook and other course materials — 29,906 4,917 — 34,823 Other fees 546 2,419 437 — 3,402 Total Revenue $ 211,729 $ 192,538 $ 34,436 $ 15,187 $ 453,890 15 Nine Months Ended September 30, 2021 (Unaudited) APUS RU HCN Corporate and Other Consolidated Instructional services, net of grants and scholarships $ 208,727 $ 17,838 $ 28,290 $ ( 156 ) $ 254,699 Graduation fees 1,042 — — — 1,042 Textbook and other course materials — 3,282 4,801 — 8,083 Other fees 552 12 415 — 979 Total Revenue $ 210,321 $ 21,132 $ 33,506 $ ( 156 ) $ 264,803 The RU Segment reflects the operations of RU, which was acquired on the RU Closing Date. The Company did not consolidate the financial results of the RU Segment prior to the RU Closing Date. Corporate and Other includes tuition and contract training revenue earned by GSUSA from the GSUSA Closing Date through September 30, 2022. Contract training revenue represents both individual and customized training programs and is recognized when the services are performed. Additionally, the APUS Segment charges the HCN Segment and corporate employees for the value of courses taken by HCN Segment employees and corporate employees at APUS. The elimination of this intersegment revenue is included within Corporate and Other. Contract Balances and Performance Obligations The Company had no contract assets or deferred contract costs as of September 30, 2022 and December 31, 2021. The Company recognizes a contract liability, or deferred revenue, when a student begins an online course or term, in the case of APUS, starts a term, in the case of RU and HCN, or begins a long-term program, open enrollment program or government contract, in the case of GSUSA. Deferred revenue at September 30, 2022 was $ 27.6 million and includes $ 15.8 million in future revenue that has not yet been earned for courses and terms that are in progress, as well as $ 11.8 million in consideration received in advance for future courses or terms, or student deposits. Deferred revenue at December 31, 2021 was $ 21.8 million and included $ 12.9 million in future revenue that had not yet been earned for courses and terms that were in progress, as well as $ 8.9 million in student deposits. Deferred revenue represents the Company’s performance obligation to transfer future instructional services to students. The Company’s remaining performance obligations represent the transaction price allocated to future reporting periods. The Company has elected, as a practical expedient, not to disclose additional information about unsatisfied performance obligations for contracts with students that have an expected duration of one year or less. When the Company begins performing its obligations, a contract receivable is created, resulting in accounts receivable on the Consolidated Balance Sheets. The Company accounts for receivables in accordance with FASB ASC 310, Receivables . The Company uses the portfolio approach, a practical expedient, to evaluate if a contract exists and to assess collectability at the time of contract inception based on historical experience. Contracts are subsequently reviewed for collectability if significant events or circumstances indicate a change. The allowance for doubtful accounts is based on management’s evaluation of the status of existing accounts receivable. Among other factors, management considers the age of the receivable, the anticipated source of payment, and historical allowance considerations. Consideration is also given to any specific known risk areas among the existing accounts receivable balances. Recoveries of receivables previously written off are recorded when received. APUS, RU, and GSUSA do not charge interest on past due accounts receivable. HCN charges interest on payment plans when a student graduates or otherwise exits the program. Interest charged by HCN on payment plans was immaterial for the periods presented. Note 5. Leases The Company’s principal leasing activities include facilities, classified as operating leases, and, as a result of the GSUSA Acquisition, copiers and printers, classified as finance leases. Leases are classified as operating leases unless they meet any of the criteria below to be classified as a finance lease: 16 • the lease transfers ownership of the asset at the end of the lease; • the lease grants an option to purchase the asset which the lessee is expected to exercise; • the lease term reflects a major part of the asset’s economic life; • the present value of the lease payments equals or exceeds the fair value of the asset; or • the asset is specialized with no alternative use to the lessor at the end of the term. Operating Leases The Company has operating leases for office space and campus facilities. Some leases include options to terminate or extend for one or more years. These options are included in the lease term when it is reasonably certain that the option will be exercised. The Company leases corporate office space in Maryland under an operating lease that expires in May 2023. The RU Segment leases administrative office space in suburban Chicago, Illinois, and Minneapolis, Minnesota, and leases 23 campuses located in six states under operating leases that expire through October 2033. The HCN Segment leases administrative office space in suburban Columbus, Ohio, and leases six campuses located in Ohio, one campus in Indianapolis, Indiana, and beginning in the fall of 2022, one campus in suburban Detroit, Michigan, under operating leases that expire through June 2029. GSUSA leases classroom and administrative office space in Washington, D.C. and Honolulu, Hawaii, under operating leases that expire through September 2036. Operating lease assets are ROU assets, which represent the right to use the underlying assets for the lease term. Operating lease liabilities represent the obligation to make lease payments arising from the lease. Operating leases are included in the operating lease assets, net, and lease liabilities, current and long-term, on the Consolidated Balance Sheets. These assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. When the lease does not provide an implicit interest rate, the Company uses an incremental borrowing rate based on information available at lease commencement to determine the present value of the lease payments. The ROU assets include all remaining lease payments and exclude lease incentives. Lease expense for operating leases is recognized on a straight-line basis over the lease term. There are no variable lease payments. Lease expense for the three and nine months ended September 30, 2022 was $ 5.0 million and $ 15.1 million, respectively, compared to $ 1.8 million and $ 3.4 million for the three and nine months ended September 30, 2021, respectively. These costs are primarily related to long-term operating leases, but also include amounts for short-term leases with terms greater than 30 days that are not material. Cash paid for amounts included in the present value of operating lease liabilities during the three and nine month periods ended September 30, 2022 was $ 4.8 million and $ 14.7 million, respectively, and is included in operating cash flows. Cash paid for amounts included in the present value of operating lease liabilities during the three and nine months ended September 30, 2021 was $ 1.9 million and $ 3.4 million, respectively, and is included in operating cash flows. Finance Leases In connection with the GSUSA Acquisition, the Company acquired leases for copiers and printers that are classified as finance leases and expire on December 31, 2024. The Company pledged the assets financed to secure the outstanding leases. As of September 30, 2022, the total finance lease liability was $ 0.2 million with an average interest rate of 3.75 %. The ROU assets are recorded within Property and equipment, net on the Consolidated Balance Sheets. Lease amortization expense associated with the Company’s finance leases was approximately $ 0.03 million and $ 0.08 million for the three and nine months ended September 30, 2022, respectively, and is recorded within Depreciation and amortization expense on the Consolidated Statements of Income. The following tables present information about the amount and timing of cash flows arising from the Company’s finance and operating leases as of September 30, 2022 (dollars in thousands): 17 Maturity of Lease Liabilities (Unaudited) Operating Leases Finance Leases 2022 (remaining) $ 4,884 $ 28 2023 18,128 114 2024 16,420 113 2025 14,734 — 2026 14,287 — 2027 14,081 — 2028 and beyond 62,681 — Total future minimum lease payments $ 145,215 $ 255 Less: imputed interest ( 28,555 ) ( 10 ) Present value of operating lease liabilities $ 116,660 $ 245 Less: lease liabilities, current ( 14,231 ) ( 107 ) Lease liabilities, long-term $ 102,429 $ 138 Balance Sheet Classification (Unaudited) Current Operating lease liabilities, current $ 14,231 Finance lease liabilities, current 107 Long-term Operating lease liabilities, long-term 102,429 Finance lease liabilities, long-term 138 Total lease liabilities $ 116,905 Other Information (Unaudited) Weighted average remaining lease term (in years) Operating leases 9.21 Finance leases 2.25 Weighted average discount rate Operating leases 4.1 % Finance leases 3.8 % 18 Note 6. Goodwill and Intangible Assets In connection with its acquisitions, the Company has applied ASC 805, using the acquisition method of accounting. The Company recorded $ 217.4 million of goodwill in connection with the Rasmussen Acquisition, representing the excess of the purchase price over the fair value of assets acquired and liabilities assumed, including identifiable intangible assets. The Company previously recorded goodwill in the amount of $ 38.6 million in connection with its acquisition of HCN, and later recorded non-cash impairment charges reducing the carrying value of HCN Segment goodwill to $ 26.6 million. There was no goodwill recorded in connection with the acquisition of GSUSA. In addition to goodwill, in connection with the acquisitions of RU and HCN, the Company recorded identified intangible assets with an indefinite useful life in the aggregate amount of $ 51.0 million and $ 3.7 million, respectively, which includes trade name, accreditation, licensing, and Title IV, and affiliate agreements. There were no indefinite useful life intangible assets identified as a result of the GSUSA Acquisition. The Company recorded $ 35.5 million, $ 4.4 million and $ 1.0 million, respectively, of identified intangible assets with a definite useful life in connection with the acquisitions of RU, HCN and GSUSA. Amortization expense related to definite lived intangibles assets was approximately $ 4.0 million and $ 11.9 million for the three and nine months ended September 30, 2022, respectively. The following table represents the balance of the Company’s intangible assets as of September 30, 2022 (in thousands): Gross Carrying Amount Accumulated Amortization Impairment Net Carrying Amount (Unaudited) Finite-lived intangible assets Student roster $ 20,000 $ 10,833 $ — $ 9,167 Curricula 14,563 5,500 — 9,063 Student and customer contracts and relationships 4,614 4,093 — 521 Lead conversions 1,500 813 — 687 Non-compete agreements 86 86 — — Tradename 35 26 — 9 Accreditation and licenses 28 9 — 19 Total finite-lived intangible assets $ 40,826 $ 21,360 $ — $ 19,466 Indefinite-lived intangible assets Trade name 28,498 — — 28,498 Accreditation, licensing, and Title IV 26,186 — 13,500 12,686 Affiliation agreements 37 — — 37 Total indefinite-lived intangible assets 54,721 — 13,500 41,221 Total intangible assets $ 95,547 $ 21,360 $ 13,500 $ 60,687 19 The following table represents the balance of the Company’s intangible assets as of December 31, 2021 (in thousands): Gross Carrying Amount Accumulated Amortization Impairment Net Carrying Amount Finite-lived intangible assets Student roster $ 20,000 $ 3,333 $ — $ 16,667 Curricula 14,405 1,961 — 12,444 Student contracts and relationships 3,870 3,870 — — Lead conversions 1,500 250 — 1,250 Non-compete agreements 86 86 — — Total finite-lived intangible assets $ 39,861 $ 9,500 $ — $ 30,361 Indefinite-lived intangible assets Trade name 28,498 — — 28,498 Accreditation, licensing, and Title IV 26,186 — — 26,186 Affiliation agreements 37 — — 37 Total indefinite-lived intangible assets 54,721 — — 54,721 Total intangible assets $ 94,582 $ 9,500 $ — $ 85,082 During the three months ended June 30, 2022, in connection with preparation of the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 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. There were no indicators of impairment at HCN. Therefore, the Company proceeded with a quantitative impairment test for the RU Segment 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 of $ 36.0 million, 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. 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. These evaluations concluded there were indicators of impairment during the three months ended June 30, 2022 of the RU Segment accreditation, licensing, and Title IV indefinite-lived intangible asset. The Company determined the fair value of the intangible asset was $ 11.0 million, or $ 13.5 million less than its carrying value. 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 of $ 36.0 million. 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 income and cost approaches were used, as applicable, to value the RU indefinite-lived intangibles assets. The impairment charge recorded in the quarter ended June 30, 2022 eliminated the difference between the fair value of goodwill and the respective indefinite-lived intangible assets and the book value. 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. 20 Goodwill is tested for impairment annually and upon occurrence of certain triggering events or substantive changes in circumstances that indicate that fair value may be below carrying value. Upon review, the Company determined that there were no indicators of impairment at RU or HCN during the three months ended September 30, 2022. The following table summarizes the changes in the carrying amount of goodwill by reportable segment as of December 31, 2021 and September 30, 2022 (in thousands): APUS Segment RU Segment HCN Segment Total Goodwill (Unaudited) Goodwill as of December 31, 2021 $ — $ 216,923 $ 26,563 $ 243,486 Goodwill acquired — — — — Impairment — ( 131,400 ) — ( 131,400 ) Adjustments — 507 — 507 Goodwill as of September 30, 2022 $ — $ 86,030 $ 26,563 $ 112,593 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, changes in the regulatory environment, 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. 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. 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. For additional information on goodwill and intangible assets, see the Consolidated Financial Statements and accompanying notes in the Annual Report. 21 Note 7. Net Income Per Common Share Basic net income per common share is based on the weighted average number of shares of common stock outstanding during the period. Diluted net income per common share increases the shares used in the per share calculation by the dilutive effects of restricted stock and option awards. The table below reflects the calculation of the weighted average number of common shares outstanding, on an as if converted basis, used in computing basic and diluted net income per common share (in thousands). Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Unaudited) (Unaudited) Basic weighted average shares outstanding 18,885 18,700 18,854 17,874 Effect of dilutive restricted stock and options 42 155 52 174 Diluted weighted average shares outstanding 18,927 18,855 18,906 18,048 The table below reflects a summary of securities that could potentially dilute basic net income per common share in future periods that were not included in the computation of diluted earnings per share because the effect would have been antidilutive (in thousands). Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Unaudited) (Unaudited) Antidilutive securities: Stock options 136 112 136 112 Restricted shares 613 11 581 3 Total antidilutive securities 749 123 717 115 Note 8. Long-Term Debt In connection with the Rasmussen Acquisition, APEI, as borrower, entered into a Credit Agreement with Macquarie Capital Funding LLC, or the Credit Agreement, as administrative agent and collateral agent, Macquarie Capital USA Inc. and Truist Securities, Inc., as lead arrangers and joint bookrunners, and certain lenders party thereto. The Credit Agreement provides for (i) a senior secured term loan facility in an aggregate original principal amount of $ 175 million, or the Term Loan, with a scheduled maturity date of September 1, 2027 and (ii) a senior secured revolving loan facility in an aggregate commitment amount of $ 20.0 million, or the Revolving Credit Facility, which together with the Term Loan is referred to as the Facilities, with a scheduled maturity date of September 1, 2026, the full capacity of which may be utilized for the issuance of letters of credit. The Revolving Credit Facility also includes a $ 5.0 million sub-facility for swing line loans. The Term Loan, the proceeds of which were used as part of the cash consideration for the Rasmussen Acquisition, was fully funded on the RU Closing Date and is presented net of the debt issuance costs at origination of $ 13.1 million on the Consolidated Balance Sheets. The debt issuance costs are being amortized using the effective interest method over the term of the Term Loan. Debt issuance costs of $ 0.5 million related to the Revolving Credit Facility were recorded as an asset and are being amortized to interest expense over the term of the Revolving Credit Facility. There were no borrowings outstanding under the Revolving Credit Facility at September 30, 2022 and December 31, 2021. Outstanding borrowings under the Facilities bear interest at a per annum rate equal to LIBOR (subject to a 0.75 % floor) plus 5.50 %, which shall increase by an additional 2.00 % on all past due obligations if APEI fails to pay any amount when due. As of September 30, 2022, the Facilities borrowing rate was 8.02 %, excluding any offset from the interest rate cap agreement described below. An unused commitment fee in the amount of 0.50 % is payable quarterly in arrears based on the average daily unused amount of the commitments under the Revolving Credit Facility. APEI is also required to make principal payments of the Term Loan on the last day of each quarter, in an amount equal to $ 2.2 million per quarter. The Credit Agreement contains customary affirmative and negative covenants, including limitations on APEI’s and its subsidiaries’ abilities, among other things, to incur additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, pay dividends and distributions and enter into affiliate 22 transactions, in each case, subject to certain exceptions, as well as customary representations, warranties, events of default, and remedies upon default, including acceleration and rights to foreclose on the collateral securing the Facilities. In addition, the Credit Agreement contains a financial covenant that requires APEI to maintain a Total Net Leverage Ratio of no greater than 2.0 to 1.0. At September 30, 2022, APEI was in compliance with all debt covenants. Long-term debt consists of the following as of September 30, 2022 (in thousands): Long-Term debt (Unaudited) Credit agreement $ 166,250 Deferred financing fees ( 10,430 ) Total debt 155,820 Less: Current portion ( 8,750 ) Long-Term Debt $ 147,070 Scheduled maturities of long-term debt at September 30, 2022 are as follows (in thousands): Maturities of Long-Term Debt (Unaudited) Loan Payments 2022 (remaining) 2,188 2023 8,750 2024 8,750 2025 8,750 2026 8,750 2027 129,062 Total 166,250 Derivatives and Hedging The Company is subject to interest rate risk, as all outstanding borrowings under the Credit Agreement are subject to a variable rate of interest. On September 30, 2021, the Company entered into an interest rate cap agreement to manage its exposure to the variable rate of interest with a total notional value of $ 87.5 million. This interest rate cap agreement, designated as a cash flow hedge, provides the Company with interest rate protection in the event the three month LIBOR rate exceeds 2.0 %. The interest rate cap is effective October 1, 2021 and will expire on January 1, 2025. Changes in the fair value of the interest rate cap designated as a hedging instrument that effectively offset the variability of cash flows associated with the Company’s variable-rate long-term debt obligations are reported in accumulated other comprehensive income. These amounts subsequently are reclassified into interest expense as a yield adjustment of the hedged interest payments in the same period in which the related interest affects earnings. During the three months ended September 30, 2022, the Company reclassified approximately $ 0.1 million from other comprehensive income to interest expense. The Company estimates that approximately $ 2.1 million will be reclassified from accumulated other comprehensive income into interest expense during the next twelve months. At September 30, 2022, the $ 4.5 million fair value of the interest rate cap is recorded in Other assets on the Consolidated Balance Sheets. The unrealized gain of $ 3.0 million, net of taxes, is included in accumulated other comprehensive income. Note 9. Segment Information In connection with the Rasmussen Acquisition (as further described in “Note 3. Acquisition Activity”), the Company revised its reportable segments to reflect the manner in which the chief operating decision-maker evaluates performance and allocates resources, and to include RU as a separately reportable segment. Prior to the third quarter of 2021, the Company had two reportable segments: the American Public Education, Inc. Segment, or APEI Segment, and the Hondros College of Nursing 23 Segment, or HCN Segment. Post-acquisition, the Company has three reportable segments: the APUS Segment, which was previously included within the former APEI Segment; the RU Segment; and the HCN Segment. The APEI Segment previously reported the results of both APUS and remaining unallocated Company expenses. GSUSA does not meet the quantitative thresholds to qualify as a reportable segment; therefore, its operational activities are presented below within “Corporate and Other”. Adjustments to reconcile segment results to the Consolidated Financial Statements, including unallocated corporate activity and eliminations, which generally were previously reported within the former APEI Segment, are also included in “Corporate and Other”. Prior periods have been updated to conform to the revised presentation. In accordance with FASB ASC 280, Segment Reporting , the chief operating decision-maker has been identified as the Company’s Chief Executive Officer. The Company’s Chief Executive Officer reviews operating results to make decisions about allocating resources and assessing performance for the APUS, RU, and HCN Segments. A summary of financial information by reportable segment is as follows (in thousands): 24 Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Unaudited) (Unaudited) Revenue: APUS Segment $ 68,735 $ 65,906 $ 211,729 $ 210,321 RU Segment 61,548 21,132 192,538 21,132 HCN Segment 11,409 11,240 34,436 33,506 Corporate and Other 7,843 ( 30 ) 15,187 ( 156 ) Total Revenue $ 149,535 $ 98,248 $ 453,890 $ 264,803 Depreciation and amortization: APUS Segment $ 1,573 $ 2,246 $ 4,860 $ 7,071 RU Segment 6,015 1,935 18,254 1,935 HCN Segment 248 195 693 524 Corporate and Other 146 10 442 31 Total Depreciation and amortization $ 7,982 $ 4,386 $ 24,249 $ 9,561 Income (loss) from operations before interest and income taxes: APUS Segment $ 12,532 $ 7,825 $ 39,338 $ 30,969 RU Segment ( 7,900 ) ( 999 ) ( 153,562 ) ( 999 ) HCN Segment ( 1,392 ) 448 ( 3,017 ) 1,348 Corporate and Other ( 4,266 ) ( 6,012 ) ( 19,845 ) ( 17,444 ) Total (loss) income from operations before interest and income taxes $ ( 1,026 ) $ 1,262 $ ( 137,086 ) $ 13,874 Interest income (expense): APUS Segment $ 69 $ 41 $ 146 $ 171 RU Segment 30 — 38 — HCN Segment 5 2 10 6 Corporate and Other ( 3,698 ) ( 1,348 ) ( 10,533 ) ( 1,344 ) Total Interest expense $ ( 3,594 ) $ ( 1,305 ) $ ( 10,339 ) $ ( 1,167 ) Income tax expense (benefit): APUS Segment $ ( 3,557 ) $ 2,606 $ 11,628 $ 9,673 RU Segment ( 2,183 ) ( 371 ) ( 38,564 ) ( 371 ) HCN Segment 66 250 ( 816 ) 494 Corporate and Other 4,814 ( 2,261 ) ( 7,400 ) ( 6,287 ) Total Income tax (benefit) expense $ ( 860 ) $ 224 $ ( 35,152 ) $ 3,509 Capital expenditures: APUS Segment $ 811 $ 1,159 $ 2,209 $ 2,973 RU Segment 1,942 1,259 6,860 1,259 HCN Segment 776 367 1,666 1,581 Corporate and Other 67 — 170 — Total Capital Expenditures $ 3,596 $ 2,785 $ 10,905 $ 5,813 A summary of the Company’s consolidated assets by reportable segment is as follows (in thousands): 25 As of September 30, 2022 As of December 31, 2021 (Unaudited) Assets: APUS Segment $ 116,579 $ 126,926 RU Segment 309,344 429,299 HCN Segment 54,783 51,936 Corporate and Other 180,121 117,447 Total Assets $ 660,827 $ 725,608 Note 10. Commitments and Contingencies The Company accrues for costs associated with contingencies, including, but not limited to, regulatory compliance and legal matters, when such costs are probable and can be reasonably estimated. Liabilities established to provide for contingencies are adjusted as further information develops, circumstances change, or contingencies are resolved. The Company bases these accruals on management’s estimate of such costs, which may vary from the ultimate costs and expenses, associated with any such contingency. From time to time, the Company is involved in legal matters in the normal course of its business. Note 11. Concentration The Company’s students utilize various payment sources and programs to finance their education expenses, including funds from: the U.S. Department of Defense, or DoD, tuition assistance programs, or TA, education benefit programs administered by the U.S. Department of Veterans Affairs, or VA, and federal student aid from Title IV programs; and cash and other sources. A summary of APUS Segment revenue derived from students by primary funding source is as follows (unaudited): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 DoD tuition assistance programs 45 % 43 % 46 % 44 % VA education benefits 22 % 22 % 21 % 22 % Title IV programs 19 % 21 % 19 % 20 % Cash and other sources 14 % 14 % 14 % 14 % A summary of RU Segment revenue derived from students by primary funding source is as follows (unaudited): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Title IV programs 74 % 75 % 74 % 76 % Cash and other sources 24 % 23 % 24 % 22 % VA education benefits 2 % 2 % 2 % 2 % A summary of HCN Segment revenue derived from students by primary funding source is as follows (unaudited): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Title IV programs 80 % 81 % 80 % 81 % Cash and other sources 18 % 18 % 18 % 18 % VA education benefits 2 % 1 % 2 % 1 % 26 Note 12. Subsequent Events 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 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. 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. 27