AMERICAN PUBLIC EDUCATION INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations In this Quarterly Report on Form 10-Q, or Quarterly Report, “we,” “our,” “us,” “the Company” and similar terms refer to American Public Education, Inc., or “APEI,” and its subsidiary institutions collectively unless the context indicates otherwise. All quarterly information in this Management’s Discussion and Analysis is unaudited. The following discussion of our historical results of operations and our liquidity and capital resources should be read in conjunction with the Consolidated Financial Statements and related notes that appear elsewhere in this Quarterly Report and the audited financial information and related notes, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations and other disclosures, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, or our Annual Report. Forward-Looking Statements This Quarterly Report contains forward-looking statements intended to be covered by the safe harbor provisions for forward-looking statements in Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We may use words such as “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “potentially,” “will,” or “may,” or other words or expressions that convey future events, conditions, circumstances, or outcomes to identify these forward-looking statements. Forward-looking statements in this Quarterly Report include, without limitation, statements regarding: • changes in and our ability to comply with the extensive regulatory framework applicable to our industry, as well as state law and regulations and accrediting agency requirements, and the expected impacts of any non-compliance; • our ability to manage, grow, and diversify our business and execute our business initiatives and strategy; • our cash needs and expectations regarding cash flow from operations, including the impacts of our debt service and the dividend payments that are required to be paid on our Series A Senior Preferred Stock; • our ability to undertake initiatives to improve the learning experience and attract students who are likely to persist, and improve student outcomes; • integration of Rasmussen University, or RU, and Graduate School USA, or GSUSA; • changes to and expectations regarding our student enrollment, net course registrations, and the composition of our student body, including the pace of such changes; • our ability to maintain, develop, and grow our technology infrastructure to support our student body; • our conversion of prospective students to enrolled students and our retention of active students; • our ability to update and expand the content of existing programs and develop new programs to meet emerging student needs and marketplace demands, and our ability to do so in a cost-effective manner or on a timely basis; • our plans for, marketing of, and initiatives at, our institutions; • our ability to leverage our investments in support of our initiatives, students, and institutions; • our maintenance and expansion of our relationships and partnerships and the development of new relationships and partnerships; • actions by the U.S. Department of Defense, or DoD, or branches of the U.S. Armed Forces, including actions related to the disruption of DoD tuition assistance programs, or TA, and ArmyIgnitED, and expectations regarding the effects of those actions; • federal appropriations and other budgetary matters, including government shutdowns; • changes in enrollment in postsecondary degree-granting institutions and workforce needs; • the competitive environment in which we operate; • our ability to recognize the benefits of our cost savings efforts; • our ability to manage and influence our bad debt expense; • our use of our share repurchase program; and • our financial performance generally. Forward-looking statements are based on our beliefs, assumptions, and expectations of our future performance, taking into account information currently available to us and are not guarantees of future results. There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. Risks and uncertainties involved in forward-looking statements include, among others: • our dependence on the effectiveness of our ability to attract students who persist in our institutions’ programs; • our inability to effectively market our programs or expand into new markets; • the loss of our ability to receive funds under TA programs or the reduction, elimination, or suspension of TA, or continued disruption due to systems used to request TA; • our inability to maintain enrollments from military students; 26 • adverse effects of changes our institutions make to improve the student experience and enhance their ability to identify and enroll students who are likely to succeed; • our failure to successfully adjust to future market demands; • our failure to comply with regulatory and accrediting agency requirements or to maintain institutional accreditation , and risks related to any actions we may take to prevent or correct such failure; • adverse impacts of recent Department of Education, or ED, negotiated rulemakings; • our failure to meet applicable NCLEX pass rates and other NCLEX standards, and the consequences thereof; • our failure to comply with the “90/10 Rule,” • our loss of eligibility to participate in student financial aid programs authorized under Title IV of the Higher Education Act of 1965, as amended, or Title IV programs, or ability to process Title IV financial aid; • economic and market conditions in the United States and abroad and changes in interest rates; • risks related to business combinations and acquisitions, including integration challenges, business disruption, dilution of stockholder value, and diversion of management attention; • risks related to our substantial indebtedness and our Series A Preferred Stock; and • our dependence on and need to continue to invest in our technology infrastructure. Forward-looking statements should be considered in light of these factors and the factors described elsewhere in this Quarterly Report, including in the “Risk Factors” section, in the “Risk Factors” section of our Annual Report, and in our various filings with the Securities and Exchange Commission, or the SEC. It is important that you read these factors and the other cautionary statements made in this Quarterly Report as being applicable to all related forward-looking statements wherever they appear in this Quarterly Report. If any of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance, or achievements may differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. You should also read the more detailed description of our business in our Annual Report when considering forward-looking statements. We caution readers not to place undue reliance on any forward-looking statements herein, which speak only as of the date of this Quarterly Report. We undertake no obligation to publicly update any forward-looking statements, except as required by law. Overview Background We are a provider of online and campus-based postsecondary education to approximately 106,600 students through American Public University System, or APUS, RU, and Hondros College of Nursing, or HCN, and career learning through GSUSA. These subsidiary institutions are purpose built to offer programs designed to prepare individuals to be of service to their communities, as well as help students progress in their current professions or prepare for their next career. Our subsidiary institutions are licensed or otherwise authorized by state authorities to offer postsecondary education programs to the extent the institutions believe such licenses or authorizations are required, and APUS, RU, and HCN, are certified by ED to participate in Title IV programs. Acquisitions 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. At closing, we 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 we retained to secure the indemnification obligations of the Seller. 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. For more information on the GSUSA Acquisition, please refer to, “Note 3. Acquisition Activity” included in the Notes to the Consolidated Financial Statements in our Annual Report and in this Quarterly Report. Our Institutions Our wholly owned operating subsidiary institutions include the following: • American Public University System, Inc., referred to herein as APUS, provides online postsecondary education to approximately 89,600 adult learners, directed primarily at the needs of the military, military-affiliated, public service and service-minded communities through two brands: American Military University, or AMU, and American Public 27 University, or APU. As of March 31, 2023, approximately 66% 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 14,300 students at its 22 campuses in six states and online. As of March 31, 2023, approximately 6,800 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 2,700 students at eight campuses in three states. All of HCN’s students are enrolled in its pre-licensure degree programs. • American Public Training LLC, referred to herein as Graduate School USA, or GSUSA, provides career learning and leadership training 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. GSUSA operational activities are presented within “Corporate and Other”. Tuition Increases In April 2023, APUS implemented tuition and fee increases for its non-military and veteran students. With these tuition and fee increases, we believe that APUS’s tuition and fees remain lower than the average in-state cost at public universities. RU implemented tuition increases, which took effect on January 3, 2023, for select programs to help offset the increased costs of delivering a quality education, and HCN implemented a 5% increase in tuition and fees effective in the second quarter of 2023 across all programs to offset the increased costs of delivering a quality, competitive education. Cost and Expense Reductions On January 14, 2022, RU completed a reduction in force that resulted in the termination of nine full-time faculty members and 19 non-faculty employees across a variety of roles and departments at RU, representing approximately 3.0% of RU’s full-time faculty workforce, and 2.1% of RU’s non-faculty workforce. We incurred an aggregate of approximately $0.4 million of pre-tax cash expenses associated with employee severance benefits as a result of this reduction in force. The reduction in force resulted in pre-tax labor and benefit savings of approximately $2.7 million in 2022. Regulatory and Legislative Activity The Accreditation Commission for Education in Nursing, or ACEN, accredits certain RU PN and ADN programs at certain RU locations. In September 2021, ACEN granted RU’s ADN program in Bloomington, Minnesota continued accreditation with conditions. The ADN program had two years from the date the conditions were imposed to demonstrate compliance with all applicable accreditation criteria. If compliance is not achieved by the end of the monitoring period, ACEN may determine to deny continuing accreditation absent good cause. ACEN had a site visit at the Bloomington, Minnesota ADN program in April 2023. We believe that ACEN’s site visit team is planning to recommend withdrawal of accreditation following its April 2023 site visit. RU will have an opportunity to respond to that recommendation before the ACEN board makes a decision, and we believe that we have a strong rationale for why accreditation should not be withdrawn for this program. As explained more fully in “Risk Factors”, if ACEN denies continuing accreditation, RU has the ability to immediately reapply for accreditation with ACEN or with another national nursing accreditor, the first step of which would be candidacy. If RU is unable to obtain accreditation or candidacy status with ACEN or another national nursing accrediting body, RU would likely have to close the Bloomington, Minnesota ADN program, which would have a material adverse impact on RU’s enrollments and RU’s and our results of operations. Third-party servicers that institutions engage for the administration of participation in Title IV programs must, among other obligations, comply with Title IV requirements and be jointly and severally liable with the institution to ED for any violation by the servicer of any Title IV provision. In February 2023, as more fully described in ‘Regulatory Environment’ in Part I, Item 1 of our Annual Report, ED issued guidance that would have significantly expanded the types of activities and functions that constitute third-party servicer activities for Title IV purposes and that stated ED’s position that an institution may not contract with third-party servicers with specified foreign ties. However, in April 2023, ED effectively rescinded this guidance and indicated that it intended to reissue the guidance in revised form, with an effective date of at least six months after publication, and to remove provisions pertaining to foreign ownership of third-party servicers. 28 Reportable Segments Our operations are organized into three reportable segments: • American Public University System Segment, or APUS Segment. This segment reflects the operational activities of APUS. • Rasmussen University Segment, or RU Segment . This segment reflects the operational activities of RU. • Hondros College of Nursing Segment, or HCN Segment. This segment reflects the operational activities of HCN. Adjustments to reconcile segment results to the Consolidated Financial Statements are included in “Corporate and Other”. These adjustments include unallocated corporate activity and eliminations, and the operational activities of GSUSA. Summary of Results Consolidated revenue for the three months ended March 31, 2023 decreased to $149.7 million from $154.7 million, or by 3.3%, compared to the prior year period. Our operating margins decreased to negative 3.7% for the three months ended March 31, 2023 from 3.4% in the prior year period. Our net loss for the three months ended March 31, 2023 was $5.7 million compared to net income of $5.3 million in the prior year period, a decrease of $11.1 million. For the three months ended March 31, 2023, APUS net course registrations increased 2,300, or by 2.4%, to 96,300, as compared to the prior year period. APUS Segment revenue increased to $74.0 million from $73.1 million, or by 1.2%, compared to the prior year period. APUS operating margins increased to 23.1% from 18.0% in the prior year period. RU total enrollment, for the three months ended March 31, 2023, decreased to approximately 14,300, or by 11.7%, compared to the prior year period. RU Segment revenue decreased to $57.5 million from $67.1 million, or by 14.4%, compared to the prior year period. RU Segment operating margins decreased to negative 22.4% from 1.3% in the prior year period. For the three months ended March 31, 2023, HCN total enrollment increased to approximately 2,700, or by 10.1%, compared to the prior year period. New student enrollment at HCN for the three months ended March 31, 2023 increased approximately 200 students to 730, or by 36.0%, as compared to the prior year period, which contributed to the increase in total enrollment. HCN Segment operating margins decreased to negative 9.9% from negative 8.6% in the prior year period. Critical Accounting Policies and Use of Estimates Goodwill and indefinite-lived intangible assets. Goodwill is the excess of the purchase price of an acquired business over the fair value of the assets acquired and liabilities assumed. Goodwill is not amortized. Goodwill is reported at the reporting unit level that we have defined as our reporting segments. In connection with our acquisitions of RU and HCN, we recorded $217.4 million and $38.6 million of goodwill, respectively, in our RU and HCN Segments. There was no goodwill recorded in connection with the acquisition of GSUSA reported in Corporate and Other, and there is no goodwill in our APUS Segment. In addition to goodwill, in connection with the acquisitions of RU and HCN, we recorded identified intangible assets with an indefinite useful life in the aggregate amount of $51.0 million and $3.7 million, respectively, in our RU and HCN Segments which includes trade name, accreditation, licensing, Title IV, and affiliate agreements. There were no indefinite useful life intangible assets identified as a result of the acquisition of GSUSA reported in Corporate and Other. There are no indefinite-lived intangible assets in our APUS Segment. We recorded, at each respective subsidiary, $35.5 million, $4.4 million, and $1.0 million of identified intangible assets with a definite useful life in connection with the acquisitions of RU, HCN, and GSUSA, respectively, reported in our RU and HCN Segments, and in Corporate and Other. There are no definite-lived intangible assets in our APUS Segment. Goodwill and indefinite-lived intangible assets are tested for impairment at least annually, and more frequently if events and circumstances exist that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The process of evaluating goodwill and indefinite-lived intangible assets for impairment is subjective and requires significant judgment and estimates. When performing an optional qualitative analysis, we consider many factors, including general economic conditions, industry and market conditions, certain cost factors, financial performance and key business drivers (for example, student enrollment), long-term operating plans, and potential changes to significant assumptions and 29 estimates used in the most recent fair value analysis. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions and estimates. 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. The results of the annual assessment completed as of October 31, 2022 concluded that the fair value of goodwill for RU and HCN exceeded their carrying values by approximately $10.0 million, or by 5%, and $4.9 million, or by 13%, respectively. Significant assumptions in the forecast used in the discounted cash flow valuation model for the October 31, 2022 valuation, include the recovery in our RU Segment enrollment in year three to historical norms and two future campus openings in our HCN Segment. These assumptions could be negatively affected by any of, but not limited to, changes in our regulatory environment, declines in student enrollment, adverse actions by state boards of nursing including enrollment caps, and increases in our expenses not in our budgeted plan. We applied a hypothetical ten percent decrease to the fair values of our RU and HCN Segment, which at December 31, 2022 would have triggered additional impairment testing and analysis for our RU Segment. Applying the hypothetical decrease to the fair value of our HCN Segment did not result in an additional impairment. At March 31, 2023, we performed a qualitative analysis for our RU and HCN Segments’ goodwill and indefinite-lived intangible assets. As part of our analysis we considered all the events and circumstances listed in Financial Accounting Standards Board Accounting Standards Codification 350, Intangibles-Goodwill and Other, in addition to other entity-specific factors. Factors of consideration included: RU’s and HCN’s financial and enrollment performance against internal targets for the first quarter of 2023; the fact that the overall long-term outlook remains similar to that used in the annual assessment; economic factors; key leadership changes including the appointment of a new President and appointees to other significant leadership roles; and the continued favorable growth outlook for nursing education. In addition, we considered the 2022 quantitative analysis performed and concluded that the events in the first quarter of 2023 did not have a significant impact on the fair value of our RU Segment. After completing the qualitative review of goodwill and indefinite-lived intangible assets for our RU and HCN Segments for the three months ended March 31, 2023, we concluded it was more likely than not that the fair value of the RU and HCN Segments was more than the carrying value and therefore it was not necessary to perform a quantitative goodwill impairment test. Significant assumptions inherent to valuation methodologies for goodwill include, but are not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in the higher education market. Future changes, including minor changes in the significant assumption or other factors including revenue, operating income, valuation multiples, and other inputs to the valuation process may result in future impairment charges, and those charges could be material. For more information regarding our Critical Accounting Policies and Use of Estimates, see the “Critical Accounting Policies and Use of Estimates” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report. Results of Operations Below we have included a discussion of our operating results and material changes in our operating results during the three months ended March 31, 2023 compared to the three months ended March 31, 2022. Our revenue and operating results normally fluctuate as a result of seasonal or other variations in our enrollments and the level of expenses in our reportable segments. Our student population varies as a result of new enrollments, graduations, student attrition, the success of our marketing programs, and other reasons that we cannot always anticipate. We expect quarterly fluctuations in operating results to continue as a result of various enrollment patterns and changes in revenue and expenses. APUS net course registrations for the three months ended March 31, 2023 were 96,300 compared to 94,000 for the three months ended March 31, 2022, an increase of 2,300, or 2.4%. The increase in net course registrations at APUS in 2023 as compared to 2022 was due primarily due to increases in military registrations from students utilizing TA. APUS Segment operating margins increased to 23.1% from 18.0% in the prior year period. The increase in the operating margin was primarily due to an increase in revenue during the period and decreases in advertising costs and employee compensation costs partially offset by increases in technology costs as compared to the prior year period. For the three months ended March 31, 2023, RU total enrollment decreased to approximately 14,300, or by 11.7% as compared to the prior year period. We believe this decline in enrollment, which reflects year-over-year declines in new and total nursing enrollment, as well as declines in campus-based non-nursing programs, was caused, in part, by the prior departure of leadership accountable for enrollment and nursing operations, caps on nursing student enrollment at certain RU campuses due to returning to on-ground nursing education, and increasing pay for nurses resulting in fewer available nursing faculty to educate students and oversee clinicals. RU Segment operating margins decreased to negative 22.4% from 1.3% in the prior year 30 period. The decrease in the operating margin was primarily due a decrease in revenue during the period, and $2.4 million in transition services fees related to the termination of the Collegis marketing contract effective January 31, 2023. At HCN, total enrollment for the three months ended March 31, 2023 increased to approximately 2,700, or by 10.1%, as compared to the prior year period. We believe that the increase in new and total student enrollment at HCN is due, in part, to enrollment growth in recently opened campuses including the opening of the Detroit, Michigan campus in October 2022. For the three months ended March 31, 2023, HCN Segment operating margins decreased to negative 9.9% from negative 8.6% in the prior year period. The decrease in the operating margin is primarily due to increases in nursing faculty compensation costs, other employee compensation costs, technology costs, bad debt expense, and Title IV costs partially offset by decreases in advertising costs as compared to the prior year period. For a more detailed discussion of our results by reportable segment, refer to “Analysis of Operating Results by Reportable Segment” below. Analysis of Consolidated Statements of Income The following table sets forth statements of income data as a percentage of revenue for each of the periods indicated: Three Months Ended March 31, 2023 2022 (Unaudited) Revenue 100.0 % 100.0 % Costs and expenses: Instructional costs and services 49.4 46.3 Selling and promotional 26.7 25.4 General and administrative 22.4 19.1 Loss on disposals of long-lived assets — 0.5 Depreciation and amortization 5.2 5.3 Total costs and expenses 103.7 96.6 Income (loss) from operations before interest and income taxes (3.7) 3.4 Gain on acquisition — 2.9 Interest expense (1.2) (2.2) Income (loss) from operations before income taxes (4.9) 4.1 Income tax (benefit) expense (0.9) 0.7 Equity investment loss — — Net (loss) income (4.0) 3.4 Preferred Stock Dividend 1.0 — Net income available to common shareholders (5.0) % 3.4 % 31 Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022 Revenue. Our consolidated revenue for the three months ended March 31, 2023 was $149.7 million, a decrease of $5.1 million, or 3.3%, compared to $154.7 million for the three months ended March 31, 2022. The decrease in revenue was primarily due to a $9.6 million, or 14.4% decrease in revenue in our RU Segment partially offset by a $2.0 million, or 63.9%, increase in GSUSA revenue included in Corporate and Other, a $1.6 million, or 13.9% increase in revenue in our HCN Segment and a $0.9 million, or 1.2% increase in revenue in our APUS Segment. The RU Segment revenue decrease was primarily due to an 11.7% decrease in total student enrollment as compared to the prior year period. The APUS Segment revenue increase was primarily due to a 2.4% increase in net course registrations as compared to the prior year period. The HCN Segment revenue increase was primarily due to a 36.0% increase in new student enrollment included in a 10.1% increase in total student enrollment compared to the prior year period. Costs and expenses. Costs and expenses for the three months ended March 31, 2023 were $155.1 million, an increase of $5.5 million, or 3.7%, compared to $149.5 million for the three months ended March 31, 2022. Costs and expenses for the three months ended March 31, 2023 include $2.4 million in transition services fees in our RU Segment selling and promotional expenses related to the termination of the marketing contract with Collegis, LLC, or Collegis, effective January 31, 2023. Other increases in costs and expenses for the three months ended March 31, 2023 as compared to the prior year period include increases in bad debt expense, and employee compensation and technology costs, partially offset by a decrease in advertising costs. Costs and expenses as a percentage of revenue increased to 103.7% for the three months ended March 31, 2023 from 96.6% for the three months ended March 31, 2022. Instructional costs and services expenses. Our instructional costs and services expenses for the three months ended March 31, 2023 were $73.9 million, an increase of $2.2 million, or 3.1%, compared to $71.7 million for the three months ended March 31, 2022. The increase in instructional costs and services expenses was primarily due to an increase in nursing faculty compensation costs, technology costs and classroom costs in our HCN Segment, increases in employee compensation and related costs, travel costs and technology costs in Corporate and Other, and an increase in technology costs in our RU Segment, partially offset by decreases in employee compensation costs in our APUS and RU Segments. Instructional costs and services expenses as a percentage of revenue increased to 49.4% for the three months ended March 31, 2023 from 46.3% for the three months ended March 31, 2022. Selling and promotional expenses. Our selling and promotional expenses for the three months ended March 31, 2023 were $39.9 million, an increase of $0.6 million, or 1.5%, compared to $39.3 million for the three months ended March 31, 2022. Selling and promotional expenses for the three months ended March 31, 2023 include $2.4 million in transition services fees in our RU Segment related to the termination of the Collegis marketing contract effective January 31, 2023. This increase was partially offset by decreases in advertising costs in our APUS and HCN Segments. Selling and promotional expenses as a percentage of revenue increased to 26.7% for the three months ended March 31, 2023 from 25.4% for the three months ended March 31, 2022. General and administrative expenses. Our general and administrative expenses for the three months ended March 31, 2023 were $33.5 million, an increase of $3.9 million, or 13.2%, compared to $29.6 million for the three months ended March 31, 2022. The increase in general and administrative expenses was primarily due to increases in technology costs in all segments and Corporate and Other, an increase in bad debt expense in our RU and HCN Segments, and increases in employee compensation costs in Corporate and Other. Consolidated bad debt expense for the three months ended March 31, 2023 was $3.9 million, or 2.6% of revenue, compared to $2.8 million, or 1.8% of revenue in the prior year period. General and administrative expenses as a percentage of revenue increased to 22.4% for the three months ended March 31, 2023 from 19.1% for the three months ended March 31, 2022. As we continue to evaluate strategic growth opportunities and enhancements to our business capabilities, we expect to incur additional costs and that our general and administrative expenses related to professional fees will vary from time to t ime. Loss on disposals of long-lived assets. The loss on disposals of long-lived assets was $1,000 for the three months ended March 31, 2023 compared to $0.8 million for the three months ended March 31, 2022. The prior year loss was primarily related to the sale of excess facilities located in Charles Town, West Virginia. Depreciation and amortization expenses. Depreciation and amortization expenses were $7.8 million and $8.1 million for the three months ended March 31, 2023 and 2022, respectively. Depreciation and amortization expenses as a percentage of revenue decreased to 5.2% for the three months ended March 31, 2023 from 5.3% for the three months ended March 31, 2022. Stock-based compensation expenses. Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses were $2.2 million and $2.4 million for the three months ended March 31, 2023 and 2022, respectively. Stock-based compensation costs include accelerated expense for retirement-eligible employees and performance stock unit incentive costs. 32 Gain on acquisition. The $4.5 million gain on acquisition for the period ended March 31, 2022 resulted from the GSUSA Acquisition and represents the excess of the fair value of net assets acquired over consideration paid. Interest expense. Interest expense was $1.8 million for the three months ended March 31, 2023, compared to $3.4 million for the three months ended March 31, 2022. The decrease in interest expense was primarily due to the decrease in the outstanding balance in our senior secured term loan facility. In December 2022, we made $65.0 million in prepayments to reduce our outstanding debt. Income tax (benefit) expense. We recognized an income tax benefit of $1.4 million for the three months ended March 31, 2023, compared to income tax expense of $1.0 million for the three months ended March 31, 2022, or an effective tax rate benefit of 19.8% in 2023 compared to an effective tax rate of 16.3% in 2022. The increase in effective tax rate from the prior year period is primarily related to the non-taxable gain on acquisition in 2022, and an increase in non-deductible stock compensation expense in the three months ended March 31, 2023 as compared to prior year period. Net (loss) income. Our net loss was $5.7 million for the three months ended March 31, 2023, compared to net income of $5.3 million for the three months ended March 31, 2022, a decrease of $11.1 million. This decrease was related to the factors discussed above. Preferred stock dividends. Preferred stock dividends for the three months ended March 31, 2023 were $1.5 million. The Series A Senior Preferred Stock was issued in December 2022, and therefore there were no preferred stock dividends in the comparable prior year period. Net income (loss) available to common stockholders. The net loss available to common stockholders for the three months ended March 31, 2023 was $7.2 million, compared to net income available to common stockholders of $5.3 million for the three months ended March 31, 2022, a decrease of $12.5 million. This decrease was related to the factors discussed above. Analysis of Operating Results by Reportable Segment The following table provides details on our operating results by reportable segment for the respective periods (in thousands): Three Months Ended March 31, 2023 2022 (Unaudited) Revenue: APUS Segment $ 73,978 $ 73,090 RU Segment 57,467 67,099 HCN Segment 13,140 11,541 Corporate and Other 5,104 3,017 Total Revenue $ 149,689 $ 154,747 Income (loss) from operations before interest and income taxes: APUS Segment $ 17,074 $ 13,182 RU Segment (12,864) 891 HCN Segment (1,303) (995) Corporate and Other (8,277) $ (7,878) Total income (loss) from operations before interest and income taxes (5,370) $ 5,200 APUS Segment For the three months ended March 31, 2023, the $0.9 million, or 1.2%, increase to approximately $74.0 million in revenue in our APUS Segment was primarily attributable to higher net course registrations. Net course registrations increased 2.4% to approximately 96,300 from approximately 94,000 in the prior year period, due primarily to an increase in registration 33 by military students utilizing TA, which generate a lower revenue per registration than other funding sources. Income from operations before interest and income taxes increased to $17.1 million, or by 29.5%, during the three months ended March 31, 2023 from $13.2 million in the prior year period, an increase of $3.9 million, as a result of the increase in revenue and an overall decrease in expenses as compared to the same period in 2022. RU Segment For the three months ended March 31, 2023, the $9.6 million, or 14.4% decrease to approximately $57.5 million in revenue in the RU Segment was primarily due to an 11.7% decrease in total student enrollment to approximately 14,300 from approximately 16,200 in the prior year period. The RU Segment loss from operations before interest and income taxes was $12.9 million for the three months ended March 31, 2023, as compared to income of $0.9 million in the prior year period, a decrease of $13.8 million. The 2023 period includes $2.4 million of transition fees related to the termination of the Collegis marketing services contract. HCN Segment For the three months ended March 31, 2023, the $1.6 million, or 13.9% increase to approximately $13.1 million in revenue in our HCN Segment was primarily due to year-over-year increases in new students, which contributed to the increase of total student enrollment. New student enrollment at HCN increased 36.0% to approximately 730, and total student enrollment increased 10.1% to approximately 2,700 students as compared to the same period in 2022. The loss from operations before interest and income taxes was $1.3 million during the three months ended March 31, 2023, compared to a loss from operations before interest and income taxes of $1.0 million in the same period in 2022, a decrease of $0.3 million. Liquidity and Capital Resources Liquidity Cash and cash equivalents were $136.2 million and $129.5 million at March 31, 2023 and December 31, 2022, respectively, representing an increase of $6.7 million, or 5.2%. The increase in cash was primarily due to payments received by APUS from the Army in the first quarter of 2023 related to courses taken in 2022, and the timing of other receipts and payments. We have historically financed operating activities and capital expenditures with cash provided by operating activities. We expect to continue to fund our costs and expenses through cash generated from operations. For more on our material cash requirements from known contractual and other obligations, please refer to the section entitled “Contractual Obligations” in Item 7 of Part II of our Annual Report. We derive a significant portion of our revenue from our participation in ED’s Title IV programs, for which disbursements are governed by federal regulations. We have typically received disbursements under Title IV programs within 30 days of the start of the applicable course or term. Another significant source of revenue is derived from TA from the DoD and programs from the U.S. Department of Veterans Affairs, or the VA. Generally, these funds are received within 60 days of the start of the courses to which they relate. The Higher Education Act of 1965, as amended, requires for-profit education institutions to comply with what is commonly referred to as the 90/10 Rule, which imposes sanctions on institutions that derive more than 90% of their total revenue on a cash accounting basis from Title IV programs, as calculated under ED’s regulations. Some payments from the Army that were expected in 2022 are being received in 2023, which, together with recent changes to the 90/10 Rule and faster enrollment growth among service members than non-military growth, has caused APUS’s 90/10 Rule percentage to increase and could make it more difficult for APUS to meet the 90/10 Rule requirements for 2023. Failure to meet the 90/10 Rule for fiscal 2023, which would require APUS to notify ED and students of this failure, would lead to placement of APUS on provisional certification status for two years with respect to its Title IV participation, could subject us to heightened regulatory scrutiny and possible adverse regulatory action, and could damage our reputation, which would have a material adverse impact on our results of operation, cash flow, and financial condition. Steps that we may take to reduce our 90/10 Rule percentage in order to comply with the 90/10 Rule may require us to make significant cash expenditures to acquire new students who do not receive educational assistance funds provided by a federal agency, which would reduce the amount of cash we have available to fund our operations. Furthermore, any future delays in receipt of funds from the Army or other service branches could have an adverse impact on our cash flow and results of operations. For more information please refer to the section entitled “Risk Factors” in our Annual Report. 34 During the third quarter of 2022, the Army transitioned from the initial version of ArmyIgnitED, a system for soldiers to use to request TA, 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 from July 30, 2022 until August 29, 2022, which impacted our ability to collect on our accounts receivable and caused our accounts receivable to increase. As of March 31, 2023, approximately $19.2 million, of which $10.0 million is older than 60 days from the course start date, was due from the Army, as compared to $26.0 million due from the Army as of December 31, 2022, of which $16.5 million was older than 60 days from the course start date. In early 2023 we have experienced an improvement in Army’s processing of invoices and payments. During the three months ended March 31, 2023, APUS received approximately $20.7 million in payments from the Army. While we are taking efforts to mitigate any adverse impact of the transition to ArmyIgnitED 2.0 on accounts receivable and cash flow, there can be no assurance that these efforts will be successful. 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, 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. RU has historically relied on Collegis for a variety of outsourced marketing services and information technology functions under one contract for marketing services and another for information technology functions. 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. Expenses for the fourth quarter of 2022 include $3.9 million in transition fees in connection with the termination of the Collegis marketing services contract as specific transition obligations were completed, and first quarter of 2023 expenses include the remaining $2.4 million in transition service fees, for total non-recurring transition service fees of $6.3 million. Outsourced information technology services under the Collegis information technology contract will continue until September 30, 2024. The total minimum expenses for information technology services over the remaining period is approximately $13.6 million. 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. 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. Share Repurchase Program During the three months ended March 31, 2023, we repurchased 75,000 shares of common stock for approximately $0.4 million. On March 16, 2023, our Board of Directors confirmed the availability under our existing share repurchase program to repurchase up to approximately $8.0 million of shares of our common stock. We fully expended this $8.0 million as of April 30, 2023 and repurchased a total of 1,335,357 shares of our common stock with this amount. Operating Activities Net cash provided by operating activities was $12.8 million and $25.3 million for the three months ended March 31, 2023 and 2022, respectively. The decrease in cash from operating activities was primarily due to the net loss during the three months ended March 31, 2023, compared to net income in the prior year period, and changes in working capital due to the timing of receipts and payments. Accounts receivable at March 31, 2023, decreased approximately $5.3 million compared to December 31, 2022, primarily as a result of improvement in Army’s processing of invoices and payments to APUS. Accounts 35 payable, accrued liabilities, and accrued compensation and benefits at March 31, 2023 were approximately $4.3 million higher than December 31, 2022, primarily due to the timing of payment processing. Investing Activities Net cash used in investing activities was $3.2 million and $0.3 million for the three months ended March 31, 2023 and 2022, respectively. Investing activities for the three months ended March 31, 2023 include capital expenditures of $3.2 million. For the three months ended March 31, 2022, capital expenditures were $3.0 million, partially offset by net proceeds from GSUSA Acquisition and the proceeds from the sale of real property of $1.9 million and $0.8 million, respectively. Financing Activities Net cash used in financing activities was $2.8 million and $3.7 million for the three months ended March 31, 2023 and 2022, respectively. For the three months ended March 31, 2023, the cash used in financing activities of $1.5 million was related to the payment of a dividend on our preferred stock, $1.4 million used for the deemed repurchase of our common stock to satisfy minimum tax-withholding requirements in connection with the vesting of restricted stock grants, and purchases of our common stock under our share repurchase program. For the three months ended March 31, 2022, the cash used in financing activities was primarily due to $1.4 million used for the deemed repurchase of our common stock to satisfy minimum tax-withholding requirements in connection with the vesting of restricted stock grants, and $2.2 million in principal payments on our long term debt. Due to debt prepayments made in December 2022, no further principal payments are required on our outstanding debt until 2027. Contractual Commitments We have various contractual obligations consisting of operating leases and purchase obligations. Purchase obligations include agreements with consultants, contracts with third-party service providers, and other future contracts or agreements. For a summary of our contractual obligations, please refer to Item 7 of Part II of our Annual Report. Outsourced information technology services under the Collegis information technology contract will continue until September 30, 2024. The total minimum expenses for information technology services over the remaining period is approximately $13.6 million. 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 in the future. 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. Expenses for the fourth quarter of 2022 include $3.9 million in transition fees in connection with the termination of the Collegis marketing services contract as specific transition obligations were completed, and first quarter of 2023 expenses include the remaining $2.4 million in transition service fees, for total non-recurring transition service fees of $6.3 million. We completed the transition of RU marketing in-house to our centralized marketing team during the first quarter of 2023.