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, including the 90/10 Rule, 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; • 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 cost savings efforts and their benefits; • 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; 27 • 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, the consequences thereof, 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; • our inability to recognize the benefits of our cost savings efforts; • 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 106,300 students worldwide through American Public University System, or APUS, Rasmussen University, or RU, and Hondros College of Nursing, or HCN, and career learning through Graduate School USA, or GSUSA. These subsidiary institutions are purpose-built to deliver inclusive, high-quality education that empowers learners to achieve their ambitions, serve their communities, and realize a return on their educational investment. 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, or the GSUSA Acquisition, of substantially all the assets of Graduate School USA, 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 90,000 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 28 University, or APU. As of September 30, 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 13,500 students at its 22 campuses in six states and online. As of September 30, 2023, approximately 5,700 students are pursuing nursing degrees at RU, approximately 90% of whom are enrolled in RU’s pre-licensure nursing degree programs. • National Education Seminars, Inc., referred to herein as Hondros College of Nursing, or HCN, provides nursing education to approximately 2,800 students at eight campuses in three states. All of HCN’s students are enrolled in its pre-licensure nursing 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 and July 2023, APUS implemented tuition and fee increases for its non-military and veteran students. Even 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 cost 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 cost of delivering a quality, competitive education. Cost and Expense Reductions During the three months ended September 30, 2023, we completed a reduction in force that resulted in the termination of 74 employees and the elimination of 57 open positions across a variety of roles and departments at APEI, RU, HCN and GSUSA. The headcount reductions reflect our ongoing efforts focused on realigning our organizational structure, eliminating redundancies, and optimizing certain functions. We incurred an aggregate of approximately $3.0 million of pre-tax cash expenses associated with employee severance costs as a result of this reduction in force, all of which were incurred in the third quarter of 2023. The reduction in force is expected to result in pre-tax labor and benefit savings in 2023 of approximately $6.2 million, excluding severance costs, or approximately $15.5 million in savings on an annualized basis. In November 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 representing 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 costs as a result of this reduction in force, all of which were incurred in the fourth quarter of 2022. The reduction in force resulted in pre-tax labor and benefit savings of approximately $2.3 million in 2022. In January 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 costs 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 Practical Nursing, or PN, and Associate Degree in Nursing, or ADN, programs at certain RU campuses. In September 2021, ACEN granted RU’s ADN program in Bloomington, Minnesota continued accreditation with conditions, requiring it to demonstrate compliance with all applicable accreditation criteria within two years. In June 2023, ACEN’s site visit team recommended denial of continuing accreditation for the program based on the team’s findings that the program did not demonstrate compliance with certain accreditation criteria related to student outcomes. RU thereafter responded to the recommendation detailing RU’s belief that good cause existed not to deny continuing accreditation. On October 6, 2023, RU received notice from ACEN that the ACEN board had granted continuing accreditation for good cause until September 2024. ACEN also requested a follow-up report for good cause to be submitted in advance of a required follow-up site visit in spring 2024 due to a finding of non-compliance 29 related to an alleged lack of evidence that the program implements actions based on data analysis to improve the program completion rate . In conjunction with the spring 2024 follow-up visit, the ACEN board will also conduct a focused visit due to a complaint received by ACEN related to student clinical preparation and graduate clinical performance. If the ACEN board grants continuing accreditation following its review of the follow-up report and spring 2024 site visit report, the next evaluation visit will be scheduled for spring 2031. If the ACEN board denies continuing accreditation following its review of the report and the spring 2024 visit, the program can apply for an additional year of continuing accreditation for good cause. In August 2023, RU decided to voluntarily pause new enrollments beginning in November 2023. Due to previously self-imposed enrollment caps in this program and the pause on new enrollments, enrollment in the Bloomington, MN ADN program currently represents less than 2% of RU’s current total enrollment. If RU is unable to obtain accreditation or candidacy status with ACEN or another nursing accreditor, RU would likely have to close its Bloomington, Minnesota ADN program, which would have an adverse impact on RU’s enrollments and RU’s and our results of operations, cash flows, and financial condition. The State of Illinois enacted legislation in August 2023, which takes effect January 1, 2024, that we believe could positively impact RU ADN program in Illinois by providing the program with additional time to improve National Council Licensure Examination, or NCLEX, pass rates. The legislation changes the Illinois NCLEX pass rate requirements from a one-year measurement based on first attempts only to a three-year average that includes all test attempts. It also temporarily removes all nursing programs from probationary status for a period of three years. The resulting removal from probationary status of RU’s Illinois ADN program may be viewed favorably by ACEN or another nursing program accreditor and may result in RU’s Illinois ADN program obtaining ACEN accreditation following a site visit in February 2024, which we also believe will allow RU to be deemed to have met Illinois’ requirement for its Illinois ADN program to have achieved accreditation by the end of 2022 in satisfaction of state approval requirements. ED recently released a final rule amending and expanding the current financial responsibility, administrative capability, and certification regulations, which takes effect July 1, 2024. Under the amended regulations, institutions will be required to meet additional financial responsibility criteria and must report certain “financial responsibility” events to ED. In addition, ED may find that an institution has failed the administrative capability requirements if it: does not provide adequate financial aid counseling or career services; has been subject to a negative action by a state or federal agency, court, or accreditor; fails to verify high school diplomas; or does not timely place students in clinical or externship opportunities. ED may require institutions that fail to meet these financial responsibility and administrative capability criteria to participate in Title IV programs under a provisional certification or submit financial protection. ED may also impose additional requirements on the institution’s participation in Title IV programs, such as restrictions on enrollment, addition of new programs, or acquisitions. Cohort Default Rate To remain eligible to participate in Title IV programs, an educational institution’s student loan cohort default rates must remain below certain levels. Pursuant to requirements of the Higher Education Act, as amended, if the cohort default rate for any year exceeds 40% in any single year, or exceeds 30% for three consecutive years, an institution loses eligibility to participate in Title IV programs. If an institution’s cohort default rate is equal to or greater than 30% in any year, it must establish a default prevention task force. In September 2023, ED released final official cohort default rates for institutions for federal fiscal year 2020, with ED reporting a zero percent cohort default rate for APUS, RU and HCN. These rates were favorably impacted by regulatory relief provided in connection with the COVID-19 pandemic pursuant to which borrowers with Title IV program student loans were not required to make payments. Additional information regarding student loan default rates, prior year default rates, and potential risks associated with them is available in our Annual Report. Reportable Segments 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. 30 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 September 30, 2023 increased to $150.8 million from $149.5 million, or by 0.9%, compared to the prior year period. Our net loss for the three months ended September 30, 2023 was $3.3 million, compared to a net loss of $3.8 million in the prior year period, an increase of $0.4 million. The results for the three months ended September 30, 2023, include a non-cash investment loss of $5.2 million, net of tax, on one of our cost method equity investments, due to the investee entering into an agreement to be sold which will result in no sales proceeds. Our operating margins increased to 4.2% for the three months ended September 30, 2023, compared to negative 0.7% in the prior year period. Consolidated revenue for the nine months ended September 30, 2023, decreased to $447.7 million from $453.9 million, or by 1.4%, compared to the prior year period. Results for the nine months ended September 30, 2023, include a non-cash impairment charge of $64.0 million in our RU Segment to reduce the carrying value of RU Segment goodwill and intangible assets, and to reflect the corresponding tax impact, and a non-cash investment loss of $5.2 million, net of tax, on one of our cost method investments in Corporate and Other. Results for the nine months ended September 30, 2022, include a non-cash impairment charge of $144.9 million in our RU Segment to reduce the carrying value of RU Segment goodwill and intangible assets, and to reflect the corresponding tax impact. Our operating margins increased to negative 14.3% for the nine months ended September 30, 2023 from negative 30.1% in the prior year period. Our net loss for the nine months ended September 30, 2023, was $60.3 million, compared to net loss of $108.5 million in the prior year period, a decrease of $48.2 million. Excluding the impact of the non-cash impairment charges, for the nine months ended September 30, 2023 and 2022, our operating margin was negative 0.1% and positive 1.7%, respectively, and our net loss was $6.9 million, compared to net income of $0.4 million in the prior year period. The net loss for the nine months ended September 30, 2023, includes a non-cash investment loss of $5.2 million, net of tax. APUS net course registrations for the three months ended September 30, 2023, increased to approximately 92,300 from approximately 85,800, an increase of 6,500, or 7.6%, compared to the prior year period. APUS Segment revenue for the three months ended September 30, 2023, increased to $76.4 million from $68.7 million, or by 11.2%, compared to the prior year period. The revenue increase for the period was greater than the increase in net course registrations due to the April and July tuition and fee increases. APUS net course registrations for the nine months ended September 30, 2023, increased to approximately 276,900 from approximately 263,200, or approximately 5.2%. APUS Segment revenue nine months ended September 30, 2023, increased to $223.9 million from $211.7 million, or by 5.8%, compared to the prior year period. During the nine month period, the impact of the April and July tuition and fee increases was partially offset by a change in student mix to more students that utilize military TA at a lower revenue per net course registration. For the three months ended September 30, 2023, APUS Segment operating margins increased to 28.7% from 18.2% in the prior year period and increased to 25.9% from 18.6% for the nine months ended September 30, 2023, compared to the prior year period. RU total enrollment for the three months ended September 30, 2023, decreased to approximately 13,500 from approximately 15,000, a decrease of 1,500, or 10.0%, compared to the prior year period. RU Segment revenue for the three months ended September 30, 2023, decreased to $52.1 million from $61.5 million, or by 15.4%, compared to the prior year period. RU total enrollment for the nine months ended September 30, 2023, decreased 11.5%, as compared to the prior year period. RU Segment revenue for the nine months ended September 30, 2023, decreased to $161.5 million from $192.5 million, or by 16.1%, compared to the prior year period. In both periods, the revenue decrease was greater than the enrollment decrease due to a change in student mix to more online students that have lower revenue per enrollment, partially offset by tuition increases implemented in January 2023. RU Segment operating margins decreased to negative 20.3% from negative 12.8% for the three months ended September 30, 2023, and improved to negative 62.4% for the nine months ended September 30, 2023, from negative 79.8% in the prior year period. HCN total enrollment for the three months ended September 30, 2023, increased to approximately 2,800 from approximately 2,400, an increase of approximately 400, or 17.0%, compared to the prior year period. HCN Segment revenue for the three months ended September 30, 2023, increased to $13.7 million from $11.4 million, or by 20.4%, compared to the prior year period. HCN total enrollment for the nine months ended September 30, 2023, increased approximately 16.4%, as compared to the prior year period. HCN Segment revenue for the nine months ended September 30, 2023, increased to $41.1 million from $34.4 million, or by 19.5%, compared to the prior year period. In both periods, the revenue increase was greater than the enrollment increase due to tuition increases in the second quarter of 2023. For the three months ended September 30, 2023, HCN Segment operating margins improved to negative 4.7% from negative 12.2% in the three months ended September 30, 2022. For the nine months ended September 30, 2023, HCN Segment operating margins improved to negative 5.3% from negative 8.8% in the prior year period. 31 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. The Company recorded non-cash impairment charges in 2022 and 2023 for RU, and 2016 and 2019 for HCN, reducing the carrying value of RU and HCN Segment goodwill to $ 33.0 million and $ 26.6 million, respectively. 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 include intangible assets related to trade name, accreditation, licensing, and Title IV, and affiliate agreements. The Company recorded non-cash impairment charges in 2022 and 2023, reducing the carrying value of RU identified intangible assets with an indefinite useful life to $ 24.5 million. 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 $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 or changes in 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 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. We estimate fair value in our quantitative analysis by weighting the results from three different valuation approaches. They include: (1) discounted cash flow; (2) guideline public company; and (3) guideline transaction for comparable transactions. Under the discounted cash flow method, fair value was determined by discounting the estimated future cash flows of RU and HCN at their estimated weighted-average cost of capital. We incorporate the use of projected financial information and a discount rate that are developed using market participant-based assumptions. The cash-flow projections are based on three-year financial forecasts developed by management that include revenue projections, capital spending trends, and investment in working capital to support anticipated revenue growth, which are updated at least annually and approved by management. Under the guideline public company method, pricing multiples from other public companies in the public higher education market were used to determine the fair value of RU and HCN. Under the comparable transaction method, pricing terms from other transactions in the higher education market were used to determine the fair value. Values derived under the three valuation methods are then weighted to estimate RU and HCN’s enterprise values. If we determine that the carrying amount of a reporting unit exceeds its fair value, we then calculate the implied fair value of the reporting unit goodwill as compared to its carrying amount to determine the appropriate impairment charge. Although we believe our assumptions are reasonable, actual results may vary significantly and may expose us to material impairment charges in the future. Our methodology for determining fair values remained consistent for the periods presented. During the three months ended September 30, 2023 and 2022, we completed a qualitative analysis for the RU and HCN Segments’ goodwill and indefinite-lived intangible assets. As part of the analysis, the Company considered the events and circumstances expressly required by ASC 350, in addition to other entity-specific factors. Factors considered included RU and HCN’s financial and enrollment performance against internal targets, economic factors, and the continued favorable growth outlook for nursing education. After completing the qualitative review of goodwill for the RU and HCN Segments for the three months ended September 30, 2023 and 2022, the Company concluded it was more likely than not that the fair value of the RU and HCN Segments were more than the carrying value and therefore no quantitative impairment test and no impairment charge was necessary. 32 During the second quarter of 2023, we completed qualitative assessments to determine if an interim goodwill impairment test was necessary. We concluded that due to our RU Segment underperformance when compared to the 2023 internal targets, projected enrollment trends, the decline in financial performance projected for the remainder of 2023 as compared to prior projections, and our market value, it was more likely than not that the fair value of our RU Segment was less than its carrying value. Therefore, we proceeded with a quantitative impairment test. As a result of these assessments, during the second quarter of 2023, we recorded a non-cash goodwill impairment charge of $ 53.0 million to reduce the carrying value of the RU Segment goodwill, and to reflect the corresponding tax impact. In addition, we concluded there were indicators of impairment of the RU Segment’s intangible assets. As a result, during the second quarter of 2023, we recorded non-cash impairment charges of $11.0 million to reduce the carrying value of our RU Segment indefinite-lived intangible assets. There were no indicators of impairment for our HCN Segment. During the second quarter of 2022, we completed a qualitative assessment to determine if an interim goodwill impairment test was necessary. We concluded that it was more likely than not that the fair value of our RU Segment was less than its carrying value. Therefore, we proceeded with a quantitative impairment test. We also completed our annual assessment at October 31, 2022 of goodwill and indefinite-lived intangibles for RU and HCN Segments. As a result of these assessments, we recorded a non-cash goodwill impairment charge of $131.4 million, and to reflect the corresponding tax impact, in the second quarter of 2022, to reduce the carrying value of the RU Segment goodwill. In addition, we concluded there were indicators of impairment of the RU Segment intangible assets during the second quarter of 2022 and during the annual assessment. We determined the fair value of the RU Segment accreditation, licensing and Title IV indefinite-lived intangible asset was $13.5 million, during the second quarter of 2022, and $2.0 million, during the annual assessment, less than its carrying value. As a result, we recorded total non-cash impairment charges of $15.5 million during 2022 to reduce the carrying value of our RU Segment indefinite-lived intangible assets. There were no indicators of impairment for our HCN Segment. Determining fair value requires judgment and the use of significant estimates and assumptions, including fluctuations in enrollments, 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. Given the current competitive and regulatory environment 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 impairment tests will prove to be accurate predictions of the future. If the Company’s assumptions are not realized, the Company may record additional goodwill 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. 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 and nine months ended September 30, 2023, compared to the three and nine months ended September 30, 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 September 30, 2023, increased to approximately 92,300 from approximately 85,800, an increase of 6,500, or 7.6%, compared to the prior year period. APUS net course registrations for the nine months ended September 30, 2023, increased to approximately 276,900 from approximately 263,200, or 5.2%. The increase in net course registrations during the three and nine months ended September 30, 2023, was primarily due to increases in military registrations from students utilizing TA which is at a lower revenue per net course registration. APUS Segment operating margins increased to 28.7% for the three months ended September 30, 2023, from 18.2% for the prior year period, and increased to 25.9% for the nine months ended September 30, 2023, from 18.6% for the prior year period. The increase in the operating margin was primarily due to increases in revenue during the three and nine months ended September 30, 2023, and decreases in advertising and marketing support costs and credit card processing fees, partially offset by increases in technology costs and bad debt expense as compared to the prior year period. 33 RU total enrollment for the three months ended September 30, 2023, was 13,500 compared to 15,000 for the three months ended September 30, 2022, a decrease of 1,500, or 10.0%, driven by a 26.0% decrease in nursing enrollment. RU enrollment for the nine months ended September 30, 2023, decreased 11.5%, driven by a 22.2% decrease in nursing enrollment. We believe this decline in enrollment, which reflects year-over-year declines in new and total nursing enrollment was caused, in part, by the prior departure of leadership accountable for enrollment and nursing operations and caps on nursing student enrollment at certain RU campuses. Excluding the impact of the non-cash impairment charge discussed above, RU Segment operating margin decreased to negative 20.3% for the three months ended September 30, 2023 from negative 12.8% in the prior year period, and decreased to negative 22.7% for the nine months September 30, 2023, from negative 4.5% in the prior year period. The decrease in the operating margin was primarily due to decreases in revenue during the three and nine months ended September 30, 2023, and increases in technology costs due in part to the Collegis contract mandated annual fee increase, facilities costs, and classroom materials costs, partially offset by decreases in advertising costs and employee compensation costs as compared to the prior year period. Additionally, the nine months ended September 30, 2023, includes increases in bad debt expense as well as $2.4 million in transition services fees related to the termination of the Collegis, LLC, or Collegis, marketing contract effective January 31, 2023, as compared to the prior year period. HCN total enrollment for the three months ended September 30, 2023, increased to approximately 2,800 from approximately 2,400, an increase of approximately 400, or 17.0%, compared to the prior year period. HCN total enrollment for the nine months ended September 30, 2023, increased approximately 16.4%, 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. HCN Segment operating margin improved to negative 4.7% from negative 12.2% for the three months ended September 30, 2023, and improved to negative 5.3% for the nine months ended September 30, 2023, from negative 8.8% in the prior year period. The improvement in the operating margin is primarily due to increases in revenue and decreases in advertising costs partially offset by increases in employee compensation costs, bad debt expense, and facilities 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. 34 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 September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (Unaudited) (Unaudited) Revenue 100.0 % 100.0 % 100.0 % 100.0 % Costs and expenses: Instructional costs and services 48.5 48.0 49.6 47.5 Selling and promotional 22.1 27.4 23.7 25.6 General and administrative 20.5 19.8 21.6 19.6 Impairment of goodwill and intangible assets — — 14.3 31.9 Loss on disposals of long-lived assets — 0.1 — 0.2 Depreciation and amortization 4.7 5.3 5.1 5.3 Total costs and expenses 95.8 100.7 114.3 130.1 Loss from operations before interest and income taxes 4.2 (0.7) (14.3) (30.1) Gain on acquisition — — — 0.8 Interest expense, net (0.5) (2.4) (0.8) (2.3) Loss from operations before income taxes 3.7 (3.1) (15.1) (31.6) Income tax expense (benefit) 2.5 (0.6) (2.9) (7.7) Equity investment loss, net of tax (3.5) — (1.2) — Net loss (2.2) (2.5) (13.5) (23.9) Preferred Stock Dividend 1.0 — 1.0 — Net loss available to common shareholders (3.2) % (2.5) % (14.5) % (23.9) % Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022 Revenue. Our consolidated revenue for the three months ended September 30, 2023, was $150.8 million, an increase of $1.3 million, or 0.9%, compared to $149.5 million for the three months ended September 30, 2022. The increase in revenue was primarily due to a $7.7 million, or 11.2% increase in revenue in our APUS Segment, a $2.3 million, or 20.4%, increase in revenue in our HCN Segment, and a $0.8 million, or 10.0%, increase in GSUSA revenue included in Corporate and Other, partially offset by $9.5 million, or 15.4%, decrease in revenue in our RU Segment. The RU Segment revenue decrease was primarily due to a 10.0% decrease in total student enrollment driven by a 26.0% decrease in nursing enrollment as compared to the prior year period, partially offset by increases in tuition in certain programs implemented in January 2023. The APUS Segment revenue increase was primarily due to a 7.6% increase in net course registrations and tuition and fee increases implemented in April and July 2023, as compared to the prior year period. The HCN Segment revenue increase was primarily due to a 17.0% increase in total student enrollment, as well as a 5% tuition increase implemented during the second quarter, compared to the prior year period. Costs and expenses. Costs and expenses for the three months ended September 30, 2023, were $144.4 million, a decrease of $6.1 million, or 4.1%, compared to $150.6 million for the three months ended September 30, 2022. The decrease in costs and expenses for the three months ended September 30, 2023, as compared to the prior year period were due primarily to decreases in advertising costs, depreciation and amortization costs, and marketing support material costs, partially offset by increases in technology costs, bad debt expense, and employee compensation costs in our APUS and HCN Segments due to an increase in registrations at APUS and enrollments at HCN. Costs and expenses as a percentage of revenue decreased to 95.8% for the three months ended September 30, 2023, from 100.7% for the three months ended September 30, 2022. Instructional costs and services expenses. Our instructional costs and services expenses for the three months ended September 30, 2023, were $73.2 million, an increase of $1.4 million, or 2.0%, compared to $71.8 million for the three months ended September 30, 2022. The increase in instructional costs and services expenses was primarily due to increases in 35 employee compensation costs in our APUS and HCN Segments due to an increase in registrations at APUS and enrollments at HCN, and Corporate and Other due to higher revenue at GSUSA, an increase in classroom material costs in our RU and HCN Segments, and an increase in technology costs in our RU Segment, due in part to the Collegis contract mandated annual fee increase, partially offset by decreases in employee compensation costs in our RU Segment. Instructional costs and services expenses as a percentage of revenue increased to 48.5% for the three months ended September 30, 2023 from 48.0% for the three months ended September 30, 2022. Selling and promotional expenses. Our selling and promotional expenses for the three months ended September 30, 2023, were $33.3 million, a decrease of $7.6 million, or 18.6%, compared to $40.9 million for the three months ended September 30, 2022. The decrease in selling and promotional expenses was primarily due to decreases in advertising costs in all our segments, a decrease in marketing support materials costs in our APUS Segment and decreases in employee compensation costs in our RU and HCN Segments and Corporate and Other. Selling and promotional expenses as a percentage of revenue decreased to 22.1% for the three months ended September 30, 2023, from 27.4% for the three months ended September 30, 2022. General and administrative expenses. Our general and administrative expenses for the three months ended September 30, 2023, were $30.9 million, an increase of $1.2 million, or 4.1%, compared to $29.7 million for the three months ended September 30, 2022. The increase in general and administrative expenses was primarily due to an increase in bad debt expense in our APUS and HCN Segments, an increase in technology costs in our HCN and APUS Segments and Corporate and Other, an increase in professional fees in Corporate and Other, partially offset by decreases in employee compensation costs, primarily in our APUS Segment. Consolidated bad debt expense for the three months ended September 30, 2023, was $4.5 million, or 3.0% of revenue, compared to $3.7 million, or 2.5% of revenue in the prior year period. General and administrative expenses as a percentage of revenue increased to 20.5% for the three months ended September 30, 2023, from 19.8% for the three months ended September 30, 2022. As we continue to evaluate enhancements to our business capabilities, particularly in technology, we expect to incur additional costs and that our general and administrative expenses will vary from time to time. (Gain) loss on disposals of long-lived assets. The gain on sale of long-lived assets was $16,000 for the three months ended September 30, 2023, compared to a loss of $178,000 for the three months ended September 30, 2022. Depreciation and amortization expenses. Depreciation and amortization expenses were $7.0 million and $8.0 million for the three months ended September 30, 2023 and 2022, respectively. Depreciation and amortization expenses as a percentage of revenue was 4.7% and 5.3% for the three months ended September 30, 2023 and 2022, respectively. Stock-based compensation expenses. Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses were $1.7 million and $2.0 million for the three months ended September 30, 2023 and 2022, respectively. Stock-based compensation costs include accelerated expense for retirement-eligible employees and performance stock unit incentive costs. Interest expense, net. Interest expense, net, was $0.8 million and $3.6 million for the three months ended September 30, 2023 and 2022, respectively. 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 expense (benefit). We recognized income tax expense of $3.7 million for the three months ended September 30, 2023, compared to an income tax benefit of $0.9 million in the prior year period, respectively, or an effective tax rate of 66.2% in 2023, compared to an effective tax rate benefit of 18.6% in 2022. The increase in the effective tax rate in 2023 is primarily due to a change in our estimated state apportionment, reducing the expected future benefit for our net deferred tax assets. Net loss. Our net loss was $3.3 million, compared to a net loss of $3.8 million, for the three months ended September 30, 2023 and 2022, respectively, an increase of $0.4 million. This increase was related to the factors discussed above. Preferred stock dividends. Preferred stock dividends for the three months ended September 30, 2023, were $1.5 million. Our 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 loss available to common stockholders. The net loss available to common stockholders for the three months ended September 30, 2023, was $4.9 million, compared to net loss available to common stockholders of $3.8 million for the three months ended September 30, 2022, an increase of $1.1 million. This increase in net loss available to common shareholders was related to the factors discussed above. 36 Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022 Revenue. Our consolidated revenue for the nine months ended September 30, 2023, was $447.7 million, a decrease of $6.1 million, or 1.4%, compared to $453.9 million for the nine months ended September 30, 2022. The decrease in revenue was primarily due to a $31.0 million, or 16.1% decrease in revenue in our RU Segment, partially offset by a $12.2 million, or 5.8% increase in revenue in our APUS Segment, a $6.7 million, or 19.5% increase in revenue in our HCN Segment, and a $5.9 million, or 38.1%, increase in GSUSA revenue included in Corporate and Other. The RU Segment revenue decrease was primarily due to a 11.5% decrease in total student enrollment, partially offset by tuition increases in certain programs implemented in January 2023, as compared to the prior year period. The APUS Segment revenue increase was primarily due to a 5.2% increase in net course registrations and tuition and fee increases implemented in April and July 2023, as compared to the prior year period. The HCN Segment revenue increase was primarily due to a 16.4% increase in total student enrollment compared to the prior year period, as well as a 5% tuition increase implemented during the second quarter, compared to the prior year period. Costs and expenses. Costs and expenses for the nine months ended September 30, 2023, were $512.0 million, a decrease of $79.0 million, or 13.4%, compared to $591.0 million for the nine months ended September 30, 2022. Costs and expenses for the nine months ended September 30, 2023, include a non-cash impairment charge of $64.0 million to reduce the carrying value of RU Segment goodwill and intangible assets, and to reflect the corresponding tax impact. This compares to a non-cash impairment charge and the corresponding tax impact of $144.9 million in the prior year period, a decrease of $80.9 million in the current year period. Other increases in costs and expenses for the nine months ended September 30, 2023, as compared to the prior year period include increases in employee compensation costs in our APUS and HCN Segments due to an increase in registrations at APUS and enrollments at HCN, technology costs, bad debt expense, and facilities costs, partially offset by a decrease in advertising costs and depreciation and amortization costs. Excluding impairment charges, on a pre-tax basis costs increased $1.9 million as compared to the prior year period and 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, effective January 31, 2023. Costs and expenses as a percentage of revenue decreased to 114.3% for the nine months ended September 30, 2023, from 130.1% for the nine months ended September 30, 2022. Excluding impairment charges and Collegis transition service fees, costs and expenses were 99.5% of revenue for the three months ended September 30, 2023, compared to 98.3% of revenue in the prior year period. Instructional costs and services expenses. Our instructional costs and services expenses for the nine months ended September 30, 2023, were $222.1 million, an increase of $6.5 million, or 3.0%, compared to $215.6 million for the nine months ended September 30, 2022. The increase in instructional costs and services expenses was primarily due to increases in employee compensation costs in our APUS and HCN Segments due to an increase in registrations and APUS and enrollments at HCN, higher nursing faculty compensation costs, and classroom materials costs in our HCN Segment, higher employee compensation costs in Corporate and Other due to higher revenue at GSUSA, and increases in technology costs, facilities costs and professional services costs in our RU Segment, partially offset by decreases in employee compensation costs in our RU Segment and classroom materials costs in our APUS Segment. Instructional costs and services expenses as a percentage of revenue increased to 49.6% for the nine months ended September 30, 2023, from 47.5% for the nine months ended September 30, 2022. Selling and promotional expenses. Our selling and promotional expenses for the nine months ended September 30, 2023 were $106.2 million, a decrease of $9.9 million, or 8.5%, compared to $116.1 million for the nine months ended September 30, 2022. The decrease in selling and promotional expenses was primarily due to decreases in advertising costs in all segments and Corporate and Other, partially offset by $2.4 million in transition services fees in our RU Segment related to the termination of the Collegis marketing contract effective January 31, 2023. Selling and promotional expenses as a percentage of revenue decreased to 23.7% for the nine months ended September 30, 2023 from 25.6% for the nine months ended September 30, 2022. Excluding the Collegis transition service fees, selling and promotional expenses were 23.2% of revenue for the nine months ended September 30, 2023, compared to 25.6% of revenue in the prior year period. General and administrative expenses. Our general and administrative expenses for the nine months ended September 30, 2023, were $96.9 million, an increase of $7.7 million, or 8.7%, compared to $89.2 million for the nine months ended September 30, 2022. The increase in general and administrative expenses was primarily due to increases in employee compensation costs in our RU and HCN Segments and Corporate and Other, increases in bad debt expense in all segments, and increases in technology costs in all segments and Corporate and Other, partially offset by decreases in professional fees in our APUS and RU Segments and Corporate and Other. Consolidated bad debt expense for the nine months ended September 30, 2023, was $12.3 million, or 2.7% of revenue, compared to $9.4 million, or 2.1% of revenue in the prior year period. General and administrative expenses as a percentage of revenue increased to 21.6% for the nine months ended September 30, 2023, from 19.6% for the nine months ended September 30, 2022. As we continue to evaluate enhancements to our business 37 capabilities, particularly in technology, we expect to incur additional costs and that our general and administrative expenses will vary from time to t ime. Loss on disposals of long-lived assets. The loss on disposals of long-lived assets was $17,000 and $1.0 million for the nine months ended September 30, 2023 and 2022, respectively. The prior year loss was primarily related to the sale of excess facilities located in Charles Town, West Virginia. Impairment of goodwill and intangible assets. For the nine months ended September 30, 2023, we recorded $64.0 million in non-cash impairment charges in our RU Segment to reduce the carrying value of RU Segment goodwill and intangible assets, and to reflect the corresponding tax impact, compared to $144.9 million for the nine months ended September 30, 2022. For additional information regarding the impairment of goodwill and intangible assets, and a discussion of the potential for future impairment charges for goodwill and intangible assets, please refer to the discussion in “Note 6. Goodwill and Intangible Assets” included in the Consolidated Financial Statements in this Quarterly Report. Depreciation and amortization expenses. Depreciation and amortization expenses were $22.7 million and $24.2 million for the nine months ended September 30, 2023 and 2022, respectively. Depreciation and amortization expenses as a percentage of revenue were 5.1% and 5.3% for the nine months ended September 30, 2023 and September 30, 2022, respectively. Stock-based compensation expenses. Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses were $6.0 million and $6.7 million for the nine months ended September 30, 2023 and 2022, respectively. Stock-based compensation costs include accelerated expense for retirement-eligible employees and performance stock unit incentive costs. Gain on acquisition. The $3.8 million gain on acquisition for the for the nine months ended September 30, 2022, resulted from the GSUSA Acquisition and represents the excess of the fair value of net assets acquired over consideration paid. Interest expense, net. Interest expense, net, was $3.7 million and $10.3 million for the nine months ended September 30, 2023 and 2022, respectively. 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 expense (benefit). We recognized an income tax benefit of $12.8 million and $35.2 million, for the nine months ended September 30, 2023 and 2022, respectively, or an effective tax rate benefit of 18.9% in 2023 compared to an effective tax rate benefit of 24.5% in 2022. The nine months ended September 30, 2023 and 2022 include a $15.8 million and $36.0 million income tax benefit related to the impairment of goodwill and intangible assets, respectively. Excluding the $15.8 million and $36.0 million income tax benefits, the income tax expense for the nine months ended September 30, 2023 and 2022 was $3.0 million and $0.8 million, or an effective tax rate of 75.8% and 65.1%. The 2023 effective tax rate, excluding the impairment charge and the corresponding tax impact, was impacted by the items impacting the three months ended September 30, 2023, and higher non-deductible expenses in relation to the pre-tax loss for the period. The higher effective tax rate in 2022, excluding the impairment charge and the corresponding tax impact, is due to higher non-deductible expenses in relation to the pre-tax income for the period. Net loss. Our net loss was $60.3 million and $108.5 million for the nine months ended September 30, 2023 and 2022, respectively, a decrease in net loss of $48.2 million. This decrease was related to the factors discussed above. Preferred stock dividends. Preferred stock dividends for the nine months ended September 30, 2023 were $4.5 million. The Series A Senior Preferred Stock was issued in December 2022, and therefore there were no preferred stock dividends issued in the comparable prior year period. Net loss available to common stockholders. The net loss available to common stockholders was $64.8 million and $108.5 million for the nine months ended September 30, 2023 and 2022, respectively, a decrease in net loss available to common stockholders of $43.7 million. This decrease was related to the factors discussed above. 38 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 September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (Unaudited) (Unaudited) Revenue: APUS Segment $ 76,406 $ 68,735 $ 223,941 $ 211,729 RU Segment 52,073 61,548 161,511 192,538 HCN Segment 13,741 11,409 41,147 34,436 Corporate and Other 8,618 7,843 21,142 15,187 Total Revenue $ 150,838 $ 149,535 $ 447,741 $ 453,890 Income (loss) from operations before interest and income taxes: APUS Segment $ 21,948 $ 12,532 $ 57,963 $ 39,338 RU Segment (10,570) (7,900) (100,708) (153,562) HCN Segment (641) (1,392) (2,179) (3,017) Corporate and Other (4,337) (4,266) (19,314) (19,845) Total loss from operations before interest and income taxes $ 6,400 $ (1,026) $ (64,238) $ (137,086) APUS Segment For the three months ended September 30, 2023, the $7.7 million, or 11.2%, increase to approximately $76.4 million in revenue in our APUS Segment was primarily attributable to higher net course registrations. Net course registrations increased 7.6% to approximately 92,300 from approximately 85,800 in the prior year period, primarily due to an increase in registration by military students utilizing TA, and tuition and fee increases implemented in April and July 2023. Income from operations before interest and income taxes increased to $21.9 million, or by 75.1%, during the three months ended September 30, 2023, from $12.5 million in the prior year period, an increase of $9.4 million, as a result of the increase in revenue and an overall decrease in expenses as compared to the same period in 2022. For the nine months ended September 30, 2023, the $12.2 million, or 5.8%, increase to approximately $223.9 million in revenue in our APUS Segment was primarily attributable to higher net course registrations. Net course registrations increased 5.2% to approximately 276,900 from approximately 263,200 in the prior year period, primarily due to an increase in registration by military students utilizing TA, and tuition and fee increases implemented in April and July 2023. Income from operations before interest and income taxes increased to $58.0 million, or by 47.3%, during the nine months ended September 30, 2023, from $39.3 million in the prior year period, an increase of $18.6 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 September 30, 2023, the $9.5 million, or 15.4%, decrease to approximately $52.1 million in revenue in the RU Segment was primarily due to a 10.0% decrease in total student enrollment driven by a 26.0% decrease in nursing enrollment as compared to the prior year period, partially offset by tuition increases in certain programs implemented in January 2023. The RU Segment loss from operations before interest and income taxes was $10.6 million for the three months ended September 30, 2023, compared to a loss from operations of $7.9 million in the prior year period. For the nine months ended September 30, 2023, the $31.0 million, or 16.1%, decrease to approximately $161.5 million in revenue in the RU Segment was primarily due to a 11.5% decrease in total student enrollment driven by a 22.2% decrease in nursing enrollment, partially offset by tuition increases in certain programs which took effect in January 2023, as compared to 39 the same period in 2022. The RU Segment loss from operations before interest and income taxes was $100.7 million for the nine months ended September 30, 2023, compared to a loss from operations of $153.6 million for the nine months ended September 30, 2022. We believe this decline in total nursing enrollment was caused, in part, by changes in nursing operations management and caps on nursing student enrollment at certain RU campuses. HCN Segment For the three months ended September 30, 2023, the $2.3 million, or 20.4% increase to approximately $13.7 million in revenue in our HCN Segment was primarily due to year-over-year increase in total student enrollment, as well as a 5% tuition increase implemented during the second quarter. Total student enrollment increased 17.0% to approximately 2,800 students as compared to the same period in 2022. The loss from operations before interest and income taxes was $0.6 million during the three months ended September 30, 2023, compared to a loss from operations before interest and income taxes of $1.4 million in the same period in 2022, a decrease of $0.8 million. For the nine months ended September 30, 2023, the $6.7 million, or 19.5% increase to approximately $41.1 million in revenue in our HCN Segment was primarily due to year-over-year increases in total student enrollment. Total student enrollment increased 16.4%, as compared to the same period in 2022. The loss from operations before interest and income taxes was $2.2 million during the nine months ended September 30, 2023, compared to a loss from operations before interest and income taxes of $3.0 million in the same period in 2022, a decrease of $0.8 million. We believe that the increase in total student enrollment is primarily due to the opening of new campuses, including the Detroit, Michigan campus, which opened in October 2022. Liquidity and Capital Resources Liquidity Cash and cash equivalents were $155.2 million and $129.5 million at September 30, 2023 and December 31, 2022, respectively, representing an increase of $25.7 million, or 19.9%. The increase in cash was primarily due to payments received by APUS from the Army, which totaled approximately $51.3 million during the nine months ended September 30, 2023, of which approximately $18.1 million in payments related to periods prior to 2023, 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. 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 and other federal educational assistance funds, as calculated under ED’s regulations. Payments from the Army that were expected in 2021 and 2022 were delayed and have been received in 2023. As of September 2023, approximately $18.1 million in these delayed Army payments had been received in 2023. These delayed Army payments, 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 are making 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. 40 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. In early 2023, we experienced an improvement in Army’s processing of current invoices and payments, while continuing to work with the Army on invoices submitted during the transition to ArmyIgnitED 2.0. Beginning in September of 2023, we began to change our approach to invoicing for TA to offset the effect of the receipt of the delayed payments from the Army. Previously, TA was typically billed by branch of service on a course-by-course basis when a student either started or completed a course. Beginning in September 2023, APUS is taking longer to bill TA, which we expect will have the effect of delaying into 2024 payments for TA that ordinarily would have been received in 2023. We anticipate that APUS’s change in billing approach will result in approximate ly $17.6 million of receivables that we would have expected to receive in 2023 will instead be received in 2024, which amount is consistent with the amount of the delayed Army payments that were received in 2023. As of September 30, 2023, approximately $13.5 million, of which $5.0 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 addition to the $17.6 million of receivables that will be received in 2024 due to the change in billing timing, we would expect to bill the Army and collect $4.3 million outstanding from courses that began in 2022 and prior, in 2024. 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 enhancements to our business capabilities, particularly in technology. 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 $9.3 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 estimate that the cost of the transition will be between approximately $1.3 million and $1.5 million for the remainder of 2023, and between approximately $2.0 million and $3.5 million in 2024. Share Repurchase Program 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. Operating Activities Net cash provided by operating activities was $48.7 million and $52.2 million for the nine months ended September 30, 2023 and 2022, respectively. The decrease in cash from operating activities was primarily due to an increase in negative cash flow from operations in our RU Segment, and changes in working capital due to the timing of receipts and payments. Accounts receivable at September 30, 2023 decreased approximately $13.3 million compared to December 31, 2022, 41 primarily as a result of improvement in Army’s processing of invoices and payments to APUS. Accounts payable, accrued liabilities, and accrued compensation and benefits at September 30, 2023 were approximately $6.2 million higher than December 31, 2022, primarily due to the timing of payment processing. Investing Activities Net cash used in investing activities was $9.4 million and $8.2 million for the nine months ended September 30, 2023 and 2022, respectively. Investing activities for the nine months ended September 30, 2023 include capital expenditures of $9.5 million compared to capital expenditures of $10.9 million for the nine months ended September 30, 2022. For the nine months ended September 30, 2023 and 2022, proceeds from the sale of real property were $0.1 million and $0.8 million, respectively. The nine months ended September 30, 2022, includes $2.0 million in cash received from the GSUSA Acquisition. Financing Activities Net cash used in financing activities was $13.6 million and $8.2 million for the nine months ended September 30, 2023 and 2022, respectively. Financing activities for the nine months ended September 30, 2023, include $4.5 million related to the payment of dividends on our preferred stock and $8.0 million used for the repurchase of our common shares, and $1.0 million for the deemed repurchase of our common stock to satisfy minimum tax-withholding requirements in connection with the vesting of restricted stock grants. For the nine months ended September 30, 2022, the cash used in financing activities was primarily due to $1.5 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 $6.6 million in principal payments on our long-term debt. Due to debt prepayments made in December 2022, no 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 $9.3 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.