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, 2023, 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 “project,” “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 and financial responsibility standards, as well as state law and regulations and accrediting agency requirements, and the expected impacts of any non-compliance; • actions by the U.S. Department of Education, or ED, institutional and programmatic accreditors, and state authorizing agencies and expectations regarding the effects of those actions; • 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, 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; • the branding and marketing of our institutions; • our ability to leverage our investments in support of our initiatives, students, and institutions; • our maintenance and expansion of our relationships and partnerships and the development of new relationships and partnerships; • actions by the Department of Defense, or DoD, or branches of the United States Armed Forces, including actions related to the disruption and suspension of DoD tuition assistance, or TA, programs and ArmyIgnitED, and expectations regarding the effects of those actions; • 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 and their benefits; • challenges related to insourcing and outsourcing information technology services to our operations and third-party vendors, respectively; • our ability to manage and influence our bad debt expense; 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; 23 • 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; • adverse effects of changes our institutions make to improve the student experience and enhance each institutions 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 ED negotiated rulemakings; • our failure to meet applicable National Council Licensure Examination, or 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 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 after the date of this Quarterly Report, whether as a result of new information, future events, or otherwise, except as required by law. Overview Background We are a provider of online and campus-based postsecondary education to approximately 106,400 students, and career learning to approximately 25,000 individuals, through four subsidiary institutions, American Public University System, or APUS, Rasmussen University, or RU, Hondros College of Nursing, or HCN, and Graduate School USA, or GSUSA. Our subsidiary institutions offer purpose-built education programs and career learning designed to prepare individuals for productive contributions to their professions and society, and to offer opportunities designed to advance students in their current professions or to help them prepare for their next career. Our subsidiary institutions are licensed or otherwise authorized by state authorities to offer postsecondary education programs to the extent the institutions believe such licenses or authorizations are required, and APUS, RU, and HCN are certified by ED to participate in Title IV programs. 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 University, or APU. As of March 31, 2024, 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 approximately 13,500 students at 21 campuses in six states and online. As of March 31, 2024, on-ground enrollment was 6,300, of which approximately 5,500 students were pursuing nursing 24 degrees at RU, approximately 90% of whom were enrolled in RU’s pre-licensure nursing degree programs. At March 31, 2024, online enrollment was approximately 7,200 students. • National Education Seminars, Inc., referred to herein as Hondros College of Nursing, or HCN, provides nursing education to approximately 3,300 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. GSUSA operational activities are presented within Corporate and Other. In April 2024, APU announced its intention to expand its reach to become a global digital university that integrates emerging technologies and enhanced teaching and learning opportunities for faculty and students, adopted a new visual identity, a new tagline: Digital Learning for Real Life TM , an expanded global focus, and a suite of digital student services. Tuition Increases Providing affordable degree and certificate programs is an important element of our competitive strategy. APUS implemented modest tuition and fee increases for non-military and veteran students in the second and third quarters of 2023. In April 2024, APUS implemented an additional modest tuition increase to master’s level students across all categories, including military, non-military and veteran students. Even after 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 modest tuition increases effective in the first quarter of 2023 and 2024 for select programs, and HCN implemented a 5% increase in tuition and fees effective in the second quarter of 2023 across all programs. At RU and HCN, the tuition increases are intended to reflect adjustments to be consistent with the local campus markets. Even inclusive of these increases, RU and HCN’s tuition and fees are designed to be affordable and competitive when compared to the tuition and fees at similar institutions offering the same level of flexibility, accessibility, and student experience. Regulatory and Legislative Activity American Public University System A team of Higher Learning Commission, or HLC, peer reviewers conducted a focused visit at APUS in March 2024, after HLC raised concerns regarding compliance with standards related to program development oversight and program assessment processes as a result of course availability in one program. The results of the focused visit will be sent to the HLCs Institutional Action Council, or IAC, for review and action. The next meeting of the IAC is scheduled for June 2024, at which time the focused visit results may or may not be on the agenda. Rasmussen University In March 2024, the Florida Board of Nursing, or FBN, placed RU’s ADN programs at its Tampa/Brandon, and Ocala, Florida, campuses, along with the Ocala campus satellite program at North Orlando, Florida, on probationary status due to two consecutive years of NCLEX pass rates not meeting the state standard. If a program’s pass rate continues to not satisfy the required standard in any of the two years following the program’s placement on probationary status, but the program shows adequate progress toward the required pass rate, FBN may allow the program to continue on probation for one additional year. If the program fails to show adequate progress toward the required pass rate, FBN may choose to disapprove the program. In February 2023, FBN placed RU’s ADN program at its Fort Myers, Florida, campus on probation due to two consecutive years of NCLEX pass rates not meeting the state standard. In February 2024, the second year on probationary status, FBN notified RU that the program will be allowed to continue on probation for one additional year. If the program fails to achieve the required NCLEX pass rate at the end of this additional one-year period of probation, but the program continues to show adequate progress toward the required pass rate, FBN may allow the program to continue on probation for one additional year. If the program fails to show adequate progress toward the required pass rate, FBN may choose to disapprove the program. As of March 31, 2024, enrollment in these Florida programs represents approximately 10% of RU’s current total enrollment. 25 Gainful Employment Pursuant to new gainful employment, or GE, regulations, that will take effect July 1, 2024, ED will determine the Title IV eligibility of GE programs based in part on satisfaction of specified performance levels of two new measures, as discussed in more detail in our Annual Report. Institutions will generally be required to report certain information used to calculate these measures to ED by July 31 of each year. However, on March 29, 2024, ED announced that the reporting deadline for 2024 had been extended from July 31, 2024, to October 1, 2024. 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, 2024, increased to $154.4 million from $149.7 million, or by 3.2%, compared to the prior year period. Our net income for the three months ended March 31, 2024, was $0.5 million, compared to a net loss of $5.7 million in the prior year period, an increase of $6.3 million. The results for the three months ended March 31, 2024, include a non-cash impairment loss on investments of $3.3 million in Corporate and Other on one of our cost method equity investments, due to the investee entering into a new convertible debt agreement which resulted in the conversion of the Company’s preferred stock holdings in the investee into common shares, and the dilution of the Company’s ownership percentage, a $2.9 million pre-tax loss on leases in our RU Segment, and $1.9 million in information technology transition service costs. The results in the prior year period include $2.4 million in transition service fees related to the termination of a marketing contract. Our operating margins improved to 3.4% for the three months ended March 31, 2024, compared to negative 3.7%, in the prior year period. APUS net course registrations for the three months ended March 31, 2024, increased to approximately 99,000 from approximately 96,300, an increase of 2,700, or 2.8%, compared to the prior year period. APUS Segment revenue for the three months ended March 31, 2024, increased to $80.7 million from $74.0 million, or by 9.0%, compared to the prior year period. The revenue increase for the period was greater than the increase in net course registrations due to the tuition and fee increases in the second and third quarters of 2023. For the three months ended March 31, 2024, APUS Segment operating margins increased to 28.6% from 23.1% in the prior year period. RU total enrollment for the three months ended March 31, 2024, decreased to approximately 13,500 from approximately 14,300, a decrease of 800, or 5.6%, compared to the prior year period. RU Segment revenue for the three months ended March 31, 2024, decreased to $53.1 million from $57.5 million, or by 7.5%, compared to the prior year period. 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. For the three months ended March 31, 2024, RU Segment operating margins improved to negative 16.9% from negative 22.4% in the prior year period. HCN total enrollment for the three months ended March 31, 2024, increased to approximately 3,300 from approximately 2,700, an increase of 600, or 20.5%, compared to the prior year period. HCN Segment revenue for the three months ended March 31, 2024, increased to $16.4 million from $13.1 million, or by 25.2%, compared to the prior year period. The revenue increase was greater than the enrollment increase due to tuition increases in the second quarter of 2023. For the three months ended March 31, 2024, HCN Segment operating margins improved to negative 1.8% from negative 9.9% 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, and the fair value assigned to identifiable intangible assets. 26 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 later recorded non-cash impairment charges 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. No goodwill is recorded 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 later recorded non-cash impairment charges reducing the carrying value of RU indefinite-lived identified intangible assets to $ 24.5 million. There were no indefinite useful life intangible assets identified as a result of the acquisition of GSUSA. 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. 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. Impairment testing consists of an optional qualitative assessment as well as a quantitative test. When performing a qualitative assessment, 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 two different valuation approaches. They are: (1) discounted cash flow and (2) guideline public company. Under the discounted cash flow method, fair value is 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 are used to determine the fair value of RU and HCN. Values derived under the two 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. At October 31, 2023, we completed our annual assessment of goodwill and indefinite-lived intangibles for our RU and HCN Segments. The annual assessment concluded that the fair value of our RU and HCN Segments exceeded their carrying values by approximately $32.4 million, or 25%, and $7.4 million, or 21%, respectively. Significant assumptions in the RU Segment forecast used in the discounted cash flow valuation model include the recovery in RU enrollment and the impact of cost containment measures. Significant assumptions in the HCN Segment forecast used in the discounted cash flow valuation model include the addition of a medical assistant program in all Ohio campuses, a future campus opening and future tuition increases. These assumptions could be negatively affected by any of the following including, 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 plan. In addition, the annual assessment determined the fair value of RU and HCN Segment indefinite-lived intangible assets were greater than their carrying value, and therefore, no impairment charge was recorded. During the three months ended March 31, 2024, and 2023, we completed a qualitative assessment of RU and HCN Segments goodwill and indefinite-lived intangible assets. As part of the assessment, 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 27 outlook for nursing education. After completing this qualitative assessment, we concluded it was more likely than not that the fair value of the RU and HCN Segments were greater than the carrying values, and therefore no quantitative impairment test and no impairment charge was necessary. 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, 2024, compared to the three months ended March 31, 2023. 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, 2024, increased to approximately 99,000 from approximately 96,300, an increase of 2,700, or 2.8%, compared to the prior year period. The increase in net course registrations during the three months ended March 31, 2024, was primarily due to an increase in registrations by military students utilizing TA and military-affiliated students utilizing VA. APUS Segment operating margins increased to 28.6% for the three months ended March 31, 2024, from 23.1% in the prior year period. The increase in the operating margin was primarily due to increases in revenue during the three months ended March 31, 2024, and decreases in advertising costs and payment processing fees, partially offset by increases in employee compensation costs, information technology transition service costs, and bad debt expense as compared to the prior year period. RU total enrollment for the three months ended March 31, 2024, was 13,500 compared to 14,300 for the three months ended March 31, 2023, a decrease of 800, or 5.6%, driven by a 11.3% decrease in on-ground enrollment. We believe this decline in enrollment, which reflects the year-over-year decline in on-ground enrollment, with online enrollment remaining flat, can be attributed to several factors, including caps on nursing student enrollment and low NCLEX pass rates at certain RU campuses, and the overall environment in which RU operates, including as a result of the effects of regulatory matters and competition. RU Segment operating margin improved to negative 16.9% for the three months ended March 31, 2024 from negative 22.4% in the prior year period. The improvement in the operating margin was primarily due to decreases in advertising and marketing support costs primarily related to the termination of the Collegis LLC, or Collegis, marketing contract during the three months ended March 31, 2023, and decreases in depreciation and amortization expenses, and employee compensation costs during the three months ended March 31, 2024, partially offset by the impact of lower revenue and the loss on leases in the current year period. HCN total enrollment for the three months ended March 31, 2024, increased to approximately 3,300 from approximately 2,700, an increase of 600, or 20.5%, compared to the prior year period. The increase in total student enrollment is primarily due to the opening of the Detroit, Michigan campus in October 2022. For the three months ended March 31, 2024, HCN Segment operating margin improved to negative 1.8% from negative 9.9% in the prior year period. The improvement in the operating margin is primarily due to an increase in revenue, partially offset by increases in employee compensation costs, classroom costs, and bad debt expense, 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. 28 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, 2024 2023 (Unaudited) Revenue 100.0 % 100.0 % Costs and expenses: Instructional costs and services 46.9 49.4 Selling and promotional 21.0 26.7 General and administrative 23.5 22.4 Depreciation and amortization 3.3 5.2 Loss on leases 1.9 — Total costs and expenses 96.6 103.7 Income (loss) from operations before interest and income taxes 3.4 (3.7) Interest expense, net (0.1) (1.2) Income (loss) from operations before income taxes 3.3 (4.9) Income tax expense (benefit) 0.8 (0.9) Equity investment loss (2.2) — Net income (loss) 0.3 (4.0) Preferred Stock Dividend 1.0 1.0 Net loss available to common shareholders (0.7) % (5.0) % Three Months Ended March 31, 2024, Compared to Three Months Ended March 31, 2023 Revenue. Our consolidated revenue for the three months ended March 31, 2024, was $154.4 million, an increase of $4.7 million, or 3.2%, compared to $149.7 million for the three months ended March 31, 2023. The increase in revenue was primarily due to a $6.7 million, or 9.0% increase in revenue in our APUS Segment, a $3.3 million, or 25.2%, increase in revenue in our HCN Segment, partially offset by $4.3 million, or 7.5%, decrease in revenue in our RU Segment, and a $0.9 million, or 17.2%, decrease in GSUSA revenue included in Corporate and Other. The APUS Segment revenue increase was primarily due to a 2.8% increase in net course registrations and tuition and fee increases implemented in the second and third quarters of 2023, as compared to the prior year period. The HCN Segment revenue increase was primarily due to a 20.5% increase in total student enrollment, as well as a 5% tuition increase implemented during the second quarter of 2023, compared to the prior year period. The RU Segment revenue decrease was primarily due to a 5.6% decrease in total student enrollment driven by a 11.3% decrease in on-ground enrollment, with online enrollment remaining flat, as compared to the prior year period. Costs and expenses. Costs and expenses for the three months ended March 31, 2024, were $149.3 million, a decrease of $5.8 million, or 3.7%, compared to $155.1 million for the three months ended March 31, 2023. Costs and expenses for the three months ended March 31, 2024, include a $2.9 million pre-tax loss on leases in our RU Segment and $1.9 million in information technology transition service costs. Costs and expenses for the three months ended March 31, 2023, include a pre-tax charge of $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. Other decreases in costs and expenses for the three months ended March 31, 2024, as compared to the prior year period were due primarily to decreases in advertising costs, depreciation and amortization expenses, marketing support costs, and other technology costs, partially offset by increases in employee compensation costs. Costs and expenses as a percentage of revenue decreased to 96.6% for the three months ended March 31, 2024, from 103.7% for the three months ended March 31, 2023. Instructional costs and services expenses. Our instructional costs and services expenses for the three months ended March 31, 2024, were $72.4 million, a decrease of $1.5 million, or 2.0%, compared to $73.9 million for the three months ended March 31, 2023. The decrease in instructional costs and services expenses was primarily due to decreases in employee 29 compensation costs in our RU Segment due to lower revenue, and in Corporate and Other, decreases in technology costs and professional fees in our RU Segment, and payment processing costs in our APUS Segment, partially offset by increases in employee compensation costs in our APUS and HCN Segments due to an increase in registrations at APUS and enrollments at HCN. Instructional costs and services expenses as a percentage of revenue decreased to 46.9% for the three months ended March 31, 2024, from 49.4% for the three months ended March 31, 2023. Selling and promotional expenses. Our selling and promotional expenses for the three months ended March 31, 2024, were $32.5 million, a decrease of $7.5 million, or 18.7%, compared to $39.9 million for the three months ended March 31, 2023. 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. Other decreases in selling and promotional expenses were primarily due to decreases in advertising costs in all our segments, a decrease in marketing support costs in our RU Segment and Corporate and Other and decreases in employee compensation costs in our RU Segment. Selling and promotional expenses as a percentage of revenue decreased to 21.0% for the three months ended March 31, 2024, from 26.7% for the three months ended March 31, 2023. General and administrative expenses. Our general and administrative expenses for the three months ended March 31, 2024, were $36.3 million, an increase of $2.8 million, or 8.3%, compared to $33.5 million for the three months ended March 31, 2023. General and administrative expenses for the three months ended March 31, 2024, include $1.9 million in information technology transition service costs. Other increases in general and administrative expenses were due to increases in employee compensation costs in our RU and HCN Segments and professional fees in Corporate and Other, partially offset by a decrease in employee compensation costs in our APUS Segment and Corporate and Other. Consolidated bad debt expense for the three months ended March 31, 2024, was $4.2 million, or 2.7% of revenue, compared to $3.9 million, or 2.6% of revenue in the prior year period. General and administrative expenses as a percentage of revenue increased to 23.5% for the three months ended March 31, 2024, from 22.4% for the three months ended March 31, 2023. 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. Loss on disposals of long-lived assets. The loss on disposal of long-lived assets was $28,000 for the three months ended March 31, 2024, compared to a loss of $1,000 for the three months ended March 31, 2023. Depreciation and amortization expenses. Depreciation and amortization expenses were $5.1 million for three months ended March 31, 2024, compared to $7.8 million in the prior year period, a decrease of $2.6 million primarily related to the full amortization of certain definite lived intangible assets in our RU Segment in 2023. Depreciation and amortization expenses as a percentage of revenue was 3.3% and 5.2% for the three months ended March 31, 2024, and 2023, respectively. Loss on leases. Loss on leases was $2.9 million for the three months ended March 31, 2024, for leases in our RU Segment. There were no losses on leases in the prior year period. Stock-based compensation expenses. Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses were $1.9 million and $2.2 million for the three months ended March 31, 2024, and 2023, respectively. Stock-based compensation costs include accelerated expense for retirement-eligible employees and performance stock unit incentive costs. Interest expense, net. Interest expense, net of interest and other income, was $0.1 million and $1.8 million for the three months ended March 31, 2024, and 2023, respectively. The decrease in net interest expense was primarily due to the increase in interest income earned in the three months ended March 31, 2024, compared to the prior year period. Income tax expense (benefit). We recognized income tax expense of $1.2 million for the three months ended March 31, 2024, compared to an income tax benefit of $1.4 million in the prior year period, respectively, or an effective tax rate of 70.2% in 2024, compared to an effective tax rate benefit of 19.8% in 2023. The increase in the effective tax rate in 2024 is primarily due to the $3.3 million equity investment loss not deductible for tax purposes, and an increase in non-deductible stock compensation expense in relation to taxable income in the three months ended March 31, 2024 as compared to the prior year period. Equity investment loss. Equity investment loss was $3.3 million for the three months ended March 31, 2024, compared to equity investment loss of $5,000 in 2023. The increase is due to a $3.3 million non-cash investment loss on a cost method investment due to the investee entering into a new convertible debt agreement which resulted in the conversion of the Company’s preferred stock holdings in the investee into common shares, and the dilution of the Company’s ownership percentage. 30 Net income (loss). Our net income was $0.5 million, compared to a net loss of $5.7 million, for the three months ended March 31, 2024, and 2023, respectively, an increase of $6.3 million. This increase was related to the factors discussed above. Preferred stock dividends. Preferred stock dividends were $1.5 million for both the three months ended March 31, 2024, and 2023. Net loss available to common stockholders. The net loss available to common stockholders for the three months ended March 31, 2024, was $1.0 million, compared to net loss available to common stockholders of $7.2 million in the prior year, an improvement of $6.2 million. This improvement in net loss available to common shareholders 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, 2024 2023 (Unaudited) Revenue: APUS Segment $ 80,656 $ 73,978 RU Segment 53,135 57,467 HCN Segment 16,447 13,140 Corporate and Other 4,194 5,104 Total revenue $ 154,432 $ 149,689 Income (loss) from operations before interest and income taxes: APUS Segment $ 23,087 $ 17,074 RU Segment (8,966) (12,864) HCN Segment (304) (1,303) Corporate and Other (8,635) (8,277) Total income (loss) from operations before interest and income taxes $ 5,182 $ (5,370) APUS Segment For the three months ended March 31, 2024, the $6.7 million, or 9.0%, increase to approximately $80.7 million in revenue in our APUS Segment was primarily attributable to higher net course registrations, and tuition and fee increases in 2023. Net course registrations increased 2.8% to approximately 99,000 from approximately 96,300 in the prior year period, was primarily due to an increase in registrations by military students utilizing TA and military-affiliated students utilizing VA. Income from operations before interest and income taxes increased to $23.1 million, or by 35.2%, during the three months ended March 31, 2024, from $17.1 million in the prior year period, an increase of $6.0 million, as a result of the increase in revenue, partially offset by an increase in expenses as compared to the same period in 2023. RU Segment For the three months ended March 31, 2024, the $4.3 million, or 7.5%, decrease to approximately $53.1 million in revenue in the RU Segment was primarily due to a 5.6% decrease in total student enrollment, driven by a 11.3% decrease in on-ground enrollment, with online enrollment remaining flat. We believe this decline in enrollment, which reflects year-over-year declines in total nursing enrollment, can be attributed to several factors, including caps on nursing student enrollment and low NCLEX pass rates at certain RU campuses, and the overall environment in which RU operates, including as a result of the effects of regulatory matters and competition. The loss from operations before interest and income taxes was $9.0 million and $12.9 million for the three months ended March 31, 2024, and 2023, respectively, an improvement of $3.9 million in the current year period. 31 HCN Segment For the three months ended March 31, 2024, the $3.3 million, or 25.2% increase to approximately $16.4 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 of 2023. Total student enrollment increased 20.5% to approximately 3,300 students as compared to the same period in 2023. The increase in total student enrollment is primarily due to the opening of the Detroit, Michigan campus in October 2022. The loss from operations before interest and income taxes was $0.3 million and $1.3 million during the three months ended March 31, 2024, and 2023, respectively, an improvement of $1.0 million in the current year period. Liquidity and Capital Resources Liquidity Cash and cash equivalents were $153.2 million and $144.3 million at March 31, 2024, and December 31, 2023, respectively, representing an increase of $8.9 million, or 6.2%. The increase in cash was primarily due to higher revenue and operating income at APUS, and the receipt of fourth quarter 2023 APUS TA billing in the first quarter of 2024, partially offset by the change in the APUS TA billing policy effective January 1, 2024, higher capital expenditures, and an increase in cash paid for repurchases of common stock. 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 invoicing the applicable course or term. Effective January 1, 2024, APUS revised its billing policy for students utilizing TA, which previously ranged from two weeks to five weeks after course start date to nine weeks after the course start date. After the change in TA billing policy, these funds are generally received within 90 days of the start of the course to which they relate. Another significant source of revenue is derived 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. ED evaluates institutions on an annual basis for compliance with specified financial responsibility standards, including a complex formula based on line items from the institution’s audited financial statements. Generally, an institution’s financial ratios must yield a composite score of at least 1.5 for the institution to be deemed financially responsible. A composite score between 1.0 and 1.4 is considered by ED to be in the “zone.” An institution in the “zone” may still participate in the Title IV programs as a financially responsible institution through the “zone alternative” or the “financial protection alternative” as set forth in ED regulations. On March 4, 2024, ED notified us that in calculating our composite score for the fiscal year-ended December 31, 2022, it excluded our deferred tax assets from its calculation of our assets. As a result, ED calculated that we had a 2022 consolidated composite score of 1.1 and our institutions were therefore in the “zone.” We disagree with ED’s calculation and conclusion and submitted a rebuttal to ED on March 18, 2024. On April 10, 2024, ED issued a response to our rebuttal, indicating that ED does not agree with our position and reiterating that our institutions must establish financial responsibility on an alternative basis. On April 17, 2024, we timely informed ED that although we continue to disagree with its composite score methodology with respect to deferred tax assets, we select the “zone alternative” as the alternative basis on which we establish financial responsibility. Under the zone alternative, we are required to: (i) make Title IV disbursements to eligible students and parents under the heightened cash monitoring payment method, or HCM1, pursuant to which we would be required to first make disbursements to eligible students and parents and pay any credit balances before we request or receive funds from ED for the amount of those disbursements; (ii) notify ED of certain events, such as an adverse action taken by any of our institution’s accreditors or state authorizing agencies; (iii) provide regular reports to ED relating to our institution’s current operations and future plans; and (iv) require our auditors to express an opinion on our compliance with the requirements under the zone alternative. While RU already complies with HCM1, if HCM1 had applied to APUS and HCN in 2023, we estimate that we would have received approximately $6.2 million from ED at a point in time after we had disbursed the related funds. Our Credit Agreement and the purchase agreement for the shares of Series A Senior Preferred Stock, or the Purchase Agreement, contain financial covenants that require us to maintain a Total Net Leverage Ratio (as defined in each respective agreement) of no greater than 2.00 to 1.00 and 0.75 to 1.00, respectively, subject to certain exceptions. Changes in TA invoicing in the fourth quarter of 2023 added to our accounts receivable as of December 31, 2023 as compared to prior practice and policy, and resulted in an increase to our leverage ratio as of December 31, 2023, under our Credit Agreement and the Purchase Agreement. As of March 31, 2024, the ratio decreased due to results, including a decrease in accounts receivable, 32 primarily related to our APUS Segment, and an increase in our cash balance. Our Total Net Leverage Ratio, under the Credit Agreement, at March 31, 2024, and December 31, 2023, was 0.33 and 0.51, respectively. Capital expenditures could be higher in the future as a result of, among other things, additional expenditures for technology or other business capabilities, the maintenance of existing campuses at RU and HCN, the opening of new campuses at RU and 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. 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. On April 1, 2024, as part of our technology transformation program, we transitioned to a managed service provider for certain services including service desk, end user support, and network support and operations. The second phase of the project will include the insourcing of technology from Collegis for our RU Segment and is expected to be completed this summer. For the three months ended March 31, 2024, we incurred approximately $1.9 million in information technology transition service costs. We estimate that the remaining cost of the technology transformation will be approximately $1.0 million for the remainder of 2024. Share Repurchase Program In January 2024, we repurchased 251,146 shares of common stock for an aggregate purchase price of $2.8 million. Effective February 1, 2024, the Company ceased purchases under this purchase authorization. Operating Activities Net cash provided by operating activities was $20.7 million and $12.8 million for the three months ended March 31, 2024, and 2023, respectively. The increase in cash from operating activities was primarily due to improved financial performance and changes in working capital due to the timing of receipts and payments. During the three months ended March 31, 2024, due to a change in the approach to invoicing TA in the fourth quarter of 2023, APUS collected approximately $21.4 million from TA related to periods prior to 2024. Accounts receivable at March 31, 2024, decreased approximately $6.4 million compared to December 31, 2023, primarily related to our APUS Segment. Accounts payable, accrued liabilities, and accrued compensation and benefits at March 31, 2024, were approximately $2.6 million higher than December 31, 2023, primarily due to the timing of payment processing. Investing Activities Net cash used in investing activities was $6.2 million and $3.2 million for the three months ended March 31, 2024, and 2023, respectively. For the three months ended March 31, 2024, capital expenditures were $6.2 million compared to capital expenditures of $3.2 million for the three months ended March 31, 2023. The increase in capital expenditures for the three months ended March 31, 2024, was primarily due campus relocations at our HCN and RU Segments and an increase in information technology capital expenditures. Financing Activities Net cash used in financing activities was $5.7 million and $2.8 million for the three months ended March 31, 2024, and 2023, respectively. The increase in cash used in financial activities is due to an increase in cash used to repurchase our common stock. For the three months ended March 31, 2024, we repurchased 251,146 shares of common stock for an aggregate purchase price of $2.8 million compared to 75,000 shares for an aggregate purchase price of $0.4 million during the three months ended March 31, 2023. 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, at which time we will complete the transition of information technology services currently provided by Collegis to our internal operations team and to one or more third-party vendors. The total minimum expenses for information technology services through September 30, 2024, is approximately $4.7 million. 33