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, 2024, 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 efforts and 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 our efforts to comply and 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; • the impact, timing, projected benefits, and terms of the planned combination of American Public University System, or APUS, Rasmussen University, or RU, and Hondros College of Nursing, or HCN, into one consolidated institution that will be a system encompassing all APUS, RU, and HCN programs, campuses, and operations, or the Combination; • legislative and regulatory changes, shifts in regulatory priorities, restrictions on the function, operations, and budgets of federal agencies, including ED, as a result of U.S. presidential and administration transitions and presidential directives regarding governmental actions; • 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 and remain competitive; • 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 U.S. Armed Forces, including actions related to the participating in DoD tuition assistance, or TA, programs, our responses to those actions, and expectations regarding the effects of those actions and responses; • federal appropriations and other budgetary matters, including government shutdowns; • changes in enrollment in postsecondary degree-granting institutions and workforce needs; • our ability to recognize the intended benefits of our cost savings and revenue-generating efforts; • the expected impact on our students and our business from campus closures and consolidations; • our plans with respect to potential strategic alternatives for Graduate School USA, or GSUSA; • our financial performance generally; and • our expectations and estimates regarding tax and accounting matters. 22 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: • potential changes to the ED’s, and other federal government agencies’, structure, policies, priorities, and oversight, including as a result of federal elections and the Trump administration’s stated intention to dismantle ED; • 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; • 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; • 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, acquisitions, divestitures, and other strategic transactions, including, as applicable, integration challenges, business disruption, dilution of stockholder value, financial charges, 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 23,000 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 the ED to participate in Title IV programs. Our Institutions Our wholly owned operating subsidiary institutions include the following: 23 • American Public University System, Inc., referred to herein as APUS, provides online postsecondary education to approximately 88,300 adult learners, directed primarily at the needs of the military, veterans, extended military families, and other public service and service-minded communities through two brands: American Military University, or AMU, and American Public University, or APU. As of March 31, 2025, approximately 64% 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 14,500 students at 20 campuses in six states and online. As of March 31, 2025, on-ground enrollment was 6,500, of which approximately 5,600 students were pursuing nursing degrees at RU, approximately 90% of whom were enrolled in RU’s pre-licensure nursing degree programs. At March 31, 2025, online enrollment was approximately 8,000 students. • National Education Seminars, Inc., referred to herein as Hondros College of Nursing, or HCN, provides nursing education to approximately 3,600 students at eight campuses in three states. HCN’s students are enrolled in its pre-licensure nursing degree programs or its Medical Assisting Diploma program. • 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. The Planned Combination of APUS, RU, and HCN On January 28, 2025, we announced the planned combination of APUS, RU, and HCN (the “Combination”), which will result in a combined institution named American Public University System comprised of two divisions tentatively named (i) APUS Global, comprised of AMU and APU, and (ii) Rasmussen, comprised of RU’s campus-based and online nursing programs, RU’s healthcare programs, HCN’s campus-based nursing and healthcare programs, and RU’s non-healthcare programs, with final division names to be determined closer to closing of the Combination. The Combination constitutes a Change of Control, Structure or Organization pursuant to HLC policy and, accordingly, we must receive HLC approval prior to effectuating the Combination. APUS and RU have jointly submitted an application for Change of Control, Structure or Organization. For HLC purposes, APUS will be the surviving institution, and the application seeks approval for the Combination and the expansion of APUS’s HLC accreditation to include the RU and HCN programs and locations. We anticipate completing the Combination in the third quarter of 2025 subject to obtaining required approvals and ED taking related actions. HLC conducted a site visit in March 2025 related to the joint application and is expected to complete its review of the joint application in June 2025. In May 2025, APUS and RU received the site visit report, and HLC has confirmed that the application for Change of Structure will be placed on the agenda for HLC’s June 2025 meeting. Regulatory and Legislative Activity Rasmussen University The Florida legislature passed legislation in May 2025 that will subject RU nursing programs to additional regulatory scrutiny by the Florida Board of Nursing, or FBN, and the Florida Department of Health, or FDH. The legislation, which will take effect July 1, 2025, unless vetoed by Florida’s governor, is expected to lead to increased challenges in hiring and retaining qualified nursing program directors and increased expenses related to compliance with new requirements, such as those related to standardized admissions criteria, exit examinations, remedial programs for students, and tuition and fees reimbursement to students who fail the NCLEX if RU’s pass rate is less than 30%. In addition, the legislation shortens the period before a program will be placed on probation due to low NCLEX scores and shortens the length of time a program can spend on probation, and it allows FBN to impose disciplinary remedies on an approved program against which an adverse action has been taken by another regulatory jurisdiction in the United States. The Florida ADN programs and several RU nursing programs in other states have previously been, and may in the future be, subject to disciplinary actions by state regulatory bodies for failure to meet applicable NCLEX pass rates or other requirements including disciplinary actions that could be deemed adverse actions by FBN for purposes of the legislation’s requirements. Failure to comply with the new legislation and any adverse action taken as a result could adversely impact our business, operations, financial results, and reputation, including RU’s ability to expand or operate in Florida. See the “Risk Factors” section of this Quarterly Report below for additional information. Hondros College of Nursing 24 ABHES may withdraw accreditation if it determines that an institution fails to demonstrate at least a 70% retention rate for each program. Alternatively, it may provide an opportunity for a program not meeting ABHES’ outcomes thresholds to come into compliance within a specified time period, and may extend such period if a program demonstrates improvement or for other good cause. For the reporting year ended June 30, 2024, HCN’s Cleveland and Dayton Diploma in Practical Nursing, or PN, programs, and the Akron Associate Degree in Nursing, or ADN, program were below the 70% benchmark for retention. As a result, ABHES placed the Cleveland and Dayton PN programs and Akron ADN program on outcomes reporting status and required HCN to submit reports for each of these programs demonstrating their retention rate through the first three quarters of the 2024-2025 reporting year by May 2025. These three programs have met the 70% benchmark for retention through the first three quarters of the 2024-2025 reporting year. As a result, we expect the ABHES Commission to vote to remove retention reporting requirements for all affected HCN programs at its July 2025 meeting. Graduate School USA GSUSA provides contract training to federal government agency customers and through direct enrollment by federal, state, and municipal government employees, contractors, and non-government employees. Changing priorities and policies under the Trump administration, including reductions in force, or RIFS, at government agencies, and including other actions taken by the Department of Government Efficiency, or DOGE, have resulted in significant uncertainty relating to the provision of career learning and contract training at federal government agencies, including whether they will remain a priority for our federal government agency customers. These changes have begun to adversely impact, and may continue to adversely impact, GSUSA’s business, and, as a result, we are exploring a range of paths to stabilize the business and considering alternatives for GSUSA. Any divestiture of GSUSA or other significant transaction, whether by sale or otherwise, may require an investment of time and resources, may distract management from other responsibilities, and may result in losses on disposition or continued financial involvement in GSUSA. Tuition Increases Providing affordable degree and certificate programs is an important element of our competitive strategy. In April 2024, APUS implemented a tuition increase to master’s level students across all categories, including military, non-military and veteran students, and in September 2024, APUS returned the military rate for master’s level students to the $250 per credit hour rate in effect prior to the April 2024 tuition increase. We believe that APUS’s tuition and fees remain lower than the average in-state cost at public universities. RU implemented modest tuition increases for all students in select programs in the first quarter of 2024, for new students in select programs in August 2024, and for returning students in select programs in October 2024. In the third quarter of 2025, RU plans to implement a tuition increase, similar to the increases implemented in the third and fourth quarters of 2024. The tuition and fee increases at RU are intended to reflect adjustments to be consistent with the local campus markets. Even with these increases, RU 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. 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, 2025, increased to $164.6 million from $154.4 million, or by 6.6%, as compared to the prior year period. Our net income for the three months ended March 31, 2025, was $8.9 million, compared to $0.5 million in the prior year period, an increase of $8.4 million. The results for the three months ended March 31, 2025, include a non-cash $1.5 million loss on assets held for sale in our APUS Segment, and $1.0 million in professional fees in Corporate and Other relating to the Combination, both on a pre-tax basis. The results in the prior year period include a non-cash investment loss of $3.3 million on one of our cost method equity investments in Corporate and Other, a $2.9 million pre-tax 25 loss on leases in our RU Segment, and $1.9 million in information technology transition service costs, on a pre-tax basis. Our operating margin improved to 7.4% for the three months ended March 31, 2025, compared to 3.4% in the prior year period. Excluding the loss on assets held for sale and professional fees relating to the Combination in 2025, and the loss on leases and information technology transition services costs in 2024, our operating margin was 9.0% and 6.5% for the three months ended March 31, 2025, and 2024, respectively. APUS net course registrations for the three months ended March 31, 2025, increased to approximately 102,500 from approximately 99,000, an increase of 3,500, or 3.5%, as compared to the prior year period. APUS Segment revenue for the three months ended March 31, 2025, increased to $83.9 million from $80.7 million, or by 4.1%, as 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 quarter of 2024, and the timing of course starts within the respective periods. APUS Segment operating margin increased to 28.7% for the three months ended March 31, 2025, from 28.6% in the prior year period. RU total enrollment for the three months ended March 31, 2025, increased to approximately 14,500 from approximately 13,500, an increase of 1,000, or 7.4%, as compared to the prior year period. RU Segment revenue for the three months ended March 31, 2025, increased to $59.3 million from $53.1 million, or by 11.5%, as compared to the prior year period. The revenue increase for the period was greater than enrollment for the comparable prior year period due to tuition increases in the third and fourth quarters of 2024. RU Segment operating margin improved to negative 0.1% for the three months ended March 31, 2025, from negative 16.9% in the prior year period. HCN total enrollment for the three months ended March 31, 2025, increased to approximately 3,600 from approximately 3,300, an increase of 300, or 9.6%, as compared to the prior year period. HCN Segment revenue for the three months ended March 31, 2025, increased to $17.7 million from $16.4 million, or by 7.5%, as compared to the prior year period. The revenue increase was less than enrollment increase due to higher student enrollment from community partners which is at a lower revenue per student. HCN Segment operating margin decreased to negative 4.2% for the three months ended March 31, 2025, from negative 1.8% 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. 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. We 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 included intangible assets related to trade name, accreditation, licensing, and Title IV, and affiliate agreements. We 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. 26 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. During the three months ended March 31, 2025, we completed a qualitative assessment for potential impairment of the RU and HCN Segment goodwill and indefinite-lived intangible assets. As part of the assessment, we 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 this qualitative assessment, we concluded it was more likely than not that the fair value of each of the RU and HCN Segments was greater than the respective carrying value, 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 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, 2025, compared to the three months ended March 31, 2024. 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, 2025, increased to approximately 102,500 from approximately 99,000, an increase of 3,500, or 3.5%, as compared to the prior year period. The increase in net course registrations was primarily due to an increase in registrations by military-affiliated students utilizing education benefit programs administered by the U.S. Department of Veterans Affairs, or VA, and an increase in students utilizing federal student aid from Title IV programs, partially offset by a decrease in military students utilizing TA. APUS Segment operating margin increased to 28.7% for the three months ended March 31, 2025, from 28.6% in the prior year period. The increase in operating margin for the three months ended March 31, 2025, was primarily due to the increase in revenue and a decrease in professional fees, partially offset by the loss on assets held for sale, and an increase in employee compensation costs, as compared to the prior year period. RU total enrollment for the three months ended March 31, 2025, increased to approximately 14,500 from approximately 13,500, an increase of 1,000, or 7.4%, as compared to the prior year period, driven by an 11.1% increase in online enrollment and a 3.2% increase in on-ground enrollment. RU Segment operating margin improved to negative 0.1% for the three months ended March 31, 2025, from negative 16.9% in the prior year period. The improvement in the operating margin for the three months ended March 31, 2025, was primarily due to the increase in revenue as well as decreases in loss on leases, depreciation and amortization expenses, and information technology costs, partially offset by an increase in employee compensation costs, as compared to the prior year period. 27 HCN total enrollment for the three months ended March 31, 2025, increased to approximately 3,600 from approximately 3,300, an increase of 300, or 9.6%, as compared to the prior year period. HCN Segment operating margin decreased to negative 4.2% for the three months ended March 31, 2025, from negative 1.8% in the prior year period. The decrease in the operating margin for the three months ended March 31, 2025, was primarily due to increases in employee compensation costs, classroom and course materials costs, and bad debt expense, partially offset by the increase in revenue, as compared to the prior year period. For a more detailed discussion of our results by reportable segment, refer to “Analysis of Operating Results by Reportable Segment” below. Analysis of Consolidated Statements of Income The following table sets forth statements of income data as a percentage of revenue for each of the periods indicated: Three Months Ended March 31, 2025 2024 (Unaudited) Revenue 100.0 % 100.0 % Costs and expenses: Instructional costs and services 45.5 46.9 Selling and promotional 21.4 21.0 General and administrative 22.1 23.5 Depreciation and amortization 2.4 3.3 Loss on assets held for sale 0.9 — Loss on leases — 1.9 Loss on disposals of long-lived assets 0.1 — Total costs and expenses 92.6 96.6 Income from operations before interest and income taxes 7.4 3.4 Interest expense, net (0.5) (0.1) Income from operations before income taxes 6.9 3.3 Income tax expense 1.5 0.8 Equity investment loss — (2.2) Net income 5.4 0.3 Preferred stock dividend 0.9 1.0 Net income (loss) available to common shareholders 4.5 % (0.7) % Three Months Ended March 31, 2025, Compared to Three Months Ended March 31, 2024 Revenue. Our consolidated revenue for the three months ended March 31, 2025, was $164.6 million, an increase of $10.1 million, or 6.6%, compared to $154.4 million for the three months ended March 31, 2024. The increase in revenue was primarily due to a $6.1 million, or 11.5%, increase in revenue in our RU Segment, a $3.3 million, or 4.1%, increase in revenue in our APUS Segment, and a $1.2 million, or 7.5%, increase in revenue in our HCN Segment, partially offset by a $0.5 million, or 12.5%, decrease in GSUSA revenue included in Corporate and Other. The RU Segment revenue increase was primarily due to a 7.4% increase in total student enrollment and the impact of tuition increases in the third and fourth quarters of 2024. The APUS Segment revenue increase was primarily due to a 3.5% increase in net course registrations, tuition and fee increases in the second quarter of 2024, and the timing of course starts, as compared to the prior year period. The HCN Segment revenue increase was primarily due to a 9.6% increase in total student enrollment, as compared to the prior year period. Costs and expenses. Costs and expenses for the three months ended March 31, 2025, were $152.3 million, an increase of $3.1 million, or 2.0%, compared to $149.3 million for the three months ended March 31, 2024. Costs and expenses for the three months ended March 31, 2025, included a $1.5 million loss on assets held for sale in our APUS Segment and $1.0 million in professional fees in Corporate and Other relating to the Combination, both on a pre-tax basis. Costs and expenses in the prior year period included a $2.9 million pre-tax loss on leases in our RU Segment and $1.9 million in information technology transition service costs, both on a pre-tax basis. Costs and expenses for the three months ended March 31, 2025, as compared to the prior year period, excluding the items noted above, increased $5.3 million, or 3.7%, due primarily to increases in employee 28 compensation costs and advertising costs, partially offset by a decrease in information technology costs, and depreciation and amortization expenses. Costs and expenses as a percentage of revenue decreased to 92.6% for the three months ended March 31, 2025, from 96.6% for the three months ended March 31, 2024. Instructional costs and services expenses. Our instructional costs and services expenses for the three months ended March 31, 2025, were $74.9 million, an increase of $2.5 million, or 3.5%, compared to $72.4 million for the three months ended March 31, 2024. The increase in instructional costs and services expenses was primarily due to increases in faculty compensation costs in our RU, APUS, and HCN Segments due to an increase in registrations at APUS and enrollments at RU and HCN and an increase in classroom and course materials costs in our HCN Segment, partially offset by decreases information technology costs in our RU Segment. Instructional costs and services expenses as a percentage of revenue decreased to 45.5% for the three months ended March 31, 2025, from 46.9% for the three months ended March 31, 2024. Selling and promotional expenses. Our selling and promotional expenses for the three months ended March 31, 2025, were $35.2 million, an increase of $2.7 million, or 8.5%, compared to $32.5 million for the three months ended March 31, 2024. The increase in selling and promotional expenses was primarily due to increases in employee compensation costs and advertising costs in all our segments, professional fees in our APUS Segment, and marketing support costs in our RU Segment. Selling and promotional expenses as a percentage of revenue increased to 21.4% for the three months ended March 31, 2025, from 21.0% for the three months ended March 31, 2024. General and administrative expenses. Our general and administrative expenses for the three months ended March 31, 2025, were $36.4 million, an increase of $0.1 million, or 0.4%, compared to $36.3 million for the three months ended March 31, 2024. For the three months ended March 31, 2025, general and administrative expenses included $1.0 million in professional fees relating to the Combination in Corporate and Other. Consolidated bad debt expense for the three months ended March 31, 2025, was $5.0 million, or 3.0% of revenue, compared to $4.2 million, or 2.7% of revenue in the prior year period. General and administrative expenses as a percentage of revenue decreased to 22.1% for the three months ended March 31, 2025, from 23.5% for the three months ended March 31, 2024. As we continue to evaluate enhancements to our business capabilities, we expect to incur additional costs and that our general and administrative expenses will vary from time to time. Depreciation and amortization expenses. Depreciation and amortization expenses were $4.0 million for three months ended March 31, 2025, compared to $5.1 million in the prior year period, a decrease of $1.1 million, primarily related to the full amortization of all definite lived intangible assets in our RU Segment in 2024. Depreciation and amortization expenses as a percentage of revenue was 2.4% and 3.3% for the three months ended March 31, 2025, and 2024, respectively. Loss on assets held for sale. For the three months ended March 31, 2025, the $1.5 million non-cash loss on assets held for sale is for real property in Charles Town, West Virginia in our APUS Segment. There were no losses on assets held for sale in the comparable prior year period. Loss on disposals of long-lived assets. The loss on disposal of long-lived assets was $230,000 for the three months ended March 31, 2025, compared to $28,000 for the three months ended March 31, 2024. Stock-based compensation expenses. Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses were $2.3 million and $1.9 million for the three months ended March 31, 2025, and 2024, respectively. Stock-based compensation costs included accelerated expense for retirement-eligible employees and performance stock unit incentive costs. Interest expense, net. Interest expense, net of interest and other income, was $0.9 million and $0.1 million for the three months ended March 31, 2025, and 2024, respectively. The increase in net interest expense in the three months ended March 31, 2025, as compared to the prior year period, was primarily due to an increase in interest expense due to the expiration of the interest rate cap in December 2024, and a decrease in interest income earned. Income tax expense. We recognized income tax expense of $2.5 million and $1.2 million for the three months ended March 31, 2025, and 2024, respectively, or an effective tax rate of 21.7% and 70.2% in 2025, and 2024, respectively. The effective tax rate in 2025 was positively impacted by excess tax benefits related to stock compensation. The high effective tax rate in 2024 was due to the $3.3 million equity investment loss not deductible for tax purposes, and non-deductible stock compensation expense in relation to taxable income in the three months ended March 31, 2024. Equity investment loss. There was no equity investment loss for the three months ended March 31, 2025. The $3.3 million non-cash investment loss in the prior year period is related to a cost method investment and was 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. 29 Net income. Our net income was $8.9 million and $0.5 million for the three months ended March 31, 2025, and 2024, respectively, an increase of $8.4 million. This increase was related to the factors discussed above. Preferred stock dividends. Preferred stock dividends were $1.4 million and $1.5 million for the three months ended March 31, 2025, and 2024, respectively. Net income (loss) available to common stockholders. The net income available to common stockholders was $7.5 million for the three months ended March 31, 2025, compared to a net loss of $1.0 million for the three months ended March 31, 2024, an improvement of $8.5 million. This improvement 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, 2025 2024 (Unaudited) Revenue: APUS Segment $ 83,946 $ 80,656 RU Segment 59,251 53,135 HCN Segment 17,676 16,447 Corporate and Other 3,678 4,194 Total revenue $ 164,551 $ 154,432 Income (loss) from operations before interest and income taxes: APUS Segment $ 24,126 $ 23,087 RU Segment (72) (8,966) HCN Segment (746) (304) Corporate and Other (11,062) (8,635) Total income from operations before interest and income taxes $ 12,246 $ 5,182 APUS Segment For the three months ended March 31, 2025, the $3.3 million, or 4.1%, increase to approximately $83.9 million in revenue in our APUS Segment was primarily attributable to higher net course registrations and tuition and fee increases in the second quarter of 2024, as compared to the prior year period. Net course registrations increased 3.5% to approximately 102,500 from approximately 99,000 in the prior year period. Income from operations before interest and income taxes increased to $24.1 million, or by 4.5%, during the three months ended March 31, 2025, from $23.1 million in the prior year period, an increase of $1.0 million, and was primarily due to an increase in revenue and a decrease in professional fees, partially offset by the loss on assets held for sale and an increase in employee compensation costs, as compared to the prior year period. RU Segment For the three months ended March 31, 2025, the $6.1 million, or 11.5%, increase to approximately $59.3 million in revenue in the RU Segment was primarily due to an increase in enrollment of 7.4% and tuition increases effective in the third and fourth quarters 2024 for select programs. The loss from operations before interest and income taxes was $0.1 million and $9.0 million for the three months ended March 31, 2025, and 2024, respectively, an improvement of $8.9 million in the current year period primarily due to the increase in revenue as well as decreases in loss on leases, depreciation and amortization expenses, and information technology costs, partially offset by an increase in employee compensation costs, as compared to the prior year period. 30 HCN Segment For the three months ended March 31, 2025, the $1.2 million, or 7.5%, increase to approximately $17.7 million in revenue in our HCN Segment was primarily due to a 9.6% increase in total student enrollment, as compared to the prior year period. The loss from operations before interest and income taxes was $0.7 million and $0.3 million during the three months ended March 31, 2025, and 2024, respectively, a decrease of $0.4 million, as compared to the prior year period. Liquidity and Capital Resources Liquidity Cash and cash equivalents were $187.5 million and $158.9 million at March 31, 2025, and December 31, 2024, respectively, representing an increase of $28.6 million, or 18.0%. The increase in cash was primarily due to the collection of TA accounts receivable at APUS, and a reduction in operating losses at RU. 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 the next twelve months and beyond. 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 DoD and programs from VA. Generally, these funds are received within 60 days of the start of the courses to which they relate. However, in September 2023, APUS changed its approach to invoicing for TA, taking longer to bill TA, which had the effect of delaying payments from 2023 to 2024. Due to this change in the approach to invoicing TA in the fourth quarter of 2023, APUS collected approximately $22.1 million from TA related to periods prior to 2024. In January 2024, APUS separately revised its billing policy for students utilizing TA from two weeks to five weeks after course start date to nine weeks after the course start date. In December 2024, APUS again changed its approach to invoicing for TA, taking longer to bill TA, which had the effect of delaying payments from 2024 to 2025. As a result, during the three months ended March 31, 2025, due to this change in the approach to invoicing TA in the fourth quarter of 2024, APUS collected approximately $25.9 million from TA related to periods prior to 2025. While the change in billing approach positively impacted the “90%” side of the ratio in 2024, it reduced operating cash flow in 2024, may result in increased bad debt expense in 2025, and may cause the “90%” side of the ratio to increase in 2025 or future years, which could have an adverse impact on our cash flow and results of operations, as well as APUS’s ability to comply with the 90/10 Rule in 2025 or future years. The change in billing practice added to our accounts receivable as of December 31, 2024, and resulted in an increase to our leverage ratios as of December 31, 2024, under our Credit Agreement and the purchase agreement for the shares of Series A Senior Preferred Stock as further discussed in “Note 8. Long-Term Debt” and “Note 12. Preferred Stock” included in the Consolidated Financial Statements in this Quarterly Report. ED evaluates institutions on an annual basis for compliance with specified financial responsibility standards, including a composite score calculation based on a complex formula using line items from the institution’s audited financial statements. Generally, an institution’s composite score must be 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 Title IV programs as a financially responsible institution through the “zone alternative” as set forth in ED regulations. On April 9, 2025, ED notified us that according to its calculations, we had a fiscal year end 2023 consolidated composite score of 1.3 and our institutions were therefore in the “zone.” On April 13, 2025, we timely informed ED that we selected the “zone alternative” as the alternative basis on which we establish financial responsibility. As a result, APUS, RU and HCN currently operate under the zone alternative to 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 institutions’ accreditors or state authorizing agencies; (iii) provide regular reports to ED relating to our institutions’ current operations and future plans; and (iv) require our auditors to express an opinion on our compliance with the requirements under the zone alternative. Our placement on HCM1 status did not have a significant impact on our 2024 financial results. Additionally, RU is required to provide a letter of credit for the benefit of ED on behalf of RU in connection with RU’s 2020 composite score being below the minimum required. Restricted cash includes a $24.3 million restricted certificate of deposit to secure a letter of credit. 31 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. Our Total Net Leverage Ratio, under the Credit Agreement, at March 31, 2025, was negative 0.19 due to the growth in both cash and earnings. The net leverage ratio at December 31, 2024 was 0.20. While we do not anticipate that a higher leverage ratio will have material limitations on our expected operations for 2025, it could result in reduced operational flexibility in 2026 and future years. 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 or the consolidation of existing 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 January 28, 2025, we announced the Combination, which we anticipate completing in the third quarter of 2025 subject to obtaining required approvals and ED taking related actions. For the period ended March 31, 2025, we incurred approximately $1.0 million in professional fees related to the Combination, and we expect to incur between approximately an additional $2.0 million and $4.0 million in professional fees for the remainder of 2025 to complete the Combination. Operating Activities Net cash provided by operating activities was $37.0 million and $20.7 million for the three months ended March 31, 2025, and 2024, respectively. The increase in cash from operating activities was primarily due to the collection of TA accounts receivable at APUS related to the 2024 change in TA billing approach, and other changes in working capital due to the timing of receipts and payments. Accounts receivable at March 31, 2025, decreased approximately $20.6 million compared to December 31, 2024, primarily related TA collections in our APUS Segment. Accounts payable, accrued liabilities, and accrued compensation and benefits at March 31, 2025, were approximately $2.6 million higher than December 31, 2024. Investing Activities Net cash used in investing activities was $3.4 million and $6.2 million for the three months ended March 31, 2025, and 2024, respectively. For the three months ended March 31, 2025, capital expenditures were $3.9 million compared to capital expenditures of $6.2 million for the three months ended March 31, 2024. Prior year period capital expenditures were higher than the current year period primarily due to campus consolidations at RU and relocations at HCN that occurred in the prior year period. Financing Activities Net cash used in financing activities was $5.0 million and $5.7 million for the three months ended March 31, 2025, and 2024, respectively. The decrease in cash used in financial activities is primarily due to a decrease 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. Financing activities for the three months ended March 31, 2025, and 2024, included $1.4 million and $1.5 million, respectively, related to the payment of dividends on our preferred stock. 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.