# AMERICAN PUBLIC EDUCATION INC (APEI) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from AMERICAN PUBLIC EDUCATION INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1201792/000120179223000004/apei-20221231.htm
Accession: 0001201792-23-000004
Filing date: 2023-03-14
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/APEI/
All MD&A years: /company/APEI/mda/
Previous year: /company/APEI/mda/fy2021/ (FY 2021)
Next year: /company/APEI/mda/fy2023/ (FY 2023)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with the consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K, or this Annual report. This discussion contains forward-looking statements that are based on management’s current expectations, estimates, and projections about our business and operations, and involves risks and uncertainties. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under “Risk Factors”, “Special Note Regarding Forward-Looking Statements”, and elsewhere in this Annual Report. For a discussion of our financial condition and results of operations for 2021 compared to 2020, refer to Part II, Item 7 of our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on March 2, 2022, which discussion is incorporated in this Annual Report by reference and which is available free of charge on the SECs website at www.sec.gov.

OVERVIEW

    We are a provider of online and campus-based postsecondary education, and career learning, to approximately 107,100 students 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 and are certified by the U.S. Department of Education, or ED, to participate in Title IV programs. Additional information regarding our subsidiary institutions and their regulation is included in the “Business” section of this Annual Report.

On September 1, 2021, we completed the acquisition of RU, or the Rasmussen Acquisition, for an adjusted aggregate purchase price, subject to post-closing working capital adjustments, of $325.5 million in cash, net of cash acquired.

We relied on debt financing pursuant to our Credit Agreement with Macquarie Capital Funding LLC, or the Credit Agreement, to fund a portion of the consideration for the Rasmussen Acquisition. For more information on this financing, please refer to “– Liquidity and Capital Resources – Liquidity – Acquisition of Rasmussen University” and “Note 8. Long-Term Debt” included in the Notes to the Consolidated Financial Statements in this Annual Report. For more information on the Rasmussen Acquisition, please refer to “Note 3. Acquisition Activity” included in the Notes to the Consolidated Financial Statements in this Annual Report, and for more information on the impacts of regulatory action related to the Rasmussen Acquisition, please refer to “– Reportable Segments – RU Change in Ownership” in this Annual Report.

On January 1, 2022, we completed the acquisition of substantially all the assets of GSUSA, for $1.0 million, subject to working capital adjustments. At closing, we received approximately $1.9 million from the seller, which represented the estimated net working capital at closing net of the initial cash payment to the seller of $0.5 million, which is the purchase price less $0.5 million that we retained to secure the indemnification obligations of the seller. The purchase price reflects the $0.5 million due to the seller post-closing and additional adjustments to the estimated net working capital at closing.

Our financial results do not include the RU Segment or GSUSA results prior to the respective acquisition closing dates. Therefore, our consolidated results for the year ended December 31, 2021 include the operations of RU for the months of September through December 2021 only, and the consolidated results do not reflect the operations of GSUSA in the 2021 periods. Adjustments to reconcile segment results to the Consolidated Financial Statements are included in “Corporate and Other”, which includes unallocated corporate activity and eliminations, and for the year ended December 31, 2022, the operational activities of GSUSA.

Our revenue is largely driven by the number of students enrolled at our institutions, the number of and types of courses that students take, student payor source, and the mix of programs students attend. Our consolidated revenue in 2022 was $606.3 million, representing a $187.5 million, or 44.8%, increase from $418.8 million in 2021. The 2022 revenue increase was primarily due to the inclusion of RU Segment revenue for the full year. A significant portion of our revenue comes from our institutions’ participation in Title IV programs, APUS’s participation in the TA programs, and other government programs, and this creates significant risks to our operations.

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Our operations are organized into three reporting segments:

•American Public University System, 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.

Prior to the Rasmussen Acquisition, we had two reportable segments: the American Public Education, Inc. Segment, or APEI Segment, and the HCN Segment. The APEI Segment previously reported the results of both APUS and unallocated corporate expenses. GSUSA does not meet the quantitative thresholds to qualify as a reportable segment. We therefore present its operational activities within “Corporate and Other”. We also include adjustments to reconcile segment results to the Consolidated Financial Statements in “Corporate and Other”, primarily related to unallocated corporate activity and eliminations, and which also were generally previously reported within the former APEI Segment. Prior periods have been updated to conform to the revised presentation.

Financial information regarding each of our reportable segments is reported in this Annual Report in the sections “Financial Statements and Supplementary Data” and “– Operating Results by Reportable Segment Year Ended December 31, 2022 Compared to Year Ended December 31, 2021”.

Student Body. As of December 31, 2022, approximately 65% of APUS’s students self-reported that they served in the military on active-duty at the time of initial enrollment, and as a result APUS is particularly reliant on tuition assistance programs, or TA, and the Department of Defense, or DoD, budget. At APUS, active-duty military students generally take fewer courses per year on average than non-military students and have a lower revenue per net course registration than other funding sources. A significant portion of APUS’s registrations are also attributable to students using VA education benefits, and funds from Title IV programs. RU nursing students and HCN students generally attend classes at physical campuses and use Title IV program funds. At APUS and for RU programs outside pre-licensure nursing and allied health, all coursework is delivered online. For the fiscal year ended December 31, 2022, 48% of RU students were enrolled in nursing programs, 19% in health sciences programs, 16% in business programs, with the remainder of students in education, technology, design and justice studies programs. For the fiscal year ended December 31, 2022, approximately 60% of HCN students were enrolled in the Practical Nursing, or PN program, while 40% were enrolled in the Associate Degree in Nursing, or ADN program.

Increased Costs and Expenses. Our costs and expenses have increased over time due in part to the acquisitions of RU and GSUSA, the addition of new HCN campuses, including HCN’s new campus located in suburban Detroit, which opened in October 2022, increases in nursing faculty and employee compensation, as well as increases in advertising and Title IV costs as a result of increased competition and rising inflation rates, and the changing needs of our students, including costs for technology required to support students at our institutions. For example, in 2022, we continued to incur expenses to invest in replacements and upgrades to our information technology systems.

We believe that in order to continue to attract and retain qualified students our institutions need to continuously update and expand the content of their existing programs and develop new programs, specializations and modes of teaching, faculty engagement initiatives, and co-curricular initiatives. These efforts may require obtaining appropriate regulatory approvals, incurring marketing expenses, and making investments in management and capital expenditures, including technology-related expenditures. Initiatives to attract and retain qualified students require significant time, energy, and resources, and if our efforts are not successful, our results of operations, cash flows, and financial condition may be adversely impacted. For more information about the risks related to attracting and retaining qualified students please refer to “Risk Factors – Risks Related to Attracting and Retaining Students”.

Reductions in Force. We implemented multiple reductions in force in 2021 and 2022. On August 9, 2021, we completed a reduction in force that resulted in the termination of 11 full-time faculty members at APUS and 28 non-faculty employees across a variety of roles and departments at APEI and APUS, representing approximately 3.2% of the APUS full-time faculty workforce, and 3.1% of the APEI and APUS non-faculty workforce. We incurred approximately $1.0 million of pre-tax cash expenses associated with employee severance benefits as a result of this reduction in force. The reduction in force resulted in $1.4 million and $3.3 million in pre-tax labor and benefit savings in 2021 and 2022, respectively.

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On January 14, 2022, RU completed a reduction in force that resulted in the termination of nine full-time faculty members and 19 non-faculty employees across a variety of roles and departments at RU, representing approximately 3.0% of RU’s full-time faculty workforce, and 2.1% of RU’s non-faculty workforce. We incurred an aggregate of approximately $0.4 million of pre-tax cash expenses associated with employee severance benefits as a result of this reduction in force. The reduction in force resulted in pre-tax labor and benefit savings of approximately $2.7 million in 2022.

Additionally, on November 2, 2022, we completed a reduction in force that resulted in the termination of 98 non-faculty employees and the elimination of 78 open positions across a variety of roles and departments representing approximately 5.8% of our non-faculty workforce. We incurred an aggregate of approximately $3.1 million of pre-tax cash expenses associated with employee severance benefits as a result of this reduction in force, all of which were incurred in the fourth quarter of 2022. The reduction in force resulted in pre-tax labor and benefit savings in 2022 of approximately $2.3 million, or approximately $13.5 million on an annualized basis. We anticipate a portion of these annualized cost savings to be reinvested in the business in future years.

The cost savings noted above do not include expenses associated with employee severance benefits. We recorded expenses for termination benefits related to the workforce reductions in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 420, Exit or Disposal Cost Obligations.

Our Initiatives. Our revenue may decline, and our costs and expenses may increase, as our institutions adjust to changes in their student composition, undertake initiatives to improve the learning experience, and work to attract students who are more likely to persist in their programs. Additional initiatives that we are implementing or may implement that may increase costs and expenses or adversely affect our revenue may include the following:

•altering our institutions’ marketing programs to target the appropriate prospective students;

•investing in technology related to our overall information technology transformation program;

•insourcing RU marketing and information technology functions and services from Collegis;

•changing admissions standards, requirements, processes, and procedures;

•implementing more stringent satisfactory academic progress standards;

•changing tuition costs and payment options;

•upgrading existing campuses and opening additional campuses to meet student needs;

•changing fund disbursement methods; and

•implementing alternative learning delivery methods.

Information technology systems are an essential part of the student experience and our business operations, as discussed more fully in “Business – Information Technology” in this Annual Report. APEI provides information technology services to APUS, HCN, RU, and GSUSA through a shared services model. We are in the midst a multi-year technology transformation program to enable us to enhance the learning experience for students, to better accommodate new flexible learning modalities, and to improve our operational effectiveness. We believe we will need to continue, and potentially increase, our investment of time and money in technology operations and enhancements to support our systems and mission and evaluate when it is appropriate to make significant changes, modifications, or upgrades. We believe we will also need to continue to make investments in information technology in response to competitive pressures in the marketplace, including increased demands for interactive solutions and access from multiple platforms, and to update older systems and to enhance functionality. We also expect operating and capital expenditures to increase in future periods as we accelerate the investment in and refreshment of our information technology systems.

Changes and upgrades to our information technology systems have resulted and may continue to result in our incurring significant costs, including in the short term, and carry risk to our operations and financial results. In 2021 and 2022, we incurred approximately $6.0 million, and $3.2 million, respectively, in information technology costs in our APUS Segment related to our multi-year technology transformation program. In 2021, we completed work to consolidate HCN and APUS onto a single, cloud-based LMS platform, Brightspace by D2L. We are continuing to consolidate APUS’s customer relationship management systems onto a single platform, the first phases of which we completed in 2022. We also have several other systems that support the student experience, financial aid processing, financial management, human resources processes, marketing, and decision support. In early 2023, we will be launching a new native mobile application to improve the student experience at APUS. Not all of our information technology spending can be capitalized, and our investments may cost more than expected or fail to be successful. Furthermore, as a result of unsuccessful development efforts, or a result of replacing outdated technology, software, or other technology related assets, we may have assets that become impaired.

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Opening new campuses and maintaining existing campuses at RU and HCN may result in our incurring significant costs in the future. At RU and HCN, adding new campuses is a necessary step to extend our student reach throughout the U.S. For example, during 2021 and 2022, HCN opened new campuses in Akron, Ohio, and Detroit, Michigan, respectively, and in July 2022, RU opened a consolidated Hennepin/Anoka, Minnesota campus by merging two existing campuses and relocating to a new space. We expect operating and capital expenditures to increase in future periods as we continue to add new campuses and incur maintenance costs at existing campuses.

RU Change in Ownership. The Rasmussen Acquisition was required to be reported to, and in some cases approved by, various education regulatory bodies. An institution must obtain ED approval for a change in ownership and control in order to continue to participate in Title IV programs under the new ownership. ED does not provide pre-closing approval. In September 2021, RU timely submitted a change in ownership and control application to ED seeking approval to participate in the Title IV programs under our ownership. ED and RU entered into a Temporary Provisional Program Participation Agreement, or TPPPA, effective in October 2021, that allows RU to continue disbursing Title IV funds during the period of ED’s review of the change in ownership application. The TPPPA continues the growth restrictions that ED imposed as a result of RU’s previous March 2019 change in ownership, including limitations on new programs and locations, and an enrollment cap, until after ED reviews and accepts financial statements and compliance audits that cover complete fiscal periods of RU’s Title IV participation under our ownership. The growth restrictions under the TPPPA could limit or adversely affect RU’s growth opportunities, including restricting its ability to serve additional students, particularly additional nursing students, and limiting its ability to continue to evolve to address current needs by providing new or changed programs. For more information on the regulatory review related to the Rasmussen Acquisition and RU’s previous change in ownership, please refer to the sections in “Business – Regulatory Environment” entitled “Student Financing Sources and Related Regulations/Requirements – Regulation of Title IV Financial Aid Programs – Eligibility and Certification Procedures” and “Regulatory Actions and Restrictions on Operations –Change in Ownership Resulting in a Change of Control”.

Competition. The U.S. postsecondary education market is characterized by intense competition, with approximately 4,500 institutions of higher learning. Due to the increase in online postsecondary offerings, which accelerated as a result of the COVID-19 pandemic, coupled with the prospect of continued postsecondary enrollment declines in the United States, we face increased competition as fewer students pursue degree-based postsecondary education from a wider selection of offerings. For example, the Navy recently launched the U.S. Naval Community College, which supports naval education for enlisted service members. While a number of schools with which APUS competes are participating partners with the U.S. Naval Community College, APUS is not an eligible partner. Navy-related registrations were 5% of total net registrations, using TA as their primary pay type, in each of the years ended December 31, 2020, 2021, and 2022, respectively. We expect each military branch and the DoD to continually evaluate their approaches to education, and any resulting changes could have a material adverse effect on APUS’s enrollments. For more information on our competition and its potential impacts, please refer to “Business – Our Market and Competition – Competition” in this Annual Report.

ArmyIgnitED. APUS relies on the ability of the Armed Forces to process service members’ participation in TA programs, and from time-to-time changes to processes have impacted the ability of service members to participate in the TA programs. The Army in 2021 transitioned from its legacy system, GoArmyEd, to a new system, ArmyIgnitED, for soldiers to use to request TA. This transition was beset by delays and disruption of the Army’s TA programs. In connection with the transition, we experienced challenges related to system performance, process changes, and third-party software defects. The disruption to Army TA and resulting decreases in Army registrations had an adverse impact on registrations and revenue, profits and cash flow for the quarters ending June 30, 2021 and September 30, 2021. In addition, due to the transition, ArmyIgnitED does not currently reflect all courses previously taken by soldiers at APUS in the relevant period, and ArmyIgnitED does not reflect all amounts due to APUS. In August 2022, the Army transitioned from the initial version of ArmyIgnitED to an upgraded ArmyIgnitED 2.0, with a new third-party service provider, and announced that all TA requests for courses beginning on or after October 1, 2022 must be submitted via ArmyIgnitED 2.0. As part of this change, the Army stopped allowing institutions to submit invoices from July 30, 2022 until August 29, 2022, which impacted our ability to collect on our accounts receivable, caused our accounts receivable to increase and, as a result, may cause our bad debt expense to increase. As of December 31, 2022, approximately $26.0 million, of which $16.5 million is older than 60 days from the course start date, was due from the Army due to the disruption caused by the transition to ArmyIgnitED and upgrade to ArmyIgnitED 2.0. There can be no assurance that our efforts to mitigate any adverse impact of the transition to ArmyIgnitED 2.0 on accounts receivable, bad debt, and cash flow will be successful or that ArmyIgnitED 2.0 will work as expected.

Regulated Industry. Our institutions operate in a highly regulated industry. For more information on the regulations to which our institutions are subject and recent regulatory developments, please refer to “Business – Regulatory Environment” in this Annual Report. Regulations may impact our financial results in a way that we cannot predict and may have an adverse impact on our financial condition.

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OUR KEY FINANCIAL METRICS

Revenue

When reviewing our revenue, we evaluate the following elements: net course registrations and enrollment; tuition rate; net tuition; and other fees.

Net course registrations and enrollment. For financial reporting and analysis purposes, APUS measures its student population in terms of aggregate course enrollments, or net course registrations. Net course registrations, which include one-credit lab courses combined with their related three-credit courses, represent the aggregate number of courses in which students remain enrolled after the date by which they may drop the course without financial penalty. RU and HCN measure their student population in terms of student enrollments. Student enrollment represents the total number of students enrolled in a course immediately after the date students may drop a course without financial penalty.

    Because we recognize revenue over the length of a course, net course registrations and student enrollments in a financial reporting period do not correlate directly with revenue for that period because revenue recognized from courses is not necessarily recognized in the financial reporting period in which the course registrations or enrollments occur. For example, at APUS, revenue in a quarter reflects a portion of the revenue from courses that began in a prior quarter and continued into the quarter, all revenue from courses that began and ended in the quarter, and a portion of the revenue from courses that began but did not end in the quarter. At RU and HCN, generally programs begin and end in a calendar quarter.

The average number of courses per term at APUS varies by payor type. For example, Title IV students take more courses per term than TA students. As a result, should the number of APUS’s students who utilize ED’s Title IV programs decrease (or the number of students using TA increase), we anticipate that it may cause the average number of courses per student per term to decrease.

You should not rely on the results of any prior periods as an indication of future net course registrations at APUS, student enrollments at RU and HCN, or consolidated revenue. The composition of our students, changing market demands, and competition make forecasting very difficult, and we are unable to determine if we will continue to grow or what level of growth we will achieve, if any. Similarly, you should not rely on our operating margins in any prior periods as an indication of our future operating margins.

Tuition rate. Providing affordable degree and certificate programs is an important element of our competitive strategy. APUS plans to adopt modest tuition and fee increases for non-military students effective in the second quarter of 2023, but we estimate that APUS’s tuition and fees will remain lower than the average in-state cost at public universities. RU adopted modest tuition increases, which took effect on January 3, 2023, for select programs to help offset the increased costs of delivering a quality education, and HCN plans to implement a 5% increase in tuition and fees effective in the second quarter of 2023 across all programs to offset the increased costs of delivering a quality, competitive education. At RU and HCN, the tuition increases are adjusted 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.

Net tuition. Tuition revenue varies from period to period based on the aggregate number of students attending courses and the number of courses students are attending during the period, the student payor source, the mix of programs that students are attending during the period, the number of students starting courses each month during the period, and the timing of course starts each month or term. Tuition revenue is adjusted to reflect amounts for students who withdraw from a course in the month or term in which the withdrawal occurs. We also provide tuition grants and scholarships to certain students to assist them financially with their educational goals. The cost of these grants and scholarships is reported as a reduction of tuition revenue in the period incurred for purposes of establishing net tuition revenue.

Other fees. In addition to tuition, APUS charges a per course technology fee of $65 or $100 per course, depending on the course. In the second quarter of 2023, APUS plans to increase the technology fee up to $150 per course for non-military students. APUS students are also charged certain additional fees, such as graduation, late registration, transcript request, and comprehensive examination fees, when applicable. APUS provides a grant to cover the technology fee for students using TA and other programs, as applicable. Technology fee revenue net of grants was approximately $8.3 million in 2020, $7.9 million in 2021, and $7.3 million in 2022, or 2.6%, 2.8%, and 2.6% of revenue, respectively.

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RU and HCN students are charged fees for various items such as applications, testing, books and supplies, laboratory work, technology, and graduation. For example, RU charges a course technology and resource fee of $175 per course and a one-time administrative fee for certain programs, up to $495, for all new, reentering, and program transfer students.

Costs and Expenses

We categorize our costs and expenses in the following categories: instructional costs and services expenses; selling and promotional expenses; general and administrative expenses; loss on disposals of long-lived assets; impairment of goodwill and intangible assets; and depreciation and amortization.

Instructional costs and services expenses. Instructional costs and services expenses are directly attributable to the educational services our institutions provide to their students. Instructional costs and services expenses include salaries and benefits for full-time faculty, administrators, and academic advisors, and costs associated with part-time faculty. Instructional costs and services expenses also include costs associated with curriculum development, academic records and graduation, and other services provided by our institutions, such as evaluating transcripts. Instructional costs and services expenses are generally affected by the cost of academic resources, the efficiency of delivering academic products and services to our students, salaries and benefits for our faculty and other academic and administration personnel, and the level of expenditures for new and existing academic programs. At RU and HCN, instructional costs and services expenses also includes operating expenses directly associated with campus operations, including rent. At APUS, instructional costs and services expenses include expenses related to course materials, learning resources, the library, the APUS-funded book grant program, and instructional pay for part-time faculty that are primarily dependent on the number of students taught.

Selling and promotional expenses. Selling and promotional expenses include salaries and benefits of personnel engaged in student enrollment, advertising costs, and marketing material production costs, and include expenses from the third-party contract with Collegis to provide marketing services to RU, which was terminated effective January 31, 2023. Our selling and promotional expenses are generally affected by the cost of advertising media, the efficiency of our selling efforts, salaries and benefits for our selling and admissions personnel, the level of expenditures for advertising initiatives for new and existing academic programs, and costs incurred in connection with the third-party contract at RU. We believe the impact of competition and the rising cost of internet search and other advertising media has caused our student acquisition costs to increase. This trend may continue, and our student acquisition costs may continue to increase.

General and administrative expenses. General and administrative expenses include salaries and benefits of employees engaged in corporate management, finance, financial aid processing, information technology (including expenses from the third-party contract with Collegis to provide IT services to RU), human resources, facilities, compliance, and other corporate functions, the cost of renting and maintaining administrative facilities, technology expenses, and costs for professional services. General and administrative expenses also include bad debt expense. General and administrative expenses are generally affected by the costs of salaries and benefits for our general and administrative personnel, the efficiency of delivering back-office support including technology services, and the level of expenditures for supporting company initiatives.

Loss on disposals of long-lived assets. Loss on disposals of long-lived assets is the difference between the long-lived assets’ residual value and their book value at the time of the assets’ disposition or abandonment.

Impairment of goodwill and intangible assets. Impairment of goodwill and intangible assets recognizes the difference between the carrying value of goodwill and intangible assets and the fair value of goodwill and intangible assets.

Depreciation and amortization. We incur depreciation and amortization expenses for costs related to the capitalization of property, equipment, software, and program development on a straight-line basis over the estimated useful lives of the assets. In addition, we incur amortization expense for the amortization of identified intangible assets with a definite life resulting from the Rasmussen Acquisition.

Interest Income (Expense). Interest income (expense) consists primarily of interest expense incurred on our long-term debt, net of any interest income earned on cash and cash equivalents, and, prior to 2021, interest income earned on cash and cash equivalents.

Equity Investment Loss. Equity investment loss consists of our proportional share of after-tax income or losses attributable to our equity investment as well as the loss from any other-than-temporary impairment charges, which represents the difference between the carrying value of and fair value of the investment.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. During the preparation of these financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition and the valuation of goodwill and indefinite-lived intangible assets. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ and have a material impact on our Consolidated Financial Statements, or our results of operations and financial position, and subsequent events are not necessarily indicative of the reasonableness of the original assumptions or estimates. The following discussion of our critical accounting policies and estimates is intended to supplement the accounting policies presented in “Note 2. Significant Accounting Policies” included in our Consolidated Financial Statements.

Business combinations. We account for business combinations using the acquisition method of accounting, which requires that once control is obtained, the purchase price be allocated to all tangible assets and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. Any excess purchase price over the fair value of the net assets acquired and liabilities assumed is recorded as goodwill. The determination of the fair value of assets acquired and liabilities assumed requires estimates and assumptions with respect to the timing and amounts of cash flow projections, revenue growth rates, earnings before interest and taxes margins, student attrition rates, royalty rates, discount rates, and useful lives. These estimates are based on assumptions we believe to be reasonable, and, when appropriate, include assistance from independent third-party valuation firms. During the measurement period, which is up to one year from the acquisition date, we recorded adjustments to the assets acquired and liabilities assumed, with a corresponding adjustment to goodwill.

Goodwill and indefinite-lived intangible assets.

Goodwill is the excess of the purchase price of an acquired business over the fair value of the assets acquired and liabilities assumed. Goodwill is not amortized. Goodwill is reported at the reporting unit level that we have defined as our reporting segments. We recorded $217.4 million of goodwill in our RU Segment in connection with the RU acquisition and $38.6 million of goodwill in our HCN Segment in connection with the HCN acquisition. There was no goodwill recorded in connection with the acquisition of GSUSA reported in Corporate and Other, and there is no goodwill in our APUS Segment.

In addition to goodwill, in connection with the acquisitions of RU and HCN, we recorded identified intangible assets with an indefinite useful life in the aggregate amount of $51.0 million and $3.7 million, respectively, which includes trade name, accreditation, licensing, Title IV, and affiliate agreements. There were no indefinite useful life intangible assets identified as a result of the acquisition of GSUSA. 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 indefinite-lived intangible assets in our APUS Segment.

Goodwill and indefinite-lived intangible assets are tested for impairment at least annually, and more frequently if events and circumstances exist that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The process of evaluating goodwill and indefinite-lived intangible assets for impairment is subjective and requires significant judgment and estimates. When performing an optional qualitative analysis, we consider many factors including: general economic conditions, industry and market conditions, certain cost factors, financial performance and key business drivers (for example, student enrollment), long-term operating plans, and potential changes to significant assumptions and 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.

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We estimate fair value in our quantitative analysis by weighting the results from three different valuation approaches. They include: (1) discounted cash flow; (2) guideline public company; and (3) guideline transaction for comparable transactions. Under the discounted cash flow method, fair value was determined by discounting the estimated future cash flows of RU and HCN at their estimated weighted-average cost of capital. We incorporate the use of projected financial information and a discount rate that are developed using market participant based assumptions. The cash-flow projections are based on three-year financial forecasts developed by management that include revenue projections, capital spending trends, and investment in working capital to support anticipated revenue growth, which are updated at least annually and approved by management. Under the guideline public company method, pricing multiples from other public companies in the public higher education market were used to determine the fair value of RU and HCN. Under the comparable transaction method, pricing terms from other transactions in the higher education market were used to determine the fair value. Values derived under the three valuation methods are then weighted to estimate RU and HCN’s enterprise values. If we determine that the carrying amount of a reporting unit exceeds its fair value, we then calculate the implied fair value of the reporting unit goodwill as compared to its carrying amount to determine the appropriate impairment charge. Although we believe our assumptions are reasonable, actual results may vary significantly and may expose us to material impairment charges in the future. Our methodology for determining fair values remained consistent for the periods presented.

At October 31, 2021, we annually assessed goodwill and indefinite-lived intangible assets for our HCN Segment, resulting in no impairment. Due to the timing of the RU acquisition, a quantitative analysis was not conducted for our RU Segment at October 31, 2021.

During the second quarter of 2022, we completed a qualitative assessment to determine if an interim goodwill impairment test was necessary for our RU Segment. The assessment concluded that due to our RU Segment under performance when compared to the 2022 internal targets, enrollment declines in the second quarter 2022, projected enrollment trends, the decline in financial performance projected for the remainder of 2022, and our decline in market value and that of comparable companies, it was more likely than not that the fair value of our RU Segment was less than its carrying value. We proceeded with a quantitative impairment test as of May 31, 2022. As a result, we recorded a non-cash goodwill impairment charge of $131.4 million, and to reflect the corresponding tax impact, to reduce the carrying value of the RU Segment goodwill. In addition, we concluded there were indicators of impairment of the RU Segment accreditation, licensing and Title IV indefinite-lived intangible assets. We determined the fair value of the intangible asset was $11.0 million, or $13.5 million less than its carrying value. As a result, we recorded a non-cash impairment charge of $13.5 million to reduce the carrying value of our RU Segment indefinite-lived intangible assets. There were no indicators of impairment for our HCN Segment.

At October 31, 2022, 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 goodwill for RU and HCN exceeded their carrying values by approximately $10.0 million, or 5%, and $4.9 million, or 13%, respectively. Significant assumptions in the forecast used in the discounted cash flow valuation model include the recovery in our RU Segment enrollment in year three to historical norms and two future campus openings in our HCN Segment. These assumptions could be negatively affected by and 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, we determined the fair value of our RU Segment’s indefinite-lived intangible asset was less than its carrying value. As a result, we recorded a $2.0 million non-cash impairment charge to reduce the carrying value of our RU Segment indefinitely-lived intangible assets for accreditation, licensing and Title IV to $9.0 million. There was no impairment to HCN goodwill or indefinite-lived intangible assets. The estimated fair value of our RU Segment does not significantly exceed its carrying amount at the date of testing. We applied a hypothetical ten percent decrease to the fair values of our RU and HCN Segment, which at December 31, 2022, would have triggered additional impairment testing and analysis for our RU Segment. Applying the hypothetical decrease to the fair value of our HCN Segment did not result in an additional impairment.

At December 31, 2022, after the reduction in carrying value due to the goodwill and intangible assets in 2022, and, in the case impairment charges in prior years in the HCN Segment, goodwill is $86.0 million and $26.6 million in the RU and HCN Segments, respectively.

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 additional details regarding goodwill and indefinite-lived intangible assets please refer to “Note 6. Goodwill and Intangible Assets” included in our Consolidated Financial Statements.

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Series A Senior Preferred Stock. On December 28, 2022, we issued $40 million of the Series A Senior Preferred Stock, $0.01 par value per share, to affiliates of existing common stockholders of the Company. Additionally, we accrued $48,000 in dividends for the period ended December 31, 2022.

The Series A Senior Preferred Stock has been classified as permanent equity on the accompanying Consolidated Balance Sheets. The Series A Senior Preferred Stock is recorded net of issuance costs. Dividends accrued on the Series A Senior Preferred Stock are included in preferred stock dividends on the Consolidated Statements of Income. Our preferred stock dividends are cumulative and accrue as contractually obligated. Dividends will be paid upon approval by the Board of Directors.

The determination as to permanent equity treatment considered the obligations to the shareholder. The Series A Senior Preferred Stock is only redeemable at the Company’s option. Upon a change of control, default, non-compliance event or liquidation event an increased dividend rate is applicable, and dependent on timing, an early premium may be applicable, but the Series A Senior Preferred Stock is not mandatorily redeemable.

The Company evaluated the Series A Senior Preferred Stock at issuance for the embedded derivative features and the potential need for bifurcation under ASC 815 Derivatives and Hedging- Embedded Derivatives. The Company engaged an independent valuation firm to assist with the evaluation. As of December 31, 2022, the embedded features identified for bifurcation were determined to have minimal or no value and therefore deemed to not be material to the financial statements.

The Series A Senior Preferred Stock has no stated maturity, is not convertible, is not subject to any mandatory redemption, sinking fund or other similar provisions and will remain outstanding unless redeemed at the Company’s option. The Company has the right to redeem the preferred stock pro rata in whole or in part at the price per share equal to the liquidation preference, plus any applicable early premium amount noted in the Certificate of Designation and Purchase Agreement.

The Series A Senior Preferred Stock has no voting rights for directors or otherwise, except as required by law or with respect to certain protective provisions. Without the consent of at least 60% of the then outstanding shares of Series A Senior Preferred Stock, with certain exceptions, the Company may not, among other things, (i) incur any indebtedness if such incurrence would cause the Company’s Total Net Leverage Ratio (as defined in the Purchase Agreement) to exceed 0.75:1, (ii) issue any capital stock senior to or pari passu with the Series A Senior Preferred Stock, (iii) declare or pay any cash dividends on the Company’s common stock, or (iv) repurchase more than an aggregate of $30 million of the Company’s common stock.

For additional details regarding the Series A Senior Preferred Stock, please refer to “Note 11. Stockholders’ Equity” included in our Consolidated Financial Statements.

RECENT ACCOUNTING PRONOUNCEMENTS

    We consider the applicability and impact of all Accounting Standards Updates, or ASUs. Please refer to “Note 2 Significant Accounting Policies” included in our Consolidated Financial Statements for information relating to our discussion of the effects of recent accounting pronouncements.     

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Results of Operations

The following table sets forth statements of income data as a percentage of revenue for each of the years ended:

[[GREPCENT_TABLE]]
[["","","2021","","2022"],["Revenue","","100.0","%","","100.0","%"],["Costs and expenses:"],["Instructional costs and services","","41.2","%","","47.6","%"],["Selling and promotional","","22.3","%","","25.5","%"],["General and administrative","","24.7","%","","19.9","%"],["Loss on disposals of long-lived assets","","0.3","%","","0.2","%"],["Impairment of goodwill and intangible assets","","\u2014","%","","24.2","%"],["Depreciation and amortization","","4.3","%","","5.3","%"],["Total costs and expenses","","92.8","%","","122.7","%"],["Income (loss) from operations before interest and income taxes","","7.2","%","","(22.7)","%"],["Gain on acquisition","","\u2014","%","","0.6","%"],["Interest income (expense)","","(1.0)","%","","(2.9)","%"],["Income (loss) from operations before income taxes","","6.2","%","","(25.0)","%"],["Income tax expense","","1.8","%","","(6.0)","%"],["Equity investment loss","","(0.2)","%","","\u2014","%"],["Net income (loss)","","4.2","%","","(19.0)","%"],["Preferred Stock Dividend","","\u2014","%","","\u2014","%"],["Net income (loss) available to common stockholders","","4.2","%","","(19.0)","%"]]
[[/GREPCENT_TABLE]]

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Our results of operations for the years ended December 31, 2021 and 2022 do not include the financial results for RU and GSUSA prior to their acquisition dates, of September 1, 2021 and January 1, 2022, respectively. Therefore, the prior year period presented is not directly comparable to the current period.

For a more detailed discussion of our results by reportable segment, please refer to “Operating Results by Reportable Segment” in this Annual Report.

Revenue

For the year ended December 31, 2022, our consolidated revenue was $606.3 million, an increase of $187.5 million, or 44.8%, compared to $418.8 million in 2021. The increase in revenue was primarily due to the inclusion of the RU Segment and GSUSA. For the year ended December 31, 2022, RU Segment revenue increased $163.8 million, and GSUSA generated $21.1 million. In 2021, RU Segment contributed four months of revenue and GSUSA was not yet acquired. The increase in revenue was also due to revenue increases of $1.4 million, or 0.5%, in revenue in our APUS Segment and $1.3 million, or 2.8%, in our HCN Segment.

APUS net course registrations increased approximately 1.5% to 350,400 for the year ended December 31, 2022 from approximately 345,300 in the 2021 period. The increase in net course registrations was primarily due to an increase in military related registrations from students utilizing TA, which generate a lower revenue per registration. Net course registrations represent the total number of courses for which students remain enrolled after the date by which they may drop a course without financial penalty.

For the year ended December 31, 2022, RU enrollment decreased 7.4% as compared to the prior year period in 2021. We believe this decline in enrollment, which reflects year-over-year declines in new and total nursing enrollment, as well as declines in non-nursing and online programs, was caused, in part, by caps on nursing student enrollment at certain RU campuses, reduced demand for nursing education due to record low unemployment in some RU markets, increasing pay for nurses resulting in fewer available nursing faculty to educate and oversee clinicals, and unexpected leadership departures.

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In February 2022, the Illinois ADN Program was placed on probationary status by the Illinois Department of Professional Regulation, or IDPR, as a result of which RU is required to temporarily reduce admitted students in the program by 25% and has two years to demonstrate evidence of implementing strategies to correct deficiencies and satisfy the required NCLEX pass rate. Additionally, in July 2022, we implemented a voluntary enrollment reduction in RU’s Bloomington, Minnesota ADN Program as part of an effort to meet desired faculty to student ratios and improve student performance. RU is now required to maintain a specified faculty to student ratio in 2023 for the Bloomington ADN Program, which constrains our ability to increase enrollments for that program based on our ability to attract and retain qualified faculty. Finally, based on the first-time NCLEX pass rate in the Bloomington ADN Program in the third quarter of 2022, RU has informed the Minnesota Board of Nursing, or MBN, that RU would voluntarily further reduce enrollments in the program starting with the quarterly cohort in January 2022. The various factors adversely impacting NCLEX pass rates and RU enrollments, including nursing enrollments, including those described in “Risk Factors” in this Annual Report, are expected to continue to negatively impact RU’s results.

For the year ended December 31, 2022, HCN student enrollment increased approximately 4.5% as compared to the prior year period in 2021. We believe that the increase in total student enrollment at HCN was due, in part, to the opening of the Akron campus in April 2021 and the Detroit, Michigan campus in October 2022, and to the Indiana State Board of Nursing action to increase the maximum enrollment at the Indianapolis campus, which effective for the 2022 calendar year, increased maximum enrollment to 200 students per calendar year from 30 students in 2021. HCN total student enrollment represents the total number of students enrolled in a course immediately after the date by which students may drop a course without financial penalty.

Costs and Expenses

For the year ended December 31, 2022, costs and expenses were $743.7 million, an increase of $355.3 million, or 91.5%, compared to $388.4 million in 2021. The increase in costs and expenses as compared to the prior year period was primarily due to the inclusion of 12 months of RU Segment expenses in 2022 as compared to four months in 2021, the inclusion of GSUSA in Corporate and other expenses in 2022, and a non-cash impairment charge of $146.9 million to reduce the carrying value of RU Segment goodwill and intangible assets, and to reflect the corresponding tax impact for the year ended December 31, 2022. For the year ended December 31, 2022, the increase in RU Segment and GSUSA costs and expenses were $184.9 million and $22.8 million, respectively, excluding the goodwill and intangible assets impairment charge in the RU Segment. Other increases in costs and expenses include employee compensation costs, bad debt expense, instructional materials costs, and advertising costs in our HCN Segment and employee compensation costs in Corporate and Other. The increase in cost and expenses were partially offset by decreases in employee compensation costs and professional fees in our APUS Segment.

In 2022, costs and expenses include the following items on a pretax basis: $3.2 million in information technology costs related to our multi-year technology transformation program and $1.9 million in professional fees primarily related to the Rasmussen and GSUSA acquisitions in Corporate and Other. In 2021, costs and expenses include the following items on a pretax basis: $7.6 million in professional fees primarily related to the Rasmussen Acquisition in Corporate and Other and $6.0 million in information technology costs related to our multi-year technology transformation program.

Costs and expenses as a percentage of revenue increased to 122.7% in 2022 from 92.8% in 2021. Our income before interest and income taxes as a percentage of revenue, or our operating margin, decreased to negative 22.7% from 7.2% compared to the same prior year period. The increase in our costs and expenses as a percentage of revenue and decrease in our operating margin was primarily due to the factors discussed above.

Instructional costs and services expenses. For the year ended December 31, 2022, instructional costs and services expenses were $288.5 million, an increase of approximately $115.9 million, or 67.1%, compared to $172.6 million in 2021. The increase in instructional costs and services expenses was primarily due to the inclusion of RU Segment and GSUSA instructional costs and services expenses of $94.3 million and $13.9 million, respectively, for the full year in 2022, compared to four months of RU Segment instructional costs and services expenses and no GSUSA instructional services costs and expenses in the prior year period. The increase was also due to increases in employee compensation costs and instructional materials costs in our HCN Segment and increases in graduation event costs and in employee compensation costs in our APUS Segment. Instructional costs and services expenses as a percentage of revenue were 47.6% in 2022, compared to 41.2% in 2021.

Selling and promotional expenses. For the year ended December 31, 2022, selling and promotional expenses were $154.6 million, an increase of $61.3 million, or 65.7%, compared to $93.3 million in 2021. The increase in selling and promotional expenses was primarily due to the inclusion of RU Segment and GSUSA selling and promotional expenses of $56.0 million and $4.1 million, respectively, for the full year in 2022, compared to four months of RU Segment selling and

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promotional expenses and no GSUSA selling and promotional expenses in the prior year period. The increase is also due to increases in employee compensation costs in our HCN Segment and Corporate and Other and increases in marketing costs in our APUS Segment, partially offset by decreases in employee compensation costs and advertising costs in our APUS Segment. Selling and promotional expenses as a percentage of revenue were 25.5% in 2022 compared to 22.3% in 2021.

General and administrative expenses. For the year ended December 31, 2022, general and administrative expenses were $120.4 million, an increase of $17.0 million, or 16.4%, compared to $103.4 million in 2021. The increase in general and administrative expenses was primarily due to the inclusion of additional RU Segment and GSUSA general and administrative expenses of $18.4 million and $4.2 million, respectively, for the full year in 2022, compared to four months of RU Segment general and administrative expenses and no GSUSA general and administrative expenses in the prior year period. The increase was also due to an increase in IT maintenance costs in the APUS Segment, HCN Segment, and Corporate and Other. These increases were partially offset by a decrease in consulting costs in the APUS Segment, HCN Segment and Corporate and Other. In 2022, general and administrative expenses include the following costs on a pre-tax basis: $3.2 million of information technology costs related to our multi-year technology transformation program; and $1.9 million in professional fees primarily related to the RU and GSUSA Acquisitions in Corporate and Other. In 2021, general and administrative expenses include the following costs on a pre-tax basis: $7.6 million in professional fees primarily related to the Rasmussen Acquisition in Corporate and Other; and $6.0 million of information technology costs related to our multi-year technology transformation program. General and administrative expenses as a percentage of revenue were 19.9% in 2022 compared to 24.7% in 2021.

For the year ended December 31, 2022, consolidated bad debt expense increased to $13.5 million, or approximately 2.2% of revenue, from $7.8 million, or approximately 1.9% of revenue, in 2021. The increase in bad debt expense was primarily due to the inclusion of $5.0 million and $0.1 million of RU Segment and GSUSA bad debt expense, respectively, for the year ended December 31, 2022, as compared to four months of RU Segment bad debt expense in 2021, no GSUSA bad debt expense in the prior year period, and an increase in bad debt expense at RU in the fourth quarter of 2022.

Loss on disposal of long-lived assets. The loss on disposal of long-lived assets was $1.2 million in 2022, compared to $1.3 million in 2021.

Depreciation and amortization. Depreciation and amortization expenses were $32.1 million in 2022, compared to $17.8 million in 2021, an increase of $14.3 million or 80.3%. The increase in depreciation and amortization expenses was primarily due to the inclusion of $16.2 million and $0.6 million of RU Segment and GSUSA depreciation and amortization expenses, respectively, for the year ended December 31, 2022, as compared to four months of RU Segment depreciation and amortization expenses and no GSUSA depreciation and amortization expenses in the prior year period. These increases were partially offset by a decrease in our APUS Segment depreciation and amortization expense.

Impairment of goodwill and intangible assets. The non-cash, pre-tax impairment of goodwill and intangible assets of $146.9 million resulted from the reduction of the carrying value of goodwill and intangible assets in our RU Segment, and the corresponding tax impact. For additional information regarding the impairment of goodwill and intangible assets, and a discussion of the potential for future impairment charges for goodwill and intangible assets, please refer to the discussion in “Note 6. Goodwill and Intangible Assets” included in the Consolidated Financial Statements in this Annual Report.

Stock-based compensation. Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses in 2022 were $8.0 million in the aggregate, representing an increase of $0.4 million, or 4.6%, compared to $7.7 million in 2021. Stock-based compensation costs include accelerated expense for retirement-eligible employees and performance stock unit incentive costs.

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The table below reflects our stock-based compensation expense recorded in our Consolidated Statements of Income included in our Consolidated Financial Statements for the years ended 2021 and 2022 (in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","2022"],["Instructional costs and services","","$","1,480","","","$","1,254"],["Selling and promotional","","771","","","823"],["General and administrative","","5,403","","","5,932"],["Total stock-based compensation expense","","$","7,654","","","$","8,009"]]
[[/GREPCENT_TABLE]]

Interest income (expense). Interest expense, net of interest income, was $17.7 million in 2022, compared to net interest expense of $4.3 million in 2021. The increase in interest expense in 2022 as compared to 2021 was due to the twelve months of interest on a secured term loan facility in the aggregate principal amount of $175.0 million entered into in connection with the Rasmussen Acquisition, or the Term Loan, compared to four months in the prior year period. In addition, as a result of our December 2022 prepayments on the Term Loan totaling $65.0 million, we wrote off a proportionate amount of unamortized debt issuance costs in the amount of $3.9 million. The write off is recorded in interest expense on the Consolidated Statements of Income for the year ended December 31, 2022.

Income tax (benefit) expense. Due to pre-tax losses in 2022, we recognized an income tax benefit for 2022 of $36.3 million, compared to income tax expense of $7.5 million in 2021. The effective tax rate was 24.0% benefit and 29.7% expense in 2022 and 2021, respectively. As a percent of pre-tax loss in 2022 versus pre-tax income in 2021, the decrease in our effective tax rate for 2022 is due to a higher overall state tax rate in 2022 compared to 2021 and the impact of ASU 2016-09. The effective tax rate for 2022 includes expense of $0.6 million compared to a benefit of approximately $0.3 million related to ASU 2016-09 in 2021.

Equity investment loss. Equity investment loss was $0.02 million in 2022, compared to equity investment loss of $0.8 million in 2021.

Net income (loss). The net loss in 2022 was $115.0 million, compared to net income of $17.8 million in 2021, a decrease of $132.8 million. This decrease was related to the factors discussed above, and is primarily due to the non-cash, pre-tax impairment of goodwill and intangible assets of $146.9 million, and the corresponding tax impact of $36.0 million.

Preferred stock dividends. Preferred stock dividends accrued in 2022 were $48,000. The Series A Senior Preferred Stock issuance occurred in December 2022, and the first dividend payments will be made in 2023. There were no preferred stock dividends in 2021.

Net income (loss) available to common stockholders. The net loss available to common stockholders in 2022 was $115.0 million, compared to net income available to common stockholders of $17.8 million in 2021, a decrease of $132.8 million. This decrease was related to the factors discussed above.

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Operating Results by Reportable Segment - Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

The table below details our operating results by reportable segment for the periods indicated (in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2022","","$ Change","","% Change"],["Revenue"],["APUS Segment","$","283,700","","","$","285,128","","","$","1,428","","","0.5","%"],["RU Segment","89,483","","","253,257","","","163,774","","","183.0","%"],["HCN Segment","45,803","","","47,078","","","1,275","","","2.8","%"],["Corporate and Other","(183)","","","20,865","","","21,048","","","NM"],["Total Revenue","$","418,803","","","$","606,328","","","$","187,525","","","44.8","%"],["Income (loss) from operations before interest and income taxes"],["APUS Segment","$","51,050","","","$","58,452","","","$","7,402","","","14.5","%"],["RU Segment","1,630","","","(166,557)","","","(168,187)","","","NM"],["HCN Segment","1,829","","","(4,011)","","","(5,840)","","","(319.3)","%"],["Corporate and Other","(24,138)","","","(25,232)","","","(1,094)","","","4.5","%"],["Total income (loss) from operations before interest and income taxes","$","30,371","","","$","(137,348)","","","$","(167,719)","","","(552.2)","%"]]
[[/GREPCENT_TABLE]]

Adjustments to reconcile segment results to the Consolidated Financial Statements are included in “Corporate and Other”. These adjustments include unallocated corporate activity and eliminations, which generally were previously reported within the APEI Segment, and, effective January 1, 2022, the operational activities of GSUSA.

APUS Segment

Our APUS Segment revenue was $285.1 million in 2022, an increase of $1.4 million, or 0.5%, compared to $283.7 million in 2021, which is primarily attributable to higher net course registrations. Net course registrations at APUS increased 1.5% to approximately 350,400 in 2022 compared to the 2021 period. The increase in net course registrations was primarily due to an increase in military related registrations from students utilizing TA, which generate a lower revenue per registration. Income from operations before interest and income taxes was approximately $58.5 million in 2022, an increase of $7.4 million, or 14.5%, compared to the 2021 period. The increase in income from operations before interest and income taxes is due to the changes in revenue and expenses discussed above.

RU Segment

Our RU Segment revenue was $253.3 million in 2022, an increase of $163.8 million, or 183.0%, compared to $89.5 million in 2021, as 2021 included only four months of revenue. RU Segment loss from operations before interest and income taxes was $166.6 million in 2022 compared to income from operations before income and taxes was $1.6 million in 2021. The RU Segment loss includes impairment charges on goodwill and intangible assets of $146.9 million, and the corresponding tax impact of $36.0 million. Enrollment at RU decreased approximately 7.4% during the year ended December 31, 2022 as compared to the 2021 period. We believe this decline in enrollment, which reflects year-over-year declines in new and total nursing enrollment, as well as declines in non-nursing program and online enrollments, was caused, in part, to caps on nursing student enrollment at certain RU campuses, reduced demand for nursing education due to record low unemployment in some RU markets, and increasing pay for nurses resulting in fewer available nursing faculty to educate and oversee clinicals.

HCN Segment

Our HCN Segment revenue was approximately $47.1 million in 2022, an increase of $1.3 million, or 2.8% compared to $45.8 million in the 2021 period, which is primarily attributable to an increase in student enrollment. HCN student enrollment increased 4.5% in 2022 compared to the 2021 period. The increase in HCN total student enrollment was primarily due to the opening of the Akron campus in April 2021 and the Detroit, Michigan campus in October 2022, and to the

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Indianapolis campus, which effective for the 2022 calendar year could enroll up to 200 students per calendar year compared to 30 students in 2021. Loss from operations before interest and income taxes in the HCN Segment was approximately $4.0 million in 2022 compared to income from operations of $1.8 million in 2021, a decrease of $5.8 million. The decrease in income from operations before interest and income taxes is due to the changes in revenue and expenses discussed above.

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Liquidity and Capital Resources

Cash, cash equivalents, and restricted cash were $149.6 million and $129.5 million at December 31, 2021 and 2022, respectively, representing a decrease of $20.2 million, or 13.5%, in the 2022 period. The decrease in cash was due to the prepayment of debt, partially offset by an increase in cash provided by operations, and the proceeds from our Series A Senior Preferred Stock offering in December 2022. 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 “Contractual Obligations” in this Annual report.

We derive a significant portion of our revenue from our participation in ED’s Title IV programs, for which disbursements are governed by federal regulations. We have typically received disbursements under Title IV programs within 30 days of the start of the applicable course or term. Another significant source of revenue is derived from TA from the DoD and programs from the Department of Veterans Affairs. Generally, these funds are received within 60 days of the start of the courses to which they relate.

In 2021, the Army transitioned from its legacy system, GoArmyEd, to a new system, ArmyIgnitED, for soldiers to use to request TA. This transition was beset by delays and disruption of the Army’s TA programs. In connection with the transition, we experienced challenges related to system performance, process changes, and third-party software defects. The disruption to Army TA and resulting decreases in Army registrations had an adverse impact on registrations and revenue, profits and cash flow for the quarters ending June 30, 2021 and September 30, 2021. In addition, due to the transition, ArmyIgnitED does not currently reflect all courses previously taken by soldiers at APUS in the relevant period, and ArmyIgnitED does not reflect or all amounts due to APUS. In August 2022, the Army transitioned from the initial version of ArmyIgnitED to an upgraded ArmyIgnitED 2.0, with a new third-party service provider, and announced that all TA requests for courses beginning on or after October 1, 2022 must be submitted via ArmyIgnitED 2.0. As part of this change, the Army stopped allowing institutions to submit invoices from July 30, 2022 until August 29, 2022, which impacted our ability to collect on our accounts receivable, caused our accounts receivable to increase and, as a result, may cause our bad debt expense to increase. For the year ended December 31, 2022, APUS received approximately $48.8 million in payments from the Army. As of December 31, 2022, approximately $26.0 million, of which $16.5 million is older than 60 days from the course start date, was due from the Army due to the disruption caused by the transition to ArmyIgnitED and upgrade to ArmyIgnitED 2.0. There can be no assurance that our efforts to mitigate any adverse impact of the transition to ArmyIgnitED 2.0 on accounts receivable, bad debt, and cash flow will be successful or that ArmyIgnitED 2.0 will work as expected.

Furthermore, some payments from the Army that were expected in 2022 were delayed until 2023, which is expected to cause APUS’s 90/10 Rule percentage to increase and could make it more difficult for APUS to meet the 90/10 Rule requirements for 2023. Failure to meet the 90/10 Rule for fiscal 2023, which would require APUS to notify ED and students of this failure, could subject us to heightened regulatory scrutiny and possible adverse regulatory action, and could damage our reputation, which would have a material adverse impact on our results of operation, cash flow, and financial condition. Steps that we may take to reduce our 90/10 Rule percentage in order to comply with the 90/10 Rule, may require us to make significant cash expenditures to acquire new students who do not receive educational assistance funds provided by a federal agency, which would reduce the amount of cash we have available to fund our operations. Furthermore, any future delays in receipt of funds from the Army, or other service branches could have an adverse impact on our cash flow and results of operations. For more information about the risks related to the Army’s transition to new systems for soldiers to request TA please refer to “Risk Factors – Risks Related to Attracting and Retaining Students”.

The United States is nearing the federal debt ceiling, the Department of the Treasury has begun implementing measures to prevent a default on the U.S. national debt, and certain members of Congress have called for negotiations to reduce federal spending in exchange for increasing the debt ceiling. Budget cuts or constraints, including in connection with the failure to increase or a delay in increasing the federal debt ceiling, could negatively affect us by leading to force reductions or cuts to services and tools that we or APUS’s students rely upon for recruitment, enrollment, access, and TA. Even temporary changes to military activity and budgets may adversely affect operations. For example, funding for the federal government or portions thereof, including the DoD, Department of Homeland Security, and Coast Guard, lapsed and resulted in partial shutdowns in 2018 and 2019. Any future government shutdown could have a material adverse effect on APUS’s enrollments and on our cash flows and results of operations, and U.S. government default on its debt would have broad adverse macroeconomic effects that would materially affect our cash flow and results of operations.

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Our operating expenditures may increase in future periods as we continue to invest in the modernization of our information technology systems, advertising, and other expenditures. For the years ended December 31, 2020, 2021 and 2022, we incurred approximately $5.9 million, $6.0 million, and $3.2 million, respectively, of information technology costs related to our multi-year technology transformation program, focusing on specific information technology projects, including replacements of our learning management and customer relationship management systems. APUS completed the migration of all students to the new learning management system in the first quarter of 2021, and completed the first phases of the implementation of the new customer relationship management system in January 2022. APUS will continue to evaluate the Partnership At a Distance™, or PAD, customized student information and services system for possible changes and upgrades and anticipate that we will eventually make significant changes to that system as well.

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. Professional fees may continue to be elevated or increase as we continue the integration of RU and the integration of GSUSA, and continue to evaluate investments in strategic growth opportunities and enhancements to our business capabilities. We also expect to continue to explore opportunities to invest in the education industry, which could include purchasing or investing in other education-related companies or companies developing new technologies. For the years ended December 31, 2020, 2021, and 2022, we incurred approximately $4.3 million, $7.6 million and $1.9 million, respectively, of acquisition-related expenses, which are included in general and administrative expenses on the Consolidated Statements of Income.

RU has historically relied on Collegis, LLC, or Collegis, for a variety of outsourced marketing services and information technology functions under one contract for marketing services and another for information technology functions. In April 2022, we notified Collegis that we intended to permit both contracts to expire by their terms on September 30, 2024. In October 2022, RU and Collegis mutually agreed to the termination of the marketing services contract effective January 31, 2023, rather than having the contract expire by its terms in September 2024. Approximately $6.5 million in transition related fees became due to Collegis as specific transition obligations were completed. We paid approximately $3.3 million in transition fees to Collegis in the fourth quarter of 2022, with the remainder to be paid in the first quarter of 2023. Outsourced information technology services under the Collegis information technology contract will continue until September 30, 2024.

We have completed the transition of RU marketing in-house to our centralized marketing team and plan to transition all of the information technology services currently outsourced to Collegis back to our operations or to one or more other third-party vendors. As we continue to develop our transition plans, at this time we are unable to predict the full costs of the transition, in which periods we will incur those costs, or the impact on our financial results, but the transition may cause us to incur significant costs, which could adversely affect our financial condition, results of operations, and cash flows.

We raised additional capital to finance the Rasmussen Acquisition, and we may also need additional capital in the future, including to finance other business acquisitions and investments in technology or to achieve growth or fund other business initiatives.

In December 2022, we issued $40 million of Series A Senior Preferred Stock, $0.01 par value per share, to affiliates of existing common stockholders of the Company. We used a portion of the net proceeds from the sale of the Series A Senior Preferred Stock, along with available cash, to repay approximately $65 million of the outstanding principal balance of our Term Loan. After the repayment, the aggregate amount of the Term Loan outstanding was $99.1 million at December 31, 2022. We are required to pay periodic cash dividends to the holders of our Series A Senior Preferred Stock, which will accrue at an annual rate equal to Term SOFR (as defined in the Certificate of Designation) plus 10.00%, and will increase by 2.0% on June 28, 2025 and another 0.5% on October 1, 2025 and the first day of every following quarter, subject to a maximum of Term SOFR plus 25.0%, other than an increase in the dividend rate in connection with an event of default under the Certificate of Designation. We also have the option, from time to time, to redeem the Series A Senior Preferred Stock pro rata in whole or in part. Payment of dividends or the exercise of this redemption right could adversely impact our liquidity and reduce the amount of cash flow available for working capital, capital expenditures, growth opportunities, and other general corporate purposes.

In connection with the completion of the Rasmussen Acquisition, on September 1, 2021, or the Closing Date, we entered into a Credit Agreement with Macquarie Capital Funding LLC, as administrative agent and collateral agent, Macquarie Capital (USA) Inc., and Truist Securities, Inc. as joint lead arrangers and bookrunners, and a syndicate of lenders, or the Lenders and, pursuant to the Credit Agreement, the Lenders provided us with (i) the $175.0 million Term Loan, and (ii) a senior secured revolving loan facility in an aggregate commitment amount of $20.0 million, or together with the Term Loan, the Facilities. We paid a portion of the consideration for the Rasmussen Acquisition with proceeds from the Term Loan. For more

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information on the Facilities and their terms, please refer to “Note 8. Long-Term Debt” included in the Consolidated Financial Statements in this Annual Report.

We believe our cash flow from operations and our existing cash and cash equivalents will provide adequate funds for ongoing operations, debt and interest obligations, and planned capital expenditures for the next 12 months and the foreseeable future. However, our future capital requirements and our ability to generate sufficient cash to fund our future operations will depend on a number of factors. There can be no guarantee that our business will generate sufficient cash flow from operations or that future capital or borrowings will be available to us in an amount sufficient to enable us to service our indebtedness, to pay dividends on our Series A Senior Preferred Stock when due, or to fund our other liquidity needs. Failure to achieve business performance consistent with our expectations, to reverse the decline in enrollments at RU, including as a result of regulatory action, or to comply with the 90/10 Rule, or any government shutdown could adversely impact our cash flows and results of operations. In addition, our efforts to comply with the 90/10 Rule could lead us to reduce enrollments or require us to make expenditures that would reduce our existing cash available for operations. In addition, upon the occurrence of certain events, such as a change of control, we could be required to repay or refinance our indebtedness or pay a special dividend to holders of our Series A Senior Preferred Stock, which would also reduce our existing cash available for operations. There can be no assurance that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.

Operating Activities

Net cash provided by operating activities was $16.3 million and $29.2 million in 2021 and 2022, respectively. The increase in cash from operating activities is primarily due to payments received from Army and other changes in working capital due to the timing of receipts and payments. In 2021, cash flow from operations was negatively impacted by the timing of the Rasmussen Acquisition. RU receives the majority of its cash receipts during the first month of each fiscal quarter while disbursements occur throughout the quarter. Pursuant to the terms of the Rasmussen Acquisition, the seller in the transaction retained substantially all of the cash held by RU on the Closing Date. Accordingly, from the Closing Date through September 30, 2021, and continuing through mid-October 2021 when RU entered into its TPPPA, APEI funded the majority of RU’s operations. Cash flow from operating activities also increased due to lower estimated tax payments in 2022 compared to the prior year. Tax payments for income taxes were approximately $7.5 million in 2021 compared to $4.0 million in 2022.

Investing Activities

Net cash used in investing activities was $336.7 million and $13.7 million in 2021, and 2022, respectively. This decrease in investing activities was primarily related to the $325.5 million of cash used for the Rasmussen Acquisition in 2021. The increase in capital expenditures in 2022 as compared to the 2021 period was primarily due to the inclusion of RU Segment capital expenditures of $9.3 million in the 2022 period.

Financing Activities

Net cash provided by financing activities was $242.3 million in 2021, compared to $35.7 million of net cash used in financing activities in 2022. The cash used in financing activities in 2022 was due to debt principal prepayments made in December 2022, offset by proceeds from the issuance of our Series A Senior Preferred Stock. Cash provided by financing activities in 2021 was due to our underwritten public offering of common stock for aggregate net proceeds of approximately $86.2 million and proceeds of $175.0 million from the Term Loan in connection with the Rasmussen Acquisition, partially offset by debt issuance costs of $13.6 million.

Contractual Obligations

Long-term debt

We have long-term debt outstanding under the Credit Agreement of $99.1 million as of December 31, 2022. No principal payments are due in 2023 as a result of the December 2022 prepayments. Interest payable of $9.2 million is due in 2023, assuming the variable rate as of December 31, 2022. For more information on the timing and amount of our future principal and interest payments, please refer to “Note 8. Long-Term Debt” included in the Consolidated Financial Statements in this Annual Report.

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Lease obligations

We have leases for office space and campus facilities. As of December 31, 2022, we had lease payment obligations of $153.8 million, with $18.8 million payable in 2023. In connection with the acquisition of GSUSA on January 1, 2022, we assumed lease obligations in the aggregate of $50.0 million over 15 years for GSUSA’s Washington, D.C., headquarters facility. For more information on the timing and amount of our future lease obligations, please refer to “Note 7. Leases” included in the Consolidated Financial Statements in this Annual Report.

Other purchase obligations

As of December 31, 2022, we had other purchase obligations of $14.7 million, with $8.3 million payable in 2023. RU is a party to service contracts with a third party, Collegis, to provide marketing and information technology services. The agreements expire September 30, 2024. Notices of the non-renewal of the marketing and information technology services contracts were issued to Collegis in April 2022. In October 2022, RU and Collegis mutually agreed to the termination of the marketing services contract effective January 31, 2023, rather than having the contract expire by its terms in September 2024. Approximately $6.5 million in transition related fees became due to Collegis as specific transition obligations were completed. We paid approximately $3.3 million in transition fees to Collegis in the fourth quarter of 2022, with the remainder to be paid in the first quarter of 2023. We have completed the transition of RU marketing in-house to our centralized marketing team.

Outsourced information technology services under the Collegis information technology contract will continue until September 30, 2024. The total minimum value for marketing and information technology services over the remaining periods, excluding the transition-related fees in connection with the termination of the marketing services, are approximately $1.1 million and $15.8 million, respectively. We plan to transition all of the information technology services currently outsourced to Collegis back to our operations or to one or more other third-party vendors.

Impact of Inflation

The U.S. economy is experiencing the highest rates of inflation since the 1980s. Historically, we have not experienced significant inflation risk in our business arising from fluctuations in market prices, however, our ability to raise our tuition and fees depends on market conditions. While APUS, RU, and HCN plan to increase certain tuition and fees beginning in 2023, including in order to offset increased faculty costs, there may be periods during which we are unable to fully recover increases in our costs.