AMERICAN PUBLIC EDUCATION INC (APEI) FY 2023 MD&A

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 2022 compared to 2021, 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 14, 2023, 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 107,000 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 January 1, 2022, or the GSUSA Closing Date, our wholly owned subsidiary, American Public Training LLC, completed our acquisition, or the GSUSA Acquisition, of substantially all the assets of Graduate School USA.

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 2023 was $600.5 million, representing a $5.8 million, or 1.0%, decrease from $606.3 million in 2022. 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.

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.

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.

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, 2023 Compared to Year Ended December 31, 2022”.

Student Body. As of December 31, 2023, approximately 66% 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, or TA, programs, 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 students utilizing other funding sources. A significant portion of APUS’s registrations are also attributable to students using VA

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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, 2023, 40% of RU students were enrolled in nursing programs, 23% in health sciences programs, 17% in business programs, with the remainder of students in education, technology, design and justice studies programs. For the fiscal year ended December 31, 2023, approximately 65% of HCN students were enrolled in the Practical Nursing, or PN program, while 35% 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, campus relocations for RU and HCN, 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 costs, and the changing needs of our students, including costs for technology required to support students at our institutions.

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 completed employee reductions in force in 2021, 2022 and 2023. These headcount reductions reflect our ongoing efforts focused on realigning our organizational structure, eliminating redundancies, and optimizing certain functions.

In the third quarter of 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 costs as a result of this reduction in force. The reduction in force resulted in approximately $1.4 million in pre-tax labor and benefit savings in 2021.

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

In the fourth quarter of 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 at APEI, APUS, RU and HCN representing approximately 5.8% of our non-faculty workforce. We incurred an aggregate of approximately $3.1 million of pre-tax cash expenses associated with employee severance costs as a result of this reduction in force. The reduction in force resulted in an additional pre-tax labor and benefit savings of approximately $2.3 million in 2022.

In the third quarter of 2023, we completed a reduction in force that resulted in the termination of 74 employees, primarily non-faculty, and the elimination of 57 open positions across a variety of roles and departments at APEI, RU, HCN and GSUSA. We incurred an aggregate of approximately $3.0 million of pre-tax cash expenses associated with employee severance costs as a result of this reduction in force. The reduction in force resulted in an additional pre-tax labor and benefit savings of approximately $6.2 million in 2023, or $15.5 million on an annualized basis.

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.

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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 program to support our current and future needs;

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

•implementing more stringent satisfactory academic progress standards;

•changing tuition costs and payment options;

•improving our RU Segment financial results, NCLEX pass rates, and stabilizing enrollment;

•upgrading or relocating 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 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. Information technology operating and capital expenditures may 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 launched 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.

We plan to transition all of RU’s information technology services currently outsourced to Collegis back to our operations or to one or more other third-party vendors. As part of that transition and our overall multi-year technology transformation program, in December 2023, we entered into an agreement to outsource a number of our information technology operations to a managed service provider, including service desk, end user support, and network support and operations. As we continue to develop our transition plans, at this time we estimate that the cost of the transition will be between approximately $2.9 million and $3.6 million in 2024.

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 United States. 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. 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 acquisition of RU, or 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. In September 2021, in connection with the Rasmussen Acquisition, 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 allowed RU to continue disbursing Title IV funds during the period of ED’s review of the change in ownership application. The TPPPA continued the growth restrictions that ED

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imposed as a result of RU’s March 2019 change in ownership and control, which was prior to our acquisition of RU, including limitations on new programs and locations, and an enrollment cap, until after ED reviewed and accepted financial statements and compliance audits that cover complete fiscal periods of RU’s Title IV participation under our ownership.

In August 2023, ED notified RU that it had approved RU’s continued participation in the Title IV programs under APEI ownership under a Provisional Program Participation Agreement, or PPPA. The PPPA continues to impose certain growth restrictions on RU that were included in the TPPPA, including limitations on new programs and locations and an enrollment cap on the number of students that participate in Title IV programs. ED continues the prior requirement that RU to submit periodic financial and Title IV enrollment reports. The PPPA also imposes new reporting requirements related to accrediting agency actions, government actions, and class actions and new reporting requirements related to student complaints. The PPPA specifies that after ED reviews and accepts financial statements and compliance audits for one complete fiscal year of RU’s Title IV participation under our ownership, RU may seek removal of the enrollment cap and approval for new programs that replace current programs. Although one complete fiscal year of RU’s Title IV participation under APEI’s ownership has passed and we believe that we may now seek approval for new programs that replace current programs, we have not yet confirmed with ED that it has accepted the financial statements and compliance audits for such purpose. The PPPA also specifies that after ED reviews and accepts financial statements and compliance audits that cover the second complete fiscal year of RU’s Title IV participation under our ownership, RU must seek pre-approval for new locations, new programs that are not replacing current programs, and other changes. For the second and third fiscal years of RU’s Title IV participation under APEI’s ownership, RU is also subject to enrollment growth limitations, after which RU can request that ED release RU from further enrollment restrictions. The PPPA no longer requires RU to post the financial responsibility letter of credit that ED had imposed based on the 2019 change in ownership and control of RU, although this letter of credit has not yet been released. We believe we have met all obligations for the release of the letter of credit.

For more information on the regulatory review related to the Rasmussen Acquisition and RU’s previous change in ownership and related risks, please refer to “Business – Regulatory Environment – 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” and “Risk Factor – Risk Related to the Regulation of Our Industry - RU is currently on provisional certification with ED, and the terms of that provisional certification could limit its potential for growth”.

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 uncertainty in postsecondary enrollment in the United States, we face increased competition as fewer students pursue degree-based postsecondary education from a wider selection of offerings. For example, in 2019, the Navy launched the U.S. Naval Community College, or the USNCC, which supports naval education for enlisted service members. While a number of schools with which APUS competes are participating partners with the USNCC, APUS, as a for-profit educator, 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, 2021, 2022, and 2023, 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.

“90/10 Rule” Compliance and Delayed Billing. For fiscal years beginning on or after January 1, 2023, which for our institutions means the year ended December 31, 2023, federal educational assistance funds used to calculate the “90%” side of the ratio include Title IV funds and any other educational assistance funds provided by a federal agency directly to an institution or a student, including the federal portion of any grant funds provided by or administered by a non-federal agency, except for non-Title IV federal educational assistance funds provided directly to a student to cover expenses other than tuition, fees, and other institutional charges. ED confirmed that the 90/10 Rule no longer permits institutions to count federal aid for veterans and service members as part of the “10%” side of the ratio. As a result, effective January 1, 2023, TA and VA benefits are included in the “90%” side of the ratio, and our institutions’ 90/10 Rule percentages increased, particularly at APUS. While each of our institutions was in compliance with the 90/10 Rule for 2023, with APUS’s relevant percentage for 2023 being 89%, there is no assurance that we will continue to be able to comply in future years, particularly at APUS.

As a result of the problems with TA discussed in further detail in the Risk Factor that begins “Our student registrations, revenue, and cash flow have been adversely impacted...” cash payments from the Army to APUS that were expected in 2021 and 2022 were delayed and were received in 2023. These delayed payments, together with recent modifications to the 90/10 Rule and enrollment growth among service members as compared to declining enrollments from students who use non-federal educational assistance funds caused APUS’s 90/10 Rule percentage to increase. For the year ended December 31, 2023, APUS received approximately $56.3 million in payments from the Army, as compared to $48.8

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million for the year ended December 31, 2022. Of the amount received from the Army in 2023, approximately $18.4 million represented delayed payments that had been expected in prior years. As of December 31, 2023, approximately $22.3 million, of which $12.7 million is older than 60 days from the course start date, was due from the Army, as compared to $26.0 million due from the Army as of December 31, 2022, of which $16.5 million was older than 60 days from the course start date. If we are unable to collect aged amounts due from the Army, this may cause our bad debt expense to increase. Moreover, delayed invoicing may cause the “90%” side of the ratio to increase in 2024 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 2024 or future years.

In September 2023, APUS changed its approach to invoicing for TA, which had the effect of offsetting the receipt of the delayed payments from the Army. APUS is currently taking longer to bill TA, which had the effect of delaying into 2024 payments for TA that ordinarily would have been received in 2023. We estimate that APUS’s change in billing approach resulted in approximately $22.1 million of receivables that we would have expected to receive in 2023 being received in 2024, which may cause the “90%” side of the ratio to increase in 2024 or future years. In addition to the $22.1 million of receivables received in 2024 due to the change in billing timing, in 2024 we expect to bill the Army and collect $4.0 million outstanding from courses that began in 2022 and prior. The change in billing practice also added to our accounts receivable as of December 31, 2023 and resulted in an increase to our leverage ratio as of December 31, 2023 under our Credit Agreement and the purchase agreement for the shares of Series A Senior Preferred Stock, as described in Notes 9 and 13 to our audited consolidated financial statements for the year ended December 31, 2023.

In addition, effective January 1, 2024, APUS revised its billing policy for students utilizing TA, which previously ranged from two weeks to five weeks after course start date to nine weeks after the course start date. Billed accounts receivable are considered past due if the invoice has been outstanding for more than 30 days.

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.

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 term immediately after the date students may drop a term without financial penalty.

At APUS, 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 terms begin and end in a calendar quarter.

The average number of courses taken by students at APUS varies by payor type. For example, Title IV students take more courses on average 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.

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Tuition rate. Providing affordable degree and certificate programs is an important element of our competitive strategy. APUS implemented modest tuition and fee increases for non-military and veteran students in the second and third quarters of 2023, but we estimate that APUS’s tuition and fees remain lower than the average in-state cost at public universities. RU implemented modest tuition increases effective in the first quarter of 2023 for select programs, and HCN implemented a 5% increase in tuition and fees effective in the second quarter of 2023 across all programs. At RU and HCN, the tuition increases are 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. In the second quarter of 2024, as part of the continuous improvement initiatives in education quality, APUS plans to implement a modest tuition increase to master’s students across all categories, including military, non-military, and veteran students.

Net tuition. Tuition revenue varies from period to period based on the number of students enrolled at our institutions, the number of and types of courses that students take, student payor source, the mix of programs students attend, 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 technology fee of $85 to $100 per course, depending on the course. In the second quarter of 2023, the technology fee increased from $65 per course, and in the third quarter of 2023 the technology fee per course was eliminated for all undergraduate students. APUS students are also charged certain additional fees, such as graduation, late registration, transcript request, and comprehensive examination fees, when applicable. Prior to September 2023, APUS provided a grant to cover the technology fee for students using TA and other programs, as applicable. Technology fee revenue net of grants was approximately $7.9 million in 2021, $7.3 million in 2022, and $8.1 million in 2023, or 2.8%, 2.6%, and 2.7% of revenue, respectively.

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. Textbook and other course materials revenue for RU and HCN was approximately $22.2 million in 2021, $49.6 million in 2022, and $43.3 million in 2023, or 16.4%, 16.5%, and 16.0% of revenue, respectively.

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; depreciation and amortization; impairment of goodwill and intangible assets; loss on assets held for sale; and loss on disposals of long-lived assets.

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, prior to January 31, 2023, include expenses from the third-party contract with Collegis to provide marketing services to RU. 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, and the level of expenditures for advertising initiatives for new and existing academic programs.

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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, finance, legal, and 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.

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.

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

Loss on assets held for sale. Loss on assets held for sale is the difference between the asset’s estimated fair value less estimated costs to sell and the asset’s book value at the time the asset is no longer used for operations and reclassified as held for sale in accordance with the held-for-sale criteria.

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

Interest expense, net. Interest expense, net, consists primarily of interest incurred on our long-term debt, net of any 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.

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

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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 recorded non-cash impairment charges in 2022 and 2023 for RU, and 2016 and 2019 for HCN, reducing the carrying value of RU and HCN Segments goodwill to $33.0 million and $26.6 million, respectively. There was no goodwill recorded in connection with the acquisition of GSUSA reported in Corporate and Other, and there is no goodwill in our APUS Segment.

In addition to goodwill, in connection with the acquisitions of RU and HCN, we recorded identified intangible assets with an indefinite useful life in the aggregate amount of $51.0 million and $3.7 million, respectively, in our RU and HCN Segments, which include intangible assets related to trade name, accreditation, licensing, and Title IV, and affiliate agreements. We recorded non-cash impairment charges in 2023 and 2022, reducing the carrying value of RU identified intangible assets with an indefinite useful life to $24.5 million. There were no indefinite useful life intangible assets identified as a result of the acquisition of GSUSA reported in Corporate and Other. There are no indefinite-lived intangible assets in our APUS Segment.

We recorded $35.5 million, $4.4 million, and $1.0 million of identified intangible assets with a definite useful life in connection with the acquisitions of RU, HCN, and GSUSA, respectively, reported in our RU and HCN Segments, and in Corporate and Other. There are no definite-lived intangible assets in our APUS Segment.

Goodwill and indefinite-lived intangible assets are tested for impairment at least annually, and more frequently if events 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.

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 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. 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 second quarter of 2022, we completed a qualitative assessment to determine if an interim goodwill impairment test was necessary. The assessment concluded that due to our RU Segment under performance when compared to projections at the time of acquisition, along with 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. Therefore, we proceeded with a quantitative impairment test. As a result of these assessments, we recorded a non-cash goodwill impairment charge of $131.4 million, and to reflect the corresponding tax impact, in the second quarter of 2022, to reduce the carrying value of the RU Segment goodwill. In addition, we concluded there were indicators of impairment of the RU Segment intangible assets during the second quarter of 2022 and during the annual assessment. We determined the fair value of the RU Segment accreditation, licensing and Title IV indefinite-lived intangible asset was $13.5 million, during the second quarter of 2022, and $2.0 million, during the annual assessment, less than its carrying value. As a result, we recorded total non-cash impairment charges of $15.5 million during 2022 to reduce the carrying value of our RU Segment indefinite-lived intangible assets. There were no indicators of impairment for our HCN Segment.

During the second quarter of 2023, we completed qualitative assessments to determine if an interim goodwill impairment test was necessary. The assessment concluded that due to our RU Segment underperformance when compared to the 2023 internal targets, projected enrollment trends, the decline in financial performance projected for the remainder of 2023 as compared to prior projections, and our market value, it was more likely than not that the fair value of our RU Segment was

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less than its carrying value. Therefore, we proceeded with a quantitative impairment test. As a result of these assessments, we recorded a non-cash goodwill impairment charge of $53.0 million, which reflects the corresponding tax impacts, to reduce the carrying value of the RU Segment goodwill. In addition, we concluded there were indicators of impairment of the RU Segment’s intangible assets. As a result, we recorded non-cash impairment charges of $11.0 million to reduce the carrying value of our RU Segment indefinite-lived intangible assets. There were no indicators of impairment for our HCN Segment.

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, as described above, 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 indefinite-lived intangible assets for accreditation, licensing and Title IV. 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 Segments, 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 October 31, 2023, we completed our annual assessment of goodwill and indefinite-lived intangibles for our RU and HCN Segments. The annual assessment concluded that the fair value of goodwill for RU and HCN exceeded their carrying values by approximately $32.4 million, or 25%, and $7.4 million, or 21%, respectively. Significant assumptions in the forecast used in the discounted cash flow valuation model include the recovery in our RU Segment enrollment and cost containment measures. Our HCN Segment’s significant assumptions in the forecast relate to the addition of a medical assistant program in all Ohio campuses, a future campus opening and future tuition increases. These assumptions could be negatively affected by 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 greater than its carrying value. As a result, no impairment charge recorded regarding the carrying value of our RU Segment indefinite-lived intangible assets. Additionally, there was no impairment to HCN goodwill or indefinite-lived intangible assets.

At December 31, 2023, after the reduction in carrying value due to the goodwill and intangible assets in 2022 and 2023, and, in the case impairment charges in prior years in the HCN Segment, goodwill is $33.0 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 7. Goodwill and Intangible Assets” included in our Consolidated Financial Statements.

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 our existing common stockholders.

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 presented 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 our 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 our 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.

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We 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. We engaged an independent valuation firm to assist with the evaluation at issuance. 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. We reviewed the embedded features as of December 31, 2023 and determined that they are not 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 our option. We have 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. However, holders of our Series A Senior Preferred Stock have certain consent rights that limit our ability to obtain debt or preferred stock financing or take certain other corporate actions. Without the consent of at least 60% of the then outstanding shares of Series A Senior Preferred Stock, with certain exceptions, we may not, among other things, (i) incur any indebtedness if such incurrence would cause our Total Net Leverage Ratio (as defined in the Purchase Agreement) to exceed 0.75 to 1.00, (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 our common stock, or (iv) repurchase more than an aggregate of $30 million of our common stock.

For additional details regarding the Series A Senior Preferred Stock, please refer to “Note 13. Preferred Stock” 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:

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Revenue

For the year ended December 31, 2023, our consolidated revenue was $600.5 million, a decrease of $5.8 million, or 1.0%, compared to $606.3 million in 2022. The decrease in revenue was primarily due to a $39.2 million, or 15.5% decrease in revenue in our RU Segment, partially offset by a $18.2 million, or 6.4% increase in revenue in our APUS Segment, a $9.9 million, or 20.9%, increase in revenue in our HCN Segment, and a $5.3 million, or 25.0%, increase in GSUSA revenue included in Corporate and Other.

APUS net course registrations increased approximately 4.9% to 367,600 for the year ended December 31, 2023 from approximately 350,400 in the 2022 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, 2023, RU enrollment decreased 11.0% as compared to the 2022 period. We believe this decline in enrollment, which reflects year-over-year declines in new and total nursing enrollment, and which was partially offset by an increase in non-nursing program enrollment, can be attributed to several factors, including the prior departure of leadership accountable for enrollment and nursing operations and caps on nursing student enrollment at certain RU campuses. RU 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.

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For the year ended December 31, 2023, HCN student enrollment increased approximately 16.9% as compared to the 2022 period. We believe that the increase in total student enrollment is primarily due to the opening of new campuses, including the Detroit, Michigan campus, which opened in October 2022. 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, 2023, costs and expenses were $648.9 million, a decrease of $94.8 million, or 12.8%, compared to $743.7 million in 2022. The decrease in costs and expenses as compared to the prior year period was primarily due to a decrease in the non-cash goodwill and intangible asset impairment charge compared to the prior year period. Costs and expenses for the year ended December 31, 2023, include a non-cash goodwill and intangible asset impairment charge of $64.0 million to reduce the carrying value of RU Segment goodwill and intangible assets, and to reflect the corresponding tax impact compared to a non-cash impairment charge and the corresponding tax impact of $146.9 million in the prior year period, a decrease of $82.9 million in the current year period. Other decreases in costs and expenses for the year ended December 31, 2023, as compared to the prior year period include decreases in advertising costs in all segments and decreases in depreciation and amortization costs, partially offset by an increase in employee compensation costs in Corporate and Other and our HCN Segment and a $2.4 million loss on assets held for sale in our APUS Segment.

In 2023, costs and expenses also include the following on a pretax basis: $3.0 million in severance costs related to a reduction in force, and $2.4 million in selling and promotional costs related to the termination of the marketing contract with Collegis. In 2022, costs and expenses also include the following items on a pretax basis: $3.9 million in selling and promotional costs related to the termination of the marketing contract with Collegis, $3.5 million of severance costs related to reductions in force, $3.2 million in information technology costs related to our multi-year technology transformation program, and $1.9 million in professional services costs primarily related to the Rasmussen and GSUSA Acquisitions.

Costs and expenses as a percentage of revenue decreased to 108.0% in 2023 from 122.7% in 2022. Excluding impairment charges, losses on assets held for sale and Collegis transition fees, costs and expenses were 96.6% of revenue for the year ended December 31, 2023, compared to 97.8% of revenue in the prior year period. Our income before interest and income taxes as a percentage of revenue, or our operating margin, improved to negative 8.0% from negative 22.7% compared to the same prior year period. Excluding impairment charges, loss on assets held for sale, and Collegis transition fees, our operating margin improved to 3.4% from 2.2% compared to the same prior year period. The decrease 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, 2023, instructional costs and services expenses were $292.9 million, an increase of approximately $4.4 million, or 1.5%, compared to $288.5 million in 2022. The increase in instructional costs and services expenses was primarily due to increases in employee and faculty compensation costs in our APUS and HCN Segments due to an increase in registrations at APUS and enrollment at HCN, and Corporate and Other due to higher revenue at GSUSA, an increase in classroom materials costs in our RU and HCN Segments, and an increase in facilities maintenance costs in our RU and HCN Segments, partially offset by a decrease in employee and faculty compensation costs in our RU Segment due to a decrease in enrollment, and a decrease in classroom materials costs in our APUS Segment. Instructional costs and services expenses as a percentage of revenue increased to 48.8% in 2023, compared to 47.6% in 2022.

Selling and promotional expenses. For the year ended December 31, 2023, selling and promotional expenses were $133.0 million, a decrease of $21.6 million, or 14.0%, compared to $154.6 million in 2022. The decrease in selling and promotional expenses was primarily due to a decrease in advertising costs in all segments and Corporate and Other, a decrease in employee compensation costs in our APUS Segment, and the transition from Collegis to our in-house marketing function in our RU Segment, partially offset by an increase in employee compensation costs in Corporate and Other. In 2023 and 2022, selling and promotional costs include $2.4 million and $3.9 million, respectively, related to the termination of the Collegis marketing contract effective January 31, 2023. Selling and promotional expenses as a percentage of revenue decreased to 22.1% in 2023, compared to 25.5% in 2022. Excluding the Collegis transition service fees, selling and promotional expenses were 21.7% in 2023 compared to 24.9% in 2022.

General and administrative expenses. For the year ended December 31, 2023, general and administrative expenses were $128.2 million, an increase of $7.9 million, or 6.6%, compared to $120.4 million in 2022. The increase in general and administrative expenses was primarily due to increases in employee compensation costs in Corporate and Other and our RU and HCN Segments, increases in bad debt expense in all segments, and increases in technology costs in all segments and Corporate and Other, partially offset by a decrease in employee compensation costs in our APUS Segment, and a decrease in professional services costs in our APUS and RU Segments. General and administrative expenses as a percentage of revenue increased to 21.3% in 2023 compared to 19.9% in 2022.

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For the year ended December 31, 2023, consolidated bad debt expense increased to $16.5 million, or approximately 2.7% of revenue, from $13.5 million, or approximately 2.2% of revenue, in 2022. The increase in bad debt expense was primarily due to an increase in the APUS, HCN, and RU Segments of $1.3 million, $1.0 million and $0.5 million, respectively, as compared to the prior year period.

Depreciation and amortization. Depreciation and amortization expenses were $27.8 million in 2023, compared to $32.1 million in 2022, a decrease of $4.3 million or 13.4%, primarily related to the full amortization of certain definite lived intangible assets in our RU Segment in 2023. Depreciation and amortization expenses as a percentage of revenue decreased to 4.6% in 2023 compared to 5.3% in 2022.

Impairment of goodwill and intangible assets. For the year ended December 31, 2023, we recorded $64.0 million in non-cash impairment charges in our RU Segment to reduce the carrying value of RU Segment goodwill and intangible assets, and to reflect the corresponding tax impact, compared to $146.9 million in 2022. For additional information regarding the impairment of goodwill and intangible assets, and a discussion of the potential for future impairment charges for goodwill and intangible assets, please refer to the discussion in “Note 7. Goodwill and Intangible Assets” included in the Consolidated Financial Statements in this Annual Report.

Loss on assets held for sale. For the year ended December 31, 2023, we recorded a $2.4 million loss to reduce the carrying value of real property held for sale in our APUS Segment. There was no loss on assets held for sale in the year ended December 31, 2022.

Loss on disposal of long-lived assets. The loss on disposal of long-lived assets was $0.6 million in 2023, compared to $1.2 million in 2022. The prior year loss was primarily related to the sale of excess facilities located in Charles Town, West Virginia.

Stock-based compensation. Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses in 2023 were $7.7 million in the aggregate, representing a decrease of $0.3 million, or 3.4%, compared to $8.0 million in 2022. Stock-based compensation costs include performance stock unit incentive costs and accelerated expense for retirement-eligible employees.

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 2022 and 2023 (in thousands):

Interest expense, net. Interest expense, net of interest income, was $4.5 million in 2023, compared to interest expense, net of interest income of $17.7 million in 2022. The decrease in interest expense was primarily due to the decrease in the outstanding balance in our senior secured term loan facility. In December 2022, we made $65.0 million in prepayments to reduce our outstanding debt and as a result of these prepayments, we wrote off a proportionate amount of unamortized debt issuance costs in the amount of $3.9 million. The write off in 2022 is recorded in interest expense on the Consolidated Statements of Income for the year ended December 31, 2022.

Income tax (benefit) expense. For the year ended December 31, 2023, we recognized an income tax benefit of $10.7 million, compared to an income tax benefit of $36.3 million in 2022. The effective tax rate was 18.5% and 24.0% in 2023 and 2022, respectively. The year ended December 31, 2023 and 2022 includes a $15.8 million and $36.0 million income tax benefit related to the impairment of goodwill and intangible assets, respectively. The 2023 effective tax rate was impacted by higher non-deductible expenses in relation to the pre-tax losses for the period, compared to 2022.

Equity investment loss. Equity investment loss was $5.2 million in 2023, compared to equity investment loss of $21,000 in 2022. The increase is primarily due to a $5.2 million non-cash investment loss related to the investee entering into an agreement to be sold which resulted in no sales proceeds.

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Net income (loss). The net loss in 2023 was $47.3 million, compared to net loss of $115.0 million in 2022, a decrease in loss of $67.7 million. This decrease was related to the factors discussed above.

Preferred stock dividends. Preferred stock dividends for the year ended December 31, 2023 were $6.0 million compared to $48,000 in 2022. The Series A Senior Preferred Stock was issued on December 28, 2022.

Net income (loss) available to common stockholders. The net loss available to common stockholders in 2023 was $53.3 million, compared to net income available to common stockholders of $115.0 million in 2022, a decrease of $61.7 million. This decrease was related to the factors discussed above.

Operating Results by Reportable Segment - Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

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

APUS Segment

Our APUS Segment revenue was $303.3 million in 2023, an increase of $18.2 million, or 6.4%, compared to $285.1 million in 2022, which is primarily attributable to higher net course registrations and the impact of tuition and fee increases in the second and third quarters. Net course registrations at APUS increased 4.9% to approximately 367,600 in 2023 compared to the 2022 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 $84.4 million in 2023, an increase of $26.0 million, or 44.4%, compared to the 2022 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 $214.1 million in 2023, a decrease of $39.2 million, or 15.5%, compared to $253.3 million in 2022, which was primarily due to lower enrollments. Enrollment at RU decreased approximately 11.0% during the year ended December 31, 2023 as compared to the 2022 period. We believe this decline in enrollment, which reflects year-over-year declines in new and total nursing enrollment, which was partially offset by an increase in non-nursing program enrollment, can be attributed to several factors, including the prior departure of leadership accountable for enrollment and nursing operations and caps on nursing student enrollment at certain RU campuses. RU Segment loss from operations before interest and income taxes was $103.6 million in 2023 compared to a loss from operations before income and taxes was $166.6 million in 2022. The RU Segment loss includes impairment charges on goodwill and intangible assets of $64.0 million in 2023 and $146.9 million in 2022 and the corresponding tax impacts of $15.8 million and $36.0 million, respectively.

HCN Segment

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Our HCN Segment revenue was approximately $56.9 million in 2023, an increase of $9.9 million, or 20.9% compared to $47.1 million in the 2022 period, which is primarily attributable to an increase in student enrollment and a 5% tuition increase in the second quarter of 2023. HCN student enrollment increased approximately 16.9% during the year ended December 31, 2023 as compared to the 2022 period. The increase in HCN total student enrollment was primarily due to the opening of new campuses, including the Detroit, Michigan campus, which opened in October 2022. Loss from operations before interest and income taxes in the HCN Segment was approximately $1.4 million in 2023 compared to a loss from operations of $4.0 million in 2022, an improvement of $2.6 million. The decrease in loss from operations before interest and income taxes is due to the changes in revenue and expenses discussed above.

Liquidity and Capital Resources

Cash, cash equivalents, and restricted cash was $129.5 million and $144.3 million at December 31, 2022 and 2023, respectively, representing an increase of $14.9 million, or 11.5%, in the 2023 period. The increase in cash was primarily due to higher revenue and operating income at APUS, increased payments received from the Army including payments related to periods prior to 2023, and the timing of other receipts and payments, partially offset by our investment in capital expenditures, payment of preferred dividends, repurchases of common stock in 2023, and the change in billing approach for TA at APUS. 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 twelve months and beyond. 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 in the second and third quarters of 2021. 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. In early 2023, we experienced an improvement in Army’s processing of current invoices and payments, while continuing to work with the Army on invoices submitted during the transition to ArmyIgnitED 2.0. For example, 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. For the year ended December 31, 2023, APUS received approximately $56.3 million in payments from the Army. As of December 31, 2023, approximately $22.3 million, of which $12.7 million is older than 60 days from the course start date, was due from the Army, as compared to $26.0 million due from the Army as of December 31, 2022, of which $16.5 million was older than 60 days from the course start date. There can be no assurance that our continued efforts to mitigate any adverse impact of the transition to ArmyIgnitED 2.0 on accounts receivable, bad debt, and cash flow will be successful.

As discussed in greater detail above in “Overview - 90/10 Rule - Compliance and Delayed Billing”, payments from the Army that were expected in 2021 and 2022 were delayed. Approximately $18.4 million of those delayed payments were received in 2023, which counted toward the “90” side of the 90/10 Rule. In September 2023, APUS changed its approach to invoicing for TA, which offset the receipt of the delayed payments from the Army, resulting in approximately $22.1 million of receivables that we would have expected to receive in 2023 being received in 2024. While the change in billing approach positively impacted the "90%" side of the ratio in 2023, it may cause the “90%” side of the ratio to increase in 2024 or future years. In addition to the $22.1 million of receivables expected to be received in 2024 due to the change in billing timing, in 2024 we expect to bill the Army and collect $4.0 million outstanding from courses that began in 2022 and prior. Effective January 1, 2024, APUS revised its billing policy for students utilizing TA, which previously ranged from two weeks to five weeks after course start date to nine weeks after the course start date. Billed accounts receivable are considered past due if the invoice has been outstanding for more than 30 days.

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. The change in TA

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invoicing added to our accounts receivable as of December 31, 2023 and resulted in an increase to our leverage ratio as of December 31, 2023 under our Credit Agreement and the Purchase Agreement, as described in Notes 9 and 13 to our audited consolidated financial statements for the year ended December 31, 2023.

Our Total Net Leverage Ratio, under the Credit Agreement, at December 31, 2022 and 2023 was 0.67 and 0.51, respectively. While we do not anticipate that a higher leverage ratio will have material limitations on our expected operations for 2024, it could result in reduced operational flexibility in 2024 and future years.

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.

As described more fully in “Regulatory Environment – Student Financing Sources and Related Regulations/Requirements – Department of Education – Regulation of Title IV Financial Aid Programs – Financial Responsibility”, on March 4, 2024, ED notified us that according to its calculations, we had a 2022 consolidated composite score of 1.1 and our institutions were therefore in the “zone.” Although we disagree with ED’s calculation and conclusion and plan to submit a rebuttal to ED, ED may not agree with our position. If ED does not agree with our position, we intend to submit to what are referred to as the “zone alternative” requirements, under which we would be required to: (i) make Title IV disbursements to eligible students and parents under the heightened cash monitoring payment method, or HCM1, pursuant to which we would be required to first make disbursements to eligible students and parents and pay any credit balances before we request or receive funds from ED for the amount of those disbursements; (ii) notify ED of certain events, such as an adverse action taken by any of our institution’s accreditors or state authorizing agencies; (iii) provide regular reports to ED relating to our institution’s current operations and future plans; and (iv) require our auditors to express an opinion on our compliance with the requirements under the zone alternative. While Rasmussen already complies with HCM1, if HCM1 had applied to APUS and HCN in 2023, we estimate that we would have received approximately $6.2 million from ED at a point in time after we had disbursed the related funds.

Our 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, 2021 and 2022, we incurred approximately $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. We have a legacy customized SIS at APUS that we refer to as Partnership at a Distance™, or PAD, and proprietary information systems and processes to support PAD, into which we have invested considerable time and money. PAD is designed to enable APUS to provide each student with individualized support at appropriate times from pre-enrollment through and beyond graduation, including student advising, administrative support, and community networking. We continually evaluate PAD for changes and upgrades and anticipate that we will eventually make significant changes to or replace this system. RU uses Anthology Campus Nexus as its SIS. The RU SIS environment is currently hosted with Collegis, which maintains all systems, support, and hosting. RU’s and APUS’s admissions function are managed inside of Salesforce and connected to Anthology for RU and PAD for APUS to ensure all pertinent information is synchronized appropriately. HCN and GSUSA have their own SIS platforms. In 2024, we plan to replace the existing SIS platform used by GSUSA, and will also begin moving HCN to a new SIS platform. More broadly, we continue to review and assess our student information and services platforms and their capabilities, including whether to consolidate to a standard platform across more or all our institutions.

Capital expenditures could be higher in the future as a result of, among other things, additional expenditures for technology or other business capabilities, the maintenance of existing campuses at RU and HCN, the opening of new campuses at RU and HCN, the acquisition or lease of existing structures or potential new construction projects, and necessary tenant improvements that arise as a result of our ongoing evaluation of our space needs and opportunities for physical growth. We also expect to continue to explore opportunities to invest in the education industry, which could include purchasing or investing in other education-related companies or companies developing new technologies. For the years ended December 31, 2021 and 2022, we incurred approximately $7.6 million and $1.9 million, respectively, of acquisition-related expenses related to the Rasmussen and GSUSA Acquisitions, which are included in general and administrative expenses on the Consolidated Statements of Income.

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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. Expenses for the fourth quarter of 2022 include $3.9 million in transition fees in connection with the termination of the Collegis marketing services contract as specific transition obligations were completed, and first quarter of 2023 expenses include the remaining $2.4 million in transition service fees, for total non-recurring transition service fees of $6.3 million. We completed the transition of RU marketing to our in-house centralized marketing team during the first quarter of 2023. We plan to transition all of the information technology services currently outsourced to Collegis back to our operations and to one or more third-party vendors in 2024.

In December 2022, we issued $40 million of Series A Senior Preferred Stock, $0.01 par value per share, to affiliates of our 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, 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 information on the Facilities and their terms, please refer to “Note 9. 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 meet the financial responsibility requirements, 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 $29.2 million and $45.5 million in 2022, and 2023, respectively. The increase in cash from operating activities is primarily due to improved financial performance and changes in working capital due to the timing of receipts and payments. Accounts receivable at December 31, 2023 increased approximately $8.6 million compared to December 31, 2022, primarily as a result of the change in the timing of billing for students using TA at APUS, partially offset by a decrease in accounts receivable at RU. Accounts payable, accrued liabilities, and accrued compensation and benefits at December 31, 2023 were approximately $4.2 million higher than December 31, 2022, primarily due to the timing of payment processing.

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Investing Activities

Net cash used in investing activities was $13.7 million and $13.8 million in 2022, and 2023, respectively. Investing activities for the years ended December 31, 2022 and 2023 include capital expenditures of $16.4 million and $13.9 million, respectively. The results for the year ended December 31, 2022, include $2.0 million in cash received from the GSUSA Acquisition.

Financing Activities

Net cash used in financing activities was $35.7 million and $16.9 million in 2022 and 2023, respectively. The cash used in financing activities in 2023 includes $6.0 million related to the payment of dividends on our preferred stock and $9.7 million used for the repurchase of our common shares, and $1.0 million for the deemed repurchase of our common stock to satisfy minimum tax-withholding requirements in connection with the vesting of restricted stock grants. 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. As of January 31, 2024, we repurchased an additional 251,000 shares for $2.8 million. Effective February 1, 2024, we ceased purchases under this purchase authorization.

Contractual Obligations

Long-term debt

We have long-term debt outstanding under the Credit Agreement of $99.1 million as of December 31, 2023. No principal payments are due in 2024 as a result of the December 2022 prepayments. Interest payable of $10.9 million is due in 2024, assuming the variable rate as of December 31, 2023. For more information on the timing and amount of our future principal and interest payments, please refer to “Note 9. Long-Term Debt” included in the Consolidated Financial Statements in this Annual Report.

Lease obligations

We have leases for office space and campus facilities. As of December 31, 2023, we had lease payment obligations of $149.1 million, with $18.5 million payable in 2024. For more information on the timing and amount of our future lease obligations, please refer to “Note 8. Leases” included in the Consolidated Financial Statements in this Annual Report.

Other purchase obligations

As of December 31, 2023, we had other purchase obligations of $10.9 million, with $8.2 million payable in 2024. Collegis, a third-party service provider, was previously engaged with RU for marketing services and is currently engaged with RU for information technology services through September 2024. The original agreements were to expire on 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. Expenses for the fourth quarter of 2022 include $3.9 million in transition fees in connection with the termination of the Collegis marketing services contract as specific transition obligations were completed, and first quarter of 2023 expenses include the remaining $2.4 million in transition service fees, for total non-recurring transition service fees of $6.3 million. We completed the transition of RU marketing to our in-house centralized marketing team during the first quarter of 2023.

Outsourced information technology services under the Collegis information technology contract will continue until September 30, 2024 at which time we will complete the transition of information technology services currently provided by Collegis to our operations and to one or more third-party vendors. The total minimum expenses for information technology services through September 30, 2024 is approximately $7.0 million.

We plan to transition all of RU’s information technology services currently outsourced to Collegis back to our operations or to one or more other third-party vendors. As part of that transition, we further evaluated the current and future needs of Company’s information technology infrastructure and determined to outsource a number of our information technology operations to a managed service provider, including service desk, end user support, and network support and operations. As we continue to develop our transition plans, at this time we estimate that the cost of the transition will be between approximately $2.9 million and $3.6 million in 2024.

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Impact of Inflation

Recently, the U.S. economy experienced 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. APUS, RU, and HCN increased certain tuition and fees beginning in 2023, and APUS intends to increase in 2024, in order to offset increased faculty costs and other costs, but there may be periods during which we are unable to fully recover increases in our costs.