PERDOCEO EDUCATION Corp (PRDO) FY 2021 MD&A

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

The discussion below contains “forward-looking statements,” as defined in Section 21E of the Securities Exchange Act of 1934, as amended, that reflect our current expectations regarding our future growth, results of operations, cash flows, performance and business prospects and opportunities, as well as assumptions made by, and information currently available to, our management. We have tried to identify forward-looking statements by using words such as “anticipate,” “believe,” “expect,” “plan,” “may,” “should,” ”will,” “continue to,” “focused on” and similar expressions, but these words are not the exclusive means of identifying forward-looking statements. These statements are based on information currently available to us and are subject to various risks, uncertainties, and other factors, including, but not limited to, those matters discussed in Item 1A, “Risk Factors,” in Part I of this Annual Report on Form 10-K that could cause our actual growth, results of operations, financial condition, cash flows, performance, business prospects and opportunities to differ materially from those expressed in, or implied by, these statements. Except as expressly required by the federal securities laws, we undertake no obligation to update such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events, developments, or changed circumstances or for any other reason.

As used in this Annual Report on Form 10-K, the terms “we,” “us,” “our,” “the Company,” “Perdoceo” and “PEC” refer to Perdoceo Education Corporation and our wholly-owned subsidiaries. The terms “institution” and “university” refer to an individual, branded, for-profit educational institution, owned by us and including its campus locations. The term “campus” refers to an individual main or branch campus operated by one of our institutions.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing elsewhere in this Annual Report on Form 10-K. The MD&A is intended to help investors understand the results of operations, financial condition and present business environment. The MD&A is organized as follows:

OVERVIEW

Our academic institutions offer a quality postsecondary education primarily online to a diverse student population, along with campus-based and blended learning programs. Our accredited institutions – Colorado Technical University (“CTU”) and the American InterContinental University System (“AIUS” or “AIU System”) – provide degree programs from associate through doctoral level as well as non-degree professional development and continuing education offerings. Our universities offer students industry-relevant and career-focused academic programs that are designed to meet the educational needs of today’s busy adults. CTU and AIUS continue to show innovation in higher education, advancing personalized learning technologies like their intellipath® learning platform and using data analytics and technology to support students and enhance learning. Perdoceo is committed to providing quality education that closes the gap between learners who seek to advance their careers and employers needing a qualified workforce.

Our reporting segments are determined in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280 – Segment Reporting and are based upon how the Company analyzes performance and makes decisions. Each segment represents a postsecondary education provider that offers a variety of academic programs. We organize our business across two reporting segments: CTU and AIUS.

On August 2, 2021, the Company acquired substantially all of the assets of DigitalCrafts (the “DigitalCrafts acquisition”). DigitalCrafts helps provide individuals an opportunity in the technology area through reskilling and upskilling courses within the areas of web development, web design and cybersecurity. DigitalCrafts operations were brought within the AIUS segment, preserving the ‘DigitalCrafts’ name and programs as part of AIUS’ operations.

On September 10, 2021, the Company acquired Hippo Education, LLC (“Hippo” and the “Hippo Acquisition”). Hippo provides continuing medical education and exam preparation for medical professionals with a quality technology platform and strong course content. Hippo’s operations were brought within the CTU segment, preserving the ‘Hippo Education’ name and programs as part of CTU’s operations.

On March 2, 2020, the Company acquired substantially all of the assets of Trident University International (“Trident University”), an accredited university offering online undergraduate, master’s and doctoral programs with a strong focus on graduate programs. Trident University’s operations were brought within the AIUS segment, preserving the ‘Trident’ name and programs as part of AIU’s operations.

36

See Note 18 “Segment Reporting” for a description of each of our current reporting segments along with revenues, operating income and total assets by reporting segment for each of the past three fiscal years.

Regulatory Environment and Political Uncertainty

We operate in a highly regulated industry, which has significant impacts on our business and creates risks and uncertainties. In recent years, Congress, the Department, states, accrediting agencies, the CFPB, the FTC, state attorneys general and the media have scrutinized the for-profit postsecondary education sector. Congressional hearings and roundtable discussions were held regarding various aspects of the education industry and reports were issued that are highly critical of for-profit colleges and universities. A group of influential U.S. senators, consumer advocacy groups and some media outlets have strongly and repeatedly encouraged the Departments of Education, Defense and Veterans Affairs to take action to limit or terminate the participation of for-profit educational institutions, including Perdoceo, in existing tuition assistance programs. In addition, targeted loan relief to student borrowers is a stated priority for the Department, and consumer advocacy groups and others are focusing their lobbying and other efforts relating to student debt forgiveness on for-profit colleges and universities, encouraging loan discharge applications and complaints by former students.

The current Presidential and Department administrations, as well as Congress, are pursuing significant legislative, regulatory and administrative actions affecting our business. A loss or material reduction in Title IV Programs or the amount of student financial aid for which our students are eligible would materially impact our student enrollments and profitability and could impact the continued viability of our business as currently conducted.

We encourage you to review Item 1, “Business,” and Item 1A, “Risk Factors,” to learn more about our highly regulated industry and related risks and uncertainties.

Note Regarding Non-GAAP measures

We believe it is useful to present non-GAAP financial measures which exclude certain significant and non-cash items as a means to understand the performance of our core business. As a general matter, we use non-GAAP financial measures in conjunction with results presented in accordance with GAAP to help analyze the performance of our core business, assist with preparing the annual operating plan, and measure performance for some forms of compensation. In addition, we believe that non-GAAP financial information is used by analysts and others in the investment community to analyze our historical results and to provide estimates of future performance.

We believe certain non-GAAP measures allow us to compare our current operating results with respective historical periods and with the operational performance of other companies in our industry because it does not give effect to potential differences caused by items we do not consider reflective of underlying operating performance. In evaluating the use of non-GAAP measures, investors should be aware that in the future we may incur expenses similar to the adjustments presented below. Our presentation of non-GAAP measures should not be construed as an inference that our future results will be unaffected by expenses that are unusual, non-routine or non-recurring. A non-GAAP measure has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for net income, operating income, earnings per diluted share, or any other performance measure derived in accordance with and reported under GAAP or as an alternative to cash flow from operating activities or as a measure of our liquidity.

Non-GAAP financial measures, when viewed in a reconciliation to respective GAAP financial measures, provide an additional way of viewing the Company's results of operations and the factors and trends affecting the Company's business. Non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, the respective financial results presented in accordance with GAAP.

2021 Review

During the year ended December 31, 2021 (“current year”), we prioritized resources for academic operations and technology enhancements and adjusted our processes to support and educate our students as effectively as possible as they continued to adapt to the challenges presented by the COVID-19 pandemic. Our financial results include the DigitalCrafts and Hippo acquisitions commencing on the respective dates of acquisition in the current year, and the Trident acquisition commencing on the March 2, 2020 date of acquisition. The DigitalCrafts and Hippo acquisitions completed during the current year expand the professional development and continuing education offerings at our academic institutions.

We believe the prolonged pandemic and its resulting social distancing practices and safety measures, as well as the macro-economic and governmental response, has impacted overall student engagement, particularly during the latter half of 2021. During the year we experienced some students pause their academic programs or decide not to begin classes. Additionally, leveraging data analytics, we made adjustments to our marketing strategies beginning in the third quarter of 2021. We believe these changes will help further improve our ability, in the long term, to identify prospective students who are more likely to succeed at one of our universities, however we believe these changes negatively impacted total student enrollments as of December 31, 2021.

As a result of these factors, total student enrollments decreased 5.4% at December 31, 2021 as compared to December 31, 2020, with CTU increasing by 0.4% and AIUS decreasing by 13.3%. The increase in total student enrollments for CTU was due to the timing impact of the academic calendar redesign. In early 2021, we redesigned CTU’s academic calendar to strategically place breaks

37

between sessions and provide more opportunities for students to continue with their academic programs. We believe this redesign may improve student experiences and engagement. CTU’s academic calendar redesign, along with the previous academic calendar redesign at AIU, may impact the comparability of revenue-earning days and enrollment results in any given quarter. The decrease in total student enrollments for AIUS at December 31, 2021 as compared to December 31, 2020 was impacted by the factors mentioned above. Additionally, we believe changes in the Army education administration portal and related technical challenges as well as a reduced number of in-person recruiting events negatively impacted enrollments of military-affiliated students at Trident.

We believe investments in technology continued to positively impact student experiences and student learning during 2021. We continued to invest in machine learning and data analytics across the academics and advising functions and we began implementing enhancements to our student technology infrastructure during the year. The enhancements to our student technology infrastructure are anticipated to be completed over a multi-year period and include several upgrades to our mobile platform and virtual campus. We believe that continuing to refine these internet-based student platforms will further enhance the student experience, especially for our non-traditional adult learners, while driving efficiencies within the business.

We believe that the lingering impact of the COVID-19 pandemic on student engagement as well as the changes in our marketing strategies discussed above will negatively impact total student enrollments in 2022. Typically, changes in total student enrollments have a lag impact on revenue, and, as a result, we expect revenue and operating income for 2022 to be lower as compared to 2021, excluding any positive impacts from acquisitions or the academic calendar redesign. We will continue our efforts to adjust our operating processes and expenses to align with overall revenue and enrollment trends, although we do not expect these adjustments to fully offset the expected revenue decline.

Financial Highlights

Revenue for the year ended December 31, 2021 increased by 0.8% or $5.7 million as compared to the prior year, reflecting increases in revenue at both CTU and AIUS. The revenue increase for CTU was primarily due to the Hippo acquisition in September 2021. AIUS’ revenue for the current year was benefitted by the DigitalCrafts acquisition in August 2021 as well as twelve months of revenue for Trident as compared to ten months in the prior year. Operating income for the current year increased to $149.0 million as compared to operating income of $142.9 million for the prior year. The increase in operating income was primarily due to decreased operating expense associated with advertising and marketing, occupancy, bad debt and admissions for the current year as compared to the prior year. These benefits more than offset increased legal fee expense relating to loan forgiveness applications submitted to the Department by former students and acquisition efforts.

The Company believes it is useful to present non-GAAP financial measures, which exclude certain significant and non-cash items, as a means to understand the performance of its operations. (See tables below for a GAAP to non-GAAP reconciliation.) Adjusted operating income was $175.5 million for the current year as compared to $159.0 million in the prior year. The improvement was primarily due to the decrease in advertising and marketing, occupancy, bad debt and admissions expense as compared to the prior year.

During 2021, we began adjusting operating income and earnings per diluted share for legal fee expense associated with (i) responses to the Department relating to borrower defense to repayment applications from former students, and (ii) acquisition efforts, as we believe that these expenses are not reflective of underlying operating performance. Additionally, we no longer adjust for expenses related to vacated facilities at closed campuses as these expenses are expected to be immaterial. The prior period amounts were recast for these items to maintain comparability to 2021 non-GAAP measures.

Adjusted operating income for the years ended December 31, 2021 and 2020 is presented below (dollars in thousands, unless otherwise noted):

38

___________________________

COVID-19 Pandemic

Since the outbreak of COVID-19 in March of 2020 we have made several changes to our business operations in response to the global pandemic. While our universities are primarily online, we have a small portion of our students at campus locations. Early in the pandemic, we transitioned these students to our online platform, and during the latter half of 2021 we began to gradually re-open our ground-based campuses for campus activities and classes. Similarly, during the first year of the pandemic, we transitioned our workforce to a remote work environment, and during 2021 our employees largely remained remote with certain functions beginning the transition to a hybrid work model. We continue to provide our employees with support and resources during this critical time so that they have the tools and information they need to continue supporting our students. Both our students and our workforce are well supported by our scalable and innovative technology infrastructure which enabled us to make these changes with minimal disruptions to our business operations.

While we have not experienced any material disruptions to our business operations as a result of the COVID-19 pandemic to date, we experienced some impacts to student enrollments during 2021 and expect those impacts to continue into 2022 as discussed above. Our strong balance sheet and technology infrastructure provide us with the ability to adapt our operations in response to fluctuations in enrollment trends. We continue to monitor for future impacts of a potential worsening of global economic conditions on our university operations and for changes in prospective student interest or student engagement levels as a result of changes in social distancing requirements and the U.S. economy.

39

Title IV Programs

A significant majority of our students rely on Title IV Programs to finance their education and therefore a significant proportion of our cash receipts come from Title IV Programs. As discussed throughout this Annual Report on Form 10-K, our participation in Title IV Programs subjects us to extensive regulation. Significant resources and management time are devoted to monitoring compliance with this complex regulatory framework. The scrutiny of the for-profit postsecondary education sector and the current Presidential and Department administrations, including Congress, could lead to significant regulatory changes. Regulatory change is also likely to continue to be considered by the states and other governmental and regulatory agencies.

As discussed in Item 1, “Business – Student Financial Aid and Related Federal Regulation - Legislative Action and Recent Department Regulatory Initiatives,” the Department is undertaking significant rulemaking initiatives. Some of these initiatives are focused on the participation of for-profit postsecondary education institutions in Title IV Programs. We will continue to closely monitor potential regulatory changes while we endeavor to manage our business in a way that enhances our ability to comply with any future regulatory changes. However, depending on the nature of any future regulatory changes, we may be required to alter the manner in which we conduct our business, perhaps significantly, in order to preserve our students’ ability to benefit from financial assistance for their education pursuant to Title IV Programs. Necessary business changes could include voluntarily reducing enrollments in programs eligible for Title IV Program financial assistance and eliminating certain educational programs, among other things. Changes we make to our business to comply with regulatory changes may reduce our student enrollments, revenue and profitability and regulatory changes may impact our ability to maintain or grow our business. Please see Item 1A, “Risk Factors – Risks Related to the Highly Regulated Field in Which we Operate,” for more information about the risks and uncertainties relating to our highly regulated industry and potential regulatory changes.

CONSOLIDATED RESULTS OF OPERATIONS

The summary of selected financial data table below should be referenced in connection with a review of the following discussion of our results of operations for the years ended December 31, 2021 and 2020 (dollars in thousands), including comparisons of our year-over-year performance between these years. Please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation” in our Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of our results for the year ended December 31, 2019, as well as the year-over-year comparison of our 2020 financial performance to 2019.

_______________

40

Year Ended December 31, 2021 as Compared to the Year Ended December 31, 2020

Revenue

Revenue for the year ended December 31, 2021 (“current year”) increased 0.8% or $5.7 million, driven by growth in revenue within both CTU and AIUS. The current year increase was benefitted by the DigitalCrafts and Hippo acquisitions, and also benefitted from twelve months of results related to the Trident acquisition as compared to only ten months in the prior year.

Educational Services and Facilities Expense (dollars in thousands)

The educational services and facilities expense for the current year decreased by 2.7% or $3.0 million as compared to the prior year. Academics and student related expense increased by 0.8% or $0.8 million for the current year as compared to the prior year, primarily as a result of the DigitalCrafts and Hippo acquisitions. Occupancy expenses for the current year improved by 18.0% or $3.8 million as compared to the prior year, driven by non-recurring real estate tax credits.

General and Administrative Expense (dollars in thousands)

The general and administrative expense for the current year increased by 0.3% or $1.3 million as compared to the prior year. This increase was primarily driven by increased administrative expense, which was partially offset by decreases in advertising and marketing, admissions and bad debt expenses. Administrative expense increased by 10.4% or $13.2 million primarily due to increased legal fees within Corporate and Other related to the borrower defense to repayment applications from former students and acquisition efforts as well as expense for the DigitalCrafts and Hippo acquisitions completed in the current year.

The advertising and marketing expense for the current year decreased by 4.2% or $6.1 million as compared to the prior year, as a result of improved marketing processes related to identifying prospective student interest within both CTU and AIUS. Admissions expense decreased by 2.7% or $2.6 million as compared to the prior year, due to lower admissions expense within both CTU and AIUS as a result of the improved marketing processes mentioned above which also benefit admissions expense.

Bad debt expense incurred by each of our segments during the years ended December 31, 2021, 2020 and 2019 was as follows (dollars in thousands):

41

Bad debt expense decreased by 6.8% or $3.2 million for the current year as compared to the prior year. Total bad debt expense as a percentage of revenue also improved for the current year by 50 basis points as compared to the prior year. CTU’s bad debt expense improved by 13.5% or $3.1 million as compared to the prior year while AIUS’ bad debt expense remained relatively flat as compared to the prior year.

We continue to expect periodic fluctuations in bad debt expense. We regularly monitor our reserve rates, which includes a quarterly update of our analysis of historical student receivable collectability based on the most recent data available and a review of current known factors which we believe could affect future collectability of our student receivables, such as the number of students that do not complete the financial aid process. Our student support teams have maintained their focus on financial aid documentation collection and are counseling students through the Title IV financial aid process so that they are better prepared to start school. We have also focused on emphasizing employer-paid and other direct-pay education programs such as corporate partnerships as students within these programs typically have lower bad debt expense associated with them.

Operating Income

Operating income for the current year increased by 4.3% or $6.1 million as compared to the prior year. The current year improvement was primarily due to decreased advertising and marketing, occupancy, bad debt and admissions expenses which more than offset the increases in academics and student related and administrative expenses.

Provision for Income Taxes

For the year ended December 31, 2021, we recorded a tax provision of $39.4 million, which includes a $1.6 million unfavorable adjustment associated with the tax effect of stock-based compensation and a $0.5 million favorable adjustment related to federal and state credits claimed for the 2020 tax return and anticipated for the 2021 tax year. For the full year 2022, we expect our effective tax rate to be between 25.5% and 26.5%.

For the year ended December 31, 2020, we recorded a tax provision of $22.5 million, which includes a $16.0 million favorable adjustment related to the release of a valuation allowance maintained against the portion of the foreign tax credit carryforward supported by an overall domestic loss account balance and a $0.4 million favorable adjustment associated with the tax effect of stock-based compensation.

SEGMENT RESULTS OF OPERATIONS

The summary of segment financial information below should be referenced in connection with a review of the following discussion of our segment results from operations for the years ended December 31, 2021 and 2020 (dollars in thousands), including comparisons of our year-over-year performance between these years. Please refer to Part II Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation” in our Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of our results for the year ended December 31, 2019, as well as the year-over-year comparison of our 2020 financial performance to 2019.

42

______________________

Total student enrollments represent all students who are active as of the last day of the reporting period. Active students are defined as those students who are considered in attendance by participating in class related activities. Total student enrollments do not include learners participating in non-degree professional development and continuing education offerings.

In early 2021, we redesigned CTU’s academic calendar to strategically place breaks between sessions and provide more opportunities for students to continue with their academic programs. We believe this redesign may improve student experiences and engagement. CTU’s academic calendar redesign, along with the previous academic calendar redesign at AIU, may impact the comparability of revenue-earning days and enrollment results in any given quarter.

_______________________

(1)    AIUS includes total student enrollments relating to the Trident acquisition as of December 31, 2021 and 2020.

Year Ended December 31, 2021 as Compared to the Year Ended December 31, 2020

CTU. Current year revenue increased by 0.8% or $3.0 million as compared to the prior year. The current year increase was benefited by the Hippo acquisition. CTU’s total student enrollments increased 0.4% at December 31, 2021 as compared to December 31, 2020 due to the timing impact of the academic calendar redesign.

Current year operating income for CTU increased by 7.2% or $10.0 million as compared to the prior year, primarily due to decreased bad debt, advertising and marketing and occupancy expenses as compared to the prior year.

43

AIUS. Current year revenue increased by 0.7% or $2.0 million as compared to the prior year. The current year increase was driven by the DigitalCrafts acquisition as well as twelve months of revenue related Trident as compared to ten months in the prior year. AIUS experienced a decrease in total student enrollment of 13.3% at December 31, 2021 as compared to December 31, 2020.  We believe the decrease in total student enrollments was caused by several factors, including students pausing their academic programs and prolonged student decision-making as a result of the COVID-19 pandemic, changes in our marketing and student recruitment processes as we continue to use technology and data analytics to help us identify prospective students who are more likely to succeed at one of our universities, and a reduction in student enrollments from the military population.

Current year operating income for AIUS increased by 27.0% or $8.3 million as compared to the prior year, driven by decreased advertising and marketing, admissions and administrative expenses as compared to the prior year.

Corporate and Other. This category includes unallocated costs that are incurred on behalf of the entire company and remaining expenses associated with closed campuses. Total Corporate and Other operating loss for the current year increased by 46.3% or $12.2 million as compared to the prior year, primarily as a result of increased legal fee expense associated with the borrower defense to repayment applications from former students and acquisition efforts.

SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We have identified the accounting policies and estimates listed below as those that we believe require management’s most subjective and complex judgments in estimating the effect of inherent uncertainties. This section should be read in conjunction with Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements which includes a discussion of these and other significant accounting policies.

Revenue Recognition

Description: Our revenue, which is derived primarily from academic programs taught to students who attend our universities, is generally segregated into two categories: (1) tuition and fees, and (2) other. Tuition and fees represent costs to our students for educational services provided by our universities and are reflected net of scholarships and tuition discounts. Our universities charge tuition and fees at varying amounts, depending on the university, the type of program and specific curriculum. Our universities bill students a single charge that covers tuition, fees and required program materials, such as textbooks and supplies, which we treat as a single performance obligation. Generally, we bill student tuition at the beginning of each academic term for our degree programs and recognize the tuition as revenue on a straight-line basis over the academic term. As part of a student’s course of instruction, certain fees, such as technology fees and graduation fees, are billed to students. These fees are earned over the applicable term and are not considered separate performance obligations. We bill student tuition upon enrollment for our non-degree professional development and continuing education offerings and recognize the tuition as revenue on a straight-line basis over the length of the course.

Assumptions and judgment: Revenue recognition includes assumptions and significant judgments including determination of the appropriate portfolios to assess for meeting the criteria to recognize revenue under ASC Topic 606 as well as the assessment of collectability. We analyze revenue recognition on a portfolio approach under ASC Topic 606. Significant judgment is used in determining the appropriate portfolios to assess for meeting the criteria to recognize revenue under ASC Topic 606. We have determined that all of our students can be grouped into one portfolio. Based on our past experience, students at different universities, in different programs or with different funding all behave similarly. Enrollment agreements all contain similar terms, refund policies are similar across all institutions and students work with the university to obtain some type of funding, for example, Title IV Program funds, Veterans Administration funds, military funding, employer reimbursement or self-pay. We have significant historical data for our students which allows us to analyze collectability. We do not expect that revenue earned for the portfolio is significantly different as compared to revenue that would be earned if we were to assess each student contract separately.

Significant judgment is also required to assess collectability, particularly as it relates to students seeking funding under Title IV Programs. Because students are required to provide documentation, and in some cases extensive documentation, to the Department to be eligible and approved for funding, the timeframe for this process can sometimes span between 90 to 120 days. We monitor the progress of students through the eligibility and approval process and assess collectability for the portfolio each reporting period to monitor that the collectability threshold is met.

These assumptions and significant judgments are based upon our interpretation of accounting guidance and historical experience. Although management believes these assumptions and significant judgments to be reasonable, actual amounts may differ if historical experience is not reflective of future results.

Impact if actual results differ from assumptions and judgment: If actual performance is not consistent with historical experience in regards to our assessment of collectability, our revenue recognition may be materially different than what was originally recorded.

Allowance for Credit Losses

Description: We extend unsecured credit to a portion of the students who are enrolled at our academic institutions for tuition and certain other educational costs. Based upon past experience and judgment, we establish an allowance for credit losses with respect to student receivables which we estimate will ultimately not be collectible. Our standard student receivable allowance is based on an

44

estimate of lifetime expected credit losses for student receivables. Our estimation methodology considers a number of quantitative and qualitative factors that, based on our collection experience, we believe have an impact on our repayment risk and ability to collect student receivables. Changes in the trends in any of these factors may impact our estimate of the allowance for credit losses. These factors include, but are not limited to: internal repayment history, changes in the current economic, legislative or regulatory environments, internal cash collection forecasts and the ability to complete the federal financial aid process with the student. These factors are monitored and assessed on a regular basis. Overall, our allowance estimation process for student receivables is validated by trending analysis and comparing estimated and actual performance.

Assumptions and judgment: Management makes a range of assumptions to determine what is believed to be the appropriate level of allowance for credit losses. Management determines a reasonable and supportable forecast based on the expectation of future conditions over a supportable forecast period as described above, as well as qualitative adjustments based on current and future conditions that may not be fully captured in the historical modeling factors described above. All of these estimates are susceptible to significant change.

Impact if actual results differ from assumptions and judgment: We monitor our collections and write-off experience to assess whether or not adjustments to our allowance percentage estimates are necessary. Changes in trends in any of the factors that we believe impact the collection of our student receivables, as noted above, or modifications to our collection practices, and other related policies may impact our estimate of our allowance for credit losses and our results from operations.

A one percentage point change in our allowance for credit losses as a percentage of gross earned student receivables as of December 31, 2021 would have resulted in a change in pretax income from continuing operations of $0.8 million during the year then ended.

Because a substantial portion of our revenue is derived from Title IV Programs, any legislative or regulatory action that significantly reduces the funding available under Title IV Programs, or the ability of our students or institutions to participate in Title IV Programs, would likely have a material impact on the realizability of our receivables.

Goodwill Impairment

Description: Goodwill represents the excess of cost over the fair value of identifiable net assets of acquired companies. Goodwill often involves estimates based on third party valuations, or internal valuations based on discounted cash flow analyses or other valuation techniques. Under ASC Topic 350, we conduct a goodwill impairment assessment at least annually, and more frequently if events occur or circumstances change that would more-likely-than-not reduce the fair value of the goodwill on our balance sheet below its carrying amount. In making this assessment we assess qualitative factors to determine whether it is more-likely-than-not the fair value of the goodwill is less than its carrying amount. If we conclude based on the qualitative assessment that goodwill may be impaired, we then perform a quantitative one-step impairment test, and an impairment loss would be recognized for the excess of the carrying value over the fair value of the goodwill. Any subsequent increases in goodwill would not be recognized on the consolidated financial statements.

Assumptions and judgment: During the current year, we performed a qualitative assessment for the annual review of goodwill balances for impairment. Management first considered events and circumstances that may affect the fair value of the reporting unit to determine whether it was necessary to perform the quantitative impairment test. Management focused on the significant inputs utilized in the most recent quantitative assessment and any events or circumstances that could affect the significant inputs, including, but not limited to, financial performance compared with actual and projected results of relevant prior periods, legal, regulatory, contractual, competitive, economic, political, business or other factors, and industry and market considerations, such as a deteriorating operating environment or increased competition.

When performing a quantitative assessment for the annual review of goodwill balances for impairment, we estimate the fair value of each of our reporting units based on projected future operating results and cash flows, market assumptions and/or comparative market multiple methods. Determining fair value requires significant estimates and assumptions based on an evaluation of a number of factors, such as marketplace participants, relative market share, new student interest, student retention, future expansion or contraction expectations, amount and timing of future cash flows and the discount rate applied to the cash flows. Projected future operating results and cash flows used for valuation purposes do reflect improvements relative to recent historical periods with respect to, among other things, modest revenue growth and operating margins. Although we believe our projected future operating results and cash flows and related estimates regarding fair values are based on reasonable assumptions, historically projected operating results and cash flows have not always been achieved. The failure of one of our reporting units to achieve projected operating results and cash flows in the near term or long term may reduce the estimated fair value of the reporting unit below its carrying value and result in the recognition of a goodwill impairment charge. Significant management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows. Assumptions used in our impairment evaluations, such as forecasted growth rates and our cost of capital, are based on the best available market information and are consistent with our internal forecasts and operating plans. In addition to cash flow estimates, our valuations are sensitive to the rate used to discount cash flows and future growth assumptions. These assumptions could be adversely impacted by certain of the risks discussed in Item 1A, “Risk Factors,” in this Annual Report on Form 10-K.

45

Impact if actual results differ from assumptions and judgment: Changes in these qualitative and quantitative factors, as well as downturns in economic or business conditions, could have a significant adverse impact on the fair value of our reporting units in relation to their respective carrying values of goodwill and could result in an impairment loss affecting our consolidated financial statements as a whole. Generally, an impairment loss would reduce our net income for the reporting period being presented, and proportionally reduce the value of the assets and equity reflected on our balance sheet.

We did not record any goodwill impairment charges during the years ended December 31, 2021 and 2020, and have $162.6 million of goodwill as of December 31, 2021. The most recent quantitative fair value analysis was performed as of October 1, 2020, which indicated that the fair values of our CTU and AIUS reporting units exceeded their carrying values by $458.4 million and $116.7 million (fair value as a percentage of carrying value for these reporting units of 904% and 229%), respectively. We performed a qualitative analysis as of October 1, 2021 to determine if any critical estimates or judgments were significantly different as compared to those utilized in the 2020 quantitative analysis and determined a quantitative analysis was not required as of October 1, 2021.

Income Taxes

Description: We are subject to the income tax laws of the U.S. and various state and local jurisdictions. These tax laws are complex and subject to interpretation. As a result, significant judgments and interpretations are required in determining our income tax provisions (benefits) and evaluating our uncertain tax positions.

We account for income taxes in accordance with FASB ASC Topic 740 – Income Taxes. Topic 740 requires the recognition of deferred income tax assets and liabilities based upon the income tax consequences of temporary differences between financial reporting and income tax reporting by applying enacted statutory income tax rates applicable to future years to differences between the financial statement carrying amounts and the income tax basis of existing assets and liabilities. Topic 740 also requires that deferred income tax assets be reduced by a valuation allowance if it is more likely than not that some portion of the deferred income tax asset will not be realized.

Assumptions and judgment: In establishing a provision for income tax expense or a liability for an uncertain tax position, we must make judgments and interpretations about the application of inherently complex tax laws. We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions. Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems in the various tax jurisdictions or may be settled with the taxing authority upon examination or audit.

Impact if actual results differ from assumptions and judgment: Although we believe the judgments and estimates used are reasonable, actual results could differ and we may be exposed to changes in tax liability that could be material. To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would result in an increase in our effective income tax rate.

LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES

As of December 31, 2021, cash, cash equivalents, restricted cash and available-for-sale short-term investments (“cash balances”) totaled $499.4 million. Restricted cash as of December 31, 2021 was $5.2 million and relates to amounts held in escrow accounts to secure post-closing indemnification obligations of the sellers pursuant to the Trident and Hippo acquisitions. Our cash flows from operating activities have historically been adequate to fulfill our liquidity requirements. We have historically financed our operating activities, organic growth and acquisitions primarily through cash generated from operations and existing cash balances. We generated cash in 2021 as a result of improved operating performance and reduced operating losses associated with closed campuses and expect to continue to do so in 2022. We anticipate that we will be able to satisfy the cash requirements associated with, among other things, our working capital needs, capital expenditures, lease commitments and acquisitions through at least the next 12 months primarily with cash generated by operations and existing cash balances.

On September 8, 2021, the Company and the subsidiary guarantors thereunder entered into a credit agreement with Wintrust Bank N.A. (“Wintrust”), in its capacities as the sole lead arranger, sole bookrunner, administrative agent and letter of credit issuer for the lenders from time to time parties thereto. The credit agreement provides the Company with the benefit of a $125.0 million senior secured revolving credit facility. The $125.0 million revolving credit facility under the credit agreement is scheduled to mature on September 8, 2024. So long as no default has occurred and other conditions have been met, the Company may request an increase in the aggregate commitment in an amount not to exceed $50.0 million. The loans and letter of credit obligations under the credit agreement are secured by substantially all assets of the Company and the subsidiary guarantors.

The credit agreement and the ancillary documents executed in connection therewith contain customary affirmative, negative and financial maintenance covenants. The Company is required to maintain unrestricted cash, cash equivalents and short-term investments in domestic accounts in an amount at least equal to the aggregate loan commitments then in effect. Acquisitions to be undertaken by the Company must meet certain criteria, and the Company’s ability to make restricted payments, including payments in connection with a repurchase of shares of our common stock, is subject to an aggregate maximum of $100.0 million per fiscal year. Upon the occurrence of certain regulatory events or if the Company’s unrestricted cash, cash equivalents and short term investments are less

46

than 125% of the aggregate amount of the loan commitments then in effect, the Company is required to maintain cash in a segregated, restricted account in an amount not less than the aggregate loan commitments then in effect. The credit agreement also contains customary representations and warranties, events of default, and rights and remedies upon the occurrence of any event of default thereunder, including rights to accelerate the loans, terminate the commitments and realize upon the collateral securing the obligations under the credit agreement.

The credit agreement with Wintrust replaced the previous $50.0 million revolving credit facility set forth in the credit agreement dated as of December 27, 2018 with BMO Harris Bank N.A. As of December 31, 2021, there were no amounts outstanding under the revolving credit facility.

We maintain a balanced capital allocation strategy that focuses on maintaining a strong balance sheet and adequate liquidity, while (i) investing in organic projects at our universities, in particular technology-related initiatives which are designed to benefit our students, and (ii) evaluating diverse strategies to enhance stockholder value, including acquisitions of quality educational institutions or programs and share repurchases. We completed two acquisitions with a combined initial cash consideration of approximately $57.1 million during the year ended December 31, 2021 and are pursuing additional acquisition opportunities similar in size to these two. We currently anticipate that we will complete another acquisition by the end of 2022. Ultimately, our goal is to deploy resources in a way that drives long term stockholder value while supporting and enhancing the academic value of our institutions.

On November 4, 2019, the Board of Directors of the Company approved a stock repurchase program which authorizes the Company to repurchase up to $50.0 million of our common stock from time to time depending on market conditions and other considerations. The program’s original expiration date was December 31, 2021. On October 19, 2021, the Board of Directors of the Company extended the expiration date of the program to February 28, 2022. On January 27, 2022 the Board of Directors of the Company approved a new stock repurchase program for up to $50.0 million which commences March 1, 2022 and expires September 30, 2023. Share repurchases will remain a part of our capital allocation strategy and we intend to pursue them when deemed appropriate based on market and other conditions. Since the November 4, 2019 inception date, the Company repurchased approximately 3.9 million shares for $47.1 million as of December 31, 2021.

The discussion above reflects management’s expectations regarding liquidity; however, as a result of the significance of the Title IV Program funds received by our students, we are highly dependent on these funds to operate our business. Any reduction in the level of Title IV funds that our students are eligible to receive or any impact on timing or our ability to receive Title IV Program funds, or any requirement to post a significant letter of credit to the Department, may have a significant impact on our operations and our financial condition. In addition, our financial performance is dependent on the level of student enrollments which could be impacted by external factors. See Item 1A, “Risk Factors.”

Sources and Uses of Cash

Operating Cash Flows

During the years ended December 31, 2021 and 2020, net cash flows provided by operating activities totaled $191.1 million and $180.0 million, respectively. The increase in cash flow from operations as compared to the prior year is primarily driven by the improvement in operating income during the current year.

Our primary source of cash flows from operating activities is tuition collected from our students. Our students derive the ability to pay tuition costs through the use of a variety of funding sources, including, among others, federal loan and grant programs, state grant programs, private loans and grants, institutional payment plans, private and institutional scholarships and cash payments, as well as private loans for our non-degree programs. For the years ended December 31, 2021 and 2020, approximately 81% and 80% of our institutions’ aggregate cash receipts from tuition payments came from Title IV Program funding. This percentage differs from the Title IV Program percentage calculated under the 90-10 Rule due to the treatment of certain funding types and certain student level limitations on what and how much to count as prescribed under the rule.

For further discussion of Title IV Program funding and other funding sources for our students, see Item 1, “Business - Student Financial Aid and Related Federal Regulation.”

Our primary uses of cash to support our operating activities include, among other things, cash paid and benefits provided to our employees for services, to vendors for products and services, to lessors for rents and operating costs related to leased facilities, to suppliers for textbooks and other institution supplies, and to federal, state and local governments for income and other taxes.

Investing Cash Flows

During the year ended December 31, 2021, net cash flows provided by investing activities totaled $54.3 million compared to net cash flows used in investing activities of $165.9 million for the year ended December 31, 2020.

Purchases and Sales of Available-for-Sale Investments. Purchases and sales of available-for-sale investments resulted in a net cash inflow of $121.9 million for the current year as compared to net cash outflow of $116.4 million for the prior year.

47

Business acquisitions. For the year ended December 31, 2021, the Company completed the DigitalCrafts and Hippo acquisitions and made initial payments of $57.1 million. The year ended December 31, 2020 includes $39.8 million for payments related to the Trident acquisition.

Capital Expenditures. Capital expenditures increased to $10.5 million for the year ended December 31, 2021 as compared to $9.8 million for the year ended December 31, 2020. Capital expenditures represented approximately 1.5% and 1.4% of revenue for the years ended December 31, 2021 and 2020, respectively. For the year ending December 31, 2022, we expect capital expenditures to be approximately 2.0% of revenue.

Financing Cash Flows

During the years ended December 31, 2021 and 2020, net cash flows used in financing activities totaled $29.9 million and $13.1 million, respectively.

Payments of employee tax associated with stock compensation. Payments of employee tax associated with stock compensation were $5.5 million for the year ended December 31, 2021 and $0.9 million for the year ended December 31, 2020.

Repurchase of Stock. During the year ended December 31, 2021, we repurchased 2.3 million shares of our common stock for approximately $25.3 million at an average price of $10.94 per share as compared to 1.3 million shares of common stock repurchased for $17.9 million at an average price of $13.53 per share for the year ended December 31, 2020. Repurchases of stock during 2021 and 2020 were funded by cash generated from operating activities and existing cash balances. See Part II, Item 5 for more information.

Contractual Obligations

As of December 31, 2021, future minimum cash payments due under contractual obligations for our non-cancelable operating lease arrangements were $52.8 million, with approximately $11.5 million due within the next 12 months. These future minimum cash payments reflect base rent and other fixed lease-related costs identified in the lease agreements but excludes variable costs such as common area maintenance payments and taxes, as these amounts are undeterminable at this time and may vary based on future circumstances. We lease most of our administrative and educational facilities under non-cancelable operating leases expiring at various dates through 2032. Lease terms generally range from one to ten years with one to four renewal options for extended terms.

As of December 31, 2021, we were not a party to any off-balance sheet financing or contingent payment arrangements, nor do we have any unconsolidated subsidiaries.

Changes in Financial Position – December 31, 2021 compared to December 31, 2020

Selected consolidated balance sheet account changes from December 31, 2020 to December 31, 2021 were as follows (dollars in thousands):

Total cash and cash equivalents, restricted cash and short-term investments: The increase is primarily driven by cash provided by operating activities, partially offset with payments made for business acquisitions and share repurchases during the current year.

Right of use asset, net: The decrease is attributable to the reduction of future leased space, particularly associated with our campus support center relocation.

Goodwill: The increase in goodwill is attributable to the DigitalCrafts and Hippo acquisitions.

48

Intangible assets, net: The increase in intangible assets is attributable to the DigitalCrafts and Hippo acquisitions.

Deferred income tax assets, net: The decrease reflects the usage of deferred tax assets associated with the offset of income taxes payable.

Accrued expenses other: The increase is primarily related to the reclassification of $4.0 million of escrow liability related to the Trident acquisition from long term to short term.

Deferred revenue: The increase is primarily related to the timing of the academic calendar redesign at CTU as well as the DigitalCrafts and Hippo acquisitions during the current year.

Treasury stock: The increase is driven primarily by the repurchase of the Company’s common stock during the current year for approximately $25.3 million.

Recent Accounting Pronouncements

See Note 4 “Recent Accounting Pronouncements” to our consolidated financial statements for a discussion of recent accounting pronouncements that may affect us.