PERDOCEO EDUCATION Corp (PRDO) FY 2022 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:

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Overview

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Consolidated Results of Operations

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Segment Results of Operations

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Summary of Critical Accounting Policies and Estimates

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Liquidity, Financial Position and Capital Resources

OVERVIEW

Perdoceo’s accredited academic institutions offer a quality postsecondary education primarily online to a diverse student population, along with campus-based and blended learning programs. The Company’s academic institutions – Colorado Technical University (“CTU”) and the American InterContinental University System (“AIUS” or “AIU System”) – provide degree programs from the associate through doctoral level as well as non-degree seeking and professional development programs. Our academic institutions 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 serve and educate students while enhancing overall learning and academic experiences. 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 December 1, 2022, the Company acquired Coding Dojo (the "Coding Dojo Acquisition"). Coding Dojo provides computer programming and general technology upskilling and reskilling development opportunities to technology-driven students with a quality technology platform and market demand course offering content in the areas of software development, data science and cybersecurity. Results of operations related to the Coding Dojo acquisition are included in the consolidated financial statements within the CTU segment from the date of acquisition.

On July 1, 2022, the Company acquired substantially all of the assets of California Southern University ("CalSouthern" and the "CalSouthern acquisition"). CalSouthern provides online education with a quality technology platform and strong course content in the areas of behavioral sciences and business management programs. Results of operations related to the CalSouthern acquisition are included in the consolidated financial statements within the AIUS segment from the date of acquisition.

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

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content. Results of operations related to the Hippo acquisition are included in the consolidated financial statements within the CTU segment from the date of acquisition.

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. Results of operations related to the DigitalCrafts acquisition are included in the consolidated financial statements within the AIUS segment from the date of acquisition.

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 all scrutinized the for-profit postsecondary education sector. Congressional hearings and roundtable discussions were held regarding various aspects of the education industry, including issues surrounding student debt as well as publicly reported student outcomes that may be used as part of an institution’s recruiting and admissions practices, 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 Department, DoD and the VA and its state approving agencies to take action to limit or terminate the participation of institutions such as ours 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 administration, 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. We believe the items we are adjusting for are not normal operating expenses necessary to run our business. 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.

2022 Review

During the year ended December 31, 2022 ("current year"), we continued to focus on our primary objectives of enhancing student experiences, retention and academic outcomes. We experienced meaningful improvements in student retention and engagement as we progressed through the current year, as the lingering impacts from the pandemic and macro-economic policies began to recede. Additionally, changes we made to our marketing processes positively impacted student retention and engagement, particularly in the second half of the year. These marketing changes were made to refine the process to identify prospective students who are more likely to succeed at one of our academic institutions.

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During the year we completed the acquisitions of California Southern University on July 1, 2022 and Coding Dojo on December 1, 2022. These acquisitions expand the depth and breadth of our educational offerings at our academic institutions.

Total student enrollments decreased 3.0% at December 31, 2022 as compared to December 31, 2021, with AIUS’ decrease of 10.8% partially offset with an increase of 2.0% at CTU. CTU's increase in total student enrollments was driven by student enrollments resulting from our corporate partnership program. The rate of decrease in AIUS’ total student enrollments moderated during the second half of 2022 as compared to the first half. Improvements experienced in student retention and engagement, partially due to a positive impact from student loan initiatives implemented by the current administration benefited total student enrollments at both of our academic institutions as of December 31, 2022.

During 2022 we further increased the size of our corporate partnership team and they are successfully engaging with employers to leverage their tuition assistance programs and provide a debt-free education to their employees. In general, these partnerships take time to develop, and students are awarded higher tuition grants from the university to offset their tuition costs, resulting in lower revenue per student in any given period. However, we believe students participating in these programs typically experience higher retention over the course of their program, have better academic outcomes, graduate with no debt and ultimately may lead to a higher life time value per student.

We believe investments in technology positively impact student experiences and academic outcomes. During the current year, we made necessary investments to upgrade our student-serving systems and continued to leverage data analytics and machine learning to strive to provide current and prospective students with a more targeted, relevant and meaningful experience throughout their academic journey from admissions and enrollment, to classroom learning and interaction and ultimately through graduation. We launched a new student relationship system that provides assistance and insights in the advising process, enabling us to effectively engage with students with the appropriate support at the right time. We continued to update our mobile applications during the current year and have further optimized our chatbots at both our academic institutions, supporting a more efficient, effective and round the clock engagement with students.

During the fourth quarter we experienced further improvements in student retention and engagement, in part, due to student loan relief initiatives implemented by the current administration and we expect these improvements to persist in 2023. Additionally, we expect full year revenue to be higher as compared to 2022, resulting from recent acquisitions, the academic calendar redesign at CTU and underlying organic improvements in student retention and engagement.

Financial Highlights

Revenue for the year ended December 31, 2022 increased by 0.3% or $2.2 million as compared to the prior year, resulting from an increase in revenue for CTU of 2.7% or $11.1 million mostly offset with a decrease for AIUS of 3.1% or $8.9 million. The increase in revenue for the current year was driven by a positive impact of the academic calendar redesign at both CTU and AIUS as well as the acquisitions completed in the current year and prior year that were not part of the full comparative prior year period. Excluding these items, revenue for both AIUS and CTU would have decreased as compared to the prior year.

Operating income for the current year decreased to $129.6 million as compared to operating income of $149.0 million in the prior year. The decrease in operating income for the current year was primarily due to certain one-time investments at our academic institutions within human capital and marketing expenses as well as increased amortization expense related to acquisitions and asset impairments as compared to the prior year.

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 $164.0 million for the current year as compared to $175.5 million in the prior year.

Adjusted operating income for the years ended December 31, 2022 and 2021 is presented below (dollars in thousands, unless otherwise noted):

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(1)
Amortization for acquired intangible assets relate to definite-lived intangible assets associated with acquisitions.

(2)
Legal fee expense associated with (i) responses to the Department relating to borrower defense to repayment applications from former students, and (ii) acquisition efforts.

(3)
The tax effect of adjustments was calculated by multiplying the pre-tax adjustments with a tax rate of 25%. This tax rate is intended to reflect federal and state taxable jurisdictions as well as the nature of the adjustments.

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, 2022 and 2021 (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, 2021 for a discussion of our results for the year ended December 31, 2020, as well as the year-over-year comparison of our 2021 financial performance to 2020.

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(1)
Educational services and facilities expense includes costs attributable to the educational activities of our campuses, including: salaries and benefits of faculty, academic administrators and student support personnel, and costs of educational supplies and facilities, such as rents on leased facilities. Also included in educational services and facilities expense are rents on leased administrative facilities, such as our corporate headquarters, and costs of other goods and services provided by our campuses, including costs of textbooks and laptop computers.

(2)
General and administrative expense includes operating expenses associated with, including salaries and benefits of personnel in, corporate and campus administration, marketing, admissions, information technology, financial aid, accounting, human resources, legal and compliance. Other expenses within this expense category include costs of advertising and production of marketing materials and bad debt expense.

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

Revenue

Revenue for the year ended December 31, 2022 ("current year") increased 0.3% or $2.2 million, driven by growth in revenue within CTU which was mostly offset with the reduction in revenue for AIUS as compared to the prior year. The decline in revenue for AIUS was driven by the decrease in total student enrollments as compared to the prior year end. Revenue for the current year was benefitted by the academic calendar redesign as well as the acquisitions completed in 2022 and 2021 that were not part of the full comparative prior year period. Excluding the positive impacts of the academic calendar redesign and the current and prior year acquisitions, revenue would have decreased for both CTU and AIUS as compared to the prior year.

Educational Services and Facilities Expense (dollars in thousands)

Educational services and facilities expense for the current year increased by 7.3% or $8.0 million as compared to the prior year, driven by academics and student related expense primarily related to the 2022 and 2021 acquisitions. Occupancy expense remained relatively flat as compared to the prior year.

General and Administrative Expense (dollars in thousands)

The general and administrative expense for the current year increased by 1.8% or $7.6 million as compared to the prior year. The 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 16.6% or $23.4 million due to increased legal fees, including those related to the borrowers defense to repayment applications from former students, increased payroll expenses due to one-time items and acquisition-related costs.

The advertising and marketing expense for the current year decreased by 7.6% or $10.4 million as compared to the prior year, as a result of adjustments to our 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 primarily due to the changes to the marketing processes mentioned above which also benefit admissions expense, this improvement was partially offset with increased admissions expense within CTU due to acquisitions.

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Bad debt expense incurred by each of our segments during the years ended December 31, 2022, 2021 and 2020 was as follows (dollars in thousands):

Bad debt expense decreased by 6.3% or $2.8 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 40 basis points as compared to the prior year. AIUS' bad debt expense decreased by 17.6% or $4.3 million which more than offset CTU's increased bad debt expense of 7.4% or $1.5 million for the current year as compared to the prior year.

We continue to expect quarterly fluctuations in bad debt expense. We regularly evaluate 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 decreased by 13.0% or $19.4 million as compared to the prior year. The current year decrease in operating income was primarily due to increased administrative and academics and student related expense, along with increased amortization expense and asset impairment charges, which were only partially offset by decreases within advertising and marketing, admissions and bad debt expenses as compared to the prior year.

Provision for Income Taxes

For the year ended December 31, 2022, we recorded a tax provision of $38.4 million, which includes a $0.8 million unfavorable adjustment associated with the tax effect of stock-based compensation, which increased the effective rate by 0.6%. The 2022 effective rate also reflects the establishment of a full valuation allowance of $1.4 million with respect to select combined state net operating losses that are anticipated to go unused based on current expectations and $0.9 million related to the expected non-deductibility of reductions in the carrying value of our equity investment, which collectively increased the effective rate by 1.7%. Additionally, we re-evaluated the character of the loss incurred on the elimination of a wholly-owned subsidiary during the prior year and re-categorized this transaction in the 2021 tax returns as an ordinary loss attributable to the stock of a worthless subsidiary. As a result of our assessment, the $3.1 million deferred tax asset and offsetting valuation allowance with respect to the capital loss carryforward was eliminated, which had an offsetting impact on the effective tax rate of 2.3%.

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 2023, we expect our effective tax rate to be between 25.5% and 26.5%.

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, 2022 and 2021 (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, 2021 for a discussion of our results for the year ended December 31, 2020, as well as the year-over-year comparison of our 2021 financial performance to 2020.

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(1)
CTU’s results of operations include the Coding Dojo acquisition commencing on the December 1, 2022 date of acquisition and the Hippo acquisition commencing on the September 10, 2021 date of acquisition.

(2)
AIUS’ results of operations include the CalSouthern acquisition commencing on the July 1, 2022 date of acquisition and the DigitalCrafts acquisition commencing on the August 2, 2021 date of acquisition.

(3)
Revenue recorded within Corporate and Other relates to miscellaneous non-student related revenue.

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 during the previous two weeks. Total student enrollments do not include learners participating in: a) non-degree seeking and professional development programs, and b) degree seeking, non-Title IV, self-paced programs at our universities.

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

CTU. Current year revenue increased by 2.7% or $11.1 million as compared to the prior year. The current year increase was driven by a positive impact of the academic calendar redesign and the acquisitions completed in the prior year and current year.

Current year operating income for CTU decreased by 4.6% or $6.9 million as compared to the prior year, driven by increased operating expenses across most categories, with the exception of advertising and marketing. The increase in operating expenses were primarily due to acquisitions as well as one-time investments in human capital, which more than offset the increased revenue for the current year as compared to the prior year.

AIUS. Current year revenue decreased by 3.1% or $8.9 million as compared to the prior year. The current year decrease was primarily driven by a decrease in total student enrollments of 10.8% as compared to the prior year. A discussion of the factors we believe contributed to the decrease in total student enrollments is discussed above within "2022 Review".

Current year operating income for AIUS decreased by 14.9% or $5.8 million as compared to the prior year, primarily due to lower revenue discussed above as well as one time investments in human capital, which were only partially offset with decreased advertising and marketing, bad debt and admissions expenses for the current year as compared to the prior year.

Corporate and Other. This category includes unallocated costs that are incurred on behalf of the entire company. Total Corporate and Other operating loss for the current year increased by 17.4% or $6.7 million as compared to the prior year, primarily as

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a result of increased legal fee expense, including legal fees associated with the borrower defense to repayment applications from former students and expenses associated with acquisitions.

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, certain 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 separately to students. These fees are generally earned over the applicable term and are not considered separate performance obligations. We generally bill student tuition upon enrollment for our non-degree professional development programs and recognize the tuition as revenue on a straight-line basis over the length of the offering.

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. As such, our results from operations only reflect the amount of revenue that is estimated to be reasonably collectible. Our standard student receivable allowance is based on an 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

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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, 2022 would have resulted in a change in pretax income of $0.9 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 acquired through purchases. 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 consolidated 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.

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, 2022 and 2021, and have $243.5 million of goodwill as of December 31, 2022.

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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, 2022, cash, cash equivalents, restricted cash and available-for-sale short-term investments (“cash balances”) totaled $518.2 million. Restricted cash as of December 31, 2022 was $9.5 million and relates to amounts held in escrow accounts to secure post-closing indemnification obligations of the sellers pursuant to the Coding Dojo, CalSouthern 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 2022 as a result of improved operating performance and expect to continue to do so in 2023. 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.

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 that further extend the depth and breadth of our educational offerings and share repurchases. 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 January 27, 2022, the Board of Directors of the Company approved a new stock repurchase program for up to $50.0 million which commenced March 1, 2022 and expires September 30, 2023. The timing of purchases and the number of shares repurchased under the program will be determined by the Company’s management and will depend on a variety of factors including stock price, trading volume and other general market and economic conditions, its assessment of alternative uses of capital, regulatory requirements and other factors. Share repurchases will remain a part of our capital allocation strategy. Since the March 1, 2022 inception date, the Company repurchased approximately 2.1 million shares for $23.1 million as of December 31, 2022.

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

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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. As of December 31, 2022, there were no amounts outstanding under the revolving credit facility.

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, 2022 and 2021, net cash flows provided by operating activities totaled $148.2 million and $191.1 million, respectively. The decrease in cash flow from operations as compared to the prior year is primarily driven by a timing impact of the academic calendar redesign and the related cash collections as well as lower total student enrollments as we entered 2022.

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. For the years ended December 31, 2022 and 2021, approximately 79% and 81% 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, 2022, net cash flows used in investing activities totaled $326.8 million compared to net cash flows provided by investing activities of $54.3 million for the year ended December 31, 2021.

Purchases and Sales of Available-for-Sale Investments. Purchases and sales of available-for-sale investments resulted in a net cash outflow of $229.8 million for the current year as compared to net cash inflow of $121.9 million for the prior year.

Business acquisitions. For the year ended December 31, 2022, the Company completed the Coding Dojo and CalSouthern acquisitions and made total initial cash payments of $84.3 million. The year ended December 31, 2021 includes $57.1 million for payments related to the DigitalCrafts and Hippo acquisitions.

Capital Expenditures. Capital expenditures increased to $12.6 million for the year ended December 31, 2022 as compared to $10.5 million for the year ended December 31, 2021. Capital expenditures represented approximately 1.8% and 1.5% of revenue for the years ended December 31, 2022 and 2021, respectively. For the year ending December 31, 2023, we expect capital expenditures to be approximately 1.0% - 2.0% of revenue.

Financing Cash Flows

During the years ended December 31, 2022 and 2021, net cash flows used in financing activities totaled $27.7 million and $29.9 million, respectively.

Payments of employee tax associated with stock compensation. Payments of employee tax associated with stock compensation were $1.6 million for the year ended December 31, 2022 and $5.5 million for the year ended December 31, 2021.

Repurchase of stock. During the year ended December 31, 2022, we repurchased 2.1 million shares of our common stock for approximately $23.1 million at an average price of $11.02 per share as compared to 2.3 million shares of common stock repurchased for $25.3 million at an average price of $10.94 per share for the year ended December 31, 2021. Repurchases of stock during 2022 and 2021 were funded by cash generated from operating activities and existing cash balances. See Part II, Item 5 for more information.

Release of cash held in escrow. During the year ended December 31, 2022, we released $4.2 million of escrow associated with the Trident and Hippo acquisitions.

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Contractual Obligations

As of December 31, 2022, future minimum cash payments due under contractual obligations for our non-cancelable operating lease arrangements were $39.1 million, with approximately $8.2 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, 2022, 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, 2022 compared to December 31, 2021

Selected consolidated balance sheet account changes from December 31, 2021 to December 31, 2022 were as follows (dollars in thousands):

Receivables, other: The increase is primarily driven by interest income receivable related to our available for sale short term investments.

Right of use asset, net: The decrease is primarily driven by lease terminations and ROU asset impairments.

Goodwill: The increase in goodwill is attributable to the CalSouthern and Coding Dojo acquisitions.

Intangible assets, net: The increase in intangible assets is attributable to the CalSouthern and Coding Dojo acquisitions.

Payroll and related benefits: The increase is primarily driven by an increased compensation accrual as compared to the prior year end related to guaranteed payments.

Income taxes: The increase is primarily driven by tax reserves.

Other non-current liabilities: The increase is primarily driven by the escrow payable and contingent consideration payable associated with the Coding Dojo acquisition.

Treasury stock: The increase is driven primarily by the repurchase of the Company’s common stock during the current year for approximately $23.1 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.