PERDOCEO EDUCATION Corp: Form 10-Q for the period ended Mar 31, 2024

The discussion below and other items in this Quarterly Report on Form 10-Q contain “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 our Annual Report on Form 10-K for the year ended December 31, 2023 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. Among the factors that could cause actual results to differ materially from those expressed in, or implied by, our forward-looking statements are the following:

• declines in enrollment or interest in our programs or our ability to market to and contact prospective students;
• our continued compliance with and eligibility to participate in Title IV Programs under the Higher Education Act of 1965, as amended, and the regulations thereunder (including the terms of any potential changes to or conditions imposed on our continued participation in the Title IV programs under new program participation agreements, the new 90-10, financial responsibility and administrative capability standards prescribed by the U.S. Department of Education (the “Department”)), as well as applicable accreditation standards and state regulatory requirements;
• the impact of various versions of “borrower defense to repayment” regulations;
• the final outcome of various legal challenges to the Department's loan discharge and forgiveness efforts;
• rulemaking or changing interpretations of existing regulations, guidance or historical practices by the Department or any state or accreditor and increased focus by Congress and governmental agencies on, or increased negative publicity about, for-profit education institutions;
• the success of our initiatives to improve student experiences, retention and academic outcomes;
• our continued eligibility to participate in educational assistance programs for key employers, veterans and other military personnel;
• increased competition;
• our ability to pay dividends on our common stock and execute our stock repurchase program;
• the impact of management changes; and
• changes in the overall U.S. economy.

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 unaudited condensed consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. 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
• Consolidated Results of Operations
• Segment Results of Operations
• Summary of Critical Accounting Policies and Estimates
• Liquidity, Financial Position and Capital Resources

OVERVIEW

Our 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's institutions are 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.

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 Consumer Financial Protection Bureau, the Federal Trade Commission, state attorneys general, consumer advocacy groups 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, the Department of Defense and the Department of Veterans Affairs 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 several cases, these groups have received significant financial support from third parties critical of our sector and have aligned on messaging that negatively impacts our sector during policy and rulemaking discussions. In addition, the current administration has made student loan forgiveness one of its top domestic policy objectives, and it has been aggressively pursued by the Department in cooperation with special interest groups, other federal agencies, state attorneys general and others. These groups collectively have focused efforts relating to student debt forgiveness on for-profit colleges and universities, encouraging loan discharge applications and complaints by former students.

We continue to see one of the most challenging operating environments in recent memory as the Department has undertaken a complete overhaul of almost all of the major regulatory requirements associated with our participation in Title IV Programs and which disproportionally negatively impact the for-profit postsecondary education sector. Additionally, a number of the Department’s regulatory initiatives are explicitly targeted at negatively impacting the proprietary sector of education. In many cases the new regulatory requirements are unclear, require further clarification as to their interpretation or applicability or are subject or will be subject to legal challenges. We expect to continue to need to operate nimbly in this uncertain environment, making necessary changes to the extent possible to comply with the myriad of new vague or unclear rules or interpretations as well as new interpretations of existing rules. For example, in 2023, we materially reduced prospective student enrollment, marketing and outreach processes at AIUS during the year to limit the volume of new federal funding that the institution would receive and to preserve available funding for existing students under the Department’s new 90-10 Rule. Any actions that limit our participation 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,” in our Annual Report on Form 10-K to learn more about our highly regulated industry and related risks and uncertainties, in addition to the MD&A in our 2024 Quarterly Reports on Form 10-Q.

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 reflective of our underlying 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.

2024 First Quarter Overview

During the first quarter ended March 31, 2024 ("current quarter"), we continued to experience strong student retention and engagement at both of our academic institutions as a result of our focus on our key objectives of enhancing student experiences, retention and academic outcomes.

Total student enrollments increased 9.0% at March 31, 2024 as compared to March 31, 2023, with CTU’s increase of 28.5% being partially offset with AIUS’ decrease of 22.9%. CTU's increase in total student enrollments was primarily driven by a positive timing impact from the academic calendar comparability resulting in more enrollment days for the current quarter as compared to the prior year quarter as well as organic student enrollment growth due to strong student retention and engagement. The total student enrollment decrease at AIUS was expected as a result of the operational changes made within prospective student enrollment, marketing and outreach processes by AIUS in the prior year to address regulatory changes which went into effect in July of 2023. AIUS had mostly reverted to normalized levels of operations during the fourth quarter of 2023 and as a result experienced growth in student enrollments for the current quarter when compared to the low point of the fourth quarter of 2023.

We view technology as a catalyst and differentiator for us and remain committed to making selective investments that deliver a more meaningful and relevant educational experience for our learners while continuing to improve the efficiency and effectiveness of our academic institutions’ academic and student support functions. Additionally, we remained focused on investing in and improving processes that support our corporate engagement programs. These programs remain a focus and a priority for both academic institutions and we will continue to make necessary investments in staff and technology to further grow their programs in an efficient and effective manner. Lastly, marketing and admissions spend, and commensurately prospective student inquiry generation, was lower during the current quarter as compared to the prior year quarter. Aided by data analytics, we continue to adjust our marketing strategies to further improve our focus on identifying prospective students who are more likely to succeed at one of our universities, as well as comply with updated expectations from various federal agencies around prospective student outreach.

We expect the strong levels of student retention and engagement that we experienced in 2023 and through the current quarter, to continue through the remainder of 2024. Additionally, as AIUS had mostly reverted to normalized levels of operations in the fourth quarter of 2023, we expect AIUS to experience double digit total student enrollment growth during 2024 as compared to December 31, 2023. Full year revenue is expected to be lower for 2024 primarily as a result of the academic calendar redesign at CTU which will result in lower revenue-earning days in 2024 as well as the lag impact on revenue of lower beginning total student enrollments at AIUS. Management expects to optimize operating expenses throughout 2024 to mostly offset this expected decline in revenue.

Financial Highlights

Revenue for the current quarter decreased by 14.0% or $27.3 million as compared to the prior year quarter, resulting from a decrease in revenue for CTU of 8.8% or $10.9 million and a decrease for AIUS of 23.1% or $16.3 million. CTU’s academic calendar may impact the comparability of revenue-earning days and enrollment results in any given quarter, with the impact on revenue and total student enrollments not necessarily having the same magnitude or directional impact. The decrease in revenue at CTU was due to less revenue-earning days during the current quarter as compared to the prior year quarter. The decrease within AIUS was driven by a lag impact on revenue of the operational changes undertaken during 2023.

Operating income for the current quarter increased to $46.3 million as compared to operating income of $43.3 million in the prior year quarter. The increase in operating income for the current quarter was primarily due to lower operating expenses across most functional categories in the current quarter as compared to the prior year quarter which more than offset the decline in revenue.

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 $49.5 million for the current quarter as compared to $53.1 million for the prior year quarter.

Adjusted operating income and adjusted earnings per diluted share for the quarters ended March 31, 2024 and 2023 is presented below (dollars in thousands, unless otherwise noted):

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

(2) 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.

Regulatory Updates

Borrower Defense to Repayment

On February 28, 2023, the Career Colleges & Schools of Texas (“CCST”) filed a lawsuit in the U.S. District Court for the Northern District of Texas challenging the Department’s most recent versions of the borrower defense to repayment (BDR) and closed school loan discharge (CSLD) regulations that were to be effective July 1, 2023. CCST seeks to set aside these rules on the grounds that they violate the U.S. Constitution and the Administrative Procedure Act. On April 4, 2024, the Fifth Circuit reversed the district court’s denial of CCST’s motion for preliminary injunction and remanded the case back to the district court with instructions to postpone the effective date of these rules pending final judgment, effectively maintaining a nationwide injunction against these latest rules going into effect that had previously been entered by the Fifth Circuit. The Fifth Circuit’s ruling included a detailed analysis of the likelihood of success of CCST’s legal arguments against the Department and identified numerous reasons why, in its opinion, CCST is likely to be successful on the merits. Among other conclusions, the Fifth Circuit determined that the Higher Education Act likely does not grant the Department the authority to draft regulations providing affirmative claims that borrowers can assert against schools, in contrast to “defenses” to a creditor’s effort to collect on student loans. The Fifth Circuit also determined that the new BDR rule raised constitutional questions about the Department’s authority to adjudicate claims outside of the judicial system, and held that the new rule’s standards for actionable misrepresentations or omissions or aggressive or deceptive recruiting tactics most likely do not comply with the specificity requirements of the enabling statute. Finally, the Fifth Circuit held that the new CSLD regulations exceeded the Department’s authority by redefining a school “closure” to mean when the school ceased to provide programs in which most students were enrolled, and in authorizing automatic, full discharges of student loans without proof that the school closure was the reason that students were unable to complete their programs. On remand, the district court will decide the merits of CCST’s legal challenges. We are unable to predict whether and to what extent this legal challenge will have on the newest or prior versions of the BDR regulations and any related effort by the Department to seek recoupment of approved claims from institutions.

See Item 1, “Business – Legislative Action and Recent Department Regulatory Initiatives” and “Compliance with Federal Regulatory Standards and Effect of Federal Regulatory Violations” in our Annual Report on Form 10-K for the year ended December 31, 2023 for an overview of BDR.

See Item 1A, “Risk Factors – Risks Related to the Highly Regulated Field in Which We Operate – ‘Borrower defense to repayment' regulations, including closed school loan discharges, may subject us to significant repayment liability to the Department for discharged federal student loans and posting of substantial letters of credit that may limit our ability to make investments in our business which could negatively impact our future growth,’” in our Annual Report on Form 10-K for the year ended December 31, 2023 for more information about risks associated with the BDR and closed school loan discharge regulations.

Department Information Requests

In connection with its administration of Title IV Programs, the Department has broad powers to request information and review records of a participating institution. Since December 2021, the Company has responded to extensive requests for information from the Department's Investigation Group relating to CTU and AIUS and may be asked to respond to further requests in the future. Most recently, this group made an inquiry that questions whether and to what extent the promotion of our flexible mobile app technology is incompatible or inconsistent with how we also inform students of technology equipment and internet access requirements and may violate Title IV regulations. We believe our discussions of these topics are in compliance with the applicable Title IV regulations and are preparing an appropriate response. Significant resources are required to respond to the requests and the Department’s review of information provided could lead to additional requests for information or claims of noncompliance with the extensive regulatory requirements relating to the administration of Title IV Programs.

See Item 1A, “Risk Factors – Risks Related to the Highly Regulated Field in Which We Operate – ‘Compliance with the extensive regulatory requirements applicable to our business can be costly and time consuming, and failure to comply could result in substantial financial penalties, severe restrictions on or closure of our operations, loss of federal and state financial aid funding for our students, or loss of our authorization to operate our institutions,’ and ‘If the Department denies, or significantly conditions, recertification of either of our institutions to participate in Title IV Programs, that institution could not conduct its business as it is currently conducted,’” and other risk factors in our Annual Report on Form 10-K for additional information about the risks surrounding continued participation in Title IV Programs.

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 quarters ended March 31, 2024 and 2023 (dollars in thousands):

(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.

Revenue

Revenue for the first quarter of 2024 ("current quarter") decreased 14.0% or $27.3 million as compared to the prior year quarter. The decline was primarily driven by a timing impact of the academic calendar at CTU and lower total student enrollments at

AIUS over the past few quarters. Typically, total student enrollment balances at the end of any given quarter have a lag impact on revenue in the subsequent quarter.

Educational Services and Facilities Expense (dollars in thousands)

The educational services and facilities expense for the current quarter decreased by 11.8% or $4.0 million as compared to the prior year quarter. Academics and student related costs decreased by 11.3% or $3.5 million for the current quarter as compared to the prior year quarter, primarily driven by operational changes made to align with recent student enrollments trends. Occupancy expenses for the current quarter improved by 17.6% or $0.5 million as compared to the prior year quarter driven by the optimization of leased space.

General and Administrative Expense (dollars in thousands)

The general and administrative expense for the current quarter decreased by 22.4% or $25.2 million as compared to the prior year quarter, driven by decreases within all expense categories for the current comparative period.

The administrative expense decreased by 19.8% or $8.8 million for the current quarter as compared to the prior year quarter, primarily driven by operational efficiencies within our academic institutions and decreased legal fees within Corporate and Other.

Advertising and marketing expense for the current quarter decreased by 22.5% or $7.1 million as compared to the prior year quarter, as a result of adjustments made to our marketing process related to identifying prospective student interest within both CTU and AIUS.

Admissions expense for the current quarter decreased by 19.6% or $5.1 million as compared to the prior year quarter. The current period improvement was driven by decreased expenses within both CTU and AIUS as a result of operational changes made during the prior year.

Bad debt expense incurred by each of our segments during the quarters ended March 31, 2024 and 2023 was as follows (dollars in thousands):

Bad debt expense decreased by 39.1% or $4.2 million for the current quarter as compared to the prior year quarter, with improvement experienced at both CTU and AIUS. CTU and AIUS' bad debt expense decreased by 57.5% or $4.1 million and 2.9% or $0.1 million, respectively, for the current quarter as compared to the prior year quarter. Bad debt as a percentage of revenue improved by 1.6% for the current quarter as compared to the prior year quarter.

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. We continue to expect quarterly fluctuations in bad debt expense, especially as some of the various federal aid initiatives expire.

Operating Income

Operating income increased by 6.8% or $2.9 million for the current quarter as compared to the prior year quarter. The current quarter increase was primarily driven by lower operating expenses across all categories which more than offset the decline in revenue for the current quarter.

Provision for Income Taxes

For the quarter ended March 31, 2024, we recorded a provision for income taxes of $13.4 million or 25.4% as compared to a provision for income taxes of $12.6 million or 26.7% for the prior year quarter. The effective tax rate for the quarter ended March 31, 2024 was benefitted by the tax effect of stock-based compensation and the release of previously recorded tax reserves, which reduced the effective tax rate by 2.5%. The effective tax rate for the quarter ended March 31, 2023 was impacted by the tax effect of stock-based compensation and the release of previously recorded tax reserves, the net effect of which decreased the effective tax rate by 0.8%. For the full year 2024, we expect our effective tax rate to be between 25.5% and 26.5%.

SEGMENT RESULTS OF OPERATIONS

The following tables present unaudited segment results for the reported periods (dollars in thousands):

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 pursuing: a) non-degree seeking and professional development programs, and b) degree seeking, non-Title IV, self-paced programs at our universities.

CTU. Current quarter revenue decreased by 8.8% or $10.9 million as compared to the prior year quarter. The decrease was primarily driven by a lower number of revenue earnings days during the current quarter as compared to the prior year quarter.

Current quarter operating income for CTU decreased by 3.5% or $1.5 million as compared to the prior year quarter driven by the decrease in revenue discussed above, which was mostly offset with decreased operating expenses.

AIUS. Current quarter revenue decreased by 23.1% or $16.3 million as compared to the prior year quarter. The decrease was primarily driven by a decrease in total student enrollments of 22.9% at March 31, 2024 as compared to the prior year quarter end due to the lag impact from the operational changes made during the latter half of 2023.

Current quarter operating income for AIUS decreased by 22.6% or $2.7 million as compared to the prior year quarter driven by the decrease in revenue discussed above, which was mostly offset with decreased operating expenses.

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 quarter improved by 58.2% or $7.2 million as compared to the prior year quarter, primarily as a result of decreased legal fee expense.

SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A detailed discussion of the accounting policies and estimates that we believe are most critical to our financial condition and results of operations that require management’s most subjective and complex judgments in estimating the effect of inherent uncertainties is included under the caption “Summary of Critical Accounting Policies and Estimates” included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2023. Note 2 “Summary of Significant Accounting Policies” of the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2023 also includes a discussion of these and other significant accounting policies.

LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES

As of March 31, 2024, cash, cash equivalents, restricted cash and available-for-sale short-term investments (“cash balances”) totaled $642.4 million. 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 expect to continue to generate cash during the remainder of 2024. 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 quarterly dividends payments 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, quarterly dividend payments 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 February 20, 2024, the Board of Directors of the Company approved a new stock repurchase program for up to $50.0 million which commenced March 1, 2024 and expires September 30, 2025. The new stock repurchase program replaced the previous stock repurchase program. 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.

The Board of Directors approved the aforementioned stock repurchase programs believing it advantageous to the Company and its stockholders to repurchase shares of the Company’s common stock from time to time at prices below what the Board of Directors believed to be the intrinsic value of the Company’s common stock.

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”). The Credit Agreement provides the Company with the benefit of a $125.0 million senior secured revolving credit facility and was originally scheduled to mature on September 8, 2024. On January 23, 2024, after having previously been amended on April 1, 2022, the Company and the subsidiary guarantors thereunder entered into a Second Amendment to the Credit Agreement with Wintrust (the “Second Amendment” and the Credit Agreement, as amended to date, the “Second Amended Credit Agreement”). The Second Amendment, among other things, (i) extends the maturity date of the revolving credit facility to January 31, 2027; (ii) lowers the “Prime Rate” floor from 4% to 3%; (iii) replaces BMO Bank N.A. with Valley National Bancorp as one of the lenders that is party to the revolving credit facility; and (iv) modifies the relative commitments of the lenders that are parties to the revolving credit facility. Under the Second Amended Credit Agreement, the Company continues to have the benefit of a $125.0 million senior secured revolving credit facility, and, 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 Second Amended Credit Agreement are secured by substantially all assets of the Company and the subsidiary guarantors.

The Second Amended 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 and quarterly dividend payments, 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 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 Second Amended 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 March 31, 2024, 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,” in our Annual Report on Form 10-K for the year ended December 31, 2023.

Sources and Uses of Cash

Operating Cash Flows

During the quarters ended March 31, 2024 and 2023, net cash flows provided by operating activities totaled $54.5 million and $4.6 million, respectively. The current quarter increase in net cash flows provided by operating activities was driven by timing of academic terms at CTU and the resulting cash receipts versus the prior year quarter.

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 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,” in our Annual Report on Form 10-K for the year ended December 31, 2023.

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 quarters ended March 31, 2024 and 2023, net cash flows used in investing activities totaled $30.8 million and $21.4 million, respectively.

Purchases and Sales of Available-for-Sale Investments. Purchases and sales of available-for-sale investments resulted in a net cash outflow of $29.6 million and $19.4 million for the quarters ended March 31, 2024 and 2023, respectively.

Capital Expenditures. Capital expenditures decreased to $1.2 million for the quarter ended March 31, 2024 as compared to $1.9 million for the quarter ended March 31, 2023. For the full year 2024, we expect capital expenditures to be between 1% to 2% of revenue.

Financing Cash Flows

During the quarters ended March 31, 2024 and 2023, net cash flows used in financing activities totaled $15.9 million and $2.8 million, respectively. Payments to repurchase shares of our common stock were $6.8 million for the quarter ended March 31, 2024 and $0.8 million for the quarter ended March 31, 2023.

Payments of employee tax associated with stock compensation. Payments of employee tax associated with stock compensation were $3.4 million and $2.2 million for the quarters ended March 31, 2024 and 2023, respectively.

Payments of cash dividends. During the quarter ended March 31, 2024, the Company made dividend payments of $7.2 million.

Changes in Financial Position

Selected condensed consolidated balance sheet account changes from December 31, 2023 to March 31, 2024 were as follows (dollars in thousands):

Student receivables, net: The increase is driven by timing of academic terms within CTU and AIUS, along with an increase in total student enrollments at CTU.

Right of use asset, net: The decrease is driven by impairment charges associated with the decision to exit a portion of certain leased facilities during the quarter along with recurring amortization of remaining ROU assets.

Payroll and related benefits: The decrease is driven by annual incentive compensation payments made during the current quarter which were accrued as of the prior year end.

Income taxes: The increase primarily relates to amounts owed with respect to estimated payments of federal and state income tax for 2024.

Deferred revenue: The increase is primarily related to the timing impact of the academic terms within CTU and AIUS along with an increase in total student enrollments at CTU.

We are exposed to financial market risks, primarily changes in interest rates. We use various techniques to manage our interest rate risk. We have no derivative financial instruments or derivative commodity instruments, and believe the risk related to cash equivalents and available for sale investments is limited due to the adherence to our investment policy, which focuses on capital preservation and liquidity. In addition, we use asset managers who conduct initial and ongoing credit analyses on our investment portfolio and monitor that investments are in compliance with our investment policy. Despite the investment risk mitigation strategies we employ, we may incur investment losses as a result of unusual and unpredictable market developments and may experience reduced investment earnings if the yields on investments deemed to be low risk remain low or decline.

Interest Rate Exposure

Our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell investments that have declined in market value due to changes in interest rates. At March 31, 2024, a 10% increase or decrease in interest rates applicable to our investments or borrowings would not have a material impact on our future earnings, fair values or cash flows.

Under the Second Amended Credit Agreement, outstanding principal amounts bear annual interest at a fluctuating rate equal to 1.0% less than the administrative agent’s prime commercial rate, subject to a 3.0% minimum rate. A higher rate may apply to late payments or if any event of default exists. As of March 31, 2024, we had no outstanding borrowings under this facility.

Our financial instruments are recorded at their fair values as of March 31, 2024 and December 31, 2023. We believe that the exposure of our consolidated financial position and results of operations and cash flows to adverse changes in interest rates applicable to our investments or borrowings is not significant.

Evaluation of Disclosure Controls and Procedures

We completed an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q (“Report”) under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief

Financial Officer concluded that, as of March 31, 2024, our disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in this Report was recorded, processed, summarized and reported within the time periods specified in the rules and forms provided by the U.S. Securities and Exchange Commission (“SEC”), and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on the Effectiveness of Controls

Our management does not expect that our disclosure controls and procedures or our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our Company have been detected.

These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

In addition to the information set forth in this Quarterly Report on Form 10-Q, the reader should carefully consider the factors discussed in Part I, Item 1A “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the Securities and Exchange Commission on February 21, 2024.