What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-09 compared with 2020-08-10 · 239 added, 171 removed, 250 unchanged (62% of the section changed)

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Forward-looking statements in this Quarterly Report include, without limitation, statements regarding:

• our proposed acquisition of Rasmussen University;

• changes to and expectations regarding our student enrollments, net course registrations, and the composition of our student body;

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• federal appropriations and other budgetary matters, including government shutdowns;

• our ability to comply with the extensive regulatory framework applicable to our industry, as well as state law and regulations and accrediting agency requirements;

• changes in and our ability to comply with the extensive regulatory framework applicable to our industry, as well as state law and regulations and accrediting agency requirements;

• our ability to undertake initiatives to improve the learning experience and attract students who are likely to persist;

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• our dependence on and need to continue to invest in our technology infrastructure;

• risks related to the acquisition of Rasmussen University, including:

◦ satisfaction of closing conditions, including the failure to obtain or delay in obtaining required regulatory and accreditor approvals;

◦ our reliance on a debt commitment letter, or alternative financing, to fund a portion of the purchase price for the acquisition;

◦ the significant transaction and integration costs we have incurred and expect to incur in connection with the acquisition;

◦ risks related to the integration of Rasmussen’s business and our ability to realize the expected benefits of the acquisition;

◦ that Rasmussen may have liabilities that are not known to us.

Forward-looking statements should be considered in light of these factors and the factors described elsewhere in this Quarterly Report, including in the “Risk Factors” section, in the “Risk Factors” section of our Annual Report, and in our various filings with the Securities and Exchange Commission, or the SEC.

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Our subsidiary institutions offer programs designed to prepare individuals for productive contributions to their professions and society, and to offer opportunities that may advance students in their current professions or help them prepare for their next career.

Our subsidiary institutions are licensed or otherwise authorized by state authorities, or are in the process of obtaining such licenses or authorizations, to offer postsecondary education programs to the extent the institutions believe such licenses or authorizations are required, and are certified by the United States Department of Education, or ED, to participate in student financial aid programs authorized under Title IV of the Higher Education Act of 1965, as amended, or Title IV programs.

believe such licenses or authorizations are required, and are certified by the United States Department of Education, or ED, to participate in student financial aid programs authorized under Title IV of the Higher Education Act of 1965, as amended, or Title IV programs.

On March 11, 2020, the World Health Organization declared the novel coronavirus COVID-19 a global pandemic and recommended containment and mitigation measures worldwide.

The pandemic did not materially impact our results of operations during the six month period ended June 30, 2020.

The pandemic did not materially impact our results of operations during the nine month period ended September 30, 2020.

However, the duration and intensity of the outbreak, and therefore any future impact, is uncertain.

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HCN has since fully reopened its campuses, using smaller in person classes with screening, social distancing and masking requirements while continuing to offer courses in a virtual setting for those that prefer remote course learning.

While not yet material, ongoing and future impacts of the COVID-19 pandemic may cause additional disruption of educational services provided to our students, cause a disruption in revenue, lead to increased absenteeism in our workforce, increase costs for HCN to continue to deliver courses in person and online, be considered a triggering event to evaluate the value of HCN goodwill, lead to an impairment of APEI investments, impact the recoverability of receivables, and lead to an increase in bad debt expense and cohort default rates, among other impacts.

In October 2020, HCN began temporarily expanding certain campuses through short-term leases of additional space to be used as lab space in order to accommodate student demand in compliance with COVID-related public health measures that effectively limit the number of students in each lab class.

Ongoing and future impacts of the COVID-19 pandemic may cause additional disruption of educational services provided to our students, cause a disruption in revenue, lead to increased absenteeism in our workforce, increase costs for HCN to continue to deliver courses in person and online, be considered a triggering event to evaluate the value of HCN goodwill, lead to an impairment of APEI investments, impact the recoverability of receivables, and lead to an increase in bad debt expense and cohort default rates, among other impacts.

For more information on the potential risks related to COVID-19, please refer to the section entitled “Risk Factors” in this Quarterly Report.

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APUS has institutional accreditation from the Higher Learning Commission, or HLC, and several of its academic programs have specialized accreditation granted by industry governing organizations.

On April 7, 2020 APUS announced Momentum 2020, a $20.0 million scholarship initiative for undergraduate students of four-year, primarily campus-based institutions who may be experiencing disruptions at their home institutions due to the coronavirus pandemic.

Momentum 2020 will enable students to continue their education by

taking up to two undergraduate courses for transfer using a 50% tuition grant for each course started in May through August 2020 unless otherwise extended.

At this time, we cannot predict the impact this initiative will have on our revenue, operating margins, or income.

On June 30, 2020, we entered into an Amendment to Amended and Restated Employment Agreement, or the Amendment, with Dr.

Boston, the President of APUS.

The Amendment amends Dr.

The Amendment amended Dr.

Boston’s Amended and Restated Employment Agreement, which had contemplated that Dr.

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Pursuant to the Amendment, Dr.

Boston will now retire as APUS President on August 12, 2020 when Dr.

Wade Dyke assumes the role of APUS President.

Boston retired as APUS President on August 12, 2020.

Wade Dyke assumed the role of APUS President on the same day.

In June 2020, APUS timely applied for recertification to participate in Title IV programs.

On September 9, 2020, ED notified APUS that it had completed its review of APUS’s application and had granted APUS provisional certification until June 30, 2023.

ED issued APUS a provisional program participation agreement, or PPPA, outlining the terms of provisional certification.

As described in the PPPA, the reason ED granted approval on a provisional basis is because APUS is subject to an open program review.

Specifically, the program review ED began in September 2016 of APUS’s administration of Title IV programs during the 2014-2015 and 2015-2016 award years remains open and ongoing.

At this time, we cannot predict the outcome of the program review, when it will be completed, or whether ED will place any liability or other limitations on APUS as a result of the review.

During a period of provisional certification, an institution must comply with any additional conditions imposed by ED.

In addition, ED may more closely review a provisionally-certified institution if it applies for approval to open a new location, add an educational program, acquire another school, or make any other significant change.

If ED determines that a provisionally certified institution is unable to meet its responsibilities, it may seek to revoke the institution’s certification to participate in Title IV programs with fewer due process protections than if it were fully-certified.

For more information on the potential risks associated with the above APUS initiatives, APUS more generally, and applicable accreditation matters, please refer to our Annual Report and the section entitled “Risk Factors” in this Quarterly Report.

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Classes began online as a result of the COVID-19 pandemic but have since shifted to a blended learning model.

HCN has been authorized by the Indiana Board for Proprietary Education/Indiana Commission for Higher Education to offer instruction at the campus in Indiana.

HCN is authorized to offer instruction in Indiana by the Indiana Board for Proprietary Education/Indiana Commission for Higher Education.

The Indiana State Board of Nursing has voted to grant initial accreditation and authorized the admission of the first cohort of students.

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While NLN CNEA approval is not required to begin classes, NLN CNEA may accept the notification or take other actions, such as requesting follow-up information or imposing conditions.

NLN CNEA’s March 2020 Board of Commissioners meeting was canceled due to the COVID-19 pandemic.

HCN has not received any additional requests or follow up communication.

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The grant is designed to limit a student’s monthly payment to $200 through an award of up to $200 per month, or $600 per term after consideration of financial aid, employer tuition reimbursement, and other financial resources.

HCN awarded approximately $45,200 and $69,700 of institutional grants during the three and six month periods ended June 30, 2020, respectively.

ABHES annually reviews student achievement indicators, including retention rate, placement rate, and licensing and credentialing examination pass rate.

HCN awarded approximately $43,100 and $112,800 of institutional grants during the three and nine month periods ended September 30, 2020, respectively.

ABHES annually reviews student achievement indicators, including retention rate, placement rate, and licensing and credentialing examination pass rates.

Under ABHES policy, ABHES may withdraw accreditation at any time if it determines that an institution fails to demonstrate at least a 70% retention rate for each program, a 70% placement rate for each program, or a 70% pass rate on mandatory licensing and credentialing examinations, or fails to meet the state-mandated results for credentialing or licensure.

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Specifically, ABHES:

report and informed HCN that those programs must meet the retention rate threshold by May 1, 2020;

(i) placed the PN programs at the Dayton and Toledo campuses on program specific warning status because the programs have failed to meet the 70% retention rate threshold since HCN’s 2017-2018 annual report and informed HCN that those programs must meet the retention rate threshold by May 1, 2020;

(ii) removed the ADN programs at the Cleveland and Toledo campuses from outcomes reporting status after placement rates for those programs at those locations met the 70% compliance threshold;

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On April 22, 2020, HCN notified ABHES that, as of March 31, 2020, HCN met the 70% retention rate threshold at each campus location.

For the reporting year July 1, 2019 through June 30, 2020, HCN’s programs satisfied ABHES’s threshold requirements for retention rates, placement rates, and mandatory licensure and credentialing examination pass rates.

For the reporting year July 1, 2019 through June 30, 2020, HCN’s programs satisfied ABHES’s threshold requirements for retention rate, placement rate, and mandatory licensure and credentialing examination pass rates.

There can be no assurance that HCN will be able to continue to demonstrate compliance in all cases.

On August 12, 2020, ABHES requested that HCN provide ABHES with a financial improvement plan that details HCN’s financial objectives, outlines HCN’s financial improvement plans, including a specific timeline, and addresses the net loss for the fiscal year ending December 31, 2019.

The plan was timely submitted to ABHES.

To apply for licensure to practice nursing in Ohio, an applicant must have successfully completed a nursing education program approved by the OBN.

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HCN has been implementing changes, including curriculum, admissions, and academic achievement and course retake policy changes that are designed to improve NCLEX scores over time, but there is no assurance that these changes will be successful or will not have negative effects on HCN’s enrollment.

In June 2020, HCN filed a letter of intent with the Ohio Board of Nursing to expand its nursing programs to a new location in Akron, Ohio.

In July 2020, the Ohio Board of Nursing approved HCN’s request.

From August through October 2020, ABHES conducted virtual site visits to HCN campuses to assess compliance with ABHES accreditation standards.

The visits resulted in a finding that student satisfaction with the ADN and PN Programs at HCN’s Toledo campus, and the PN Program at HCN’s Cincinnati, Columbus, and Dayton campuses was below expected levels, which ABHES attributed to the transition to online courses as a result of the COVID-19 pandemic, and a finding at the Indianapolis and Columbus campuses related to the composition of an advisory board.

For more information on the potential risks associated with these HCN initiatives and HCN more generally, please refer to our Annual Report and the section entitled “Risk Factors” in this Quarterly Report.

To remain eligible to participate in Title IV programs, an educational institution’s student loan cohort default rates must remain below certain levels.

Pursuant to requirements of the Higher Education Act, as amended, if the cohort default rate for any year exceeds 40%, an institution loses eligibility to participate in Title IV programs, and if the institution’s cohort default rate exceeds 30% for three consecutive years, the institution loses eligibility to participate in Title IV programs.

If an institution’s cohort default rate is equal to or greater than 30% in any year, it must establish a default prevention task force.

In September 2020, ED released final official cohort default rates for institutions for federal fiscal year 2017, with ED reporting a 15.2% cohort default rate for APUS and a 12.1% cohort default rate for HCN.

Additional information regarding student loan default rates, prior year default rates, and potential risks associated with them is available in our Annual Report.

Proposed Acquisition of Rasmussen University

On October 28, 2020, we entered into a definitive agreement to acquire Rasmussen University, a nursing- and health sciences-focused institution serving over 18,000 students at its 24 campuses across six states and online.

Pursuant to the terms of a Membership Interest Purchase Agreement, or the Rasmussen Agreement, with FAH Education, LLC, or Seller, Rasmussen, LLC, or Rasmussen, and Rasmussen College, LLC, or together with Rasmussen, the Acquired Companies, a wholly owned subsidiary of Rasmussen, we agreed to purchase from Seller all of the units of membership interests in Rasmussen, or the Rasmussen Acquisition, for $300 million in cash consideration and $29 million in shares of a new series of non-voting preferred stock be issued at the closing of the Rasmussen Acquisition, or the Rasmussen Closing (or, at our election, up to an additional $29 million in cash in lieu thereof), subject to customary adjustments, including for net working capital, cash and debt of the Acquired Companies prior to the Rasmussen Closing.

The Rasmussen Acquisition is expected to close in the third quarter of 2021, subject to the satisfaction or waiver of closing conditions that include, among others, regulatory review by the U.S.

Department of Education, approval by the Higher Learning Commission, and approval by or notices to other regulatory and accrediting bodies.

Regulatory and Legislative Activity

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ED published a notice of proposed rulemaking on April 2, 2020 based on consensus language agreed to by the Accreditation and Innovation Committee and accepted public comments on the proposal until May 4, 2020.

The proposed rulemaking on distance education provides institutions additional flexibility in offering distance education and competency-based education programs.

For example, the proposed rulemaking clarifies and simplifies requirements related to direct assessment programs, including with respect to eligibility requirements and subscription-based programs.

The proposed rulemaking also provides new definitions for “academic engagement,” “distance education,” and “regular and substantive interaction” in order to provide further clarity regarding the instructional requirements for distance education programs.

ED announced that it plans to release a final rule before November 1, 2020, which would allow the rule to go into effect on July 1, 2021.

On August 24, 2020, ED released the final rule, which goes into effect on July 1, 2021.

The rulemaking on distance education provides institutions additional flexibility in offering distance education and competency-based education programs.

For example, the rulemaking clarifies and simplifies requirements related to direct assessment programs, including with respect to eligibility requirements and subscription-based programs.

The rulemaking also provides new definitions for “academic engagement,” “distance education,” and “regular and substantive interaction” in order to provide further clarity regarding the instructional requirements for distance education programs.

The COVID-19 pandemic has resulted in widespread disruptions in higher education, particularly with respect to institutions that engage in on-ground delivery of education, and a number of related regulatory developments.

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HCN’s next comprehensive evaluation for renewal of accreditation by ABHES had been scheduled for April 2020, but has been postponed due to the pandemic and related disruptions.

ABHES has announced that it intends to hold a virtual comprehensive evaluation meeting, but has not yet announced a date.

In addition, ED has issued numerous statements that provide guidance on how institutions are permitted to handle certain federal student financial aid requirements under certain circumstances related to responses to the COVID-19 pandemic.

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Due to the COVID-19 pandemic, many higher education institutions shifted to distance learning as campuses shut down as a result of the public health emergency.

The CARES Act includes provisions

designed to provide relief to higher education institutions in connection with the COVID-19 pandemic.

The CARES Act includes provisions designed to provide relief to higher education institutions in connection with the COVID-19 pandemic.

The CARES Act created the Higher Education Emergency Relief Fund, or HEERF, that includes $12.6 billion in funding for higher education institutions.

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The CARES Act modifies processes related to the return of unearned Title IV funds in connection with student withdrawals during the COVID-19 pandemic, extends time limits for Pell Grants and Direct Loans as a result of withdrawals during this period, allows for flexibility in measuring the satisfactory academic progress of students, and permits institutions to continue making federal work study payments to students who can no longer meet work study obligations during the period.

Additionally, the CARES Act suspends payments for Federal Family Education Loans and Direct Loans until September 30, 2020.

Additionally, the CARES Act suspended payments for Federal Family Education Loans and Direct Loans until September 30, 2020, and an executive order extended this suspension until December 31, 2020.

During this period, these loans will not accrue interest and ED will suspend involuntary collection practices.

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Graduates of OBN-approved nursing education programs, such as HCN’s programs, may apply for a temporary license that would be valid until the earlier of March 1, 2021 and 90 days after the period of emergency ends.

We cannot predict the extent to which the aforementioned regulatory activity or any other potential regulatory or legislative activity, including as a result of COVID-19, may impact us or our institutions, nor can we predict the possible associated burdens and costs.

The postsecondary education regulatory environment may change in the future as a result of the U.S.

federal election in November 2020 and any related run-off elections.

A change i n the Presidential Administration or Congress may result in

changes to, or elimination of, currently effective ED regulations, or to implement new ED regulations.

For example, a new Congress could seek to act under the Congressional Review Act, which establishes legislative procedures through which Congress may adopt a joint resolution of disapproval to nullify certain agency final regulations within a certain time period after the regulations are finalized by the agency.

ED, under new leadership, could also initiate new rulemaking processes to alter existing regulations and could act to change existing ED policies and practices with respect to matters related to postsecondary education institutions.

We cannot predict the extent to which a new Presidential Administration or Congress will act to ch ange or eliminate or to implement new ED regulations, policies, and practices, nor can we predict the form that new regulations, policies, or practices may take.

We cannot predict the extent to which the aforementioned regulatory activity or any other potential regulatory or legislative activity, including as a result of COVID-19 or the U.S.

federal election, may impact us or our institutions, nor can we predict the possible associated burdens and costs.

Additional information regarding the regulatory and legislative environment and potential risks associated with it is available in our Annual Report and the section entitled “Risk Factors” in this Quarterly Report.

Rasmussen Acquisition Regulatory Review

The Rasmussen Acquisition will be required to be reported to, and in some cases approved by, various education regulatory bodies.

An institution must obtain ED approval for a change in ownership and control in order to continue to participate in Title IV programs under the new ownership.

ED does not provide pre-closing approval, but at the request of the parties, ED will conduct a “pre-acquisition review” of a proposed change.

In this case, the parties will request that ED conduct an “abbreviated pre-acquisition review.” Upon completion of an abbreviated pre-acquisition review, ED informs the institution whether the institution will be required to post a letter of credit in connection with its continued participation in Title IV programs after closing.

As required, we intend to timely notify ED about the occurrence of the change in ownership of Rasmussen and submit an application for approval to participate in Title IV programs after the closing of the transaction.

We will also notify state agencies, accreditors, boards of nursing, and other relevant regulators of this change in ownership as required.

In some instances, these bodies will require prior approval before the change in ownership can be completed.

For example, HLC requires approval before the closing of a transaction in order for an institution to maintain accredited status after closing.

The parties will submit an application to HLC for pre-closing approval of the change in ownership.

Additionally, some regulators will require approval after the change in ownership in order to continue proper licensure, accreditation, approval, or authorization.

Reportable Segments

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Summary of Results

For the three months ended June 30, 2020, our consolidated revenue increased to $82.1 million from $70.6 million, or by 16.4%, compared to the prior year period.

Our operating margins increased to 11.0% from 8.0% for the three months ended June 30, 2020, compared to the prior year period.

For the six months ended June 30, 2020, our consolidated revenue increased to $156.7 million from $144.0 million, or by 8.8%, compared to the prior year period.

Our operating margins increased to 7.5% from 4.9% for the six months ended June 30, 2020, compared to the prior year period.

Net income increased to $6.7 million from $4.9 million, or by 35.9%, compared to the prior year period.

For the three months ended June 30, 2020, APEI Segment revenue increased to $73.5 million from $63.4 million, or by 15.9%, compared to the prior year period.

Net course registrations at APUS for the three months ended June 30, 2020 increased to approximately 89,600 from approximately 75,900, or approximately 18.1%, compared to the prior year period.

APEI Segment operating margins increased to 12.3% from 10.4% for the three months ended June 30, 2020, compared to the prior year period.

For the six months ended June 30, 2020, APEI segment revenue increased to $140.6 million from $129.2 million, or by 8.9% compared to the prior year period.

Net course registrations at APUS for the six months ended June 30, 2020 increased to approximately 174,400 from approximately 160,200, or approximately 8.9%, compared to the prior year period.

APEI Segment operating margins decreased to 9.0% from 10.9% for the six months ended June 30, 2020, compared to the prior year period.

The increase in net course registrations is primarily due to an increase in military-related registrations from students utilizing DoD tuition assistance which is at a lower revenue per net course registration than other funding sources.

For the three months ended September 30, 2020, our consolidated revenue increased to $79.1 million from $67.9 million, or by 16.6%, compared to the prior year period.

Our operating margins increased to 4.2% from negative 4.3% for the three months ended September 30, 2020, compared to the prior year period.

For the nine months ended September 30, 2020, our consolidated revenue increased to $235.9 million from $211.9 million, or by 11.3%, compared to the prior year period.

Our operating margins increased to 6.4% from 2.0% for the nine months ended September 30, 2020, compared to the prior year period.

Net income increased to $2.6 million from a net loss of $1.6 million, an increase of $4.2 million compared to the prior year period.

For the three months ended September 30, 2020, APEI Segment revenue increased to $69.6 million from $61.2 million, or by 13.7%, compared to the prior year period.

Net course registrations at APUS for the three months ended September 30, 2020 increased to approximately 90,300 from approximately 76,700, or approximately 17.7%, compared to the prior year period.

APEI Segment operating margins increased to 4.1% from 0.4% for the three months ended September 30, 2020, compared to the prior year period.

For the nine months ended September 30, 2020, APEI segment revenue increased to $210.3 million from $190.4 million, or by 10.4% compared to the prior year period.

Net course registrations at APUS for the nine months ended September 30, 2020 increased to approximately 264,700 from approximately 236,900, or approximately 11.7%, compared to the prior year period.

APEI Segment operating margins decreased to 7.4% from 7.5% for the nine months ended September 30, 2020, compared to the prior year period.

The increase in net course registrations was primarily due to an increase in military-related registrations from students utilizing DoD tuition assistance which is at a lower revenue per net course registration than other funding sources.

Net course registrations represent the total number of courses for which students remain enrolled after the date by which they may drop a course without financial penalty.

For the three months ended June 30, 2020, HCN Segment revenue increased to $8.6 million from $7.1 million, or by 20.5%, compared to the prior year period.

Total enrollment at HCN for the three months ended June 30, 2020 increased to approximately 1,700 from approximately 1,500, or approximately 13.7%, as compared to the prior year period.

New student enrollment at HCN for the three months ended June 30, 2020 increased to 492 from 314, or approximately 56.7%, as compared to the prior year period.

HCN Segment operating margins increased to negative 0.4% from negative 12.7% for the three months ended June 30, 2020, compared to the prior year period.

For the six months ended June 30, 2020, HCN Segment revenue increased to $16.1 million from $14.9 million, or by 8.4%, compared to the prior year period.

HCN Segment operating margins increased to negative 5.7% from negative 47.4% for the six months ended June 30, 2020, compared to the prior year period.

The increase in new student enrollment was due in part to an increase in demand for nursing education, a change in the competitive environment due to COVID-19, an increase in marketing expenditures, the continued impact of new initiatives implemented in 2019 such as the direct entry ADN Program, and the implementation of the institutional affordability grant in the first quarter of 2020.

For the three months ended September 30, 2020, HCN Segment revenue increased to $9.5 million from $6.7 million, or by 42.5%, compared to the prior year period.

Total enrollment at HCN for the three months ended September 30, 2020 increased to approximately 2,000 from approximately 1,400, or approximately 38.6%, as compared to the prior year period.

New student enrollment at HCN for the three months ended September 30, 2020 increased to 649 from 345, or approximately 88.1%, as compared to the prior year period.

HCN Segment operating margins increased to 4.9% from negative 47.2% for the three months ended September 30, 2020, compared to the prior year period.

For the nine months ended September 30, 2020, HCN Segment revenue increased to $25.7 million from $21.6 million, or by 19.0%, compared to the prior year period.

HCN Segment operating margins increased to negative 1.8% from negative 47.3% for the nine months ended September 30, 2020, compared to the prior year period.

We believe that the increase in new student enrollment at HCN was due in part to an increase in demand for nursing education, a change in the competitive environment due to COVID-19, an increase in marketing expenditures, the continued impact of new initiatives implemented in 2019 such as the direct entry ADN Program, and the implementation of the institutional affordability grant in the first quarter of 2020.

HCN total student enrollment represents the total number of students enrolled in a course immediately after the date by which students may drop a course without financial penalty.

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Results of Operations

Below we have included a discussion of our operating results and material changes in our operating results during the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019.

Below we have included a discussion of our operating results and material changes in our operating results during the three and nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019.

Our revenue and operating results normally fluctuate as a result of seasonal or other variations in our enrollments and the level of expenses in our APEI and HCN Segments.

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We expect quarterly fluctuations in operating results to continue as a result of various enrollment patterns and changes in expenses.

COVID-19 did not materially impact our results of operations during the three and six months ended June 30, 2020.

COVID-19 did not materially adversely impact our results of operations during the three and nine months ended September 30, 2020.

However, the duration and intensity of the outbreak, and therefore any future impact, is uncertain.

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While not yet material, ongoing and future impacts may cause additional disruption of educational services provided to students, increase costs for HCN to continue to deliver courses in person and online, and could be considered a triggering event to evaluate the value of HCN goodwill, impairment of investments, and recoverability of receivables.

In addition, in October 2020, HCN began temporarily expanding certain campuses through short-term leases of additional space to be used as lab space in order to accommodate student demand in compliance with COVID-related public health measures that effectively limit the number of students in each lab class.

While not yet material, ongoing and future impacts may cause additional disruption of educational services provided to students, and increase costs for HCN to continue to deliver courses in person and online, and could be considered a triggering event to evaluate the value of HCN goodwill, impairment of investments, and recoverability of receivables.

For more information on the potential risks related to COVID-19, please refer to the section entitled “Risk Factors” in this Quarterly Report.

In addition, during the three and six months ended June 30, 2020, and thereafter, we have experienced a significant decrease in interest

rates, including in connection with the COVID-19 pandemic, and we expect to continue to earn reduced interest income on our invested funds.

Enrollment at HCN improved for the three months ended June 30, 2020 as compared to the prior year period due in part to an increase in demand for nursing education, a change in the competitive environment due to COVID-19, an increase in marketing expenditures, the continued impact of new initiatives implemented in 2019 such as the direct entry ADN Program, and the implementation of the institutional affordability grant in the first quarter of 2020.

In addition, during the three and nine months ended September 30, 2020, and thereafter, we have experienced a significant decrease in interest rates, including in connection with

the COVID-19 pandemic, as compared to 2019, and we expect to continue to earn reduced interest income on our invested funds.

We believe that the increase in enrollment at HCN for the three months ended September 30, 2020 as compared to the prior year period is due in part to an increase in demand for nursing education, a change in the competitive environment due to COVID-19, an increase in marketing expenditures, the continued impact of new initiatives implemented in 2019 such as the direct entry ADN Program, and the implementation of the institutional affordability grant in the first quarter of 2020.

We cannot predict whether our initiatives and efforts will continue to be successful over the long term and cannot guarantee continued enrollment and revenue growth in our HCN Segment.

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For more information on the initiatives discussed above, our operations, and related risk factors, please refer to the “Overview” section of this Management’s Discussion and Analysis and our Annual Report.

Our consolidated results for the three and six months ended June 30, 2020 and 2019 reflect the operations of our APEI and HCN Segments.

Our consolidated results for the three and nine months ended September 30, 2020 and 2019 reflect the operations of our APEI and HCN Segments.

For a more detailed discussion of our results by reportable segment, refer to our Analysis of Operating Results by Reportable Segment.

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

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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Total costs and expenses 95.8 104.3 93.6 98.0

Income from operations before interest income and income taxes 11.0 8.0 7.5 4.9

Income (loss) from operations before interest income and income taxes 4.2 (4.3) 6.4 2.0

Interest income, net 0.2 1.5 0.4 1.5

Income from operations before income taxes 11.2 9.6 8.0 6.4

Income tax expense 3.1 2.7 2.2 1.3

Income (loss) from operations before income taxes 4.4 (2.8) 6.8 3.5

Income tax expense (benefit) 1.0 (0.4) 1.8 0.8

Equity investment loss — — — (0.7)

Net income 8.1 % 6.9 % 5.8 % 4.1 %

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

Our consolidated revenue for the three months ended June 30, 2020 was $82.1 million, an increase of $11.5 million, or 16.4%, compared to $70.6 million for the three months ended June 30, 2019.

Net income (loss) 3.4 % (2.4) % 5.0 % 2.0 %

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Our consolidated revenue for the three months ended September 30, 2020 was $79.1 million, an increase of $11.2 million, or 16.6%, compared to $67.9 million for the three months ended September 30, 2019.

The increase in revenue was due to a $8.4 million, or 13.7%, increase in revenue in our APEI Segment and a $2.8 million, or 42.5%, increase in revenue in our HCN Segment.

In our APEI Segment, net course registrations by new students increased 30.0% and total net course registrations increased 18.1% during the three months ended June 30, 2020, as compared to the prior year period.

The HCN Segment revenue increase was primarily due to a 56.7% increase in new student enrollment and a 13.7% increase in total enrollment.

In our APEI Segment, net course registrations by new students and total net course registrations increased 25.0% and 17.7%, respectively, during the three months ended September 30, 2020, as compared to the prior year period.

The HCN Segment revenue increase was primarily due to an 88.1% increase in new student enrollment and a 38.6% increase in total enrollment.

Costs and expenses.

Costs and expenses for the three months ended June 30, 2020 were $73.1 million, an increase of $8.2 million, or 12.6%, compared to $64.9 million for the three months ended June 30, 2019.

The increase in costs and expenses for the three months ended June 30, 2020 as compared to the prior period was primarily due to an increase in employee compensation costs, advertising and marketing support costs, and professional fees in our APEI Segment and an increase in instructional materials costs in our HCN Segment partially offset by a decrease in commencement and travel costs in our APEI Segment.

The three months ended June 30, 2020 includes the following costs on a pre-tax basis:

$2.1 million increase in advertising costs compared to the prior year period, $1.3 million in professional fees associated with growth opportunities, and $1.0 million in information technology costs related to the replacements and upgrades to our information technology systems, including the replacements of our learning management and customer relationship management systems.

Costs and expenses as a percentage of revenue decreased to 89.0% for the three months ended June 30, 2020, from 92.0% for the three months ended June 30, 2019.

Costs and expenses for the three months ended September 30, 2020 were $75.8 million, an increase of $5.0 million, or 7.1%, compared to $70.8 million for the three months ended September 30, 2019.

The increase in costs and expenses for the three months ended September 30, 2020 as compared to the prior year period was primarily due to increases in employee compensation costs, advertising costs, professional fees, and information technology costs in our APEI Segment and increases in instructional materials costs and employee compensation costs in our HCN Segment partially offset by a decrease in advertising costs in our HCN Segment and bad debt expense in our APEI Segment.

Results for the three months ended September 30, 2020 include the following costs on a pre-tax basis:

a $2.1 million increase in advertising costs compared to the prior year period, $1.9 million in professional fees associated with strategic growth opportunities including the Rasmussen Acquisition, and $1.5 million in information technology costs related to the replacements and upgrades to our information technology systems, including the replacements of our learning management and customer relationship management systems.

Results for the three months ended September 30, 2019 include the following on a pre-tax basis:

$2.8 million in employee compensation costs for post-employment benefits related to the former APUS President’s retirement in our APEI Segment and a non-cash goodwill impairment of $1.5 million in our HCN Segment.

Costs and expenses as a percentage of revenue decreased to 95.8% for the three months ended September 30, 2020, from 104.3% for the three months ended September 30, 2019.

The decrease in costs and expenses as a percentage of revenue was primarily due to our consolidated revenue increasing at a rate greater than the increase in costs and expenses.

Instructional costs and services expenses.

Our instructional costs and services expenses for the three months ended June 30, 2020 were $30.7 million, an increase of $2.0 million, or 7.0%, from $28.7 million for the three months ended June 30, 2019.

The increase in instructional costs and services expenses was primarily due to an increase in employee compensation costs in our APEI Segment and an increase in employee compensation and instructional materials costs in our HCN Segment partially offset by a decrease in commencement and travel costs in our APEI Segment.

Instructional costs and services expenses as a percentage of revenue decreased to 37.4% for the three months ended June 30, 2020, from 40.7% for the three months ended June 30, 2019.

Our instructional costs and services expenses for the three months ended September 30, 2020 were $31.1 million, an increase of $3.8 million, or 14.0%, from $27.3 million for the three months ended September 30, 2019.

The increase in instructional costs and services expenses was primarily due to an increase in employee compensation costs in our APEI Segment and increases in instructional materials costs and employee compensation costs in our HCN Segment.

Instructional costs and services expenses as a percentage of revenue decreased to 39.3% for the three months ended September 30, 2020, from 40.2% for the three months ended September 30, 2019.

The decrease in instructional costs and services expenses as a percentage of revenue was primarily due to our consolidated revenue increasing at a rate greater than the increase in instructional costs and services expenses.

Selling and promotional expenses.

Our selling and promotional expenses for the three months ended June 30, 2020 were $17.1 million, an increase of $3.0 million, or 21.1%, from $14.1 million for the three months ended June 30, 2019.

The increase in selling and promotional expenses was primarily due to an increase in advertising costs in our APEI and HCN Segments and an increase in employee compensation costs and marketing support costs in our APEI Segment partially offset by a decrease in travel costs in our APEI Segment.

Advertising costs increased $1.9 million in our APEI Segment and $0.2 million in our HCN Segment and marketing support costs increased $0.5 million in our APEI Segment as compared to the prior year period.

Selling and promotional expenses as a percentage of revenue increased to 20.8% for the three months ended June 30, 2020, from 20.0% for the three months ended June 30, 2019.

The increase in selling and promotional expenses as a percentage of revenue was primarily due to selling and promotional expenses increasing at a rate greater than the increase in our consolidated revenue.

Our selling and promotional expenses for the three months ended September 30, 2020 were $18.5 million, an increase of $2.6 million, or 16.7%, from $15.9 million for the three months ended September 30, 2019.

The increase in selling and promotional expenses was primarily due to increases in advertising costs and employee compensation costs in our APEI Segment partially offset by a decrease in advertising costs in our HCN Segment.

APEI Segment advertising costs increased $2.3 million compared to the prior year period.

Selling and promotional expenses as a percentage of revenue was 23.4% for both the three months ended September 30, 2020 and 2019.

General and administrative expenses.

Our general and administrative expenses for the three months ended June 30, 2020 were $21.7 million, an increase of $3.6 million, or 19.9%, from $18.1 million for the three months ended June 30, 2019.

The increase in general and administrative expenses for the three months ended June 30, 2020 as compared to the prior year period was primarily the result of an increase in employee compensation costs and professional fees in our APEI Segment partially offset by decreases in employee compensation costs in our HCN Segment and bad debt expense in our APEI Segment.

For the three months ended June 30, 2020, general and administrative expenses include approximately $1.3 million in professional fees associated with growth opportunities, and $1.0 million of information technology costs related to replacements and upgrades to our information technology systems in our APEI Segment, including replacements of our learning management and customer relationship management systems.

Consolidated bad debt expense for the three months ended June 30, 2020 was $1.0 million, or 1.2% of revenue, compared to $0.9 million, or 1.3% of revenue in the prior year period.

General and administrative expenses as a percentage of revenue increased to 26.5% for the three months ended June 30, 2020, from 25.7% for the three months ended June 30, 2019.

The increase in general and administrative expenses as a percentage of revenue was primarily due to general and administrative expenses increasing at a rate greater than the increase in our consolidated revenue.

As we continue to evaluate strategic growth opportunities and enhancements to our business capabilities, we expect our general and administrative expenses related to professional fees will vary from time to time, with an increase expected in the third quarter of 2020.

Our general and administrative expenses for the three months ended September 30, 2020 were $22.6 million, an increase of $0.6 million, or 2.5%, from $22.0 million for the three months ended September 30, 2019.

The increase in general and administrative expenses for the three months ended September 30, 2020 as compared to the prior year period was primarily the result of increases in professional fees and information technology costs in our APEI Segment partially offset by decreases in employee compensation costs and bad debt expense in our APEI Segment.

For the three months ended September 30, 2020, APEI Segment general and administrative expenses include the following on a pre-tax basis:

approximately $1.9 million in professional fees associated with strategic growth opportunities including the Rasmussen Acquisition, and $1.5 million of information technology costs related to replacements and upgrades to our information technology systems, including replacements of our learning management and customer relationship management systems.

For the three months ended September 30, 2019, APEI Segment general and administrative expenses include $2.8 million in employee compensation costs for post-employment benefits related to the former APUS President’s retirement.

Consolidated bad debt expense for the three months ended September 30, 2020 was $0.9 million, or 1.1% of revenue, compared to $1.0 million, or 1.5% of revenue in the prior year period.

General and administrative expenses as a percentage of revenue decreased to 28.5% for the three months ended September 30, 2020, from 32.4% for the three months ended September 30, 2019.

The decrease in general and administrative expenses as a percentage of revenue was primarily due to our consolidated revenue increasing at a rate greater than the increase in general and administrative expenses.

As we continue to evaluate strategic growth opportunities and enhancements to our business capabilities, we expect to incur additional costs and that our general and administrative expenses related to professional fees will vary from time to t ime, and may increase in the fourth quarter of 2020.

Loss on disposals of long-lived assets.

The loss on disposals of long-lived assets was $0.2 million and $0.0 million for the three months ended June 30, 2020 and 2019, respectively.

The loss on disposals of long-lived assets was $0.4 million for both the three months ended September 30, 2020 and 2019, respectively.

Impairment of goodwill.

There was no impairment of goodwill for the three months ended September 30, 2020.

The $1.5 million pretax, non-cash impairment of goodwill for the three months ended September 30, 2019 resulted from the reduction of the carrying value of goodwill in our HCN Segment.

Depreciation and amortization expenses.

Depreciation and amortization expenses were $3.4 million and $3.9 million for the three months ended June 30, 2020 and 2019, respectively.

Depreciation and amortization expenses as a percentage of revenue decreased to 4.1% for the three months ended June 30, 2020, from 5.6% for the three months ended June 30, 2019.

Depreciation and amortization expenses were $3.2 million and $3.8 million for the three months ended September 30, 2020 and 2019, respectively.

Depreciation and amortization expenses as a percentage of revenue decreased to 4.1% for the three months ended September 30, 2020, from 5.5% for the three months ended September 30, 2019.

The decrease in depreciation and amortization expenses as a percentage of revenue was primarily due to a decrease in depreciation and amortization expenses during a period when consolidated revenue increased.

Stock-based compensation expenses.

Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses was approximately $1.6 million for both the three months ended June 30, 2020 and 2019.

Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses were $1.9 million and $1.7 million for the three months ended September 30, 2020 and 2019, respectively.

Stock-based compensation costs include accelerated expense for retirement-eligible employees and performance stock unit incentive costs.

Interest income.

Interest income was $0.2 million and $1.1 million for the three months ended June 30, 2020 and 2019, respectively.

Interest income was $0.1 million and $1.0 million for the three months ended September 30, 2020 and 2019, respectively.

The decrease was due to a decrease in interest rates when compared to the prior year period.

Income tax expense.

We recognized income tax expense of $2.5 million and $1.9 million for the three months ended June 30, 2020 and 2019, respectively, or effective tax rates of 27.5% and 27.8%, respectively.

The effective tax rate for the three months ended June 30, 2020 includes a lower amount of non-deductible expenses in proportion to pre-tax income as compared to the prior period.

There was no material impact to our effective tax rate for the three months ended June 30, 2020 as a result of the effects of the COVID-19 pandemic and related programs.

Income tax expense (benefit).

We recognized income tax expense of $0.8 million and an income tax benefit of $0.2 million for the three months ended September 30, 2020 and 2019, respectively, or effective tax rates of 22.9% and (12.7)%, respectively.

The increase in the effective tax rate for the three months ended September 30, 2020 compared to the tax benefit for the three months ended September 30, 2019 is due to the pre-tax loss in the prior year period.

There was no material impact to our effective tax rate for the three months ended September 30, 2020 as a result of the effects of the COVID-19 pandemic.

Equity investment income (loss).

Equity investment income was $0.0 million and $0.01 million for the three months ended June 30, 2020 and 2019, respectively.

Our net income was $6.7 million for the three months ended June 30, 2020, compared to net income of $4.9 million for the three months ended June 30, 2019, an increase of $1.8 million.

Equity investment income was $0.0 million and $0.02 million for the three months ended September 30, 2020 and 2019, respectively.

Net income (loss).

Our net income was $2.6 million for the three months ended September 30, 2020, compared to a net loss of $1.6 million for the three months ended September 30, 2019, an increase of $4.2 million.

This increase was related to the factors discussed above.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Our consolidated revenue for the six months ended June 30, 2020 was $156.7 million, an increase of $12.7 million, or 8.8%, compared to $144.0 million for the six months ended June 30, 2019.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Our consolidated revenue for the nine months ended September 30, 2020 was $235.9 million, an increase of $24.0 million, or 11.3%, compared to $211.9 million for the nine months ended September 30, 2019.

The increase in revenue was due to a $19.9 million, or 10.4% increase in our APEI Segment and a $4.1 million, or 19.0%, increase in revenue in our HCN Segment.

In our APEI Segment, net course registrations by new students and total net course registrations increased 14.4% and 8.9%, respectively, during the six months ended June 30, 2020, as compared to the prior year period.

In our APEI Segment, net course registrations by new students and total net course registrations increased 18.2% and

11.7%, respectively, during the nine months ended September 30, 2020, as compared to the prior year period.

The HCN Segment revenue increase was primarily due to a 58.8% increase in new student enrollment and a 12.7% increase in total enrollment.

Costs and expenses.

Costs and expenses for the six months ended June 30, 2020 were $145.0 million, an increase of $8.1 million, or 5.9%, compared to $136.9 million for the six months ended June 30, 2019.

The increase in costs and expenses was primarily due to increases in employee compensation costs, advertising and marketing support costs, professional fees, and information technology costs in our APEI Segment and increases in advertising costs, instructional materials costs, facilities costs, and bad debt expense in our HCN Segment partially offset by decreases in commencement and travel costs in our APEI Segment.

The six months ended June 30, 2020 includes the following costs on a pre-tax basis:

$4.6 million increase in advertising costs compared to the prior year period, $1.9 million in professional fees associated with growth opportunities, and $1.9 million in information technology costs related to the replacements and upgrades to our information technology systems, including the replacements of our learning management and customer relationship management systems.

Costs and expenses for the six months ended June 30, 2019 include a $5.9 million pretax, non-cash impairment of goodwill in our HCN Segment.

Costs and expenses as a percentage of revenue decreased to 92.5% for the six months ended June 30, 2020, from 95.1% for the six months ended June 30, 2019.

Costs and expenses for the nine months ended September 30, 2020 were $220.8 million, an increase of $13.1 million, or 6.3%, compared to $207.7 million for the nine months ended September 30, 2019.

The increase in costs and expenses was primarily due to increases in employee compensation costs, advertising and marketing support costs, professional fees, and information technology costs in our APEI Segment and increases in instructional materials costs, employee compensation costs, facilities costs, advertising costs, and bad debt expense in our HCN Segment partially offset by decreases in commencement and travel costs and bad debt expense in our APEI Segment.

The nine months ended September 30, 2020 includes the following costs on a pre-tax basis:

a $6.6 million increase in advertising costs compared to the prior year period, $3.8 million in professional fees associated with strategic growth opportunities including the Rasmussen Acquisition, and $3.4 million in information technology costs related to the replacements and upgrades to our information technology systems, including the replacements of our learning management and customer relationship management systems.

Costs and expenses for the nine months ended September 30, 2019 includes the following on a pre-tax basis:

a non-cash goodwill impairment of $7.3 million in our HCN Segment and $2.8 million in employee compensation costs for post-employment benefits related to the former APUS President’s retirement in our APEI Segment.

Costs and expenses as a percentage of revenue decreased to 93.6% for the nine months ended September 30, 2020, from 98.0% for the nine months ended September 30, 2019.

The decrease in costs and expenses as a percentage of revenue was primarily due to our consolidated revenue increasing at a rate greater than the increase in costs and expenses.

Instructional costs and services expenses.

Our instructional costs and services expenses for the six months ended June 30, 2020 were $60.0 million, an increase of $3.4 million, or 5.9%, from $56.6 million for the six months ended June 30, 2019.

The increase in instructional costs and services expenses was primarily due to an increase in employee compensation costs in our APEI Segment and increases in employee compensation costs, instructional materials costs, and facilities costs in our HCN Segment, partially offset by a decrease in commencement and travel costs in our APEI Segment.

Instructional costs and services expenses as a percentage of revenue decreased to 38.2% for the six months ended June 30, 2020, from 39.3% for the

six months ended June 30, 2019.

Our instructional costs and services expenses for the nine months ended September 30, 2020 were $91.1 million, an increase of $7.2 million, or 8.5%, from $83.9 million for the nine months ended September 30, 2019.

The increase in instructional costs and services expenses was primarily due to increases in employee compensation costs and instructional materials costs in our APEI Segment and increases in employee compensation costs, instructional materials costs, and facilities costs in our HCN Segment partially offset by a decrease in commencement and travel costs in our APEI Segment.

Instructional costs and services expenses as a percentage of revenue decreased to 38.6% for the nine months ended September 30, 2020, from 39.6% for the nine months ended September 30, 2019.

Selling and promotional expenses.

Our selling and promotional expenses for the six months ended June 30, 2020 were $35.2 million, an increase of $6.1 million, or 21.0%, from $29.1 million for the six months ended June 30, 2019.

The increase in selling and promotional expenses was primarily the result of increased advertising and marketing support costs, and employee compensation costs in our APEI Segment and an increase in advertising costs in our HCN Segment.

Our selling and promotional expenses for the nine months ended September 30, 2020 were $53.8 million, an increase of $8.8 million, or 19.5%, from $45.0 million for the nine months ended September 30, 2019.

The increase in selling and promotional expenses was primarily due to increases in advertising and marketing support costs and employee compensation costs in our APEI Segment and an increase in advertising costs in our HCN Segment.

Advertising costs increased $6.4 million and marketing support costs increased $0.5 million in our APEI Segment and advertising costs increased $0.2 million in our HCN Segment as compared to the prior year period.

Selling and promotional expenses as a percentage of revenue increased to 22.5% for the six months ended June 30, 2020, from 20.2% for the six months ended June 30, 2019.

Selling and promotional expenses as a percentage of revenue increased to 22.8% for the nine months ended September 30, 2020, from 21.3% for the nine months ended September 30, 2019.

General and administrative expenses.

Our general and administrative expenses for the six months ended June 30, 2020 were $42.7 million, an increase of $5.5 million, or 14.9%, from $37.2 million for the six months ended June 30, 2019.

The increase in general and administrative expenses was primarily related to an increase in employee compensation costs, professional fees, and information technology costs in our APEI Segment and an increase in bad debt expense in our HCN Segment partially offset by a decrease in employee compensation costs in our HCN Segment.

For the six months ended June 30, 2020, general and administrative expenses includes the following costs on a pre-tax basis:

$1.9 million in professional fees associated with growth opportunities, $1.9 million of information technology costs related to replacements and upgrades to our information technology systems in our APEI Segment, including replacements of our learning management and customer relationship management systems.

During the six month period ended June 30, 2019, our APEI Segment incurred approximately $1.4 million of pretax professional fees associated with growth opportunities.

Consolidated bad debt expense for the six months ended June 30, 2020 was $2.0 million, or 1.3% of revenue, compared to $1.9 million, or 1.3% of revenue in the prior year period.

General and administrative expenses as a percentage of revenue increased to 27.3% for the six months ended June 30, 2020, from 25.8% for the six months ended June 30, 2019.

Our general and administrative expenses for the nine months ended September 30, 2020 were $65.3 million, an increase of $6.1 million, or 10.3%, from $59.2 million for the nine months ended September 30, 2019.

The increase in general and administrative expenses was primarily related to increases in professional fees, employee compensation costs, and information technology costs in our APEI Segment and an increase in bad debt expense in our HCN Segment partially offset by a decrease in bad debt expense in our APEI Segment and a decrease in employee compensation costs in our HCN Segment.

For the nine months ended September 30, 2020, APEI Segment general and administrative expenses includes the following costs on a pre-tax basis:

$3.8 million in professional fees associated with strategic growth opportunities including the Rasmussen Acquisition, $3.4 million of information technology costs related to replacements and upgrades to our information technology systems, including replacements of our learning management and customer relationship management systems.

For the nine months ended September 30, 2019, APEI Segment general and administrative expenses includes the following costs on a pre-tax basis:

$2.8 million in employee compensation costs for post-employment benefits related to the former APUS President’s retirement;

$1.4 million of professional fees associated with strategic growth opportunities including the Rasmussen Acquisition;

and $1.1 million related to the evaluation of replacements or upgrades to our information technology and learning management systems.

Consolidated bad debt expense for the nine months ended September 30, 2020 was $2.8 million, or 1.2% of revenue, compared to $2.9 million, or 1.4% of revenue in the prior year period.

General and administrative expenses as a percentage of revenue decreased to 27.7% for the nine months ended September 30, 2020, from 27.9% for the nine months ended September 30, 2019.

The decrease in general and administrative expenses as a percentage of revenue was primarily due to our consolidated revenue increasing at a rate greater than the increase

in general and administrative expenses.

Loss on disposals of long-lived assets.

The loss on disposals of long-lived assets was $0.3 million and $0.1 million for the six months ended June 30, 2020 and 2019, respectively.

The loss on disposals of long-lived assets was $0.7 million and $0.5 million for the nine months ended September 30, 2020 and 2019, respectively.

Impairment of goodwill.

The $5.9 million pretax, non-cash impairment of goodwill for the six months ended June 30, 2019 resulted from the reduction of the carrying value of goodwill in our HCN Segment.

There was no impairment of goodwill for the six months ended June 30, 2020.

There was no impairment of goodwill for the nine months ended September 30, 2020.

The $7.3 million pretax, non-cash impairment of goodwill for the nine months ended September 30, 2019 resulted from the reduction of the carrying value of goodwill in our HCN Segment.

Depreciation and amortization expenses.

Depreciation and amortization expenses were $6.7 million and $8.0 million for the six months ended June 30, 2020 and 2019, respectively.

Depreciation and amortization expenses as a percentage of revenue decreased to 4.3% for the six months ended June 30, 2020, from 5.6% for the six months ended June 30, 2019.

Depreciation and amortization expenses were $10.0 million and $11.8 million for the nine months ended September 30, 2020 and 2019, respectively.

Depreciation and amortization expenses as a percentage of revenue decreased to 4.2% for the nine months ended September 30, 2020, from 5.5% for the nine months ended September 30, 2019.

Stock-based compensation expenses.

Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses was approximately $3.3 million for both the six months ended June 30, 2020 and 2019.

Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses was approximately $5.3 million and $5.0 million for the nine months ended September 30, 2020 and 2019.

Stock-based compensation costs include accelerated expense for retirement-eligible employees and performance stock unit incentive costs.

Interest income.

Interest income was $0.9 million and $2.2 million for the six months ended June 30, 2020 and 2019, respectively.

Interest income was $1.0 million and $3.2 million for the nine months ended September 30, 2020 and 2019, respectively.

The decrease was due to a decrease in interest rates when compared to the prior year period.

Income tax expense.

We recognized income tax expense of $3.5 million and $1.8 million for the six months ended June 30, 2020 and 2019, respectively, or effective tax rates of 27.8% and 23.6%, respectively.

The increase in the effective tax rate for the six months ended June 30, 2020 is primarily due to the benefit from ASU No.

2016-09 Compensation - Stock Compensation (Topic 718), in our APEI Segment for the six months ended June 30, 2019.

The effective tax rate for the six months ended June 30, 2020 includes income tax expense of $0.1 million related to ASU No.

2016-09, compared to an income tax expense benefit of $0.5 million for the six months ended June 30, 2019.

Equity investment income (loss).

There was no equity investment income or loss for the six months ended June 30, 2020 compared to a loss of $1.5 million for the six months ended June 30, 2019.

Our net income was $9.1 million for the six months ended June 30, 2020, compared to net income of $5.9 million for the six months ended June 30, 2019, an increase of 53.6%, or $3.2 million.

We recognized income tax expense of $4.3 million and $1.6 million for the nine months ended September 30, 2020 and 2019, respectively, or effective tax rates of 26.7% and 27.1%, respectively.

The decrease in the effective tax rate for the nine months ended September 30, 2020 is primarily due to lower amount of non-deductible expenses in proportion to pre-tax income as compared to the prior period.

The effective tax rate for the nine months ended September 30, 2020 includes income tax expense of $0.1 million related to ASU No.

2016-09 Compensation - Stock Compensation (Topic 718), compared to an income tax expense benefit of $0.5 million for the nine months ended September 30, 2019.

There was no material impact to our effective tax rate for the nine months ended September 30, 2020 as a result of the effects of the COVID-19 pandemic.

Equity investment loss.

Equity investment loss was $0.0 million for the nine months ended September 30, 2020 compared to a loss of $1.5 million for the nine months ended September 30, 2019.

Our net income was $11.8 million for the nine months ended September 30, 2020, compared to net income of $4.3 million for the nine months ended September 30, 2019, an increase of $7.5 million.

This increase was related to the factors discussed above.

1 unchanged sentence

The following table provides details on our operating results by reportable segment for the respective periods (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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Intersegment elimination

Total income from operations before interest income and income taxes

Total income (loss) from operations before interest income and income taxes

$ 3,308 $ (2,913) $ 15,042 $ 4,147

For the three months ended June 30, 2020, the $10.1 million, or 15.9%, increase to approximately $73.5 million in revenue in our APEI Segment was attributable to higher net course registrations primarily as a result of additional military registrations from students utilizing DoD tuition assistance which is at a lower revenue per net course registration than other funding sources.

Net course registrations at APUS increased 18.1% to approximately 89,600 from approximately 75,900 during the three months ended June 30, 2020 compared to the same period in 2019.

Income from operations before interest income and income taxes was $9.1 million during the three months ended June 30, 2020, an increase of 37.8% compared to the same period in 2019 as a result of an increase in revenue due to increases in registrations discussed above.

For the six months ended June 30, 2020, the $11.5 million, or 8.9%, increase to approximately $140.6 million in revenue in our APEI Segment was primarily attributable to higher net course registrations primarily as a result of additional military registrations from students utilizing DoD tuition assistance which is at a lower revenue per net course registration than other funding sources.

Net course registrations at APUS increased 8.9% to approximately 174,400 from approximately 160,200 during the six months ended June 30, 2020 compared to the same period in 2019.

Income from operations before interest income and income taxes in our APEI Segment was $12.7 million during the six months ended June 30, 2020, a decrease of 10.3% compared to the same period in 2019, as a result of increases in costs and expenses including higher compensation costs, advertising costs, professional fees and technology costs.

For the three months ended June 30, 2020, the $1.4 million, or 20.5%, increase to approximately $8.6 million in revenue in our HCN Segment was attributable to an increase in total student enrollment.

HCN total student enrollment increased 13.7% to approximately 1,700 from approximately 1,500 students during the three months ended June 30, 2020 compared to the same period in 2019.

New student enrollment at HCN for the three month period ended June 30, 2020

increased to 492 from 314, or approximately 56.7%, as compared to the comparable prior year period.

We believe that the increase in HCN’s total student enrollment for the three months ended June 30, 2020 was due in part to an increase in demand for nursing education, a change in the competitive environment due to COVID-19, an increase in marketing expenditures, the continued impact of new initiatives implemented in 2019 such as the direct entry ADN Program, and the implementation of the institutional affordability grant in the first quarter of 2020.

The loss from operations before interest income and income taxes in our HCN Segment was $35,000 during the three months ended June 30, 2020, compared to a loss of $0.9 million in the same period in 2019, primarily as a result of the increase in revenue due to higher enrollment discussed above.

For the six months ended June 30, 2020, the $1.3 million, or 8.4%, increase to approximately $16.1 million in revenue in our HCN Segment was primarily attributable to an increase in student enrollment.

HCN new student enrollment increased 43.3% and total student enrollment increased 1.5% during the six months ended June 30, 2020 compared to the same period in 2019.

We believe that the increase in HCN’s enrollment for the six months ended June 30, 2020 was due in part to an increase in demand for nursing education, a change in the competitive environment due to COVID-19, an increase in marketing expenditures, the continued impact of new initiatives implemented in 2019 such as the direct entry ADN Program, and the implementation of the institutional affordability grant in the first quarter of 2020.

The loss from operations before interest income and income taxes in our HCN Segment was $0.9 million during the six months ended June 30, 2020, compared to a loss of $7.1 million in the same period in 2019, primarily as a result of the increase in revenue due to higher enrollment discussed above and the $5.9 million pretax, non-cash impairment of goodwill in 2019.

For the three months ended September 30, 2020, the $8.4 million, or 13.7%, increase to approximately $69.6 million in revenue in our APEI Segment was attributable to higher net course registrations primarily as a result of additional military registrations from students utilizing DoD tuition assistance which is at a lower revenue per net course registration than other funding sources.

Net course registrations at APUS increased 17.7% to approximately 90,300 from approximately 76,700 during the three months ended September 30, 2020 compared to the same period in 2019.

Income from operations before interest income and income taxes increased to $2.8 million during the three months ended September 30, 2020, from $0.2 million, an increase of $2.6 million compared to the prior year as a result of an increase in revenue due to increases in registrations discussed above.

For the nine months ended September 30, 2020, the $19.9 million, or 10.4%, increase to approximately $210.3 million in revenue in our APEI Segment was primarily attributable to higher net course registrations primarily as a result of additional military registrations from students utilizing DoD tuition assistance which is at a lower revenue per net course registration than other funding sources.

Net course registrations at APUS increased 11.7% to approximately 264,700 from approximately 236,900 during the nine months ended September 30, 2020 compared to the same period in 2019.

Income from operations before interest income and income taxes was $15.5 million during the nine months ended September 30, 2020, an increase of 7.9% compared to the same period in 2019, as a result of an increase in revenue due to increases in registrations discussed above.

For the three months ended September 30, 2020, the $2.8 million, or 42.5%, increase to approximately $9.5 million in revenue in our HCN Segment was attributable to an increase in total student enrollment.

HCN new student enrollment for the three month period ended September 30, 2020 increased to 649 from 345, or approximately 88.1%, as compared to the comparable prior year period.

HCN total student enrollment increased 38.6% to approximately 2,000 from approximately 1,400 students during the three months ended September 30, 2020 compared to the same period in 2019.

We believe that the increase in HCN’s total student enrollment for the three months ended September 30, 2020 was due in part to an increase in demand for nursing education, a change in the competitive environment due to COVID-19, the continued impact of new initiatives implemented in 2019 such as the direct entry ADN Program, and the implementation of the institutional affordability grant in the first quarter of 2020.

Income from operations before interest income and income taxes in our HCN Segment was $0.5 million during the three months ended September 30, 2020, compared to a loss of $3.2 million in the same period in 2019, an increase of $3.7 million, primarily as a result of the increase in revenue due to higher enrollment discussed above and the $1.5

million pretax, non-cash impairment of goodwill in 2019.

For the nine months ended September 30, 2020, the $4.1 million, or 19.0%, increase to approximately $25.7 million in revenue in our HCN Segment was primarily attributable to an increase in student enrollment.

HCN new student enrollment increased 58.8% and total student enrollment increased 12.7% during the nine months ended September 30, 2020 compared to the same period in 2019.

We believe that the increase in HCN’s enrollment for the nine months ended September 30, 2020 was due in part to an increase in demand for nursing education, a change in the competitive environment due to COVID-19, an increase in marketing expenditures, the continued impact of new initiatives implemented in 2019 such as the direct entry ADN Program, and the implementation of the institutional affordability grant in the first quarter of 2020.

The loss from operations before interest income and income taxes in our HCN Segment was $0.5 million during the nine months ended September 30, 2020, compared to a loss of $10.2 million in the same period in 2019, a decrease of $9.7 million, primarily as a result of the increase in revenue due to higher enrollment discussed above and the $7.3 million pretax, non-cash impairment of goodwill in 2019.

Liquidity and Capital Resources

We financed operating activities and capital expenditures during the six months ended June 30, 2020 and 2019 with cash provided by operating activities.

Cash and cash equivalents were $216.0 million and $202.7 million at June 30, 2020 and December 31, 2019, respectively, representing an increase of $13.3 million, or 6.6%.

Cash and cash equivalents at June 30, 2020 decreased by $4.8 million from $220.8 million, or 2.2%, as compared to June 30, 2019.

We financed operating activities and capital expenditures during the nine months ended September 30, 2020 and 2019 with cash provided by operating activities.

Cash and cash equivalents were $228.0 million and $202.7 million at September 30, 2020 and December 31, 2019, respectively, representing an increase of $25.3 million, or 12.5%.

Cash and cash equivalents at September 30, 2020 increased by $17.9 million from $210.1 million, or 8.5%, as compared to September 30, 2019.

We derive a significant portion of our revenue from tuition assistance programs from the Department of Defense, or DoD.

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We expect operating expenditures to increase in future periods as we accelerate the investment in and modernization of our information technology systems and increase marketing and other expenditures.

In 2019, we incurred approximately $2.1 million to evaluate and invest in replacements and upgrades to our information technology systems, including replacements of our learning management and customer relationship systems, and to inform the scope and duration of the larger overall information technology transformation program.

Through the six months ended June 30, 2020, we incurred approximately $2.1 million, including $0.2 million of capital costs, of the anticipated 2020 spending of between approximately $6.0 million and $8.0 million on our information technology transformation program, focusing on specific information technology projects, including replacements of our learning management and customer relationship management systems.

For the year ended December 31, 2019, we incurred approximately $2.1 million to evaluate and invest in replacements and upgrades to our information technology systems, including replacements of our learning management and customer relationship systems, and to inform the scope and duration of the larger overall information technology transformation program.

For the nine months ended September 30, 2020, we incurred approximately $3.7 million, including $0.4 million of capital costs, of the anticipated 2020 spending of between approximately $6.0 million and $8.0 million on our information technology transformation program, focusing on specific information technology projects, including replacements of our learning management and customer relationship management systems.

APUS signed a contract for a replacement customer relationship management system in the first quarter of 2020 and began its first cohort of students in a new learning management system in March 2020.

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Capital expenditures could be higher in the future as a result of, among other things, additional expenditures for technology or other business capabilities, the opening of new campuses at HCN, the acquisition or lease of existing structures or potential new construction projects, and necessary tenant improvements that arise as a result of our ongoing evaluation of our space needs and opportunities for physical growth.

We expect professional fees to increase during 2020 as we evaluate investments in strategic growth opportunities and enhancements to our business capabilities.

Professional fees may increase as we evaluate investments in strategic growth opportunities and enhancements to our business capabilities.

We expect to continue to explore opportunities to invest in the education industry, which could include purchasing or investing in other education-related companies or companies developing new technologies.

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

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

Acquisition of Rasmussen University

In connection with entering into the Rasmussen Agreement, on October 28, 2020, we entered into a senior secured credit facilities commitment letter, or the Commitment Letter, with Macquarie Capital (USA) Inc., or Macquarie Capital, and Macquarie Capital Funding LLC, or Macquarie Lender, pursuant to which Macquarie committed to provide (i) a senior secured

term loan facility in the aggregate principal amount of $175 million, or the Term Facility, and (ii) a senior secured revolving loan facility in an aggregate commitment amount of $20 million, or together with the Term Facility, the Facilities.

Macquarie Capital will act as lead arranger and bookrunner with respect to the Facilities.

The commitments under the Commitment Letter to provide the Facilities are subject to customary conditions, including the absence of a Material Adverse Effect (as defined in the Rasmussen Agreement) on the Acquired Companies having occurred, the execution of satisfactory documentation, and other customary closing conditions.

We currently expect to pay up to $175 million of the cash consideration for the Rasmussen Acquisition with proceeds from the Facilities, and the Rasmussen Agreement requires us to use commercially reasonable efforts to obtain debt financing for the Rasmussen Acquisition.

Our future capital requirements will depend on a number of factors, including our ability to consummate the Rasmussen Acquisition on the terms and schedule contemplated and our ability to obtain the Facilities or to secure alternative financing.

There can be no guarantee that we will be able to close the Facilities or alternative financing arrangements on commercially reasonable terms or at all, or that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs.

In addition, upon the occurrence of certain events, such as a change of control, we could be required to repay or refinance our indebtedness.

There can be no assurance that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.

Share Repurchase Program

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The authorization under this program is in addition to our repurchase program under which we may annually purchase up to the cumulative number of shares issued or deemed issued in that year under our equity incentive and stock purchase plans.

During the three and six months ended June 30, 2020, the Company repurchased 0 and 547,563 shares of common stock, respectively.

At June 30, 2020, there remains $8.4 million available under our share repurchase authorization.

The Company did not repurchase shares during the three months ended September 30, 2020.

During the nine months ended September 30, 2020, the Company repurchased 547,563 shares of common stock.

At September 30, 2020, there remains $8.4 million available under our share repurchase authorization.

For additional information on our repurchases of our common stock, please refer to “Item 5.

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Operating Activities

Net cash provided by operating activities was $31.7 million and $23.7 million for the six months ended June 30, 2020 and 2019, respectively.

The increase in cash from operating activities is primarily due to changes in working capital due to the timing of receipts and payments, and lower estimated tax payments in 2020.

Accounts receivable at June 30, 2020, was approximately $4.4 million lower than December 31, 2019 due to the timing of payment processing by customers.

Accounts payable, accrued compensation and benefits, and accrued liabilities at June 30, 2020 were approximately $5.8 million higher than December 31, 2019 primarily due to additional incentive compensation costs and the timing of expenditures and the processing of payments.

Net cash provided by operating activities was $44.7 million and $31.9 million for the nine months ended September 30, 2020 and 2019, respectively.

The increase in cash from operating activities is primarily due to an increase in net income, changes in working capital due to the timing of receipts and payments, and lower estimated tax payments in 2020.

Accounts receivable at September 30, 2020, was approximately $1.8 million lower than December 31, 2019 due to the timing of payment processing by customers.

Accounts payable, accrued compensation and benefits, and accrued liabilities at September 30, 2020 were approximately $7.2 million higher than December 31, 2019 primarily due to additional incentive compensation accruals and the timing of expenditures and the processing of payments.

Investing Activities

Net cash used in investing activities was $2.9 million and $3.0 million for the six months ended June 30, 2020 and 2019, respectively.

This decrease was primarily related to a decrease in capital expenditures and capitalized program development costs, compared to the comparable prior year period.

Net cash used in investing activities was $3.8 million and $4.2 million for the nine months ended September 30, 2020 and 2019, respectively.

This decrease was primarily related to proceeds received for the sale of real property in our APEI Segment during the nine months ended September 30, 2020.

Financing Activities

Net cash used in financing activities was $15.6 million and $12.1 million for the six months ended June 30, 2020 and 2019, respectively.

The increase in cash used in financing activities for the six months ended June 30, 2020 was related to $13.6 million used to repurchase our common stock during the three months ended March 31, 2020 in accordance with our share repurchase program, and increased cash used for the deemed repurchase of our common stock to satisfy minimum tax-withholding requirements in connection with the vesting of restricted stock grants.

For the six months ended June 30, 2019, $9.6 million was used to repurchase our common stock in accordance with our share repurchase program.

Net cash used in financing activities was $15.7 million and $29.8 million for the nine months ended September 30, 2020 and 2019, respectively.

The decrease in cash used in financing activities for the nine months ended September 30, 2020 was due to a decrease in cash used to repurchase our common stock partially offset by an increase in cash used for the deemed repurchase of our common stock to satisfy minimum tax-withholding requirements in connection with the vesting of restricted stock grants.

For the nine months ended September 30, 2020 and 2019, we used $13.6 million and $27.3 million, respectively, to repurchase shares of our common stock in accordance with our share repurchase program.

Off-Balance Sheet Arrangements

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The total value of the contract over that 48 month period is approximately $3.5 million.

Other than that agreement, there were no material changes to our contractual commitments outside of the ordinary course of our business during the six months ended June 30, 2020.

Other than this agreement, there were no material changes to our contractual commitments outside of the ordinary course of our business during the nine months ended September 30, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis