AMERICAN PUBLIC EDUCATION INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations In this Quarterly Report on Form 10-Q, or Quarterly Report, “we,” “our,” “us,” “the Company” and similar terms refer to American Public Education, Inc., or “APEI,” and its subsidiary institutions collectively unless the context indicates otherwise. The following discussion of our historical results of operations and our liquidity and capital resources should be read in conjunction with the Consolidated Financial Statements and related notes that appear elsewhere in this Quarterly Report and the audited financial information and related notes, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations and other disclosures, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, or our Annual Report. Forward-Looking Statements This Quarterly Report contains forward-looking statements intended to be covered by the safe harbor provisions for forward-looking statements in Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We may use words such as “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “potentially,” “will,” or “may,” or other words that convey uncertainty of future events, conditions, circumstances, or outcomes to identify these forward-looking statements. 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; • our ability to maintain, develop, and grow our technology infrastructure to support our student body; • our conversion of prospective students to enrolled students and our retention of active students; • our ability to update and expand the content of existing programs and develop new programs to meet emerging student needs and marketplace demands, and our ability to do so in a cost-effective manner or on a timely basis; • our plans for, marketing of, and initiatives at, our institutions; • our ability to leverage our investments in support of our initiatives, students, and institutions; • our maintenance and expansion of our relationships and partnerships and the development of new relationships and partnerships; • actions by the Department of Defense or branches of the United States Armed Forces; • federal appropriations and other budgetary matters, including government shutdowns; • 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; 16 • the competitive environment in which we operate; • our cash needs and expectations regarding cash flow from operations; • our ability to manage and influence our bad debt expense; • our ability to manage, grow, and diversify our business and execute our business initiatives and strategy; • our expectations regarding the effects of and our response to the COVID-19 pandemic, including our ability to successfully shift to blended in person and online learning at HCN, impacts on business operations and our financial results, and our ability to take advantage of emergency relief and to comply with related regulations; and • our financial performance generally. Forward-looking statements are based on our beliefs, assumptions, and expectations of our future performance, taking into account information currently available to us and are not guarantees of future results. There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. Risks and uncertainties involved in forward-looking statements include, among others: • the effects, duration and severity of the ongoing COVID-19 pandemic and the actions we have taken or may take in response, particularly at HCN and as a result of working remotely; • our dependence on the effectiveness of our ability to attract students who persist in our institutions’ programs; • our inability to effectively market our programs; • adverse effects of changes our institutions make to improve the student experience and enhance their ability to identify and enroll students who are likely to succeed; • our inability to maintain strong relationships with the military and maintain enrollments from military students; • our failure to comply with regulatory and accrediting agency requirements or to maintain institutional accreditation; • our loss of eligibility to participate in Title IV programs or ability to process Title IV financial aid; • our need to successfully adjust to future market demands by updating existing programs and developing new programs; • our dependence on and need to continue to invest in our technology infrastructure; and • 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; and ◦ 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. It is important that you read these factors and the other cautionary statements made in this Quarterly Report as being applicable to all related forward-looking statements wherever they appear in this Quarterly Report. If any of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance, or achievements may differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. You should also read the more detailed description of our business in our Annual Report when considering forward-looking statements. We caution readers not to place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report. We undertake no obligation to publicly update any forward-looking statements except as required by law. Overview Background We are a provider of online and on-campus postsecondary education to approximately 88,300 students through two subsidiary institutions. 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 17 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 nine month period ended September 30, 2020. However, the duration and intensity of the outbreak, and therefore any future impact, is uncertain. For example, in March 2020, we implemented our business continuity plans and employees transitioned to a remote workforce, and HCN shifted to a blended model with online delivery of its courses and on campus delivery of certain labs. 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. 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. Our wholly-owned operating subsidiary institutions include the following: • American Public University System, Inc., or APUS, which provides online postsecondary education to approximately 86,300 adult learners. APUS is an accredited university system with a history of serving the academic needs of the military, military-affiliated, public service and service-minded communities through two brands: American Military University, or AMU, and American Public University, or APU. APUS offers 129 degree programs and 112 certificate programs in diverse fields of study, with a particular focus on those relevant to today’s job market and emerging fields. Fields of study include traditional academics, such as business administration, health science, technology, criminal justice, education and liberal arts, as well as public service-focused fields of study such as national security, military studies, intelligence, and homeland security. 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 June 30, 2020, we entered into an Amendment to Amended and Restated Employment Agreement, or the Amendment, with Dr. Wallace E. Boston, the President of APUS. The Amendment amended Dr. Boston’s Amended and Restated Employment Agreement, which had contemplated that Dr. Boston would retire as APUS President on June 30, 2020. Pursuant to the Amendment, Dr. Boston retired as APUS President on August 12, 2020. Dr. 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. 18 • National Education Seminars, Inc., which we refer to as Hondros College of Nursing, or HCN, provides nursing education to approximately 2,000 students at five campuses in Ohio, and, beginning in April 2020, to students enrolled at a campus in Indianapolis, Indiana, to serve the needs of local nursing and healthcare communities that addresses the persistent supply-demand gap of nurses that is evident nation-wide. The Ohio campuses are located in the suburban areas of Cincinnati, Cleveland, Columbus, Dayton, and Toledo. In March 2020, in response to the COVID-19 global pandemic, HCN, leveraging the expertise of APUS, shifted to a blended model with online delivery of its courses and on campus delivery of certain labs. 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. HCN is institutionally accredited by the Accrediting Bureau for Health Education Schools, or ABHES, and HCN’s Ohio locations and programs are approved by the Ohio State Board of Career Colleges and Schools, or the Ohio State Board. HCN’s Ohio Diploma in Practical Nursing, or PN, and Associate Degree in Nursing, or ADN, Programs are approved by the Ohio Board of Nursing, or OBN, and the PN Program is accredited by the National League for Nursing Commission for Nursing Education Accreditation, or NLN CNEA. In April 2020, HCN began classes for the first cohort of students enrolled in the PN Program at HCN’s new campus in Indianapolis, Indiana. Classes began online as a result of the COVID-19 pandemic but have since shifted to a blended learning model. 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. HCN has also notified NLN CNEA of the opening of the Indianapolis campus. 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. HCN has not received any additional requests or follow up communication. Beginning January 1, 2020, HCN began offering an institutional grant to students demonstrating financial need to cover the difference between the total cost of tuition and fees and the amount of all eligible financial aid resources. 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 $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. Alternatively, ABHES may in its discretion provide opportunity for a program to come into compliance within a period of time specified by ABHES, and ABHES may extend the period for achieving compliance if a program demonstrates improvement over time or other good cause. In February 2020, ABHES notified HCN that it had taken additional actions with respect to certain HCN programs at certain locations related to those programs’ performance in relation to ABHES student achievement indicators. Specifically, ABHES: (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; (iii) continued outcomes reporting status for the PN program at the Columbus campus because it has not met the retention rate compliance threshold and reconfirmed that it has until May 1, 2021 to do so; and (iv) directed HCN to provide evidence to ABHES that the ADN programs at each of the Columbus, Cleveland, Cincinnati, Dayton, and Toledo campuses and the PN programs at the Cleveland and Cincinnati campuses met the retention rate compliance threshold for the period from July 1, 2019 through March 31, 2020 and informed HCN that those programs must meet the compliance threshold by May 1, 2021. 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 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. 19 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. The OBN requires that nursing education programs have a pass rate on the relevant National Council Licensure Examination, or NCLEX, that is at least 95% of the national average for first-time candidates in a calendar year. If a program does not attain this pass rate, the program may face various consequences. In March 2017, the OBN placed HCN’s ADN Program on provisional approval because the ADN Program had not met the pass rate standard for four consecutive years. The OBN will consider restoring a program to Full Approval status if the program meets the pass rate standard for at least two consecutive years. If a program on provisional approval fails to meet OBN requirements at the end of the time period established for provisional approval, the OBN may propose to continue provisional approval for a set time period or may propose to withdraw approval. In March 2020, the OBN found that HCN’s ADN Program did not meet the OBN pass rate standard in 2019 for a seventh consecutive year. 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. 20 Regulatory and Legislative Activity In October 2018, ED announced that a negotiated rulemaking committee broadly focused on accreditation and innovation, or the Accreditation and Innovation Committee, would prepare proposed regulations related to, among other things, courses offered through distance education. 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. 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. The pandemic led to the shifting of HCN’s courses to a blended model with online delivery of its courses and on campus delivery of certain labs. 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. 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. In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, in response to COVID-19 and its related effects. 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 created the Higher Education Emergency Relief Fund, or HEERF, that includes $12.6 billion in funding for higher education institutions. The CARES Act authorizes ED to allocate funding based on a statutory formula that accounts for the relative share of full-time students who are Pell Grant recipients. Students who were enrolled exclusively in distance education courses prior to the COVID-19 emergency are excluded from this calculation. Wholly online institutions were not eligible to receive an allocation of funding under the HEERF given the allocation formula’s exclusion of students enrolled exclusively in distance education courses prior to the onset of the COVID-19 emergency. ED allocated $3.1 million for HCN and in May 2020, HCN received its HEERF allocation. No allocation of HEERF funds was made to APUS by ED. The CARES Act requires recipient institutions to use at least 50% of their HEERF funds to provide emergency grants to students for expenses related to the disruption of campus operations due to COVID-19. The CARES Act also permits institutions to use up to 50% of their HEERF funds to cover any costs associated with significant changes to the delivery of instruction due to COVID-19, so long as such costs do not include payment to contractors for the provision of pre-enrollment recruitment activities, endowments, or capital outlays associated with facilities related to athletics, sectarian instruction, or religious worship. Although HCN incurred costs to shift its operations and delivery of instruction in light of COVID-19, it chose to distribute its entire HEERF allocation directly to eligible students. As of June 30, 2020, HCN had distributed its entire allocation of $3.1 million in HEERF funds to eligible students. The CARES Act also includes waivers of certain Higher Education Act provisions related to the federal student financial aid programs in order to provide regulatory flexibility to institutions in connection with COVID-19-related disruptions. 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 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. However, borrowers may choose to make payments towards principal on these loans voluntarily. On March 27, 2020, Ohio enacted a COVID-19 emergency relief law that allows individuals who have successfully completed a nursing education program approved by OBN to receive a temporary license to practice as an RN or LPN before taking the NCLEX. 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. 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 21 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 Our operations are organized into two reportable segments: • American Public Education Segment, or APEI Segment. This segment reflects the operational activities of APUS, other corporate activities, and minority investments; and • Hondros College of Nursing Segment, or HCN Segment. This segment reflects the operational activities of HCN. Summary of Results 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. 22 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 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. We believe the changes in revenue and operating margins are primarily due to the factors discussed below in the “Results of Operations” section of this Management’s Discussion and Analysis. Critical Accounting Policies and Use of Estimates For information regarding our Critical Accounting Policies and Use of Estimates, see the “Critical Accounting Policies and Use of Estimates” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report. Results of Operations 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. Our student population varies as a result of new enrollments, graduations, student attrition, the success of our marketing programs, and other reasons that we cannot always anticipate. 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 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. For example, in March 2020, in response to the pandemic, HCN shifted to a blended model with online delivery of its courses and on campus delivery of certain labs. 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. 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 nine months ended September 30, 2020, and thereafter, we have experienced a significant decrease in interest rates, including in connection with 23 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. The success of these efforts could also be adversely affected by future impacts of the COVID-19 pandemic. 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 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. Analysis of Consolidated Statements of Income For the Consolidated Statements of Income, refer to our Financial Statements: Consolidated Statements of Income. The following table sets forth statements of income data as a percentage of revenue for each of the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (Unaudited) (Unaudited) Revenue 100.0 % 100.0 % 100.0 % 100.0 % Costs and expenses: Instructional costs and services 39.3 40.2 38.6 39.6 Selling and promotional 23.4 23.4 22.8 21.3 General and administrative 28.5 32.4 27.7 27.9 Loss on disposals of long-lived assets 0.5 0.6 0.3 0.2 Impairment of goodwill — 2.2 — 3.5 Depreciation and amortization 4.1 5.5 4.2 5.5 Total costs and expenses 95.8 104.3 93.6 98.0 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 (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 (loss) 3.4 % (2.4) % 5.0 % 2.0 % 24 Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019 Revenue. 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 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 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 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 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. 25 General and administrative expenses. 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 $0.4 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 $3.2 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 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 $0.1 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 (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 $0.02 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. Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 Revenue. 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 18.2% and 26 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 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 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. 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 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 22.8% for the nine months ended September 30, 2020, from 21.3% for the nine months ended September 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. General and administrative expenses. 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 27 in general and administrative expenses. 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, and may increa se in the fourth quarter of 2020. Loss on disposals of long-lived assets. 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. 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 $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. 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 $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 $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 $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. Net income. 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. 28 Analysis of Operating Results by Reportable Segment The following table provides details on our operating results by reportable segment for the respective periods (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (Unaudited) (Unaudited) Revenue: American Public Education Segment $ 69,610 $ 61,217 $ 210,251 $ 190,386 Hondros College of Nursing Segment 9,541 6,696 25,682 21,584 Intersegment elimination (18) (25) (57) (81) Total Revenue $ 79,133 $ 67,888 235,876 $ 211,889 Income (loss) from operations before interest income and income taxes: American Public Education Segment $ 2,840 $ 247 $ 15,495 $ 14,358 Hondros College of Nursing Segment 466 (3,158) (455) (10,214) Intersegment elimination 2 (2) 2 3 Total income (loss) from operations before interest income and income taxes $ 3,308 $ (2,913) $ 15,042 $ 4,147 APEI Segment 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. HCN Segment 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 29 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 Liquidity 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. Generally, these funds are received within 60 days of the start of the courses to which they relate. We also participate in programs from the U.S. Department of Veterans Affairs, or VA. Generally, these funds are received within 60 days of the start of the courses to which they relate. Another significant source of revenue is derived from our participation in ED’s Title IV programs, for which disbursements are governed by federal regulations. We have typically received disbursements under Title IV programs within 30 days of the start of the applicable course or term. We expect to continue to fund our costs and expenses through cash generated from operations. Based on our current level of operations, we believe that our cash flow from operations and our existing cash and cash equivalents will provide adequate funds for ongoing operations and planned capital expenditures for the foreseeable future. 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. 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. We will continue to evaluate our Partnership At a Distance™, or PAD, customized student information and services system for possible changes and upgrades and anticipate that we will eventually make significant changes to that system, as well. 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. 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 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 30 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 On May 2, 2019, our Board of Directors authorized the repurchase of up to $35.0 million of our common stock, and on December 5, 2019, the Board approved an additional authorization of up to $25.0 million of shares. We may purchase shares at management’s discretion in the open market, in privately negotiated transactions, in transactions structured through investment banking institutions, or a combination of the foregoing. We may also, from time to time, enter into Rule 10b5-1 plans to facilitate repurchases of shares under this authorization. The amount and timing of repurchases are subject to a variety of factors, including liquidity, cash flow, stock price and general business and market conditions. We have no obligation to repurchase shares and may modify, suspend or discontinue the repurchase program at any time. 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. 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. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of Part II of our Annual Report and “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - Repurchases” of Part II of this Quarterly Report. Operating Activities 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 $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. 31 Financing Activities 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 We do not have off-balance sheet financing arrangements, including any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. Contractual Commitments We have various contractual obligations consisting of operating leases and purchase obligations. Purchase obligations include agreements with consultants, contracts with third-party service providers, and other future contracts or agreements. In February 2020, APUS entered into a 48 month agreement with a customer relationship management platform provider. The total value of the contract over that 48 month period is approximately $3.5 million. 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.