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Item 7. Management’s Discussion and Analysis

2021-03-09 compared with 2020-03-10 · 255 added, 322 removed, 281 unchanged (67% of the section changed)

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Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” and elsewhere in this Annual Report.

American Public Education, Inc., or APEI, is a provider of online and on-campus postsecondary education to approximately 82,600 students.

American Public Education, Inc., or APEI, is a provider of online and campus-based postsecondary education to approximately 92,500 students.

We provide online postsecondary education primarily directed at the needs of the military, military-affiliated, public service, and service-minded communities through the American Public University System, or APUS, that includes two brands:

American Military University, or AMU, and American Public University, or APU.

APUS is institutionally accredited by the Higher Learning Commission, or HLC, a regional accrediting agency recognized by ED.

We provide on-campus nursing to students in Ohio, and, beginning in the second quarter of 2020, Indiana, through National Education Seminars, Inc., which we refer to as Hondros College of Nursing, or HCN.

APUS is institutionally accredited by the Higher Learning Commission, or HLC, a regional accrediting agency recognized by the U.S.

Department of Education, or ED.

We provide blended online and on-campus nursing education to students in Ohio and Indiana, through National Education Seminars, Inc., which we refer to as Hondros College of Nursing, or HCN.

HCN is institutionally accredited by the Accrediting Bureau of Health Education Schools, or ABHES.

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Our revenue is largely driven by the number of students enrolled at our institutions, the number of and types of courses that they take, student payor source, and the mix of programs that students are attending.

Our consolidated revenue in 2020 was $321.8 million, representing a $35.5 million, or 12.4%, increase from $286.3 million in 2019.

Our consolidated revenue in 2019 was $286.3 million, representing an $11.4 million, or 3.8%, decrease from $297.7 million in 2018.

Our consolidated revenue in 2018 was $297.7 million, representing a $1.5 million , or 0.5% , decrease from $299.2 million in 2017 .

The 2019 revenue decrease was primarily due to a decrease in net course registrations at APUS and a decline in student enrollment at HCN during that period.

The 2018 revenue decrease was due to a decrease in net course registrations at APUS partially offset by an increase in student enrollment at HCN.

The 2020 revenue increase was primarily due to an increase in net course registrations at APUS and an increase in student enrollment at HCN during that period.

The increase in net course registrations at APUS was due to an increase in registrations from military students utilizing Department of Defense, or DoD tuition assistance, or TA, which is at a lower revenue per net course registration than other funding sources.

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

We believe the increase was due in part to the launch of the Freedom Grant in January 2020, which offers a tuition reduction and free course materials for active duty military pursuing graduate degrees, an increase in marketing spend as compared to the prior year, and may also have been due to the impact of the novel coronavirus COVID-19 pandemic.

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 as compared to prior year, 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 2019 revenue decrease was due to a decrease in net course registrations at APUS and a decline in student enrollment at HCN.

Our operations are organized into two reporting segments:

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This segment reflects the operational activities of HCN.

Financial information regarding each of our reportable segments is reported in this Annual Report in the sections “Financial Statements and Supplementary Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Operating Results by Reportable Segment Year Ended December 31, 2019 Compared to Year Ended December 31, 2018 ,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Year Ended December 31, 2018 Compared to Year Ended December 31, 2017 .”

For a discussion of the financial results of operations for the fiscal year ended December 31, 2019 compared to the fiscal year ended December 31, 2018, refer to Part II, Item 7 of our 2019 Form 10-K filed with the SEC on March 10, 2020 which discussion is incorporated herein by reference and which is available free of charge on the SECs website at www.sec.gov.

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

In March 2020, in response to the pandemic, we implemented our business continuity plan and employees transitioned to a remote workforce at APEI and APUS.

HCN, leveraging the expertise of APUS, temporarily closed all its campuses and then shifted to a blended model with online delivery of its courses and on-campus delivery of certain labs.

HCN later 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, and then reverted to online courses and limited on-campus labs in November 2020 following spikes in COVID-19 cases.

There can be no assurance that these and other protective measures we have implemented or may put in place will be successful in preventing cases of COVID-19 among our employees and students, when on-campus courses will resume more broadly or to what degree, or that thereafter HCN will not need to again further limit campus interactions or close its campuses.

The pandemic did not materially adversely impact our results of operations during the year ended December 31, 2020.

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

For example, 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 quantifiable, ongoing impacts may cause a 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 Annual Report.

Rasmussen Acquisition.

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, which we refer to as the Rasmussen Acquisition.

Pursuant to the terms of a Membership Interest Purchase Agreement, or the Rasmussen Agreement, we agreed to purchase from FAH Education, LLC all of the units of membership interests in Rasmussen LLC, Rasmussen University’s parent company, for $300 million in cash and $29 million in shares of a new series of non-voting preferred stock to be issued at the closing of the Rasmussen Acquisition (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.

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 ED, approval by the HLC, and approval by or notices to other regulatory and accrediting bodies.

We are relying on the availability of financing under a commitment letter for debt financing, or alternative financing, to fund a portion of the purchase price for the Rasmussen Acquisition.

For more information on the Rasmussen Acquisition, see “Business – Company Overview,” “Business – Regulatory Environment – Regulatory Actions and Restrictions on Operations – Rasmussen Acquisition Regulatory Review,” and “Risk Factors – Risks Related to Our Business.”

Student Body.

As of December 31, 2019 , approximately 57% of APUS’s students self-reported that they served in the military on active duty at the time of initial enrollment, and as a result APUS is particularly reliant on the Department of Defense, or DoD’s, tuition assistance programs and DoD’s budget.

At APUS, active duty military students generally take fewer courses per year on average than non-military students.

A significant portion of APUS’s enrollments are also attributable to students using funds from ED’s Title IV financial aid programs, or Title IV programs, and Veteran’s Affairs education benefits.

HCN students generally attend classes at physical campuses and use Title IV program funds.

As of December 31, 2020, approximately 61% of APUS’s students self-reported that they served in the military on active duty at the time of initial enrollment, and as a result APUS is particularly reliant on TA and the DoD’s budget.

At APUS, active duty military students generally take fewer courses per year on average than non-military students and have a lower revenue per net course registration than other funding sources.

A significant portion of APUS’s enrollments is also attributable to students using Department of Veterans Affairs, or VA, education benefits and funds from ED’s Title IV financial aid programs, or Title IV programs.

HCN students generally attend classes at physical campuses, except as a result of the impact of the COVID-19 pandemic and use Title IV program funds.

In recent years at APUS, and at HCN during 2019, we experienced declines in student enrollments.

At the same time, we experienced increases in our operating costs as we provide new, and more costly, services to our students.

We attribute these enrollment declines and operating cost increases, in part, to increased competition, changes in our marketing approach, investments in technology modernization, changes in our admissions processes at APUS, and changes in admissions and academic achievement requirements at HCN, among other factors.

We believe that in order to continue to attract and retain qualified students our institutions need to continuously update and expand the content of their existing programs and develop new programs, specializations and modes of teaching, faculty engagement initiatives, and co-curricular initiatives that may require obtaining appropriate federal, state, and accrediting approvals, incur marketing expenses, make investments in management and capital expenditures, and reallocate other resources.

We attribute these enrollment declines and operating cost increases, in part, to increased competition, changes in our marketing approach, investments in technology modernization, changes to our admissions processes at APUS, and changes in admissions and academic achievement requirements at HCN, among other factors.

Initiatives to attract and retain qualified students and control the growth of expenditures require significant time, energy, and resources, and if our efforts are not successful, our results of operations, cash flows, and financial condition may be adversely impacted.

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Our Initiatives.

Our costs and expenses have increased over time due in part to increased marketing expenditures, the addition of the HCN Toledo campus in January 2017, the addition of a new HCN campus located in Indianapolis, Indiana expected to open in the second quarter of 2020, as well as the changing needs of our students including costs for technology required to support students at APUS.

In addition, we incurred expenses in 2019 to evaluate and invest in replacements and upgrades to our information technology systems, including one-time expenses to upgrade our learning management system, and to inform the scope and duration of our larger overall information technology transformation

program in our APEI Segment.

Lastly, we recorded pretax, non-cash impairment charges related to a goodwill impairment in our HCN Segment and employee compensation costs for post-employment benefits that will be payable to the APUS President upon retirement.

For more information about HCN’s goodwill impairment please see “Note 6 Goodwill and Intangible Assets” in our Consolidated Financial Statements.

Our revenue may continue to decline and our costs and expenses may increase as our institutions adjust to changes in their student composition, undertake initiatives to improve the learning experience, and attract students who are more likely to persist in their programs.

Additional initiatives that we implement that may increase costs and expenses or adversely affect our revenues may include the following:

Our costs and expenses have increased over time due in part to increased marketing expenditures, the addition of new HCN campuses located in Indianapolis, Indiana, which opened in April 2020, and Akron, Ohio, which is expected to open in April 2021, as well as the changing needs of our students including costs for technology required to support students at APUS.

In addition, in 2020 we continued to incur expenses to evaluate and invest in replacements and upgrades to our information technology systems, including replacements of our learning management and our customer relationship management systems, and to inform the scope and duration of our larger overall information technology transformation program in our APEI Segment.

Our revenue may decline, and our costs and expenses may increase, as our institutions adjust to changes in their student composition, undertake initiatives to improve the learning experience, and attract students who are more likely to persist in their programs.

Additional initiatives that we implement that may increase costs and expenses or adversely affect our revenue may include the following:

• altering our institutions’ marketing programs to target the appropriate prospective students;

• investments in technology related to our overall information technology transformation program;

• further changes to admissions standards and requirements;

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• implementing alternative learning delivery methods.

altering our institutions’ marketing programs to target the appropriate prospective students;

investments in technology related to our overall information technology transformation program.

Our Board of Directors approved an increase in marketing expenditures for 2020 primarily in support of a planned new advertising campaign focusing on affordability and return on investment for learners.

As a result of these increased expenses, we expect selling and promotional expenses as a percentage of revenue to increase in 2020 as compared to 2019.

As a result of these increased expenses, selling and promotional expenses as a percentage of revenue increased in 2020 as compared to 2019.

Information technology systems are an essential part of the APUS student experience and our business operations.

As part of our implementation of the shared services model discussed in “Reporting Segments” above, we began providing information technology services to APUS and HCN through APEI.

Previously, APUS had managed its own information technology infrastructure and services and provided information technology services to HCN through an intercompany arrangement.

We believe we will need to continue, and potentially increase, our investment of capital, time and resources, in technology operations and enhancements to support our systems and mission, and evaluate when it is appropriate to make significant changes, modifications or upgrades.

Pursuant to the shared services model discussed in “Business – Company Overview – Reporting Segments” above, we now provide information technology services to APUS and HCN through APEI.

Prior to 2019, APUS had managed its own information technology infrastructure and services and provided information technology services to HCN through an intercompany arrangement.

We believe we will need to continue, and potentially increase, our investment of time and money in technology operations and enhancements to support our systems and mission, and evaluate when it is appropriate to make significant changes, modifications, or upgrades.

We believe we will need to continue to make investments in information technology in response to competitive pressures in the marketplace, including increased demands for interactive solutions and access from multiple platforms, and to update older systems and to enhance functionality.

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Changes and upgrades to our information technology systems may result in us incurring significant costs, including in the short term, and carry risk to our operations and financial results.

We anticipate spending between $6.0 million and $8.0 million in 2020, focusing on specific information technology projects, including replacements of our Learning Management and Customer Relationship Management systems.

For example, in 2019 and 2020, we incurred approximately $2.1 million and $5.6 million, to evaluate and invest in replacements and upgrades to our information technology systems, including replacements of our learning management and customer relationship management systems and to inform the scope and duration of our larger overall information technology transformation program.

We anticipate spending between $4.0 million and $5.0 million in 2021.

These types of changes are not without risk to our operations and financial results.

Our investments in information technology systems will result in an increased level of spending.

For example, in 2019 we incurred approximately $2.1 million to evaluate and invest in replacements and upgrades to our information technology systems, including one-time expenses to upgrade our learning management system and to inform the scope and duration of our larger overall information technology transformation program.

Not all of our information technology spending can be capitalized, and our investments may cost more than expected or fail to be successful.

Not all of our information

technology spending can be capitalized, and our investments may cost more than expected or fail to be successful.

Furthermore, as a result of unsuccessful development efforts, or a result of replacing outdated technology, software or other technology related assets, we may have assets that become impaired.

For example, for the year ended December 31, 2016, APUS disposed of approximately $5.1 million in long-lived assets, primarily consisting of a loss that resulted from the abandonment of development of a new student course registration system because it was no longer probable that development would be completed and the software placed in service.

Implementation of Shared Services Model.

Beginning in 2016, we began to invest capital and human resources in the transition and planned implementation of the shared services model pursuant to which APEI provides services to APUS and HCN that were previously handled directly within APUS and HCN, as well as in changes to our systems and training of employees, among other things.

In November 2018, HLC approved APUS’s application for a change in structure related to APUS’s proposal to enter into a shared services model with APEI and we entered into an intercompany agreement to implement the shared services model.

As required by HLC policy, HLC conducted a focused site visit in May 2019.

The site visit team found that evidence of compliance with APUS’s commitments made in its application and with HLC’s Eligibility Requirements and Criteria for Accreditation was sufficiently demonstrated and no further follow up was recommended.

August 2019, HLC notified APUS that the Institutional Actions Council of the HLC, which conducts reviews and takes action on accreditation recommendations, concurred with the site visit team’s findings.

During 2020, we expanded the use of our shared services model and APUS now provides additional services to HCN.

As with any operational change, the implementation of the shared services model could lead to strategic and operational challenges, distractions of management from other key initiatives, inefficiencies or increased costs, any of which could adversely affect our business, financial condition, results of operations, and cash flows.

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For the reporting year ended June 30, 2018, several HCN programs did not satisfy ABHES’s threshold requirements for retention rates or placement rates and, for the reporting year ended June 30, 2019, each of HCN’s programs at each of HCN’s campuses satisfied ABHES’s placement rate requirements but failed to satisfy ABHES’s threshold requirements for retention rates.

As described more fully in “Regulatory Environment - Accreditation,” ABHES has notified HCN that it has taken actions with respect to certain HCN programs at certain campuses related to those programs’ performance in relation to ABHES student achievement indicators and has directed HCN in a number of those cases to demonstrate by a certain date that those programs meet the applicable threshold requirements.

There can be no assurance that HCN will be able to demonstrate compliance by the relevant deadlines in all cases.

If HCN is unable to bring the programs into compliance during the timeframe established by ABHES, unless such timeframe is extended for good cause, ABHES may take other action, up to and including withdrawing accreditation for those programs.

In addition, adverse actions taken by ABHES may trigger reporting requirements and ED action under ED’s Borrower Defense Regulations, see “Regulatory Environment - Student Financing Sources and Related Regulations/Requirements - Department of Education - Regulation of Title IV Financial Aid Programs - Borrower Defenses.”

ABHES also informed HCN in February 2020 that based on review of the visit report from its recently completed unannounced visit to the Columbus campus, the response to the report, and ABHES program approval information, it had acted to affirm the institution’s accreditation, which continues through February 28, 2021.

The next comprehensive evaluation for renewal of ABHES accreditation, which will include HCN’s submission of evidence related to its compliance with ABHES standards and a series of site visits, is scheduled for April 2020.

Renewal of accreditation is not guaranteed, and any failure to be renewed would have a material adverse impact on HCN’s ability to enroll students.

In February 2020, as described more fully in “Regulatory Environment - Accreditation,” ABHES notified HCN that it had taken actions with respect to certain HCN programs at certain campuses related to those programs’ performance in relation to ABHES student achievement indicators and directed HCN in a number of those cases to demonstrate by a certain date that those programs meet the applicable threshold requirements.

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.

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

If HCN is unable to maintain compliance during any timeframe established by ABHES, unless such timeframe is extended for good cause, ABHES may take other action, up to and including withdrawing accreditation for those programs.

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.

ABHES has taken no additional action regarding this matter since the plan was submitted.

Adverse actions taken by ABHES may trigger reporting requirements and ED action under ED’s Borrower Defense Regulations, see “Regulatory Environment - Student Financing Sources and Related Regulations/Requirements - Department of Education - Regulation of Title IV Financial Aid Programs - Borrower Defenses.”

Staffing Realignment and Management Transition .

APUS implemented new general education requirements during the first quarter of 2018.

These new requirements changed the courses that are required of all students.

APUS incurred approximately $400,000 in costs related to the implementation of the new general education requirements in the first quarter of 2018 related to faculty realignment.

We cannot predict what additional effects, if any, these new requirements will have on the total number of registrations, student persistence, or our financial condition or results of operations.

We regularly evaluate and review our costs and expenses.

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We incurred an aggregate of approximately $1.7 million of pretax expenses associated with employee severance benefits.

The reduction in force resulted in pretax labor and benefits costs savings of approximately $2.1 million in 2018 and approximately $2.7 million in 2019.

The reduction in force resulted in pretax labor and benefits costs savings of approximately $2.1 million and $2.7 million in 2018 and 2019, respectively.

These cost savings do not include expenses associated with employee severance benefits.

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APEI’s former Chief Executive Officer, Dr.

Boston, will continue to serve as President of APUS until his expected retirement in June 2020.

In 2019 we recorded approximately $2.8 million in employee compensation costs for post-employment benefits that will be payable to Dr.

Boston upon retirement.

Boston, continued to serve as President of APUS until his retirement on August 12, 2020.

Wade Dyke assumed the role of APUS President effective on Dr.

Boston’s retirement date.

In 2019 we recorded approximately $2.8 million in pretax employee compensation costs for post-employment benefits related to Dr.

Boston’s retirement.

To the extent we have further leadership or operational changes, we could incur similar or greater costs.

Admissions Process and Academic Achievement Requirements.

In April 2017, APUS continued to strengthen its verification process by implementing new procedures for prospective non-military students, an effort that originated in April 2015 with the implementation of a requirement for prospective students to complete a free, noncredit admissions assessment.

APUS has made multiple changes to the assessment process since its original implementation and may further modify it in the future in order to better identify college-ready students.

For example, in July 2017, APUS implemented a process requiring enhanced certification of prospective non-military students’ prior transcripts.

These initiatives require significant time, energy and resources, and if our efforts are not successful, they may adversely impact our results of operations, cash flows, and

financial condition.

In recent years, APUS has strengthened its verification process, including by implementing new procedures for prospective non-military students.

APUS has also made multiple changes to its admissions assessment process since its original implementation and may further modify it in the future in order

to better identify college-ready students.

These initiatives require significant time, energy and resources, and if our efforts are not successful, they may adversely impact our results of operations, cash flows, and financial condition.

Even if these initiatives successfully lead to the identification and enrollment of students who are likely to succeed and improve the student experience, they could result in adverse impacts on APUS enrollments.

Beginning with the term that started in January 2019, HCN implemented enhanced ADN Program admissions requirements, requiring external ADN applicants to have an active unencumbered PN license and to have graduated from an approved PN program.

All ADN applicants must take math and reading entrance exams.

Applicants that do not meet the minimum placement scores may be required to take additional reading and math prerequisites or denied admission.

During 2019, HCN implemented enhanced ADN Program admissions requirements requiring external ADN applicants to have graduated from an approved PN program.

ADN Program applicants who apply to start in the quarter immediately following their graduation from HCN’s PN Program may be admitted prior to possessing an active unencumbered PN license but must obtain an active unencumbered PN license prior to the start of their second term.

Beginning with the April 2019 term, HCN further changed its admissions standards to remove certain entrance exam requirements.

HCN has made multiple changes to the assessment process since its original implementation and may further modify it in the future in order to better identify college-ready students.

HCN offers a Direct Entry ADN option that offers an accelerated graduation pathway for students who meet certain transfer, academic and entrance exam requirements.

HCN has made multiple changes to its admissions assessment process since its original implementation and may further modify it in the future in order to better identify college-ready students.

These initiatives require significant time, energy, and resources, and if our efforts are not successful, they may adversely impact our results of operations, cash flows, and financial condition.

While we believe changes in admissions and academic achievement requirements are beneficial for our students and will result in a better and more positive educational experience and improved testing pass rates in the long term, we believe some of the changes have contributed to a decline in enrollment and have had a negative impact on our results of operations.

While we work on identifying an appropriate balance of admissions requirements, academic achievement requirements and attracting appropriate students, there may continue to be a negative impact on enrollments at HCN.

Even if these initiatives lead to the identification and enrollment of students who are likely to succeed and improve the student experience, they could result in adverse impacts on HCN enrollments.

While we believe changes in admissions and academic achievement requirements are beneficial for our students and will result in a better and more positive educational experience and improved testing pass rates in the long term, we believe some of the changes have contributed to a decline in enrollment in previous years and have had a negative impact on our results of operations.

We continue to work on identifying an appropriate balance of admissions requirements, academic achievement requirements and attracting appropriate students.

However, even if these initiatives lead to the identification and enrollment of students who are likely to succeed and improve the student experience, they could result in adverse impacts on HCN enrollments.

HCN Enrollments.

Enrollments in HCN’s ADN Program for all 2019 terms were significantly lower than HCN planned, which we believe is likely partly associated with the implementation of the new admissions requirements discussed above, among other potential factors.

For example, our enrollments appear to have been impacted by negative perceptions by certain current and prospective student cohorts, which is the type of factor that can occur more easily at a land-based institution than an online institution.

While we continue to work on implementing and enhancing our academic and achievement and admission requirements, identifying and remediating the factors impacting our enrollments at HCN, and implementing new initiatives such as extending the hours of HCN’s customer service team, there can be no assurance we will be successful in these efforts over the long term and we cannot guarantee that we will be able to reverse the revenue decline in our HCN Segment or return to prior level of enrollments.

Enrollments in HCN’s ADN Program for all 2020 terms were higher than HCN planned, which we believe 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.

Enrollments for all 2019 terms were significantly lower than HCN planned, which we believe is likely partly associated with the implementation of the new admissions requirements discussed above, among other potential factors.

For example, our enrollments appear to have been impacted by negative perceptions by certain current and prospective student cohorts.

While we continue to work on implementing and enhancing our academic and achievement and admission requirements, identifying and remediating the factors that impacted our enrollments at HCN in 2019, and implementing new initiatives such as extending the hours of HCN’s customer service team, there can be no assurance we will be successful in these efforts over the long term, and we cannot guarantee that we will continue to see these increases in enrollments.

Tuition and Fees.

Affordable tuition has been a priority of APUS since its founding when APUS set tuition to align with tuition assistance programs available to members of the military.

Following a July 2015 tuition increase, to support APUS’s active duty military and certain military-affiliated students, APUS implemented a tuition grant that kept the cost of tuition for these students at its previous level.

As a result, undergraduate course tuition continued to be $250 per credit hour, and graduate course tuition continued to be $325 per credit hour for U.S.

Military active duty service members, National Guard members, reservists, military spouses and dependents, and veterans.

In October 2019, APUS announced the following changes for undergraduate and master’s course registrations made on or after January 1, 2020:

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• The technology fee would increase from $50 to $65 per course.

This January 2020 tuition increase is APUS’s first increase since the July 2015 tuition increase described above.

In support of APUS's active duty military students using TA, APUS has increased the tuition grant for those undergraduate students and their spouses and dependents from $20 to $35 per credit hour to keep the cost at $250 per credit hour, and increased the tuition grant for those master’s students and their spouses and dependents from $25 to $120 per credit hour to reduce the cost from $325 per credit hour to $250 per credit hour for graduate active duty military students.

As a result, undergraduate and master’s students who are eligible for TA benefits and their spouses and dependents will pay a net tuition of $250 per credit hour.

APUS also extended its book grant, previously available only to undergraduate students, to active-duty military students and their spouses and dependents at the master’s level.

This January 2020 tuition increase was APUS’s first increase since July 2015.

In support of APUS's active duty military students using TA, APUS increased the APUS funded tuition grant for those undergraduate students and their spouses and dependents from $20 to $35 per credit hour to keep the cost at $250 per credit hour, and increased the APUS funded tuition grant for those master’s students and their spouses and dependents from $25 to $120 per credit hour to reduce the cost from $325 per credit hour to $250 per credit hour for graduate active duty military students.

As a result, undergraduate and master’s students eligible for TA benefits and their spouses and dependents pay a net tuition of $250 per credit hour.

APUS also extended its APUS funded book grant, previously available only to undergraduate students, to active-duty military students and their spouses and dependents at the master’s level.

The net effect of these price and grant adjustments is that for active duty military students using TA, an undergraduate or graduate degree at APUS may be attained for no out-of-pocket cost.

APUS also announced that the existing tuition grant for veterans will expire at the end of 2019.

APUS’s existing tuition grant for veterans expired at the end of 2019.

However, veterans who qualify for 100% of their Post-9/11 GI Bill benefits are expected to continue to have no out-of-pocket expenses.

Those veterans who do not qualify for 100% may experience a small increase in out-of-pocket costs, but because APUS is a “Yellow Ribbon” university, many are expected to have access to additional funding resources.

APUS estimates that the tuition grant applied to approximately 77%, and 78% of its total net course registrations in 2018 and 2019 , respectively, and will apply to approximately 60% of its total net course registrations made on or after January 1, 2020.

APUS’s tuition grant applied to approximately 77%, 78%, and 68% of its total net course registrations in 2018, 2019, and 2020, respectively.

Today, tuition at APUS remains among the lowest in the sector.

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The combined tuition and fees at APUS are generally less expensive for undergraduate and graduate students than the average in-state cost at a public university.

APUS’s low tuition and fees, in combination with APUS’s undergraduate book grant that is provided to all undergraduate students, and beginning January 2020, to active duty graduate students and their spouses and dependents, results in significant savings for students.

APUS has provided approximately $140 million in book grant savings to undergraduate students since 2001, and will provide approximately $0.4 million to $0.6 million in book grant savings to graduate students in 2020.

APUS has two applied doctoral programs, Strategic Intelligence and Global Security, that began instruction in January 2018.

APUS’s low tuition and fees, in combination with the APUS funded book grant that is provided to all undergraduate students, and beginning January 2020, to active duty graduate students and their spouses and dependents, results in significant savings for students.

Since 2001, APUS has provided approximately $144 million in book grant savings to students.

APUS has two applied doctoral programs, Strategic Intelligence and Global Security.

The programs meet a need for higher-level education and research combined with professional practice in these fields.

The doctoral degrees tuition and residency costs are currently $5,600 per term and include a book grant for course materials.

In connection with our doctoral programs, we incurred approximately $0.7 million and $0.3 million in capital expenditures in 2018 and 2019 , respectively.

The doctoral degrees tuition and residency costs are currently $5,600 per term and include an APUS funded book grant for course materials.

In connection with our doctoral programs, for the years ended December 31, 2018 and 2019, we incurred approximately $0.7 million, and $0.3 million in capital expenditures, respectively.

HCN’s tuition and fees are also designed to be affordable and competitive with those of similar institutions offering the same level of flexibility, accessibility, and student experience.

Tuition and certain fees at HCN were increased approximately 3% effective with the January 2019 term.

Tuition and certain fees at HCN were increased approximately 3% effective with the January 2019 term, and there have been no further tuition increases.

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 expects to award approximately $250,000 of institutional grants during 2020.

In November 2019, HCN entered into a memorandum of understanding, or MOU, to participate in the DoD tuition assistance program and is therefore subject to such program’s requirements and restrictions.

For the year ended December 31, 2020, HCN awarded approximately $0.2 million of institutional grants.

In November 2019, HCN entered into a memorandum of understanding, or MOU, to participate in TA and is therefore subject to such program’s requirements and restrictions.

The MOU and these requirements and restrictions are more fully discussed in the “Regulatory Environment - Student Financing Sources and Related Regulations / Requirements” and “Risk Factors” sections of this Annual Report.

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We experienced an increase in bad debt expense in our HCN segment in 2020 and have experienced increases in other recent interim periods in both our HCN and APUS segments.

We believe the increase in bad debt expense in our HCN segment was primarily due to HCN’s implementation of extended payment plan options in 2018 .

We also experienced increases in our bad debt expense over several years prior to 2015 , particularly at APUS.

We believe those increases were primarily driven by an increase in the number of students using Title IV program funds, operational policies, processing challenges, and challenges collecting funds primarily related to students who did not complete courses.

In September 2015, APUS changed the method by which it disburses Title IV program funds in an effort to lower bad debt expense and to reduce the attractiveness of our programs to students who are seeking to abuse the Title IV programs.

While we have experienced decreases in bad debt expense at APUS during each of the last several years, there is no assurance that these changes caused the reductions.

We believe the increase in bad debt expense in our HCN segment was primarily due to increases in revenue as a result of increases in enrollment.

While we have experienced decreases in bad debt expense at APUS during each of the last several years, there is no assurance we will not experience an increase in bad debt expense at APUS in the future.

Impact of Government Budgetary Pressures.

Congressional inaction on budgetary matters has led to lapses in funding, resulting government shutdowns, and subsequent policy changes that have affected tuition assistance programs at DoD.

For example, funding for the federal government, including the DoD, lapsed on each of January 20, 2018 and February 9, 2018, resulting in partial shutdowns that lasted for a few days and several hours, respectively.

Funding for some portions of the federal government, not including the DoD, lapsed on December 22, 2018, resulting in a partial government shutdown that lasted for 35 days.

The Coast Guard suspended its tuition assistance program during this partial government shutdown and the

Marine Corps began to require Marines to have 24 months on active duty prior to being eligible to apply for tuition assistance.

A future government shutdown, particularly one that includes DoD or suspension or resulting modification of DoD tuition assistance programs, could have a material adverse effect on our operations and financial condition.

Congressional inaction on budgetary matters has led to lapses in funding, resulting in government shutdowns, and subsequent policy changes that have affected TA.

For example, during a 35-day partial government shutdown that began in December 2018, the Coast Guard suspended its tuition assistance program.

A future government shutdown, particularly one that includes DoD or suspension or resulting modification of TA, could have a material adverse effect on our operations and financial condition.

In May 2019, the Navy announced that as a result of increased demand stemming from improvements in service delivery and higher limits on annual benefits available per sailor, TA benefits available to sailors for the fiscal year ending September 30, 2019 were expected to be exhausted by the end of May 2019, and effective May 28, 2019 the Navy ceased approving TA program funds for eligible sailors until the start of the new government fiscal year on October 1, 2019.

In addition, effective October 1, 2019, Navy service members must have a minimum of two years of service before becoming eligible to use TA or the Navy College Program for Afloat College Education, funding will be capped at twelve semester hours per fiscal year, and career funding will be capped at 120 semester hours.

Navy-related registrations were 10.3%, and 7.2% of total registrations for the three months ended September 30, 2018 and 2019, respectively.

In addition, effective October 1, 2019, Navy service members must have a minimum of two years of service before becoming eligible to use TA or the Navy College Program for Afloat College Education, funding is capped at 12 semester hours per fiscal year, and career funding is capped at 120 semester hours.

Effective October 1, 2021, the annual funding cap will increase to 18 semester hours.

The temporary exhaustion of Navy tuition assistance program funds had a significant negative impact on our results of operations for the third quarter of 2019, and negatively impacted October 2019 revenue by approximately $0.4 million.

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Furthermore, in March 2020, the Navy announced a new “Education Strategy for Seapower 2020” that is intended to be a new comprehensive education strategy.

While the details and impact of this particular strategy are still uncertain, we expect each military branch and the DoD to continually evaluate their approaches to education, and any resulting changes could have an impact on the funds available to service members to pursue their education at our institutions.

As part of this strategy, the Navy, in

cooperation with the U.S.

Marine Corps and the U.S.

Coast Guard, in January 2021 began piloting online courses for the new United States Naval Community College, a community college supporting naval education for enlisted service members, with plans to enroll as many as 5,000 students into targeted associate’s degree programs with partner colleges and universities in a second pilot phase beginning in 2022.

Navy-related registrations were 5% of total registrations in each of the years ended December 31, 2019 and 2020, respectively.

We expect each military branch and the DoD to continually evaluate their approaches to education, and any resulting changes could have an impact on the funds available to service members to pursue their education at APUS.

Changes in funding allocations could have a material adverse effect on APUS’s enrollments.

In February 2021, the Army suspended access to its “ArmyIgniteED” portal, which is the portal used by soldiers to participate in TA programs, as part of a scheduled upgrade to the portal.

The suspension was scheduled to last through March 7, 2021, but technical difficulties on March 8, 2021 caused the launch of the upgraded portal to be delayed.

During the suspension, soldiers, Army education counselors, and education institutions such as APUS do not have access to the portal and soldiers cannot register for courses through the Army’s TA program.

There is no assurance when the portal will be operational, or that if operational it will work correctly or efficiently or will not have other impacts on our ability to participate in the TA programs or receive funds under those programs.

ED Program Review and 2016 APUS Compliance Audit.

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In a Final Audit Determination letter in January 2018, ED conveyed its finding that funds had not been returned timely.

ED also noted that a similar finding had been made in an open program review with respect to which APUS has not yet received a program review report.

ED also noted that a similar finding had been made in a program review that ED subsequently closed on January 27, 2021.

In connection with the finding, ED required that APUS post an irrevocable letter of credit for approximately $700,000.

APUS posted the letter of credit March 2018 and it expired December 31, 2019.

APUS posted the letter of credit in March 2018 and it expired December 31, 2019.

Walmart Partnership.

On May 30, 2018, Walmart announced that in connection with entering into a new arrangement for education benefits to its affiliates it would not be renewing its partnership agreement with APUS to offer academic courses and degree programs to Walmart associates effective June 2019 and that it would begin transitioning to its new arrangement.

In 2018 and 2019 approximately 1.1%, and 0.8%, respectively, of our consolidated revenue was associated with students that enrolled with APUS in connection with its partnership with Walmar t.

On May 30, 2018, Walmart announced that in connection with entering into a new arrangement for education benefits it would not be renewing its partnership agreement with APUS to offer academic courses and degree programs to Walmart associates effective June 2019 and that it would begin transitioning to its new arrangement.

In 2019, approximately 0.8% of our consolidated revenue was associated with students that enrolled with APUS in connection with its partnership with Walmart.

APUS Program Participation Agreement.

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 was subject to an open program review at the time of renewal.

As discussed more fully in “Compliance with Regulatory Standards and the Effect of Regulatory Violations - Compliance Reviews,” in September 2016 ED began a program review of APUS’s administration of the Title IV programs during the 2014-2015 and 2015-2016 award years, and that program review was closed on January 27, 2021 with no findings and no further action required.

Regulated Industry.

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For financial reporting and analysis purposes, APUS measures its student population in terms of aggregate course enrollments, or net course registrations.

Course enrollments, or net course registrations, which include one-credit lab courses combined with their related three-credit courses, represent the aggregate number of courses in which students remain enrolled after the date by which they may drop the course without financial penalty.

Net course registrations, which include one-credit lab courses combined with their related three-credit courses, represent the aggregate number of courses in which students remain enrolled after the date by which they may drop the course without financial penalty.

HCN measures its student population in terms of student enrollments.

Student enrollment represents the number of students enrolled in one or more courses after the date by which they may drop the course without financial penalty.

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.

Because we recognize revenue over the length of a course, net course registrations and student enrollments in a financial reporting period do not correlate directly with revenue for that period because revenue recognized from courses is not necessarily recognized in the financial reporting period in which the course registrations or enrollments occur.

For example, revenue in a quarter reflects a portion of the revenue from courses that began in a prior quarter and continued into the quarter, all revenue from courses that began and ended in the quarter, and a portion of the revenue from courses that began but did not end in the quarter.

For example, at

APUS, revenue in a quarter reflects a portion of the revenue from courses that began in a prior quarter and continued into the quarter, all revenue from courses that began and ended in the quarter, and a portion of the revenue from courses that began but did not end in the quarter.

The average number of courses per term at APUS varies by payor type.

For example, ED’s Title IV programs require participating students to take more courses per term than students participating in DoD tuition assistance programs.

As a result, should the number of APUS’s students who utilize ED’s Title IV programs decrease (or the number of students using DoD tuition assistance programs increase), we anticipate that it may cause the average number of courses per student per term to decrease.

For example, ED’s Title IV programs require participating students to take more courses per term than students participating in TA.

As a result, should the number of APUS’s students who utilize ED’s Title IV programs decrease (or the number of students using TA increase), we anticipate that it may cause the average number of courses per student per term to decrease.

You should not rely on the results of any prior periods as an indication of future net course registrations at APUS, student enrollments at HCN, or consolidated revenue.

The composition of our students, changing market demands and competition, make forecasting very difficult, and we are unable to determine if we will return to growth or what level of growth we will achieve, if any.

The composition of our students, changing market demands and competition, make forecasting very difficult, and we are unable to determine if we will continue to grow or what level of growth we will achieve, if any.

Similarly, you should not rely on our operating margins in any prior periods as an indication of our future operating margins.

Tuition rate.

Providing affordable certificate and degree programs is an important element of our competitive strategy.

Providing affordable degree and certificate programs is an important element of our competitive strategy.

We estimate that APUS’s tuition is lower than the average in-state rates at public universities.

In October 2019, APUS announced increases in tuition and technology fee for undergraduate and master’s course registrations made on or after January 1, 2020, as discussed in “Overview” above.

In October 2019, APUS announced increases in tuition and the technology fee for undergraduate and master’s course registrations made on or after January 1, 2020, as discussed in “Overview” above.

The January 2020 tuition increase is APUS’s first increase since July 2015 and is intended to help support increased investments in academic learning and student operations.

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APUS students are also charged certain additional fees, such as graduation, late registration, transcript request, and comprehensive examination fees, when applicable.

APUS provides a grant to cover the technology fee for students using DoD tuition assistance programs and other programs, as applicable.

In 2018 , and 2019 , technology fee revenue net of technology fee grants was approximately $ 7.2 million, or 2.4% of revenue, and $ 7.0 million, or 2.4% of consolidated revenue, respectively.

Until early 2019, APUS received purchase commissions for graduate student book purchases and ancillary supply purchases that students make directly from our preferred book vendor.

APUS provides a grant to cover the technology fee for students using TA and other programs, as applicable.

In 2019, and 2020, technology fee revenue net of technology fee grants was approximately $7.0 million, or 2.4% of consolidated revenue, and $8.3 million, or 2.6% of consolidated revenue, respectively.

Until early 2019, APUS received purchase commissions for graduate student book purchases and ancillary supply purchases that students made directly from our preferred book vendor.

HCN students are charged fees for various items such as application, testing, books and supplies, lab, technology and graduation.

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Instructional costs and services expenses also include costs associated with curriculum development, academic records and graduation, as well as other services provided by our institutions, such as evaluating transcripts.

Instructional costs and services expenses are generally affected by the cost of academic resources, the efficiency of delivering academic products and services to our students, salaries and benefits for our faculty and other academic and administration personnel, and the level of expenditures for initiatives for new and existing academic programs.

At APUS, instructional costs and services expenses includes expenses related to course materials, learning resources, the library, the book grant program, and instructional pay for part-time faculty that is primarily dependent on the number of students taught.

At HCN, instructional costs and services expenses also includes operating expenses directly associated with HCN’s campus operations, including rent.

At APUS, instructional costs and services expenses that are primarily dependent on the number of students taught include expenses related to course materials, learning resources, the library, the book grant program, and instructional pay for part-time faculty that is primarily dependent on the number of students taught.

Selling and promotional expenses.

Selling and promotional expenses includes salaries and benefits of personnel engaged in student enrollment, advertising costs, and marketing material production costs.

Our selling and promotional

expenses are generally affected by the cost of advertising media, the efficiency of our selling efforts, salaries and benefits for our selling and admissions personnel, and the level of expenditures for advertising initiatives for new and existing academic programs.

Selling and promotional expenses include salaries and benefits of personnel engaged in student enrollment, advertising costs, and marketing material production costs.

Our selling and promotional expenses are generally affected by the cost of advertising media, the efficiency of our selling efforts, salaries and benefits for our selling and admissions personnel, and the level of expenditures for advertising initiatives for new and existing academic programs.

We believe the availability of Title IV program funds to students has increased our marketability in non-military markets, but the nature of these markets, including the impact of competition, and the rising cost of internet search and other advertising media has caused our student acquisition costs to increase.

This trend may continue and our student acquisition costs may increase.

This trend may continue, and our student acquisition costs may continue to increase.

General and administrative expenses.

General and administrative expenses includes salaries and benefits of employees engaged in corporate management, finance, financial aid processing, information technology, human resources, facilities, compliance and other corporate functions, the cost of renting and maintaining APUS’s administrative facilities, technology expenses, and costs for professional services.

General and administrative expenses also includes bad debt expense.

General and administrative expenses include salaries and benefits of employees engaged in corporate management, finance, financial aid processing, information technology, human resources, facilities, compliance and other corporate functions, the cost of renting and maintaining APUS’s administrative facilities, technology expenses, and costs for professional services.

General and administrative expenses also include bad debt expense.

General and administrative expenses are generally affected by the costs of salaries and benefits for our general and administrative personnel, the efficiency of delivering back-office support including technology services, and the level of expenditures for supporting company initiatives.

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We incur depreciation and amortization expenses for costs related to the capitalization of property, equipment, software, and program development on a straight-line basis over the estimated useful lives of the assets.

In addition, we incur amortization expense for the amortization of identified intangible assets with a definite life resulting from our acquisition of HCN.

In addition, prior to 2020, we incurred amortization expense for the amortization of identified intangible assets with a definite life resulting from our acquisition of HCN.

Interest Income, Net

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We generally recognize revenue ratably as instructional services are provided over the period or term, which is, for APUS, either an eight- or sixteen-week period, and for HCN, a quarterly term.

Revenue is recognized when evidence of a contract exists, delivery has occurred or as instructional services are delivered, the price is determinable, and collectability is reasonably assured.

Revenue is recognized when evidence of a contract exists, delivery has occurred or as instructional

services are delivered, the price is determinable, and collectability is reasonably assured.

Revenue from fees is recognized as information or services are delivered to customers, assuming all other revenue recognition criteria are met.

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Goodwill is not amortized.

In connection with

the November 1, 2013 acquisition of HCN, we recorded $38.6 million of goodwill, representing the excess of the purchase price over the amount assigned to the new assets acquired and the fair value assigned to identified intangible assets.

In connection with the November 1, 2013 acquisition of HCN, we recorded $38.6 million of goodwill, representing the excess of the purchase price over the amount assigned to the new assets acquired and the fair value assigned to identified intangible assets.

We also recorded $3.7 million of indefinite-lived intangible assets as part of the HCN acquisition.

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If the fair value is less than the carrying value, the asset is reduced to fair value.

As of October 31, 2018 and 2019 , we completed our annual assessment of goodwill and concluded that HCN’s fair value was more than the carrying value;

The Company evaluated events and circumstances related to the valuation of goodwill of HCN through the year ended December 31, 2020 and determined there were no indicators of impairment.

This evaluation included consideration of enrollment trends and financial performance, as well as industry and market conditions, and the impact of the COVID-19 pandemic.

We completed our annual assessment of goodwill as of October 31, 2019 and 2020, and concluded that HCN’s fair value was more than the carrying value;

consequently, there was no impairment.

Our October 31, 2019 annual assessment concluded that the fair value of HCN exceeded the carrying value by approximately 4%, or $1.5 million.

Our October 31, 2020 annual assessment concluded that the fair value of HCN exceeded the carrying value by approximately $13.7 million, or 37.1%.

During the year ended December 31, 2019, the Company completed interim goodwill impairment tests during the first and third quarters, as a result of circumstances that included HCN’s continued underperformance against revised 2019 internal targets and overall 2019 financial performance.

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

Revenue 100.0 % 100.0 %

Costs and expenses:

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Equity investment loss (0.5) % — %

Net income 3.6 % 5.8 %

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Our consolidated revenue in 2019 was $286.3 million, a decrease of $11.4 million or 3.8% , compared to $297.7 million in 2018 .

The revenue decrease resulted from a decrease in net course registrations at APUS and a decrease in student enrollment at HCN.

APUS net course registrations decreased approximately 1.1% to approximately 316,700 in 2019 from approximately 320,300 in 2018 .

The decrease in APUS’s net course registrations was due in part to the temporary exhaustion of Navy TA program funds, which resulted in registration declines during the second and third quarters of 2019, and ongoing declines in new student course registrations resulting in decreased student net course registrations.

HCN average student enrollment decreased 23.1% in 2019 compared to 2018 .

The decrease in HCN’s enrollment in 2019 was primarily attributable to changes in academic standards and admissions policies instituted in 2018 and the first quarter of 2019, among other factors.

In addition, HCN enrollments appear to have been impacted by negative perceptions by certain and prospective student cohorts.

Our consolidated revenue in 2020 was $321.8 million, an increase of $35.5 million or 12.4%, compared to $286.3 million in 2019.

The revenue increase resulted from an increase in net course registrations at APUS and an increase in student enrollment at HCN.

APUS net course registrations increased approximately 11.5% to approximately 353,100 in 2020 from approximately 316,700 in 2019.

The increase in net course registrations at APUS was primarily due to an increase in registrations from military students utilizing TA, which is at a lower revenue per net course registration than other funding sources.

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

We believe the increase was due in part to the launch of the Freedom Grant in January 2020, which offers a tuition reduction and free course materials for active duty military pursuing graduate degrees, and an increase in marketing spend as compared to the prior year, and may also have been due to the impact of the COVID-19 pandemic.

HCN average student enrollment increased 18.1% in 2020 compared to 2019.

The increase in 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 as compared to the prior year, 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.

Costs and Expenses

Costs and expenses were $297.1 million in 2020, an increase of $23.6 million, or 8.6%, compared to $273.5 million in 2019.

The increase in costs and expenses was primarily due to increases in employee compensation costs, advertising and marketing support costs, professional fees, information technology costs and instructional material costs in our APEI Segment and increases in employee compensation costs, instructional material costs, and advertising costs in our HCN Segment.

In 2020, costs and expenses include the following items on a pretax basis:

a $10.4 million increase in advertising costs in our APEI and HCN Segments;

$5.6 million in information technology costs related to the evaluation and investment in replacements and upgrades to our information technology systems, including replacements of our learning management and customer relationship management systems, and to inform the scope and duration of our larger overall information technology transformation program in our APEI Segment;

and $5.0 million in professional fees associated with strategic growth opportunities including the Rasmussen Acquisition in our APEI Segment.

In 2019, costs and expenses include the following on a pretax basis:

approximately $2.8 million in employee compensation costs for post-employment benefits payable to the former APUS President upon his retirement;

a non-cash impairment of goodwill of $7.3 million in our HCN segment;

$3.5 million increase in advertising costs in our APEI and HCN Segments;

$2.8 million in employee compensation costs in our APEI Segment for post-employment benefits that will be payable to the APUS President upon retirement;

$2.1 million in information technology costs related to the evaluation and investment in replacements and upgrades to our information technology systems, including one-time expenses to upgrade our learning management system, and to inform the scope and duration of our larger overall information technology transformation program in our APEI Segment;

and $1.4 million in in professional fees associated with the evaluation of a potential acquisition in our APEI Segment.

In 2018 , costs and expenses include pretax expenses of approximately $1.7 million resulting from the voluntary reduction in force program in our APEI Segment.

Costs and expenses as a percentage of revenue increased to 95.5% in 2019 from 89.0% in 2018 .

Our income before interest and income taxes, or our operating margin, decreased to 4.5% from 11.0% compared to the same period.

Our costs and expenses as a percentage of revenue increased largely due to the changes in costs and expenses described above.

a $3.5 million increase

in advertising costs in our APEI and HCN Segments;

and $2.1 million in information technology costs related to the evaluation and investment in replacements and upgrades to our information technology systems.

Costs and expenses as a percentage of revenue decreased to 92.3% in 2020 from 95.5% in 2019.

Our income before interest and income taxes, or our operating margin, increased to 7.7% from 4.5% compared to the same period.

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

Instructional costs and services expenses.

Instructional costs and services expenses in 2019 were $111.9 million, a decrease of approximately $ 3.4 million, or 2.9% , compared to $115.3 million in 2018 .

Instructional costs and services expenses in 2020 were $122.2 million, an increase of approximately $10.3 million, or 9.2%, compared to $111.9 million in 2019.

Instructional costs and services expenses as a percentage of revenue were 38.0% in 2020, compared to 39.1% in 2019.

The decrease in instructional costs and services

expenses was primarily due to a decrease in employee compensation costs and instructional materials costs in both our APEI and HCN Segments, partially offset by an increase in payment processing fees in our APEI Segment.

In 2018 , employee compensation costs include approximately $0.8 million of pretax expenses from the voluntary reduction in force program in our APEI Segment.

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

The increase in instructional costs and services expenses was primarily due to an increase 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 expenses in our APEI Segment.

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.

Selling and promotional expenses in 2020 were $73.0 million, an increase of $13.0 million, or 21.7%, compared to $60.0 million in 2019.

This increase was primarily the result of increased advertising costs in our APEI and HCN Segments, partially offset by a decrease in employee compensation costs in our APEI Segment.

In 2018 , employee compensation costs include approximately $0.5 million of pretax expenses from the voluntary reduction in force program in our APEI Segment.

This increase was primarily the result of 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, partially offset by a decrease in travel expenses in our APEI Segment and a decrease in employee compensation costs in our HCN Segment.

Selling and promotional expenses as a percentage of revenue were 22.7% in 2020 compared to 21.0% in 2019.

The increase in selling and promotional expenses as a percentage of revenue was primarily due to an increase in selling and promotional expenses during a period when consolidated revenue decreased.

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.

General and administrative expenses in 2020 were $88.0 million, an increase of $9.9 million, or 12.7%, compared to $78.1 million in 2019.

The increase in general and administrative expenses was primarily related to the following items on a pretax basis:

$2.8 million in employee compensation costs for post-employment benefits that will be payable to the APUS President upon retirement in our APEI Segment;

$1.4 million of professional fees related to the evaluation of an acquisition in our APEI Segment;

and $2.1 million in information technology costs related to the evaluation of replacements or upgrades to our information technology systems, including one-time expenses to upgrade our learning management system in our APEI Segment.

In 2018 , employee compensation costs include approximately $0.4 million of pretax expenses from the voluntary reduction in force program in our APEI Segment.

General and administrative expenses as a percentage of revenue were 27.3% in 2019 compared to 25.0% in 2018 .

The increase in general and administrative expenses as a percentage of revenue was primarily due to the increase in general and administrative expenses during a period when consolidated revenue decreased.

Bad debt expense decreased to $3.9 million, or approximately 1.4% of revenue, in 2019 , from $4.6 million, or approximately 1.5% of revenue, in 2018 .

We believe the decrease in bad debt expense in our APEI Segment was primarily due to changes in student mix, changes in admissions and verification processes, and other changes partially offset by an increase in bad debt expense in our HCN Segment primarily driven by the implementation of the HCN extended payment program in 2018.

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.

In 2020, APEI Segment general and administrative expenses includes the following costs on a pre-tax basis:

$5.6 million in information technology costs related to the evaluation of replacements or upgrades to our information technology systems, including replacements of our learning management and customer relationship management systems;

and $5.0 million in professional fees associated with strategic growth opportunities including the Rasmussen Acquisition.

In 2019, employee compensation costs include approximately $2.8 million in pretax employee compensation costs for post-employment benefits payable to the former APUS President upon his retirement.

General and administrative expenses as a percentage of revenue were 27.3% in each of 2020 and in 2019.

Consolidated bad debt expense decreased to $3.8 million, or approximately 1.2% of revenue, in 2020, from $3.9 million, or approximately 1.4% of revenue, in 2019.

We believe the decrease in bad debt expense in our APEI Segment was primarily due to changes in student mix, changes in admissions and verification processes, and other changes partially offset by an increase in bad debt expense in our HCN Segment that we believe was driven by an increase in enrollment.

Loss on disposal of long-lived assets .

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Impairment of goodwill.

The Company completed interim goodwill impairment tests during the first and third quarters of 2019 as a result of circumstances that included HCN’s continued underperformance against revised 2019 internal targets and overall 2019 financial performance.

The implied fair value of goodwill was calculated and compared to the recorded goodwill, and the Company determined the fair value of goodwill was $26.6 million, or $7.3 million less than its carrying value.

There was no impairment of the indefinite-lived intangible assets.

As a result, the Company recorded a pretax, non-cash charge of $ 7.3 million to reduce the carrying value of its goodwill in the HCN Segment in 2019 .

Our October 31, 2019 annual assessment concluded there was no additional impairment.

There was no impairment of goodwill for the year ended December 31, 2020 and the Company’s October 31, 2020 annual assessment concluded that the fair value of HCN exceeded the carrying value by approximately $13.7 million, or 37.1%.

The $7.3 million pretax, non-cash impairment of goodwill for the year ended December 31, 2019 resulted from the reduction of the carrying value of goodwill in our HCN segment.

Depreciation and amortization.

Depreciation and amortization expenses were $13.0 million in 2020, compared to $15.6 million in 2019, a decrease of $2.6 million or 16.7%.

When compared to the prior year, the decrease in depreciation and amortization was due to lower capital expenditures, lower amortization of intangible assets and lower total investment in property and equipment net of depreciation.

The decrease in depreciation and amortization was due to lower capital expenditures, lower amortization of intangible assets and lower total investment in property and equipment net of depreciation.

Stock-based compensation.

Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses in 2019 were $6.0 million in the aggregate, representing a decrease of $1.2 million , or 17.0% , compared to $7.2 million in 2018 .

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

The decrease in stock-based compensation costs was due to decrease in performance-based stock unit costs.

Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses in 2020 were $7.1 million in the aggregate, representing an increase of $1.1 million, or 18.7%, compared to $6.0 million in 2019.

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

The increase in stock-based compensation costs was due to additional performance unit incentive costs.

The table below reflects our stock-based compensation expense recorded in our Consolidated Statements of Income included in our Consolidated Financial Statements for the years ended 2019 and 2020 (in thousands):

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Interest income was $1.1 million in 2020, compared to income of $3.9 million in 2019.

The increase is due to an increase in the average rate of interest earned on invested funds during 2019 .

The decrease is due to a decrease in the rate of interest earned on invested funds during 2020.

Income Tax Expense

We recognized tax expense from operations for 2020 and 2019 of $7.0 million and $5.2 million, respectively, or an effective tax rate of 27.2% and 34.1% in 2020 and 2019, respectively.

The increase in our effective tax rate for 2019 is primarily due to a higher amount of non-deductible expenses compared to 2018 in our APEI Segment, and lower pretax income in our APEI and HCN Segments, partially offset by the benefit from ASU No.

The decrease in our effective tax rate for 2020 is primarily due to a higher amount of non-deductible expenses in 2019 in our APEI Segment, and lower pretax income in our APEI and HCN Segments, partially offset by the benefit from ASU No.

2016-09 Compensation - Stock Compensation (Topic 718) in our APEI Segment.

The effective tax rate for 2019 includes a benefit of approximately $0.1 million related to ASU No.

2016-09, compared to additional income tax expense of $0.1 million for 2018 .

There was no material impact related to ASU No.

2016-09 for 2020.

Equity Investment Loss

Equity investment loss was $1.5 million in 2019 , compared to equity investment loss of $0.5 million in 2018 , an increase of $1.0 million.

Equity investment loss was $0.01 million in 2020, compared to equity investment loss of $1.5 million in 2019.

For additional information on our investments please refer to “Note 6.

Investments” in our Consolidated Financial Statements.

Net income was $10.0 million in 2019 , compared to net income of $25.6 million in 2018 , a decrease of $15.6 million, or 60.9% .

This decrease was related to the factors discussed above.

Net income was $18.8 million in 2020, compared to net income of $10.0 million in 2019, an increase of $8.8 million, or 88.0%.

This increase was related to the factors discussed above.

Operating Results by Reportable Segment - Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

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Year Ended December 31,

2019 2020 $ Change % Change

American Public Education Segment

$ 256,899 $ 285,766 $ 28,867 11.2 %

Hondros College of Nursing Segment

29,479 36,091 6,612 22.4 %

Intersegment elimination (108) (72) 36 (33.3) %

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American Public Education Segment

$ 23,522 $ 24,034 $ 512 2.2 %

Hondros College of Nursing Segment

(10,768) 722 11,490 NM

Intersegment elimination

Total income from operations before interest income and income taxes

Effective January 1, 2019, the APEI Segment began charging the HCN Segment for the value of courses taken by HCN Segment employees at APUS.

Intersegment elimination represents the elimination of this intersegment revenue in consolidation.

Our APEI Segment revenue was approximately $256.9 million in 2019 , a decrease of $3.2 million , or 1.2% , compared to $260.1 million in 2018 , which is primarily attributable to lower net course registrations.

Net course registrations at APUS decreased 1.1% to approximately 316,700 in 2019 compared to the same period in 2018 .

The decrease in APUS’s net course registrations was primarily attributable to the temporary exhaustion of Navy TA program funds, which resulted in registration declines during the second and third quarter of 2019, and ongoing declines in new student course registration resulting in decreased student net course registrations.

Income from operations before interest income and income taxes was approximately $23.5 million in 2019 , a decrease of $5.0 million , or 17.6% , compared to 2018 , as a result of the decrease in revenue resulting from lower net course registrations and increases in selling and promotional expenses and general and administrative expenses.

For information regarding the APEI Segment’s net course registrations please refer to “Year Ended December 31, 2019 Compared to Year Ended December 31, 2018 - Revenue” above.

Our HCN Segment revenue was approximately $29.5 million in 2019 , a decrease of $8.1 million , or 21.7% compared to $37.6 million in 2018 , due to a decrease in student enrollment.

HCN average student enrollment decreased 23.1% in 2019 compared to 2018 .

We believe that the decrease in HCN’s enrollment in 2019 was primarily attributable to changes in academic standards and admissions policies instituted in the first quarter of 2019, among other factors.

Additionally, our enrollments appear to have been impacted by negative perceptions by certain current and prospective student cohorts.

The loss from operations before interest income and income taxes in the HCN Segment was approximately $10.8 million in 2019 compared to income from operations before income tax of $4.0 million in 2018 , as a result of the goodwill impairment of $7.3 million and decrease in revenue due to lower enrollment in 2019 .

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Our consolidated revenue for the year ended December 31, 2018 was $297.7 million, a decrease of $1.5 million or 0.5% , compared to $299.2 million for the year ended December 31, 2017 .

The decrease in revenue was a result of a decrease in net course registrations and lower revenue per net course registration at APUS, due, in part, to changes in the general education requirements, partially offset by an increase in average student enrollments at HCN.

APUS net course registrations decreased to approximately 320,300 in the year ended December 31, 2018 from approximately 325,000 in the year ended December 31, 2017 , a decrease of approximately 1.4% .

We believe that the decrease in APUS’s net course registrations for the year ended December 31, 2018 , was primarily attributable to challenges associated with competition for students, the continuing effects of prior periods of decreased registrations and ongoing declines in new student course registrations resulting in decreased returning student net course registrations.

We believe that HCN’s average student enrollment increase is attributable to the opening of the Toledo campus in January 2017.

Costs and Expenses

Costs and expenses were $265.2 million for the year ended December 31, 2018 , an increase of $0.8 million, or 0.3% , compared to $264.4 million for the year ended December 31, 2017 .

The increase in costs and expenses was primarily due to increased employee compensation costs in both our APEI Segment and our HCN Segment, including severance costs related to the voluntary reduction in force program in our APEI Segment during the three months ended March 31, 2018, increases in stock-based compensation expense, and professional fees associated with an acquisition we are no longer pursuing in our APEI Segment.

These increased costs were partially offset by decreases in advertising expense and instructional materials costs in our APEI Segment.

Costs and expenses as a percentage of revenue increased to 89.0% in the year ended December 31, 2018 from 88.4% in the year ended December 31, 2017 .

Our income before interest and income taxes, or our operating margin, decreased to 11.0% from 11.6% over that same period.

Our costs and expenses as a percentage of revenue increased due to increased general and administrative costs as a percentage of revenue partially offset by decreases in instructional costs and services expenses as a percentage of revenue and selling and promotional expenses as a percentage of revenue.

Instructional costs and services.

Instructional costs and services expenses for the year ended December 31, 2018 were $115.3 million, a decrease of approximately $0.9 million, or 0.8% , compared to $116.2 million for the year ended December 31, 2017 .

Instructional costs and services expenses as a percentage of revenue were 38.7% for the year ended December 31, 2018 , compared to 38.8% for the year ended December 31, 2017 .

The decrease in instructional costs and services expenses is primarily the result of decreased instructional materials costs in our APEI Segment, partially offset by increases in stock compensation costs in our APEI Segment and employee compensation costs in our HCN Segment.

Our instructional costs and services expenses as a percentage of revenue decreased primarily due to our instructional costs and services expenses decreasing at a rate greater than the decrease in consolidated revenue.

Selling and promotional.

Selling and promotional expenses for the year ended December 31, 2018 were $57.0 million, a decrease of $1.3 million, or 2.2% , compared to $58.3 million for the year ended December 31, 2017 .

This decrease was primarily due to decreases in advertising costs and marketing support materials costs in our APEI Segment partially offset by increased advertising costs in our HCN Segment.

Selling and promotional expenses as a percentage of revenue were 19.1% for the year ended December 31, 2018 compared to 19.5% for the year ended December 31, 2017 .

Selling and promotional expenses as a percentage of revenue decreased year over year due to our selling and promotional expenses decreasing at a rate greater than the decrease in consolidated revenue.

General and administrative.

General and administrative expenses for the year ended December 31, 2018 were $74.5 million, an increase of $5.5 million, or 8.0% compared to $69.0 million for the year ended December 31, 2017 .

The increase in general and administrative expenses was primarily related to increases in employee compensation costs including the voluntary reduction in force program, reduced capitalized labor for APUS capital projects, stock-based and other incentive compensation expense, and professional fees in our APEI Segment and increased bad debt expense in our HCN Segment partially offset by decreases in bad debt expense in our APEI Segment.

General and administrative expenses as a percentage of revenue were 25.0% for the year ended December 31, 2018 , compared to 23.1% for the year ended December 31, 2017 .

Bad debt expense decreased to $4.6 million , or approximately 1.5% of revenue, for the year ended December 31, 2018 , from $4.7 million , or approximately 1.6% of revenue, in the year ended December 31, 2017 .

We believe the decrease in bad debt expense was primarily due to changes in student mix, changes in admissions and verification, and other changes, partially offset by increases in bad debt expense in our HCN Segment.

Loss on disposal of long-lived assets.

The loss on disposal of long-lived assets was $0.9 million in the year ended December 31, 2018 , compared to $2.1 million in the year ended December 31, 2017 .

Depreciation and amortization.

Depreciation and amortization expenses were $17.5 million for the year ended December 31, 2018 , compared to $18.8 million for the year ended December 31, 2017 , a decrease of $1.3 million or 6.9% .

Stock-based compensation.

Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses for the year ended December 31, 2018 were $7.2 million in the aggregate, representing an increase of $1 million or 15.0% , compared to $6.2 million for the year ended December 31, 2017 .

The increase in stock-based compensation was primarily due to the accelerated stock-based compensation expense of awards to employees who reached retirement eligibility and additional performance unit incentive costs.

The table below reflects our stock-based compensation expense recognized in our Consolidated Statements of Income for the years ended December 31, 2017 and 2018 (in thousands):

Year Ended December 31,

Instructional costs and services

Selling and promotional

General and administrative

Total stock-based compensation expense

Interest income

Interest income was $2.9 million for the year ended December 31, 2018 compared to income of $0.2 million for the year ended December 31, 2017 .

The increase was related to an increase in interest rates and larger invested balances in cash and cash equivalents during the year ended December 31, 2018 .

Income Tax Expense

We recognized tax expense from operations for the years ended December 31, 2018 and 2017 of $9.3 million and $11.5 million, respectively, or an effective tax rate of 26.6% and 35.2% in 2018 and 2017 , respectively.

The decrease in our effective tax rate for the year ended December 31, 2018 is primarily due to the reduction in the federal corporate tax rate to 21% from the prior maximum rate of 35% effective January 1, 2018 under the U.S Tax Cuts and Jobs Act, or the Tax Act and favorable adjustments related to taxes paid for the 2017 tax year, partially offset by additional income tax expense of approximately $0.1 million related to the adoption of ASU 2016-09.

The effective tax rate for the year ended December 31, 2017 includes approximately $0.5 million in additional income tax expense due to the adoption of ASU 2016-09.

Equity Investment Loss

Equity investment loss was $0.5 million for the year ended December 31, 2018 , compared to equity investment loss of $2.4 million for the year ended December 31, 2017 , an increase of $1.9 million.

The investment loss was due to other-than-temporary impairments totaling $0.5 million on certain minority investments during the year ended December 31, 2018 compared to other-than-temporary impairments totaling $2.7 million on certain minority investments during the year ended December 31, 2017.

For additional information on our investments and other than temporary impairments please refer to “Note 5.

Investments” in our Consolidated Financial Statements.

At December 31, 2017 and December 31, 2018 our total equity method investments were $12.5 million and $12.0 million , respectively.

Net income was $25.6 million for the year ended December 31, 2018 , compared to net income of $21.1 million for the year ended December 31, 2017 , an increase of $4.5 million, or 21.3% .

This increase was related to the factors discussed above.

Operating Results by Reportable Segment - Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

The table below details our operating results by reportable segment for the periods indicated (in thousands):

Year Ended December 31,

American Public Education Segment

Hondros College of Nursing Segment

Total Revenue

Income from operations before interest income and income taxes

American Public Education Segment

Hondros College of Nursing Segment

2 1 (1) (50.0) %

Total income from operations before interest income and income taxes $ 12,756 $ 24,757 $ 12,001 94.1 %

For the year ended December 31, 2018 , our APEI Segment earned approximately $260.1 million in revenue, a $5.2 million , or 2.0% , decrease as compared to the year ended December 31, 2017 , which is primarily attributable to lower net course registrations and lower revenue per net course registration, due in part to changes in the general education requirements.

Net course registrations at APUS decreased 1.4% to approximately 320,300 for the year ended December 31, 2018 compared to the same period in 2017 .

We believe the decrease in APUS’s net course registrations was primarily attributable to challenges associated with competition for students, the continuing effects of prior periods of decreased registrations, and ongoing declines in new student net course registrations resulting in decreased returning student net course registrations.

Income from operations before interest income and income taxes was approximately $28.6 million for the year ended December 31, 2018 , a decrease of $2.3 million , or 7.5% , compared to the year ended December 31, 2017 , as a result of the decrease in revenue resulting from

lower net course registrations and increases in general and administrative expenses.

For information regarding the APEI Segment’s net course registrations please refer to “Year Ended December 31, 2018 Compared to Year Ended December 31, 2017 - Revenue” above.

For the year ended December 31, 2018 , the HCN Segment earned approximately $37.6 million in revenue, a $3.6 million , or 10.7% increase as compared to the year ended December 31, 2017 , which is due to the opening of the Toledo campus during 2017.

HCN student enrollment was approximately 2,100 for the year-ended December 31, 2018 and December 31, 2017 with higher average enrollment during 2018 primarily as a result of the new Toledo campus.

Income from operations before interest income and income taxes was approximately $4.0 million for the years ended December 31, 2018 and December 31, 2017 as a result of an increase in revenue from higher enrollments offset by increased employee compensation, advertising, and bad debt expense during the year ended December 31, 2018 .

Quarterly Results

The following table presents our unaudited quarterly results of operations for the last eight quarters, and should be reviewed in conjunction with our Consolidated Financial Statements and related notes contained elsewhere in this Annual Report.

We have prepared the unaudited information on the same basis as our audited Consolidated Financial Statements.

Results of operations for any quarter are not necessarily indicative of results for any future quarters or for a full year (in thousands).

Quarter Ended

September 30,

Statement of Operations Data:

Costs and expenses:

Instructional costs and services

Selling and promotional

General and administrative

Loss on disposals of long-lived assets

Impairment of goodwill

Depreciation and amortization

Total costs and expenses

Income from operations before interest income and income taxes

Interest income, net

Income from operations before income taxes

Income tax expense

Equity investment income (loss)

Net income (loss)

Stock-based compensation

Net cash provided by operating activities

Capital expenditures

APUS net course registrations

The APEI Segment charges the HCN Segment for the value of courses taken by HCN Segment employees at APUS.

The intersegment elimination represents the elimination of this intersegment revenue in consolidation.

Our APEI Segment revenue was approximately $285.8 million in 2020, an increase of $28.9 million, or 11.2%, compared to $256.9 million in 2019, which is primarily attributable to higher net course registrations.

Net course registrations at APUS increased 11.5% to approximately 353,100 in 2020 compared to 2019.

The increase in net course registrations is primarily due to an increase in registrations from military students utilizing TA, which is at a lower revenue per net course registration than other funding sources.

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

We believe the increase was due in part to the launch of the Freedom Grant in January 2020, which offers a tuition reduction and free course materials for active duty military pursuing graduate degrees, and an increase in marketing spend as compared to the prior year, and may also have been due to the impact of the COVID-19 pandemic.

Income from operations before interest income and income taxes was approximately $24.0 million in 2020, an increase of $0.5 million, or 2.2%, compared to 2019.

The increase is due to the increase in revenue resulting from higher net course registrations as discussed above.

Our HCN Segment revenue was approximately $36.1 million in 2020, an increase of $6.6 million, or 22.4% compared to $29.5 million in 2019, which is primarily attributable to an increase in student enrollment.

HCN average student enrollment increased 18.1% in 2020 compared to 2019.

We believe that the increase in HCN’s enrollment in 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 as compared to the prior year, 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 the HCN Segment was approximately $0.7 million in 2020 compared to a loss from operations before income tax of $10.8 million in 2019.

The increase in income from operations is primarily a result of the increase in revenue due to higher student enrollment in 2020 as discussed above and the $7.3 million pretax, non-cash impairment of goodwill in 2019.

Liquidity and Capital Resources

We financed our operating activities and capital expenditures in 2019 and 2020 primarily with cash provided by operating activities.

Cash, cash equivalents, and restricted cash were $212.1 million and $202.7 million at December 31, 2018 and December 31, 2019 , respectively, representing a decrease of $9.4 million , or 4.4% , in 2019 .

The decrease in cash, cash equivalents, and restricted cash in 2019 was primarily due to the repurchase of our common stock during the period.

Cash, cash equivalents, and restricted cash increased by $32.9 million , or 18.4% , to $212.1 million in 2018 , which was due to cash provided by operating activities exceeding cash used in investing and financing activities.

We derive a significant portion of our revenue from tuition assistance programs from the DoD in our APEI Segment.

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 applicable course.

In both our APEI and HCN Segments, another significant source of revenue is derived from our participation in ED’s Title IV programs, for which disbursements are governed by federal regulations.

Cash, cash equivalents, and restricted cash were $202.7 million and $227.7 million at December 31, 2019 and December 31, 2020, respectively, representing an increase of $24.9 million, or 12.3%, in 2020, primarily due to cash provided by operating activities exceeding cash used in investing and financing activities.

Cash, cash equivalents, and restricted cash decreased by $9.4 million, or 4.4%, to $202.7 million in 2019, primarily due to the repurchase of our common stock during the period.

We derive a significant portion of our revenue from TA 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 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.

These factors, together with the number of courses starting each month, affect our operating cash flow.

We expect to continue to fund our costs and expenses through cash generated from operations.

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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 one-time expenses to upgrade our learning management system, and to inform the scope and duration of the larger overall information technology transformation program.

We anticipate spending between approximately $6.0 million and $8.0 million in 2020, focusing on specific information technology projects, including replacements of our learning management and customer relationship management systems.

We estimate 80% of this anticipated spending to be one-time spending, with respect to the projects and systems to which these expenditures relate.

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 PAD system for possible changes and upgrades and anticipate that we will eventually make significant changes to that system, as well.

In addition, our Board of Directors approved an increase in marketing expenditures for 2020, including in support of a planned advertising campaign focusing on affordability and return on investment for learners.

As a result of these increased marketing expenses, we expect selling and promotional expenses as a percentage of revenue to increase in 2020 as compared to 2019 .

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 year ended December 31, 2020, we incurred approximately $5.9 million, including $0.3 million of capital costs, on our information technology transformation program, focusing on specific information technology projects, including replacements of our learning management and customer relationship management systems, and we anticipate spending between approximately $4.0 million and $5.0 million in 2021.

APUS began its first cohort of students in a new learning management system in March 2020 and has completed migration to the new

APUS signed a contract for a replacement customer relationship management system in the first quarter of 2020 and the implementation is underway.

APUS will continue to evaluate the 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.

For example, in 2019 we incurred approximately $0.5 million in capital expenditures related to a new HCN campus in Indianapolis, Indiana.

We also expect that we will continue to make expenditures to invest in strategic opportunities and to enhance our business capabilities.

We will 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 need additional capital in connection with any change in our current level of operations, including if we were to pursue significant business acquisitions or investment opportunities, or determine to make other significant investments in our business.

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.

In February 2021, we filed a shelf registration statement in order to help facilitate potential public offerings.

On March 1, 2021, we completed an underwritten public offering of 3,680,000 shares of our common stock at a price to the public of $25.00 per share for estimate aggregate net proceeds of $86.4 million, after deducting underwriting discounts and commissions and estimated offering expenses.

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 additional 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.

Operating Activities

Net cash provided by operating activities was $38.4 million and $44.8 million in 2019 and 2020, respectively.

The decrease from 2018 to 2019 was primarily due to changes in working capital due to the timing of receipts and payments.

Accounts receivable at December 31, 2019 , was approximately $2.7 million lower than December 31, 2018 primarily due to improved payment processing by DoD tuition assistance programs.

Accounts payable at December 31, 2019 was approximately $5.6 million lower than December 31, 2018 primarily due to the timing of processing of purchases and payments.

The increase in cash from operating activities from 2019 to 2020 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 December 31, 2020 was approximately $6.3 million higher than at December 31, 2019 primarily due to increased volume with students using TA.

Accounts payable, accrued compensation and benefits, and accrued liabilities at December 31, 2020 were approximately $4.8 million higher than December 31, 2019 primarily due to an increase in incentive compensation accruals, and the timing of expenditures and the processing of payments.

Investing Activities

Net cash used in investing activities was $7.3 million and $4.2 million in 2019, and 2020, respectively.

The decrease from 2018 to 2019 was primarily related to a decrease in technology-related capital expenditures partially offset by capital expenditures related to software development and program development within our APEI Segment and capital expenditures related to the new Indianapolis, Indiana campus in our HCN Segment.

In 2019 , cash used in investing activities for capital expenditures was primarily for software development, including software development related to PAD, furniture and fixtures,

and program development within our APEI Segment and capital expenditures related to the new Indianapolis, Indiana campus in our HCN Segment.

In 2018 , cash used in investing activities for capital expenditures was primarily for computer hardware and software, and software development, including software development related to PAD within our APEI Segment.

The decrease from 2019 to 2020 was primarily related to a decrease in technology-related capital expenditures and capitalized program development costs compared to the prior year, and proceeds received from the sale of real property in our APEI segment.

In 2020, cash used in investing activities for capital expenditures was primarily for software development, computer hardware and software, and program development within our APEI Segment.

In 2019, cash used in investing activities for capital expenditures was primarily for computer hardware and software, and software development, including software development

related to PAD within our APEI Segment, as well as capital expenditures related to the new Indianapolis, Indiana campus in our HCN Segment.

Financing Activities

Net cash used in financing activities was $40.5 million and $15.7 million in 2019 and 2020, respectively.

The increase in cash used in financing activities in 2019 was related to $39.0 million used to repurchase our common stock in accordance with our share repurchase programs 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.

The decrease in cash used in financing activities in 2018 was primarily due to excess tax expense related to stock-based compensation recorded as a component of income tax expense, partially offset by 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.

The decrease in cash used in financing activities in 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 years ended December 31, 2019 and 2020, we used $39.1 million, and $13.6 million, respectively, to repurchase shares of our common stock in accordance with our share repurchase program.

Contractual Obligations

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.

Purchase obligations include contracts with third-party service providers, agreements with consultants, and other future contracts or agreements.

The following table sets forth our future contractual obligations as of December 31, 2020 (in thousands):

Payments Due by Period

More than 5 Years

Total Less than

1 Year 1-3 Years 3-5 Years More than 5 Years

Operating lease obligations $ 12,604 $ 3,054 $ 4,874 $ 2,135 $ 2,541

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Total contractual obligations

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.

$ 20,481 $ 6,876 $ 8,044 $ 3,020 $ 2,541

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.

We do not have off-balance sheet financing arrangements, including any relationships with unconsolidated entities or financial partnerships, including such entities often referred to as structured finance or special purpose entities.

Impact of Inflation

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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-K

Item 7. Management’s Discussion and Analysis