Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with the consolidated financial statements and the related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements that are based on management’s current expectations, estimates, and projections about our business and operations, and involves risks and uncertainties. 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.
OVERVIEW
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 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. Additional information regarding our subsidiary institutions and their regulation is included in the “Business - Company Overview” and “Business - Regulatory Environment” sections of this Annual Report.
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. 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:
• American Public Education Segment, or APEI Segment. This segment reflects the operational activities of APUS, other corporate activities, and minority investments.
• Hondros College of Nursing Segment, or HCN Segment. 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, 2020 Compared to Year Ended December 31, 2019.”
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.
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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, 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.
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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 to 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, including technology-related expenditures, and reallocate other resources. 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. For more information about the risks related to these challenges please see “Risk Factors - Risks Related to Attracting and Retaining Students.”
Increased Costs and Expenses; Our Initiatives. 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;
• updates to the admissions process and procedures;
• implementing more stringent satisfactory academic progress standards;
• changing tuition costs and payment options;
• changing fund disbursement methods; and
• implementing alternative learning delivery methods.
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, 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. 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. We also expect operating and capital expenditures to increase in future periods as we accelerate the investment in and refreshment of our information technology systems.
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. 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. Not all of our information
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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.
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 effective January 1, 2019. 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.
HCN Accreditation. HCN is institutionally accredited by ABHES, a national accrediting agency recognized by ED. 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. 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 . We regularly evaluate and review our costs and expenses. As part of that effort, in the first quarter of 2018, APUS initiated a voluntary reduction in force program for employees with more than eight years of service. The program resulted in a reduction of 48 employees, representing approximately 5% of APUS’s non-faculty workforce at that time. Our APEI Segment recorded expenses for termination benefits related to the workforce reduction in the first quarter of 2018 in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 420, Exit or Disposal Cost Obligations . 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 and $2.7 million in 2018 and 2019, respectively. These cost savings do not include expenses associated with employee severance benefits. There is no certainty that the voluntary program, or any other expense reduction initiative, will have the intended benefits of reducing costs and expenses over the long-term, or whether there will be adverse impacts because of the loss of valuable employees.
In August 2019, after an extensive search, Angela Selden was appointed Chief Executive Officer of APEI, effective September 23, 2019. APEI’s former Chief Executive Officer, Dr. Wallace E. Boston, continued to serve as President of APUS until his retirement on August 12, 2020. Dr. 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 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
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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.
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. 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 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 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. In October 2019, APUS announced the following changes for undergraduate and master’s course registrations made on or after January 1, 2020:
• The tuition for undergraduate level courses would increase by $15 per credit hour to $285 per credit hour.
• The tuition for master’s level courses would increase by $20 per credit hour to $370 per credit hour.
• The technology fee would increase from $50 to $65 per course.
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’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.
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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. APUS’s low tuition rates mean that its students are not required to take on as much debt as they might at another institution. 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 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 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, 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. 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.
We cannot predict whether APUS’s and HCN’s tuition and fee increase or APUS’s new programs will be successful, or how they will impact our results of operations, cash flows, or financial condition.
Bad Debt Expense. 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 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 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 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. We are unable to predict whether and to what extent the Navy will continue to impose limitations on TA program approvals as a result of limited funding. Furthermore, in March 2020, the Navy announced a new “Education Strategy for Seapower 2020” that is intended to be a new comprehensive education strategy. As part of this strategy, the Navy, in
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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. APUS’s Title IV compliance audit for the year ended December 31, 2016 identified a finding related to return of Title IV funds calculations that were not properly computed. 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 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 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 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. Our institutions operate in a highly regulated industry. For more information on the regulations to which our institutions are subject, please refer to the “Business - Company Overview” and “Business - Regulatory Environment” section of this Annual Report. Such regulations may impact our financial results in a way that we cannot predict and may have an adverse impact on our financial condition.
Our Key Financial Results Metrics
Revenue
When reviewing our revenue, we evaluate the following components: net course registrations and enrollment, tuition rate, net tuition and other fees.
Net course registrations and enrollment. For financial reporting and analysis purposes, APUS measures its student population in terms of aggregate course enrollments, or net course registrations. 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 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, at
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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 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 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 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 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. Prior to the 2015 increase, APUS had not raised undergraduate tuition for 15 years or graduate tuition in four years. HCN’s tuition and fees are also designed to be affordable and competitive when compared to the costs of similar institutions offering the same level of flexibility, accessibility, and student experience.
Net tuition. Tuition revenue varies from period to period based on the aggregate number of students attending courses and the number of courses they are attending during the period, the student payor source, the mix of programs that students are attending during the period, as well as the number of students starting courses each month during the period and the timing of the start of a course each month or term. Tuition revenue is adjusted to reflect amounts for students who withdraw from a course in the month or term the withdrawal occurs. We also provide tuition grants and scholarships to certain students to assist them financially with their educational goals. The cost of these grants and scholarships is reported as a reduction of tuition revenue in the period incurred for purposes of establishing net tuition revenue.
Other fees. In addition to tuition, APUS charges a per course technology fee. Prior to January 2020, the technology fee per course was $50, and for registrations made on or after January 2020 the technology fee per course was increased to $65. APUS may further alter this fee in the future. 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 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.
Costs and Expenses
We categorize our costs and expenses in the following categories: instructional costs and services expenses; selling and promotional expenses; general and administrative expenses; loss on disposals of long-lived assets; impairment of goodwill; and depreciation and amortization.
Instructional costs and services expenses. Instructional costs and services expenses are directly attributable to the educational services our institutions provide to their students. Instructional costs and services expenses include salaries and benefits for full-time faculty, administrators, and academic advisors, and costs associated with part-time faculty. 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 new and existing academic programs. At HCN, instructional costs and services expenses also includes operating expenses directly associated with HCN’s campus operations, including rent.
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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 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 continue to increase.
General and administrative expenses. 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.
Loss on disposals of long-lived assets . Loss on disposals of long-lived assets is the difference between the long-lived assets’ residual value and their book value at the time of the assets’ disposition or abandonment.
Impairment of goodwill . Impairment of goodwill recognizes the difference between the carrying value of goodwill and the fair value of goodwill.
Depreciation and amortization. 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, 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
Interest income, net consists primarily of interest income earned on cash and cash equivalents, net of any interest expense.
Equity Investment Income/Loss
Equity investment income/loss consists of our proportional share of after-tax income or losses attributable to our equity investment as well as the loss from any other-than-temporary impairment charges, which represents the difference between the carrying value of and fair value of the investment.
Critical Accounting Policies and Use of Estimates
The discussion of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. During the preparation of these financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition and goodwill and indefinite-lived intangible assets. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our Consolidated Financial Statements.
The following discussion of accounting policies is intended to supplement the accounting policies presented in “Note 2. Significant Accounting Policies” included in our Consolidated Financial Statements.
Revenue Recognition. Our revenue is primarily derived from the sale of instructional services and various fees. Instructional services revenue includes tuition, technology, and laboratory fees. 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
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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. For additional information regarding our revenue recognition refer to “Note 4. Revenue” included in our Consolidated Financial Statements.
Goodwill and indefinite-lived intangible assets. Goodwill represents the excess of the purchase price of an acquired business over the amount assigned to the assets acquired and liabilities assumed. 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. We also recorded $3.7 million of indefinite-lived intangible assets as part of the HCN acquisition.
We annually assess goodwill and indefinite-lived intangible assets for impairment on October 31 st , or more frequently if events and circumstances indicate that goodwill might be impaired. If the carrying value exceeds fair value, the asset is considered impaired and is reduced to fair value. In assessing goodwill impairment, we may choose to initially evaluate qualitative factors to determine if it is more likely than not that the fair value is less than its carrying amount. If the qualitative assessment is not conclusive, then the impairment analysis for goodwill is performed using a quantitative approach.
The process of evaluating goodwill and indefinite-lived intangibles for impairment is subjective and requires significant judgment at many points during the analysis. When performing an optional qualitative analysis, we consider many factors including: general economic conditions, industry and market conditions, certain cost factors, financial performance and key business drivers, long-term operating plans, and potential changes to significant assumptions used in the most recent fair value analysis. We utilize the services of an independent third-party valuation firm to complete the quantitative analysis and estimate fair value. In completing their analysis, the valuation firm weights the results of four different valuation methods: (1) discounted cash flow; (2) guideline company; (3) guideline transaction for comparable transactions; and (4) guideline transaction for private equity transactions. Under the discounted cash flow method, cash flows are discounted by an estimated risk weighted average cost of capital, which is intended to reflect the overall level of inherent risk of HCN. Under the guideline company method, valuation metrics from other education companies are used to determine the value. Under the comparable transaction method, pricing terms from other transactions in the higher education market are used to determine the value. Under the private equity method, pricing terms from private equity transactions are used to determine the value. Values derived under the four valuation methods are then weighted to estimate HCN’s enterprise value. The analysis includes significant estimates and assumptions from management, including revenue growth rates, operating margins and future economic and market conditions, among others. Additionally, the valuation firm’s analysis includes significant assumptions with respect to discount rates and assumed royalty rates. If the fair value is less than the carrying value, the asset is reduced to fair 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, 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. The valuations determined that the fair value was less than the carrying value. As a result, we recorded pretax, non-cash impairment charges of $7.3 million.
The 2019 and 2020 annual testing also concluded the indefinite-lived assets were not impaired.
For additional details regarding goodwill and indefinite-lived intangible assets refer to “Note 7. Goodwill and Intangible Assets” included in our Consolidated Financial Statements.
For additional information on our critical accounting policies, including information regarding estimates and assumptions, refer to “Note 2. Significant Accounting Policies” included in our Consolidated Financial Statements.
Recent Accounting Pronouncements
We consider the applicability and impact of all Accounting Standards Updates, or ASUs. See “Note 2 Significant Accounting Policies” included in our Consolidated Financial Statements for information relating to our discussion of the effects of recent accounting pronouncements.
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Results of Operations
The following table sets forth statements of income data as a percentage of revenue for each of the years ended:
2019 2020
Revenue 100.0 % 100.0 %
Costs and expenses:
Instructional costs and services 39.1 % 38.0 %
Selling and promotional 21.0 % 22.7 %
General and administrative 27.3 % 27.3 %
Loss on disposals of long-lived assets 0.2 % 0.3 %
Impairment of goodwill 2.5 % — %
Depreciation and amortization 5.4 % 4.0 %
Total costs and expenses 95.5 % 92.3 %
Income from operations before interest income and income taxes 4.5 % 7.7 %
Interest income, net 1.4 % 0.3 %
Income from operations before income taxes 5.9 % 8.0 %
Income tax expense 1.8 % 2.2 %
Equity investment loss (0.5) % — %
Net income 3.6 % 5.8 %
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Revenue
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; a $3.5 million increase
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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 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 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 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 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 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 . The loss on disposal of long-lived assets was $0.9 million in 2020, compared to $0.6 million in 2019.
Impairment of goodwill. 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%. 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 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.
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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):
Year Ended December 31,
2019 2020
Instructional costs and services $ 1,570 $ 1,535
Selling and promotional 766 1,007
General and administrative 3,624 4,533
Total stock-based compensation expense $ 5,960 $ 7,075
Interest income
Interest income was $1.1 million in 2020, compared to income of $3.9 million in 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 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. There was no material impact related to ASU No. 2016-09 for 2020.
Equity Investment Loss
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
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
The table below details our operating results by reportable segment for the periods indicated (in thousands):
Year Ended December 31,
2019 2020 $ Change % Change
Revenue
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) %
Total Revenue $ 286,270 $ 321,785 $ 35,515 12.4 %
Income (loss) from operations before interest income and income taxes
American Public Education Segment
$ 23,522 $ 24,034 $ 512 2.2 %
Hondros College of Nursing Segment
(10,768) 722 11,490 NM
Intersegment elimination
2 1 (1) (50.0) %
Total income from operations before interest income and income taxes $ 12,756 $ 24,757 $ 12,001 94.1 %
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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.
APEI Segment
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.
HCN Segment
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 $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.
We expect to continue to fund our costs and expenses through cash generated from operations. Based on our current level of operations, we believe that our cash flow from operations and our existing cash and cash equivalents will provide adequate funds for ongoing operations and planned capital expenditures for the foreseeable future. We expect operating expenditures to increase in future periods as we accelerate the investment in and modernization of our information technology systems and increase marketing and other expenditures. For the year ended December 31, 2019, we incurred approximately $2.1 million to evaluate and invest in replacements and upgrades to our information technology systems, including replacements of our learning management and customer relationship systems, and to inform the scope and duration of the larger overall information technology transformation program. For the 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
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system. 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. 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 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 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
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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 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 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
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
Purchase obligations 7,877 3,822 3,170 885 —
Total contractual obligations
$ 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, including such entities often referred to as structured finance or special purpose entities.
Impact of Inflation
We do not believe that inflation had a material impact on our results of operations in 2019 or 2020. There can be no assurance that future inflation will not have an adverse impact on our operating results and financial condition.