AMERICAN PUBLIC EDUCATION INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS American Public Education, Inc. and Subsidiaries Page American Public Education, Inc. and Subsidiaries: Report of Independent Registered Public Accounting Firm 100 Consolidated Balance Sheets as of December 31, 2019 and 2020 102 Consolidated Statements of Income for the years ended December 31, 2018, 2019 , and 2020 103 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2019 , and 2020 104 Consolidated Statements of Cash Flows for the years ended December 2018, 2019 and 2020 105 Notes to Consolidated Financial Statements 106 99 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of American Public Education, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of American Public Education, Inc. and subsidiaries (the "Company") as of December 31, 2019 and 2020, the related consolidated statements of income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgements. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Goodwill – HCN Reporting Unit – Refer to Notes 2 and 7 to the financial statements Critical Audit Matter Description In connection with the Company’s November 1, 2013 acquisition of Hondros College of Nursing (HCN), the Company 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. The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. Management performs its annual impairment analysis for goodwill on its elected assessment date of October 31, or more frequently, if certain events or circumstances indicate that goodwill might be impaired. In 2020, Management performed its annual assessment as of October 31, 2020. The Company concluded that the fair value of the HCN reporting unit exceeded its carrying value by $13.7 million, or 37.1%. Given the significant estimates and assumptions made by management to estimate the fair value of the HCN reporting unit, and the sensitivity of the estimated fair value to changes in those estimates and assumptions, performing audit procedures to 100 evaluate the reasonableness of management's estimates and assumptions utilized in its impairment analyses, particularly the revenue growth rates and the selection of discount rates, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the revenue growth rates and the selection of discount rates and valuation multiples for the HCN reporting unit included the following, among others: • We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of HCN, such as controls related to management’s revenue growth rates and the selection of the discount rates and valuation multiples. • We evaluated the reasonableness of management’s growth rates by comparing management’s rates with: ◦ historical results; ◦ prior forecasts; ◦ internal communications to the Company’s management and the board of directors; and ◦ forecasted information included in the Company’s press releases as well as in analyst and industry reports of the Company and companies in its peer group. • We considered the impact of changes in the regulatory environment on management’s forecasts. We also considered the impact of the COVID-19 Global Pandemic and inquired of the effects of the pandemic on the Company’s enrollments and forecasts. • We evaluated the impact of changes in management’s forecasts from the October 31, 2020 annual measurement date to December 31, 2020. • With the assistance of our fair value specialists, we evaluated the valuation methodology and discount rates used, including testing the underlying source information and the mathematical accuracy of the calculations, and developing a range of independent estimates and comparing those to the discount rate selected by management. /s/ Deloitte & Touche LLP McLean, VA March 9, 2021 We have served as the Company's auditor since 2018. 101 AMERICAN PUBLIC EDUCATION, INC. Consolidated Balance Sheets As of December 31, 2019 2020 (In thousands) Assets Current assets: Cash, cash equivalents, and restricted cash (Note 2) $ 202,740 $ 227,686 Accounts receivable, net of allowance of $ 6,174 in 2019 and $ 5,983 in 2020. 11,325 17,652 Prepaid expenses 7,087 6,472 Income tax receivable 1,757 — Total current assets 222,909 251,810 Property and equipment, net 78,495 68,434 Operating lease assets, net 11,658 8,743 Investments 10,502 10,495 Goodwill 26,563 26,563 Other assets, net 4,770 4,973 Total assets $ 354,897 $ 371,018 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 3,546 $ 3,757 Accrued compensation and benefits 13,753 15,660 Accrued liabilities 8,270 10,967 Deferred revenue and student deposits 17,426 22,104 Income tax payable — 178 Operating lease liabilities, current 2,283 2,392 Total current liabilities 45,278 55,058 Operating lease liability, long term 9,495 6,455 Deferred income taxes 3,391 2,580 Total liabilities 58,164 64,093 Commitments and contingencies (Notes 8 and 12) Stockholders’ equity: Preferred Stock, $ .01 par value; authorized shares - 10,000 ; no shares issued or outstanding — — Common Stock, $ .01 par value; authorized shares - 100,000 ; 15,178 issued and outstanding in 2019; 14,809 issued and outstanding in 2020 152 148 Additional paid-in capital 190,620 195,597 Retained earnings 105,961 111,180 Total stockholders’ equity 296,733 306,925 Total liabilities and stockholders’ equity $ 354,897 $ 371,018 The accompanying notes are an integral part of these consolidated statements. 102 AMERICAN PUBLIC EDUCATION, INC. Consolidated Statements of Income Year Ended December 31, 2018 2019 2020 (In thousands, except per share amounts) Revenue $ 297,687 $ 286,270 $ 321,785 Costs and expenses: Instructional costs and services 115,280 111,916 122,161 Selling and promotional 57,042 60,028 72,989 General and administrative 74,456 78,082 88,043 Loss on disposals of long-lived assets 882 556 851 Impairment of goodwill — 7,336 — Depreciation and amortization 17,501 15,596 12,984 Total costs and expenses 265,161 273,514 297,028 Income from operations before interest income and income taxes 32,526 12,756 24,757 Interest income, net 2,915 3,908 1,092 Income from operations before income taxes 35,441 16,664 25,849 Income tax expense 9,287 5,187 7,020 Equity investment loss ( 515 ) ( 1,464 ) ( 7 ) Net income $ 25,639 $ 10,013 $ 18,822 Net income per common share: Basic $ 1.56 $ 0.62 $ 1.27 Diluted $ 1.54 $ 0.62 $ 1.25 Weighted average number of shares outstanding: Basic 16,404 16,094 14,876 Diluted 16,634 16,255 15,047 The accompanying notes are an integral part of these consolidated statements. 103 AMERICAN PUBLIC EDUCATION, INC. Consolidated Statements of Stockholders’ Equity (In thousands) Additional Paid-In Capital Retained Earnings Total Stockholders’ Equity Preferred Stock Common Stock Shares Amount Shares Amount Balance as of December 31, 2017 — $ — 16,268 $ 163 $ 180,674 $ 108,569 $ 289,406 Impact of adoption of ASC 606 — — — — — ( 278 ) ( 278 ) Issuance of common stock under employee benefit plans — — 223 2 ( 2 ) — — Deemed repurchased shares of common and restricted stock for tax withholding — — ( 66 ) ( 1 ) ( 1,822 ) — ( 1,823 ) Stock-based compensation — — — — 8,322 — 8,322 Net income — — — — — 25,639 25,639 Balance as of December 31, 2018 — — 16,425 164 187,172 133,930 321,266 Issuance of common stock under employee benefit plans — — 252 3 ( 3 ) — — Deemed repurchased shares of common and restricted stock for tax withholding — — ( 83 ) ( 1 ) ( 2,509 ) — ( 2,510 ) Stock-based compensation — — — — 5,960 — 5,960 Repurchased and retired shares of common stock — — ( 1,416 ) ( 14 ) — ( 37,982 ) ( 37,996 ) Net income — — — — — 10,013 10,013 Balance as of December 31, 2019 — — 15,178 152 190,620 105,961 296,733 Issuance of common stock under employee benefit plans — — 258 2 ( 2 ) — — Deemed repurchased shares of common and restricted stock for tax withholding — — ( 79 ) ( 1 ) ( 2,096 ) — ( 2,097 ) Stock-based compensation — — — — 7,075 — 7,075 Repurchased and retired shares of common stock — — ( 548 ) ( 5 ) — ( 13,603 ) ( 13,608 ) Net income — — — — — 18,822 18,822 Balance as of December 31, 2020 — $ — 14,809 $ 148 $ 195,597 $ 111,180 $ 306,925 The accompanying notes are an integral part of these consolidated statements. 104 AMERICAN PUBLIC EDUCATION, INC. Consolidated Statements of Cash Flows Year Ended December 31, 2018 2019 2020 (In thousands) Operating activities Net income $ 25,639 $ 10,013 $ 18,822 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 17,501 15,596 12,984 Stock-based compensation 7,180 5,960 7,075 Equity investment loss 515 1,464 7 Deferred income taxes ( 917 ) ( 1,973 ) ( 811 ) Loss on disposal of long-lived assets 882 556 851 Impairment of goodwill — 7,336 — Other 302 145 24 Changes in operating assets and liabilities: Accounts receivable, net of allowance for bad debt ( 6,923 ) 2,734 ( 6,327 ) Prepaid expenses ( 560 ) ( 1,149 ) 320 Income tax receivable ( 898 ) ( 859 ) 1,757 Operating lease assets, net — 120 ( 16 ) Other assets 71 550 ( 165 ) Accounts payable 266 ( 5,564 ) ( 86 ) Accrued compensation and benefits 3,298 653 1,907 Accrued liabilities 875 3,672 3,612 Income tax payable ( 1,710 ) — 178 Deferred revenue and student deposits ( 1,342 ) ( 884 ) 4,678 Net cash provided by operating activities 44,179 38,370 44,810 Investing activities Capital expenditures ( 9,430 ) ( 7,255 ) ( 4,926 ) Proceeds from the sale of real property — — 767 Net cash used in investing activities ( 9,430 ) ( 7,255 ) ( 4,159 ) Financing activities Cash paid for repurchase of common/restricted stock ( 1,823 ) ( 40,506 ) ( 15,705 ) Net cash used in financing activities ( 1,823 ) ( 40,506 ) ( 15,705 ) Net increase (decrease) in cash, cash equivalents, and restricted cash 32,926 ( 9,391 ) 24,946 Cash, cash equivalents, and restricted cash at beginning of period 179,205 212,131 202,740 Cash, cash equivalents, and restricted cash at end of period $ 212,131 $ 202,740 $ 227,686 Supplemental disclosures of cash flow information Income taxes paid $ 12,712 $ 8,019 $ 5,898 The accompanying notes are an integral part of these consolidated statements. 105 Notes to Consolidated Financial Statements Note 1. Nature of Business American Public Education, Inc., or APEI, which together with its subsidiaries is referred to as the “Company,” is a provider of online and campus-based postsecondary education to approximately 92,500 students through two subsidiary institutions: • American Public University System, Inc., or APUS, which provides online postsecondary education directed primarily at the needs of the military, military-affiliated, public service and service-minded communities through American Military University, or AMU, and American Public University, or APU. APUS is institutionally accredited by the Higher Learning Commission. • National Education Seminars, Inc., which is referred to herein as Hondros College of Nursing, or HCN, which provides nursing education to students enrolled at five campuses in Ohio, and, beginning in April 2020, to students enrolled at a campus in Indianapolis, Indiana, to serve the needs of the nursing and healthcare communities. In April 2021, HCN will begin offering classes at a new campus in Akron, Ohio. HCN is institutionally accredited by the Accrediting Bureau for Health Education Schools, or ABHES. In March 2020, in response to the novel coronavirus COVID-19 global pandemic, HCN 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. There can be no assurance that HCN will not need to further limit campus interactions or close its campuses in response to the COVID-19 pandemic or as a result of local regulations. The Company’s institutions are licensed or otherwise authorized, or are in the process of obtaining such licenses or authorizations, to offer postsecondary education programs by state authorities to the extent the institutions believe such licenses or authorizations are required, and are certified by the U.S. Department of Education, or ED, to participate in student financial aid programs authorized under Title IV of the Higher Education Act of 1965, as amended, or Title IV programs. The Company’s operations are organized into two reportable segments: • American Public Education Segment, or APEI Segment. This segment reflects the operational activities at APUS, other corporate activities, and minority investments. • Hondros College of Nursing Segment, or HCN Segment. This segment reflects the operational activities of HCN. Note 2. Significant Accounting Policies A summary of the Company’s significant accounting policies follows: Basis of presentation and accounting. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. Principles of consolidation. The accompanying consolidated financial statements include the accounts of APEI and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. Use of estimates. In preparing financial statements in conformity with GAAP, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The Company evaluates these estimates and judgments on an ongoing basis and bases its estimates on experience, current and expected future conditions and various other assumptions that the Company believes are reasonable under the circumstances. Actual results may differ from those estimates under different assumptions or conditions, and the impact of such differences may be material to the Company’s Consolidated Financial Statements. Cash and cash equivalents. The Company considers all short-term highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of demand deposits with financial institutions, money market funds invested in securities backed by the U.S. government, and U.S. Treasury bills. Cash and cash equivalents are Level 1 assets in the fair value reporting hierarchy. Restricted cash. Cash and cash equivalents include funds held for students for unbilled educational services that were received from Title IV programs. As a trustee of these Title IV program funds, the Company is required to maintain and restrict 106 these funds pursuant to the terms of the program participation agreement with ED. Restricted cash on the Company’s Consolidated Balance Sheets as of December 31, 2019 and 2020 was $ 1.3 million and $ 1.2 million, respectively. Accounts receivable. The Company accounts for receivables in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification Subtopic 310, or ASC 310, Receivables. Course tuition is recorded as accounts receivable and deferred revenue at the time students begin a course or term. Students may remit tuition payments at any time or they may elect various other payment options with payment terms extending beyond the start of the course or term. These other payment options include payments by sponsors, financial aid, alternative loans, or tuition assistance programs that remit payments directly to the subsidiary. HCN also offers an extended payment plan option. When a student remits payment after a course or term has begun, accounts receivable is reduced. If payment is made prior to the start of a course or term, the payment is recorded as a student deposit, and the student is provided access to the online classroom when courses start, in the case of APUS, or allowed to start the term, in the case of HCN. If a payment option is confirmed, the student is allowed to start the course or term. Generally, if no receipt is confirmed or payment option secured, the student will be dropped from the online course or not allowed to start the term. Therefore, billed amounts represent charges that have been prepared and sent to students or the applicable third-party payor according to the terms agreed upon in advance. TA is billed by branch of service on a course-by-course basis when a student starts a course, whereas Title IV programs are billed based on the courses included in a student’s term. Billed accounts receivable are considered past due if the invoice has been outstanding for more than 30 days. Allowance for doubtful accounts. The allowance for doubtful accounts is based on management’s evaluation of the status of existing accounts receivable. Among other factors, management considers the age of the receivable, the anticipated source of payment, and historical allowance considerations. Consideration is also given to any specific known risk areas among the existing accounts receivable balances. Recoveries of receivables previously written off are recorded when received. APUS does not charge interest on past due accounts receivable. HCN charges interest on payment plans when a student leaves the payment plan program upon graduation or exits the program. Property and equipment. All property and equipment is carried at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over the estimated useful lives of the assets. Leasehold improvement depreciation is calculated on a straight-line basis over the lesser of the estimated useful life of the asset or the term of the lease. For tax purposes, different methods are used. Maintenance and repairs are expensed as incurred, while other costs are capitalized if they extend the useful life of the asset. The Company’s Partnership At a Distance system, or PAD, is a customized student information and services system used by APUS to manage admissions, online orientation, course registrations, tuition payments, grade reporting, progress toward degrees, and various other functions. Costs associated with this system have been capitalized in accordance with FASB ASC 350-40, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use , and classified as property and equipment. These costs are amortized over the estimated useful life of five years . The Company also capitalizes certain costs for academic program development, and these costs are amortized over an estimated life not to exceed three years . Leases. The Company accounts for lease arrangements in accordance with FASB ASC 842, Leases . The Company determines if there is a lease at inception. Operating lease assets are right-of-use, or ROU assets, which represent the right to use an underlying asset for the lease term. Operating lease liabilities represent the obligation to make lease payments arising from the lease. Operating leases are included in the Operating lease assets, net, and Operating lease liabilities, current and long-term on the Consolidated Balance Sheets as of December 31, 2019 and 2020. These assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. When the lease does not provide an implicit interest rate, the Company uses an incremental borrowing rate based on information available at lease commencement to determine the present value of the lease payments. The ROU asset includes all lease payments and excludes lease incentives. The Company adopted the following practical expedients and elected the following accounting policies related to this standard: • carry forward of historical lease classification; • short-term lease accounting policy election allowing lessees to not recognize ROU assets and lease liabilities for leases with a term of 12 months or less; and • not to separate lease and non-lease components for office space and campus leases. 107 Investments. The Company accounts for its investments in less than majority owned companies in accordance with FASB ASC 323, Investments - Equity Method and Joint Ventures and FASB ASC 321, Investments - Equity Securities. The Company applies ASC 323, Investments - Equity Method and Joint Ventures to investments w hen it has the ability to exercise significant influence but does not control the operating and financial policies of the company. This is generally represented by equity ownership of at least 20 percent but not more than 50 percent. Investments accounted for under the equity method are initially recorded at cost and subsequently adjusted by the Company’s share of equity in income or losses after the date of acquisition. The pro-rata share of the operating results of the investee is reported in the Consolidated Statements of Income as equity investment loss. Investments that do not meet the equity method requirements are accounted for under ASC 321, Investments - Equity Securities, with changes in the fair value of the investment reported in the Consolidated Statements of Income as equity investment loss. The Company periodically evaluates its equity method investment for indicators of other-than-temporary impairments. Factors the Company considers when evaluating for other-than-temporary impairments include the duration and severity of the impairment, the reasons for the decline in value, including the impact of COVID-19, and the potential recovery period. For an investee with impairment indicators, the Company measures fair value on the basis of discounted cash flows or other appropriate valuation methods. If it is probable that the Company will not recover the carrying amount of the investment, the impairment is considered other-than-temporary and recorded in equity investment loss, and the equity investment balance is reduced to its fair value accordingly. In each reporting period, the Company evaluates its cost method investments for observable prices changes. Factors the Company may consider when evaluating an observable price may include significant changes in the regulatory, economic or technological environment, changes in the general market condition, bona fide offers to purchase or sell similar investments, and other criteria, including the impact of the COVID-19 pandemic. Management must exercise significant judgment in evaluating the potential impairment of its equity investments. The Company’s investments are presented on a one-line basis as “Investments” in the accompanying Consolidated Balance Sheets. Additional information regarding the Company’s investments is located in “Note 6. Investments” below, in these 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. The Company accounts for goodwill and indefinite-lived intangible assets in accordance with FASB ASC 350, Intangibles Goodwill and Other, and in 2018 adopted Accounting Standards Update, or ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment . The Company annually assesses goodwill for impairment on October 31 st , or more frequently if events and circumstances indicate that goodwill might be impaired. In connection with the Company’s November 1, 2013 acquisition of HCN, the Company 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. The Company also recorded $ 3.7 million of indefinite-lived intangible assets as part of the HCN acquisition. APEI utilizes the services of an independent valuation firm to estimate fair value of goodwill and indefinite-lived intangibles. In completing their analysis, the valuation firm uses a discounted cash flow analysis as well as other valuation methods. The discounted cash flow 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. During the year ended December 31, 2019, the Company used an independent valuation firm to complete interim assessments of goodwill after qualitative analysis indicated that goodwill at HCN might be impaired. The valuations performed during the first and third quarters of 2019, determined that the fair value was less than the carrying value. As a result, the Company recorded pretax, non-cash impairment charges of $ 7.3 million at HCN during the year ended December 31, 2019. The Company evaluated events and circumstances related to the valuation of goodwill through the year ended December 31, 2020 and determined there were no indicators of impairment at HCN. 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. The Company completed its annual assessment of goodwill as of October 31, 2020 and concluded that HCN’s fair value was more than the carrying value. This annual assessment concluded that the fair value of HCN exceeded the carrying value by approximately $ 13.7 million, or 37.1 %. 108 Indefinite-lived intangible assets are tested at least annually for impairment by comparing the fair value of the asset to the carrying value. The 2019 and 2020 interim and annual testing concluded that 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” below in these Consolidated Financial Statements. Valuation of long-lived assets. The Company accounts for the valuation of long-lived assets under FASB ASC 360, Accounting for the Impairment or Disposal of Long-Lived Assets. ASC 360 requires that long-lived assets and certain identifiable definite-lived intangible assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the long-lived asset is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. Deferred revenue and student deposits. Deferred revenue and student deposits at December 31, 2019 and 2020 was $ 17.4 million and $ 22.1 million, respectively. Deferred revenue includes payments that have been received from students for courses or terms that are still in process and student deposits represent cash received from students prior to the commencement of a course or term and are refundable to the student in the event the student withdrawals before the start of the course or term. Student deposits at December 31, 2019 and 2020 were $ 7.8 million and $ 8.4 million, respectively. Revenue recognition. The Company adopted FASB ASC 606, Revenue from Contracts with Customers, with a date of initial application of January 1, 2018. For periods prior to January 1, 2018, the Company recognized revenue in accordance with the previous accounting standard, ASC 605, Revenue Recognition . Under ASC 606, 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 students, assuming all other revenue recognition criteria are met. For additional information regarding the Company’s adoption of ASC 606 and revenue recognition refer to “Note 4. Revenue” below in these Consolidated Financial Statements. The Company provides scholarships and grants and technology fee grants to certain students to assist them financially and promote their registration. Scholarship assistance and technology fee grants of $ 26.7 million, $ 26.1 million, and $ 45.6 million were provided for the years ended December 31, 2018, 2019 and 2020, respectively, and are included as a reduction to revenue in the accompanying Consolidated Statements of Income. Advertising costs. Advertising costs are expensed as incurred during the year pursuant to FASB ASC 720-35. Advertising expenses for the years ended December 31, 2018, 2019 and 2020 were $ 37.4 million, $ 40.9 million, and $ 51.3 million, respectively, and are included in selling and promotional expenses in the accompanying Consolidated Statements of Income. Income taxes. Deferred taxes are determined using the liability method, whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. As these differences reverse, they will enter into the determination of future taxable income. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment of such changes. Under ASC 740, the Company is required to determine whether uncertain tax positions should be recognized within the Company’s financial statements. The Company recognizes interest and penalties, if any, related to uncertain tax positions in income tax expense. Uncertain tax positions are recognized when a tax position, based solely on its technical merits, is determined more likely than not to not be sustained upon examination. Upon determination, uncertain tax positions are measured to determine the amount of benefit that is greater than 50% likely to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. An uncertain tax position is reversed if it no longer meets the more likely than not threshold of being sustained. There were no material uncertain tax positions as of December 31, 2018, 2019 or 2020. The Company has not recorded any material interest or penalties during any of the years presented. Stock-based compensation. The Company accounts for stock-based compensation in accordance with FASB ASC 718, Stock Compensation , which requires companies to expense share-based compensation based on fair value, and adopted ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting in 109 January 2017. Stock-based payments may include incentive stock options or non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, performance shares, performance units, cash-based awards, other stock-based awards, including unrestricted shares, or any combination of the foregoing. Stock-based compensation cost is recognized as expense generally over a three-year vesting period using the straight-line method for employees and the graded-vesting method for members of the Board of Directors. It is measured using the Company’s closing stock price on the date of the grant. An accelerated one-year period is used to recognize stock-based compensation cost for employees who have reached certain service and retirement eligibility criteria on the date of grant. The fair value of each option award is estimated at the date of grant using a Black-Scholes option-pricing model that uses certain assumptions. The Company makes assumptions with respect to expected stock price volatility based on the average historical volatility of APEI’s common stock. In addition, the Company determines the risk-free interest rate by selecting the U.S. Treasury constant maturity for the same maturity as the estimated life of the option quoted on an investment basis in effect at the time of grant for that business day. Judgment is required in estimating the percentage of share-based awards that are expected to vest, and in the case of performance stock units, or PSUs, the level of performance that will be achieved and the number of shares that will be earned. The Company estimates forfeitures of share-based awards at the time of grant and revises such estimates in subsequent periods if actual forfeitures differ from original estimates. The forfeiture assumption is ultimately adjusted to the actual forfeiture rate. If actual results differ significantly from these estimates, stock-based compensation expense could be higher and have a material impact on the Company’s consolidated financial statements. Estimates of fair value are subjective and are not intended to predict actual future events, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made under ASC 718 . For additional information regarding stock-based compensation, refer to “Note 11. Stockholders’ Equity” in these Consolidated Financial Statements. Income per common share. Basic net income per common share is based on the weighted average number of shares of common stock outstanding during the period. Diluted net income per common share increases the shares used in the per share calculation by the dilutive effects of options, warrants, and restricted stock. Fair value of financial instruments. Cash equivalents are measured and recorded at fair value. The Company also measures certain financial assets at fair value for disclosure purposes, as well as on a nonrecurring basis when they are deemed to be other-than-temporary impairments. Fair value represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset. Assets recorded at fair value are measured and classified in accordance with a three-tier fair value hierarchy based on the observability of the inputs available in the market used to measure fair value: Level 1 - inputs to the valuation techniques that are quoted prices in active markets for identical assets or liabilities; Level 2 - inputs to the valuation techniques that are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly; or Level 3 - inputs to the valuation techniques that are unobservable for the assets or liabilities. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company’s cash, cash equivalents, and restricted cash, accounts receivable, accounts payable and accrued liabilities are all short-term in nature. As such, their carrying amounts approximate fair value and fall within Level 1 of the fair value hierarchy. Concentration of credit risk. The Company maintains its cash, cash equivalents, and restricted cash in bank deposit accounts with various financial institutions. Cash, cash equivalents, and restricted cash balances may exceed the FDIC insurance limit. The Company has historically not experienced any losses in such accounts. Recent Accounting Pronouncements. The Company considers the applicability and impact of all ASUs. ASUs issued but not listed below were assessed and determined to be either not applicable or expected to have minimal impact on its consolidated financial position and/or results of operations. In June 2016, FASB, issued ASU No. 2016-13, Financial Instruments - Credit Losses, which is included in ASC Topic 326, Measurement of Credit Losses on Financial Instruments with certain amendments made to the standard in November 2018 110 through ASU No. 2018-9, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. The new guidance revises the accounting requirements related to the measurement of credit losses and requires entities to measure all expected credit losses for financial assets based on historical experience, current conditions, and reasonable and supportable forecasts about collectability. Assets must be presented in the financial statements at the net amount expected to be collected. The guidance is effective for the fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption was permitted. The Company adopted this standard effective January 1, 2020 using the modified retrospective approach. The adoption of this standard did not have a material impact on its Consolidated Financial Statements. In August 2018, FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract , which amends ASC 350-40 to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software or software licenses. The accounting for the service element of a hosting arrangement that is a service contract is not affected by this amendment. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption was permitted. The Company adopted this standard effective January 1, 2020 using the prospective approach. The adoption of this standard did not have a material impact on its Consolidated Financial Statements. Note 3. Acquisition Activity On October 28, 2020, the Company 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 the Company refers to as the Rasmussen Acquisition. Pursuant to the terms of a Membership Purchase Agreement, or the Rasmussen Agreement, the Company 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 of the Company to be issued at the closing of the Rasmussen Acquisition (or, at the Company’s 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 Higher Learning Commission, and approval by or notices to other regulatory and accrediting bodies. In connection with entering into the Rasmussen Agreement, on October 28, 2020, the Company 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 Lender 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 (together with the Term Facility, the Facilities). Macquarie Capital will act as lead arranger and bookrunner with respect to the Facilities. The Company currently expects to pay up to $ 175 million of the cash consideration for the Rasmussen Acquisition with proceeds from the Facilities. Note 4. Revenue On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective approach. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with previous accounting under ASC 605, Revenue Recognition . The following is a description of principal activities from which the Company generates its revenue. Instructional services . Instructional services revenue includes tuition, technology, and laboratory fees. The Company generally recognizes 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. Tuition is charged by course or term, technology fees are charged to APUS students on a per course basis, and technology and laboratory fees are charged to HCN students on a per term basis, when applicable. Generally, instructional services are billed when a course or term begins and paid within thirty days of the bill date. Graduation fees . APUS graduation fee revenue represents a one-time, non-refundable $ 100 fee per degree, charged to students upon submission of a program graduation application. The fee covers administrative costs associated with completing 111 a review of the student’s academic and financial standing prior to graduation. The Company recognizes revenue once graduation review services are completed. Generally, graduation fees are billed and paid when the student submits the graduation application. Textbook and other course material fees . Textbook and other course materials revenue represent fees related to the sale of textbooks and other course materials to HCN students. Revenue is recognized at the beginning of the term when the textbooks and other course materials fees are billed. Payment is generally received within thirty days of the bill date. Sales tax collected from students on the sale of textbooks and other course materials is excluded from revenue. Other fees . Other fees revenue represents one-time, non-refundable fees such as application, enrollment, transcript, and other miscellaneous fees. Generally, other fees revenue is recognized when the fee is charged to the student, which coincides with the completion of the specific performance obligation to the student. APUS provides an APUS funded tuition grant to support students who are U.S. Military active-duty service members, National Guard members, reservists, military spouses and dependents, and, until January 2020, veterans, as well as a grant to cover the technology fee for students using TA. APUS and HCN also provide grants and scholarships to certain students to assist them financially with their educational goals. The statement of retained earnings at January 1, 2018 was adjusted by $ 278,000 to reflect the after tax impact of the adoption of ASC 606, related to the recognition of graduation fee revenue at APUS. There were no adjustments to any other revenue type as a result of the adoption of ASC 606. For the year ended December 31, 2020, there were no material adverse impacts to revenue, deferred revenue, or accounts receivable due to the COVID-19 pandemic. Disaggregation of Revenue In the following table, revenue, shown net of grants and scholarships, is disaggregated by type of service provided. The table also includes a reconciliation of the disaggregated revenue with the reportable segments: Year Ended December 31, 2018 (In thousands) APEI HCN Intersegment Consolidated Instructional services, net of grants and scholarships $ 258,253 $ 32,468 $ — $ 290,721 Graduation fees 1,069 — — 1,069 Textbook and other course materials — 4,678 — 4,678 Other fees 740 479 — 1,219 Total Revenue $ 260,062 $ 37,625 $ — $ 297,687 Year Ended December 31, 2019 (In thousands) APEI HCN Intersegment Consolidated Instructional services, net of grants and scholarships $ 254,961 $ 25,369 $ ( 108 ) $ 280,222 Graduation fees 1,138 — — 1,138 Textbook and other course materials — 3,650 — 3,650 Other fees 800 460 — 1,260 Total Revenue $ 256,899 $ 29,479 $ ( 108 ) $ 286,270 112 Year Ended December 31, 2020 (In thousands) APEI HCN Intersegment Consolidated Instructional services, net of grants and scholarships $ 283,656 $ 30,346 $ ( 72 ) $ 313,930 Graduation fees 1,336 — — 1,336 Textbook and other course materials — 5,197 — 5,197 Other fees 774 548 — 1,322 Total Revenue $ 285,766 $ 36,091 $ ( 72 ) $ 321,785 Effective January 1, 2019, the APEI Segment began charging 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. Contract Balances and Performance Obligations The Company has no contract assets or deferred contract costs as of December 31, 2020. The Company recognizes a contract liability, or deferred revenue, when a student begins an online course, in the case of APUS, or starts a term, in the case of HCN, and revenue is recognized as described earlier in this footnote. Deferred revenue at December 31, 2019 was $ 17.4 million and includes $ 9.6 million in future revenue that has not yet been earned for courses and terms that are in progress, as well as $ 7.8 million in consideration received in advance for future courses or terms, or student deposits, and represents the Company’s performance obligation to transfer future instructional services to students. Deferred revenue at December 31, 2020 was $ 22.1 million and includes $ 13.7 million in future revenue that has not yet been earned for courses and terms that are in progress as well as $ 8.4 million in student deposits. The Company has elected, as a practical expedient, not to disclose additional information about unsatisfied performance obligations for contracts with students that have an expected duration of one year or less. When the Company begins providing the performance obligations, a contract receivable is created, resulting in accounts receivable on the Company’s Consolidated Balance Sheets. The Company accounts for receivables in accordance with ASC 310, Receivables . The Company uses the portfolio approach, a practical expedient, to evaluate if a contract exists and to assess collectability at the time of contract inception based on historical experience. Contracts are subsequently reviewed for collectability if significant events or circumstances indicate a change. The allowance for doubtful accounts is based on management’s evaluation of the status of existing accounts receivable. Among other factors, management considers the age of the receivable, the anticipated source of payment, and historical allowance considerations. Consideration is also given to any specific known risk areas among the existing accounts receivable balances. Recoveries of receivables previously written off are recorded when received. APUS does not charge interest on past due accounts receivable. HCN charges interest on payment plans when a student leaves the payment plan program upon graduation or exit of the program. Interest earned for the years ended December 31, 2019, and 2020, was approximately $ 15,000 and $ 17,000 , respectively. There was no interest earned for the year ended December 31, 2018. Refund Policies The Company provides a stated period of time during which students may withdraw from a course for APUS, or a term for HCN, without further financial obligation resulting in a refund liability. The refund policy for each subsidiary is as follows: American Public University System APUS’s tuition revenue varies from period to period based on the number of students enrolled, the number of net course registrations, the volume of undergraduate versus graduate registrations, and student payor source. Students may remit tuition payments through the online registration process at any time or they may elect various payment options, including payments by sponsors, alternative loans, financial aid, or TA, which remits payments directly to APUS. If one of the various other payment options is confirmed as secured, the student is allowed to start the course. These other payment options can delay the receipt of payment up until the course starts or longer, resulting in the recording of an account receivable at the beginning of each session. Tuition revenue that has not yet been earned by APUS is presented as deferred revenue in the accompanying Consolidated Balance Sheets. 113 APUS refunds 100 % of tuition for courses that are dropped before the conclusion of the first seven days of a course. The Company does not recognize revenue for dropped courses. After a course begins, APUS uses the following refund policy: 8-Week Course- Tuition Refund Schedule Withdrawal Date Tuition Refund Percentage Before or During Week 1 100 % During Week 2 75 % During Weeks 3 through 4 50 % During Weeks 5 through 8 No Refund 16-Week Course- Tuition Refund Schedule Withdrawal Date Tuition Refund Percentage Before or During Week 1 100 % During Week 2 100 % During Weeks 3 through 4 75 % During Weeks 5 through 8 50 % During Weeks 9 through 16 No Refund Students affiliated with certain organizations may have an alternate refund policy. If a student withdraws during the academic term, APUS calculates the portion of instructional services and technology fees that are non-refundable based on the tuition refund policy and recognizes it as revenue in the period the withdrawal occurs. Hondros College of Nursing HCN’s tuition revenue varies from period to period based on the number of students enrolled and the programs in which they are enrolled. Students may remit tuition payments at any time, or they may elect various payment options that can delay receipt of payment up until the term starts or longer. These other payment options include payments by sponsors, financial aid, and alternative loans. Beginning July 1, 2018, HCN began offering its students an extended payment plan option designed to assist students with educational costs consisting of tuition, textbooks, and fees. The extended payment plan option is only available after all other student financial assistance has been applied to those costs. The payment plan requires monthly payments while the student is enrolled in a program and extends for a period up to six months after the last day of attendance or graduation. To the extent interest is applied, it is generally fixed and does not accrue until the student departs the program or graduates. The extended payment plan option does not impose any origination fees. Borrowers are advised about the terms of the loans and counseled to use all federal funding options. In addition, 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 less the amount of all eligible financial aid resources. The grant is designed to limit a student’s monthly payment to $ 200 through an award of up to $ 200 per month or $ 600 per term after consideration of financial aid, employer tuition reimbursement, and other financial resources. HCN awarded approximately $ 0.2 million of institutional grants during the year ended December 31, 2020. Generally, financial aid is awarded prior to the start of the term and requests for authorization of disbursement begin in the second week of the term. Tuition revenue that has not yet been earned by HCN is presented as deferred revenue in the accompanying Consolidated Balance Sheets. HCN’s refund policy for Ohio campuses complies with the rules of the Ohio State Board of Career Colleges and Schools and is applicable to each term. For a course with an on-campus or other in-person component, the date of withdrawal is determined by a student’s last attended day of clinical offering, laboratory session, or lecture. For an online course, the date of withdrawal is determined by a student’s last submitted assignment in the course. HCN uses the following refund policies: HCN’s refund policy for students at its Ohio campuses is as follows: 114 Quarterly Term Withdrawal Date Tuition Refund Percentage Before first full calendar week of the quarter 100 % During first full calendar week of the quarter 75 % During second full calendar week of the quarter 50 % During third full calendar week of the quarter 25 % During fourth full week of the quarter No Refund HCN’s refund policy for students at its Indianapolis campus is as follows: Withdrawal Date Tuition Refund Percentage Before first calendar week of quarter 100 % During first full calendar week of the quarter 90 % During third full calendar week of the quarter 75 % During sixth full calendar week of the quarter 50 % During ninth full calendar week of the quarter 25 % After the ninth week of the quarter No Refund If a student withdraws during the term, HCN calculates the portion of tuition that is non-refundable based on the tuition refund policy and recognizes it as revenue in the period the withdrawal occurs. Refund Liability APUS uses the portfolio approach and applies the expected value method to determine if a refund liability exists. This requires management judgment and the use of estimates and historical data to assess the likelihood and magnitude of a revenue reversal due to a refund liability. Due to the short duration of the courses, and the refund policy described above, any uncertainty regarding a student’s withdrawal is resolved in a short time period. Based on measurement and analysis, the Company determined that a significant reversal in the cumulative amount of revenue recognized is not expected. The Company includes this estimate in the transaction price. At December 31, 2019 and 2020, there was approximately $ 9,000 and $ 28,800 , respectively, of refund liabilities for APUS included in deferred revenue. APUS updates the measurement of the refund liability at the end of each reporting period for changes in expectations, and if the reversal becomes significant, recognizes corresponding adjustments to revenue. Because each HCN term coincides with the Company’s fiscal quarter period, there is no refund liability as of December 31, 2019 and December 31, 2020. 115 Note 5. Property and Equipment Property and equipment consisted of the following: As of December 31, Useful Life 2019 2020 (in thousands) Land — $ 9,244 $ 9,019 Building and building improvements 15 - 39 years 54,592 53,309 Leasehold improvements up to 15 years 1,536 1,569 Office equipment 5 years 911 587 Computer equipment 3 years 22,090 20,227 Furniture and fixtures 7 years 9,035 8,447 Other capital assets 5 years 128 150 Software development 5 years 87,774 89,320 Program development 3 years 13,103 13,370 198,413 195,998 Accumulated depreciation and amortization 119,918 127,564 $ 78,495 $ 68,434 The Company disposed of long-lived assets resulting in a loss of $ 0.9 million, $ 0.6 million, and $ 0.9 million during the years ended December 31, 2018, 2019, and 2020, respectively. The disposals and losses were primarily related to assets no longer in use. The losses on long-lived assets are included as loss on disposals of long-lived assets in these Consolidated Financial Statements. For the year ended December 31, 2020, the Company’s APEI Segment sold certain excess real property located in Charles Town, West Virginia, for a net sales price of $ 0.8 million, resulting in a loss on disposals of long-lived assets of $ 0.4 million. The loss was included in loss on disposals of long-lived assets in these Consolidated Financial Statements. During the years ended December 31, 2018, 2019, and 2020, the Company recorded depreciation expense of $ 16.9 million, $ 15.3 million and $ 13.0 million, respectively. In addition, the Company recorded amortization expense related to other assets of $ 0.6 million and $ 0.3 million, during the years ended December 31, 2018 and 2019, respectively. There was no amortization expense during the year ended December 31, 2020 due to assets being fully amortized. Note 6. Investments On September 30, 2012, the Company made a $ 6.8 million investment in preferred stock, treated as in-substance common stock, of NWHW Holdings, Inc., or NWHW Holdings, a holding company that operates an information technology training company, New Horizons Worldwide, Inc., or New Horizons, representing approximately 20 % of the fully diluted equity of NWHW Holdings. The Company initially accounted for its investment in New Horizons under ASC 323, Investments - Equity Method and Joint Ventures . Therefore, the Company recorded the investment at cost and recognized its share of earnings or losses in the investee in the periods for which they were reported with a corresponding adjustment in the carrying amount of the investment. During the first quarter of 2019, the Company determined that it no longer qualified to account for its investment in NWHW Holdings under ASC 323 because the Company is unable to exercise significant influence over operating and financial policies of NWHW Holdings; therefore, the Company elected to account for the investment under ASC 321, Equity Investments . Under ASC 321, for each reporting period, the Company completes a qualitative assessment considering impairment indicators to evaluate whether the investment is impaired. Earnings or losses that were previously recorded remain as part of the carrying amount of the investment. The carrying value of the investment was approximately $ 5.2 million, as of December 31, 2019 and 2020, respectively. On February 20, 2013, the Company made a $ 4.0 million investment in preferred stock of Fidelis Education, Inc., or Fidelis Education, representing approximately 22 % of its fully diluted equity. On February 1, 2016, the Company made an additional $ 950,000 investment in preferred stock increasing its investment in Fidelis Education to approximately 23 % of its fully diluted equity. Fidelis Education offers a learning relationship management platform that improves education advising and 116 career mentoring services offered to students as they pursue college degrees. In connection with the investment, the Company is entitled to certain rights, including the right to representation on the Board of Directors of Fidelis Education. The Company accounts for its investment in Fidelis Education under ASC 323, Investments - Equity Method and Joint Ventures . Therefore, the Company recorded the investment at cost and recognizes its share of earnings or losses in the investee in the periods for which they are reported with a corresponding adjustment in the carrying amount of the investment. Under ASC 323, for each reporting period, the Company completes a qualitative assessment considering impairment indicators to evaluate whether the investment is impaired. Earnings or losses that were previously recorded remain as part of the carrying amount of the investment. The carrying value of the investment is approximately $ 1.1 million, as of December 31, 2019 and 2020. On April 2, 2014, the Company made a $ 1.5 million investment in preferred stock of Second Avenue Software, Inc., or Second Avenue Software, representing approximately 26 % of its fully diluted equity. Second Avenue Software is a game-based education software company that develops software on a proprietary and “work-for-hire” basis. The Company initially accounted for its investment in Second Avenue Software under ASC 323, Investments - Equity Method and Joint Ventures . Therefore, the Company recorded the investment at cost and recognized its share of earnings or losses in the investee in the periods for which they were reported with a corresponding adjustment in the carrying amount of the investment. During the first quarter of 2019, the Company determined that it no longer qualified to account for its investment in Second Avenue Software under ASC 323 because the Company is no longer able to exercise significant influence over operating and financial policies of Second Avenue Software; therefore, the Company has elected to account for the investment under ASC 321, Equity Investments . Under ASC 321, for each reporting period, the Company completes a qualitative assessment considering impairment indicators to evaluate whether the investment is impaired. The carrying value of the investment is approximately $ 0.8 million as of December 31, 2019 and 2020. On December 21, 2015, the Company made a $ 3.5 million investment in preferred stock of RallyPoint, an online social network for members of the military, representing approximately 14 % of its fully diluted equity. The Company accounts for its investment in RallyPoint using ASC 321, Investments - Equity Securities . On October 24, 2017, the Company made an additional $ 0.3 million investment in preferred stock of Rally Point. Subsequent to the additional investment, the Company’s fully diluted ownership was unchanged. Under ASC 321, for each reporting period, the Company completes a qualitative assessment considering impairment indicators to evaluate whether the investment is impaired. The carrying value of the investment was approximately $ 3.3 million as of December 31, 2019 and 2020. The Company evaluated its equity method investment for impairment as of December 31, 2019 and 2020, including a review of any impacts related to the COVID-19 pandemic, and determined the investment was no t impaired. During the year ended December 31, 2018, the Company recorded an impairment charge of approximately $ 0.1 million on its equity method investment. The Company evaluated its cost method investments for impairment as of December 31, 2019 and 2020, including a review of any impacts related to the COVID-19 pandemic, and determined no ne of the investments were impaired. During the year ended December 31, 2018, the Company recorded impairment charges of approximately $ 0.5 million on its cost method investments. The aggregate carrying amount of the Company’s investments accounted for under ASC 321, Investments - Equity Securities , presented on its Consolidated Balance Sheets on a one-line basis as “Investments”, was approximately $ 9.4 million as of December 31, 2019 and 2020. Note 7. Goodwill and Intangible Assets In connection with its November 1, 2013 acquisition of HCN, the Company applied ASC 805, Business Combinations, using the acquisition method of accounting. The Company recorded $ 38.6 million of goodwill, representing the excess of the purchase price over the amount assigned to the net assets acquired and the fair value assigned to identified intangible assets, and recorded $ 8.1 million of identified intangible assets. The Company accounts for goodwill and indefinite-lived intangible assets in accordance with FASB ASC 350, Intangibles Goodwill and Other, and in 2018 adopted ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment . The Company annually assesses goodwill for impairment on October 31 st , or more frequently if events and circumstances, including a review of any impacts related to the COVID-19 pandemic, indicate that goodwill might be impaired. Goodwill impairment testing consists of an optional qualitative assessment as well as a quantitative test. The quantitative test compares the fair value of the reporting unit to its carrying value. If the carrying value of the reporting unit is greater than zero and its fair value is greater than its carrying amount, there is no impairment. If the carrying value is greater than the fair value, the difference between the two values is recorded as an impairment. 117 In addition to goodwill, HCN recorded identified intangible assets with an indefinite useful life in the aggregate amount of $ 3.7 million, which includes trade names, accreditation, licensing and Title IV, and affiliate agreements, and recorded $ 4.4 million of identified intangible assets with a definite useful life. At the acquisition date, the useful life assigned to each type of intangible asset with a definite useful life was as follows: Useful Life Student contracts and relationships 6 years Curricula 3 years Non-compete agreements 5 years As of December 31, 2019 and 2020, all identified intangible assets with a useful life were fully amortized. During the year ended December 31, 2019, as a result of circumstances that included HCN’s continued underperformance against revised 2019 internal targets and overall 2019 financial performance, the Company completed interim goodwill impairment tests during the first and third quarters. 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 intangible assets. As a result, the Company recorded a pretax, non-cash charges of $ 7.3 million to reduce the carrying value of its goodwill in the HCN Segment during 2019. There was no impairment of goodwill or the intangible assets during the year ended December 31, 2020. The Company engaged an independent valuation firm to assist with the valuation and determination of the fair value of HCN for both assessments. The independent valuation firm weighted the results of four different valuation methods: (1) discounted cash flows; (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 were discounted by an estimated risk weighted average cost of capital, which was intended to reflect the overall level of inherent risk of HCN. Under the guideline company method, valuation metrics from other education companies were used to determine the value. Under the comparable transaction method, pricing terms from other transactions in the higher education market were used to determine the value. Under the private equity method, pricing terms from private equity transactions were used to determine the value. Values derived under the four valuation methods were then weighted to estimate HCN’s enterprise value. The goodwill impairment charges recorded in 2019 eliminated the difference between the fair value of goodwill and the carrying value of goodwill. As of October 31, 2019 and 2020, the Company completed its annual assessment of goodwill and concluded that HCN’s fair value was more than the carrying value; consequently, there was no impairment. 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 %. Changes in the carrying amount of goodwill by reportable segment during the years ended December 31, 2019 and 2020 are as follows (in thousands): APEI Segment HCN Segment Total Goodwill Goodwill as of December 31, 2018 $ — $ 33,899 $ 33,899 Impairment — ( 7,336 ) ( 7,336 ) Goodwill as of December 31, 2019 $ — $ 26,563 $ 26,563 Impairment — — — Goodwill as of December 31, 2020 $ — $ 26,563 $ 26,563 Intangible assets, included in Other Assets on the Consolidated Balance Sheets in these Consolidated Financial Statements, consist of the following as of December 31, 2019 and 2020 (in thousands): 118 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Finite-lived intangible assets Curricula $ 405 $ 405 $ — Non-compete agreements 86 86 — Student contracts and relationships 3,870 3,870 — Total finite-lived intangible assets 4,361 4,361 — Indefinite-lived intangible assets Trade name 1,998 — 1,998 Accreditation, licensing and Title IV 1,686 — 1,686 Affiliation agreements 37 — 37 Total indefinite-lived intangible assets 3,721 — 3,721 Total intangible assets $ 8,082 $ 4,361 $ 3,721 Finite-lived intangible assets were amortized in a manner that reflects the estimated economic benefit of the intangible assets. Curricula and non-compete agreements were amortized on a straight-line basis. Student contracts and relationships were amortized using an accelerated method. Determining the fair value of HCN requires judgment and the use of significant estimates and assumptions, including fluctuations in enrollments, revenue growth rates, EBITDA margins, discount rates, and future market conditions, among others. Given the current competitive and regulatory environment, the impact of COVID-19, and the uncertainties regarding the related impact on HCN’s business, there can be no assurance that the estimates and assumptions made for purposes of the Company’s interim and annual goodwill impairment tests will prove to be accurate predictions of the future. If the Company’s assumptions are not realized, the Company may record additional goodwill impairment charges in future periods. It is not possible at this time to determine if any such future impairment charge would result or whether such charge would be material. Note 8. Leases The Company has operating leases for office space and campus facilities. Some leases include options to terminate or extend for one or more years. These options are included in the lease term when it is reasonably certain that the option will be exercised. In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) . The Company adopted the standard effective January 1, 2019 using the cumulative-effect adjustment transition method, which applies the provisions of the standard at the effective date without adjusting the comparative periods presented. This standard requires entities to recognize most operating leases on their balance sheets as right-of-use assets, or ROU assets, with a corresponding lease liability, in addition to disclosing certain key information about leasing arrangements. The adoption of this standard resulted in the recognition of operating lease ROU assets and corresponding lease liabilities of approximately $ 12.1 million on the Consolidated Balance Sheet as of January 1, 2019. There was no impact to the Company’s net income or liquidity as a result of the adoption of this ASU. Operating lease assets are ROU assets, which represent the right to use an underlying asset for the lease term. Operating lease liabilities represent the obligation to make lease payments arising from the lease. Operating leases are included in the Operating lease assets, net, and Operating lease liabilities, current and long-term on the Consolidated Balance Sheets as of December 31, 2019 and 2020. These assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. When the lease does not provide an implicit interest rate, the Company uses an incremental borrowing rate based on information available at lease commencement to determine the present value of the lease payments. The ROU asset includes all lease payments and excludes lease incentives. Lease expense for operating leases is recognized on a straight-line basis over the lease term. There are no variable lease payments. Lease expense for the years ended December 31, 2019 and 2020 was approximately $ 2.6 million and $ 2.9 million, respectively. These costs are primarily related to long-term operating leases, but also include amounts for short-term leases with terms greater than 30 days that are not material. Cash paid for amounts included in the present value of operating lease liabilities during the years ended December 31, 2019 and 2020 was $ 2.8 million and $ 2.9 million, respectively, and is included in operating cash flows. 119 The following tables present information about the amount and timing of cash flows arising from the Company’s operating leases as of December 31, 2020 (dollars in thousands): Maturity of Lease Liabilities Lease Payments 2021 2,791 2022 2,465 2023 1,709 2024 928 2025 498 2026 and beyond 1,742 Total future minimum lease payments $ 10,133 Less imputed interest ( 1,286 ) Present value of operating lease liabilities $ 8,847 Balance Sheet Classification Operating lease liabilities, current $ 2,392 Operating lease liabilities, long-term 6,455 Total operating lease liabilities $ 8,847 Other Information Weighted average remaining lease term (in years) 4.91 Weighted average discount rate 5.1 % The APEI Segment leases corporate and administrative office space in Maryland and Virginia under operating leases that expire through May 2022. Lease expense related to the APEI Segment’s operating leases was $ 0.5 million in each of the years ended December 31, 2019 and 2020, respectively. HCN leases administrative office space in suburban Columbus, Ohio, and leases six campuses located in the suburban areas of Cincinnati, Cleveland, Columbus, Dayton, and Toledo, Ohio, and a campus in Indianapolis, Indiana, under operating leases that expire through June 2029. Lease expenses related to the HCN Segment’s operating leases were $ 2.1 million, and $ 2.4 million for the years ended December 31, 2019 and 2020, respectively. A majority of the leases require the payment of taxes, maintenance, insurance and certain other operating expenses applicable to the leased premises. In December 2020 HCN entered into a lease agreement for a new campus location in Akron, Ohio. The lease term begins in April 2021 for an 87 month period expiring in June 2028, with four additional optional five year renewal terms. The total value of the minimum rental payments for the initial term of the lease is approximately $ 2.5 million. 120 Note 9. Income Taxes The components of income tax expense were as follows (in thousands): Year Ended December 31, 2018 2019 2020 Current income tax expense: Federal $ 8,034 $ 5,803 $ 5,685 State 2,170 1,425 2,146 10,204 7,228 7,831 Deferred tax expense: Federal ( 776 ) ( 1,766 ) ( 608 ) State ( 141 ) ( 275 ) ( 203 ) ( 917 ) ( 2,041 ) ( 811 ) Income Tax Expense $ 9,287 $ 5,187 $ 7,020 The tax effects of principal temporary differences are as follows (in thousands): As of December 31, 2019 2020 Deferred tax assets Operating lease liability $ 2,912 $ 2,187 Allowance for doubtful accounts 1,528 1,487 Restricted stock 1,232 1,573 Accrued vacation and severance 660 695 Investment 304 564 Other 232 596 Stock option compensation expense 1 63 Total gross deferred tax assets 6,869 7,165 Valuation allowance — ( 536 ) Total net deferred tax assets 6,869 6,629 Deferred tax liabilities Income tax deductible capitalized software development costs ( 3,330 ) ( 2,468 ) Operating lease asset ( 2,882 ) ( 2,161 ) Property and equipment ( 1,670 ) ( 1,867 ) Prepaid expenses ( 1,607 ) ( 1,294 ) Goodwill and intangibles ( 771 ) ( 1,419 ) Total deferred tax liabilities ( 10,260 ) ( 9,209 ) Deferred tax liabilities, net $ ( 3,391 ) $ ( 2,580 ) Income tax expense differs from the amount of tax determined by applying the United States Federal income tax rates to pretax income and loss due to the application of state apportionment laws, permanent tax differences, and other temporary differences (in thousands): 121 Year Ended December 31, 2018 2019 2020 Amount % Amount % Amount % Tax expense at statutory rate $ 7,320 21.00 % $ 3,192 21.00 % $ 5,427 21.00 % State taxes, net 1,575 4.51 % 852 5.60 % 1,156 4.48 % Permanent differences 433 1.24 % 244 1.61 % 491 1.90 % Equity-based compensation benefits ( 126 ) ( 0.36 ) % 371 2.44 % ( 305 ) ( 1.18 ) % Post-employment benefits — — % 345 2.27 % ( 67 ) ( 0.26 ) % Uncertain tax position 154 0.44 % 93 0.61 % 49 0.19 % Valuation allowance — — % 213 1.40 % 287 1.11 % Other ( 69 ) ( 0.19 ) % ( 123 ) ( 0.80 ) % ( 18 ) ( 0.07 ) % $ 9,287 26.64 % $ 5,187 34.13 % $ 7,020 27.17 % Permanent differences in the table above are mainly attributable to executive and stock compensation, minority investment losses including other-than-temporary impairment charges, nondeductible meals and entertainment expenses, and non-deductible employer contributions to the American Public Education, Inc. Employee Stock Purchase Plan. There were no material uncertain tax positions as of December 31, 2018, 2019, or 2020. Interest and penalties associated with uncertain income tax positions would be classified as income tax expense. The Company has not recorded any material interest or penalties during any of the years presented. The Company is subject to U.S. federal income taxes as well as income tax of multiple state jurisdictions. For U.S. federal and state tax purposes, tax years 2017-2019 remain open to examination. Note 10. Other Employee Benefits The Company has established a tax deferred 401(k) retirement plan that provides retirement benefits to its eligible employees. Participants may elect to contribute up to 60 % of their gross annual earnings not to exceed ERISA and IRS limits. The plan provides for Company discretionary profit sharing contributions at matching percentages. Employees immediately vest 100 % in all salary reduction contributions and employer contributions. The Company made discretionary contributions to the plan of $ 3.7 million, $ 3.7 million, and $ 4.2 million for the years ended December 31, 2018, 2019, and 2020, respectively. In November 2007, the Company adopted the American Public Education, Inc. Employee Stock Purchase Plan, or the ESPP, which was implemented effective July 1, 2008 with quarterly enrollment periods. Eligible participants may only enter the plan and establish their withholdings at the start of an enrollment period. Participating employees may withdraw from the plan and end payroll deductions at any time up to five days before the share purchase date and funds will be returned to them. Under the ESPP, participating employees may purchase shares of the Company’s common stock, subject to certain limitations, at 85 % of its fair market value on the last day of the quarterly period. The total value of contributions per participant may not exceed $ 21,000 annually or the value of the common stock purchased per participant cannot exceed $ 25,000 . There were initially 100,000 shares of common stock available for purchase by participating employees under the ESPP. On June 13, 2014, the Company’s stockholders approved an amendment to the ESPP to increase the number of shares of the Company’s common stock available for issuance under the plan by 100,000 shares, extend the term of the ESPP to March 7, 2024, and make other administrative changes. On May 15, 2020, the Company’s stockholders further amended the ESPP to increase the number of shares of the Company’s common stock available for issuance under the plan by an additional 100,000 shares and extend the term of the ESPP to May 15, 2030. Shares purchased in the open market for issuance to employees pursuant to the plan for the years ended December 31, 2018, 2019, and 2020 were as follows: 122 Purchase Date Shares Common Stock Fair Value Purchase Price Compensation Expense March 31, 2018 1,931 $ 42.15 $ 35.83 $ 12,209 June 30, 2018 1,661 $ 43.15 $ 36.68 $ 10,751 September 30, 2018 2,779 $ 32.17 $ 27.34 $ 13,410 December 31, 2018 2,475 $ 28.46 $ 24.19 $ 10,566 Total/Weighted Average 8,846 $ 35.37 $ 30.07 $ 46,936 March 31, 2019 2,905 $ 30.74 $ 26.13 $ 13,395 June 30, 2019 2,465 $ 29.35 $ 24.94 $ 10,873 September 30, 2019 4,511 $ 22.34 $ 18.99 $ 15,116 December 31, 2019 3,339 $ 27.39 $ 23.28 $ 13,723 Total/Weighted Average 13,220 $ 26.77 $ 22.75 $ 53,107 March 31, 2020 3,922 $ 23.93 $ 20.34 $ 14,078 June 30, 2020 2,737 $ 29.60 $ 25.16 $ 12,152 September 30, 2020 4,015 $ 28.19 $ 23.96 $ 16,977 December 31, 2020 3,550 $ 30.48 $ 25.91 $ 16,231 Total/Weighted Average 14,224 $ 27.86 $ 23.68 $ 59,438 123 Note 11. Stockholders’ Equity Stock Incentive Plans The American Public Education, Inc. 2017 Omnibus Incentive Plan, or 2017 Incentive Plan, became effective on May 12, 2017, or the Effective Date. Upon effectiveness of the 2017 Incentive Plan, the Company ceased making awards under the American Public Education, Inc. 2011 Omnibus Incentive Plan, or the 2011 Incentive Plan. The 2017 Incentive Plan allows the Company to grant up to 1,675,000 shares, as well as shares of the Company’s common stock that were available for issuance under the 2011 Incentive Plan as of the Effective Date. In addition, the number of shares of common stock available under the 2017 Incentive Plan was increased from time to time by the number of shares subject to outstanding awards granted under the 2011 Incentive Plan that terminate by expiration, forfeiture, cancellation or otherwise without issuance of such shares following the Effective Date. On May 15, 2020, the Company’s stockholders approved an amendment to the 2017 Incentive Plan to increase the number of shares available for issuance thereunder by 1,425,000 and to extend the term of the 2017 Plan to May 15, 2030, as well as to clarify limitations on repricing. Grants under the 2017 Incentive Plan generally vest over a period of three years and the Company recognizes compensation expense over that period. The 2017 Incentive Plan includes a provision that allows individuals who have reached certain service and retirement eligibility criteria on the date of grant an accelerated service period of one year . The Company recognizes compensation expense for these individuals over the accelerated period. As of December 31, 2020, all shares subject to outstanding awards are under the 2017 Incentive Plan. Restricted Stock and Restricted Stock Unit Awards The fair value of the Company’s restricted stock and restricted stock unit awards is calculated based on the closing price of the Company’s stock on the date of grant. The estimated fair value of these awards is recognized as stock-based compensation expense and is expensed over the vesting period using the straight-line method for Company employees and the graded-vesting method for members of the Board of Directors. The Company recognizes the estimated fair value of performance-based restricted stock units by assuming the satisfaction of any performance-based objectives at the “target” level, which is the most probable outcome determined for accounting purposes at the time of grant and multiplying the corresponding number of shares earned based upon such achievement by the closing price of the Company’s stock on the date of grant. To the extent performance goals are not met, compensation cost is not ultimately recognized against the goals and, to the extent previously recognized, compensation cost is reversed. The Company also estimates forfeitures of share-based awards at the time of grant and revises such estimates in subsequent periods if actual forfeitures differ from original estimates. The table below sets forth the restricted stock and restricted stock unit activity for the year ended December 31, 2018: Number of Shares Weighted Average Grant Price and Fair Value Non vested, December 31, 2017 461,262 $ 20.91 Shares granted 302,781 27.00 Vested shares ( 222,069 ) 21.33 Shares forfeited ( 51,632 ) 22.94 Non vested, December 31, 2018 490,342 $ 24.23 The table below sets forth the restricted stock and restricted stock unit activity for the year ended December 31, 2019: Number of Shares Weighted Average Grant Price and Fair Value Non vested, December 31, 2018 490,342 $ 24.23 Shares granted 333,635 29.48 Vested shares ( 255,918 ) 22.98 Shares forfeited ( 21,119 ) 26.86 Non vested, December 31, 2019 546,940 $ 27.81 124 The table below sets forth the restricted stock and restricted stock unit activity for the year ended December 31, 2020: Number of Shares Weighted Average Grant Price and Fair Value Non vested, December 31, 2019 546,940 $ 27.81 Shares granted 396,976 24.94 Vested shares ( 307,937 ) 26.95 Shares forfeited ( 109,179 ) 26.56 Non vested, December 31, 2020 526,800 $ 26.43 There were 35,688 , 37,738 , and 48,434 shares of restricted stock or restricted stock units excluded in the computation of diluted net income per common share for the years ended December 31, 2018, 2019, and 2020, respectively. At December 31, 2020, total unrecognized compensation expense in the amount of $ 8.7 million relates to non-vested restricted stock, restricted stock units, and stock options, which will be recognized over a weighted average period of 1.8 years. As a result of termination of employment, the Company accepted the following common shares for forfeiture: 48,814 shares for $ 1,118,842 in 2018, 17,825 shares for $ 488,974 in 2019, and 73,808 shares for $ 1,855,784 in 2020. Option Awards The fair value of each option award is estimated at the date of grant using a Black-Scholes option-pricing model. The Company makes assumptions with respect to expected stock price volatility based on the average historical volatility of the Company’s common stock. In addition, the Company determines the risk-free interest rate by selecting the U.S. Treasury constant maturity for the same maturity as the estimated life of the option , quoted on an investment basis in effect at the time of grant for that business day. Estimates of fair value are subjective and are not intended to predict actual future events, and subsequent events are not necessarily indicative of the reasonableness of the original estimates of fair value made under FASB ASC Topic 718. Prior to 2012, the Company issued a mix of stock options and restricted stock, but ceased issuing options until 2019. Options currently outstanding vest ratably over a period of three years and expire in ten years from the date of grant. The table below sets forth stock option activity for the year ended December 31, 2018: Number of Options Weighted Average Exercise Price Weighted Average Contractual Life (years) Aggregate Intrinsic Value (in thousands) Outstanding, December 31, 2017 109,616 $ 37.52 Options granted — — Awards exercised — — Options forfeited ( 109,616 ) 37.52 Outstanding, December 31, 2018 — $ — $ — Exercisable, December 31, 2018 — $ — $ — 125 The table below sets forth stock option activity for the year ended December 31, 2019: Number of Options Weighted Average Exercise Price Weighted Average Contractual Life (years) Aggregate Intrinsic Value (in thousands) Outstanding, December 31, 2018 — $ — Options granted 43,134 23.77 10 Awards exercised — — Options forfeited — — Outstanding, December 31, 2019 43,134 $ 23.77 9.73 $ 156 Exercisable, December 31, 2019 — $ — $ — The table below sets forth stock option activity for the year ended December 31, 2020: Number of Options Weighted Average Exercise Price Weighted Average Contractual Life (years) Aggregate Intrinsic Value (in thousands) Outstanding, December 31, 2019 43,134 $ 23.77 9.73 $ 156 Options granted 17,370 33.11 10 $ — Awards exercised — — Options forfeited — — Outstanding, December 31, 2020 60,504 $ 26.45 8.96 $ 264 Exercisable, December 31, 2020 14,378 $ 23.77 8.73 $ 88 The following table sets forth the assumptions used in calculating the fair value at the date of grant of each option award granted: Year Ended December 31, 2018 2019 2020 Expected volatility — % 47.37 % 48.74 % Expected dividends — % — % — % Expected term, in years 0 10 10 Risk-free interest rate — % 1.74 % 0.68 % Weighted-average fair value of options granted during the year $ — $ 13.91 $ 18.99 There were no anti-dilutive stock options excluded from the calculation of diluted net income per common share for the year ended December 31, 2018. For the years ended December 31, 2019, and 2020, there were 43,134 , and 60,504 anti-dilutive stock options excluded from the calculation of diluted net income per share, respectively. Stock-Based Compensation Expense For the years ended December 31, 2018, 2019, and 2020, the Company recognized stock-based compensation expense as follows: 126 Year Ended December 31, 2018 2019 2020 (In thousands) Instructional costs and services $ 1,610 $ 1,570 $ 1,535 Selling and promotional 512 766 1,007 General and administrative 5,058 3,624 4,533 Total stock-based compensation expense $ 7,180 $ 5,960 $ 7,075 The Company recognized income tax benefits of $ 1.9 million, $ 2.0 million, and $ 1.9 million from vested restricted stock and restricted stock units for the years ended December 31, 2018, 2019, and 2020, respectively. Repurchase During the year ended December 31, 2018, the Company did no t repurchase shares of the Company’s common stock, par value $ 0.01 per share, other than shares deemed to have been repurchased to satisfy employee minimum tax withholding requirements in connection with the vesting of restricted stock grants. During the year ended December 31, 2019, the Company repurchased 1,416,304 shares of the Company’s common stock, par value $ 0.01 per share. The chart and footnotes below provide the detail as to the Company’s repurchases during the period. Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)(3) January 1, 2019 — $ — — — $ 148,008 January 1, 2019 – January 31, 2019 — — — 283,876 148,008 February 1, 2019 – February 28, 2019 — — — 283,876 148,008 March 1, 2019 – March 31, 2019 — — — 283,876 148,008 April 1, 2019 – April 30, 2019 — — — 284,252 148,008 May 1, 2019 – May 31, 2019 129,973 29.38 129,973 299,060 31,181,393 June 1, 2019 – June 30, 2019 197,488 29.03 197,488 299,060 25,448,317 July 1, 2019 – July 31, 2019 218,699 30.79 218,699 299,436 18,714,574 August 1, 2019 – August 31, 2019 220,000 28.16 220,000 299,436 12,519,374 September 1, 2019 – September 30, 2019 199,921 24.12 199,921 352,104 7,697,280 October 1, 2019 – October 31, 2019 229,849 22.34 229,849 352,480 2,562,453 November 1, 2019 – November 30, 2019 110,374 23.21 110,374 352,480 673 December 1, 2019 – December 31, 2019 110,000 27.23 110,000 352,480 22,004,700 Total 1,416,304 $ 26.83 1,416,304 352,480 $ 22,004,700 127 During the year ended December 31, 2020, the Company repurchased 547,563 shares of the Company’s common stock, par value $ 0.01 per share. The chart and footnotes below provide the detail as to the Company’s repurchases during the period. Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) (3) January 1, 2020 — $ — — — $ 22,004,700 January 1, 2020 – January 31, 2020 198,300 27.10 198,300 284,723 16,630,770 February 1, 2020 – February 29, 2020 179,263 24.51 179,263 284,723 12,237,034 March 1, 2020 – March 31, 2020 170,000 22.59 170,000 284,723 8,396,734 April 1, 2020 – April 30, 2020 — — — 284,723 8,396,734 May 1, 2020 – May 31, 2020 — — — 299,843 8,396,734 June 1, 2020 – June 30, 2020 — — — 312,816 8,396,734 July 1, 2020 – July 31, 2020 — — — 317,924 8,396,734 August 1, 2020 – August 31, 2020 — — — 331,841 8,396,734 September 1, 2020 – September 30, 2020 — — — 331,841 8,396,734 October 1, 2020 – October 31, 2020 — — — 331,841 8,396,734 November 1, 2020 – November 30, 2020 — — — 331,841 8,396,734 December 1, 2020 – December 31, 2020 — — — 331,841 8,396,734 Total 547,563 $ 24.85 547,563 331,841 $ 8,396,734 (1) On December 9, 2011, our Board of Directors approved a stock repurchase program for our common stock, under which we could annually purchase up to the cumulative number of shares issued or deemed issued in that year under our equity incentive and stock purchase plans. Repurchases may be made from time to time in the open market at prevailing market prices or in privately negotiated transactions based on business and market conditions. The stock repurchase program does not obligate us to repurchase any shares, may be suspended or discontinued at any time, and is funded using our available cash. (2) On May 2, 2019, the Company’s Board of Directors authorized the repurchase of up to $ 35.0 million of the Company’s shares of common stock, and on December 5, 2019, the Board approved an additional authorization of up to $ 25.0 million of shares. Subject to market conditions, applicable legal requirements, and other factors, the repurchases may be made from time to time in the open market or in privately negotiated transactions. The authorization does not obligate the Company to acquire any shares, and purchases may be commenced or suspended at any time based on market conditions and other factors the Company deem appropriate. The Company may purchase shares at management’s discretion in the open market, in privately negotiated transactions, in transactions structured through investment banking institutions, or a combination of the foregoing. The Company may also, from time to time, enter into Rule 10b5-1 plans to facilitate repurchases of shares under this authorization. The amount and timing of repurchases are subject to a variety of factors, including liquidity, cash flow, stock price and general business and market conditions. The Company has no obligation to repurchase shares and may modify, suspend or discontinue the repurchase program at any time. The authorization under this program is in addition to the Company’s repurchase program under which we may annually purchase up to the cumulative number of shares issued or deemed issued in that year under our equity incentive and stock purchase plan. (3) During the years ended December 31, 2018, 2019, and 2020, the Company was deemed to have repurchased 66,088 , 83,214 , and 78,847 shares of common stock forfeited by employees to satisfy minimum tax-withholding requirements in connection with the vesting of restricted stock grants. These repurchases were not part of the stock repurchase programs authorized by our Board of Directors as described in footnotes 1 and 2 of this table. 128 Note 12. Contingencies The Company accrues for costs associated with contingencies including, but not limited to, regulatory compliance and legal matters when such costs are probable and can be reasonably estimated. Liabilities established to provide for contingencies are adjusted as further information develops, circumstances change, or contingencies are resolved. The Company bases these accruals on management’s estimate of such costs, which may vary from the ultimate costs and expenses, associated with any such contingency. From time to time the Company may be involved in legal matters in the normal course of its business. Note 13. Concentration APUS students utilize various payment sources and programs to finance their education expenses, including funds from: Department of Defense, or DoD, tuition assistance programs, or TA, education benefit programs administered by the U.S. Department of Veteran’s Affairs, or VA, and federal student aid from Title IV programs, as well as cash and other sources. Reductions in or changes to TA, VA education benefits, Title IV programs and other payment sources could have a significant impact on the Company’s operations. As of December 31, 2020 approximately 61 % of APUS students self-reported that they served in the military on active duty at the time of initial enrollment. Active duty military students generally take fewer courses per year on average than non-military students. A summary of APEI Segment revenue derived from students by primary funding source for the years ended December 31, 2018, 2019, and 2020 is as follows: Year Ended December 31, 2018 2019 2020 DoD tuition assistance programs 37 % 39 % 43 % VA education benefits 23 % 23 % 22 % Title IV programs 26 % 25 % 21 % Cash and other sources 14 % 13 % 14 % A summary of HCN Segment revenue derived from students by primary funding source for the years ended December 31, 2018, 2019, and 2020 is as follows: Year Ended December 31, 2018 2019 2020 Title IV programs 82 % 80 % 82 % Cash and other sources 16 % 18 % 16 % VA education benefits 2 % 2 % 2 % A reduction in, or change to, any of these programs could have a significant impact on the Company’s operations and financial condition. Note 14. Segment Information The Company has two operating segments that are managed in the following reportable segments: • American Public Education Segment, or APEI Segment, and • Hondros College of Nursing Segment, or HCN Segment. In accordance with FASB ASC Topic 280, Segment Reporting , the chief operating decision-maker has been identified as the Chief Executive Officer. The Chief Executive Officer reviews operating results to make decisions about allocating resources and assessing performance for APEI and HCN. 129 A summary of financial information by reportable segment is as follows (in thousands): Year Ended December 31, 2018 2019 2020 Revenue American Public Education Segment $ 260,062 $ 256,899 $ 285,766 Hondros College of Nursing Segment 37,625 29,479 36,091 Intersegment elimination — ( 108 ) ( 72 ) Total Revenue $ 297,687 $ 286,270 $ 321,785 Depreciation and Amortization American Public Education Segment $ 16,175 $ 14,659 $ 12,364 Hondros College of Nursing Segment 1,326 937 620 Total Depreciation and Amortization $ 17,501 $ 15,596 $ 12,984 Income (loss) from operations before interest income and income taxes American Public Education Segment $ 28,561 $ 23,522 $ 24,034 Hondros College of Nursing Segment 3,965 ( 10,768 ) 722 Intersegment elimination — 2 1 Total income from operations before interest income and income taxes $ 32,526 $ 12,756 $ 24,757 Interest Income, Net American Public Education Segment $ 2,867 $ 3,866 $ 1,075 Hondros College of Nursing Segment 48 42 17 Total Interest Income, Net $ 2,915 $ 3,908 $ 1,092 Income Tax Expense (Benefit) American Public Education Segment $ 8,267 $ 7,754 $ 6,827 Hondros College of Nursing Segment 1,020 ( 2,567 ) 193 Total Income Tax Expense $ 9,287 $ 5,187 $ 7,020 Capital Expenditures American Public Education Segment $ 8,793 $ 6,479 $ 4,724 Hondros College of Nursing Segment 637 776 202 Total Capital Expenditures $ 9,430 $ 7,255 $ 4,926 Effective January 1, 2019, the APEI Segment began charging 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. A summary of the Company’s consolidated assets by reportable segment is as follows (in thousands): As of December 31, 2019 2020 Assets American Public Education Segment $ 305,896 $ 322,544 Hondros College of Nursing Segment 49,001 48,474 Total Assets $ 354,897 $ 371,018 130 Note 15. Subsequent Events 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 other estimated offering expenses. Note 16. Quarterly Financial Summary (unaudited) The following unaudited consolidated interim financial information presented should be read in conjunction with other information included in the Company’s Consolidated Financial Statements. In the opinion of management, the following unaudited consolidated financial information reflects all adjustments necessary for the fair presentation of the results of interim periods. Historical results are not necessarily indicative of the results of operations to be expected for future periods. The following tables set forth selected unaudited quarterly financial information for each of the Company’s last eight quarters: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter (in thousands, except per share data) 2019 Revenue $ 73,441 $ 70,560 $ 67,888 $ 74,381 Income (loss) from operations before income taxes 2,435 6,813 ( 1,894 ) 9,310 Net income (loss) 1,011 4,921 ( 1,638 ) 5,719 Net income (loss) per common share: Basic $ 0.06 $ 0.30 $ ( 0.10 ) $ 0.37 Diluted $ 0.06 $ 0.30 $ ( 0.10 ) $ 0.37 2020 Revenue $ 74,616 $ 82,127 $ 79,133 $ 85,909 Income from operations before income taxes 3,395 9,220 3,429 9,805 Net income 2,420 6,689 2,642 7,071 Net income per common share: Basic $ 0.16 $ 0.45 $ 0.18 $ 0.48 Diluted $ 0.16 $ 0.45 $ 0.18 $ 0.47 131 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.