AMERICAN PUBLIC EDUCATION INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations In this Quarterly Report on Form 10-Q, or Quarterly Report, “we,” “our,” “us,” “the Company” and similar terms refer to American Public Education, Inc., or “APEI,” and its subsidiary institutions collectively unless the context indicates otherwise. The following discussion of our historical results of operations and our liquidity and capital resources should be read in conjunction with the Consolidated Financial Statements and related notes that appear elsewhere in this Quarterly Report and the audited financial information and related notes, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations and other disclosures, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, or our Annual Report. Forward-Looking Statements This Quarterly Report contains forward-looking statements intended to be covered by the safe harbor provisions for forward-looking statements in Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We may 15 use words such as “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “potentially,” “will,” or “may,” or other words that convey uncertainty of future events, conditions, circumstances, or outcomes to identify these forward-looking statements. Forward-looking statements in this Quarterly Report include, without limitation, statements regarding: • actions by the Department of Defense, or DoD, or branches of the United States Armed Forces, including actions related to the disruption and suspension of DoD tuition assistance programs; • our expectations regarding the effects of and our response to the COVID-19 pandemic, including impacts on business operations and our financial results and our ability to comply with regulations related to emergency relief and the possible reduction in demand for online education or nursing education as the pandemic abates; • our proposed acquisition of Rasmussen University and the financing thereof; • changes to and expectations regarding our student enrollment, net course registrations, and the composition of our student body, including the pace of such changes; • our ability to maintain, develop, and grow our technology infrastructure to support our student body; • our conversion of prospective students to enrolled students and our retention of active students; • our ability to update and expand the content of existing programs and develop new programs to meet emerging student needs and marketplace demands, and our ability to do so in a cost-effective manner or on a timely basis; • our plans for, marketing of, and initiatives at, our institutions; • our ability to leverage our investments in support of our initiatives, students, and institutions; • our maintenance and expansion of our relationships and partnerships and the development of new relationships and partnerships; • federal appropriations and other budgetary matters, including government shutdowns; • our ability to comply with the extensive regulatory framework applicable to our industry, as well as state law and regulations and accrediting agency requirements; • our ability to undertake initiatives to improve the learning experience and attract students who are likely to persist; • changes in enrollment in postsecondary degree-granting institutions and workforce needs; • the competitive environment in which we operate; • our cash needs and expectations regarding cash flow from operations; • our ability to manage and influence our bad debt expense; • our ability to manage, grow, and diversify our business and execute our business initiatives and strategy; and • our financial performance generally. Forward-looking statements are based on our beliefs, assumptions, and expectations of our future performance, taking into account information currently available to us and are not guarantees of future results. There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. Risks and uncertainties involved in forward-looking statements include, among others: • the loss of our ability to receive funds under DoD tuition assistance programs or the reduction, elimination, or suspension of tuition assistance; • the effects, duration and severity of the ongoing COVID-19 pandemic and the actions we have taken or may take in response, particularly at Hondros College of Nursing and as a result of working remotely, and any adverse effects on demand for online education or nursing education as impacts of the pandemic abate; • our dependence on the effectiveness of our ability to attract students who persist in our institutions’ programs; • our inability to effectively market our programs; • adverse effects of changes our institutions make to improve the student experience and enhance their ability to identify and enroll students who are likely to succeed; • our inability to maintain strong relationships with the military and maintain enrollments from military students; • our failure to comply with regulatory and accrediting agency requirements or to maintain institutional accreditation; • our loss of eligibility to participate in Title IV programs or ability to process Title IV financial aid; • our need to successfully adjust to future market demands by updating existing programs and developing new programs; • our dependence on and need to continue to invest in our technology infrastructure; and • risks related to the acquisition of Rasmussen University, including: ◦ our inability to complete the acquisition on the anticipated timeline, or at all; ◦ our reliance on a debt commitment letter, or alternative financing, to fund a portion of the purchase price for the acquisition; ◦ the significant transaction and integration costs we have incurred and expect to incur in connection with the acquisition; 16 ◦ risks related to the integration of Rasmussen’s business and our ability to realize the expected benefits of the acquisition; and ◦ that Rasmussen may have liabilities that are not known to us. Forward-looking statements should be considered in light of these factors and the factors described elsewhere in this Quarterly Report, including in the “Risk Factors” section, in the “Risk Factors” section of our Annual Report, and in our various filings with the Securities and Exchange Commission, or the SEC. It is important that you read these factors and the other cautionary statements made in this Quarterly Report as being applicable to all related forward-looking statements wherever they appear in this Quarterly Report. If any of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance, or achievements may differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. You should also read the more detailed description of our business in our Annual Report when considering forward-looking statements. We caution readers not to place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report. We undertake no obligation to publicly update any forward-looking statements except as required by law. Overview Background We are a provider of online and on-campus postsecondary education to approximately 93,800 students through two subsidiary institutions. Our subsidiary institutions offer programs designed to prepare individuals for productive contributions to their professions and society, and to offer opportunities that may advance students in their current professions or help them prepare for their next career. Our subsidiary institutions are licensed or otherwise authorized by state authorities, or are in the process of obtaining such licenses or authorizations, to offer postsecondary education programs to the extent the institutions believe such licenses or authorizations are required, and are certified by the United States Department of Education, or ED, to participate in student financial aid programs authorized under Title IV of the Higher Education Act of 1965, as amended, or Title IV programs. On March 11, 2020, the World Health Organization declared the novel coronavirus COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. The pandemic did not materially impact our results of operations during the three month period ended March 31, 2021. However, the duration and intensity of the outbreak, and therefore any future impact, remains uncertain. In March 2020, we implemented our business continuity plan and employees transitioned to a remote workforce at APEI and American Public University System, Inc., or APUS, and Hondros College of Nursing, or 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 while continuing to offer courses in a virtual setting for those that prefer remote course learning. In addition, in October 2020, HCN began temporarily expanding certain campuses through short-term leases of additional space to be used as lab space in order to accommodate student demand in compliance with COVID-related public health measures that effectively limit the number of students in each lab class. Ongoing and future impacts of the COVID-19 pandemic may cause additional disruption of educational services provided to our students, cause a disruption in revenue, lead to increased absenteeism in our workforce, increase costs for HCN to continue to deliver courses in person and online, be considered a triggering event to evaluate the value of HCN goodwill, lead to an impairment of APEI investments, impact the recoverability of receivables, and lead to an increase in bad debt expense and cohort default rates, among other impacts. In addition, we believe demand for our online education programs will moderate and could decrease and demand for our nursing education programs could also moderate or decrease as the pandemic abates. For more information on the potential risks related to COVID-19, please refer to our Annual Report and to the section entitled “Risk Factors” in this Quarterly Report. Our wholly-owned operating subsidiary institutions include the following: • American Public University System, Inc. provides online postsecondary education to approximately 91,500 adult learners. APUS is an accredited university system with a history of serving the academic needs of the military, military-affiliated, public service and service-minded communities through two brands: American Military University, or AMU, and American Public University, or APU. APUS offers 130 degree programs and 112 certificate programs in diverse fields of study, with a particular focus on those relevant to today’s job market and emerging fields. Fields of study include traditional academics, such as business administration, health science, technology, criminal justice, education and liberal arts, as well as public service-focused fields of study such as national security, military studies, intelligence, and homeland security. APUS has institutional accreditation from the Higher Learning Commission, or HLC, and several of its academic programs 17 have specialized accreditation granted by industry governing organizations. A comprehensive evaluation by HLC for reaffirmation of accreditation is due for the 2020-2021 academic year, and a related site visit occurred in April 2021. The preliminary report is expected in May 2021. APUS relies on the ability of the Armed Forces to process service members’ participation in TA programs, and from time to time changes to processes have impacted the ability of service members’ to participate in the TA programs. The Army previously announced that it would transition from its legacy system, GoArmyEd, to a new system, ArmyIgnitED, that soldiers could use to request TA. On February 12, 2021, after February enrollments for APUS were principally determined, the Army deactivated GoArmyEd and announced that access to online TA requests would be suspended until the launch of ArmyIgnitED on March 8, 2021. During the suspension, soldiers, Army education counselors, and education institutions such as APUS did not have access to the portal and soldiers could not apply for TA. APUS had prepared for this anticipated suspension by focusing more on outreach to soldiers prior to the suspension and took the suspension into account when considering anticipated results of operations for the quarter ended March 31, 2021. On March 8, 2021, the Army launched and then due to technical difficulties immediately suspended ArmyIgnitED. The Army announced on March 18, 2021 that TA-eligible soldiers could register for courses beginning on or after March 8, 2021 and then retroactively apply for TA for those courses once the TA system was online in ArmyIgnitED. The Army later modified that guidance, first by announcing that courses beginning on or after April 23, 2021 would not be eligible for retroactive TA, and then by rescinding that announcement by reinstating retroactive TA eligibility for those courses. While soldiers can continue to directly register for courses with the expectation that they can retroactively apply for TA, on May 2, 2021, the Army announced that in order to test functionality, ArmyIgnitED would undergo a limited user test for certain units and bases for a two-week period ending on May 19, 2021. However, there is no assurance when the new portal will be fully operational, or that if operational it will work correctly or efficiently or will not have other impacts on soldiers’ ability to participate in the TA programs or receive funds under those programs. While the transition did not adversely affect revenue for the quarter ended March 31, 2021, Army enrollments at APUS subsequent to March 31, 2021 have been adversely impacted by this transition. We expect the continued disruption to Army TA and resulting decreases in Army registrations to have an adverse impact on revenue for the quarter ending June 30, 2021, which could worsen if the Army again announces that soldiers will not be able to retroactively seek TA. For information on potential risks associated with APUS, please refer to the section entitled “Risk Factors” in our Annual Report and this Quarterly Report. • National Education Seminars, Inc., which we refer to as Hondros College of Nursing, provides nursing education to approximately 2,300 students at six campuses in Ohio, including a campus in Akron that opened in April 2021, and a campus in Indianapolis, Indiana, to serve the needs of local nursing and healthcare communities, addressing the persistent supply-demand gap of nurses that is evident nation-wide. In addition to Akron, HCN’s Ohio campuses are located in the suburban areas of Cincinnati, Cleveland, Columbus, Dayton, and Toledo. HCN is institutionally accredited by the Accrediting Bureau for Health Education Schools, or ABHES, and HCN’s Ohio locations and programs are approved by the Ohio State Board of Career Colleges and Schools. In February 2021, ABHES granted HCN continued accreditation through February 2027 for all programs at all campuses. HCN’s Ohio Diploma in Practical Nursing, or PN, and Associate Degree in Nursing, or ADN, Programs are approved by the Ohio Board of Nursing, or OBN, and the PN Program is accredited by the National League for Nursing Commission for Nursing Education Accreditation, or NLN CNEA. HCN is authorized to offer instruction in Indiana by the Indiana Board for Proprietary Education/Indiana Commission for Higher Education. The Indiana State Board of Nursing granted initial accreditation and authorized the admission of the first cohort of students. NLN CNEA granted HCN accreditation at its Indianapolis campus effective January 13, 2021. For information on potential risks associated with HCN, please refer to the section entitled “Risk Factors” in our Annual Report and this Quarterly Report. Acquisition of Rasmussen University On October 28, 2020, we entered into a definitive agreement to acquire Rasmussen University, a nursing- and health sciences-focused institution serving over 18,000 students at its 24 campuses across six states and online, which we refer to as the Rasmussen Acquisition. Pursuant to the terms of a Membership Interest Purchase Agreement, or the Rasmussen Agreement, we agreed to purchase from FAH Education, LLC all of the units of membership interests in Rasmussen LLC, Rasmussen University’s parent company, for $300 million in cash and $29 million in shares of a new series of non-voting preferred stock to be issued at the closing of the Rasmussen Acquisition (or, at our election, up to an additional $29 million in cash in lieu 18 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 HLC, and approval by or notices to other regulatory and accrediting bodies. We intend to rely on the availability of financing under a commitment letter for debt financing to fund a portion of the cash consideration for the Rasmussen Acquisition. For more information on this financing, see “– Liquidity and Capital Resources – Liquidity – Acquisition of Rasmussen University” below. For more information on the Rasmussen Acquisition, please refer to our Annual Report, “Note 3. Acquisition Activity” included in the Consolidated Financial Statements in this Quarterly Report, and the sections entitled “– Regulatory and Legislative Activity – Rasmussen Acquisition Regulatory Review” below. Regulatory and Legislative Activity On April 7, 2020, the Department of Veterans Affairs, or VA, announced that, effective April 1, 2021, it would no longer count the use of Veteran Readiness & Employment, or VR&E, benefits against the 48-month cap on veterans education benefits programs imposed when veterans use more than one benefit program. As a result, veterans who use VR&E benefits prior to using another veterans education benefits program, such as the Montgomery GI Bill, or the GI Bill, and the Post-9/11 GI Bill, can still use up to 48 total months of the other veterans education benefits programs. In March 2021, ED announced a revised approach for determining relief for borrowers who successfully assert borrower relief claims. Under this new approach, a borrower will receive full loan relief when evidence shows that the institution engaged in certain misconduct. This policy rescinds the prior administration’s formula that generally granted only partial loan relief for borrower defense claims. ED also announced changes to the process for borrowers to seek loan relief due to total or permanent disability. Specifically, ED has eliminated requirements that borrowers with total or permanent disability prove that they continue to have sufficiently low-incomes for three years following their loan discharge. COVID-19 Pandemic In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, in response to COVID-19 and its related effects. Due to the COVID-19 pandemic, many higher education institutions shifted to distance learning as campuses shut down as a result of the public health emergency. The CARES Act includes provisions designed to provide relief to higher education institutions in connection with the pandemic, including by creating the Higher Education Emergency Relief Fund, or HEERF, which includes $12.6 billion in funding for higher education institutions. The CARES Act authorized ED to allocate HEERF funding based on a statutory formula that accounts for the relative share of full-time students who are Pell Grant recipients and that excludes students who were enrolled exclusively in distance education courses prior to the COVID-19 emergency from the calculation. Wholly online institutions such as APUS were therefore not eligible to receive an allocation of funding under the CARES Act HEERF. The CARES Act requires recipient institutions to use at least 50% of their HEERF funds to provide emergency grants to students for expenses related to the disruption of campus operations due to COVID-19. The CARES Act also permits institutions to use up to 50% of their HEERF funds to cover any costs associated with significant changes to the delivery of instruction due to COVID-19, with certain exceptions. By June 30, 2020, HCN distributed its entire allocation of $3.1 million in CARES Act HEERF funds to eligible students. In addition, as a result of the CARES Act and subsequent administrative actions, ED implemented a temporary freeze on payments and interest accruals for federal student loans. This administrative forbearance period began on March 20, 2020 and will run until at least September 30, 2021. In December 2020, Congress passed a law that includes the Coronavirus Response and Relief Supplemental Appropriations Act, or the CRRSAA, which contains several education-related provisions. The CRRSAA appropriates an additional $22.7 billion for the HEERF, or CRRSAA HEERF, to be distributed to higher education institutions. The CRRSAA HEERF allocation formula differs from the CARES Act HEERF formula in several ways, including new allocations for institutions based on the number of students enrolled exclusively in distance education. Under this formula, ED allocated approximately $600,000 for APUS and $2.0 million for HCN, and both APUS and HCN have accepted their allocations. As of March 31, 2021, HCN had received and distributed its entire allocation of $2.0 million in CRRSAA HEERF funds to eligible students. In April 2021, ED approved APUS’s application for its $600,000 allocation, which APUS anticipates receiving and distributing to eligible students in the second quarter of 2021. In March 2021, Congress passed the American Rescue Plan Act of 2021, or the ARPA, which includes an additional $40 billion for HEERF, or HEERF III. ARPA incorporates CRRSAA’s restrictions regarding allowable uses of HEERF funds. 19 ARPA’s HEERF III allocation formula decreases the amount of funds allocated to for-profit institutions. ED has not yet announced ARPA HEERF III allocations for APUS and HCN. ARPA also includes a provision that amends the provision of the HEA that, as a condition of participation in the Title IV programs, prohibits a for-profit institution from deriving more than 90% of its revenue (as computed by ED) on a cash accounting basis (except for certain institutional loans) from Title IV programs for any fiscal year. For more information on the so-called 90/10 Rule, please refer to our Annual Report. ARPA modifies the HEA’s 90/10 Rule to require that a for-profit institution derive not less than 10 percent of its revenue from sources other than “federal education assistance funds”. ARPA provides that the amendment applies to institutional fiscal years beginning on or after January 1, 2023. In addition, ARPA provides that the amendment is subject to the HEA’s master calendar requirements and negotiated rulemaking and that such negotiated rulemaking shall commence no earlier than October 1, 2021. An ED final rule to implement the ARPA provision is not expected to go into effect until July 1, 2023 at the earliest. ARPA does not define “federal education assistance funds.” We expect such definition to be developed as part of the required negotiated rulemaking and anticipate that ED would seek to include TA and VA education benefits in the scope of the definition. At this time we cannot predict the impact of the ARPA 90/10 Rule on our business, including because we cannot predict how ED will implement the ARPA 90/10 Rule provision. We also cannot predict the likelihood that Congress will pass additional legislation to modify the 90/10 Rule further with respect to relevant sources of funds or other aspects of the calculation. For example, other recent congressional proposals have focused on decreasing the limit on Title IV funds from 90% to 85%. Such proposals, or other similar legislation, should they become law, could have a material adverse impact on our financial condition and results of operation. On March 27, 2020, Ohio enacted a COVID-19 emergency relief law that allows individuals who have successfully completed a nursing education program approved by OBN to receive a temporary license to practice as an RN or LPN before taking the NCLEX. Graduates of OBN-approved nursing education programs, such as HCN’s programs, were permitted to apply for a temporary license that was valid until March 1, 2021, at which time it expired. The postsecondary education regulatory landscape is complex and continues to evolve, and the foregoing discussion does not address all of the laws and regulations that may materially affect our business, financial condition, and results of operations. Additional information on the regulation of our business, including certain regulatory developments in 2021 that occurred prior to the filing of our Annual Report, is available in “Business – Regulatory Environment” in Item 1 of Part I of our Annual Report. We cannot predict the extent to which the aforementioned regulatory activity or any other potential regulatory or legislative activity, including as a result of COVID-19 or the 2020 U.S. federal elections, may impact us or our institutions, nor can we predict the possible associated burdens and costs. Additional information regarding the potential risks associated with the regulation of postsecondary education and our business is available in the sections entitled “Risk Factors” in our Annual Report and this Quarterly Report. Rasmussen Acquisition Regulatory Review The Rasmussen Acquisition will be required to be reported to, and in some cases approved by, various education regulatory bodies. An institution must obtain ED approval for a change in ownership and control in order to continue to participate in Title IV programs under the new ownership. ED does not provide pre-closing approval, but at the request of the parties, ED will conduct a “pre-acquisition review” of a proposed change. In this case, the parties intend to request that ED conduct an “abbreviated pre-acquisition review.” Upon completion of an abbreviated pre-acquisition review, ED will inform Rasmussen University whether it will be required to post a letter of credit in connection with its continued participation in Title IV programs after closing. As required, we intend to timely notify ED about the occurrence of the change in ownership of Rasmussen University and submit an application for approval to participate in Title IV programs after the closing of the transaction. We will also notify state agencies, accreditors, boards of nursing, and other relevant regulators of this change in ownership as required. In some instances, these bodies will require prior approval before the change in ownership can be completed. For example, HLC requires approval before the closing of a transaction in order for an institution to maintain accredited status after closing. The parties submitted an application to HLC for pre-closing approval of the change in ownership, and HLC conducted focused site visits related to the application in February and March 2021. We expect HLC to consider this matter at its June 2021 meeting. Additionally, some regulators will require approval after the change in ownership in order to continue proper licensure, accreditation, approval, or authorization. Compliance Reviews In order to participate in TA, institutions must agree to participate in DoD’s Voluntary Education Institutional Compliance Program, or ICP. An institution that through the ICP is found noncompliant with DoD requirements and 20 demonstrates an unwillingness to resolve a finding may be subject to a range of penalties from a written warning to termination of the institution’s participation in TA. In February 2020, DoD informed APUS that it was one of 250 institutions selected for ICP review in 2020. Upon request, in May 2020, APUS submitted a self-assessment in connection with the ICP. On November 30, 2020, DoD issued a report finding that APUS did not clearly articulate certain policies or clearly make certain disclosures. As required, APUS submitted its corrective action plan and related evidentiary support and in April 2021, APUS was informed that the review had been completed and no further actions are required. Reportable Segments Our operations are organized into two reportable segments: • American Public Education Segment, or APEI Segment. This segment reflects the operational activities of APUS, other corporate activities, and minority investments; and • Hondros College of Nursing Segment, or HCN Segment. This segment reflects the operational activities of HCN. Summary of Results For the three months ended March 31, 2021, our consolidated revenue increased to $88.5 million from $74.6 million, or by 18.7%, compared to the prior year period. Our operating margins increased to 12.0% from 3.6% for the three months ended March 31, 2021, compared to the prior year period. Net income increased to $8.1 million from $2.4 million, an increase of $5.7 million compared to the prior year period. For the three months ended March 31, 2021, APEI Segment revenue increased to $77.4 million from $67.1 million, or by 15.4%, compared to the prior year period. Net course registrations at APUS for the three months ended March 31, 2021 increased to approximately 92,900 from approximately 84,800, or approximately 9.6%, compared to the prior year period. The percentage increase in revenue exceeded the percentage increase in registrations as compared to the prior year due to the January 1, 2020 tuition and technology fee increases for non-active duty military students. Because students can register as much as five months in advance of a course start, the quarter ended March 31, 2020 includes registrations made before the effective date of the tuition and technology fee increases. APEI Segment operating margins increased to 12.7% from 5.3% for the three months ended March 31, 2021, compared to the prior year period. The increase in net course registrations was primarily due to an increase in military-related registrations from students utilizing TA at APUS which have a lower revenue per net course registration than other funding sources. Net course registrations represent the total number of courses for which students remain enrolled after the date by which they may drop a course without financial penalty. For the three months ended March 31, 2021, HCN Segment revenue increased to $11.1 million from $7.5 million, or by 47.7%, compared to the prior year period. Total enrollment at HCN for the three months ended March 31, 2021 increased to approximately 2,300 from approximately 1,600, or approximately 45.1%, as compared to the prior year period. New student enrollment at HCN for the three months ended March 31, 2021 increased to 644 from 444, or approximately 45.0%, as compared to the prior year period. HCN Segment operating margins increased to 7.0% from negative 11.7% for the three months ended March 31, 2021, compared to the prior year period. We believe that the increase in new student enrollment at HCN was due in part to an increase in demand for nursing education, a change in the competitive environment due to COVID-19, an increase in marketing expenditures, the continued impact of initiatives implemented in 2019 and 2020, such as the direct entry ADN Program and the institutional affordability grant. HCN total student enrollment represents the total number of students enrolled in a course immediately after the date by which students may drop a course without financial penalty. Critical Accounting Policies and Use of Estimates For information regarding our Critical Accounting Policies and Use of Estimates, see the “Critical Accounting Policies and Use of Estimates” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report. 21 Results of Operations Below we have included a discussion of our operating results and material changes in our operating results during the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Our revenue and operating results normally fluctuate as a result of seasonal or other variations in our enrollments and the level of expenses in our APEI and HCN Segments. Our student population varies as a result of new enrollments, graduations, student attrition, the success of our marketing programs, and other reasons that we cannot always anticipate. We expect quarterly fluctuations in operating results to continue as a result of various enrollment patterns and changes in expenses. COVID-19 did not materially adversely impact our results of operations during the three months ended March 31, 2021. However, the duration and intensity of the outbreak, and therefore any future impact, is uncertain. While not yet material, ongoing and future impacts may cause additional disruption of educational services provided to students, increase costs for HCN to continue to deliver courses in person and online, and could be considered a triggering event to evaluate the value of HCN goodwill, impairment of investments, and recoverability of receivables. Beginning in the first quarter of 2020, we experienced a significant decrease in interest rates, including in connection with the COVID-19 pandemic, and we expect to continue to earn reduced interest income on our invested funds. In addition, as the pandemic abates, we believe demand for our online education programs will moderate and could decrease, and demand for our nursing education programs could also moderate or decrease. We believe that the increase in enrollment at HCN for the three months ended March 31, 2021 as compared to the prior year period is due in part to an increase in demand for nursing education, a change in the competitive environment due to COVID-19, an increase in marketing expenditures, the continued impact of initiatives implemented in 2019 and 2020, such as the direct entry ADN Program and the institutional affordability grant. We cannot predict whether our initiatives and efforts will continue to be successful over the long term and cannot guarantee continued enrollment and revenue growth in our HCN Segment. The success of these efforts could also be adversely affected by future impacts of the COVID-19 pandemic or a moderation of or decrease in the demand for nursing education as the pandemic abates. For more information on the impacts of COVID-19 on the Company and the potential risks related to COVID-19, please refer to “Overview” in this Management’s Discussion and Analysis of Financial Condition and Results of Operation and the section entitled “Risk Factors” in our Annual Report and this Quarterly Report. Our consolidated results for the three months ended March 31, 2021 and 2020 reflect the operations of our APEI and HCN Segments. For a more detailed discussion of our results by reportable segment, refer to “Analysis of Operating Results by Reportable Segment” below. 22 Analysis of Consolidated Statements of Income For the Consolidated Statements of Income, refer to our Financial Statements: Consolidated Statements of Income. The following table sets forth statements of income data as a percentage of revenue for each of the periods indicated: Three Months Ended March 31, 2021 2020 (Unaudited) Revenue 100.0 % 100.0 % Costs and expenses: Instructional costs and services 36.5 39.2 Selling and promotional 21.9 24.4 General and administrative 26.6 28.1 Loss on disposals of long-lived assets — 0.2 Depreciation and amortization 3.0 4.5 Total costs and expenses 88.0 96.4 Income from operations before interest income and income taxes 12.0 3.6 Interest income, net 0.1 0.9 Income from operations before income taxes 12.1 4.5 Income tax expense 3.0 1.3 Equity investment loss — — Net income 9.1 % 3.2 % Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020 Revenue. Our consolidated revenue for the three months ended March 31, 2021 was $88.5 million, an increase of $13.9 million, or 18.7%, compared to $74.6 million for the three months ended March 31, 2020. The increase in revenue was due to a $10.3 million, or 15.4%, increase in revenue in our APEI Segment and a $3.6 million, or 47.7%, increase in revenue in our HCN Segment. The APEI Segment revenue was primarily due to an increase in new student net course registrations and total net course registrations by 13.9% and 9.6%, respectively, during the three months ended March 31, 2021, as compared to the prior year period. The percentage increase in APEI Segment revenue exceeded the percentage increase in registrations as compared to the prior year due to the January 1, 2020 tuition and technology fee increases for non-active duty military students. Because students can register as much as five months in advance of a course start, the quarter ended March 31, 2020 includes registrations made before the effective date of the tuition and technology fee increases. The HCN Segment revenue increase was primarily due to a 45.0% increase in new student enrollment and a 45.1% increase in total enrollment. Costs and expenses. Costs and expenses for the three months ended March 31, 2021 were $77.9 million, an increase of $6.0 million, or 8.3%, compared to $71.9 million for the three months ended March 31, 2020. The increase in costs and expenses for the three months ended March 31, 2021 as compared to the prior year period was primarily due to increases in employee compensation costs, advertising costs, information technology costs, and professional fees in our APEI Segment and increases in employee compensation costs, bad debt expense, and instructional materials costs in our HCN Segment. Results for the three months ended March 31, 2021 include the following costs on a pre-tax basis: $1.8 million in information technology costs related to our multi-year technology transformation program and $0.5 million in professional fees associated with the Rasmussen Acquisition in our APEI Segment, and a $0.7 million increase in advertising costs in our APEI and HCN Segments. Results for the three months ended March 31, 2020 included the following costs on a pre-tax basis: $0.9 million of information technology costs related to our multi-year technology transformation program, and $0.6 million associated with strategic opportunities in our APEI Segment. Costs and expenses as a percentage of revenue decreased to 88.0% for the three months ended March 31, 2021, from 96.4% for the three months ended March 31, 2020. The decrease in costs and expenses as a 23 percentage of revenue was primarily due to our consolidated revenue increasing at a rate greater than the increase in costs and expenses. Instructional costs and services expenses. Our instructional costs and services expenses for the three months ended March 31, 2021 were $32.3 million, an increase of $3.1 million, or 10.6%, compared to $29.2 million for the three months ended March 31, 2020. The increase in instructional costs and services expenses was primarily due to an increase in employee compensation costs in our APEI Segment and increases in instructional materials costs and employee compensation costs in our HCN Segment. Instructional costs and services expenses as a percentage of revenue decreased to 36.5% for the three months ended March 31, 2021, from 39.2% for the three months ended March 31, 2020. The decrease in instructional costs and services expenses as a percentage of revenue was primarily due to our consolidated revenue increasing at a rate greater than the increase in instructional costs and services expenses. Selling and promotional expenses. Our selling and promotional expenses for the three months ended March 31, 2021 were $19.4 million, an increase of $1.2 million, or 6.7%, compared to $18.2 million for the three months ended March 31, 2020. The increase in selling and promotional expenses was primarily due to increases in advertising costs, employee compensation costs, and marketing support materials costs in our APEI Segment and an increase in advertising costs in our HCN Segment. Advertising costs increased $0.7 million in our APEI and HCN Segments compared to the prior year period. Selling and promotional expenses as a percentage of revenue decreased to 21.9% for the three months ended March 31, 2021, from 24.4% for the three months ended March 31, 2020. The decrease in selling and promotional expenses as a percentage of revenue was primarily due to our consolidated revenue increasing at a rate greater than the increase in selling and promotional expenses. General and administrative expenses. Our general and administrative expenses for the three months ended March 31, 2021 were $23.5 million, an increase of $2.5 million, or 12.0%, compared to $21.0 million for the three months ended March 31, 2020. The increase in general and administrative expenses for the three months ended March 31, 2021 as compared to the prior year period was primarily the result of increases in employee compensation costs, information technology costs, and professional fees in our APEI Segment and increases in bad debt expense and employee compensation costs in our HCN Segment. For the three months ended March 31, 2021, APEI Segment general and administrative expenses include the following on a pre-tax basis: approximately $1.8 million of information technology costs related to our multi-year technology transformation program, and $0.5 million in professional fees associated with the Rasmussen Acquisition. Consolidated bad debt expense for the three months ended March 31, 2021 was $1.5 million, or 1.7% of revenue, compared to $1.0 million, or 1.3% of revenue in the prior year period. General and administrative expenses as a percentage of revenue decreased to 26.6% for the three months ended March 31, 2021, from 28.1% for the three months ended March 31, 2020. The decrease in general and administrative expenses as a percentage of revenue was primarily due to our consolidated revenue increasing at a rate greater than the increase in general and administrative expenses. As we continue to evaluate strategic growth opportunities and enhancements to our business capabilities, we expect to incur additional costs and that our general and administrative expenses related to professional fees will vary from time to t ime. Loss on disposals of long-lived assets. There was no loss on disposals of long-lived assets for the three months ended March 31, 2021. The loss on disposals of long-lived assets for the three months ended March 31, 2020 was $0.2 million. Depreciation and amortization expenses. Depreciation and amortization expenses were $2.7 million and $3.3 million for the three months ended March 31, 2021 and 2020, respectively. Depreciation and amortization expenses as a percentage of revenue decreased to 3.0% for the three months ended March 31, 2021, from 4.5% for the three months ended March 31, 2020. The decrease in depreciation and amortization expenses as a percentage of revenue was primarily due to a decrease in depreciation and amortization expenses during a period when consolidated revenue increased. Stock-based compensation expenses. Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses were $2.2 million and $1.8 million for the three months ended March 31, 2021 and 2020, respectively. Stock-based compensation costs include accelerated expense for retirement-eligible employees and performance stock unit incentive costs. Interest income. Interest income was $0.1 million and $0.7 million for the three months ended March 31, 2021 and 2020, respectively. The decrease was due to a decrease in interest rates when compared to the prior year period. Income tax expense. We recognized income tax expense of $2.6 million and $1.0 million for the three months ended March 31, 2021 and 2020, respectively, or effective tax rates of 24.6% and 28.7%, respectively. The decrease in the effective tax rate for the three months ended March 31, 2021 is due to a lower amount of non-deductible expenses as compared to the prior period and a $0.3 million benefit from Accounting Standards Update No. 2016-09, Compensation- Stock Compensation 24 (Topic 718), in the current year period. There was no material impact to our effective tax rate for the three months ended March 31, 2021 and 2020 as a result of the effects of the COVID-19 pandemic. Equity investment loss. Equity investment loss was $5,000 and $1,000 for the three months ended March 31, 2021 and 2020, respectively. Net income. Our net income was $8.1 million for the three months ended March 31, 2021, compared to net income of $2.4 million for the three months ended March 31, 2020, an increase of $5.7 million. This increase was related to the factors discussed above. Analysis of Operating Results by Reportable Segment The following table provides details on our operating results by reportable segment for the respective periods (in thousands): Three Months Ended March 31, 2021 2020 (Unaudited) Revenue: American Public Education Segment $ 77,422 $ 67,094 Hondros College of Nursing Segment 11,132 7,539 Intersegment elimination (13) (17) Total Revenue $ 88,541 $ 74,616 Income (loss) from operations before interest income and income taxes: American Public Education Segment $ 9,854 $ 3,577 Hondros College of Nursing Segment 783 (885) Intersegment elimination — 1 Total income from operations before interest income and income taxes $ 10,637 $ 2,693 APEI Segment For the three months ended March 31, 2021, the $10.3 million, or 15.4%, increase to approximately $77.4 million in revenue in our APEI Segment was attributable to higher net course registrations primarily as a result of additional military registrations from students utilizing TA and higher revenue per net course registration. Net course registrations at APUS increased 9.6% to approximately 92,900 from approximately 84,800 during the three months ended March 31, 2021 compared to the same period in 2020. The percentage increase in APEI Segment revenue exceeded the percentage increase in registrations as compared to the prior year due to the January 1, 2020 tuition and technology fee increases. Because students can register as much as five months in advance of a course start, the quarter ended March 31, 2020 includes registrations made before the effective date of the tuition and technology fee increases. Income from operations before interest income and income taxes increased to $9.9 million during the three months ended March 31, 2021, from $3.6 million, an increase of $6.3 million compared to the prior year as a result of an increase in revenue due to increases in registrations discussed above. Disruption related to the Army’s transition to a new system for soldiers to use to request TA is expected to adversely impact Army registrations and revenue at APUS for the quarter ending June 30, 2021. HCN Segment For the three months ended March 31, 2021, the $3.6 million, or 47.7%, increase to approximately $11.1 million in revenue in our HCN Segment was attributable to an increase in new and total student enrollment. HCN new student enrollment for the three month period ended March 31, 2021 increased to 644 from 444, or approximately 45.0%, as compared to the comparable prior year period. HCN total student enrollment increased 45.1% to approximately 2,300 from approximately 1,600 students during the three months ended March 31, 2021 compared to the same period in 2020. We believe that the increase in HCN’s total student enrollment for the three months ended March 31, 2021 was due in part to an increase in demand for 25 nursing education, a change in the competitive environment due to COVID-19, and the continued impact of initiatives implemented in 2019 and 2020, such as the direct entry ADN Program and the institutional affordability grant. Income from operations before interest income and income taxes in our HCN Segment was $0.8 million during the three months ended March 31, 2021, compared to a loss of $0.9 million in the same period in 2020, an increase of $1.7 million, primarily as a result of the increase in revenue due to higher enrollment discussed above. Liquidity and Capital Resources Liquidity We financed operating activities and capital expenditures during the three months ended March 31, 2021 and 2020 with cash provided by operating activities. Cash and cash equivalents were $320.8 million and $227.7 million at March 31, 2021 and December 31, 2020, respectively, representing an increase of $93.1 million, or 40.9%. Cash and cash equivalents at March 31, 2021 increased by $124.0 million from $196.8 million, or 63.0%, as compared to March 31, 2020. The increase in cash and cash equivalents was primarily due to the net proceeds of approximately $86.2 million from the underwritten public offering of 3,680,000 shares of our common stock completed on March 1, 2021, and cash provided by our operating activities, partially offset by cash used in investing activities. We derive a significant portion of our revenue from TA from the DoD. Generally, these funds are received within 60 days of the start of the courses to which they relate. We also participate in programs from the VA. Generally, these funds are received within 60 days of the start of the courses to which they relate. Another significant source of revenue is derived from our participation in ED’s Title IV programs, for which disbursements are governed by federal regulations. We have typically received disbursements under Title IV programs within 30 days of the start of the applicable course or term. Disruption related to the Army’s transition to a new system for soldiers to use to request TA has adversely impacted APUS’s ability to invoice the Army for Army registrations and may impact future accounts receivable balances and cash flow from operations. We expect to continue to fund our costs and expenses through cash generated from operations. Based on our current level of operations, we believe that our cash flow from operations and our existing cash and cash equivalents will provide adequate funds for ongoing operations and planned capital expenditures for the foreseeable future. We expect operating expenditures to increase in future periods as we accelerate the investment in and modernization of our information technology systems and increase marketing and other expenditures. For the year ended December 31, 2020, we incurred approximately $5.6 million on our multi-year technology transformation program, and we anticipate spending between approximately $4.0 million and $5.0 million in 2021. For the three months ended March 31, 2021, we incurred approximately $1.8 million on our information technology transformation program, focusing on specific information technology projects, including the replacement of our customer relationship management system. We will continue to evaluate our Partnership At a Distance™, or PAD, customized student information and services system for possible changes and upgrades and anticipate that we will eventually make significant changes to that system, as well. Capital expenditures could be higher in the future as a result of, among other things, additional expenditures for technology or other business capabilities, the opening of new campuses at HCN, the acquisition or lease of existing structures or potential new construction projects, and necessary tenant improvements that arise as a result of our ongoing evaluation of our space needs and opportunities for physical growth. Professional fees may increase as we approach the closing of the Rasmussen Acquisition and continue to evaluate investments in strategic growth opportunities and enhancements to our business capabilities. We expect to continue to explore opportunities to invest in the education industry, which could include purchasing or investing in other education-related companies or companies developing new technologies. We will need additional capital to finance the Rasmussen Acquisition, as discussed below, and we may also need additional capital in the future, including to finance other business acquisitions and investments in technology or to achieve growth or fund other business initiatives. In February 2021, we filed a shelf registration statement in order to help facilitate potential public offerings of our securities. 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 net proceeds of approximately $86.2 million, after deducting underwriting discounts and commissions and offering expenses. Acquisition of Rasmussen University In connection with entering into the Rasmussen Agreement, on October 28, 2020, we entered into a senior secured credit facilities commitment letter, or the Commitment Letter, with Macquarie Capital (USA) Inc., or Macquarie Capital, and Macquarie Capital Funding LLC, or Macquarie Lender, and together, Macquarie, 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 26 Facility, and (ii) a senior secured revolving loan facility in an aggregate commitment amount of $20 million, or together with the Term Facility, the Facilities. On January 26, 2021, we entered into a joinder agreement pursuant to which Macquarie assigned a portion of the commitments to Truist Bank and Truist Securities, Inc., or together, Truist. Macquarie Capital and Truist will act as lead arrangers and bookrunners with respect to the Facilities. The commitments under the Commitment Letter to provide the Facilities are subject to customary conditions, including the absence of a Material Adverse Effect (as defined in the Rasmussen Agreement) on the Acquired Companies having occurred, the execution of satisfactory documentation, and other customary closing conditions. We currently expect to pay a portion of the cash consideration for the Rasmussen Acquisition with proceeds from the Term Facility. In April 2021, Macquarie Capital informed us that it had successfully syndicated the Facilities and allocated expected commitments from lenders to be funded in connection with the closing of the Facilities, or the Closing, subject to the execution of final documentation. The Facilities are expected to bear interest at a per annum rate equal to LIBOR (subject to a floor of 0.75%) plus an applicable margin of 5.50%. In addition, we expect that we will pay to the lenders (i) holding commitments in respect of the Term Facility, and (ii) an upfront fee at Closing equal to 2.0% of the stated principal amount of the Term Facility. The terms of the Facilities are not final and are subject to entering into final documentation at Closing. Our future capital requirements will depend on a number of factors, including our ability to consummate the Rasmussen Acquisition on the terms and schedule contemplated and our ability to obtain the Facilities or to secure alternative financing. There can be no guarantee that we will be able to close the Facilities or alternative financing arrangements on commercially reasonable terms or at all, or that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. In addition, upon the occurrence of certain events, such as a change of control, we could be required to repay or refinance our indebtedness. There can be no assurance that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. Equity Offering 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 net proceeds of approximately $86.2 million, after deducting underwriting discounts and commissions and other offering expenses. Share Repurchase Program On May 2, 2019, our Board of Directors authorized the repurchase of up to $35.0 million of shares of our common stock, and on December 5, 2019, the Board approved an additional authorization of up to $25.0 million of shares. We may purchase shares at management’s discretion in the open market, in privately negotiated transactions, in transactions structured through investment banking institutions, or a combination of the foregoing. We may also, from time to time, enter into Rule 10b5-1 plans to facilitate repurchases of shares under this authorization. The amount and timing of repurchases are subject to a variety of factors, including liquidity, cash flow, stock price and general business and market conditions. We have no obligation to repurchase shares and may modify, suspend or discontinue the repurchase program at any time. The authorization under this program is in addition to our repurchase program under which we may annually purchase up to the cumulative number of shares issued or deemed issued in that year under our equity incentive and stock purchase plans. During the three months ended March 31, 2021, we did not repurchase shares of common stock. As of March 31, 2021, there remained $8.4 million available under our share repurchase authorization. For additional information on our repurchases of our common stock, please refer to “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of Part II of our Annual Report and “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - Repurchases” of Part II of this Quarterly Report. Operating Activities Net cash provided by operating activities was $11.2 million and $11.5 million for the three months ended March 31, 2021 and 2020, respectively. The decrease in cash from operating activities is primarily due to changes in working capital due to the timing of receipts and payments. Accounts receivable at March 31, 2021, decreased approximately $4.2 million compared to December 31, 2020. Accounts payable, accrued compensation and benefits, and accrued liabilities at March 31, 2021 were approximately $4.8 million lower than December 31, 2020 primarily due to the payment in the first quarter of incentive compensation costs accrued at December 31, 2020. 27 Investing Activities Net cash used in investing activities was $1.5 million and $1.9 million for the three months ended March 31, 2021 and 2020, respectively. This decrease was primarily related to a decrease in technology-related capital expenditures compared to the comparable prior year period. Financing Activities Net cash provided by financing activities was $83.4 million for the three months ended March 31, 2021, compared to $15.6 million of net cash used in financing activities for the three months ended March 31, 2020, respectively. The increase in cash provided by financing activities for the three months ended March 31, 2021 was due to our underwritten public offering of common stock for aggregate net proceeds of approximately $86.2 million. For the three months ended March 31, 2020, we used $13.6 million to repurchase shares of our common stock in accordance with our share repurchase program. Off-Balance Sheet Arrangements We do not have off-balance sheet financing arrangements, including any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. Contractual Commitments We have various contractual obligations consisting of operating leases and purchase obligations. Purchase obligations include agreements with consultants, contracts with third-party service providers, and other future contracts or agreements.