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 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 and ArmyIgnitED, and their and our expectations regarding the effects of those actions; • our expectations regarding the effects of and our response to the COVID-19 pandemic, including the demand environment for online education or nursing education as the pandemic abates, impacts on business operations and our financial results, and our ability to comply with regulations related to emergency relief; • 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 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; • the expected effects of our workforce reduction; • 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; 23 • the effects, duration and severity of the ongoing COVID-19 pandemic and the adverse effects on demand for online education or nursing education as impacts of the pandemic abate, and the actions we have taken or may take in response, particularly at Hondros College of Nursing, or HCN, and Rasmussen University, or RU, and as a result of working remotely; • risks related to the acquisition of Rasmussen University, including regulatory approvals, limitations on growth and expansion at Rasmussen, effective integration of Rasmussen University’s business, and our ability to realize the expected benefits of the acquisition; • 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 incurring substantial debt under the debt facilities that we have entered into in connection with financing the acquisition of Rasmussen University, the cost of servicing that debt, and our ability in the future to service that debt. 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 107,800 students through three 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. The COVID-19 pandemic did not materially impact our results of operations during the nine month period ended September 30, 2021. However, any future impact on our operations remains uncertain. We believe that the pandemic at times did lead to increased registrations and enrollments across our subsidiary institutions. As the COVID-19 pandemic abates, we believe near-term demand for our programs is moderating. For more information on the potential risks related to COVID-19, please refer to our Annual Report and to the sections entitled “Results of Operations” and “Risk Factors” in this Quarterly Report. Our wholly owned operating subsidiary institutions include the following: • American Public University System, Inc., or APUS, provides online postsecondary education to approximately 88,600 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. 24 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 have specialized accreditation granted by industry governing organizations. In August 2021, HLC granted APUS re-accreditation, with the next evaluation of accreditation due in 2030-2031. As part of the process, APUS moved to the Open Pathway designation, which affords institutions greater opportunity to pursue institutional improvement projects than the previous Standard Pathway designation. 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, which soldiers will 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. On March 8, 2021, the Army launched and then, due to technical difficulties, 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 came online in ArmyIgnitED. Soldiers could continue to directly register for courses with the expectation that TA can be retroactively applied for, and the Army has created a process for soldiers to seek reimbursement. On July 19, 2021, the ArmyIgnitED system went live for soldiers seeking to use TA for courses at APUS. We continue to experience challenges related to system performance, process changes and software defects, and there is no assurance that the new portal will ever work correctly or efficiently or will not have continuing impacts on soldiers’ ability to participate in the TA programs or receive funds under those programs. The disruption to Army TA and resulting decreases in Army registrations had an adverse impact on registrations and revenue for the quarters ended June 30, 2021 and September 30, 2021, and while system performance is improving, we expect some impact will continue for the remainder of 2021. For information on potential risks associated with APUS, please refer to the section entitled “Risk Factors” in our Annual Report and this Quarterly Report. • Rasmussen College, LLC, referred to herein as Rasmussen University, or RU, provides nursing- and health sciences-focused postsecondary education to over 16,900 students at its 23 campuses in six states and online. RU offers a comprehensive “ladder” of nursing degrees including a pre-licensure Diploma in Practical Nursing, or PN, an Associate Degree in Nursing, or ADN, and a Bachelor of Science in Nursing, or BSN, as well as the post-licensure RN to BSN, Master of Science in Nursing and Doctorate of Nurse Practice. As of September 30, 2021, approximately 8,500 students are pursuing nursing degrees at Rasmussen University, approximately 90% of whom are enrolled in Rasmussen University’s pre-licensure degree programs. RU is institutionally accredited by HLC with an Open Pathway designation. The Company completed the acquisition of Rasmussen University, or the Rasmussen Acquisition, on September 1, 2021, or the Closing Date. See “Acquisition of Rasmussen University” below for more information. • 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 one 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. In July 2021, the Indiana 25 Board of Nursing authorized the admission of an additional 30 students per year, increasing the maximum enrollment to 60 students for the 2022 calendar year. HCN can petition for an additional class size increase in February 2022. ABHES annually reviews student achievement indicators, including retention rate, placement rate, and licensing and credentialing examination pass rate. Under ABHES policy, ABHES may withdraw accreditation at any time if it determines that an institution fails to demonstrate at least a 70% retention rate for each program, a 70% placement rate for each program, and a 70% pass rate on mandatory licensing and credentialing examinations or fails to meet the state-mandated results for credentialing or licensure. Alternatively, ABHES may in its discretion provide an opportunity for a program to come into compliance within a period of time specified by ABHES, and ABHES may extend the period for achieving compliance if a program demonstrates improvement over time or other good cause. For the reporting year ended June 30, 2021, several HCN programs did not satisfy ABHES’s threshold requirements for retention rates. Each such program had a retention rate of between 55% and 69% for the reporting year. HCN submitted its annual report to ABHES on November 2, 2021, including an action plan regarding areas where benchmarks were not met. We cannot predict how ABHES will respond to the report. 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 the Closing Date, we completed the acquisition of Rasmussen University, or the Rasmussen Acquisition, for an adjusted aggregate purchase price, subject to post-closing working capital adjustments of $325.5 million in cash and without issuing any shares of non-voting preferred stock. Upon completion of the Rasmussen Acquisition, Rasmussen University became a wholly owned subsidiary of APEI. On September 9, 2021, Rasmussen University timely submitted a change in ownership and control application to ED seeking approval to participate in the Title IV programs under our ownership. Rasmussen University is also pursuing other post-closing notices and consents related to the change in ownership. For the three and nine months ended September 30, 2021, we incurred approximately $1.5 million and $5.0 million of acquisition-related expenses, respectively, which are included in general and administrative expenses in the Consolidated Statements of Income. We relied on debt financing pursuant to a credit agreement to fund a portion of the consideration for the Rasmussen Acquisition. For more information on this financing, see “– Liquidity and Capital Resources – Liquidity – Acquisition of Rasmussen University” below and “Note 8. Long-Term Debt” included in the Consolidated Financial Statements in this Quarterly Report. 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. 26 Cost and Expense Reductions On August 5, 2021, in connection with an evaluation and review of our costs and expenses, we initiated a plan to reduce costs. The plan includes a reduction in force that resulted in the termination of 11 full-time faculty members at APUS, and 28 non-faculty employees across a variety of roles and departments at APEI and APUS, representing approximately 3.2% of the APUS full-time faculty workforce, and 3.1% of the APEI and APUS non-faculty workforce. We completed this workforce reduction by August 9, 2021. We recorded expenses for termination benefits related to the workforce reduction in the third quarter of 2021 in accordance with FASB ASC 420, Exit or Disposal Cost Obligations . We incurred an aggregate of approximately $1.0 million of pre-tax cash expenses associated with employee severance benefits. The reduction in force is expected to result in pre-tax labor and benefit savings in 2021 of approximately $1.4 million, and in the range of approximately $2.6 million to $3.6 million on an annualized basis. These cost savings do not include expenses associated with employee severance benefits. The actual costs and benefits of the plan are preliminary and may vary based on various factors, including the timing of implementation and changes in underlying assumptions and projections. There is no certainty that the program, or any other expense reduction initiative, will have the intended benefits of reducing costs and expenses over the long-term, or whether there will be adverse impacts, including as a result of the loss of valuable employees. 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. In June 2021, ED held virtual public hearings to receive feedback on potential issues for future rulemaking sessions, including borrower defenses to repayment, change in ownership processes, student outcomes transparency, public service loan forgiveness programs, and gainful employment requirements. Following these hearings, ED solicited nominations for non-federal negotiators who can serve on the negotiated rulemaking committees, which ED indicated that it planned to convene during the third quarter of 2021. On August 6, 2021, ED announced that it was establishing a negotiated rulemaking committee to address borrower defenses to repayment, public service student loan forgiveness programs, mandatory pre-dispute arbitration and prohibition of class-action lawsuits, among other issues. The negotiated rulemaking committee held its first session in October 2021 and plans to meet two more times in November and December. ED is expected to submit at least one notice of proposed rulemaking on these matters prior to November 1, 2022. If it does so, any new rules are expected to be effective July 1, 2023. Effective May 31, 2021, APUS terminated its lease for administrative offices in Manassas, Virginia. As a result of this lease termination, APUS is no longer required to be certified by the State Council of Higher Education for Virginia, or SCHEV, and therefore did not renew its certification before it expired on June 30, 2021. This change will not impact our operations in Virginia, and we will continue to serve our Virginia students as an NC-SARA approved institution. As a result of this change, APUS will no longer need to seek SCHEV approval prior to adding any new academic programs. As part of the Consolidated Appropriations Act, 2021, Congress included legislative provisions that alter the application process for federal student aid, including streamlining the Free Application for Federal Student Aid, or FAFSA. These changes were set to become effective for the 2023-2024 academic year. On June 11, 2021, ED announced that the agency is delaying implementation, noting that many of these provisions will not be effective until the 2024-2025 academic year. On June 8, 2021, the President signed into law the Training in High-Demand Roles to Improve Veteran Employment Act, or the THRIVE Act, which amended provisions related to veterans education programs found in the American Rescue Plan Act and the Johnny Isakson and David P. Roe, M.D. Veterans Health Care and Benefits Improvement Act of 2020. The legislation requires the VA to work with the Department of Labor to determine the list of high-demand occupations for the rapid retraining assistance program, excludes programs pursued solely through distance learning on a half-time basis or less from the housing stipend available to those in the retraining program, and requires the Government Accountability Office to 27 report on the outcomes and effectiveness of retraining programs. The legislation also requires the VA to take disciplinary action if a person with whom an institution has an agreement to provide educational or recruiting services violates the VA’s incentive compensation prohibitions. Section 1018 of the Johnny Isakson and David P. Roe, M.D. Veterans Health Care and Benefits Improvement Act of 2020, became effective June 15, 2021, and applied to institutions of higher learning beginning August 1, 2021. This provision mandates that schools that receive veterans education benefits: (i) provide VA students with information on total cost of an education program and certain other disclosures; (ii) inform VA students of the availability and potential eligibility of federal financial aid before packaging or arranging private student loans or alternative financing programs; (iii) avoid fraudulent and unduly aggressive recruiting or automatic renewal techniques; (iv) avoid misrepresentations or payment of incentive compensation; (v) fully disclose conditions or additional requirements required to obtain any license, certification, or approval for which the course of education is designed to provide preparation; (vi) provide VA students with graduation requirements; (vii) obtain approval of the institutions’ accrediting agency for new courses or programs; (viii) maintain a policy to accommodate service members and reservists to be readmitted if they are temporarily unable to attend due to service requirements; and (ix) appoint a point of contact to provide academic and financial aid advising. In September 2021, APUS and HCN received waivers for the requirements of Section 1018 for the period August 1, 2021 through July 31, 2022. At the conclusion of the waiver period, it is expected that APUS and HCN will be in compliance with all of the provisions of Section 1018. In September 2021, the Navy increased their TA benefits, allowing qualified sailors to use up to 18 semester credit hours annually, previously limited to 12 semester credit hours. Along with the expanded annual credit limit comes new eligibility requirements, including new requirements as to who can use TA and when. Eligible sailors can only use TA to fund two courses each quarter of the fiscal year. The minimum time in service increased from two to three years and active duty enlisted sailors under 16 years of service and reservists on active duty orders must have 12 months or more remaining on their current enlistment or extension as of the course state date to be eligible. Reservists on one-year orders will no longer be eligible for TA, and sailors who have begun utilizing TA benefits after only two years of service must pause their TA benefits. These changes were effective October 1, 2021. On October 6, 2021, ED announced several changes to the Public Service Loan Forgiveness program, or PSLF. ED is implementing a time-limited waiver that would allow borrowers to count all prior payments toward PSLF, regardless of the loan program. The waiver will apply to borrowers with Direct Loans, those with other types of loans that submit a consolidation application into the Direct Loan Program while the waiver is in effect. The waiver will run through October 31, 2022. Additionally, ED will allow months spent on active duty to count toward PSLF, even if the service member’s loans were on deferment or forbearance. This change will allow more service members to pursue loan forgiveness. ED also plans to implement automatic PSLF crediting for federal employees and military service members. To further support these efforts, ED plans to simplify the PSLF application process and improve communication to PSLF-eligible borrowers. In October 2021, in what it termed a broad-based initiative to deter for-profit college fraud, the Federal Trade Commission, or FTC, issued informational notices to 70 for-profit higher education institutions, including APUS and RU, informing them of certain marketing practices the FTC had previously determined to be deceptive or unfair and therefore unlawful under the FTC Act. The FTC indicated that an institution’s receipt of the notice was not an indication that the institution has engaged in deceptive or unfair conduct. The informational notices were sent in furtherance of an FTC Act provision permitting penalties against those engaging in unfair or deceptive acts or practices with actual knowledge of their unfair or deceptive nature. The informational notices informed the institutions that engaging in such practices could subject a company to civil penalties under that provision. By providing the informational notices, the FTC is able to document that the institutions have knowledge that the FTC has found these marketing practices to be unfair or deceptive. The FTC also announced that it would be enhancing its enforcement cooperation with other agencies with oversight of educational institutions, including ED’s Office of Student Aid and the Department of Veterans Affairs. In addition, on October 6, 2021, ED announced that it had restored an Office of Enforcement within ED’s Office of Federal Student Aid to strengthen oversight of and enforcement actions against postsecondary institutions that participate in federal student loan, grant, and work-study programs. Cohort Default Rate To remain eligible to participate in Title IV programs, an educational institution’s student loan cohort default rates must remain below certain levels. Pursuant to requirements of the Higher Education Act, as amended, if the cohort default rate for any year exceeds 40%, an institution loses eligibility to participate in Title IV programs, and if the institution’s cohort default rate exceeds 30% for three consecutive years, the institution loses eligibility to participate in Title IV programs. If an institution’s cohort default rate is equal to or greater than 30% in any year, it must establish a default prevention task force. In 28 September 2021, ED released final official cohort default rates for institutions for federal fiscal year 2018, with ED reporting a 9.4% cohort default rate for APUS, a 7.8% cohort default rate for RU, and a 8.1% cohort default rate for HCN. Additional information regarding student loan default rates, prior year default rates, and potential risks associated with them is available in our Annual Report. Higher Education Emergency Relief Funds 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 included 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 included $12.6 billion in funding for higher education institutions. The CARES Act authorized ED to allocate HEERF funding based on a statutory formula that accounted for the relative share of full-time students who are Pell Grant recipients and that excluded 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 required 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 permitted 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 January 31, 2022. In December 2020, Congress passed a law that includes the Coronavirus Response and Relief Supplemental Appropriations Act, or the CRRSAA, which contained several education-related provisions. The CRRSAA appropriated 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 and included certain restrictions regarding allowable uses of CRRSAA HEERF funds. Under this formula, ED allocated approximately $600,000 for APUS and $2.0 million for HCN. Both APUS and HCN have distributed the entirety of their allocated CRRSAA HEERF funds to eligible students. In March 2021, Congress passed the American Rescue Plan Act of 2021, or ARPA, which includes an additional $40 billion for HEERF, or HEERF III. ARPA incorporates CRRSAA’s restrictions regarding allowable uses of HEERF funds. ARPA’s HEERF III allocation formula decreases the amount of funds allocated to for-profit institutions. Under this formula, ED allocated approximately $330,000 for APUS and $1.2 million for HCN. APUS distributed the entirety of the allocated HEERF III funds to eligible students during the third quarter. HCN declined its HEERF III allocation. ARPA also includes a provision that amends the provision of the Higher Education Act of 1964, as amended, or 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. 29 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 National Council Licensure Examination, or 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 and effective May 14, 2021 was reinstated and extended to July 1, 2021. This law specified that the individual must have completed the nursing education program no more than two years before the date of submitting the Licensure by Examination application, the individual cannot receive a temporary license if they have a prior NCLEX failure in any state, if they have been convicted of or pleaded guilty to any felony, or have failed a drug test as determined by the Board. The emergency relief law expired on July 1, 2021. 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 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 was 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. In July 2021, ED notified Rasmussen University that in connection with Rasmussen University’s March 2019 change in ownership, ED was imposing certain temporary growth restrictions on the institution, which included maintaining limitations on new programs and locations that were already in place and imposing a cap on the number of students that participate in Title IV programs that can be enrolled. Additionally, ED continued to require Rasmussen University to submit periodic financial and enrollment reports, a requirement that it had imposed on RU in connection with the financial responsibility letter of credit described below. On September 9, 2021, Rasmussen University timely submitted a change in ownership and control application to ED seeking approval to participate in the Title IV programs under our ownership. ED and Rasmussen University entered into a Temporary Provisional Program Participation Agreement, or TPPPA, effective as of October 14, 2021, that allows Rasmussen University to continue disbursing Title IV funds during the period of ED’s review of the change in ownership application. The TPPPA continues the growth restrictions that ED imposed as a result of the March 2019 change in ownership, including the same enrollment cap. The TPPPA specifies that after ED reviews and accepts financial statements and compliance audits that cover one complete fiscal year of RU’s Title IV participation under APEI’s ownership, RU may seek to have the enrollment cap removed and may seek approval for new programs that replace current programs. The TPPPA also specifies that at least until after ED reviews and accepts financial statements and compliance audits that cover the second complete fiscal year of RU’s Title IV participation under APEI’s ownership, RU must seek pre-approval for new locations, new programs that are not replacing current programs, and other changes. The growth restrictions under the TPPPA could limit or adversely affect Rasmussen University’s growth opportunities, including restricting its ability to serve additional students, particularly additional nursing students, and limiting its ability to continue to evolve to address current needs by providing new or changed programs. Rasmussen University is also pursuing other post-closing notices and consents related to the change in ownership. State agencies, accreditors, boards of nursing, and other relevant regulators also require action with respect to the Rasmussen Acquisition. In some instances, these bodies required prior approval before the change in ownership could 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. Effective in June 2021, HLC approved the application regarding the change in control. An additional site visit is required within six months of the Closing Date. Additionally, some regulators will require approval after a change in ownership in order to continue proper licensure, accreditation, approval, or authorization. ED evaluates institutions on an annual basis for compliance with specified financial responsibility standards, including a complex formula based on line items from the institution’s audited financial statements. The formula focuses on three financial ratios: (1) equity ratio (which measures the institution’s capital resources, financial viability, and ability to borrow); (2) primary reserve ratio (which measures the institution’s viability and liquidity); and (3) net income ratio (which measures the 30 institution’s profitability or ability to operate within its means). Generally, an institution’s financial ratios must yield a composite score of at least 1.5 for the institution to be deemed financially responsible. An institution which does not meet ED’s minimum composite score of 1.5 can demonstrate financial responsibility by meeting the “zone alternative” or posting a letter of credit in favor of ED. The “zone alternative” includes a delayed method of cash funding for Title IV aid, and the providing of additional information to ED, upon request. As of September 30, 2020, RU had a composite score equal to 1.4, compared to the minimum required of 1.5. RU elected to post a letter of credit with ED totaling $23.1 million, which represents 10% of the Title IV program funds received by RU during its most recently completed fiscal year. Upon the closing of the RU Acquisition, APEI was required to fund this letter of credit using a restricted deposit account that required a deposit of 105%, or $24.2 million, to secure the RU letter of credit. Under the TPPPA for RU described above, a letter of credit will continue to be required at least until ED reviews and accepts financial statements and compliance audits that cover one complete fiscal year of RU’s Title IV participation under APEI’s ownership. Additionally, RU is required to make Title IV disbursements to eligible students and parents under the heightened cash monitoring payment method, or HCM1. Under HCM1, Rasmussen University must first make Title IV disbursements to eligible students and parents and pay any credit balances before the institution requests or receives funds for the amount of those disbursements from ED. APUS, RU and HCN Compliance Reviews In July 2017, ED began a program review of RU’s administration of Title IV program during the 2015-2016 and 2016-2017 award years. The program review remains open and ongoing. At this time, we cannot predict the outcome of the program review, when it will be completed, or whether ED will place any liability or other limitations on RU as a result of the review. On July 9, 2021, HCN received a letter from ED announcing an off-site program review. The review, which was completed in August 2021, assessed HCN’s administration of Title IV programs, with a focus on award years 2019-2020 and 2020-2021. The program review is pending while ED is reviewing the data collected. Reportable Segments During the third quarter of 2021, we revised our reportable segments and updated the results for the prior period to conform to the current period presentation. As of September 30, 2021, APEI had the following reportable segments: • American Public University System Segment, or APUS Segment. This segment reflects the operational activities of APUS and was previously included within the former APEI Segment; • Rasmussen University Segment, or RU Segment . This segment reflects the operational activities of Rasmussen University; and • Hondros College of Nursing Segment, or HCN Segment. This segment reflects the operational activities of HCN. Prior to the third quarter of 2021, the Company had two reportable segments: the American Public Education, Inc. Segment, or APEI Segment, and the HCN Segment. Post-acquisition, the Company has three reportable segments: the APUS Segment, which was previously included within the APEI Segment; the Rasmussen Segment; and the HCN Segment. The APEI Segment previously reported the results of both APUS and remaining unallocated Company expenses. Adjustments to reconcile segment results to the Consolidated Financial Statements are included in “Corporate and Other”, which primarily includes unallocated corporate activity and eliminations, which generally were previously reported within the APEI Segment. Prior periods have been updated to conform to the revised presentation. Summary of Results As discussed above, we completed the Rasmussen Acquisition on September 1, 2021. Our results of operations for the three and nine months ended September 30, 2021 include the results of RU from the Closing Date through September 30, 2021. We did not consolidate the financial results of the RU Segment prior to the Closing Date. Accordingly, the financial results of each period presented are not directly comparable. This discussion highlights changes in the APUS and HCN segments, as those results are fully included in each period. For the three months ended September 30, 2021, our consolidated revenue increased to $98.2 million from $79.1 million, or by 24.2%, compared to the prior year period. Our operating margins decreased to 1.2% from 4.2% for the three months ended September 30, 2021, compared to the prior year period. For the three months ended September 30, 2021, the net loss for the period was $0.3 million, compared to net income of $2.6 million for the three months ended September 30, 2020, a 31 decrease of $2.9 million. For the nine months ended September 30, 2021, our consolidated revenue increased to $264.8 million from $235.9 million, or 12.3%, compared to the prior period. Our operating margins decreased to 5.3% from 6.4% for the nine month periods ended September 30, 2021, compared to the prior year period. Net income decreased to $8.4 million from $11.8 million, a decrease of $3.4 million, or 28.8%, compared to the prior year period. For the three months ended September 30, 2021, APUS Segment revenue decreased to $65.9 million from $69.7 million, or by 5.4%, compared to the prior year period. Net course registrations at APUS for the three months ended September 30, 2021 decreased to approximately 83,100 from approximately 90,300, or approximately 8.0%, compared to the prior year period. APUS Segment operating margins increased to 11.9% from 10.6% for the three months ended September 30, 2021, compared to the prior year period. For the nine months ended September 30, 2021, APUS Segment revenue decreased to $210.3 million from $210.4 million, or by less than 1%, compared to the prior year period. Net course registrations at APUS for the nine months ended September 30, 2021 decreased to approximately 258,700 from approximately 264,700, or approximately 2.3%, compared to the prior year period. APUS Segment operating margins increased to 14.7% from 14.2% for the nine months ended September 30, 2021, compared to the prior year period. The decreases in APUS Segment revenue were due to the decreases in net course registrations which we believe were due to a moderation in near-term demand for online education due to the abatement of the COVID-19 pandemic, and also in part to the temporary suspension and disruption of the Army’s TA program. From the Closing Date through September 30, 2021, RU Segment revenue was $21.1 million. RU Segment operating margin was negative 4.7% for the three months ended September 30, 2021. For the three months ended September 30, 2021, HCN Segment revenue increased to $11.2 million from $9.5 million, or by 17.8%, compared to the prior year period. Total enrollment at HCN for the three months ended September 30, 2021 increased to approximately 2,300 from approximately 2,000, or approximately 18.9%, as compared to the prior year period. HCN Segment operating margins decreased to 4.0% from 4.9% for the three months ended September 30, 2021, compared to the prior year period. For the nine months ended September 30, 2021, HCN Segment revenue increased to $33.5 million from $25.7 million, or by 30.5%, compared to the prior year period. HCN Segment operating margins increased to 4.0% from negative 1.8% for the nine months ended September 30, 2021, compared to the prior year period. For more information on Army TA program suspension and delays, their related impacts on the Company, and related risks, please refer to “Overview—Background” above and the section entitled “Risk Factors” in this Quarterly Report. Critical Accounting Policies and Use of Estimates For information regarding our Critical Accounting Policies and Use of Estimates, see the “Critical Accounting Policies and Use of Estimates” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report. Results of Operations Below we have included a discussion of our operating results and material changes in our operating results during the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 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 reportable 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 revenue and expenses, including due to the Rasmussen Acquisition. 32 We believe the decrease in net course registrations at APUS for the three and nine months ended September 30, 2021 was due, in part, to the temporary suspension and disruption of the Army’s TA program on March 8, 2021, resulting from delays in the transition from its legacy system, GoArmyEd, to a new system, ArmyIgnitED, and a moderation in near-term demand for online education due to the abatement of the COVID-19 pandemic. For more information on the impacts of the Army TA program delays on the Company and the potential risks related to this, 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 this Quarterly Report. We believe that the increase in enrollment at HCN for the three and nine months ended September 30, 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, and 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 further 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—Background” 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 and nine months ended September 30, 2021 and 2020 reflect the operations of our APUS and HCN Segments only and include the results of our RU Segment from the Closing Date. We did not consolidate the RU Segment prior to the Closing Date. Rasmussen enrollment was approximately 16,900 during the three months ended September 30, 2021, which compares to 17,200 during the three months ended September 30, 2020. We believe this decline in enrollment may have been caused, in part, due to a moderation in near-term demand for Rasmussen’s programs due to the abatement of the COVID-19 pandemic. However, because we have only recently acquired Rasmussen University, we cannot provide a full assessment of the factors that could have led to the decline in enrollments at Rasmussen University. For a more detailed discussion of our results by reportable segment, refer to “Analysis of Operating Results by Reportable Segment” below. 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: 33 Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (Unaudited) (Unaudited) Revenue 100.0 % 100.0 % 100.0 % 100.0 % Costs and expenses: Instructional costs and services 43.3 39.3 39.7 38.6 Selling and promotional 23.9 23.4 22.8 22.8 General and administrative 27.1 28.5 28.5 27.7 Loss on disposals of long-lived assets — 0.5 0.1 0.3 Depreciation and amortization 4.5 4.1 3.6 4.2 Total costs and expenses 98.8 95.8 94.7 93.6 Income from operations before interest income and income taxes 1.2 4.2 5.3 6.4 Interest (expense) income (1.3) 0.2 (0.4) 0.4 (Loss) Income from operations before income taxes (0.1) 4.4 4.9 6.8 Income tax expense 0.2 1.0 1.3 1.8 Equity investment loss — — (0.3) — Net (loss) income (0.3) % 3.4 % 3.3 % 5.0 % Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020 Revenue. Our consolidated revenue for the three months ended September 30, 2021 was $98.2 million, an increase of $19.1 million, or 24.2%, compared to $79.1 million for the three months ended September 30, 2020. The increase in revenue was primarily due to the inclusion of RU Segment revenue from the Closing Date through September 30, 2021 of $21.1 million, as well as a $1.7 million, or 17.8%, increase in revenue in our HCN Segment, partially offset by a $3.8 million, or 5.4%, decrease in revenue in our APUS Segment. The APUS Segment revenue decrease was primarily due to decreases in APUS total student net course registrations of 8.0% during the three months ended September 30, 2021 as compared to the prior year period. The HCN Segment revenue increased primarily due to an 18.9% increase in total enrollment as compared to the prior year period. Costs and expenses. Costs and expenses for the three months ended September 30, 2021 were $97.0 million, an increase of $21.2 million, or 27.9%, compared to $75.8 million for the three months ended September 30, 2020. The increase in costs and expenses for the three months ended September 30, 2021 as compared to the prior year period was primarily due to the inclusion of our RU Segment costs and expenses from the Closing Date through September 30, 2021 of $22.0 million, as well as increases in professional fees in our APUS Segment, increases in employee compensation costs, advertising costs, bad debt expense, and instructional materials costs in our HCN Segment, increases in employee compensation costs, professional fees primarily related to the integration planning of the Rasmussen Acquisition, and increases in other unallocated costs in Corporate and Other, partially offset by decreases in employee compensation costs, advertising expenses, and course materials costs in our APUS Segment. The three months ended September 30, 2021 includes the following costs on a pre-tax basis: $1.7 million in information technology costs related to our multi-year technology transformation program in our APUS Segment, and $1.6 million in professional fees primarily related to the Rasmussen Acquisition in our Corporate and Other unallocated costs. The three months ended September 30, 2020 included the following costs on a pre-tax basis: a $2.1 million increase in advertising in our APUS and HCN Segments, $1.5 million in information technology costs related to our multi-year technology transformation program in our APUS Segment, and $1.9 million in professional fees associated with strategic growth opportunities including the Rasmussen Acquisition in our Corporate and Other unallocated costs. Costs and expenses as a percentage of revenue increased to 98.8% for the three months ended September 30, 2021, from 95.8% for the three months ended September 30, 2020. Instructional costs and services expenses. Our instructional costs and services expenses for the three months ended September 30, 2021 were $42.5 million, an increase of $11.5 million, or 36.9%, compared to $31.1 million for the three months ended September 30, 2020. The increase in instructional costs and services expenses was primarily due to the inclusion of our RU Segment instructional costs and services expenses from the Closing Date through September 30, 2021 of $12.3 million, as 34 well as increases in employee compensation costs in our HCN Segment, partially offset by decreases in employee compensation costs and course materials costs in our APUS Segment. Instructional costs and services expenses as a percentage of revenue increased to 43.3% for the three months ended September 30, 2021, from 39.3% for the three months ended September 30, 2020. Selling and promotional expenses. Our selling and promotional expenses for the three months ended September 30, 2021 were $23.5 million, an increase of $4.9 million, or 26.6%, compared to $18.5 million for the three months ended September 30, 2020. The increase in selling and promotional expenses was primarily due to the inclusion of our RU Segment selling and promotional expenses from the Closing Date through September 30, 2021 of $5.8 million, as well as increases in advertising costs and employee compensation costs in our HCN Segment, partially offset by decreases in advertising costs in our APUS Segment. Selling and promotional expenses as a percentage of revenue increased to 23.9% for the three months ended September 30, 2021, from 23.4% for the three months ended September 30, 2020. General and administrative expenses. Our general and administrative expenses for the three months ended September 30, 2021 were $26.6 million, an increase of $4.0 million, or 17.8%, compared to $22.6 million for the three months ended September 30, 2020. The increase in general and administrative expenses was primarily due to the inclusion of our RU Segment general and administrative expenses from the Closing Date through September 30, 2021 of $2.1 million, as well as increases in employee compensation costs and professional fees primarily related to the integration planning of the Rasmussen acquisition in our Corporate and Other unallocated costs, an increase in professional fees in our APUS Segment, and increases in bad debt expense and employee compensation costs in our HCN Segment, partially offset by decreases in employee compensation costs in our APUS Segment. For the three months ended September 30, 2021, general and administrative expenses include the following on a pre-tax basis: approximately $1.7 million of information technology costs related to our multi-year technology transformation program in our APUS Segment, and $1.6 million in professional fees primarily related to the Rasmussen Acquisition in our Corporate and Other unallocated costs. Consolidated bad debt expense for the three months ended September 30, 2021 was $1.6 million, or 1.6% of revenue, compared to $0.9 million, or 1.1% of revenue in the prior year period. General and administrative expenses as a percentage of revenue decreased to 27.1% for the three months ended September 30, 2021, from 28.5% for the three months ended September 30, 2020. As we continue to integrate RU and evaluate and execute on 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 September 30, 2021. The loss on disposals of long-lived assets was $0.4 million for the three months ended and September 30, 2020. Depreciation and amortization expenses. Depreciation and amortization expenses were $4.4 million and $3.2 million for the three months ended September 30, 2021 and 2020, respectively. The increase of depreciation and amortization expenses was primarily the result of the inclusion of RU Segment depreciation and amortization expenses from the Closing Date through September 30, 2021 of $1.9 million. Depreciation and amortization expenses as a percentage of revenue increased to 4.5% for the three months ended September 30, 2021, from 4.1% for the three months ended September 30, 2020. Stock-based compensation expenses. Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses were $1.8 million and $1.9 million for the three months ended September 30, 2021 and 2020, respectively. Stock-based compensation costs include accelerated expense for retirement-eligible employees and performance stock unit incentive costs. Interest (expense) income. Interest expense was $1.3 million for the three months ended September 30, 2021, compared to interest income of $0.1 million for the three months ended September 30, 2020. The increase in interest expense was due to the $175.0 million Term Loan issued in connection with the Rasmussen Acquisition. Income tax expense. We recognized income tax expense of $0.2 million and $0.8 million for the three months ended September 30, 2021 and 2020, respectively, or a negative effective tax rate for the three months ended September 30, 2021, as compared to an effective tax rate of 22.9% in the prior year period. The negative effective tax rate for the three months ended September 30, 2021 is due to non-deductible expenses in a period with a pre-tax loss compared to pre-tax income in the prior period. There was no material impact to our effective tax rate for the three months ended September 30, 2021 and 2020 as a result of the effects of the COVID-19 pandemic. Equity investment income (loss). There was no equity investment loss for the three months ended September 30, 2021 and 2020. 35 Net (loss) income. Our net loss was $0.3 million for the three months ended September 30, 2021, compared to net income of $2.6 million for the three months ended September 30, 2020, a decrease of $2.9 million. This decrease was related to the factors discussed above. Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020 Revenue. Our consolidated revenue for the nine months ended September 30, 2021 was $264.8 million, an increase of $28.9 million, or 12.3%, compared to $235.9 million for the nine months ended September 30, 2020. The increase in revenue was primarily due to the inclusion of RU Segment revenue from the Closing Date through September 30, 2021 of $21.1 million, as well as a $7.8 million, or 30.5%, increase in revenue in our HCN Segment, partially offset by a $0.1 million or less than a 1% decrease in our APUS Segment revenue. The HCN Segment revenue increase was primarily due to a 32.3% increase in total enrollment as compared to the prior year period. The APUS Segment revenue decrease was primarily as a result of total student net course registrations decreasing 2.3% during the nine months ended September 30, 2021, as compared to the prior year period. Costs and expenses. Costs and expenses for the nine months ended September 30, 2021 were $250.9 million, an increase of $30.1 million, or 13.6%, compared to $220.8 million for the nine months ended September 30, 2020. The increase in costs and expenses for the nine months ended September 30, 2021 as compared to the prior year period was primarily due to the inclusion of our RU Segment costs and expenses from the Closing Date through September 30, 2021 of $22.0 million, as well as increases in professional fees, employee compensation costs, and information technology costs in our APUS Segment, increases in employee compensation costs, bad debt expense, and instructional materials costs in our HCN Segment, increases in professional fees primarily related to the integration planning of the Rasmussen Acquisition, and increases in employee compensation costs and other unallocated costs in Corporate and Other. Results for the nine months ended September 30, 2021 include the following costs on a pre-tax basis: $5.6 million in professional fees primarily related to the Rasmussen Acquisition in our Corporate and Other unallocated costs, $5.0 million in information technology costs related to our multi-year technology transformation program in our APUS Segment. Results for the nine months ended September 30, 2020 included the following costs on a pre-tax basis: $3.8 million in professional fees primarily related to the Rasmussen Acquisition in our corporate and other unallocated costs, and $3.4 million in information technology costs related to our multi-year technology transformation programs in our APUS Segment. Costs and expenses as a percentage of revenue increased to 94.7% for the nine months ended September 30, 2021, from 93.6% and for the nine months ended September 30, 2020. Instructional costs and services expenses. Our instructional costs and services expenses for the nine months ended September 30, 2021 were $105.3 million, an increase of $14.2 million, or 15.6%, compared to $91.1 million for the nine months ended September 30, 2020. The increase in instructional costs and services expenses was primarily due to the inclusion of RU Segment instructional costs and services expenses from the Closing Date through September 30, 2021 of $12.3 million, as well as increases in employee compensation costs, and instructional materials costs in our HCN Segment, partially offset by decreases in employee compensation costs and instructional materials costs in our APUS Segment. Instructional costs and services expenses as a percentage of revenue increased to 39.7% for the nine months ended September 30, 2021, from 38.6% for the nine months ended September 30, 2020. Selling and promotional expenses. Our selling and promotional expenses for the nine months ended September 30, 2021 were $60.4 million, an increase of $6.6 million, or 12.2%, compared to $53.8 million for the nine months ended September 30, 2020. The increase in selling and promotional expenses was primarily due to the inclusion of RU Segment selling and promotional expenses from the Closing Date through September 30, 2021 of $5.8 million, as well as increases in employee compensation costs in our APUS Segment, and increases in advertising costs in our HCN Segment. Selling and promotional expenses as a percentage of revenue was 22.8% for both the nine months ended September 30, 2021 and 2020. General and administrative expenses. Our general and administrative expenses for the nine months ended September 30, 2021 were $75.6 million, an increase of $10.3 million, or 15.7%, compared to $65.3 million for the nine months ended September 30, 2020. The increase in general and administrative expenses was primarily due to the inclusion of RU Segment general and administrative expenses from the Closing Date through September 30, 2021 of $2.1 million as well as increases in professional fees and information technology costs in our APUS Segment, increases in professional fees primarily related to the Rasmussen Acquisition and employee compensation costs in our Corporate and Other unallocated costs, and increases in bad debt expense and employee compensation costs in our HCN Segment, partially offset by decreases in rent expense in our APUS Segment. For the nine months ended September 30, 2021, general and administrative expenses include the following on a pre-tax basis: $5.6 million in professional fees primarily related to the Rasmussen Acquisition in our Corporate and Other unallocated costs, and $5.0 million in information technology costs related to our multi-year technology transformation program in our APUS Segment. Consolidated bad debt expense for the nine months ended September 30, 2021 was $4.4 million, or 1.7% of revenue, compared to $2.8 million, or 1.2% of revenue in the prior year period. General and administrative 36 expenses as a percentage of revenue increased to 28.5% for the nine months ended September 30, 2021, from 27.7% for the nine months ended September 30, 2020. As we continue to integrate RU and evaluate and execute on 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. The loss on disposals of long-lived assets was $0.2 million and $0.7 million for the nine months ended September 30, 2021 and 2020, respectively. Depreciation and amortization expenses. Depreciation and amortization expenses were $9.6 million and $10.0 million for the nine months ended September 30, 2021 and 2020, respectively. The decrease in depreciation and amortization expenses was primarily the result of a decrease in our APUS Segment, partially offset by the inclusion of the RU Segment depreciation and amortization expenses from the Closing Date through September 30, 2021 of $1.9 million. Depreciation and amortization expenses as a percentage of revenue decreased to 3.6% for the nine months ended September 30, 2021, from 4.2% for the nine months ended September 30, 2020. Stock-based compensation expenses. Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses were $6.0 million and $5.3 million for the nine months ended September 30, 2021 and 2020, respectively. Stock-based compensation costs include accelerated expense for retirement-eligible employees and performance stock unit incentive costs. Interest (expense) income. Interest expense was $1.2 million for the nine months ended September 30, 2021, compared to interest income of $1.0 million for the nine months ended September 30, 2020. The increase in interest expense was due to the $175.0 million Term Loan issued in connection with the Rasmussen Acquisition. Income tax expense. We recognized income tax expense of $3.5 million and $4.3 million for the nine months ended September 30, 2021 and 2020, respectively, or effective tax rates of 29.5% and 26.7%, respectively. The increase in the effective tax rate for the nine months ended September 30, 2021 is due to higher non-deductible expenses in the current year period as compared to the prior year period, and a higher overall effective state tax rate. There was no material impact to our effective tax rate for the nine months ended September 30, 2021 and 2020 as a result of the effects of the COVID-19 pandemic. Equity investment loss. Equity investment loss was $0.8 million for the nine months ended September 30, 2021. There was no equity investment income or loss for the nine months ended September 30, 2020. The equity investment loss for the nine months ended September 30, 2021 includes an impairment loss of $0.8 million on one of our cost method investments. For additional information on our investments please refer to “Note 2. Significant Accounting Policies” in our Consolidated Financial Statements. Net income. Our net income was $8.4 million for the nine months ended September 30, 2021, compared to net income of $11.8 million for the nine months ended September 30, 2020, a decrease of $3.4 million, or 28.8%. This decrease was related to the factors discussed above. 37 Analysis of Operating Results by Reportable Segment The following table provides details on our operating results by reportable segment for the respective periods (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (Unaudited) (Unaudited) Revenue: APUS Segment $ 65,906 $ 69,659 $ 210,321 $ 210,376 RU Segment 21,132 — 21,132 — HCN Segment 11,240 9,541 33,506 25,682 Corporate and Other (30) (67) (156) (182) Total Revenue $ 98,248 $ 79,133 $ 264,803 $ 235,876 Income (loss) from operations before interest and income taxes: APUS Segment $ 7,825 $ 7,392 $ 30,969 $ 29,785 RU Segment (999) — (999) — HCN Segment 448 466 1,348 (455) Corporate and Other (6,012) (4,550) (17,444) (14,288) Total income from operations before interest and income taxes $ 1,262 $ 3,308 $ 13,874 $ 15,042 The RU Segment reflects the operations of RU, which was acquired on the Closing Date, through September 30, 2021. The Company did not consolidate the financial results of the RU Segment prior to the Closing Date. Adjustments to reconcile segment results to the Consolidated Financial Statements are included in “Corporate and Other”, which primarily includes unallocated corporate activity and eliminations, including charges for the value of courses taken by non-APUS employees of the Company at APUS. APUS Segment For the three months ended September 30, 2021, the $3.8 million, or 5.4%, decrease to approximately $65.9 million in revenue in our APUS Segment was attributable to lower net course registrations. Net course registrations at APUS decreased 8.0% to approximately 83,100 for the three months ended September 30, 2021 from approximately 90,300 during the same period in 2020. Income from operations before interest and income taxes increased to $7.8 million during the three months ended September 30, 2021, from $7.4 million, an increase of $0.4 million, or 5.9%, compared to the prior year as a result of a decrease in revenue due to decreases in net course registrations as discussed above. For the three months ended September 30, 2021, enrollment and revenue were adversely impacted by the moderation in near-term demand for online education due to the abatement of the COVID-19 pandemic. We anticipate that enrollment and revenue for the quarter ending December 31, 2021 will continue to be impacted by these events. For the nine months ended September 30, 2021, the $0.1 million decrease to approximately $210.3 million in revenue in our APUS Segment was primarily attributable to lower net course registrations. Net course registrations at APUS decreased 2.3% to approximately 258,700 for the nine months ended September 30, 2021 from approximately 264,700 during the same period in 2020. Income from operations before interest and income taxes in our APUS Segment was $31.0 million during the nine months ended September 30, 2021, an increase of $1.2 million, or 4.0%, compared to the same period in 2020. RU Segment For the three and nine months ended September 30, 2021, RU Segment revenue was $21.1 million from the Closing Date through September 30, 2021 . The RU Segment loss from operations before interest and income taxes was $1.0 million for the period from the Closing Date through September 30, 2021. Rasmussen enrollment was approximately 16,900 during the 38 three months ended September 30, 2021, which compares to 17,200 during the three months ended September 30, 2020. We believe this decline in enrollment may have been caused, in part, due to a moderation in near-term demand for Rasmussen’s programs due to the abatement of the COVID-19 pandemic. HCN Segment For the three months ended September 30, 2021, the $1.7 million, or 17.8%, increase to approximately $11.2 million in revenue in our HCN Segment was attributable to an increase in total student enrollment. HCN total student enrollment increased 18.9% to approximately 2,300 from approximately 2,000 students during the three months ended September 30, 2021, compared to the same period in 2020. Income from operations before interest and income taxes in our HCN Segment was $0.4 million during the three months ended September 30, 2021, compared to $0.5 million in the same period in 2020, a decrease of $0.1 million, primarily as a result of increases in expenses as discussed above. For the nine months ended September 30, 2021, the $7.8 million, or 30.5%, increase to approximately $33.5 million in revenue in our HCN Segment was primarily attributable to an increase in student enrollment. HCN total student enrollment increased 32.3% during the nine months ended September 30, 2021 compared to the same period in 2020. The income from operations before interest and income taxes in our HCN Segment was $1.3 million during the nine months ended September 30, 2021, compared to a loss of $0.5 million in the same period in 2020, primarily as a result of the increase in revenue due to higher enrollment discussed above. Liquidity and Capital Resources Liquidity Cash and cash equivalents were $141.5 million and $227.7 million at September 30, 2021 and December 31, 2020, respectively, representing a decrease of $86.2 million, or 37.9%. Cash and cash equivalents at September 30, 2021 decreased by $86.5 million from $228.0 million, or 37.9%, as compared to September 30, 2020. The decrease in cash was due to the acquisition of Rasmussen University on the Closing Date, partially offset by 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. The acquisition was funded by $170.5 million of cash and cash equivalents and the net proceeds from the $175 million Term Loan. We have historically financed operating activities and capital expenditures with cash provided by operating activities. We anticipate that we will be able to satisfy the cash requirements associated with, among other things, our working capital needs, capital expenditures, lease commitments, and debt interest and principal obligations, through at least the next 12 months primarily with cash generated by operations and existing cash balances. We derive a significant portion of our revenue from TA from the DoD and programs from the VA. Generally, these funds are received within 60 days of the start of the courses to which they relate. Disruptions related to the Army’s transition to a new system for soldiers to use to request TA have adversely impacted APUS’s ability to invoice the Army for Army registrations and have adversely impacted accounts receivable balances and cash flow from operations. As of September 30, 2021, approximately $18.7 million in accounts receivable, of which $11.6 million is older than 60 days from the course start date, was due from the Army due to the disruption associated with the transition to ArmyIgnitED. We cannot predict when this disruption will be completely resolved with the Army’s systems fully operational or the timing of expected cash receipts from the Army. Another significant source of revenue is derived from our participation in ED’s Title IV programs, for which disbursements are governed by federal regulations. We have typically received disbursements under Title IV programs within 30 days of the start of the applicable course or term. We expect to continue to fund our costs and expenses through cash generated from operations. Based on our current level of operations, we believe that our cash flow from operations and our existing cash and cash equivalents will provide adequate funds for ongoing operations, debt and interest obligations, and planned capital expenditures for the foreseeable future. Our operating expenditures may increase in future periods as we continue to invest in the modernization of our information technology systems, advertising, 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 $6.0 million and $8.0 million in 2021. For the nine months ended September 30, 2021, we incurred approximately $5.0 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. 39 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 RU and 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 continue the integration of Rasmussen University, and continue to evaluate and execute on 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. For the three and nine months ended September 30, 2021, we incurred approximately $1.6 million and $5.6 million of acquisition-related expenses, respectively, which are included in general and administrative expenses on the Consolidated Statements of Income. We raised 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 up to $300 million 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, and we have approximately $214 million of room available under our shelf registration statement for future offerings. 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 with Macquarie Capital (USA) Inc., or Macquarie Lender, and Macquarie Capital Funding LLC, or Macquarie Capital, and together, Macquarie, pursuant to which Macquarie Capital committed to provide (i) a senior secured term loan facility in the aggregate principal amount of $175.0 million, or the Term Loan, and (ii) a senior secured revolving loan facility in an aggregate commitment amount of $20.0 million, or together with the Term Loan, 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. In connection with the completion of the Rasmussen Acquisition, on the Closing Date, we entered into a Credit Agreement with Macquarie Capital, as administrative agent and collateral agent, Macquarie Lender and Truist Securities as joint lead arrangers and bookrunners, and a syndicate of lenders, or the Lenders and, pursuant to the Credit Agreement, the Lenders provided us with the Facilities. We paid a portion of the consideration for the Rasmussen Acquisition with proceeds from the Term Loan. For more information on the Facilities and their terms, see “Note 8. Long-Term Debt” included in the Consolidated Financial Statements in this Quarterly Report. Our future capital requirements will depend on a number of factors. There can be no guarantee 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. Acquisition of Graduate School USA On August 11, 2021, we announced that we had entered into an agreement to acquire substantially all of the assets of Graduate School USA, or Graduate School, one of the largest providers of training to the federal government workforce, for approximately $1.0 million. The purchase price is subject to working capital adjustments, and the acquisition is expected to close in the first quarter of 2022, subject to the satisfaction or waiver of closing conditions. 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. 40 During the three and nine months ended September 30, 2021, we did not repurchase shares of common stock. As of September 30, 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 $0.6 million and $44.7 million for the nine months ended September 30, 2021 and 2020, respectively. The decrease in cash from operating activities is primarily due to the timing of the Rasmussen Acquisition. Rasmussen University receives the majority of its cash receipts during the first month of each fiscal quarter while disbursements occur throughout the quarter. Pursuant to the terms of the Rasmussen Acquisition, the Seller in the transaction retained substantially all of the cash held by Rasmussen University on the Closing Date. Accordingly, from the Closing Date through September 30, 2021, and continuing through mid-October when Rasmussen University received its TPPPA, the majority of Rasmussen’s operations were funded by APEI. Cash flow from operating activities also decreased due to changes in working capital due to the timing of receipts and payments, and higher estimated tax payments in 2021 compared to the prior year. Tax payments for income taxes were $7.0 million for the nine months ended September 30, 2021, compared to $3.1 million for the nine months ended September 30, 2020, an increase of $3.9 million. The following changes in working capital accounts had a negative impact on operating cash flow for the nine months ended September 30, 2021, as compared to the prior year period: deferred revenue of $26.9 million due to the acquisition of Rasmussen occurring during the quarterly and academic third quarter term; accounts payable, accrued compensation and benefits, and accrued liabilities of $5.4 million due in part to higher incentive-based compensation payments in the current year period; and changes in accounts receivable of $2.8 million primarily due to the disruption caused by the Army’s transition to the ArmyIgnitED system. Disruptions related to the Army’s transition to a new system for soldiers to use to request TA have adversely impacted APUS’s ability to invoice the Army for Army registrations and may impact future accounts receivable balances and cash flow from operations. As of September 30, 2021, approximately $18.7 million in accounts receivable, of which $11.6 million is older than 60 days from the course start date, was due from the Army due to the disruption caused by the transition to ArmyIgnitED. Investing Activities Net cash used in investing activities was $331.3 million and $3.8 million for the nine months ended September 30, 2021 and 2020, respectively. This increase was primarily related to the Rasmussen Acquisition, as well as increases in capital expenditures. Financing Activities Net cash provided by financing activities was $244.5 million for the nine months ended September 30, 2021, compared to $15.7 million of net cash used in financing activities for the nine months ended September 30, 2020, respectively. The increase in cash provided by financing activities for the nine months ended September 30, 2021 was due to our underwritten public offering of common stock for aggregate net proceeds of approximately $86.2 million and the long-term debt net proceeds of $162.7 million received on the Closing Date. For the nine months ended September 30, 2020, we used $13.6 million to repurchase shares of our common stock in accordance with our share repurchase program. Contractual Obligations We have various contractual obligations consisting of operating leases and purchase obligations. Purchase obligations include agreements with consultants, contracts with third-party service providers, and other future contracts or agreements. Prior to the Closing Date, RU entered into service agreements with a third party, Collegis LLC, to provide marketing and IT services that expire September 30, 2024. The total minimum value of the service contracts over the remaining three year period is approximately $57.2 million. 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. 41