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Item 7. Management’s Discussion and Analysis

2022-03-02 compared with 2021-03-09 · 327 added, 344 removed, 192 unchanged (78% of the section changed)

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

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

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

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

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

Department of Education, or ED.

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

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

American Public Education, Inc., or APEI, is a provider of online and campus-based postsecondary education to approximately 108,400 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 designed to 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 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.

Additional information regarding our subsidiary institutions and their regulation is included in the “Business - Company Overview” and “Business - Regulatory Environment” sections of this Annual Report.

On September 1, 2021, or 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, net of cash acquired.

Upon completion of the Rasmussen Acquisition, Rasmussen University, or RU, became a wholly owned subsidiary of APEI.

On September 9, 2021, RU timely submitted a change in ownership and control application to ED seeking approval to participate in the Title IV programs under our ownership.

RU is also pursuing other post-closing notices and consents related to the change in ownership.

For the year ended December 31, 2021, we incurred approximately $6.3 million of acquisition-related expenses, which are included in general and administrative expenses in the Consolidated Statements of Income.

Our consolidated results for the years ended December 31, 2020 and 2021 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.

Adjustments to reconcile segment results to the Consolidated Financial Statements are included in “Corporate and Other”, which primarily includes unallocated corporate activity and eliminations.

For more information on the Rasmussen Acquisition, please refer to “Note 3.

Acquisition Activity” included in the Consolidated Financial Statements in this Annual Report, and the sections entitled “– Regulatory and Legislative Activity – Rasmussen Acquisition Regulatory Review” above.

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, please refer to “– Liquidity and Capital Resources – Liquidity – Acquisition of Rasmussen University” below and “Note 8.

Long-Term Debt” included in the Consolidated Financial Statements in this Annual Report.

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

Our consolidated revenue in 2021 was $418.8 million, representing a $97.0 million, or 30.1%, increase from $321.8 million in 2020.

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

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

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

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

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

We believe that the increase in new student enrollment at HCN was due in part to an increase in demand for nursing education, a change in the competitive environment due to COVID-19, an increase in marketing expenditures as compared to prior year, the continued impact of new initiatives implemented in 2019 such as the Direct Entry ADN Program, and the implementation of the institutional affordability grant in the first quarter of 2020.

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

Our operations are organized into two reporting segments:

• American Public Education Segment, or APEI Segment.

This segment reflects the operational activities of APUS, other corporate activities, and minority investments.

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

The 2021 revenue increase was primarily due to the inclusion of RU Segment revenue from the Closing Date through December 31, 2021, as well as an increase in student enrollment at HCN during that period, partially offset by a decrease in APUS net registrations.

The 2020 revenue increase was due to increases in net course registrations at APUS and student enrollment at HCN.

We believe the decrease in net course registrations at APUS was due, in part, to the temporary suspension and disruption of the Army’s TA program beginning in February 2021, resulting from delays in the transition from its legacy system used by soldiers to request TA, GoArmyEd, to a new system, ArmyIgnitED, and a moderation in near-term demand for online education as the COVID-19 pandemic abated prior to the omicron variant.

We believe that the increase in new student enrollment at HCN was due in part to an increase in demand for nursing education, a change in the competitive environment due to COVID-19, an increase in marketing expenditures as compared to the prior year, and the continued impact of new initiatives implemented in 2019 and 2020 such as the Direct Entry ADN Program and the institutional affordability grant.

Additionally, the opening of a new campus in Akron, Ohio in April 2021 contributed to an increase in new student enrollment.

Our operations are organized into three reporting segments:

• American Public University System, or APUS Segment.

This segment reflects the operational activities of APUS.

• Rasmussen University Segment, or RU Segment .

This segment reflects the operational activities of RU.

• Hondros College of Nursing Segment, or HCN Segment.

This segment reflects the operational activities of HCN.

Prior to the acquisition of RU, we had two reportable segments:

the American Public Education, Inc.

Segment, or APEI Segment, and the Hondros College of Nursing, or HCN Segment.

Post-acquisition, we have three reportable segments:

the APUS Segment, which was previously included within the APEI Segment;

the RU Segment;

and the HCN Segment.

The APEI Segment previously reported the results of both APUS and 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.

Financial information regarding each of our reportable segments is reported in this Annual Report in the sections “Financial Statements and Supplementary Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Operating Results by Reportable Segment Year Ended December 31, 2021 Compared to Year Ended December 31, 2020.”

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

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

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

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

HCN later fully reopened its campuses, using smaller in person classes with screening, social distancing, and masking requirements while continuing to offer courses in a virtual setting for those that prefer remote course learning, and then reverted to online courses and limited on-campus labs in November 2020 following spikes in COVID-19 cases.

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

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

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

For example, in October 2020, HCN began temporarily expanding certain campuses through short-term leases of additional space to be used as lab space in order to accommodate student demand in compliance with COVID-related public health measures that effectively limit the number of students in each lab class.

While not yet quantifiable, ongoing impacts may cause a disruption of educational services provided to our students, cause a disruption in revenue, lead to increased absenteeism in our workforce, increase costs for HCN to continue to deliver courses in person and online, be considered a triggering event to evaluate the value of HCN goodwill, lead to an impairment of APEI investments, impact the recoverability of receivables, and lead to an increase in bad debt expense and cohort default rates, among other impacts.

For more information on the potential risks related to COVID-19, please refer to the section entitled “Risk Factors” in this Annual Report.

Rasmussen Acquisition.

On October 28, 2020, we entered into a definitive agreement to acquire Rasmussen University, a nursing- and health sciences-focused institution serving over 18,000 students at its 24 campuses across six states and online, which we refer to as the Rasmussen Acquisition.

Pursuant to the terms of a Membership Interest Purchase Agreement, or the Rasmussen Agreement, we agreed to purchase from FAH Education, LLC all of the units of membership interests in Rasmussen LLC, Rasmussen University’s parent company, for $300 million in cash and $29 million in shares of a new series of non-voting preferred stock to be issued at the closing of the Rasmussen Acquisition (or, at our election, up to an additional $29 million in cash in lieu thereof), subject to customary adjustments, including for net working capital, cash and debt of the acquired companies.

The Rasmussen Acquisition is expected to close in the third quarter of 2021, subject to the satisfaction or waiver of closing conditions that include, among others, regulatory review by ED, approval by the HLC, and approval by or notices to other regulatory and accrediting bodies.

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

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

For a discussion of the financial results of operations for the fiscal year ended December 31, 2020 compared to the fiscal year ended December 31, 2019, refer to Part II, Item 7 of our 2020 Form 10-K filed with the SEC on March 9, 2021 which discussion is incorporated in this Annual Report by reference and which is available free of charge on the SECs website at www.sec.gov.

The COVID-19 pandemic did not materially impact our results of operations during the years ended December 31, 2020 and 2021.

We believe that the pandemic contributed to increased registrations and enrollments across our subsidiary institutions in 2020, and, as the COVID-19 pandemic abated in 2021 prior to the omicron variant, we believe near-term demand for our programs moderated.

However, any future impact on our operations remains uncertain.

For more information on the operational and regulatory impacts of and potential risks related to COVID-19, please refer to the sections entitled “Business - Company Overview - COVID-19 Pandemic” and “Risk Factors – Risks Related to the COVID-19 Pandemic” in this Annual Report and to “- Results of Operations” below.

Student Body.

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

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

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

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

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

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

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

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

For more information about the risks related to these challenges please see “Risk Factors - Risks Related to Attracting and Retaining Students.”

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

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

For the fiscal year ended December 31, 2021, 50% of RU students were enrolled in nursing programs, 19% in health sciences programs, 15% in business programs, with the remainder of students in education, technology, design and justice studies programs.

For the fiscal year ended December 31, 2021, approximately 63% of HCN students were enrolled in the PN Program, while 37% were enrolled in the ADN program.

incur marketing expenses;

and make investments in management and capital expenditures, including technology-related expenditures.

may be adversely impacted.

For more information about the risks related to these challenges please refer to “Risk Factors - Risks Related to Attracting and Retaining Students.”

Increased Costs and Expenses;

Our Initiatives.

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

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

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

In addition, in 2021 we continued to incur expenses to evaluate and invest in replacements and upgrades to our information technology systems, in our APUS Segment.

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 incurred approximately $1.0 million of pre-tax cash expenses associated with employee severance benefits.

The reduction in force resulted in $1.4 million in pre-tax labor and benefit savings in 2021, and is expected to result in savings in the range of approximately $2.6 million to $3.6 million in 2022.

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

Additionally, on January 14, 2022, RU completed a reduction in force that resulted in the termination of 9 full-time faculty members and 19 non-faculty employees across a variety of roles and departments at RU, representing approximately 3.0% of RU’s full-time faculty workforce, and 2.1% of RU’s non-faculty workforce.

We incurred an aggregate of approximately $0.4 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 the range of $2.5 million to $3.5 million in 2022.

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

The actual costs and benefits savings expected for 2022 are preliminary and may vary based on various factors, including changes in underlying assumptions and projections.

We recorded expenses for termination benefits related to the workforce reductions in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 420, Exit or Disposal Cost Obligations .

There is no certainty that these cost reduction initiatives, 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.

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

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

• further changes to admissions standards and requirements;

• changes to admissions standards and requirements;

• updates to the admissions process and procedures;

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• changing tuition costs and payment options;

• opening additional campuses to meet student needs;

• changing fund disbursement methods;

• implementing alternative learning delivery methods.

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

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

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

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

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

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

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

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

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

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

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

For example, in 2019, 2020, and 2021, we incurred

approximately $2.1 million, $5.6 million, and $6.0 million, respectively, in information technology costs related to our multi-year technology transformation program in our APUS Segment.

Our learning management system upgrade was completed in early 2021 and the first phases of our customer relationship management system upgrade were completed in January 2022.

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

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

Not all of our information

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

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

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

Implementation of Shared Services Model.

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

In November 2018, HLC approved APUS’s application for a change in structure related to APUS’s proposal to enter into a shared services model with APEI and we entered into an intercompany agreement to implement the shared services model effective January 1, 2019.

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

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

Opening new campuses and maintaining existing campuses at RU and HCN may result in us incurring significant costs in the future.

At RU and HCN, adding new campuses is a necessary step to extend our student reach throughout the U.S.

For example, during 2021, we opened a new HCN campus in Akron, Ohio, and we are in the process of opening a RU campus in suburban Brooklyn Park, Minnesota, with the intent to consolidate two existing campuses currently located in that area.

We expect operating and capital expenditures to increase in future periods as we continue to add new campuses and incur maintenance costs at existing campuses.

RU Change in Ownership.

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 RU that in connection with RU’s March 2019 change in ownership, ED was imposing certain temporary growth restrictions on the institution, including imposing limitations on new programs and locations and imposing a cap on the number of students that participate in Title IV programs who can be enrolled.

ED also continued to require RU to submit periodic financial and enrollment reports, a requirement that it had imposed on RU in connection with the financial responsibility letter of credit discussed in “Regulatory Environment - Regulatory Actions and Restrictions on Operations - Rasmussen Acquisition Regulatory Review”.

On September 9, 2021, RU 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 RU entered into a Temporary Provisional Program Participation Agreement, or TPPPA, effective as of October 14, 2021, that allows RU 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 RU’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.

In connection with the Rasmussen Acquisition, state agencies, accreditors, boards of nursing, and other relevant regulators also may require further action with respect to the Rasmussen Acquisition.

For example, the Higher Learning Commission, or HLC requires an additional site visit within six months after the Closing Date, and that visit occurred in February 2022.

Additionally, some regulators will require approval after the change in ownership in order to continue proper licensure, accreditation, approval, or authorization.

RU is also pursuing other post-closing notices and consents related to the change in ownership.

APUS Accreditation.

APUS has institutional accreditation from HLC and several of its academic programs have programmatic accreditations granted by accrediting agencies that review specialized and professional programs in specific fields and disciplines.

In August 2021, HLC granted APUS re-accreditation, with the next reaffirmation of accreditation scheduled for 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.

RU Accreditation.

RU has institutional accreditation from HLC, with an Open Pathways designation, and several of its academic programs have programmatic accreditations granted by accrediting agencies that review specialized and professional programs in specific fields and disciplines.

For more information regarding RU and HLC, please refer to “Regulatory Environment - Accreditation”.

HCN Accreditation.

HCN is institutionally accredited by ABHES, a national accrediting agency recognized by ED.

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

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

For the reporting year July 1, 2019 through June 30, 2020, HCN’s programs satisfied ABHES’s threshold requirements for retention rate, placement rate, and mandatory licensure and credentialing examination pass rates.

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

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

On August 12, 2020, ABHES requested that HCN provide ABHES with a financial improvement plan that details HCN’s financial objectives, outlines HCN’s financial improvement plans, including a specific timeline, and addresses the net loss for the fiscal year ending December 31, 2019.

The plan was timely submitted to ABHES.

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

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

Staffing Realignment and Management Transition .

We regularly evaluate and review our costs and expenses.

As part of that effort, in the first quarter of 2018, APUS initiated a voluntary reduction in force program for employees with more than eight years of service.

The program resulted in a reduction of 48 employees, representing approximately 5% of APUS’s non-faculty workforce at that time.

Our APEI Segment recorded expenses for termination benefits related to the workforce reduction in the first quarter of 2018 in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 420, Exit or Disposal Cost Obligations .

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

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

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

There is no certainty that the voluntary program, or any other expense reduction initiative, will have the intended benefits of reducing costs and expenses over the long-term, or whether there will be adverse impacts because of the loss of valuable employees.

In August 2019, after an extensive search, Angela Selden was appointed Chief Executive Officer of APEI, effective September 23, 2019.

APEI’s former Chief Executive Officer, Dr.

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

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

Boston’s retirement date.

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

Boston’s retirement.

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

Admissions Process and Academic Achievement Requirements.

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

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

to better identify college-ready students.

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

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

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

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

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

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

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

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

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

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

HCN Enrollments.

Enrollments in HCN’s ADN Program for all 2020 terms were higher than HCN planned, which we believe is due in part to an increase in demand for nursing education, a change in the competitive environment due to COVID-19, an increase in marketing expenditures, the continued impact of new initiatives implemented in 2019 such as the direct-entry ADN program, and the implementation of the institutional affordability grant in the first quarter of 2020.

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

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

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

Tuition and Fees.

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

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

• The tuition for undergraduate level courses would increase by $15 per credit hour to $285 per credit hour.

• The tuition for master’s level courses would increase by $20 per credit hour to $370 per credit hour.

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

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

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

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

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

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

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

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

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

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

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

APUS’s low tuition rates mean that its students are not required to take on as much debt as they might at another institution.

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

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

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

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

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

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

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

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

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

Beginning January 1, 2020, HCN began offering an institutional grant to students demonstrating financial need to cover the difference between the total cost of tuition and fees and the amount of all eligible financial aid resources.

The grant is designed to limit a student’s monthly payment to $200 through an award of up to $200 per month, or $600 per term after consideration of financial aid, employer tuition reimbursement, and other financial resources.

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

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

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

We cannot predict whether APUS’s and HCN’s tuition and fee increase or APUS’s new programs will be successful, or how they will impact our results of operations, cash flows, or financial condition.

Bad Debt Expense.

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

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

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

Impact of Government Budgetary Pressures.

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

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

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

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

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

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

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

We are unable to predict whether and to what extent the Navy will continue to impose limitations on TA program approvals as a result of limited funding.

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

As part of this strategy, the Navy, in

cooperation with the U.S.

HCN is institutionally accredited by ABHES.

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, and the PN Program is accredited by the Indiana State Board of Nursing the National League for Nursing Commission for Nursing Education

Accreditation, or NLN CNEA.

For more information regarding our institutions’ accreditation, please refer to “Regulatory Environment - Accreditation”.

Competition from Armed Forces Institutions.

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

As part of this strategy, the Navy, in cooperation with the U.S.

Marine Corps and the U.S.

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

Coast Guard, in January 2021 began piloting online courses for the new United States Naval Community College, a community college supporting naval education for enlisted service members, and plans to enroll as many as 5,500 students into targeted associate’s degree programs with partner colleges and universities in an expanded pilot phase that began in January 2022.

Navy-related registrations were 5% of total registrations in each of the years ended December 31, 2019, 2020, and 2021, respectively.

While a number of schools with which APUS competes participate in this program, APUS is not an eligible partner.

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

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

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

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

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

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

ED Program Review and 2016 APUS Compliance Audit.

APUS’s Title IV compliance audit for the year ended December 31, 2016 identified a finding related to return of Title IV funds calculations that were not properly computed.

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

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

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

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

Walmart Partnership.

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

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

APUS Program Participation Agreement.

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.

In February 2021, the Army suspended access to its legacy GoArmyEd portal, which had been used by soldiers to request TA, as part of a scheduled replacement by the new ArmyIgnitED portal.

The suspension was scheduled to last until the launch of ArmyIgnitED on March 8, 2021, but technical difficulties on March 8, 2021 after the portal’s launch caused access to the upgraded portal to be suspended further.

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

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 ending June 30, 2021 and September 30, 2021.

As of December 31, 2021, approximately $27.0 million in accounts receivable, of which $18.2 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.

ED Program Participation Agreement and Program Reviews.

As discussed more fully in “Student Financing Sources and Related Regulations/Requirements - Department of Education - Regulation of Title IV Financial Aid Programs,” in September 2016 ED began a program review of APUS’s administration of the Title IV programs during the 2014-2015 and 2015-2016 award years.

In June 2020, APUS timely applied for recertification to participate in Title IV programs.

On September 9, 2020, ED notified APUS that it had completed its review of APUS’s application and had granted APUS provisional certification until June 30, 2023.

ED subsequently notified APUS that it had completed its review of APUS’s application and had granted APUS provisional certification until June 30, 2023.

ED issued APUS a provisional program participation agreement, or PPPA, outlining the terms of provisional certification.

As described in the PPPA, the reason ED granted approval on a provisional basis is because APUS was subject to an open program review at the time of renewal.

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

The program review was closed on January 27, 2021 with no findings, penalties, or further action required.

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.

RU has not received a program review report from ED.

In August 2021, ED began an off-site program review of HCN’s administration of Title IV programs during the 2019-2020 and 2020-2021 award years.

In January 2022, HCN received a preliminary program review report from ED.

The report includes findings related to failure to prorate fees, return of Title IV funds calculations that were not properly computed, untimely and inaccurate reporting to the National Student Loan Data System, incomplete verification, and cost of attendance formulation deficiencies.

HCN’s response to ED is due by April 2022.

At this time, we cannot predict the outcome of the RU and HCN program reviews, when they will be completed, or whether ED will place any liability or other limitations on RU or HCN as a result of the reviews.

Regulated Industry.

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

HCN measures its student population in terms of student enrollments.

RU and HCN measure its student population in terms of student enrollments.

Student enrollment represents the total number of students enrolled in a course immediately after the date by which students may drop a course without financial penalty.

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

For example, at

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

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

At RU and HCN, generally programs begin and end in a calendar quarter.

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

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

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

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

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

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

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

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

Prior to the 2015 increase, APUS had not raised undergraduate tuition for 15 years or graduate tuition in four years.

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

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

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

Tuition and certain fees at HCN were increased approximately 3% effective with the January 2019 term, and there were no tuition increases in 2020 and 2021.

RU makes target adjustments to tuition rates to be consistent with the local campus markets.

Tuition revenue varies from period to period based on the aggregate number of students attending courses and the number of courses they are attending during the period, the student payor source, the mix of programs that students are attending during the period, as well as the number of students starting courses each month during the period and the timing of the start of a course each month or term.

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The cost of these grants and scholarships is reported as a reduction of tuition revenue in the period incurred for purposes of establishing net tuition revenue.

In addition to tuition, APUS charges a per course technology fee.

Prior to January 2020, the technology fee per course was $50, and for registrations made on or after January 2020 the technology fee per course was increased to $65.

APUS may further alter this fee in the future.

In addition to tuition, APUS charges a per course technology fee of $65 per course.

APUS may alter this fee in the future as it did with a $15 increase in January 2020.

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

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

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

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

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

Technology fee revenue net of grants was approximately $7.0 million in 2019, $8.3 million in 2020, and $7.9 million in 2021, or 2.4%, 2.6%, and 2.8% of revenue, respectively.

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

In addition, RU charges a course technology and resource fee of $175 per course and a one-time administrative fee for certain programs, up to $495, for all new, reentering, and program transfer students.

Costs and Expenses

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

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

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

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

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

Selling and promotional expenses.

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

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

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

Selling and promotional expenses include salaries and benefits of personnel engaged in student enrollment, advertising costs, and marketing material production costs, and include expenses from a third-party contract to provide marketing services to RU entered into prior to the Closing Date.

Our selling and promotional expenses are generally affected by the cost of advertising media, the efficiency of our selling efforts, salaries and benefits for our selling and admissions personnel, the level of expenditures for advertising initiatives for new and existing academic programs, and costs incurred in connection with the third-party contract at RU.

We believe the impact of competition, and the rising cost of internet search and other advertising media has caused our student acquisition costs to increase.

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

General and administrative expenses.

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

General and administrative expenses include salaries and benefits of employees engaged in corporate management, finance, financial aid processing, information technology, including expenses from a third-party contract to provide IT services that RU entered into prior to the Closing Date, human resources, facilities, compliance and other corporate functions, the cost of renting and maintaining administrative facilities, technology expenses, and costs for professional services.

General and administrative expenses also include bad debt expense.

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

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

Interest Income, Net

Interest income, net consists primarily of interest income earned on cash and cash equivalents, net of any interest expense.

Equity Investment Income/Loss

Equity investment income/loss consists of our proportional share of after-tax income or losses attributable to our equity investment as well as the loss from any other-than-temporary impairment charges, which represents the difference between the carrying value of and fair value of the investment.

Critical Accounting Policies and Use of Estimates

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

Interest Income (Expense).

Interest income (expense) consists primarily of interest expense incurred on our long-term debt, net of any interest income earned on cash and cash equivalents, and, prior to 2021, interest income earned on cash and cash equivalents.

Equity Investment Loss.

Equity investment loss consists of our proportional share of after-tax income or losses attributable to our equity investment as well as the loss from any other-than-temporary impairment charges, which represents the difference between the carrying value of and fair value of the investment.

Critical Accounting Policies and Estimates

The discussion of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP.

During the preparation of these financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures.

On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition and goodwill and indefinite-lived intangible assets.

On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition and the valuation of goodwill and indefinite-lived intangible assets.

We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances.

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Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our Consolidated Financial Statements.

The following discussion of accounting policies is intended to supplement the accounting policies presented in “Note 2.

The following discussion of our critical accounting policies and estimates is intended to supplement the accounting policies presented in “Note 2.

Significant Accounting Policies” included in our Consolidated Financial Statements.

Revenue Recognition.

Our revenue is primarily derived from the sale of instructional services and various fees.

Instructional services revenue includes tuition, technology, and laboratory fees.

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

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

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

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

For additional information regarding our revenue recognition refer to “Note 4.

Revenue” included in our Consolidated Financial Statements.

Business combinations.

We account for business combinations using the acquisition method of accounting, which requires that once control is obtained, the purchase price be allocated to all tangible assets and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date.

Any excess purchase price over the fair value of the net assets acquired is recorded as goodwill.

The determination of the fair value of assets acquired and liabilities assumed requires estimates and assumptions with respect to the timing and amounts of cash flow projections, revenue growth rates, earnings before interest and taxes margins, student attrition rates, royalty rates, discount rates, and useful lives.

These estimates are based on assumptions we believe to be reasonable, and, when appropriate, include assistance from independent third-party valuation firms.

During the measurement period, which is up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with a corresponding adjustment to goodwill.

We applied the acquisition method of accounting to the acquisition of RU, which closed on September 1, 2021, and recorded $216.9 million and $86.5 million of Goodwill and Intangible Assets, respectively, representing 91.7% of the total purchase consideration.

For additional information regarding our acquisitions, please refer to “Note 3.

Acquisition Activity”, included in our Consolidated Financial Statements.

Goodwill and indefinite-lived intangible assets.

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Goodwill is not amortized.

In connection with the September 1, 2021 acquisition of RU, we recorded $216.9 million of goodwill, representing the excess of the purchase price over the amount assigned to the assets acquired and the fair value assigned to the identified intangible assets.

We also recorded identified intangible assets with an indefinite useful life in the aggregate amount of $51.0 million respectively, which includes trade name, accreditation, licensing and Title IV, and recorded $35.5 million of identified intangible assets with a definite useful life.

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

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

We annually assess goodwill and indefinite-lived intangible assets for impairment on October 31 st , or more frequently if events and circumstances indicate that goodwill might be impaired.

We annually assess goodwill and indefinite-lived intangible assets for impairment, or more frequently if events and circumstances indicate that goodwill might be impaired.

If the carrying value exceeds fair value, the asset is considered impaired and is reduced to fair value.

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If the qualitative assessment is not conclusive, then the impairment analysis for goodwill is performed using a quantitative approach.

The process of evaluating goodwill and indefinite-lived intangibles for impairment is subjective and requires significant judgment at many points during the analysis.

The process of evaluating goodwill and indefinite-lived intangibles for impairment is subjective and requires significant judgment and estimates at many points during the analysis.

When performing an optional qualitative analysis, we consider many factors including:

general economic conditions, industry and market conditions, certain cost factors, financial performance and key business drivers, long-term operating plans, and potential changes to significant assumptions used in the most recent fair value analysis.

Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions and estimates.

Actual results may differ and have a material impact or our results of operations and financial position, and subsequent events are not necessarily indicative of the reasonableness of the original assumptions or estimates.

At December 31, 2021, we performed a qualitative analysis of RU and HCN, resulting in no indications of impairment.

Due to the timing of the RU acquisition, the first quantitative analysis for RU will be performed in September 2022.

We utilize the services of an independent third-party valuation firm to complete the quantitative analysis and estimate fair value.

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and (4) guideline transaction for private equity transactions.

Under the discounted cash flow method, cash flows are discounted by an estimated risk weighted average cost of capital, which is intended to reflect the overall level of inherent risk of HCN.

Under the discounted cash flow method, cash flows are discounted by an estimated risk weighted average cost of capital, which is intended to reflect the overall level of inherent risk.

Under the guideline company method, valuation metrics from other education companies are used to determine the value.

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Under the private equity method, pricing terms from private equity transactions are used to determine the value.

Values derived under the four valuation methods are then weighted to estimate HCN’s enterprise value.

Values derived under the four valuation methods are then weighted to estimate the enterprise value.

The analysis includes significant estimates and assumptions from management, including revenue growth rates, operating margins and future economic and market conditions, among others.

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

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

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

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

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

The valuations determined that HCN’s fair value was less than the carrying value.

As a result, we recorded pretax, non-cash impairment charges of $7.3 million.

We evaluated events and circumstances related to the valuation of goodwill of HCN for the years ended December 31, 2020 and 2021 and determined there were no indicators of impairment and concluded that HCN’s fair value was more than the carrying value;

consequently, there was no impairment.

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

Our October 31, 2021 annual assessment concluded that the fair value of HCN exceeded the carrying value by approximately $20.1 million, or 51.8%.

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

The valuations determined that the fair value was less than the carrying value.

As a result, we recorded pretax, non-cash impairment charges of $7.3 million.

The 2019 and 2020 annual testing also concluded the indefinite-lived assets were not impaired.

For additional details regarding goodwill and indefinite-lived intangible assets refer to “Note 7.

The 2019, 2020, and 2021 annual assessments concluded HCN’s indefinite-lived assets were not impaired.

For additional details regarding goodwill and indefinite-lived intangible assets please refer to “Note 6.

Goodwill and Intangible Assets” included in our Consolidated Financial Statements.

For additional information on our critical accounting policies, including information regarding estimates and assumptions, refer to “Note 2.

For additional information on our critical accounting policies, including information regarding estimates and assumptions, please refer to “Note 2.

Significant Accounting Policies” included in our Consolidated Financial Statements.

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We consider the applicability and impact of all Accounting Standards Updates, or ASUs.

See “Note 2 Significant Accounting Policies” included in our Consolidated Financial Statements for information relating to our discussion of the effects of recent accounting pronouncements.

Please refer to “Note 2 Significant Accounting Policies” included in our Consolidated Financial Statements for information relating to our discussion of the effects of recent accounting pronouncements.

Results of Operations

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Loss on disposals of long-lived assets 0.3 % 0.3 %

Impairment of goodwill 2.5 % — %

Depreciation and amortization 4.0 % 4.3 %

Total costs and expenses 92.3 % 92.8 %

Income from operations before interest income and income taxes 4.5 % 7.7 %

Interest income, net 1.4 % 0.3 %

Income from operations before interest and income taxes 7.7 % 7.2 %

Interest income (expense) 0.3 % (1.0) %

Income from operations before income taxes 8.0 % 6.2 %

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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Our results of operations for the years ended December 31, 2020 and 2021 reflect the operations of our APUS and HCN Segments, and results of our RU Segment from the Closing Date through December 31, 2021, and Corporate and Other which primarily includes unallocated corporate activity and eliminations.

We did not consolidate the RU Segment prior to the Closing Date.

For a more detailed discussion of our results by reportable segment, please refer to “Analysis of Operating Results by Reportable Segment” below.

Our consolidated revenue in 2021 was $418.8 million, an increase of $97.0 million or 30.1%, compared to $321.8 million in 2020.

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

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

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

The increase in revenue was primarily due to the inclusion of RU Segment revenue from the Closing Date through December 31, 2021 of $89.5 million, as well as a $9.7 million, or 26.9%, increase in revenue in our HCN Segment, partially offset by a $2.2 million, or 0.8%, decrease in revenue in our APUS Segment.

APUS net course registrations decreased approximately 2.2% to 345,300 for the year ended December 31, 2021 from approximately 353,100 in the 2020 period.

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

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

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

The increase in student enrollment was due in part to an increase in demand for nursing education, a change in the competitive environment due to COVID-19, an increase in marketing expenditures as compared to the prior year, the continued impact of new initiatives implemented in 2019 such as the Direct Entry ADN Program, and the implementation of the institutional affordability grant in the first quarter of 2020.

The decrease in net course registrations is due, in part, to the temporary suspension and disruption of the Army’s TA program beginning in February 2021, resulting from delays in the transition from its legacy system used by soldiers to request TA, GoArmyEd, to a new system, ArmyIgnitED, and a moderation in near-term demand for online education as the COVID-19 pandemic abated prior to the omicron variant.

RU student enrollment decreased approximately 0.6% to 16,300 for the three months ended September 30, 2021 as compared to the 2020 period.

For the three months ended December 31, 2021, RU enrollment decreased approximately 3.4% to 17,100 as compared to the prior year period.

We believe these declines in enrollment may have been caused, in part, by a moderation in near-term demand for RU’s programs as the COVID-19 pandemic abated prior to the omicron variant.

HCN student enrollment increased approximately 27.9% for the year ended December 31, 2021 compared to the same period in 2020.

The increase in student enrollment was due in part to an increase in demand for nursing education, a change in the competitive environment due to COVID-19, an increase in marketing expenditures as compared to the prior year, the opening of a new campus in Akron, Ohio in April 2021, and the continued impact of new initiatives implemented in 2019 and 2020, such as the Direct Entry ADN Program and the institutional affordability grant.

Costs and Expenses

Costs and expenses were $388.4 million in 2021, an increase of $91.3 million, or 30.7%, compared to $297.1 million in 2020.

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

The increase in costs and expenses 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 December 31, 2021 of $87.9 million.

Other increases include professional fees in our APUS Segment, employee compensation costs, bad debt expense, instructional materials costs, and advertising costs in our HCN Segment, and professional fees primarily related to the integration planning of the Rasmussen Acquisition, employee compensation costs, and advertising costs in Corporate and Other.

The cost and expenses increases were partially offset by decreases in employee compensation costs, advertising expenses, and instructional materials costs in our APUS Segment.

In 2021, costs and expenses include the following items on a pretax basis:

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

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

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

$7.6 million in professional fees primarily related to the Rasmussen Acquisition in Corporate and Other;

and $6.0 million in information technology costs related to our multi-year technology transformation program in our APUS Segment.

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

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

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

a $3.5 million increase

in advertising costs in our APEI and HCN Segments;

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

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

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

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

a $10.4 million increase in advertising costs in our APUS and HCN Segments as compared to the prior year;

$5.6 million in information technology costs related to our multi-year technology transformation program in our APUS Segment;

and $5.0 million in professional fees primarily related to the Rasmussen Acquisition in Corporate and Other.

Costs and expenses as a percentage of revenue increased to 92.8% in 2021 from 92.3% in 2020.

Our income before interest and income taxes as a percentage of revenue, or our operating margin, decreased to 7.2% from 7.7% compared to the same prior year period.

The increase in our costs and expenses as a percentage of revenue and decrease in our operating margin was primarily due to the inclusion of RU costs and expenses from the Closing date through December 31, 2021.

Instructional costs and services expenses.

Instructional costs and services expenses in 2021 were $172.6 million, an increase of approximately $50.4 million, or 41.2%, compared to $122.2 million in 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 December 31, 2021 of $49.0 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, instructional materials costs, and credit card processing fees in our APUS Segment.

Instructional costs and services expenses as a percentage of revenue were 41.2% in 2021, compared to 38.0% in 2020.

The increase in instructional costs and services expenses was primarily due to an increase in employee compensation costs and instructional materials costs in our APEI Segment and increases in employee compensation costs, instructional materials costs and facilities costs in our HCN Segment, partially offset by a decrease in commencement and travel expenses in our APEI Segment.

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

Selling and promotional expenses.

Selling and promotional expenses in 2021 were $93.3 million, an increase of $20.3 million, or 27.8%, compared to $73.0 million in 2020.

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

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 December 31, 2021 of $23.2 million, as well as increases in employee compensation costs in our APUS and HCN Segments and increases in advertising 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 were 22.3% in 2021 compared to 22.7% in 2020.

The increase in selling and promotional expenses as a percentage of revenue was primarily due to selling and promotional expenses increasing at a rate greater than the increase in our consolidated revenue.

General and administrative expenses.

General and administrative expenses in 2021 were $103.4 million, an increase of $15.4 million, or 17.5%, compared to $88.0 million in 2020.

The increase in general and administrative expenses was primarily related to increases in professional fees, employee compensation costs, and information technology costs in our APEI Segment and an increase in bad debt expense in our HCN Segment, partially offset by a decrease in bad debt expense in our APEI Segment and a decrease in employee compensation costs in our HCN Segment.

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

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

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

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

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

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

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

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 December 31, 2021 of $7.6 million, as well as increases in professional fees primarily related to the integration planning of the Rasmussen Acquisition and employee compensation costs in Corporate and Other, an increase in professional fees in our APUS Segment, and increases in bad debt expense and employee compensation costs in our HCN Segment.

In 2021, general and administrative expenses include the following costs on a pre-tax basis:

$7.6 million in professional fees primarily related to the Rasmussen Acquisition in Corporate and Other;

and $6.0 million of information technology costs related to our multi-year technology transformation program in our APUS Segment.

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

$5.6 million in information technology costs related to our multi-year technology program in our APUS Segment, and $5.0 million in professional fees primarily related to the Rasmussen Acquisition in Corporate and Other.

General and administrative expenses as a percentage of revenue were 24.7% in 2021 compared to 27.3% in 2020.

Consolidated bad debt expense increased to $7.8 million, or approximately 1.9% of revenue, in 2021, from $3.8 million, or approximately 1.2% of revenue, in 2020.

The increase in bad debt expense was primarily due to the inclusion of our RU Segment bad debt expense from the Closing Date through December 31, 2021 of $2.4 million, as well as increases in bad debt expense in our HCN Segment, partially offset by a decrease in our APUS Segment.

We believe the increase in bad debt expense in our HCN Segment was driven by an increase in enrollment and changes in the processing of federal student aid.

Loss on disposal of long-lived assets .

The loss on disposal of long-lived assets was $1.3 million in 2021, compared to $0.9 million in 2020.

Impairment of goodwill.

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

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

Depreciation and amortization.

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

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

Depreciation and amortization expenses were $17.8 million in 2021, compared to $13.0 million in 2020, an increase of $4.8 million or 36.9%.

The increase in depreciation and amortization was primarily due to the inclusion of our RU Segment depreciation and amortization expenses from the Closing Date through December 31, 2021 of $8.0 million, partially offset by decreases in our APUS Segment depreciation and amortization expense due to lower capital expenditures and lower total investment in property and equipment net of depreciation.

Stock-based compensation.

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

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

The increase in stock-based compensation costs was due to additional performance unit incentive costs, and additional grants as a result of the Rasmussen Acquisition.

The table below reflects our stock-based compensation expense recorded in our Consolidated Statements of Income included in our Consolidated Financial Statements for the years ended 2020 and 2021 (in thousands):

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Total stock-based compensation expense $ 7,075 $ 7,654

Interest income

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

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

Interest income (expense).

Interest expense, net of interest income, was $4.3 million in 2021, compared to interest income of $1.1 million in 2020.

Interest expense in 2021 was due to the secured term loan facility in the aggregate principal amount of $175.0 million entered into in connection with the Rasmussen Acquisition, or the Term Loan.

Income Tax Expense.

We recognized tax expense from operations for 2021 and 2020 of $7.5 million and $7.0 million, respectively, or an effective tax rate of 29.7% and 27.2% in 2021 and 2020, respectively.

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

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

The increase in our effective tax rate for 2021 is due to a higher amount of non-deductible expenses in 2021 in Corporate and Other, and a higher overall state tax rate.

The effective tax rate for 2021 includes a benefit of approximately $0.3 million related to ASU No.

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Equity investment loss was $0.8 million in 2021, compared to equity investment loss of $0.0 million in 2020.

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

Investments” in our Consolidated Financial Statements.

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

This increase was related to the factors discussed above.

The equity investment loss for the year ended December 31, 2021 includes an impairment loss of $0.8 million on one of our cost method investments.

Net income was $17.8 million in 2021, compared to net income of $18.8 million in 2020, a decrease of $1.0 million, or 5.3%.

This decrease was related to the factors discussed above.

Operating Results by Reportable Segment - Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

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2020 2021 $ Change % Change

American Public Education Segment

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

Hondros College of Nursing Segment

29,479 36,091 6,612 22.4 %

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

APUS Segment $ 285,938 $ 283,700 $ (2,238) (0.8) %

RU Segment — 89,483 89,483 NM

HCN Segment 36,091 45,803 9,712 26.9 %

Corporate and Other (244) (183) 61 (25.0) %

Total Revenue $ 321,785 $ 418,803 $ 97,018 30.1 %

Income (loss) from operations before interest income and income taxes

American Public Education Segment

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

Hondros College of Nursing Segment

(10,768) 722 11,490 NM

Intersegment elimination

2 1 (1) (50.0) %

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

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

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

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

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

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

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

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

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

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

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

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

We believe that the increase in HCN’s enrollment in 2020 was due in part to an increase in demand for nursing education, a change in the competitive environment due to COVID-19, an increase in marketing expenditures as compared to the prior year, the continued impact of new initiatives implemented in 2019 such as the Direct Entry ADN Program, and the implementation of the institutional affordability grant in the first quarter of 2020.

Income from operations before interest income and income taxes in the HCN Segment was approximately $0.7 million in 2020 compared to a loss from operations before income tax of $10.8 million in 2019.

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

Income (loss) from operations before interest and income taxes

APUS Segment $ 43,438 $ 51,050 $ 7,612 17.5 %

RU Segment — 1,630 1,630 NM

HCN Segment 722 1,829 1,107 153.3 %

Corporate and Other (19,403) (24,138) (4,735) 24.4 %

Total income from operations before interest and income taxes $ 24,757 $ 30,371 $ 5,614 22.7 %

The RU Segment reflects the operations of RU, which was acquired on the Closing Date, through December 31, 2021.

We 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 our non-APUS employees at APUS.

Our APUS Segment revenue was $283.7 million in 2021, a decrease of $2.2 million, or 0.8%, compared to $285.9 million in 2020, which is primarily attributable to lower net course registrations, partially offset by higher revenue per net course registration.

Net course registrations at APUS decreased 2.2% to approximately 345,300 in 2021 compared to the 2020 period.

The decrease in net course registrations is due in part to the temporary suspension and disruption of the Army’s TA program beginning in February 2021 resulting from delays in the transition from its legacy system used by soldiers to request TA, GoArmyEd, to a new system, ArmyIgnitED, and a moderation in near-term demand for online education as the COVID-19 pandemic abated prior to the omicron variant.

Income from operations before interest and income taxes was approximately $51.1 million in 2021, an increase of $7.6 million, or 17.5%, compared to the 2020 period.

The increase in income from operations before interest and income taxes is due to the changes in revenue and expenses discussed above.

Our RU Segment revenue was $89.5 million for the period from the Closing Date through December 31, 2021 and RU Segment income from operations before interest and income taxes was $1.6 million for the period.

Enrollment at RU decreased approximately 0.6% to 16,300 for the three months ended September 30, 2021 as compared to the 2020 period.

For the three months ended December 31, 2021, RU enrollment decreased approximately 3.4% to 17,100 as compared to the prior year period.

We believe these declines in enrollment may have been caused, in part, by a moderation in near-term demand for RU’s programs as the COVID-19 pandemic abated prior to the omicron variant.

Our HCN Segment revenue was approximately $45.8 million in 2021, an increase of $9.7 million, or 26.9% compared to $36.1 million in the 2020 period, which is primarily attributable to an increase in student enrollment.

HCN student enrollment increased 27.9% in 2021 compared to the 2020 period.

We believe that the increase in HCN’s enrollment in 2021

was due in part to an increase in demand for nursing education, a change in the competitive environment due to COVID-19, an increase in marketing expenditures as compared to the prior year, the continued impact of new initiatives implemented in 2019 such as the Direct Entry ADN Program, and the implementation of the institutional affordability grant in the first quarter of 2020.

Income from operations before interest and income taxes in the HCN Segment was approximately $1.8 million in 2021, an increase of $1.1 million, or 153.3%, compared to the 2020 period.

The increase in income from operations before interest and income taxes is due to the changes in revenue and expenses discussed above.

Liquidity and Capital Resources

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

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

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

We derive a significant portion of our revenue from TA from the Department of Defense, or DoD.

Generally, these funds are received within 60 days of the start of the courses to which they relate.

We also participate in programs from the VA.

Generally, these funds are received within 60 days of the start of the courses to which they relate.

Another significant source of revenue is derived from our participation in ED’s Title IV programs, for which disbursements are governed by federal regulations.

Cash, cash equivalents, and restricted cash were $227.7 million and $149.6 million at December 31, 2020 and 2021, respectively, representing a decrease of $78.1 million, or 34.3%, in the 2021 period.

The decrease in cash was due to the Rasmussen Acquisition, 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 and net proceeds from the Term Loan.

We derive a significant portion of our revenue 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.

Another significant source of revenue is derived 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 December 31, 2021, approximately $27.0 million, of which $18.2 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 and the Army’s systems fully operational or the timing of expected cash receipts from the Army.

We have historically financed operating activities and capital expenditures with cash provided by operating activities.

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

Based on our current level of operations, we believe that our cash flow from operations and our existing cash and cash equivalents will provide adequate funds for ongoing operations and planned capital expenditures for the foreseeable future.

We expect operating expenditures to increase in future periods as we accelerate the investment in and modernization of our information technology systems and increase marketing and other expenditures.

For the year ended December 31, 2019, we incurred approximately $2.1 million to evaluate and invest in replacements and upgrades to our information technology systems, including replacements of our learning management and customer relationship systems, and to inform the scope and duration of the larger overall information technology transformation program.

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

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

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

We believe 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 next 12 months and the foreseeable future.

For more on our material cash requirements from known contractual and other obligations, please refer to “Contractual Obligations” below.

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 years ended December 31, 2019, 2020 and 2021, we incurred approximately $2.1 million, $5.9 million, including $0.3 million of capital costs, and $6.0 million, respectively, of information technology costs related to our multi-year technology transformation program, focusing on specific information technology projects, including replacements of our learning management and customer relationship management systems.

APUS completed the migration of all students to the new learning management system in the first quarter of 2021, and completed the first phases of the implementation of the new customer relationship management system in January 2022.

APUS will continue to evaluate the Partnership At a Distance™, or PAD, customized student information and services system for possible changes and upgrades and anticipate that we will eventually make significant changes to that system as well.

Capital expenditures could be higher in the future as a result of, among other things, additional expenditures for technology or other business capabilities, the opening of new campuses at HCN, the acquisition or lease of existing structures or potential new construction projects, and necessary tenant improvements that arise as a result of our ongoing evaluation of our space needs and opportunities for physical growth.

Professional fees may increase as we evaluate investments in strategic growth opportunities and enhancements to our business capabilities.

We expect to continue to explore opportunities to invest in the education industry, which could include purchasing or investing in other education-related companies or companies developing new technologies.

We will need additional capital to finance the Rasmussen Acquisition, and we may also need additional capital in the future, including to finance other business acquisitions and investments in technology or to achieve growth or fund other business initiatives.

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

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

Capital expenditures could be higher in the future as a result of, among other things, additional expenditures for technology or other business capabilities, the maintenance of existing campuses at RU and HCN, 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 continue to be elevated or increase as we continue the integration of RU and the integration of GSUSA, and continue to evaluate investments in strategic growth opportunities and enhancements to our business capabilities.

We also 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 years ended December 31, 2020 and 2021, we incurred approximately $4.3 million and $7.6 million, respectively, of acquisition-related expenses, 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 $213.8 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, or the Commitment Letter, with Macquarie Capital (USA) Inc., or Macquarie Capital, and Macquarie Capital Funding LLC, or Macquarie Lender, pursuant to which Macquarie committed to provide (i) a senior secured term loan facility in the aggregate principal amount of $175 million, or the Term Facility, and (ii) a senior secured revolving loan facility in an aggregate commitment amount of $20 million, or together with the Term Facility, the Facilities.

Macquarie Capital will act as lead arranger and bookrunner with respect to the Facilities.

The commitments under the Commitment Letter to provide the Facilities are subject to customary conditions, including the absence of a Material Adverse Effect (as defined in the Rasmussen Agreement) on the acquired companies having occurred, the execution of satisfactory documentation, and other customary closing conditions.

We currently expect to pay up to $175 million of the cash consideration for the Rasmussen Acquisition with proceeds from the Facilities, and the Rasmussen Agreement requires us to use commercially reasonable efforts to obtain debt financing for the Rasmussen Acquisition.

Our future capital requirements will depend on a number of factors, including our ability to consummate the Rasmussen Acquisition on the terms and schedule contemplated and our ability to obtain the Facilities or to secure additional alternative financing.

There can be no guarantee that we will be able to close the Facilities or alternative financing arrangements on commercially reasonable terms or at all, or that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs.

In connection with the completion of the Rasmussen Acquisition, on the Closing Date, we entered into a Credit Agreement with Macquarie Capital Funding LLC, as administrative agent and collateral agent, Macquarie Capital (USA) Inc., and Truist Securities, Inc.

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 (i) the $175.0 million 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.

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, please refer to “Note 8.

Long-Term Debt” included in the Consolidated Financial Statements in this Annual 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 GSUSA, one of the largest providers of training to the federal government workforce, for approximately $1.0 million, subject to working capital adjustments.

We closed on this acquisition on January 1, 2022.

Operating Activities

Net cash provided by operating activities was $44.8 million and $16.3 million in 2020 and 2021, respectively.

The increase in cash from operating activities from 2019 to 2020 is primarily due to an increase in net income, changes in working capital due to the timing of receipts and payments and lower estimated tax payments in 2020.

Accounts receivable at December 31, 2020 was approximately $6.3 million higher than at December 31, 2019 primarily due to increased volume with students using TA.

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

The decrease in cash from operating activities is primarily due to the timing of the Rasmussen Acquisition.

RU 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 RU on the Closing Date.

Accordingly, from the Closing Date through September 30, 2021, and continuing through mid-October when RU entered into its TPPPA, APEI funded the majority of RU’s operations.

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 approximately $5.9 million in 2020 compared to $7.5 million in 2021.

The following changes in working capital accounts had a negative impact on operating cash flow for the year ended December 31, 2021, as compared to the prior year period:

deferred revenue of $27.7 million due to the acquisition of RU occurring during the quarterly and academic third quarter term;

accounts payable, accrued compensation and benefits, and accrued liabilities of $5.2 million due in part to higher incentive-based compensation payments in the current year period;

and changes in accounts receivable 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 December 31, 2021, approximately $27.0 million, of which $18.2 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 $4.2 million and $336.7 million in 2020, and 2021, respectively.

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

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

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

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

This increase was primarily related to the $325.5 million of cash used for the Rasmussen Acquisition, as well as increases in capital expenditures.

The increase in capital expenditures was primarily due to the inclusion of our RU Segment capital expenditures from the Closing Date through December 31, 2021 of $6.0 million.

Financing Activities

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

The decrease in cash used in financing activities in 2020 was due to a decrease in cash used to repurchase our common stock, partially offset by an increase in cash used for the deemed repurchase of our common stock to satisfy minimum tax-withholding requirements in connection with the vesting of restricted stock grants.

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

Net cash used in financing activities was $15.7 million in 2020, compared to $242.3 million of net cash provided by financing activities in 2021.

The increase in cash provided by financing activities in 2021 was due to our underwritten public offering of common stock for aggregate net proceeds of approximately $86.2 million and proceeds of $175.0 million from the Term Loan in connection with the Rasmussen Acquisition, partially offset by debt issuance costs of $13.6 million.

For the year ended December 31, 2020, we used $13.6 million to repurchase shares of our common stock in accordance with our share repurchase program.

There were no share repurchases for the year ended December 31, 2021.

Contractual Obligations

We have various contractual obligations consisting of operating leases and purchase obligations.

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

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

Payments Due by Period

Total Less than

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

Long-term debt

We have long-term debt outstanding under the Credit Agreement of $172.8 million as of December 31, 2021.

Principal payments payable in 2022 are $8.8 million.

Interest payable of $10.6 million is due in 2022, assuming the variable rate as of December 31, 2021.

For more information on the timing and amount of our future principal and interest payments, please refer to “Note 8.

Long-Term Debt” included in the Consolidated Financial Statements in this Annual Report.

Operating lease obligations

Purchase obligations 7,877 3,822 3,170 885 —

Total contractual obligations

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

Off-Balance Sheet Arrangements

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

We have operating leases for office space and campus facilities.

As of December 31, 2021 we had lease payment obligations of $108.0 million, with $16.0 million payable in 2022.

In connection with the acquisition of GSUSA on January 1, 2022, we have also assumed an operating lease obligation in the aggregate of $50.0 million over 15 years for GSUSA’s Washington, D.C., headquarters facility.

For more information on the timing and amount of our future lease obligations, please refer to “Note 7.

Leases” included in the Consolidated Financial Statements in this Annual Report.

Other purchase obligations

Our other purchase obligations primarily consist of non-cancelable obligations primarily for marketing and IT services.

As of December 31, 2021, we had other purchase obligations of $62.8 million, with $25.4 million payable in 2022.

The majority of purchase obligations are related to service agreements entered into by RU prior to the Closing Date with Collegis to provide marketing and IT services and that expire September 30, 2024.

The total minimum value of the service contracts over the remaining approximately three-year period is approximately $52.7 million.

Impact of Inflation

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What changed 10-K

Item 7. Management’s Discussion and Analysis