American Public Education, Inc. Annual Report 2019

FY2019 Annual Report · American Public Education, Inc.

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ANNUAL REPORT 2019

Purpose Made Possible

We have a proud history of serving military and
public service professionals, as well as the com-
munity at large. Our students come to us primarily
as working adults to expand their knowledge, to
improve their skills, to pursue new opportunities—
and to achieve their full potential. As graduates,
they’re out there making a difference in the world.

American Public Education, Inc. (APEI), provides higher education to learners through
two wholly owned institutions—online learning provider American Public University
System (APUS) and campus-based Hondros College of Nursing (HCN).

FRONT COVER FROM LEFT TO RIGHT

JESSICA GEORGE, Hondros College of Nursing
TRICIA KEITER, STEM faculty member
YESLI VEGA, B.A., Criminal Justice, AMU
BAI KAMARA, M.A., Intelligence Studies, AMU
ANTHONY SOTO, B.A., Retail Management, APU
ANEESAH AKBAR-UQDAH, M.A., Intelligence Studies, APU

This Annual Report contains forward-looking statements that involve risks and uncertainties.
See “Special Note Regarding Forward-Looking Statements” in the Form 10-K that forms
part of this Annual Report for a discussion relating to these risks and uncertainties.

ANGELA SELDEN

President and CEO

At American Public Education, Inc. (APEI), we believe that everyone
deserves to realize their purpose—and that no one should be written out
of an education due to limitations of time, money or location. We are driven
by the belief that education should be accessible to all, not reserved for
the few. Since its inception, APEI has helped more than 100,000 alumni on
the path toward achieving their dreams by helping them to maximize the
return on their higher educational investment. We call that

Purpose Made Possible.

Our institutions were built on the principles of affordability, quality, inclusiveness,
accessibility and relevance—and those are the core strengths that will take us into
the future. At a time when the cost of education is out of reach for many, our unique
value proposition enables APEI to make education more widely available to adult
learners who seek education and training to achieve their purpose.

2019 ANNUAL REPORT

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AARON BRO D N I A

American Public University System (APUS), which represents 90%
of APEI’s revenue, is a leader in delivering value. APUS offers an
education with:

• The Potential for Low or No Student Debt. Our commitment to

affordability, coupled with the ability for many of our students to use
programs like Department of Defense tuition assistance, GI Bill educa-
tion benefits or corporate programs, has contributed to approxi-
mately 72% of APUS alumni graduating with no APUS-incurred
student loan debt1 and demonstrates leadership in positively
contributing to the national conversation to find ways to provide
affordable higher education with limited or no student loan debt.

• A High Return on Investment for Learners. A 2019 Georgetown
University study2 puts APUS in the top 2% among U.S. colleges in
terms of delivering economic value to graduates. The combination
of affordable tuition paired with career-minded programs and
courses is designed to help APUS students maximize their return on
educational investment.

• Strong Student Outcomes. Our longstanding record of supporting
student success and building enduring, robust relationships with
students and alumni is measured by a full 95% of APUS alumni who
would recommend APUS to a friend or colleague3 and 59% of APUS
students were referred by others.4

1. Includes alumni who graduated with an associate’s, bachelor’s or master’s degree from APUS as of
December 31, 2019. Student loan debt is defined as student loans and private education loans and
considers tuition, fees, living expenses and book costs associated with courses taken at APUS.
2. In a November 2019 Study of 4,500 institutions by Georgetown University’s Center of Education
and the Workforce, APUS programs rank #93 overall for 40-year net present value and 95th
overall, or in the top 2% nationally. The Study analyzed institutions’ return on investment using
data from the U.S. Department of Education’s College Scorecard about the average net price of
institutions and salary/earnings.

3. 2019 1-year Alumni Survey. All 2019 responses included.
4. Students starting in 2019.

“ Helping our military students
with their transition to civilian life
is very fulfilling for me because I
remember what that journey was
like—and if you keep reaching
for something new, you’ll never
be stagnant.”

TONDA NAVARRETE

Associate Vice President, Military Outreach, AMU

AMERICAN PUBLIC EDUCATION, INC.

“ The online environment is so
perfect. It eliminated the barriers
that stood between me and my
school ambitions, and it worked
well without interrupting my work
schedule. I see myself getting
closer to my dream. I see myself
making a difference in the world.”

BRYAN MOGARU

B.A., Homeland Security, APU
M.S., Cybersecurity, APU

At APUS and Hondros College of Nursing (HCN), our goal is to make purpose
possible for all learners—especially those focused on making a difference in
the world. Our service-oriented curriculum was designed for professionals in
the military, public service and nursing communities. A wide range of offerings
in fields such as public health, environmental studies and cybersecurity amplify
that service orientation.

The quality and relevance of educational opportunities at APEI are reflected in
the strength of the faculty and the breadth of its programs.

• In 2019, APUS faculty published approximately 500 articles, books and

papers; earned nearly 100 awards for their professional practice, research
and community service; and presented at more than 600 conferences
and workshops.

• American Public University (APU) and American Military University (AMU)

together offer 121 degree programs and 111 certificate programs in a diverse
array of fields, including highly specialized programs that appeal to the
public service and military communities. Our experience with educating
those who serve is central to our relationship with the military and military-
affiliated communities and goes back to our earliest beginnings.

• HCN’s Practical Nursing (PN) and Associate Degree in Nursing (ADN)

degrees address the national shortage in LPN and RN nurses while at the
same time underscoring the mission of maximizing each student’s return
on education investment.

2019 ANNUAL REPORT

“ One thing that really stood out to
me with the professors at AMU
was that they were active in the
career fields and they were able
to bring that front-line knowledge
to the classroom. Having those
professors that are up on the times
I think is excellent.”

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SCOTT M E Y E

JASON McCLAREN

B.S., Fire Science Management, AMU
M.A., Emergency and Disaster Management, AMU

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A Bold New Strategy

APEI’s unique value proposition is not widely known, making it one of higher
education’s best kept secrets. But we propose to change that.

In 2020, we are launching a bold new strategy built on amplifying our unique
value proposition. Our priority is to grow APEI’s core businesses with an
emphasis on improving experiences for our students and faculty to ultimately
drive enrollment growth and accelerate brand recognition. Key components
of the plan include elevating affordability as a core message, embracing
technology innovation and expanding our workforce training offerings. That
means efforts to increase enrollments through:

• A new marketing strategy that elevates our brand message of maximizing

learner return on educational investment and targets prospects with
uplifting purpose-driven stories.

• A technology modernization program that enhances student and
faculty experience and engagement, measured by improved learner
outcomes and increases in referrals.

• New skills offerings with affordable, flexible courses, certificates and

programs designed to attract new student segments and corporate partners.

• Building on our brand-recognition in the military, military-affiliated and

nursing communities.

AMERICAN PUBLIC EDUCATION, INC.

Our Path Forward

At this writing, our nation is facing the challenge of a novel coronavirus pandemic. APEI has set its
business continuity plan in motion and our employees are now working remotely. While we can’t
predict what lies ahead, we do know that our APUS advanced distance learning platform is a
durable, proven, at-scale educational platform designed to enable our 80,000 students to continue
to pursue their education and training goals affordably at their convenience, and especially in difficult
times. And our platform is designed to scale rapidly with enrollments as the need arises.

We have a bright future ahead. Our goal is to address the national need for an adult learning
platform where learners of all backgrounds can obtain the skills they need to maximize the return
on each learner’s educational investment. That means serving more adult learners across our
brands and channels and developing our workforce training programs to create new opportunities,
with an eye toward aligning them with employment trends.

We’ve already taken our first steps. At APUS, we extended new cost-saving benefits—our tuition
grant program and our book grant program—to active duty military at the master’s level. And,
in 2020, as part of our IT modernization, we will gradually roll out our next-generation learning
management platform. At HCN, we are pleased by the recent improvements in operating performance
and the planned opening of the new campus in Indianapolis.

As your new CEO, I’m excited by our potential—our rich heritage of supporting service-minded
learners, combined with our new action plan to achieve our ambitions, means that the possibilities
are endless. Both APUS and HCN are positioned to enable the tremendous capabilities of adult
learners at a time when the digital economy is rapidly changing. We are uniquely qualified to
meaningfully improve the quality of our students’ lives and the opportunities they can embrace.
And, most importantly, in an era when college costs are soaring, APEI is committed to delivering
affordable, high-quality education opportunities for all.

That’s Purpose Made Possible.

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G, B.S., Info r m a ti o

“ If I can teach just one of my
students to stop and think before
they’re giving care or before they
make that judgement for their
patient, then I know I’ve accom-
plished my mission of empowering
nurses to provide holistic nursing
care. That’s really why I do what I
do and what I hope for the future
of nursing.”

REBECCA GABRIEL

M.S., Nursing, APU

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We are driven by the
belief that education
should be accessible
to all, not reserved for
the few.

AMERICAN PUBLIC EDUCATION, INC.

APEI
EXECUTIVE
LEADERSHIP

FROM LEFT TO RIGHT

Amy Panzarella, SPHR, SHRM-SCP, Senior Vice President, Human Resources
Patrik Dyberg,* Executive Vice President and Chief Technology Officer
Amy Bevilacqua,* Senior Vice President and Chief Innovation Officer
Angela Selden,* Chief Executive Officer, American Public Education, Inc.
Richard Sunderland, Jr., CPA,* Executive Vice President and Chief Financial Officer
Melissa Frey, CPA, Senior Vice President and Controller
Elizabeth LaGuardia Cooper,* Senior Vice President and Chief Marketing Officer
Thomas Beckett,* Senior Vice President and General Counsel

*Denotes executive officers for Rule 3b-7

FROM LEFT TO RIGHT

Dr. Vernon Smith,* Senior Vice President and Provost
Dr. Gwendolyn Hall, Senior Vice President and Chief of Staff (retired)
Amy Bevilacqua,* Senior Vice President and Chief Innovation Officer
Dr. Wallace Boston,* President
Richard Sunderland, Jr., CPA,* Executive Vice President and Chief Financial Officer
Robert Gay,* Senior Vice President and Chief Operations Officer

*Denotes executive officers for Rule 3b-7

AMERICAN
PUBLIC
UNIVERSITY
SYSTEM

2019 ANNUAL REPORT

HONDROS
COLLEGE OF
NURSING

FROM LEFT TO RIGHT
Dr. Jeremy Hoshor-Johnson, Executive Vice President,
Business Strategy & Regulatory Compliance

Harry Wilkins, Interim Chief Executive Officer

ACADEMICS

Dr. Wallace Boston, President
Dr. Vernon Smith, Senior Vice President and Provost
Dr. Gwendolyn Hall, Senior Vice President and
Chief of Staff (retired)

Dr. Michael Cottam, Vice President Associate Provost,
Academic and Faculty Services

John Aldrich, Vice President, Military & Veteran Outreach
Michael S. Harbert, Vice President, Public Sector Outreach
Carolyn Todaro, Vice President, Academic Advising
Frank Burhance, Vice President, Service Operations
Greg Hill, Vice President, Admissions
JB Tanner, Vice President, Student Support
Caroline Simpson, Vice President and Assistant Provost
Dr. Jennifer Stephens-Helm, Vice President, Accreditation
Elizabeth Wallace, Vice President, Institutional Research

Jennifer Douglas, Dean, Graduate Studies & Resources
Dr. Brian Freeland, Dean, School of Health Sciences
and Interim Dean, School of Education

Dr. Grace Glass, Dean, School of Arts & Humanities
Dr. Conrad Lotze, Dean, Academic Services & School
of Education

Dr. Ahmed Naumaan, Dean, School of STEM
Barbara Netzer, Dean, Educational Partnerships
Dr. Marie Gould Harper, Dean, School of Business
Dr. Mark Riccardi, Dean, School of Security and
Global Studies

Dr. Chris Reynolds, Dean, Academic Outreach and
Program Development

Michelle Newman, University Registrar and Assistant Provost

UNIVERSITY AND BUSINESS OPERATIONS

Richard Sunderland, Jr., CPA, Executive Vice President
and Chief Financial Officer

Elizabeth LaGuardia Cooper, Senior Vice President and
Chief Marketing Officer

Melissa Frey, CPA, Senior Vice President and Controller
Amy Panzarella, SPHR, SHRM-SCP, Senior Vice President,
Human Resources

Claudine Stubblefield, Vice President, Finance
Chris Symanoskie, IRC, Vice President, Investor Relations
Amy Weber, CPA, Vice President, Internal Audit
Keith Wellings, Vice President, Financial Aid and Compliance
Michael White, CPA, Vice President, Budgeting,
Tax and Facilities Management

AMERICAN PUBLIC EDUCATION, INC.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

[x] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2019

[

] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ______ to ______

Commission File Number: 001-33810

American Public Education, Inc.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

01-0724376
(I.R.S. Employer Identification No.)

111 West Congress Street
Charles Town, West Virginia 25414
(Address, including zip code, of principal executive offices)

(304) 724-3700
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Common Stock, $.01 par value

Trading Symbol(s)
APEI

Name of each exchange on which registered
NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)

AMERICAN PUBLIC EDUCATION, INC.

2019 ANNUAL REPORT

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes [ ] No [x]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Act. Yes [ ] No [x]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [x] No [ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required
to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit such files). Yes [x] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large
accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
Large accelerated filer [ ]
Smaller reporting company [ ]

Accelerated filer [x]
Emerging growth company [ ]

Non-accelerated filer [ ]

If an emerging growth company indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to
Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes [ ] No [x]

The aggregate market value of the registrant’s common stock held by non-affiliates as of June 28, 2019, the
last business day of the registrant’s most recently completed second fiscal quarter, computed by reference
to the price at which the common stock was last sold on the Nasdaq Global Select Market on that date, was
approximately $305 million.

The total number of shares of common stock outstanding as of March 6, 2020, was 14,926,651.

DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’s Definitive Proxy Statement for its 2020 Annual Meeting of Stockholders
(which is expected to be filed with the Commission within 120 days after the end of the registrant’s 2019 fiscal
year) are incorporated by reference into Part III of this Report.

AMERICAN PUBLIC EDUCATION, INC.

2019 ANNUAL REPORT

INDEX

PART I

Item 1.

Business

Item 1A.

Risk Factors

Item 1B.

Unresolved Staff Comments

Item 2.

Properties

Item 3.

Legal Proceedings

Item 4.

Mine Safety Disclosures

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities

Item 6.

Selected Financial Data

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8.

Financial Statements and Supplementary Data

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

PART III

Item 10.

Directors, Executive Officers, and Corporate Governance

Item 11.

Executive Compensation

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters

Item 13.

Certain Relationships and Related Transactions, and Director Independence

Item 14.

Principal Accountant Fees and Services

PART IV

Item 15.

Exhibits and Financial Statement Schedule

Item 16.

Form 10-K Summary

Page

106

107

108

111

113

136

170

173

174

175

176

AMERICAN PUBLIC EDUCATION, INC.

2019 ANNUAL REPORT

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report, including the sections entitled “Risk Factors,” “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” and “Business,” contains forward-looking statements. We
may, in some cases, use words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,”
“should,” “would,” “could,” “potentially,” “will,” or “may,” or other words or expressions that convey future
events, conditions, circumstances or outcomes to identify these forward-looking statements. Forward-looking
statements in this Annual Report include statements about:

• changes to the size of our student enrollment, net course registrations, and the composition of our student

body, including the pace of such changes;

• our ability to maintain, develop, and grow our technology infrastructure to support our student body;

• our conversion of prospective students to enrolled students and our retention of active students;

• our ability to update and expand the content of existing programs and develop new programs to meet

emerging student needs and marketplace demands, and our ability to do so in a cost-effective manner or on
a timely basis;

• our plans for, marketing of, and initiatives at, our institutions;

• our ability to leverage our investments in support of our initiatives, students, and institutions;

• our maintenance and expansion of our relationships and partnerships with the United States Armed Forces,

corporations, and other organizations, and the development of new relationships and partnerships;

• actions by the Department of Defense or branches of the United States Armed Forces;

• federal appropriations and other budgetary matters, including government shutdowns, that affect the ability
of our students to finance their education through programs administered by the Department of Education,
the Department of Defense, and the Department of Veterans Affairs;

• our ability to comply with the extensive regulatory framework applicable to our industry, including Title IV
of the Higher Education Act of 1965, as amended, and the regulations thereunder, as well as state law and
regulations and accrediting agency requirements;

• our ability to undertake initiatives to improve the learning experience and attract students who are likely

to persist;

• changes in enrollment in postsecondary degree-granting institutions and workforce needs;

• the competitive environment in which we operate;

• our cash needs and expectations regarding cash flow from operations;

• our ability to manage and influence our bad debt expense;

• our ability to manage, grow, and diversify our business and execute our business initiatives and strategy; and

• our financial performance generally.

Forward-looking statements are not guarantees of future performance. Actual future results, performance,
achievements, or the timing of certain events may differ significantly from those expressed or implied by the

AMERICAN PUBLIC EDUCATION, INC.

2019 ANNUAL REPORT

forward-looking statements. A number of important factors could cause actual results to differ materially from
the results anticipated by these forward-looking statements. Risks and uncertainties involved in the forward-
looking statements include, among others:

• our dependence on the effectiveness of our ability to attract students who persist in our institutions’ programs;

• our inability to effectively market our programs;

• adverse effects of changes our institutions make to improve the student experience and enhance their ability

to identify and enroll students who are likely to succeed;

• our inability to maintain strong relationships with the military and maintain enrollments from military students;

• our failure to comply with regulatory and accrediting agency requirements or to maintain institutional accreditation;

• our loss of eligibility to participate in Title IV programs or ability to process Title IV financial aid;

• our need to successfully adjust to future market demands by updating existing programs and developing

new programs; and

• our dependence on and need to continue to invest in our technology infrastructure.

You should consider the forward-looking statements contained in this Annual Report in light of these factors
and the factors described elsewhere in this Annual Report, including in Item 1A “Risk Factors” and Item 7
“Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You should read
these factors and the other cautionary statements made in this Annual Report as being applicable to all
related forward-looking statements wherever they appear in this Annual Report. If one or more of these factors
materialize, or if any underlying assumptions prove incorrect, our actual results, performance, or achievements
may vary materially from any future results, performance, or achievements expressed or implied by these
forward-looking statements.

We caution readers not to place undue reliance on any forward-looking statements made by us, which speak
only as of the date of this Annual Report. We undertake no obligation to publicly update any forward-looking
statements after the date of this Annual Report, whether as a result of new information, future events, or
otherwise, except as required by law.

AMERICAN PUBLIC EDUCATION, INC.

2019 ANNUAL REPORT

PART I

ITEM 1. BUSINESS
American Public Education, Inc., or APEI, provides online and on-campus postsecondary education to
approximately 82,600 students through two wholly owned institutions. In this Annual Report, “we,” “our,” “us,”
“the Company” and similar terms refer to APEI and its educational institutions of higher learning collectively
unless the context indicates otherwise.

This Item 1 of our Annual Report contains a “Company Overview” section that provides information about our
reporting segments, the postsecondary educational market and opportunities, competition, our competitive
strengths, our strategic approach, seasonality, and available information about us. This Item 1 also contains
a section entitled “Our Institutions” that provides institution specific information regarding each of our
two subsidiary institutions, our information technology, and our executive officers, and a section entitled
“Regulatory Environment” that provides information on some of the educational and other regulations that
impact us.

COMPANY OVERVIEW
APEI seeks to maximize a student’s return on their educational investment. Our institutions of higher learning
offer programs designed to help students advance in their current occupation, or prepare for their next career,
and develop the competencies that enable them to make meaningful contributions to their profession and
society. Our institutions are:

• American Public University System, Inc., or APUS, which provides online postsecondary education to

approximately 81,000 adult learners. APUS is an accredited university system with a history of serving the
academic needs of the military, military-affiliated, public service and service-minded communities through
two brands: American Military University, or AMU; and American Public University, or APU.

APUS offers 121 degree programs and 111 certificate programs in diverse fields of study, with a particular
focus on those relevant to today’s job market and emerging fields. Fields of study include traditional
academics, such as business administration, health science, technology, criminal justice, education, and
liberal arts, as well as public service-focused fields of study such as national security, military studies,
intelligence, and homeland security. APUS has institutional accreditation from the Higher Learning
Commission, or HLC, and several of its academic programs have specialized accreditations granted by
industry governing organizations.

APUS is committed to providing quality, relevant, accessible, affordable, and student-focused higher
education to a diverse student population in order to prepare students for service and leadership in a
diverse, global society. In addition, the institution seeks to provide professional and workforce development
solutions through partnerships with corporations and industry associations. Although APUS’s reach and
appeal is broad, the institution continues to have an emphasis on serving the military, veteran, and public
service communities. As of December 31, 2019, approximately 57% of APUS’s students self-reported that
they served in the military on active duty at the time of initial enrollment and approximately 14% of APUS’s
students self-reported being a military veteran.

• National Education Seminars, Inc., which we refer to as Hondros College of Nursing, or HCN, which

provides nursing education to approximately 1,600 students at five campuses in Ohio in the suburban areas
of Cincinnati, Cleveland, Columbus, Dayton, and Toledo. In the second quarter of 2020, HCN will begin
offering classes at an additional campus in Indianapolis, Indiana. HCN serves the needs of local nursing

AMERICAN PUBLIC EDUCATION, INC.

2019 ANNUAL REPORT

and healthcare communities and addresses the persistent supply-demand gap of nurses that is evident
nation-wide. HCN offers a Diploma in Practical Nursing, or PN, and an Associate Degree in Nursing, or ADN.
In October 2019, HCN began offering a new Direct Entry ADN option that offers an accelerated graduation
pathway for students who transfer at least 32 college credits to HCN and meet certain academic and
entrance exam requirements. Portions of the PN and ADN Programs are online.

HCN is institutionally accredited by the Accrediting Bureau for Health Education Schools, or ABHES, and
HCN’s locations and programs are approved by the Ohio State Board of Career Colleges and Schools, or
the Ohio State Board. HCN’s PN and ADN Programs are approved by the Ohio Board of Nursing, or OBN,
and the PN Program is accredited by the National League for Nursing Commission for Nursing Education
Accreditation, or NLN CNEA.

HCN has also obtained or is in the process of obtaining all necessary approvals to offer postsecondary
nursing education programs in connection with a new campus in Indianapolis, Indiana. The campus has
been authorized by the Indiana Board for Proprietary Education/Indiana Commission for Higher Education
to offer instruction in Indiana. The Indiana State Board of Nursing has voted to grant initial accreditation and
authorize the admission of the first cohort of students in the PN Program at the Indianapolis campus, where
classes will begin in the second quarter of 2020. HCN has also notified NLN CNEA of the opening of the
Indianapolis campus. While NLN CNEA approval is not required to begin classes, NLN CNEA may accept
the notification or take other actions, such as requesting follow-up information or imposing conditions. We
expect a response from NLN CNEA prior to the beginning of classes.

Reporting Segments
Our operations are organized into two reporting segments:

• American Public Education Segment, or APEI Segment. This segment reflects the operational activities of

APUS, other corporate activities, and minority investments.

• Hondros College of Nursing Segment, or HCN Segment. This segment reflects the operational activities

of HCN.

Our consolidated revenue for the year ended December 31, 2019 decreased 3.8% to $286.3 million from
$297.7 million for the year ended December 31, 2018. Net income for the year ended December 31, 2019
decreased 60.9% to $10.0 million from $25.6 million for the year ended December 31, 2018. Financial
information regarding each of our reporting segments, including information regarding segment revenue,
net income, and total assets for each of the last three fiscal years, can be found in our Consolidated Financial
Statements in Item 8 of Part II of this Annual Report. Additional financial information is reported in this Annual
Report in “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” and “Financial Statements and Supplementary Data.”

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. We subsequently entered into an intercompany agreement to
implement the shared services model. As required by HLC policy, HLC conducted a focused site visit in May
2019. The site visit team found that evidence of compliance with APUS’s commitments made in its application
and with HLC’s Eligibility Requirements Criteria for Accreditation was sufficiently demonstrated and no further
follow up was recommended. In August 2019, HLC notified APUS that the Institutional Actions Council of the
HLC, which conducts reviews and takes action on accreditation recommendations, concurred with the site visit
team’s findings.

AMERICAN PUBLIC EDUCATION, INC.

2019 ANNUAL REPORT

Postsecondary Education Market Characteristics
The postsecondary education market in the United States is large (with over 4,000 institutions), diverse
in its business models, and fragmented such that no one institution has a significant market share. Most
postsecondary institutions, including for-profit postsecondary institutions, regardless of where they are
located, how they are organized, and who they serve, face significant challenges, including:

• Enrollment Declines: In the United States, student enrollment declined in the fall of 2019 by 1.3% at

postsecondary institutions participating in Title IV programs and 2.1% among four-year for-profit institutions,
as compared to the same period the previous year.

• Affordability: There is a continued focus on the cost of a college education and a resulting impact on access

as well as on the high level of college student indebtedness.

• Quality: Postsecondary institutions face questions from lawmakers, the media, potential students and others

about the quality of academic programs.

• Competition: Competition exists from lower cost alternatives and from non-traditional competitors, such as

those offering competency-based education, or CBE, programs, coding bootcamps, credentialing programs,
micro-credentials, corporate training and other alternative educational paths.

• Relevance: Challenges exist regarding the ability to translate the value of a postsecondary education into

economic mobility. Postsecondary institutions must prepare students with relevant skills to work in new and
rapidly changing industries and respond to technological change and need to support employers in efforts to
optimize and advance their workforce.

• Accessibility: Postsecondary institutions must address the needs of students who are balancing education

with other demands on their time

Despite these challenges, postsecondary institutions, and the credentials they grant, have an important
role to play in enabling social and economic mobility. According to the U.S. Bureau of Labor Statistics,
occupations that require a postsecondary credential are projected to grow at a faster rate through 2026
than those that do not require a postsecondary education, and most of the fastest-growing occupations will
need postsecondary education.

Institutions who predominantly serve adult learners must address the particular needs of that population.
According to the Lumina Foundation, approximately 38% of students enrolled in U.S. degree granting
institutions are over the age of 25, and approximately 58% of these students are working adults. Today’s adult
learners, including military service members, are often working with extended or irregular work schedules,
have family obligations, travel or relocate frequently, and have limited financial resources. In December 2019,
the Lumina Foundation, Strada Education Network, and Gallup released findings from an education consumer
survey of approximately 42,000 adults aged 25-64 with some college credit, but no degree, and who are not
currently enrolled in a postsecondary institution. Key findings included the following:

• the most common reason cited for not continuing coursework was difficulty balancing school and work;

• the factors that would have the most impact on getting this population to re-enroll are affordability, schedule

flexibility, and a guaranteed employment outcome connected to further education;

• only 19 percent of these adults reported that they were no longer interested in completing or did not need to

complete their education; and

• cost and time pressures continued to be barriers that keep people from re-enrolling.

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Opportunities for APU
U.S. employers are increasingly reporting significant gaps between required job skills and the current
capabilities of their workforce. In a 2019 survey on behalf of CareerBuilder, the Harris Poll found that 50% of
human resource managers surveyed had jobs they could not fill because they could not find qualified talent.
Working adults also recognize the need to be lifelong learners. Udemy’s 2018 Skills Gap Report found that
84% of workers surveyed said that they believe there is a skills gap in the U.S. and 72% thought skills needed
for their jobs would change. The makeup of the labor market is also contributing to the need for more skilled
workers. High-skill occupations, defined as those where at least 80% of online job postings for that position
request a bachelor’s degree or higher, have 25% more openings than available workers, according to Burning
Glass Technologies’ report Different Skills, Different Gaps: Measuring & Closing the Skills Gap, March 2018.
This report also noted a need for improved alignment between educators and employers, and a rapidly
changing labor market. We believe a growing number of employers and professional associations will seek
partnerships with academic institutions to advance the skills and productivity of their workforce through higher
education and training programs.

Opportunities for AMU
With nearly 2.2 million active duty military and reservists, we believe the U.S. military community will continue
to be an important market segment for online education. Because of their particularly irregular schedules,
frequent deployments and access to tuition assistance funding, we believe service members will continue to
seek respected universities that provide military-focused support services coupled with an online curriculum
and flexible scheduling. We believe service members are particularly interested in postsecondary credentials
that offer both career advancement and preparation for employment outside of the military. As part of their
longstanding tradition, military leaders often encourage service members to use their earned education
benefits, and to enhance their qualifications, for purposes of the military’s compensation, promotion,
assignment, and performance systems.

The Department of Defense, or DoD, uniform tuition assistance program offers active duty, National Guard
and reserve component service members a variety of education and financial aid options. Additionally,
veterans (and certain service members) are entitled to educational benefits from the Department of Veterans
Affairs, or VA. For more information, refer to “Our Institutions—Sources of Student Financing” and “Regulatory
Environment—Student Financing Sources and Related Regulations/Requirements.”

The U.S. military is demonstrating increased levels of support for credentials other than degrees. Credentialing
Opportunities On-Line, or COOL, is a program from each of the military branches that links experience
with certification. While benefits vary by service, service members may be eligible for assistance in paying
for certifications, including by vouchers, reimbursement, or grants. Students must meet certain eligibility
requirements in order to receive credentialing assistance, including in some cases service time, experience
and DoD tuition assistance eligibility requirements. The Army is now offering an expanded credentialing
program called the Army Credentialing Assistance Program, or CA. CA is a program designed to support
soldiers who wish to pursue civilian credentials, licenses, and certifications that lead directly to a specific job,
particularly in areas outside of a soldier’s Military Occupational Specialty (MOS). Through CA, soldiers can
receive reimbursement for fees associated with qualifying programs listed on Army COOL. The US Army began
a limited user test for CA at Fort Hood, Texas, in September 2018, expanded the test in 2019, and began an
Army-wide implementation in January 2020. APUS became an approved training provider for CA programs in
October 2019. We believe other service branches may follow the Army’s example or pursue other approaches
to enhancing support for credentialing. Students in the Army may use both DoD tuition assistance and
credentialing assistance for CA, subject to a combined cap on benefit amounts.

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We believe that military veterans represent another important market segment for online education. The U.S.
Census Bureau estimated that there were 1.6 million veterans aged 18 to 35 and another 4.2 million veterans
aged 35 to 54 in 2018. Furthermore, of the 9.0 million veterans aged 18 to 64, approximately 77% are part of
the labor force, but only approximately 29% have a bachelor’s degree or higher. We believe that our military
heritage, affordability, and online offerings are attractive to veterans in the pursuit of career advancement and
employment outside of the military. Veterans and their dependents pursuing a program of education on a more
than half-time basis at an on-campus location are eligible for a monthly housing allowance equal to the basic
allowance for housing available to service members who are at a military pay grade E-5, or $1,789 per month.
Veterans pursuing a program of education solely through distance education on a more than half-time basis
are eligible to receive half of that monthly housing allowance, or $895 per month.

Elected and private-industry leaders are heavily promoting new policies and campaigns to facilitate the hiring
of veterans, supporting a transition from military service to the workforce and stimulating demand for online
education. As these policies lower barriers to non-military jobs and facilitate veteran-owned businesses
winning federal contracts, online universities offer valuable educational opportunities for veterans regardless
of where they live, work, or learn.

Opportunities for Hondros
On a national level, the expanding need for healthcare coupled with a nursing shortage is driving demand for
nursing education. Job opportunities for licensed practical nurses and registered nurses are expected to grow
faster than the average growth for all occupations, or approximately 11%, between 2018 and 2028, according to
the U.S. Bureau of Labor Statistics’ Occupational Outlook Handbook, 2019–20 Edition. The demand for nurses
in Ohio is similar to national demand: job opportunities for licensed practical nurses and registered nurses in
Ohio are expected to grow 9.5% and 14.2% through 2026, respectively, according to the Ohio Department
of Job and Family Services’ 2026 Ohio Job Outlook report. However, despite the anticipated growth in job
opportunities, over 75,000 qualified applications were not accepted by entry-level baccalaureate and graduate
nursing programs in 2018, according to a 2019 report from the American Association of Colleges of Nursing.
These statistics suggest there may be unmet demand from qualified students for nursing educational programs.

Competition
Within the postsecondary education market, APUS competes primarily with not-for-profit, public and private
two-year and four-year colleges as well as other for-profit schools, particularly those that offer online learning
programs. We believe APUS’s primary competitors include Arizona State University, Capella University, DeVry
University, Grand Canyon University, Purdue Global, Southern New Hampshire University, Strayer University,
University of Maryland Global Campus (formerly University of Maryland University College), University of
Phoenix, and flagship and mid-size state universities offering degree programs online.

We believe that the competitive factors in the U.S. postsecondary education market include:

• quality of the academic program, including alignment to high growth sectors of the job market;

• affordability;

• breadth of degree offerings;

• flexibility in delivery models;

• frequency of course or program starts;

• experience of faculty members engaged in the practice of their fields;

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• level of support for student success;

• reputation among prospective students, employers, and other stakeholders;

• effectiveness of marketing efforts in attracting college-ready students; and

• track record of strong compliance.

HCN’s programs are offered as campus-based programs to residents in the geographic areas surrounding its
campuses. In these geographic areas, HCN competes with other schools offering similar programs, including
for-profit and not-for-profit public and private colleges. Because of its relatively local focus, HCN’s competitive
environment is impacted by various factors that are specific not only to Ohio and Indiana but also to the
particular areas of Ohio and Indiana where HCN’s campuses are located, including local supply and demand
dynamics for nurses and nursing schools. HCN’s results are therefore more susceptible to the actions of single
competitors than the results of an institution that draws from a broader geographical area. For example, a
particularly effective or ineffective marketing approach by another school, or the opening or closing of another
school, could have unanticipated detriments or benefits to HCN’s competitive position.

Due to the seventh straight annual enrollment decline in the United States our institutions could face increased
competition as fewer students pursue degree-based postsecondary education. Furthermore, we anticipate
increased competition from postsecondary institutions as they continue to increase the number of online
degree programs and develop more non-traditional programs for working adult students.

Increased competition for college-ready students has led to an increase in the cost of advertising in certain
marketing channels. Continued increases in the cost of advertising may adversely impact our ability to attract
our fair share of college-ready students and/or increase our student acquisition costs. Moreover, institutions
who charge higher tuition than APUS are generally in a position to make larger investments in marketing,
specifically in student acquisition.

In recent years, other providers have started providing non-traditional, credit-bearing, and non-credit-bearing
education programs without charge or at a low cost, including:

• institutions offering CBE programs, which permit students to control their own pace and progress in a program

by demonstrating that they have achieved certain skills or knowledge rather than by earning credit hours;

• non-traditional competitors, such as entities providing coding bootcamps and micro-credentials; and

• non-traditional competitors that are partnering with universities to offer new alternative educational paths.

Increased availability of federal student financial aid for CBE programs could create additional competition and
drive additional students toward non-traditional education programs.

Most public institutions are aided by substantial government subsidies. Public and private not-for-profit
institutions benefit from government and foundation grants, tax-exempt status, tax-deductible contributions,
and other financial resources not widely available to for-profit institutions. Many public competitors also benefit
from longstanding name recognition and are able to directly recruit students in a more cost-effective manner,
especially in their local markets.

For more information on competition within the postsecondary education market, refer to “Risk Factors—Risks
Related to Attracting and Retaining Students.”

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APUS has focused on serving the military community since its founding as AMU, and the military market
continues to be the primary market for APUS. Within the military market, there are more than 2,400 institutions
that serve military students and receive funds through the DoD tuition assistance program. The primary
competitors for military students are other institutions offering online instruction, and colleges and universities
offering on-campus instruction located near military installations. Over the last several years, a number of
APUS’s competitors have expanded their outreach and marketing efforts directed at active duty and reserve
service members, as well as veterans.

We believe that APUS will continue to see increased competition in the military community from both not-
for-profit and for-profit schools. As traditional not-for-profit public and private schools advance their online
capabilities, they will present increasing levels of competition for APUS. At the same time, we believe for-profit
schools will continue to market to students eligible for DoD tuition assistance programs and VA education
benefits, rather than ED’s Title IV programs, in an attempt to comply with an ED regulatory requirement known
as the 90/10 Rule (a rule that imposes sanctions on participating institutions that derive more than 90% of
their total revenue on a cash accounting basis from Title IV programs as calculated under ED’s regulations).
This regulatory requirement is described more fully below in “Regulatory Environment—Student Financing
Sources and Related Regulations/Requirements—Department of Education—Regulation of Title IV Financial
Aid Programs—The ‘90/10 Rule’.”

Within the non-military market, including service professionals, law enforcement personnel or other first
responders, and other working adults with extended and irregular work schedules, APUS faces broad
competition with not-for-profit public and private two-year and four-year colleges as well as other for-profit
schools, particularly those that offer online learning programs. Many of these competitors, whether for-profit,
not-for-profit, or public, are also able to leverage their greater scale and size to more efficiently compete.

Competitive Strengths
While many institutions are struggling to determine how to meet the needs of today’s students, both APUS and
HCN have focused on consistently delivering high returns on student educational investment, serving busy
military and non-military students who are often balancing work and other obligations with school and living
expenses with the cost of education.

The sources of our institutions’ competitive strengths include:

• Affordable Tuition. Affordable tuition has been a priority of APUS since its founding, when APUS set

undergraduate tuition to align with tuition assistance programs available to members of the military. Today,
tuition at APUS remains among the lowest in the four-year for-profit 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. To support
APUS’s active duty military students using TA, effective with courses beginning January 2020, APUS
increased the tuition grant for those master’s students and their spouses and dependents. As a result,
undergraduate and master’s students who are eligible for TA benefits and their spouses and dependents
will pay a net tuition of $250 per credit hour. 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 APUS’s tuition grants, and its book grant that is provided
to all undergraduate students, and beginning in January 2020, active-duty military students and their
spouses and dependents at the master’s level, result in significant savings for students. APUS has provided
approximately $140 million in book grant savings to undergraduate students since 2001, and will provide
approximately $0.4 million to $0.6 million in book grant savings to graduate students in 2020. Tuition and
fees at HCN are also designed to be affordable and competitive with those of similar institutions offering the
same level of flexibility, accessibility, and student experience. We believe that, given broad concerns about

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rising tuition and student loan debt in higher education, there are opportunities to create awareness and
attract college-ready students with the primary message of affordability and value.

• Relevant Offerings Aligned with Student and Employer Demands. Both APUS and HCN offer programs
aligned to areas of high growth in the job market as supported by data provided by the Bureau of Labor
Statistics and non-governmental organizations. The depth and breadth of APUS’s program offerings are
designed to effectively address the diverse needs of students who enter into education programs with
vastly different educational and career backgrounds and goals. Our institutions are committed to continually
assessing and enhancing our academic programs and our student services to offer a high-quality education
and facilitate successful outcomes for our students and graduates. APUS:

• offers healthcare, technology, business, cybersecurity, nursing, and health information management programs;

• offers a liberal arts curriculum that supports the development of the soft skills in demand by employers; and

• utilizes Industry Advisory Councils to evaluate its current curriculum and inform the career relevance of
programs and degrees, which facilitates efforts to connect APUS’s curriculum to the industries and the
students it serves and to deliver a high-quality academic product.

Similarly, HCN focuses on educational relevance and excellence by hiring experienced nurses and other
industry professionals as faculty members while enhancing student services to assist students with courses,
labs, and clinical offerings. HCN’s faculty includes individuals with research experience and specialized nursing
credentials. HCN has invested in an innovative concept-based curriculum and simulation labs to enhance the
student learning experience and improve student success.

• Military Market Leader. APUS traces its roots to AMU, which was founded in 1991 as a distance-learning,
graduate-level institution for military officers seeking an advanced degree in military studies. Since its
founding, APUS has broadened its focus to include other military communities, veterans, and public service
and service-minded communities, with a focus on a broad purpose of “educating those who serve.” Today,
APUS is a market leader among active duty military professionals and is listed as the top provider of
postsecondary education to active duty service members using DoD tuition assistance. As of December 31,
2019, approximately 57% of APUS’s students self-reported that they served in the military on active duty at
the time of initial enrollment.

• Flexible Delivery / Frequent Entry Points / Focused on Adult Learners. APUS offers online delivery

with monthly starts, giving students the opportunity to begin their studies at a time that works for them.
Our academic support offerings, from advising and mentoring to library services and career planning, are
individualized to students’ needs, designed to support them at each step of their education journey in a
format that works best for them. Because students are located worldwide, APUS focuses on providing
asynchronous, interactive education to students that fits their busy lives. HCN offers programs that
accommodate working adults by offering blended online and in-person courses for the PN and ADN
Programs, as well as daytime and evening/weekend options at convenient campus locations.

Strategic Approach
In an effort to grow revenue and improve our financial performance, we are focused on accomplishing the
following goals and have commissioned a growth study to help prioritize investments and actions:

• Increase Enrollment at APUS. Growing student enrollment at APUS while maintaining a high quality
academic experience is a priority. We aim to increase enrollment of new and returning college-ready
students and further improving student retention and completion. This includes improving enrollments from
operational improvements in enrollment management, student-onboarding, student service, and marketing,

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including a planned marketing campaign focusing on affordability and return on investment learners. Our
efforts may also include seeking additional and expanding existing academic partnerships, with a focus on
healthcare and community colleges, expanding our offerings, and launching new initiatives, including in the
business-to-business space.

• Maintain APUS’s Leading Position in the Military Market and Expand Our Presence in the Veteran
Market. The combination of our online model, market-focused curriculum, and outreach to military and
veterans has enabled APUS to maintain a leadership position against more established institutions, many of
which are traditional schools offering on-campus instruction that have served the military market for longer
periods. In an effort to continue to strengthen our position, we are taking strides to, among other things,
work with military schoolhouses to better align APUS programs with military schoolhouse curriculum in
order to maximize transfer credit. In addition, our commitment to providing exceptional service and support
to the military, military-affiliated, and veteran communities will increasingly require that we offer job-ready
credentials and other non-degree offerings as a complement to degree programs, as evidenced by the US
Army’s expansion of its credentialing assistance program.

• Increase APUS’s Share of the Non-Military Market. APUS’s programs are particularly responsive to

learners in public service communities, including public safety, intelligence, and security professions. Today’s
adult learners, regardless of their specific career requirements, are looking for a highly tailored educational
experience that prepares them for success. We believe APUS’s academic offerings are attractive options for
students seeking high quality, affordable, and flexible programs.

• Utilize Innovative Education Technology. At APUS, we provide a personalized online learning environment
that leverages existing and proprietary technologies, as well as emerging technologies, for the purpose of
enhancing student services, classroom instruction, learning outcomes, and the overall student experience. We
utilize various technologies to encourage student persistence and engagement with an emphasis on the mobile
experience. Our intention is to deliver a next-generation student experience from point of inquiry to graduation
and beyond, leveraging enhanced levels of personalization in order to address student expectations informed
by market-leading customer experiences online, while operating with agility and efficiency. In 2019, we initiated
an information technology transformation program focusing on specific information technology projects,
including replacements of our learning management and customer relationship management systems, with the
goal of improving service delivery to internal and external customers.

• Add New Campus Locations and Programs at HCN. Given the persistent gap between demand for nurses,

and the supply of qualified graduates of nursing schools, we will continue to pursue both organic and
inorganic growth opportunities for HCN. In the second quarter of 2020, HCN will begin offering classes at
a new campus in Indianapolis, Indiana. HCN will continue exploring opportunities to add campus locations,
aligned with accreditor requirements, to meet the needs of students and marketplace demands, as well
as new nursing and healthcare education programs, such as the Direct Entry ADN option. To complement
these efforts, we may also seek opportunities to expand through acquisition of nursing schools or other
organizations focused on healthcare education.

• Increase Enrollment at HCN’s ADN Program. Enrollments in HCN’s ADN Program for 2019 were

significantly lower than planned. We plan to continue to review and refine our academic and admissions
standards, including changes implemented during the year that we believe have impacted student
enrollment, to work to improve negative perceptions from current and prospective student cohorts, and to
implement new initiatives to improve the current and prospective student experiences such as by extending
the hours of the customer service team and launching a direct-entry ADN program.

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• Expand Strategic Partnerships. Our institutions partner with corporations, government agencies,
professional associations, and non-profit organizations to support their professional and workforce
development initiatives. APUS provides more than 200 partner organizations with a range of services to
maximize strategic workforce development goals, including tailored learning programs, dedicated client
services, admissions support, custom program webpages, direct payment options for eligible institutions,
and tuition grants. HCN partners with more than 40 healthcare facilities and community partners, through
corporate and local agreements, to provide clinical experiences for HCN students, meet partners’ workforce
needs, and work collaboratively to chart the future of nursing education in a community advisory capacity.

• Further Increase Alignment to Job Market Needs. Our institutions will continue exploring opportunities
to enhance degree offerings to meet emerging needs and marketplace demands, with a focus on fields
of study exhibiting higher than average job growth and new degree programs that are relevant to the
workplace. Our institutions will also continue to consider alternatives and non-traditional offerings, including
corporate training and credentialing programs aligned to the job market and requiring less time and expense
to complete, possibly including through acquisitions of training or corporate learning companies serving high
growth industries such as healthcare, technology and STEM fields.

To support growth in our existing businesses and to diversify our business model, we will continue to assess
and pursue strategic investments and acquisitions. Our investment and acquisition strategy includes a focus
on investing in nursing and healthcare education as well as investing in companies that bridge postsecondary
education to employment, to improve economic mobility for adult learners, in particular those in the military,
national security and public service communities, through a combination of educational offerings and
workforce-related solutions. For additional information regarding our investments and acquisitions, please
refer to the “Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements” in
this Annual Report.

Seasonality and Quarterly Fluctuations
Our quarterly results fluctuate and, therefore, the results in any quarter may not represent the results we
may achieve in any subsequent quarter or full year. Our revenue and operating results normally fluctuate as
a result of seasonal or other variations in our enrollments. Our student population also varies as a result of
new enrollments, graduations, student attrition, the success of our marketing programs, and other reasons
that we cannot always anticipate. We expect quarterly fluctuations in operating results to continue as a result
of these factors.

Available Information About Us
APEI was incorporated in Delaware in 2002 as the successor to a Virginia corporation incorporated in 1991.
Our website is www.apei.com. The information on our website is not incorporated by reference in this Annual
Report on Form 10-K. We make available, free of charge through our website, our Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after they
are electronically filed with, or furnished to, the SEC.

OUR INSTITUTIONS
We provide postsecondary education through two educational institutions of higher learning, APUS and HCN.
Our institutions are licensed or otherwise authorized by state authorities, or are in the process of obtaining
such licenses or authorizations, to offer postsecondary education programs to the extent the institutions
believe such licenses or authorizations are required, and are certified by the U.S. Department of Education,

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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.

American Public University System
APUS is based in Charles Town, West Virginia and has institutional accreditation from HLC, a regional
accrediting agency. As mentioned above, APUS traces its roots to AMU, which was founded in 1991 as a
distance-learning, graduate-level institution for military officers seeking an advanced degree in military
studies. APUS has gradually broadened its focus to include other military communities, veterans, and public
service and public service-minded communities with a focus on educating those who serve. In 2002, APUS
was organized into a university system with two components: AMU and APU. AMU is focused on educating
students from the military, national security, military-affiliated and service communities. APU is focused on
educating career-focused working adults with an emphasis on educating professionals working in service-
related communities. APUS is an online institution of higher learning, which we believe is well-suited to its
students, especially its military, public service and working adult students, many of who serve in positions
requiring extended and irregular work schedules, are on call for rapid response missions, participate in
extended deployments and exercises, travel or relocate frequently, must balance family and work demands or
are single parents with limited financial resources. Many APUS students have significant prior education and
career experiences; 87% are working adults and the average age of APUS students is 32. APUS is designed to
serve those students with tailored offerings to support them in successfully reaching their individual goals.

Although APUS’s focus has broadened, it continues to have an emphasis on its relationship with the military
community. Approximately 57% of APUS’s students as of December 31, 2019 self-reported that they served
in the military on active duty at the time of initial enrollment. The remainder of APUS’s students are military-
affiliated professionals (such as veterans, reservists or National Guard members), public service professionals
(such as law enforcement personnel or other first responders), and other civilians (such as military spouses and
working adult students).

Curriculum and Scheduling

APUS offers 232 degree and certificate programs, including one dual degree and four CBE programs. Over
1,600 distinct courses are available in either eight- or sixteen-week formats. Most academic terms begin on the
first Monday of each month. APUS’s programs are as follows:

Programs

Doctoral Degrees

Master’s Degrees

Bachelor’s Degrees

Associate Degrees
Total Degree Programs

Certificates

Graduate

Undergraduate
Total Certificates

Total Programs and Certificates

Number

25
121

Number

57
111

232

In addition to degree programs, APUS offers 111 certificate programs. APUS’s certificate programs generally
require a minimum of 18 credit hours and focus on a particular component of a broader degree program.
Students may earn either discrete certificates or certificates in combination with work toward a degree

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program. APUS currently offers limited enrollment in our four Momentum CBE programs, which focus on
the achievement of knowledge and skills, providing a more flexible degree path to non-traditional students
seeking an alternative to prevailing schedule and tuition constraints. In addition, APUS offers several “Learning
Tracks” that are comprised of three academic courses in a related area of interest. Like a microcredential, a
Learning Track allows students to pursue a course of study without having to commit to a degree or certificate
program. For a full list of our degree and certificate programs, please see http://catalog.apus.edu. The
information on our website is expressly not incorporated by reference in this Annual Report.

For the fiscal year ended December 31, 2019, 23% of APUS students were enrolled in security and global
studies programs, 24% in business, and 22% in arts and humanities, with the remainder of students in science,
technology, education and math, health sciences, and education programs. During that period, 59% of
students were enrolled in a bachelor’s degree program, 17% in an associate degree program, 15% in a master’s
degree program, and 9% in certificate or other programs.

Student Recruitment and Marketing

APUS’s relationship-based marketing strategy focuses on building long-term, mutually beneficial relationships
with organizations and individuals in the military, military-affiliated, and service communities. We rely on
outreach teams, which serve these communities and foster long-standing relationships, as the core of this
strategy. We believe APUS’s reputation as a trusted educator positions APUS as a respected institution among
certain federal and private sector employers. These relationships, as well as APUS’s student and alumni
networks, also cultivate personal referrals. We believe that this relationship-based marketing approach enables
APUS to achieve lower student acquisition costs than otherwise would be achieved if it focused more heavily
on traditional media advertising.

APUS supplements relationship-based marketing with multichannel, data-driven marketing campaigns to
create greater brand awareness, particularly for academically prepared potential students outside the military,
military-affiliated, and service communities. In these campaigns, APUS utilizes, among other marketing
channels, digital marketing channels such as organic and paid search, APUS owned and external content
and social marketing communities, linear and digital TV advertising, radio advertising, and print advertising.
Increased competition in paid marketing channels has resulted in higher advertising costs in certain marketing
channels and could lead to increased student acquisition costs. To better manage costs and focus marketing
efforts on prospective student audiences most likely to matriculate and succeed, APUS put in place tools to
provide new insights connecting individual student performance data with third-party audience insights and
the marketing touch points that attracted them. APUS is using these insights and other highly personalized
approaches to improve future decisions with respect to marketing mix allocation, audience targeting, new
initiatives, relevant messaging, and creative decisions, as well as to more effectively and deeply leverage
platform tools that support scalable advertising development, delivery, and testing.

APUS also provides more than 200 partner organizations with a range of services to maximize strategic
workforce development goals, including dedicated client services, admissions support, custom program
webpages, direct payment options for eligible institutions, and tuition grants.

APUS is beginning to attract greater numbers of adult learners who are younger and from more diverse
backgrounds. Digital data signals tell us that our programs, designed to help to advance purpose-driven
career goals, resonate strongly with this audience’s desire to make a difference in the world. Our commitment
to affordability, particularly compared to that of other four-year public and private institutions, also strongly
resonates given this audience’s deep concern for saving money and their reluctance to take on debt. Learners
are looking for a practical solution; one that provides a return for their educational investment and fits their
lifestyle and values. APUS is recognized among education providers in this respect. In fact, according to

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a 2019 Georgetown University Center on Education and the Workforce study titled, “A First Try at ROI:
Ranking 4,500 colleges,” based on 40-year net present value, we were ranked in the top 2 percent for
return-on-investment.

APUS continues to work to enhance the student learning experience to attract students who are more likely
to persist and succeed in its programs, and will continue to work to identify and implement changes and
initiatives in an effort to more effectively attract and enroll more college-ready students on average. These
initiatives may include updates to admissions standards, which may have an adverse effect on APUS’s
enrollment and our financial condition. For additional information on the risk factors associated with these
initiatives and the APUS admissions process please refer to “Risk Factors—Risks Related to Our Business.”

Student Body and Enrollment

The student body of APUS consists of approximately 81,000 enrolled students, most of whom hold full-time
employment. Student enrollment is defined as the number of unique active students, including those who take
an approved leave of absence for up to two years, who have reached the eighth day of their first course or who
have completed at least one course within the last 12 months for which a grade was received.

APUS is focused on executing initiatives that will more effectively support its students and help improve those
students’ educational outcomes, including through faculty engagement initiatives and co-curricular initiatives to
increase the level of engagement and collaboration in the classroom and strengthen the bond between APUS
and its students. Improved engagement is an important element in APUS’s goal of retaining qualified students.

Accreditation

APUS has institutional accreditation from HLC, a regional institutional accrediting agency recognized by ED.
The status and meaning of this accreditation is described more fully below in “Regulatory Environment—
Accreditation.” The next comprehensive evaluation for reaffirmation of accreditation is scheduled for the
2020–2021 academic year.

In addition to accreditation by HLC, certain programs offered by APUS have received specialized accreditations
or professional recognition. For example, the Accreditation Council for Business Schools and Programs
(ACBSP), accredits 21 different academic programs, including the following:

• Associate of Science, Bachelor of Science and Master of Science in Accounting;

• Associate of Arts, Bachelor and Master of Business Administration;

• Associate of Arts and Bachelor of Arts in Hospitality Management;

• Associate of Arts, Bachelor of Arts, and Master of Arts in Management;

• Associate of Arts in Real Estate Studies;

• Associate of Arts and Bachelor of Arts in Retail Management;

• Bachelor of Arts and Master of Arts in Reverse Logistics Management;

• Bachelor of Arts and Master of Arts in Entrepreneurship;

• Bachelor of Arts in Marketing; and

• Bachelor of Arts and Master of Arts in Transportation and Logistics Management.

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In addition to the general ACBSP accreditation, our Bachelor of Science and Master of Science in Accounting
hold specialized accounting accreditation from ACBSP.

The Commission on Collegiate Nursing Education, or CCNE, accredits the Bachelor and Masters of Science
in Nursing programs. In addition, APUS has obtained professional recognition for its program concentrations
in Human Resources from the Society for Human Resource Management, for certain courses in the Sports
and Health Sciences program from the American Sport Education Program for Bronze Level Certification and
the National Academy of Sports Medicine Performance Enhancement Specialist, for the Information Systems
Security program from the National Security Agency—Information Assurance Courseware Evaluation, and for
certain courses in the Human Development and Family Studies program from the National Council on Family
Relations for the Certified Family Life Educator.

Our Master of Public Health program holds accreditation from the Council on Education for Public Health, or
CEPH. In addition, the International Fire Service Accreditation Congress, or IFSAC, has accredited five APUS
programs, including:

• Associate of Science in Fire Science;

• Bachelor of Science in Fire Science Management;

• Bachelor and Master of Arts in Emergency and Disaster Management; and

• Dual Master of Arts in Emergency and Disaster Management and Homeland Security.

Student Admissions

APUS welcomes prospective students to apply for admission at any time through an online application
process. The current qualification for most undergraduate programs is a high school diploma or General
Education Development certificate. Applicants for graduate programs must hold a bachelor’s degree from
an accredited U.S. institution or an equivalent foreign institution. Certain programs may have additional
admissions standards and restrictions.

Cost of Attendance and Financial Aid

We believe that APUS’s commitment to maximizing a student’s return on their educational investment is one
of its competitive strengths. We are focused on offering our students affordable programs, and many APUS
students also transfer a significant number of previously earned academic credit hours, which reduces the
length of time required to earn their degrees, and therefore reduces the cost of the degree.

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

• The tuition for undergraduate level courses increased $15 per credit hour to $285 per credit hour.

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

• The technology fee increased from $50 to $65 per class.

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 for four years. In general, a bachelor’s degree may
be earned for $34,485 in tuition costs at current tuition rates, and APUS master’s degrees may be earned for
$13,320 in tuition at current tuition rates. The combined tuition, fees, and books at APUS are designed to be
less expensive for undergraduate and graduate students than the average in-state cost at a public university.

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Undergraduate students and, effective January 1, 2020, all active duty military students and their spouses
and dependents, enrolled in courses for academic credit receive their textbooks and certain course materials
at no additional cost to them through an institutional book-grant program. This book grant represents an
approximate savings over the course of a student’s undergraduate degree program of $5,000 as compared
to public four-year colleges and universities according to comparative information from The College Board’s
Trends in College Pricing 2019 report. APUS also utilizes open access and online library materials where
appropriate and works with various publishers to reduce the cost of textbooks and course materials for both
students receiving the book grant and for graduate students who pay for textbooks and course materials.

To support APUS’s active duty military students using TA, APUS increased the 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 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 active duty military students. As a result, undergraduate and master’s students who are eligible for TA
benefits and their spouses and dependents will pay a net tuition of $250 per credit hour. APUS also extended
its book grant, previously available only to all 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 estimates that the tuition grant will apply to approximately 60% of its total net course registrations made
on or after January 1, 2020.

APUS’s 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 has two applied doctoral programs, Strategic Intelligence and Global Security, that began instruction in
January 2018. 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 a book grant for course materials. APUS doctoral degrees may be earned for approximately $50,000 in
tuition at current tuition rates.

APUS does not charge an admission fee or fees for services such as registration, course drops, or similar
events that trigger fees at many other institutions. Because APUS is an exclusively online institution, there
are no required resident fees, such as for parking, food service, student union, and recreation. APUS charges
students a technology fee, but provides a grant to cover the technology fee for students using DoD tuition
assistance programs. When applicable, APUS students are charged certain additional fees, such as graduation,
late registration, transcript request, and comprehensive examination fees.

DoD tuition assistance programs cover $250 per credit hour for military students, and these students may
also be able to use VA education benefits or aid from ED’s Title IV programs to cover any remaining cost,
as described more fully below in “Sources of Student Financing” and “Regulatory Environment—Student
Financing Sources and Related Regulations/Requirements.” APUS has set its tuition grant so that the DoD
tuition assistance program covers the full tuition cost of undergraduate and graduate courses for members of
the military up to the annual maximum benefit.

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Sources of Student Financing

APUS’s students finance their education through a combination of individual resources, DoD tuition assistance
programs, ED’s Title IV programs, VA education benefits, private loans, state and federal grants, and corporate
reimbursement programs. Most students rely on some form of financial aid in addition to their individual
resources. Students utilizing DoD’s tuition assistance programs accounted for 39%, those utilizing ED’s Title
IV programs 25%, and those using VA education benefits 23% of APUS’s net course registrations in 2019.
We believe that the ability of our students to participate in these programs is essential to APUS’s success.
Participation in the DoD tuition assistance programs, ED’s Title IV programs and VA education benefits add
to APUS’s regulatory burden, as described more fully below in “Regulatory Environment—Student Financing
Sources and Related Regulations/Requirements.”

Federal legislative activity, including government shutdowns and other budgetary actions, as well as actions
by ED and DoD, may adversely impact the ability of our students to obtain loans, grants, and other forms of
tuition financing. Such actions could include eliminating various education and loan programs, reducing the
funds or benefits (or both) available under those programs, or enacting new restrictions on participation in those
programs. Any such changes, or any other reductions in or restrictions on funding for such programs, could
have a material adverse effect on APUS’s enrollments and our financial condition. The potential risks associated
with these and similar events are described more fully below in “Risk Factors—Risks Related to Our Business.”

Faculty and Staff

APUS’s faculty consists of approximately 1,780 full and part-time faculty members with relevant teaching and
practitioner experience. The institution also employs professional staff of approximately 860 non-faculty APUS
and APEI employees to administer APUS’s academic, technology, service, and business operations. Most of
APUS’s non-faculty employees are based at either its headquarters in Charles Town, West Virginia, or at its
administrative offices in Manassas, Virginia. None of APUS’s employees are parties to any collective bargaining
arrangement. We believe that APUS has a good relationship with its employees.

APUS has approximately 340 full-time faculty members with the remainder designated as part-time. APUS
establishes full-time and part-time positions based on program and course enrollment. Many of APUS’s full-
time faculty began their careers with APUS as part-time faculty. We expect that APUS’s faculty headcount and
the composition of full-time and part-time faculty will vary with fluctuations in enrollment.

We believe that APUS’s well-regarded faculty, which includes many former and current practitioners in their
fields, attracts new students to APUS. A significant majority of APUS’s graduate faculty members hold terminal
degrees or doctorates in their relevant fields, and virtually all undergraduate faculty members hold graduate
degrees. Exceptions have been granted for a limited number of APUS’s faculty members who do not meet
degree standards and who provide evidence of significant experience and achievement in the field of study
that they teach, in accordance with APUS’s faculty quality guidelines. Many APUS faculty members have
relevant experience at other universities and within military, corporate, and government institutions.

We believe that the quality of APUS’s faculty is critical to the student experience and student outcomes
and is therefore vital to APUS’s success. APUS regularly reviews the performance of its faculty by, among
other things, monitoring the online contact that faculty have with students, reviewing student feedback, and
evaluating the learning outcomes achieved by students. If APUS determines that a faculty member is not
performing at an acceptable level, it works with the faculty member to improve performance by assigning the
faculty member a mentor, providing additional training and/or coaching the faculty member for success. If the
faculty member’s performance does not improve, APUS will no longer employ that faculty member to teach.
APUS does not offer tenure to faculty members.

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We believe that the composition of APUS’s student body and curriculum are particularly attractive to potential
faculty members because of the opportunity to teach relevant material to students who can implement higher
education learning at their workplaces. APUS recruits faculty members through referrals by current faculty
members, advertisements in higher education and trade association journals and its internet presence. Upon
selection for a position, APUS requires each new faculty member to complete an orientation and training
program that leads to their certification to teach at APUS and assignment to courses. All faculty members
participate in annual faculty-development opportunities and requirements.

Intellectual Property

APUS owns and exercises rights associated with patents, copyrights, trademarks, service marks, domain
names, agreements, and registrations to protect its intellectual property. APUS owns all course syllabi and
course and instructional materials developed by APUS faculty and employees and, as such, these course
materials may be used by APUS in current and future courses as needed to facilitate instruction, and may
be modified by APUS to meet evolving course or curriculum requirements. In general, APUS does not assert
ownership claims to scholarly works of its faculty, such as articles and books, which were not developed as
APUS course materials. Such intellectual property of APUS’s individual faculty members remains the property
of each such faculty member and is reserved specifically for use only by the faculty member who owns it,
unless the faculty member grants permission for use by others. APUS relies on agreements under which it
obtains rights to use course content developed by faculty members and other third-party content providers.
APUS owns the copyright for a work by a faculty member if APUS compensated the faculty member for the
particular product or if APUS funded the research in whole or in part.

APUS has secured rights to trademarks for various names and terms used in its business, including “American
Public University System,” “American Military University,” “American Public University” and logos incorporating
the foregoing terms and acronyms of those terms, as well as “Ready When You Are,” “Educating Those Who
Serve,” “RESPECTED. AFFORDABLE. ONLINE.,” “COMMITTED TO YOUR FUTURE,” “MASTERS OF DISASTER,”
“MOMENTUM,” “MyMomentum” and the term “Partnership At a Distance.” These trademarks and brand names
are central to a number of APUS’s marketing efforts and we believe they are important to how prospective
students identify APUS. APUS also owns rights to more than 200 internet domain names pertaining to APEI,
APUS, AMU, APU and other unique descriptors.

Hondros College of Nursing
HCN’s programs are designed to prepare individuals for productive careers in the field of nursing. HCN’s
students principally receive on-campus instruction at one of HCN’s Ohio campuses. In 2019, HCN had five
campuses, which are located in the suburban areas of Cincinnati, Cleveland, Columbus, Dayton, and Toledo,
and an administrative office located in suburban Columbus. HCN has also obtained or is in the process of
obtaining all necessary approvals to offer postsecondary nursing education programs in connection with a
new campus in Indianapolis, Indiana beginning in the second quarter of 2020, initially in the PN Program.
Growth beyond an initial cohort of up to 30 students for the first year is subject to HCN’s ability to petition to
increase the number of admissions after a site visit that will occur upon graduation of the first cohort. HCN is
institutionally accredited by ABHES.

Curriculum and Scheduling

HCN offers on-campus instruction leading to a Diploma in PN and an ADN. Graduates of the PN Program are
eligible to seek licensure as a Licensed Practical Nurse, or LPN, after passing the NCLEX-PN exam. Graduates of
the ADN Program are eligible to seek licensure as a Registered Nurse, or RN, after passing the NCLEX-RN exam.

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HCN voluntarily discontinued new enrollments in its online Registered Nurse to Bachelor of Science in Nursing,
or RN-to-BSN, program after the start of the July 2018 term. A teach-out of the remaining students in the
program was completed in December 2019 and HCN notified CCNE and the Ohio State Board in February
2020 that it had completed the teach-out and would enroll no new students in the RN-to-BSN program. In
April 2019, HCN began offering courses in a Medical Laboratory Technician program, or MLT Program, at its
Cincinnati and Columbus campuses. Due to low enrollment, HCN ceased enrolling new students and offered
MLT Program students the opportunity to transfer to HCN’s other programs.

Academic terms for the PN and ADN Programs begin four times each year, with courses starting in January,
April, July, and October. Approximately 65% of enrollments for the fiscal year ended December 31, 2019 were
in the PN Program, while 35% were in the ADN Program.

Student Body and Enrollment

HCN provides nursing education to approximately 1,600 students at five campuses in Ohio. The average HCN
student is 30 years old and 92% of HCN students are female.

Accreditation

HCN is institutionally accredited by ABHES, a national accrediting agency that is recognized by ED. ABHES
informed HCN in February 2020 that based on review of the visit report from its recently completed
unannounced visit to HCN’s Columbus campus, the response to the report, and ABHES program approval
information, it had acted to affirm the institution’s accreditation, which continues through February 28, 2021.
The next comprehensive evaluation for renewal of accreditation, which will include HCN’s submission of
evidence related to its compliance with ABHES standards and a series of site visits, is scheduled for April 2020.
For additional information related to HCN’s accreditation, including a discussion of recent correspondence from
ABHES related to retention and placement rates at HCN, refer to “Regulatory Environment—Accreditation.”

HCN’s PN Program received its initial programmatic accreditation through NLN CNEA, with quality improvement
conditions, from October 18, 2018 through October 31, 2024. On January 29, 2019, HCN submitted a required
progress report to NLN CNEA addressing certain quality indicators. NLN CNEA may accept the report or take
certain follow-up actions, such as request additional information or conduct a site visit.

Student Recruitment and Marketing

HCN’s marketing strategy is focused on building long-term relationships with businesses, organizations, and
individuals in the healthcare community, primarily in Ohio and Indiana. We believe this strategy will continue
to generate a significant number of referrals. In addition, HCN utilizes traditional media as well as digital
marketing channels, including organic and paid search marketing.

Student Admissions

HCN welcomes prospective students to apply for admission at any time by submitting an application along with
an application fee. To be accepted into any HCN program, an applicant must be a U.S. citizen or permanent
resident, be at least 18 years old at the time of starting the program, and hold a high school diploma or General
Education Development certificate. HCN’s programs also have program-specific admissions requirements.

Applicants for the PN Program and the ADN Program are required to complete an interview with an admissions
representative, and complete and pass a criminal background check. PN Program applicants are also generally
required to take and pass the Health Education Systems Admissions Assessment. In October 2019, HCN
began offering a new Direct Entry ADN option that offers an accelerated graduation pathway for students
who transfer at least 32 college credits to HCN and meet certain academic and entrance exam requirements.
Portions of the PN and ADN Programs are online.

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Beginning with the term that started in January 2019, HCN implemented enhanced ADN Program admissions
requirements, requiring external ADN applicants to have an active unencumbered PN license and to have
graduated from an approved PN program. All ADN applicants must take math and reading entrance exams.
Applicants that do not meet the minimum placement scores may be required to take additional reading
and math prerequisites or denied admission. 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. Beginning with the April 2019 term, HCN further changed its admissions standards to remove
certain entrance exam requirements.

HCN has also made multiple changes to the 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 and have had a negative impact on our results of
operations. While we work on identifying an appropriate balance of admissions requirements, academic
achievement requirements and attracting appropriate students, there may continue to be a negative impact on
enrollments at HCN. 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.

Cost of Attendance and Financial Aid

HCN’s tuition costs vary among its programs. HCN’s PN Program may be completed for approximately $19,750
in tuition and fees and the ADN Program may be completed for approximately $28,500 in tuition and fees.
Fees include the cost of examination review materials, lab fees, test review fees, and fees for applications with
OBN, among others. Some of these costs are payable to HCN and others are payable to third parties.

HCN’s students also incur costs for textbooks, supplies, uniforms and its technology package. These costs
vary among HCN’s programs and are paid for by HCN’s students as the textbooks or supplies are needed.
HCN estimates that over the life of its programs a student’s costs related to textbooks and supplies will be
approximately $2,200 for the PN Program and $3,800 for the ADN Program.

Sources of Student Financing

HCN’s students finance their education through a combination of individual resources, VA education benefits,
ED’s Title IV programs, private loans, state and federal grants, corporate reimbursement programs, and
HCN’s extended payment plan options. Most HCN students rely on some form of financial aid in addition
to their individual resources. The substantial majority of HCN’s revenue is derived from students utilizing
ED’s Title IV programs, which results in increased regulatory scrutiny, as discussed more fully below in
“Regulatory Environment—Student Financing Sources and Related Regulations/Requirements—Department of
Education—Regulation of Title IV Financial Aid Programs—The ‘90/10 Rule.’” As a result, HCN’s management
may find it necessary to decrease HCN’s enrollment of students utilizing the Title IV programs or pursue other
approaches, any of which could have a negative impact on its operating results and financial condition.

HCN offers extended payment plan options to its students, including an additional extended payment program
newly available for the term beginning in January 2020. The extended payment plan options are designed
to assist students with educational costs consisting of tuition, textbooks, and fees, and are only available
after all other student financial assistance has been applied to those costs. Payment plans require monthly
payments while the student is enrolled in a program and extend for a period up to six months after the last day

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2019 ANNUAL REPORT

of attendance or graduation. To the extent interest is applied, it is generally fixed and does not accrue until
the student departs the program or graduates. The extended payment plans do not impose any origination
fees. Participants are advised about the terms of the extended payment plans and counseled to use all federal
funding options.

In November 2019, HCN entered into a memorandum of understanding, or MOU, to participate in the DoD
tuition assistance program 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.

In addition, beginning January 1, 2020, HCN began offering an institutional grant to students demonstrating
financial need to cover the difference between the total cost of tuition and fees less the amount of all eligible
financial aid resources. The grant is designed to limit a student’s monthly payment to $200 through an award
of up to $200 per month or $600 per term after consideration of financial aid, employer tuition reimbursement,
and other financial resources.

Faculty and Staff

HCN’s faculty consists of approximately 130 faculty members with relevant teaching and nursing or healthcare
practitioner experience. HCN also employs approximately 110 professional staff members who administer
HCN’s academic, technology, service, and business operations. HCN’s faculty and staff largely work at one of
its five campuses. None of HCN’s employees are party to any collective bargaining arrangement. We believe
that HCN has a good relationship with its employees.

HCN has approximately 100 full-time faculty members with the remainder designated as part-time. All faculty
whose instruction is focused within the PN Program must have earned the minimum of a bachelor’s degree in
nursing. All faculty whose instruction is focused within the ADN Program must have earned the minimum of
a master’s degree. All HCN faculty whose instruction is nursing theory-based must have an active license to
practice as a Registered Nurse. In addition to the formal education of HCN’s faculty members, many have also
obtained specialized certifications in the field of nursing.

We believe that selecting well-educated and qualified faculty members is a key component to HCN’s success.
In addition to having the necessary educational requirements, HCN seeks faculty members who have
demonstrated experience in the field of nursing. Almost all faculty who teach HCN’s nursing courses have
nursing experience in a clinical setting, which we believe helps teach HCN’s students the skills needed to be
effective and safe caregivers.

HCN trains and develops new faculty through a formal, structured on-boarding, training, and mentoring
program. All new HCN faculty members receive a 90-day on-boarding experience, which includes a formal
orientation to the organization, policies and procedures, teaching strategies, performance expectations, and
role responsibilities.

Intellectual Property

In connection with our acquisition of HCN, we received the right to the corporate name National Education
Seminars, Inc. and a royalty-free, irrevocable, exclusive, transferable, sublicensable license to use the name
“Hondros College of Nursing” and, instead of “Nursing,” any other qualifier directly related to nursing,
medicine, or healthcare in connection with the business and operations of HCN.

HCN exercises rights associated with copyrights, trademarks, service marks, domain names, agreements, and
registrations to protect its intellectual property.

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2019 ANNUAL REPORT

Information Technology
Information technology systems are an essential part of our student experience and our business operations.
As part of our implementation of the shared services model discussed in “Reporting Segments” above, we
began providing information technology services to APUS and HCN through APEI. Previously, APUS had
managed its own information technology infrastructure and services and provided information technology
services to HCN through an intercompany arrangement. We believe we will need to continue, and potentially
increase, our investment of capital, time, and resources in technology operations and enhancements to
support our systems and mission.

We continue to make investments in information technology. We recently embarked on a multi-year technology
transformation program in an effort to enable APUS to better accommodate new flexible learning modalities,
improve the operational effectiveness of our enterprise, and enhance the learning experience for students
and faculty.

• The first cohort of students began studies on APUS’ new learning management system in March 2020

• In January 2020, APUS signed a contract to consolidate its customer relationship management systems onto

a single platform.

• We are actively evaluating migration of key applications, systems and data to the cloud rather than in our

own co-located data centers.

Our legacy systems include a customized student information and services system that we refer to as
Partnership At a Distance™, or PAD, and proprietary information systems and processes to support PAD, into
which we have invested significant capital and resources. PAD is APUS’s platform for interacting with our
students. PAD is an information system designed to enable APUS to provide each student with individualized
support at appropriate times from pre-enrollment through and beyond graduation, including student advising,
administrative support, and community networking. PAD is used by APUS to manage admissions, online
orientation, course registrations, tuition payments, grade reporting, progress toward degrees, and various
other functions. We continually evaluate PAD for possible changes and upgrades.

APUS and HCN use Sakai Collaboration and Learning Environment, or Sakai CLE, an open-source learning
management system, for their online classroom to support teaching, learning, research, and collaboration.
We intend to replace Sakai as our learning management system in 2020. PAD and Sakai CLE are our two core
enterprise systems. We also have several other systems that are used in the online campus, and to support the
student experience, financial aid processing, financial management, human resources processes, marketing,
and decision support.

The backbone of our information technology infrastructure consists of two co-location data centers: one in
Virginia, and one in Texas. Our technology environment is managed internally. Student access to our systems
is provided through redundant data carriers in both data centers.

Our continued investment in our institutions’ information technology may place a strain on resources that
could adversely affect our systems, controls, and operating efficiency, and those of our institutions, and 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. In addition, as a result of our reliance on
information technology, system disruptions and security breaches could adversely affect our reputation and
our operations. For additional information regarding risks related to our information technology, refer to “Risk
Factors—Risks Related to Our Technology Infrastructure.”

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2019 ANNUAL REPORT

For more information on these investments and their effects on our results of operations, refer to
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview.”

Information About our Executive Officers

Set forth below is certain information concerning our executive officers serving as of the date of this Annual Report.

Name

Angela Selden

Dr. Wallace E. Boston

Richard W. Sunderland, Jr., CPA

Patrik U. Dyberg

Thomas A. Beckett

Amy Bevilacqua

Robert E. Gay

Elizabeth LaGuardia Cooper

Dr. Vernon C. Smith

Age

Position

President and Chief Executive Officer

President of APUS

Executive Vice President, Chief Financial Officer

Executive Vice President, Chief Technology Officer

Senior Vice President, General Counsel and Secretary

Senior Vice President, Chief Innovation Officer

Senior Vice President, Chief Operations Officer, APUS

Senior Vice President, Chief Marketing Officer

Senior Vice President, Provost, APUS

Angela Selden joined us in September 2019 as President and Chief Executive Officer and a member of
our Board of Directors. Prior to joining us, Ms. Selden served as Chief Executive Officer of DIGARC, LLC, an
education technology provider to higher education institutions, since October 2016. From July 2015 until
April 2016, Ms. Selden was Interim Chief Executive Officer of Skybridge Americas, a global contact center
and provider of fulfillment solutions, and served as a member of its board of directors from July 2015 through
December 2018. Prior to Skybridge Americas, Ms. Selden served as Chief Executive Officer of Workforce
Insight, LLC, a global provider of strategic workforce management, from April 2014 to April 2015, after
Workforce Insight’s acquisition by Baird Capital Partners, where Ms. Selden served as Executive in Residence
from 2013 to 2014 and participated in the acquisition of Workforce Insight. Prior to her role at Baird, Ms.
Selden served as Chief Executive Officer and Executive Co-Chairman of Arise Virtual Solutions, Inc., a virtual
workforce solutions outsourcer. Earlier in her career, Ms. Selden spent 18 years at Accenture, including serving
as the Managing Partner, leading Accenture’s North American West Consumer and Industrial Products group to
significant growth.

Dr. Wallace E. Boston joined us in September 2002 as Executive Vice President and Chief Financial Officer
of APUS. From June 2004 through September 2019, Dr. Boston served as APEI President and Chief Executive
Officer, and since October 2017, Dr. Boston has served as President of APUS. Dr. Boston will continue to
serve as President of APUS through June 30, 2020 when he plans to retire. Dr. Boston previously served as
President and Chief Executive Officer of APUS from June 2004 to July 2016. Dr. Boston has served on our
Board and as a Trustee of APUS since June 2004. From 2001 to 2002, Dr. Boston served as Chief Financial
Officer of Sun Healthcare Group. From 1998 to2001, Dr. Boston served as Chief Operating Officer and, later,
President of NeighborCare, Inc. From 1993 to 1998, Dr. Boston served as Vice President of Finance and
later, Senior Vice President of Acquisitions and Development of Manor Healthcare Corporation (now HCR
ManorCare). From 1985 to 1992, Dr. Boston served as Chief Financial Officer of Meridian Healthcare.

Richard W. Sunderland, Jr., CPA joined us in February 2011 as a consultant and became Senior Vice President
of Finance of APUS in December 2012. Effective January 1, 2014, Mr. Sunderland was appointed Executive
Vice President and Chief Financial Officer of APEI. Prior to joining APUS, Mr. Sunderland served as the Chief
Financial Officer of NovaSom, Inc. from 2008 to 2010. In addition, Mr. Sunderland served as Chief Financial

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Officer of Active Day, Inc. between 2005 and 2008, and in various roles, including as Controller, Senior Vice
President and Chief Financial Officer, of NeighborCare, Inc. from 1993 to 2004.

Patrik U. Dyberg joined us in May 2018 as Executive Vice President and Chief Technology Officer, having
previously served as interim Chief Information Officer in a consulting capacity from mid-December 2017.
Mr. Dyberg was previously a Principal with The WGroup, an information technology management consulting
firm, from August 2017 to April 2018 and Managing Director for custom software development company Luxoft
Holding, Inc. from December 2015 to February 2017. Mr. Dyberg also served as Executive Vice President and
Chief Technology Officer of publishing company John Wiley & Sons, Inc. from February 2012 to August 2015,
Senior Vice President of Global Solutions Development at LexisNexis Group Inc. from 2009 through 2011,
and Chief Information Officer in the Business Information Group of The McGraw-Hill Companies from 2005
through 2009.

Thomas A. Beckett joined us in April 2011 as Director, Legal Affairs for APUS, in January 2012 became Vice
President, Legal Affairs, and since January 2016, has served as Senior Vice President and General Counsel for
APEI and APUS, and Secretary since June 2016 for APEI. Prior to joining APUS, Mr. Beckett was the General
Counsel and Chief Operating Officer of HealthSport, Inc. and its wholly-owned subsidiary, InnoZen, Inc. (now
CURE Pharmaceutical) from 2007 to 2010. In addition, from 2004 to 2010, Mr. Beckett held various leadership
positions at HealthSport and InnoZen. Prior to this, Mr. Beckett was an associate at King & Spalding LLP
and Holland & Knight LLP. Mr. Beckett began his career as a banking officer with First Union National Bank.
Mr. Beckett is on the board of directors of Shenandoah Telecommunications Company, a wireless telephone
and cable services company.

Amy Bevilacqua joined us in May 2016 as Senior Vice President and Chief Innovation Officer. Ms. Bevilacqua
previously founded and served as Managing Director of Bevilacqua Advisors LLC, an education equity
investment advisory firm, from 2010 to 2014 and from October 2015 to April 2016. Additionally, Ms. Bevilacqua
served as President of National Education Initiative from 2014 to September 2015. Ms. Bevilacqua has also
served as an Adjunct Instructor at University of Pennsylvania and as a member of multiple education focused
councils and alumni boards. Earlier in her career, Ms. Bevilacqua served as a Senior Director for Public
Broadcasting Service, Chief Marketing Officer for an early learning company and led the global rollout of a
SaaS solution for McCann Worldgroup, the world’s largest network of advertising agencies. Ms. Bevilacqua
also served as General Manager for Films Media Group, a portfolio company for the private equity firm
KKR, shepherding its sale to a strategic buyer, and was a Principal Consultant for PricewaterhouseCoopers’
entertainment and media consulting practice.

Robert E. Gay joined APUS in December 2016 as Senior Vice President and Chief Operations Officer of APUS.
Prior to joining APUS, Mr. Gay was a Senior Vice President at Maguire Associates, a research-based consulting
firm serving educational institutions, from 2011 to November 2016. Mr. Gay previously served as Vice President
of Enrollment at The New School from 2008 to 2012, Executive Vice President of Operations and Enrollment
Management at Cardean Learning Group from 2005 to 2007, and as the first Vice President of Enrollment
Management at the University of Maryland University College from 2003 to 2005. Prior to entering higher
education, Mr. Gay spent 17 years in the communications industry, serving in various senior management
positions with MCI Communications Corp., LCC International, Inc. and Solectron Global Services.

Elizabeth LaGuardia Cooper joined us in November 2003 as Vice President, Marketing of APUS, and became
Senior Vice President and Chief Marketing Officer of APUS in December 2017. Since January 2019, Ms. Cooper
has served as Senior Vice President and Chief Marketing Officer of APEI. Prior to joining APUS, Ms. Cooper
was a Product Manager for NICE Systems, Inc., an enterprise software solutions company, from 2001 to 2003.
Prior to this, Ms. Cooper held various leadership positions at KeyBridge Corporation, LifeMinders, Inc. and

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Locus Direct Marketing Group from 1999 to 2001. Ms. Cooper also served as an Associate Promotion Manager
from 1995 to 1999 at the United States Chamber of Commerce.

Dr. Vernon C. Smith joined APUS in November 2016 as Senior Vice President and Provost. Prior to joining
APUS, Dr. Smith was Vice Provost of distributed learning and Associate Professor of Practice at the Gladys L.
Benerd School of Education for the University of the Pacific from June 2014 to October 2016.Dr. Smith served
as founding Chief Academic Officer and Provost at MyCollege Foundation, where he oversaw the successful
launch of Portmont College at Mount St. Mary’s, Los Angeles (now MSMU Online), from 2012 to 2014 and
previously served as Vice President of Academic Affairs at Rio Salado College from 2009 through 2012. Dr.
Smith previously also held various positions at Northern Arizona University and Rio Salado College.

REGULATORY ENVIRONMENT
In the United States, postsecondary education institutions are regulated by (i) accrediting agencies, (ii) state
regulatory bodies, and (iii) the federal government through the U.S. Department of Education, or ED. APUS and
HCN are approved to participate in military tuition assistance programs administered by the U.S. Department of
Defense, or DoD, and veterans’ education benefits programs administered by the U.S. Department of Veterans
Affairs, or VA, and our institutions are therefore also subject to oversight by those agencies. Regulations,
standards, and policies of these agencies address the vast majority of our operations, including our
educational programs, facilities, instructional and administrative staff, administrative procedures, marketing,
recruiting, and financial operations and condition.

The postsecondary education regulatory environment is complex and continues to evolve. Changes in or
new interpretations of law, regulations, standards, and policies could have material consequences for our
institutions’ accreditation, authorization to operate in various states, permissible activities, receipt of funds
under student financial assistance programs, and costs of doing business. The postsecondary education
regulatory environment has changed and may change in the future as a result of U.S. federal elections.
For example, ED, under new leadership, acted in 2017 to delay the implementation of certain regulations
promulgated during the prior administration. In the meantime, ED also has initiated new rulemaking processes
to alter and in some cases rescind existing regulations and could act to change other existing ED policies
and practices. The relevant committees in Congress have held hearings and considered various policy and
legislative proposals related to reauthorization of the Higher Education Act of 1964, as amended, or the HEA.
We cannot predict the extent to which the Executive Branch and Congress will act to reauthorize the HEA or
change or eliminate ED regulations, policies, and practices, nor can we predict the form that new legislation,
regulations, policies, or practices may take.

Accreditation
Accreditation is a voluntary, non-governmental process through which an institution or a program submits to
review based on the standards of the accrediting agency and the stated aims and purposes of the institution or
program. Accrediting agencies establish criteria for accreditation, conduct peer-review evaluations, and publicly
recognize those institutions or programs that meet the stated criteria. Accredited institutions and programs
are subject to periodic review to ensure institutional and program integrity, to encourage continued high
performance and improvement, and to confirm that accreditation criteria continue to be satisfied. An institution
or program that does not meet the criteria may have its accreditation limited, revoked, or not renewed.

Accreditation by an accrediting agency recognized by ED is necessary to participate in the student financial aid
programs authorized under Title IV of the HEA, or Title IV programs, and the DoD tuition assistance programs.
To be recognized by ED, accrediting agencies must adopt specific standards and procedures. The National
Advisory Committee on Institutional Quality and Integrity, or NACIQI, is charged with advising ED on whether

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to recognize accrediting agencies. In 2016, NACIQI voted to recommend that ED renew ABHES’s recognition
for five years and in February 2018, NACIQI voted to recommend that ED renew HLC’s recognition for five
years. If one of our institutions’ institutional accreditors was to lose its recognition as an accrediting agency
and the institution was unable to obtain recognition from another recognized accrediting agency, the institution
could lose its eligibility to participate in Title IV programs and DoD tuition assistance programs.

In October 2018, ED announced that it would establish a negotiated rulemaking committee broadly focused on
accreditation and innovation, or the Accreditation and Innovation Committee, to prepare proposed regulations
related to, among other things, ED’s recognition of accrediting agencies and related institutional eligibility
issues. On November 1, 2019, ED published final regulations, portions of which relating to accreditation
generally will be effective on July 1, 2020. The final regulations revise ED’s process for recognition and
review of accrediting agencies and the criteria used by ED to recognize accrediting agencies. The regulations
also revise ED’s requirements for oversight of accredited institutions and programs by generally providing
accrediting agencies with greater autonomy and flexibility.

Additional information about each of our institutions’ accreditation is provided above in each reporting
segment’s “Our Institutions—Accreditation” section and as follows:

• APUS is institutionally accredited by The Higher Learning Commission, or HLC, a regional accrediting

agency recognized by ED. HLC accredits degree-granting institutions in a 19-state region, including West
Virginia. HLC most recently reaffirmed the accreditation status of APUS in July 2011. The next comprehensive
evaluation for reaffirmation of accreditation is scheduled for the 2020-2021 academic year.

In August 2016, HLC adopted a policy that permits HLC to designate publicly an institution as “in financial
distress” or “under governmental investigation” where such situations could impact the institution’s
operations and HLC believes the public should have this information in making a decision to attend or
continue to attend the institution. A designated institution must undergo special monitoring, and HLC
may deny or defer an application from such an institution to make substantive changes in its business. A
designation typically will extend for not more than two years and may be removed when HLC determines
the institution has resolved the issues that led to the designation. In February 2018, HLC imposed a
“governmental investigation” designation on APUS in connection with a Civil Investigative Demand, or CID,
issued to APUS in July 2017 by the Attorney General of Massachusetts, which is discussed more fully below
in this section in “Consumer Protection.” In August 2018, APUS notified HLC that the Commonwealth of
Massachusetts and APUS voluntarily entered into an Assurance of Discontinuance, or AOD, to resolve the
CID, and HLC notified APUS that in light of the AOD, HLC had removed the designation.

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. As required by HLC policy and ED regulation, HLC conducted a focused site
visit in May 2019. The site visit team found that evidence of compliance with the commitments APUS made
in its application and with HLC’s Eligibility Requirements and Criteria for Accreditation was sufficiently
demonstrated and no further follow up was recommended. In August 2019, HLC notified APUS that HLC’s
Institutional Actions Council, which conducts reviews and takes action on accreditation recommendations,
concurred with the site visit team’s findings.

In connection with a routine mid-cycle review of APUS, HLC required APUS to submit an interim report
on leadership of APEI and APUS. APUS timely submitted the report in April 2019. HLC accepted the first
interim report and requested that APUS submit a second interim report, which APUS timely submitted in
November 2019.

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• Hondros College of Nursing, or HCN, is institutionally accredited by the Accrediting Bureau of Health

Education Schools, or ABHES, a national accrediting agency recognized by ED. In June 2018, ABHES granted
HCN initial institutional accreditation through February 28, 2021. At that time, HCN was accredited by the
Accrediting Council of Independent Colleges and Schools, or ACICS. In September 2018, ED approved
HCN’s application to designate ABHES, rather than ACICS, as its institutional accrediting agency for
purposes of participation in the Title IV programs. On October 1, 2018, HCN voluntarily withdrew from ACICS
accreditation. The next comprehensive evaluation for renewal of ABHES accreditation, which will include
HCN’s submission of evidence related to its compliance with ABHES standards and a series of site visits, is
scheduled for April 2020.

ABHES annually reviews student achievement indicators, including retention rate, placement rate, and
licensing and credentialing examination pass rate. Under ABHES policy, ABHES may withdraw accreditation
at any time if it determines that an institution fails to demonstrate at least a 70% retention rate for each
program, a 70% placement rate for each program, and a 70% pass rate on mandatory licensing and
credentialing examinations, or fails to meet the state-mandated results for credentialing or licensure.
Alternatively, ABHES may in its discretion provide an opportunity for a program to come into compliance
within a period of time specified by ABHES, and ABHES may extend the period for achieving compliance if a
program demonstrates improvement over time or other good cause. For the reporting year ended June 30,
2018, several HCN programs did not satisfy ABHES’s threshold requirements for retention rates or placement
rates. As a result, in February 2019, ABHES directed HCN to provide evidence to ABHES that the relevant
programs had achieved a retention rate of at least 70% for the period from July 1, 2018 through March 31,
2019 and a placement rate of at least 70% for the reporting year ended June 30, 2018, along with additional
documentation and analysis related to those rates and pertinent action plans. HCN timely submitted the
required progress report. 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, ABHES notified HCN that it had taken additional actions with respect to certain HCN
programs at certain locations related to those programs’ performance in relation to ABHES student
achievement indicators. Specifically, ABHES: (i) placed the PN programs at the Dayton and Toledo
campuses on program specific warning status because the programs have failed to meet the 70% retention
rate threshold since HCN’s 2017-2018 annual report and informed HCN that those programs must meet
the retention rate threshold by May 1, 2020; (ii) removed the ADN programs at the Cleveland and Toledo

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campuses from outcomes reporting status after placement rates for those programs at those locations
met the 70% compliance threshold; (iii) continued outcomes reporting status for the PN program at the
Columbus campus because it has not met the retention rate compliance threshold and reconfirmed that it
has until May 1, 2021 to do so; and (iv) directed HCN to provide evidence to ABHES that the ADN programs
at each of the Columbus, Cleveland, Cincinnati, Dayton, and Toledo campuses and the PN programs at
the Cleveland and Cincinnati campuses met the retention rate compliance threshold for the period from
July 1, 2019 through March 31, 2020 and informed HCN that those programs must meet the compliance
threshold by May 1, 2021. There can be no assurance that HCN will be able to demonstrate compliance by
the relevant deadlines in all cases.

If HCN is unable to bring the programs into compliance during the 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. In addition, 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.”

Institutional accreditation is an important attribute of our institutions. Colleges and universities depend in part
on accreditation in evaluating transfers of credit and applications to graduate schools. Students and sponsors of
tuition reimbursement programs look to accreditation for quality assurance, and employers rely on institutions’
accreditation status when evaluating a candidate’s credentials. In addition, the loss of institutional accreditation
would result in the loss of eligibility to participate in Title IV programs and DoD tuition assistance programs.

In addition to institutional accreditation, our institutions have obtained specialized accreditation or professional
recognition for certain programs, as described more fully above in each reporting segment’s section under
“Our Institutions” entitled “Accreditation.” If one of our institutions fails to satisfy the standards of these
specialized accrediting agencies or professional organizations, the relevant programs could lose the specialized
accreditation or professional recognition, which could result in materially reduced student enrollments in those
programs, prevent the institution from offering the programs in certain states where programmatic accreditation
is required, or prevent our students from seeking and obtaining licensure or employment.

State Licensure/Authorization
Our institutions are subject to regulation by the states in which they operate. The level of oversight varies
from state to state, and such regulations change frequently. State laws typically establish standards for
instruction, faculty qualifications, administrative procedures, marketing, recruiting, financial operations, and
other operational matters. Some states prescribe regulations related to an institution’s financial condition, and
some states require the posting of surety bonds. State laws and regulations may affect our institutions’ ability
to offer educational programs, open locations, and award degrees. If one of our institutions fails to comply with
a state’s requirements, it may lose its state licensure or authorization, which would result in the institution’s
inability to enroll students in that state, and could result in the institution’s inability to receive Title IV program
funds and DoD tuition assistance funds, at least for students in that state.

Some states assert authority to regulate an institution if its educational programs are offered to residents of
those states, regardless of whether the institution maintains a physical presence in the state. The increased
popularity of online education has led and may further lead to new laws and regulations and new interpretations
of existing laws and regulations. New laws, regulations, or interpretations could increase our cost of doing
business and affect our ability to recruit students in particular states, which could negatively affect enrollments
and revenue and have a material adverse effect on our business. Changes in our business activities could lead
states that do not currently require our institutions to be authorized to require such authorization. The extent

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of this increase in regulatory obligations, and the associated costs and significance, are not known at this
time. Furthermore, in some states it may take a significant amount of time to meet the applicable regulatory
requirements with respect to a new program initiative, or we may not be able to do so at all.

The State Authorization Reciprocity Agreement, or SARA, is a voluntary agreement among member states,
districts, and territories that establishes national standards for interstate offering of postsecondary distance
education and is intended to make it easier for students to take online courses offered by institutions based
in another jurisdiction. SARA requires member jurisdictions to approve institutions in their jurisdiction to
participate in SARA, based upon institutional accreditation and financial stability, and to resolve student
complaints. Applications must be renewed annually. SARA does not cover, or limits its coverage related to,
certain activities. As a result, an institution may still be required to obtain state authorization from, for example,
agencies, or boards responsible for professional licensure. We cannot predict the extent to which states will
retain membership in SARA, the manner in which SARA’s rules may be modified, interpreted and enforced, our
institutions’ ability to comply with SARA’s requirements and retain eligibility, or the impact that failure to meet
the SARA requirements may have on our business.

Many states also have specific requirements that an individual must satisfy in order to be licensed as a
professional in a specified field. Students’ success in obtaining licensure typically depends on several factors,
including: individual merits of the graduate; whether the institution and the program were approved by the
state in which the graduate seeks licensure or by a professional association; whether the program meets all
state requirements for professional licensure; and the accreditation of the institution and the specific program.

Federal Requirements for State Licensure/Authorization

“Home” State Authorization

ED regulations specify how an institution may demonstrate, as required by ED, that it is authorized to offer
postsecondary educational programs by the state(s) where it is located, which we refer to as its “home” state,
and that the home state otherwise satisfies ED requirements. If ED determines that an institution does not
have the required state approval, the institution will be ineligible to participate in Title IV programs. If one
of our institutions were to lose its ability to participate in Title IV programs in connection with “home” state
authorization requirements, it would also lose its ability to participate in DoD tuition assistance programs.
The loss of ability of one of our institutions to participate in either Title IV programs or DoD tuition assistance
programs could have a material adverse effect on our business and financial condition.

State Authorization of Online Education

In December 2016, ED published final regulations addressing, among other issues, state authorization of
programs offered through distance education, which were scheduled to go into effect on July 1, 2018. On June
29, 2018, ED announced that it would delay the effective date of the distance education portion of the state
authorization final regulations, or the Distance Education Rule, until July 1, 2020. In April 2019, a U.S. District
Court judge found that the delayed implementation was improper, and as a result of the court’s related order,
the Distance Education Rule took effect in May 2019. The Distance Education Rule requires an institution
offering distance education programs to be authorized by each state in which the institution enrolls students,
if such authorization is required by the state, in order to award Title IV aid to such students. An institution may
obtain such authorization directly from the state or through a state authorization reciprocity agreement that
satisfies ED’s definition of such an agreement. In addition, the Distance Education Rule requires an institution
to document the state process for resolving complaints from students enrolled in programs offered through
distance education and to provide certain public and individualized disclosures to enrolled and prospective
students regarding its programs that are provided or can be completed solely through distance education or
correspondence courses, excluding internships and practicums.

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In October 2018, ED announced the Accreditation and Innovation Committee would prepare proposed
regulations related to, among other things, institutional and programmatic eligibility issues, including state
authorization and courses offered through distance education. In June 2019, ED published certain portions
of the agreed-upon regulatory language, including those provisions related to state authorization, in a notice
of proposed rulemaking. On November 1, 2019, ED published final regulations concerning state authorization,
which generally will be effective on July 1, 2020, except that institutions may in their discretion implement early
regulations relating to state authorization and institutional information disclosures. APUS implemented early
those regulations effective November 1, 2019. The final regulations related to state authorization effectively
replace the Distance Education Rule. The final regulations also clarify the required methodology for determining
the state in which a student is located for purposes of satisfying state authorization requirements for distance
education courses and require an institution to disclose certain information related to whether programs leading
to professional licensure meet applicable state requirements, regardless of program modality.

State Authorization/Licensure of Our Institutions
APUS is authorized to enroll students from each of the 50 states and the District of Columbia. APUS is
headquartered in Charles Town, West Virginia, with administrative offices in Virginia. APUS is authorized to
offer its programs by the West Virginia Higher Education Policy Commission, or WVHEPC. Under current
law, if APUS were to lose its accreditation by HLC, WVHEPC may suspend, withdraw, or revoke APUS’s
authorization. Failure to comply with WVHEPC requirements could result in APUS losing its authorization from
WVHEPC, its accreditation by HLC, its eligibility to participate in Title IV programs and DoD tuition assistance
programs, or its ability to offer certain programs, any of which could force APUS to cease operations. Under
Virginia law, because it has administrative offices in Virginia, APUS is required to be authorized by the State
Council of Higher Education for Virginia, or SCHEV. Accordingly, APUS has obtained SCHEV’s authorization
to operate as an out-of-state institution. APUS has participated in SARA since its application was approved in
December 2014. APUS also has obtained authorization to operate in California, which is the only state that is a
non-SARA jurisdiction.

HCN is headquartered in Westerville, Ohio, and has five campuses in Ohio. Classes are expected to begin at
an additional campus in Indianapolis, Indiana in the second quarter of 2020, initially only in HCN’s PN program.
HCN is authorized to offer instruction in Ohio by the Ohio State Board. HCN’s PN and ADN programs are
approved by OBN. HCN is authorized by the Indiana Board for Proprietary Education/Indiana Commission for
Higher Education to offer instruction in Indiana, and on November 21, 2019 the Indiana State Board of Nursing
voted to grant initial accreditation and authorize the admission of HCN’s first cohort of up to 30 students at its
Indianapolis campus. HCN has participated in SARA since its application was approved in April 2016.

To apply for licensure to practice nursing in Ohio, an applicant must have successfully completed a nursing
education program approved by the OBN. The OBN requires that nursing education programs such as HCN’s
PN and ADN Programs have a pass rate on the relevant National Council Licensure Examination, or NCLEX,
that is at least 95% of the national average for first-time candidates in a calendar year. If a program does
not attain this pass rate, the program may face various consequences, including placement of a program on
provisional status or withdrawal of approval pursuant to an adjudication proceeding. In March 2017, the OBN
placed HCN’s ADN Program on provisional approval because the ADN Program had not met the pass rate
standard for four consecutive years. In March 2019, the OBN found that HCN’s ADN Program did not meet
the OBN pass rate standard in 2018 for a sixth consecutive year, and we do not expect to meet the pass rate
standard in 2019. The OBN will consider restoring a program to Full Approval status if the program meets
the pass rate standard for at least two consecutive years. If a program on provisional approval fails to meet
OBN requirements at the end of the time period established for provisional approval, the OBN may propose
to continue provisional approval for a set time period or may propose to withdraw approval. HCN has been

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implementing changes, including curriculum, admissions, and academic achievement and course retake
policy changes, that are designed to improve NCLEX scores over time, but there is no assurance that these
changes will be successful or will not have negative effects on HCN’s enrollment. For example, enrollments
in HCN’s ADN Program in 2019 were significantly lower than HCN planned, which we believe is likely partly
associated with the implementation of new academic achievement and admissions requirements that had
the effect of reducing enrollments from qualified students. If HCN is unable to improve NCLEX scores over
time, this situation could have an adverse impact on our ability to enroll students and eventually our ability
to continue HCN’s ADN Program, any of which would have an adverse effect on our results of operations,
cash flow, and financial condition. The Indiana State Board of Nursing also requires that nursing education
programs have a pass rate on the relevant NCLEX exam that satisfies certain requirements. A program that
is under initial accreditation may not be granted full accreditation if the program’s pass rate is lower than one
standard deviation below the average national pass rate. In addition, if the program’s pass rate is lower than
one standard deviation below the average national pass rate for three consecutive years, the program may be
required to subject to additional oversight or a change in accreditation status.

Failure to comply with state authorization or licensure requirements could restrict our institutions’ ability
to recruit or enroll students or result in other sanctions, including fines and penalties. We review state
requirements to determine whether our institutions’ activities in those states may constitute a physical
presence or otherwise may require authorization or licensure. New laws, regulations, interpretations, or
changed circumstances related to our institutions’ educational programs could increase our cost of doing
business and affect our ability to recruit students and offer programs in particular states, which could, in turn,
adversely affect our institutions’ enrollments and revenue and have a material effect on our business.

Student Financing Sources and Related Regulations/Requirements
Our students finance their education through a combination of Title IV programs, DoD tuition assistance
programs, education benefits administered by the VA, private loans, corporate reimbursement programs,
individual resources and, in the case of HCN, extended payment plan options. Participation in federal student
aid programs, including those administered by DoD and VA, and the extended payment plan options at
HCN, adds to the regulation of our operations. In particular, the HEA and related ED regulations subject us to
significant scrutiny in the form of numerous standards we must satisfy in order to participate in and administer
Title IV programs.

Department of Education

The federal government provides support for postsecondary education through the Title IV programs in the
form of grants and loans to eligible students who can use those funds to enroll in an eligible educational
program at any institution that has been certified by ED. An institution will be certified to participate in the
Title IV programs only if, among other things, it enters into a written program participation agreement, or PPA,
with ED, which conditions participation in Title IV programs upon compliance with ED regulations and any
additional conditions specified in the PPA.

Types of Title IV Financial Aid Programs

Title IV program aid is primarily awarded to students on the basis of financial need, generally defined as the
difference between the cost of attending an institution and the amount a student can reasonably contribute.
Our students receive grants and loans to fund their education under several Title IV programs, of which the
two largest are Direct Loans and Pell Grants. Direct Loan Program loans, including Federal Stafford Loans,
Federal Parent PLUS Loans, Federal Grad PLUS Loans, and Federal Consolidation Loans, are made directly
by the federal government to students or their parents. Pell Grants are awarded to undergraduate students
who demonstrate financial need. In accordance with applicable appropriations legislation, the maximum Pell

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Grant was $6,195 for the 2019-2020 award year and will be $6,345 for the 2020-2021 award year. A student’s
lifetime eligibility to receive a Pell Grant is 12 semesters (or its equivalent). Students may not be able to use all
of this eligibility at our institutions based on their prior receipt of Pell Grants at other institutions. Institutions
may award Pell Grant funds for up to 150% of a student’s standard scheduled Pell Grant in one award year.
This provision, which commonly is referred to as “year-round Pell,” is intended to allow students to graduate
more quickly and with less debt. Some of our students may also be eligible for other Title IV grant programs,
such as the Federal Supplemental Education Opportunity Grant or Teacher Education Assistance for College
and Higher Education, or TEACH, Grant. The Title IV programs are subject to Congressional action in terms of
appropriations and other legislation that may affect funding levels, student eligibility, and other requirements.
For example, the Pell Grant program could be subject to cuts or changes in the future, and cuts in ED’s
administrative budget could lead to delays in student eligibility determinations and delays in origination and
processing of federal student loans.

Regulation of Title IV Financial Aid Programs

To be eligible and certified to participate in Title IV programs, an institution must be accredited by an
accrediting body recognized by ED, must be authorized to operate by the appropriate regulatory authority in
each state where the institution maintains a physical presence, and must comply with specific standards and
procedures set forth in the HEA and the regulations issued thereunder by ED.

ED periodically revises its regulations and changes its interpretations of existing laws and regulations.
Accrediting agencies and state education agencies also have responsibilities for overseeing institutional
compliance with certain Title IV program requirements. For these reasons, we cannot predict with certainty
how Title IV program requirements will be applied in all circumstances. Key provisions relating to institutional
participation in Title IV and the processing of Title IV aid that could adversely affect us include the following:

Eligibility and Certification Procedures. An institution must apply periodically to ED for continued certification
to participate in Title IV programs. Recertification generally is required every six years, but may be required
earlier, including when an institution undergoes a change of control. An institution may come under review
when it expands its activities in certain ways, such as opening an additional location, adding a new program,
or, in certain cases, when it modifies academic credentials that it offers.

ED may place an institution on provisional certification status if ED finds that the institution does not fully satisfy
all Title IV requirements and in certain other circumstances, such as when an institution undergoes a change
in ownership resulting in a change of control. During a period of provisional certification, the institution must
comply with any additional conditions imposed by ED. In addition, ED may more closely review a provisionally-
certified institution if it applies for approval to open a new location, add an educational program, acquire
another school, or make any other significant change. If ED determines that a provisionally-certified institution
is unable to meet its responsibilities, it may seek to revoke the institution’s certification to participate in Title IV
programs with fewer due process protections than if it were fully-certified.

APUS is certified to participate in Title IV programs through September 30, 2020 and will be required to apply
timely for recertification in order to continue to participate in the Title IV programs after that date. 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 remains open and ongoing. If the
program review and any associated liabilities remain unresolved at the time ED acts on APUS’s recertification
application and ED decides to recertify APUS, we believe such recertification is likely to be on a provisional
basis because of the unresolved program review and associated liabilities. HCN was provisionally certified to
participate in the Title IV programs from November 2013 until September 2018. Since September 28, 2018,

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HCN has been certified to participate in Title IV programs, without the restrictions of provisional certification.
HCN will be required to apply timely for recertification in order to continue to participate in the Title IV
programs after September 30, 2021.

State Authorization. To participate in Title IV programs, a school must receive and maintain authorization by
the appropriate state education agencies. As described more fully above in “State Licensure/Authorization,” ED
has specified the types of state approvals that are acceptable to demonstrate that an institution is authorized
to offer postsecondary educational programs, and ED has promulgated rules that address authorization by
states in which students enrolled in distance education programs reside or are located.

Administrative Capability. ED regulations specify extensive criteria by which an institution must establish that it
has the requisite “administrative capability” to participate in Title IV programs, including that the institution must:

• comply with all applicable Title IV program regulations;

• have capable and sufficient personnel to administer Title IV programs;

• have acceptable methods of defining and measuring the satisfactory academic progress of its students;

• not have cohort default rates above specified levels;

• have various procedures in place for safeguarding federal funds;

• not be, and not have any principal or affiliate who is, debarred or suspended from federal contracting or

engaging in activity that is cause for debarment or suspension;

• provide financial aid counseling to its students;

• refer to ED’s Office of Inspector General any credible information indicating that any applicant, student, employee
or agent of the institution has been engaged in any fraud or other illegal conduct involving Title IV programs;

• submit in a timely manner all required reports and financial statements;

• develop and apply an adequate system to identify and resolve discrepant information with respect to a

student’s application for Title IV aid; and

• not otherwise appear to lack administrative capability.

If an institution fails to satisfy any of these criteria, ED may require the repayment of Title IV program
funds, transfer the institution from the “advance” system of payment to cash monitoring status or to the
“reimbursement” system of payment, place the institution on provisional certification status, or commence a
proceeding to impose a fine or to limit, suspend, or terminate the institution’s participation in Title IV programs.

Financial Responsibility. The HEA and ED regulations establish extensive standards of financial responsibility
that institutions must satisfy in order to participate in Title IV programs. These standards generally require that
an institution provide the services described in its official publications and statements, properly administer Title
IV programs in which it participates, and meet all of its financial obligations, including making required refunds
and any repayments to ED.

ED evaluates institutions on an annual basis for compliance with specified financial responsibility standards,
including a complex formula based on line items from the institution’s audited financial statements. The formula
focuses on three financial ratios: (1) equity ratio (which measures the institution’s capital resources, financial
viability, and ability to borrow); (2) primary reserve ratio (which measures the institution’s viability and liquidity);

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and (3) net income ratio (which measures the institution’s profitability or ability to operate within its means).
Generally, an institution’s financial ratios must yield a composite score of at least 1.5 for the institution to be
deemed financially responsible. Under certain circumstances, an institution may be able to establish financial
responsibility on an alternative basis by complying with various conditions.

ED may also apply the financial responsibility standards to other entities under common ownership with
an eligible institution. At the request of ED, for purposes of evaluating the financial responsibility of our
institutions, including the composite score calculation, we supply consolidated financial statements to ED.

In final regulations published November 1, 2016, which we refer to as the 2016 Borrower Defense Regulations,
ED modified its financial responsibility standards to provide that an institution (other than a public institution)
may not be able to meet its financial or administrative obligations, and is therefore not financially responsible,
if it is subject to one or more triggering events that occur on or after July 1, 2017. On September 23, 2019, ED
published new final regulations, which we refer to as the 2020 Borrower Defense Regulations, which among
other things amend ED’s financial responsibility provisions in several respects. Like the 2016 Borrower Defense
Regulations, the 2020 Borrower Defense Regulations identify certain conditions or other triggering events
that have or may have an adverse material effect on the institution’s financial condition, in response to which
ED would or could require that the institution submit some form of financial protection, such as a letter of
credit, to ED. Under the 2020 Borrower Defense Regulations, ED will consider an institution unable to meet its
financial or administrative obligations under ED’s financial responsibility regulations if the institution is subject
to one of certain mandatory triggering events that ED believes have or are likely to have a material adverse
effect on the financial condition of the institution, some of which are the same as under the 2016 Borrower
Defense Regulations. ED may consider an institution not to be financially responsible if ED determines that one
of certain discretionary triggering events is likely to have a material adverse effect on the financial condition
of the institution. The set of discretionary triggering events under the 2020 Borrower Defense Regulations
includes some of the same events that are triggering events under the 2016 Borrower Defense Regulations. If
the institution is subject to two or more of these discretionary triggering events, ED will consider the institution
to be subject to a mandatory triggering event and therefore unable to meet its financial or administrative
obligations. For each triggering event, to demonstrate that the institution remains financially responsible, the
institution may submit evidence that the triggering event has been resolved, that the institution has insurance
that will cover part or all of the debt or liabilities, or that the triggering event has not or will not have a material
adverse effect on the institution. If ED determines that one of our institutions is not financially responsible
because of one or more triggering events, the institution would be required to provide an irrevocable letter of
credit equal to at least 10% of the amount of federal student financial aid funds received by the institution for
the past year.

The 2020 Borrower Defense Regulations also implement updates to ED’s calculations of an institution’s
composite score to reflect certain changes in Financial Accounting Standards Board accounting standards and
to update the definitions and terms used to describe the calculation of the composite score, including leases
and long-term debt. With limited exceptions related to optional early implementation of modifications to ED’s
composite score methodology, the 2016 Borrower Defense Regulations will remain in effect until the 2020
Borrower Defense Regulations take effect on July 1, 2020.

Failure of one of our institutions to meet the “financial responsibility” requirements, because it does not
satisfy the minimum composite score or is unable to establish financial responsibility on an alternative basis,
or because it fails to meet other financial responsibility requirements, could cause the institution to lose
access to Title IV program funding, or result in other penalties or conditions on continued participation.
ED’s determination that our consolidated financial statements do not satisfy the “financial responsibility”

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requirements could cause both APUS and HCN to lose access to Title IV program funding, or result in other
penalties or conditions on continued participation.

The “90/10 Rule.” Under the so-called “90/10 Rule”, a for-profit institution is prohibited from deriving more
than 90% of its revenue (as computed by ED) on a cash accounting basis (except for certain institutional
loans) from Title IV programs for any fiscal year. If an institution violates the 90/10 Rule for any fiscal year,
the institution is placed on provisional status for two fiscal years. An institution that violates the rule for two
consecutive fiscal years becomes ineligible to participate in Title IV programs for at least two fiscal years and
is required to demonstrate compliance with Title IV eligibility and certification requirements for at least two
additional fiscal years prior to resuming Title IV program participation.

Using the applicable 90/10 formula, the following table contains the percentage of cash-basis revenue earned
from Title IV program funds:

APUS

HCN

2017

41%

83%

2018

41%

82%

2019

38%

80%

Incentive Payment Rule. An institution participating in Title IV programs may not provide any commission,
bonus or other incentive payment to any person or entity engaged in any student recruitment, admissions, or
financial aid awarding activity based directly or indirectly on success in securing enrollments or federal student
financial aid. In June 2015, ED announced that it will calculate institutional liability for noncompliance with the
incentive payment rule by calculating the cost to ED of the Title IV funds improperly received by the institution,
including the cost to ED of all of the Title IV funds received by the institution over a particular period of time
if those funds were obtained through implementation of a policy or practice in which students were recruited
in violation of the incentive payment rule. ED may also fine an institution, or take administrative action to limit,
suspend, revoke, deny, or terminate an institution’s eligibility to participate in the Title IV programs, if the
institution violates the prohibition.

We believe that our employee compensation and third-party contractual arrangements comply with the incentive
payment rule currently in effect. However, because there are ambiguities as to how the rule is interpreted and
enforced by ED, we can make no assurances that ED would not find deficiencies in our past, current, or future
employee compensation plans and relevant third-party contractual arrangements. In addition, in recent years,
other postsecondary educational institutions have been named as defendants to whistleblower lawsuits, known
as “qui tam” cases, brought pursuant to the Federal False Claims Act, alleging that an institution’s compensation
practices did not comply with the incentive payment rule. Any such litigation could be costly and could divert
management’s time and attention away from the business, regardless of whether a claim has merit.

Gainful Employment. Under the HEA, for-profit schools are eligible to participate in Title IV programs in
connection with educational programs that lead to “gainful employment in a recognized occupation,” except for
certain programs leading to a bachelor’s degree in liberal arts. Historically, this concept has not been defined
in detail.

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On October 31, 2014, ED published final regulations relating to gainful employment, which we refer to as the
GE Regulations. The GE Regulations went into effect on July 1, 2015, with the exception of certain disclosure
requirements, which generally went into effect January 1, 2017. The GE Regulations, among other things,
establish debt-related measures for determining whether certain postsecondary education programs prepare
students for gainful employment in a recognized occupation, require institutions to make certain disclosures
in connection with gainful employment programs, and require institutions to make certain certifications to ED
concerning gainful employment programs.

On July 1, 2019, ED published a final rule rescinding the GE Regulations. The rescission is scheduled to
take effect July 1, 2020, but in guidance issued on June 28, 2019, ED explained that the Secretary of ED
would exercise her authority to designate the rescission for early implementation by institutions that elect to
implement early the rescission. Institutions that implement the rescission early will not be required to report
data related to gainful employment programs to ED, comply with gainful employment disclosure requirements,
or comply with related certification requirements, among other requirements. APUS and HCN have elected
to implement early the rescission of the 2014 GE Regulations. APUS intends to continue to voluntarily make
certain disclosures related to gainful employment programs.

Student Loan Defaults. Under the HEA, an educational institution may lose its eligibility to participate in Title
IV programs if defaults on the repayment of federal loans by its students exceed 40% in any one year or 30%
for each of three consecutive years. An institution’s cohort default rate is calculated as the percentage of
borrowers who entered repayment in the relevant fiscal year who default before the end of the second fiscal
year following the fiscal year in which the borrowers entered repayment. If an institution’s cohort default rate is
equal to or greater than 30%, it must establish a default prevention task force.

In September 2018, ED released official three-year cohort default rates for federal fiscal year 2016. The final
official ED cohort default rates for APUS and HCN for the federal fiscal years 2014, 2015, and 2016 are as follows:

APUS

HCN

2014

23.6%

11.4%

2015

23.8%

11.4%

2016

18.5%

11.3%

If one or both of our institutions has a default rate in excess of allowable levels, it could result in that
institution’s or those institutions’ loss of eligibility to participate in Title IV programs or incurring additional costs
related to default prevention, which could have a material adverse effect on our business.

Privacy of Student Personal Information and Records. The Family Educational Rights and Privacy Act of
1974, or FERPA, and ED’s regulations implementing FERPA require educational institutions to protect the
privacy of students’ educational records by, among other things, limiting disclosure of a student’s personally
identifiable information without prior written consent. If an institution fails to comply with FERPA, ED may
require corrective actions by the institution or may terminate an institution’s eligibility to participate in Title IV
programs. In addition, educational institutions engaged in financial activities such as the granting of student
loans are obligated to safeguard student information pursuant to the Gramm-Leach-Bliley Act, or GLBA, and
applicable GLBA regulations, which among other things, require a comprehensive, written information security
program to protect personally identifiable financial information of students, parents, or other individuals in a
customer relationship with the institution. Failure to comply with the applicable GLBA requirements may result
in Federal Trade Commission, or FTC, enforcement, which could include the imposition of conditions, penalties,
monitoring, and oversight. Institutions are also subject to the general deceptive and unfair practices jurisdiction
of section 5 of the FTC Act with respect to their collection, use, protection, and disclosure of student
information. The FTC has brought numerous enforcement actions under section 5 of the FTC Act against

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companies that among other things: (1) may have collected, used, shared, or retained personal information
inconsistent with the representations, commitments, and promises they make in their privacy policies and other
public statements; (2) may have had privacy policies that did not adequately inform consumers about actual
practices; and (3) may have failed to reasonably protect the security, privacy and confidentiality of personal
information. Institutions must also comply with the FTC Red Flags Rule, a requirement designed to identify
and mitigate identity theft for certain student accounts. States also have so called “mini-FTC Acts under which
they may bring enforcement actions similar to those of the FTC as well as other applicable privacy and security
laws. A new law in California, the California Consumer Privacy Act, or the CCPA, which took effect in January
2020, imposes new disclosure obligations and contains a broad array of consumer rights relating to their
personal information, including among others, the right to obtain copies of their personal information collected
in the past 12 months, the ability to opt out from the sale of personal information, and the right to demand the
deletion of personal information. The CCPA also creates new consumer notice obligations. The CCPA has
the potential for significant civil penalties for failing to comply as well as a private right of action and statutory
damages for data breaches that are the result of unreasonable security, which may increase data breach
litigation, including class action litigation. Although the CCPA is now in effect, the California Attorney General is
in the process of developing regulations, the final form of which may significantly impact the CCPA compliance
measures we have or will undertake. Our collection of personal information relating to students or other
individuals who are in the European Union, or EU, may implicate the EU’s General Data Protection Regulation,
or GDPR, which took effect in May 2018. The GDPR contains numerous requirements relating to the collection,
possession, use, and disclosure of personal information, but enforcement priorities and interpretation of certain
provisions remain unclear. The GDPR requirements are generally stricter and more comprehensive than those
of the U.S. Non-compliance with the GDPR could result in a fine for certain activities of up to 20 million Euros or
4% of an organization’s global annual revenue, whichever is higher, per violation.

Accessibility for Students with Disabilities. Section 504 of the Rehabilitation Act of 1973, or Section 504,
prohibits discrimination against a person with a disability by any organization that receives federal financial
assistance, which includes us. In 2010, ED’s Office for Civil Rights, which enforces Section 504, together with
the Department of Justice, asserted that requiring the use of technology in a classroom environment when
such technology is inaccessible to individuals with disabilities violates Section 504, unless those individuals
are provided accommodations or modifications that permit them to receive all the educational benefits
provided by the technology in an equally effective and integrated manner. In recent years, ED’s Office for
Civil Rights has taken enforcement action against several institutions of higher education, including primarily
online institutions, after determining that their websites and online learning management platforms were not
accessible to persons with a disability. If one of our institutions is found to have violated Section 504, it may
be required to modify existing content and functionality of its online classroom or other uses of technology,
including through adoption of specific technical standards. An institution that does not come into compliance
with Section 504 could lose access to federal funding, including the ability to participate in the Title IV
programs and DoD tuition assistance programs.

College Affordability and Transparency Lists. ED publishes on its website lists of the top 5% of institutions, in
each of nine categories, with (i) the highest tuition and fees for the most recent academic year, (ii) the highest
“net price” for the most recent academic year, (iii) the largest percentage increase in tuition and fees for the
most recent three academic years, and (iv) the largest percentage increase in net price for the most recent
three academic years. An institution placed on a list for high percentage increases in either tuition and fees
or in net price must submit a report to ED explaining the increases and the steps that it intends to take to
reduce costs. ED reports annually to Congress on these institutions and publishes its reports on its website.
ED also posts lists of the top 10% of institutions in each of the nine categories with lowest tuition and fees or
the lowest net price for the most recent academic year. APUS was listed as the private for-profit, four-year

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or more undergraduate institution with the 14th lowest tuition for 2017-2018, the most recent year for which
data is available, and 17th lowest net price for 2016-2017, in each case the most recent years for which data is
available. We cannot determine the extent to which such lists have impacted or may impact our enrollments,
reputation, or operating results.

College Scorecard. In September 2015, ED publicly released its “College Scorecard” website, which among
other characteristics, allows users to search for schools based upon programs offered, location, size, tax
status, mission, and religious affiliation. Certain College Scorecard measures are based on data collected only
about students who receive Title IV program aid. While a significant portion of APUS students receive Title
IV program aid, they are a minority of APUS’s students. On August 14, 2018, ED announced a plan to update
the College Scorecard or a similar web-based tool to provide program-level outcomes for all higher education
programs at all institutions that participate in the Title IV Programs. In May 2019, ED updated the College
Scorecard to include additional information, including more comprehensive graduation rates for full-time,
part-time, first-time, and transfer students, and in November 2019 ED supplemented the College Scorecard to
include program-level outcomes data such as median earnings and median loan debt. We cannot determine
the extent to which the data collected and published by ED has impacted or may impact our enrollments,
reputation, or operating results.

Third-Party Servicers. ED regulations permit an institution to enter into a contract with a third-party servicer
for the administration of any aspect of the Title IV programs. Our institutions utilize third-party servicers for
some services and in the future may consider using third-party servicers for other functions that are currently
managed directly by our institutions. Third-party servicers must, among other obligations, comply with Title
IV requirements and be jointly and severally liable with the institution to ED for any violation by the servicer of
any Title IV provision. An institution must report to ED new contracts with or any significant modifications to
contracts with third-party servicers and other matters related to third-party servicers. If any third-party servicer
engaged by one of our institutions does not comply with applicable statute and regulations, our institution may
be liable for its actions, and our institution could lose its eligibility to participate in Title IV programs.

Title IV Return of Funds. When a student withdraws, an institution must return unearned Title IV program
funds to ED in a timely manner. An institution must first determine the amount of funds that a student “earned”
before withdrawal. If the student withdraws during the first 60% of any period of enrollment or payment period,
the amount of Title IV program funds that the student earned is equal to a pro rata portion of the funds for
which the student would otherwise be eligible. If the student withdraws after the 60% threshold, then the
student has earned 100% of the Title IV program funds. The institution must return to the appropriate Title
IV programs, in a specified order, the lesser of (i) the unearned Title IV program funds or (ii) the institutional
charges incurred by the student for the period multiplied by the percentage of unearned Title IV program
funds. An institution must return the funds no later than 45 days after the date of the institution’s determination
that a student withdrew.

If 5% or more of such returns were not timely made, the institution may be required to submit a letter of credit
in favor of ED equal to 25% of the amount of unearned Title IV funds the institution was required to return
for its most recently completed fiscal year. For example, 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 an open program review with
respect to which APUS has not yet received a program review report. 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 March 2018 and it expired December 31, 2019. If ED determines that one of our institutions has
repeatedly failed to comply with ED regulations, it may take adverse action against the institution on the basis

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of the repeated finding or may find that the institution has failed to demonstrate administrative capability, as
described above.

Misrepresentation. Under the HEA and its implementing regulations, ED may fine, suspend or terminate the
participation in Title IV programs by an institution that engages in substantial misrepresentation regarding the
nature of its educational program, its financial charges, or the employability of its graduates.

In December 2015, ED fined HCN $27,500 based on a finding that HCN had substantially misrepresented
its programmatic accreditation status prior to our ownership of HCN. HCN noted its disagreement with ED’s
findings but paid the fine in order to promptly resolve the matter.

The Clery Act. Our institutions are required to comply with the Jeanne Clery Disclosure of Campus Security
Policy and Campus Crime Statistics Act, or the Clery Act. The Clery Act requires an institution, among other
things, to report to ED and disclose in an annual security report, for the three most recent calendar years,
statistics concerning the number of certain crimes that occurred on or within the institution’s so-called “Clery
geography” and to publish certain policies and procedures related to campus safety. A failure to comply
with the Clery Act could result in our institutions being fined or having their eligibility to participate in Title IV
programs limited, suspended, or terminated, could lead to litigation, or could harm our institutions’ reputation,
each of which could, in turn, adversely affect our institutions’ enrollments and revenue and have a material
effect on our business.

Borrower Defenses. Under the HEA, ED is authorized to specify in regulations which acts or omissions of
an institution of higher education a borrower may assert as a defense to repayment of a Direct Loan. ED’s
previous regulations permitted a borrower to assert a borrower defense to repayment of a Direct Loan if
the institution’s acts or omissions give rise to a cause of action against the institution under state law. On
November 1, 2016, ED published the 2016 Borrower Defense Regulations, which concern which acts or
omissions of an institution of higher education a student borrower or group of borrowers may assert as a
defense to repayment of a loan made under the Direct Loan Program and certain other matters. For Direct
Loans first disbursed on or after July 1, 2017, the 2016 Borrower Defense Regulations create a new federal
standard for borrower defenses to repayment of Direct Loans, new limitation periods for such claims, and new
processes for resolution of such claims. The 2016 Borrower Defense Regulations also prohibit institutions from
requiring students to engage in the institutions’ internal complaint processes before contacting other agencies,
prohibit the use of pre-dispute arbitration agreements by institutions, prohibit class action lawsuit waivers,
and require institutions to notify ED of arbitration filings and awards, for claims that may form the basis for a
borrower defense to repayment of a Direct Loan. ED announced delays until July 1, 2019 of the implementation
of certain portions of the 2016 Borrower Defense Regulations, including those portions of the regulations
that would have established a new federal standard and a process for determining whether a Direct Loan
borrower has a defense to repayment on a Direct Loan based on an act or omission of an institution. However,
in October 2018, a judge denied a request to delay implementation of portions of the Borrower Defense
Regulations and, as a result, the 2016 Borrower Defense Regulations went into effect as of October 16, 2018.
The 2016 Borrower Defense Regulations will remain in effect until the 2020 Borrower Defense Regulations,
described below, take effect on July 1, 2020 and will thereafter continue to apply to all loans made under the
Direct Loan Program on or after July 1, 2017 and before July 1, 2020.

On September 23, 2019, ED published the 2020 Borrower Defense Regulations, which, among other things,
modify the borrower defenses to repayment for loans made under the Direct Loan Program on or after July 1,
2020, the limitation periods for related claims, and the processes for resolution of such claims as compared to
defenses and claims under the 2016 Borrower Defense Regulations. The 2020 Borrower Defense Regulations
generally remove the prohibitions contained in the 2016 Borrower Defense Regulations, but require institutions

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whose students must enter into pre-dispute arbitration agreements or class action waivers as a condition of
enrollment to disclose publicly those requirements in an easily accessible format, and prohibit such institutions
from requiring a student to participate in arbitration or any internal dispute resolution process prior to filing
a borrower defense to repayment application with ED. ED will have discretion to determine the appropriate
amount of relief, if any. The 2020 Borrower Defense Regulations eliminate the process available under the
2016 Borrower Defense Regulations for a group of borrowers.

Under the Borrower Defense Regulations, ED may also initiate a separate proceeding to collect from an
institution the amount of relief resulting from a borrower defense brought by an individual borrower. If ED
determines that borrowers of Direct Loans who attended our institutions have a defense to repayment of their
Direct Loans, our repayment liability to ED could have a material adverse effect on our financial condition,
results of operations, and cash flows.

The 2020 Borrower Defense Regulations also make other regulatory changes, including modifying ED’s
requirements with respect to the circumstances under which a borrower is eligible for a loan discharge if an
institution or location closes.

Department of Defense

Service members of the United States Armed Forces are eligible to receive tuition assistance from their
branch of service through the Uniform Tuition Assistance Program of the DoD, or DoD tuition assistance
programs. Service members may use this tuition assistance to pursue postsecondary degrees at institutions
that are accredited by accrediting agencies recognized by ED. APUS participates in DoD tuition assistance
programs, and for students in APUS undergraduate, and beginning January 2020, for students in APUS
master’s programs, we have established tuition rates per credit hour that under current DoD policies can be
100% covered by DoD tuition assistance funds provided that the student does not exceed the annual limits per
student. As of November 2019, HCN also participates in DoD tuition assistance programs.

In March 2013, DoD restricted the ability of service members who have not previously taken a postsecondary
education course and who are in certain duty locations outside the continental United States, or overseas
locations, to receive DoD tuition assistance for courses offered by institutions of higher education that are not
parties to contracts with the DoD to provide DoD voluntary education programs at those locations. Because
we do not have contracts with the DoD to provide instruction at overseas locations, service members who
begin their first postsecondary education program after arrival in an applicable overseas location may not
use DoD tuition assistance programs to pay for their education in our programs until after they have already
successfully completed a course with an institution that has entered into a contract to provide voluntary
education programs at that overseas location. Service members who were already enrolled in one of our
programs before arriving at an overseas location may continue to receive DoD tuition assistance for the
in-progress program, but they will be encouraged to enroll in courses provided by institutions that provide
programs at the applicable overseas duty location.

DoD has issued briefings that prohibit base commanders from authorizing education institutions to hold regular
or recurring office hours on installations solely to provide counseling and prohibit former military members
from accessing installations to represent an educational institution using their government ID card privileges.
This has adversely affected our efforts to support existing students and serve new students. If we are not
able to improve our access to military installations and our existing students on those installations, or find
alternative methods to serve those students, our military enrollments may decline.

Each institution participating in DoD tuition assistance programs is required to sign a Memorandum of
Understanding, or MOU outlining certain commitments and agreements between the institution and DoD prior

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to being permitted to participate in the DoD tuition assistance programs. In May 2014, DoD promulgated new
regulations and a revised MOU, or the DoD MOU, which APUS signed in August 2014 and which HCN signed in
November 2019. Pursuant to the DoD MOU, among other requirements, institutions must: explain certain tools
to service members, such as ED’s “College Navigator” website and the Consumer Financial Protection Bureau’s
“Paying for College” website; comply with requirements related to readmission policies for service members;
abide by limitations on the use of funds derived from tuition assistance; provide certain academic and
student support services; disclose information about transfer of credit; in certain circumstances, return tuition
assistance funds to DoD (such as when a student ceases to attend or an institution cancels a course); offer to
service members loan counseling before private student loans are offered or recommended; and comply with
ED’s Title IV “program integrity” rules, including rules related to incentive payments and misrepresentation.
The DoD MOU also provides that an institution may only participate in DoD tuition assistance programs if it is
accredited by an accrediting agency recognized by ED, approved for VA funding, and a participant in Title IV
programs. Additional information regarding the potential risks associated with the DoD MOU is provided in the
“Risk Factors” section of this Annual Report.

In January 2014, several federal government agencies announced an online student complaint system for
service members, veterans, and their families to report negative experiences at education institutions and
training programs administering the Post-9/11 GI Bill, DoD tuition assistance programs, and other military-
related education benefit programs. An institution having recurring substantive complaints, or demonstrating
an unwillingness to resolve complaints, may face a range of penalties, including revocation of its MOU and
removal from participation in the DoD tuition assistance programs.

In addition to DoD tuition assistance, branches of the U.S. military offer credentialing assistance, which links
soldiers to and in many cases provides funds for approved training courses or exams related to occupational
licenses or certifications, and associated books, supplies and materials. Credentialing Opportunities On-Line,
or COOL, is a program from each of the military branches that links experience with certification. While
benefits vary by service, service members may be eligible for assistance in paying for certifications, including
by vouchers, reimbursement, or grants. Students must meet certain eligibility requirements in order to
receive credentialing assistance, including in some cases service time, experience and DoD tuition assistance
eligibility requirements. The Army is now offering an expanded credentialing program called the Army
Credentialing Assistance Program, or CA. CA is a program designed to support soldiers who wish to pursue
civilian credentials, licenses, and certifications that lead directly to a specific job, particularly in areas outside
of a soldier’s Military Occupational Specialty (MOS). Through CA, soldiers can receive reimbursement for fees
associated with qualifying programs listed on Army COOL. The US Army began a limited user test for CA at
Fort Hood, Texas, in September 2018, expanded the test in 2019, and began an Army-wide implementation
in January 2020. APUS became an approved training provider for CA programs in October 2019. We believe
other service branches may follow the Army’s example or pursue other approaches to enhancing support for
credentialing. Students in the Army may use both DoD tuition assistance and credentialing assistance for CA,
subject to a combined cap on benefit amounts.

Department of Veterans Affairs

The VA administers education benefits provided by federal law, including the Montgomery GI Bill, or GI Bill, and
the Post-9/11 Veterans Educational Assistance Act of 2008, or Post-9/11 GI Bill. APUS is approved to provide
education to veterans and members of the selective reserve and their dependents by the state approving
agencies in West Virginia and Virginia. Programs at each of HCN’s campuses in Ohio are approved for VA
benefits by the state approving agency in Ohio.

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Under current law, for the academic year from August 1, 2019–July 31, 2020, an eligible veteran who attends a
non-public U.S. institution may receive veterans’ education benefits to pay for tuition and fees based on the net
cost to the veteran up to $24,476.79. Veterans pursuing a program of education on a more than half-time basis
at an on-campus location are eligible for a monthly housing allowance equal to the basic allowance for housing
available to service members who are at a military pay grade E-5 and have dependents. Veterans pursuing a
program of education solely through distance education on a more than half-time basis are eligible to receive a
monthly housing allowance equal to 50% of the basic allowance for housing available to service members who
are at a military pay grade E-5 and have dependents, or $894.50 per month.

To the extent that DoD tuition assistance programs do not cover the full cost of tuition for service members,
eligible service members may also use their benefits under the GI Bill or the Post-9/11 GI Bill through the
“Top-Up” program. The “Top-Up” program allows U.S. Military active duty service members to use their GI Bill
or Post-9/11 GI Bill benefits to pay the difference between the total cost of a college course and the amount of
DoD tuition assistance that is paid by the military for the course, but is limited to 36 months of payments.

Additional Sources of Student Payments

In addition to the Title IV, DoD, and VA programs described above, eligible students may participate in other
financial aid programs or receive support from other governmental and private sources. Some of our students
finance their own education or receive full or partial employer tuition reimbursement. Our institutions enter into
agreements with various employers through which our institutions agree to a variety of terms, including terms
related to the provision of tuition grants to eligible employees. Our institutions may offer interest free payment
plans of less than 12 months to students to assist them with the financing of educational expenses. In certain
circumstances, our students may access alternative loan programs from a number of private lenders, which
are intended to cover the difference between what the student receives from all financial aid sources and the
student’s total cost of attendance. As part of an institution’s Title IV PPA, the institution must adopt a code of
conduct pertaining to student loans, including alternative loans.

Beginning July 1, 2018, HCN began offering its students extended payment plan options, and beginning with
enrollments for the term beginning in January 2020, HCN added an additional extended payment program.
The extended payment plan options are designed to assist students with educational costs consisting of
tuition, textbooks, and fees, and are only available after all other student financial assistance has been applied.
Payment plans require monthly payments while the student is enrolled in a program and extend for up to six
months after the last day of attendance or graduation. To the extent interest is applied, it is generally fixed
and does not accrue until the student departs the program or graduates. The extended payment plans do
not impose any origination fees. Borrowers are advised about the terms of the extended payment plans and
counseled to use all federal funding options. The extended payment plans are subject to various federal
and state laws and regulations, such as the Truth in Lending Act as implemented in Regulation Z, the Equal
Credit Opportunity Act as implemented in Regulation B and the Unfair, Deceptive or Abusive Acts or Practices
provisions of Title X of the Dodd-Frank Act.

Consumer Protection

Consumer Financial Protection Bureau

The Consumer Financial Protection Bureau, or CFPB, has pursued enforcement actions against certain for-
profit institutions of higher education and has released several reports that directly address issues related
to institutions of higher education. In October 2019, the CFPB Student Loan Ombudsman released a report
analyzing more than 6,700 complaints from private student loan borrowers and more than 13,900 federal
student loan servicing complaints the CFPB received between September 1, 2017 and August 31, 2019. We do
not know what enforcement actions the CFPB may pursue, or what steps Congress or federal agencies may

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take, in response to these reports and whether such actions, if any, will have an adverse effect on our business
or results of operations.

Other Issues Related to Consumer Protection and Complaints

Many states have become more active in regulating for-profit education from a consumer protection
perspective, specifically related to enforcement of consumer protection laws and implementation of new
regulations by state attorneys general. For example, the Attorney General of Massachusetts issued APUS
a CID in July 2017 relating to an investigation of alleged unfair or deceptive acts or practices by AMU in
connection with the recruitment and retention of students and the financing of education. The CID required the
production of documents and information relating to recruitment, enrollment, job placement and other matters.
On August 6, 2018, APUS entered into an AOD to resolve the inquiry. Pursuant to the terms of the AOD, and
without any finding or admission of wrongdoing on APUS’s part, APUS paid $270,000 to the Attorney General
and agreed to otherwise comply with applicable Massachusetts regulations. Other state attorneys general may
also initiate inquiries into us or our subsidiaries. Actions by state attorneys general and other governmental
agencies, whether or not involving us or our institutions, could damage our reputation and the reputation of
our institutions and limit the ability to recruit and enroll students, which could reduce student demand for our
institutions’ programs and adversely impact our revenue and cash flow from operations.

Our institutions are recipients of complaints filed with state regulatory authorities, the Better Business Bureau,
and posted in online forums. Our institutions attempt to resolve such complaints in a cooperative manner.
However, even if such complaints are resolved or are otherwise unfounded they may still harm the reputation
of our institutions. For example, in August 2017, HCN received notice from the Ohio State Board that the Ohio
State Board was responding to student complaints and initiating formal disciplinary action against HCN’s
Cincinnati campus because the campus discontinued offering one version of the PN Program curriculum
and implemented a new PN Program curriculum allegedly without the Ohio State Board’s permission. It was
alleged that at least three students enrolled in the discontinued curriculum were unable to complete without
transferring into the new program and incurring substantial costs and time to complete the program. As
permitted, on August 10, 2017, HCN requested a hearing before the Ohio State Board with respect to the
notification. Simultaneously, HCN submitted a proposed resolution to the Ohio State Board, which included
for each of the three students a partial refund for classes in which they enrolled but earned no credit. The
Ohio State Board accepted HCN’s proposal. One student accepted the partial refund, and the two others
failed to return executed agreements to the Ohio State Board by their due dates. As a result, HCN is no
longer obligated to make partial refunds to those two students, and on January 8, 2018, the Ohio State Board
informed those two students that it had closed their cases.

Compliance with Regulatory Standards and the Effect of Regulatory Violations

Compliance Reviews

Our institutions are subject to compliance reviews and audits by various external agencies, including ED, its
Office of Inspector General, state licensing agencies, agencies that guarantee FFEL Program loans, DoD,
VA, and accrediting agencies. The HEA and ED regulations also require institutions to submit annually a
compliance audit conducted by an independent certified public accountant in accordance with Government
Auditing Standards and applicable ED Office of Inspector General audit standards. In addition, to enable ED to
make a determination of financial responsibility, institutions must annually submit audited financial statements
prepared in accordance with ED regulations.

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the institution, if ED identifies any instances of noncompliance, ED sends the institution a preliminary program
review report to which the institution has an opportunity to respond. ED then issues a final program review
determination letter identifying any findings, including any liabilities. The institution may appeal any monetary
liabilities specified in the final letter. APUS has not received a preliminary program review report or expedited
final program determination letter, and the program review remains open and ongoing. We anticipate that
certain findings addressed in the 2016 Title IV compliance audit Final Audit Determination letter dated
January 29, 2018 will be resolved through the program review process, including a finding that return of Title
IV funds calculations were incorrectly computed for some students and a finding that APUS had incorrectly
reported the students’ enrollment status to the National Student Loan Data System for some students. At
this time, we cannot predict the outcome of the program review, when it will be completed, or whether ED
will place any liability or other limitations on APUS as a result of the review. APUS is certified to participate in
Title IV programs through September 30, 2020 and will be required to apply timely for recertification in order
to continue to participate in the Title IV programs after that date. If the program review and any associated
liabilities remain unresolved at the time ED acts on APUS’s recertification application and ED decides to
recertify APUS, we believe such recertification is likely to be on a provisional basis because of the unresolved
program review and associated liabilities.

In order to participate in the DoD tuition assistance programs, institutions must agree to participate in DoD’s
Voluntary Education Institutional Compliance Program, or ICP. An institution that through the ICP is found
noncompliant with DoD requirements and demonstrates an unwillingness to resolve a finding may be subject
to a range of penalties from a written warning to termination of the institution’s participation in the DoD tuition
assistance programs. Upon request, in May 2017, APUS submitted a self-assessment in connection with the
ICP. On February 9, 2018, DoD issued a report that made two findings about APUS. First, DoD found that attire
worn by an individual providing testimonials on the institution’s public-facing website could be construed
as similar to a distinctive part of military uniform. Second, DoD found that APUS failed to provide sufficient
information relating to the financial aid process, including a timeline for applying for financial aid. APUS timely
submitted the required corrective action plan and evidence of corrective actions taken related to both findings.
On June 15, 2018, DoD notified APUS that DoD had reviewed the corrective action plan and determined the
proposed actions appear to sufficiently address DoD’s findings. On December 19, 2018, DoD notified APUS
that all corrective actions had been reviewed and accepted by DoD and no further action is required. In
February 2020, DoD informed APUS that it is one of 250 institutions selected for ICP review in 2020.

Potential Effect of Regulatory Violations

If our institutions fail to comply with the regulatory standards governing Title IV programs, ED could impose
one or more sanctions, including transferring our institutions to the reimbursement or cash monitoring system
of payment, seeking to require repayment of certain Title IV program funds, requiring the posting of an
irrevocable letter of credit in favor of ED as a condition for continued Title IV certification, taking emergency
action against our institutions, referring the matter for criminal prosecution, or initiating proceedings to
impose a fine or to limit, condition, suspend, or terminate participation in Title IV programs. If APUS’s approval
to participate in Title IV programs is terminated, APUS will also lose its ability to participate in DoD tuition
assistance programs pursuant to the DoD MOU. If such sanctions or proceedings were imposed against our
institutions and resulted in a substantial curtailment, or termination, of participation in Title IV programs, this
would materially and adversely affect our enrollments, revenue, results of operations, and financial condition.

If one of our institutions were to lose its eligibility to participate in Title IV programs, or if the amount of available
Title IV program funds were reduced, we could seek to arrange or provide alternative sources of revenue
or financial aid for students. Although we believe that one or more private organizations would be willing to
provide financial assistance to students attending our institutions, there is no assurance that this would be the

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case, and the interest rate and other terms of such financial aid might not be as favorable as those for Title IV
program funds. We may be required to guarantee all or part of such alternative assistance or might incur other
additional costs in connection with securing alternative sources of financial aid. Accordingly, the loss of our
eligibility to participate in Title IV programs, or a reduction in the amount of available federal student financial
aid, would be expected to have a material adverse effect on our financial condition and results of operations
even if we could arrange or provide alternative sources of revenue or student financial aid.

In addition to the actions that may be brought against us as a result of our institutions’ participation in Title
IV programs, we also may be subject, from time to time, to complaints and lawsuits relating to regulatory
compliance brought not only by our regulatory agencies, but also by other government agencies and third
parties, such as present or former students or employees and other members of the public.

Regulatory Actions and Restrictions on Operations
Many actions that we may wish to take in connection with our operations are subject to regulation from a
variety of agencies. For example, ED’s regulations, state regulatory requirements, and accrediting agency
standards may, in certain instances, limit our ability to acquire or sell institutions, and to establish additional
locations and programs. Many states require approval before institutions can add new programs, campuses,
or teaching locations. WVHEPC, SCHEV, HLC, ABHES, the Ohio State Board, and the Indiana Board for
Proprietary Education/Indiana Commission for Higher Education generally require institutions to notify
them, and sometimes require institutions to obtain their approval, in advance of opening a new location or
implementing new programs.

Change in Ownership Resulting in a Change of Control

ED’s regulations, state regulatory requirements, and accreditation standards may limit our ability to acquire,
merge, or sell institutions, and may impose restrictions on activities following a transaction. For example, ED
must approve any change in ownership resulting in a change of control. These restrictions may impede our
ability to grow by acquisition, or to dispose of assets. Moreover, as a publicly-traded company, the potential
adverse regulatory effects of a change of control could influence future decisions by us and our stockholders
regarding the sale, purchase, transfer, issuance, or redemption of our stock. In addition, the regulatory burdens
and risks associated with a change of control could discourage bids for our shares of common stock and could
have an adverse effect on the market price of our shares.

U.S. Department of Education

An institution that undergoes a change in ownership resulting in a change of control loses its eligibility to
participate in Title IV programs and must apply to ED in order to reestablish such eligibility. ED’s regulations
provide that a change of control of a publicly-traded company occurs in one of two ways: (i) there is an event
that would obligate the corporation to file a Current Report on Form 8-K with the Securities and Exchange
Commission disclosing a change of control; or (ii) the corporation has a stockholder that owns at least 25% of
the total outstanding voting stock of the corporation and is the largest stockholder of the corporation, and that
stockholder ceases to own at least 25% of such stock, or ceases to be the largest stockholder. As a result, a
significant purchase or disposition of our voting stock, including an acquisition resulting in a stockholder owning
at least 25% of our outstanding stock, could be determined by ED to be a change in ownership and control.

Upon a change in ownership and control, an institution is ineligible to receive Title IV program funds during
the period prior to recertification. The HEA provides that ED may temporarily provisionally certify an institution
seeking approval of a change in ownership and control based on preliminary review of a materially complete
application received within 10 business days after the transaction. ED may continue such temporary provisional
certification on a month-to-month basis until it has rendered a final decision on the institution’s application.

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If ED determines to approve the application, it issues a provisional certification, which extends for a period
expiring not later than the end of the third complete award year following the date of provisional certification.

When a change in ownership and control occurs, ED applies certain financial tests to determine the financial
responsibility of the institution in conjunction with its review. The institution generally is required to submit
a same-day audited balance sheet reflecting the financial condition of the institution immediately following
the change in ownership, and the same-day balance sheet must satisfy certain requirements. In addition,
when a change in ownership and control occurs and there is a new owner, the institution must submit to ED
audited financial statements of the institution’s new owner’s two most recently completed fiscal years. ED
may determine whether the financial statements meet financial responsibility standards with respect to the
composite score formula. If the institution does not satisfy these requirements, ED may condition its approval
of the change of ownership on the institution’s agreement to letters of credit, provisional certification, and
additional monitoring requirements. The composite score formula and related ED conditions are described
more fully above in “Student Financing Sources and Related Regulations/Requirements—Department of
Education—Regulation of Title IV Financial Aid Programs—Financial Responsibility.” If the new owner does not
have the required audited financial statements, ED may impose certain restrictions on the institution, including
with respect to adding locations and programs.

State Regulatory Agencies

Many states require institutions of higher education to report or obtain approval of certain changes in
ownership or other aspects of institutional status. The types of and triggers for such reporting or approval
vary, but many states include the sale of a controlling interest of common stock in the definition of a change of
control requiring approval. A change of control may require us to obtain approval of the change in ownership
and control in order to maintain our state approval.

Accreditors

Many accrediting agencies require institutions of higher education to report or obtain approval for certain
changes in ownership or other aspects of institutional status, but the types of and triggers for such reporting or
approval vary.

HLC, the accrediting agency for APUS, requires HLC accredited institutions to inform HLC in advance of any
substantive change. Examples of substantive changes requiring advance notice to HLC include changes in the
legal status, ownership, or form of control of the institution, such as the sale of a for-profit institution. HLC must
approve a substantive change in advance in order to include the change in the institution’s accreditation status.
HLC also requires an on-site evaluation within six months to confirm the appropriateness of the approval.

HLC oversight extends to defined changes that occur in an institution’s parent or controlling entity, and not
necessarily in the institution itself. Actions by, or relating to, an accredited institution, including a significant
acquisition of another institution, significant changes in board composition or organizational documents, and
accumulations by one stockholder of greater than 25% of the capital stock could trigger additional reviews
of the institution and possible change from accredited status to candidate status, which enhances the risks
associated with these types of actions. In particular, a change from accredited status to candidate status could
adversely impact an institution’s ability to participate in Title IV programs, which in turn would impact the
institution’s ability to participate in DoD tuition assistance programs.

ABHES, the accrediting agency for HCN, requires its accredited institutions to notify ABHES of any substantive
change. Examples of substantive changes requiring notice to and approval by ABHES include changes in the
legal status, form of control, or ownership of the institution. An institution must notify ABHES of a change of
ownership within at least 45 days before the close of the transaction, and ABHES must act to reinstate the

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institution’s accreditation status after the change of ownership. ABHES also requires an on-site evaluation
within six months to confirm the appropriateness of the approval.

Should we attempt to enter into transactions with institutions accredited by other accreditors, we would be
required to follow the requirements of such accreditors. Our management may not have experience with
the accreditors of the target institution, which would increase the risks related to such a transaction and
management of the institution subsequent to the transaction.

Other Agencies

In certain circumstances, state approving agencies responsible for oversight of veterans’ education benefits
may require an institution to obtain approval for a change in ownership and control. The state approving
agency in Ohio approved the November 1, 2013 change of ownership of HCN. However, there is no guarantee
that relevant state approving agencies will approve future transactions.

Restrictions on Adding Locations and Educational Programs

ED may, as a condition of certification to participate in Title IV programs, require prior approval of new
locations, programs, or otherwise restrict the number of programs an institution may add. ED’s regulations
also require institutions to report and, in certain cases (such as when an institution is provisionally-certified), to
seek approval for a new additional campus location at which at least 50% of an eligible program will be offered
if the institution wants to disburse Title IV program funds to students enrolled at that location. Institutions are
responsible for knowing whether they need approval, and institutions that add locations and disburse Title IV
program funds without having obtained any necessary approval may be subject to administrative repayments
and other sanctions.

The HEA requires for-profit institutions to be in full operation for two years before qualifying to participate in
Title IV programs. However, ED regulations in many circumstances permit an institution that is already qualified
to participate in Title IV programs to establish additional campus locations that are exempt from the two-
year rule. The new campus location must satisfy all other applicable requirements for institutional eligibility,
including approval by the relevant state authorizing agency and the institution’s accrediting agency.

A fully-certified degree-granting institution generally is not obligated to obtain ED’s approval of an additional
program leading to a degree at the same level previously approved by ED, or of a new program that both
prepares students for gainful employment in the same or related recognized occupation as an educational
program that has previously been designated as an eligible program at that institution and meets certain
minimum-length requirements. However, ED could require prior approval of such programs or otherwise
restrict the number of programs an institution may add. In the event that an institution is required to obtain
ED’s approval for the addition of a new program, fails to do so, and erroneously determines that the new
educational program is eligible for Title IV program funds, the institution could be liable for repayment of those
Title IV program funds.

Other Recent Legislative and Regulatory Activity
Many of our students rely on federally funded programs, including Title IV programs, DoD tuition assistance
and education benefits administered by the VA that may be affected by changes in the federal budget. Due
to the substantial amount of federal funds disbursed to schools through Title IV programs, the large number
of students and institutions participating in these programs, and significant political interest in the cost of
education, Congress continues to show interest in regulation and oversight of institutions of higher education,
especially those that are for-profit.

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Department of Defense

The Budget Control Act of 2011 put into place a series of automatic federal budget cuts, known as sequestration,
that impacted certain federal student aid programs beginning in fiscal year 2013. As a result of uncertainty about
the availability of funding, several military branches initially suspended and later announced changes to their
tuition assistance programs. For example, the Army now requires service members to complete one year of
service after graduation from Advanced Individual Training in order to be eligible for tuition assistance, and the
Army and the Coast Guard have both reduced the total per service member annual benefits.

Congressional inaction on budgetary matters has led to lapses in funding, resulting government shutdowns,
and subsequent policy changes that have affected federal student aid programs at DoD. For example, funding
for the federal government, including the DoD, lapsed on each of January 20, 2018 and February 9, 2018,
resulting in partial shutdowns that lasted for a few days and several hours, respectively. Funding for some
portions of the federal government, not including the DoD, lapsed on December 22, 2018, resulting in a partial
government shutdown that lasted for 35 days. The Coast Guard suspended its tuition assistance program
during this partial government shutdown and the Marine Corps began to require Marines to have 24 months
on active duty prior to being eligible to apply for tuition assistance. A future government shutdown, particularly
one that includes DoD or suspension or resulting modification of DoD tuition assistance programs, 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, tuition assistance benefits available to sailors
for the fiscal year ended September 30, 2019 were exhausted by the end of May 2019, and effective May 28,
2019 the Navy ceased approving tuition assistance 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 tuition assistance or the Navy College
Program for Afloat College Education, funding is capped at twelve semester hours per fiscal year, and career
funding is capped at 120 semester hours. On June 6, 2018, the Secretary of the Army issued Army Directive
2018-09, changing the Army tuition assistance eligibility policy by eliminating the one-year waiting period to
pursue an undergraduate certificate or degree and the ten-year waiting period to pursue a graduate degree
through use of tuition assistance. Under the new policy, effective beginning August 5, 2018, Army soldiers are
eligible for two tiers of tuition assistance depending on their current level of civilian education.

On July 12, 2018, DoD announced a change to the Post-9/11 GI Bill regarding the ability of service members to
transfer their educational benefits to eligible family members. Beginning July 12, 2019, the eligibility to transfer
the educational benefits is limited to service members with at least six but fewer than 16 years of total service.

On March 2, 2020, the Navy announced a new “Education Strategy for Seapower 2020” that is intended to
be a new comprehensive education strategy. While the details and impact of this particular strategy are still
uncertain, we expect each military branch and the DoD to continually evaluate their approach to education
funding, and the resulting changes could have an impact on the funds available to service members to pursue
their education at our institutions.

Higher Education Act

The HEA must be periodically reauthorized by Congress and each Title IV program must be funded through
appropriations acts on an annual basis. The most recent comprehensive reauthorization occurred in 2008
when Congress reauthorized most HEA programs through the 2014 federal fiscal year. In 2018, the House of
Representatives considered proposals from Republicans and Democrats, referred to as the Promoting Real
Opportunity, Success, and Prosperity through Education Reform Act, or PROSPER Act, and the Aim Higher Act,
respectively, but neither proposal became law.

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Congress currently is in the process of considering comprehensive legislation to reauthorize the HEA,
including proposals from Republicans and Democrats, referred to as the Student Aid Improvement Act and the
College Affordability Act, respectively.

We cannot predict whether, in what form, or when, the two houses of Congress will reauthorize the HEA or
whether, or when, the President will sign reauthorization legislation. Amendments to the HEA could occur as
part of reauthorization, which could require us to modify our business practices and increase administrative
costs, thereby negatively impacting our results of operations.

As discussions concerning reauthorization of the HEA continue, on December 19, 2019, the Fostering
Undergraduate Talent by Unlocking Resources for Education Act, or FUTURE Act, was signed into law. Among
other things, the FUTURE Act amends the Internal Revenue Code to allow the Internal Revenue Service to share
taxpayer data directly with ED, which is intended to streamline the process of applying for Title IV program aid,
reduce the need for institutions to verify students’ eligibility for Title IV program funds, and simplify the process
for borrowers to enroll in income-driven repayment plans with respect to their federal loans.

Other Regulatory Activity

Regulatory Reform Executive Order

Executive Order 13777, “Enforcing the Regulatory Reform Agenda,” signed by the President on February 24,
2017, directs federal agencies including ED to establish a Regulatory Reform Task Force to evaluate existing
regulations and make recommendations to the agency head regarding the regulations. The first Progress
Report from the ED Regulatory Reform Task Force identified a list of over 150 ED regulations and 1,772 issues
of policy-related guidance that would be reviewed by the Task Force. In October 2018, the ED Regulatory
Reform Task Force announced that ED’s Office for Postsecondary Education had identified a total of 1,230
guidance documents that were out-of-date and that it intended to withdraw. Those documents constituted
nearly 80% of the Office of Postsecondary Education’s total of 1,562 guidance documents.

Federal Rulemakings

On July 1, 2019, ED published a final rule rescinding the GE Regulations. The rescission is scheduled to take
effect July 1, 2020. For additional information, see “Gainful Employment,” above.

On September 23, 2019, ED published the 2020 Borrower Defense Regulations, which among other things,
established a new federal standard for evaluating, and a new process for adjudicating, borrower defenses to
repayment of loans made under the Direct Loan Program on or after July 1, 2020. The 2016 Borrower Defense
Regulations, which became effective October 16, 2018, will remain in effect until July 1, 2020 and will thereafter
continue to apply to all loans made under the Direct Loan Program on or after July 1, 2017 and before July 1,
2020. For additional information about the 2016 Borrower Defense Regulations and 2020 Borrower Defense
Regulations, see “Financial Responsibility” and “Borrower Defenses,” above.

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implemented early those regulations effective November 1, 2019. For additional information on these final
regulations, see “Accreditation” and “State Authorization of Online Education,” above. On December 11, 2019,
in a notice of proposed rulemaking, ED published additional portions of the agreed-upon regulatory language,
including provisions related to the participation of faith-based entities in the Title IV programs and certain
rules related to the TEACH Grant program. ED has indicated that it will issue an additional notice of proposed
rulemaking to address other provisions in the agreed-upon regulatory language developed as part of the
negotiated rulemaking, including provisions related to courses delivered by distance education. We are unable
to predict the result of any other current or future rulemakings.

On November 29, 2018, ED published in the Federal Register a notice of proposed rulemaking regarding
related to implementation of Title IX of the Education Amendments of 1972, which prohibits discrimination
on the basis of sex in education programs that receive funding from the federal government. The proposed
regulations would define what constitutes sexual harassment for purposes of Title IX in the administrative
enforcement context, would describe what actions trigger an institution’s obligation to respond to incidents
of alleged sexual harassment, and would specify how an institution must respond to allegations of sexual
harassment. We cannot predict what final regulations will be adopted as a result of this rulemaking process.

State Regulation

As discussed above in “Consumer Protection—Other Issues Related to Consumer Protection and Complaints,”
many states have become more active in regulating for-profit education from a consumer protection
perspective, specifically in regards to enforcement of consumer protection laws and implementation of new
regulations by state attorneys general. Since our institutions operate in many jurisdictions, our institutions may
be subject to regulations promulgated by a variety of regulators.

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ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. Before making an investment in our common
stock, you should carefully consider the following risks, as well as the other information contained in this
Annual Report, including our “Financial Statements and Supplementary Data” and “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.” Any of the risk factors described below
could significantly and adversely affect our business, financial condition, operating results, cash flows, and
prospects. The risks and uncertainties described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently believe are not material may also adversely
affect our business, financial condition, operating results, cash flows, and prospects. As a result of the risks
and uncertainties described below as well as such additional risks and uncertainties, the trading price of our
common stock could decline, and you may lose all or part of your investment.

RISKS RELATED TO ATTRACTING AND RETAINING STUDENTS

Our success and financial performance depends on the effectiveness of our ability to attract students
who persist in our institutions’ programs.

Building awareness and reputation among potential students of our institutions and the programs they offer
is critical to our institutions’ ability to attract new students. In order to maintain and increase our revenue
and profits, our institutions must continue to attract new, qualified students in a cost-effective manner,
and these students must remain active in our institutions’ programs. In addition, because our institutions
experience declines in their student population as a result of graduation, transfers to other academic
institutions, withdrawals, military deployments and other reasons, in order to grow we need to first attract
sufficient students to replace those who have left. Some of the factors that could prevent us from successfully
advertising and marketing our institutions’ programs and from successfully enrolling and retaining qualified
students in those programs include:

• changes and revisions to policies of the DoD and the various military services;

• challenges in maintaining strong relationships with military and military-affiliated communities;

• the emergence of more, and more successful, competitors, and alternative education models;

• factors related to our institutions’ marketing, including the costs of internet advertising and multi-faceted

interactive marketing campaigns;

• challenges in designing marketing campaigns that successfully attract college-ready students;

• the reduced availability of, or higher interest rates and other costs associated with, Title IV loan funds or

other sources of financial aid;

• performance problems with our institutions’ online systems;

• our institutions’ failure to maintain accreditation, state authorization, eligibility for Title IV programs or other

sources of financial aid, or other approvals;

• increased regulation of online education, including in states in which we do not have a physical presence;

• investigations or litigation by government agencies, other regulators, or private parties that may limit our

ability to operate or damage our reputation;

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• challenges in maintaining a positive reputation among students, employers, and other stakeholders;

• student dissatisfaction with our institutions’ services and programs;

• failure to develop, deliver and maintain a message or image for APUS that resonates well with non-military students;

• adverse publicity regarding us, our institutions, our competitors, or online or for-profit education generally;

• a decline in the acceptance of online education generally; and

• a decrease in the perceived or actual economic benefits that students derive from our institutions’ programs

or programs provided by for-profit schools generally.

If we are unable to continue to develop awareness and reputation of our institutions and the programs we
offer, and to recruit and enroll students that persist in our programs over time, our enrollments will suffer and
there could be a material adverse effect on our financial condition and results of operations.

If we are unable to effectively market our programs, our operating results would be negatively affected.

Our marketing strategy for APUS traditionally focused on building long-term, mutually beneficial relationships
with organizations and individuals in the military, military-affiliated, and public service communities. However,
with limitations on access to military students, as discussed further below under the Risk Factor that begins
“If APUS does not have strong relationships with, and access to, various military installations . . .” and with a
continued focus on efforts to attract students outside of the military, we must continue to focus on marketing
channels that attract college-ready students unaffiliated with the military who perform well at APUS. However,
we have experienced challenges attracting college-ready students unaffiliated with the military who perform
well at APUS, and there is no assurance that we will be able to do so on a cost-effective basis.

Furthermore, because APUS’s tuition is generally lower than that of most of its competitors, it has fewer
dollars to spend per student on marketing and advertising than they do. Nevertheless, APUS has tried to, and
may in the future try to, implement new marketing tactics and channels, including those with which it has no
experience and which have no guarantee of success. For example, our Board of Directors has approved an
increase in marketing expenditures for fiscal 2020, including to support a new advertising campaign focusing
on affordability and return on investment for learners. If we are unable to develop and optimize marketing and
advertising programs that are effective in developing awareness of our institutions and the programs we offer
and their value propositions, and are unable to enroll and retain qualified students in military and non-military
markets, our enrollments would suffer, and there could be a material adverse effect on our financial condition
and results of operations.

The success of HCN depends, in part, on our ability to maintain and increase student enrollments in HCN’s
programs. Enrollments in HCN’s ADN Program in 2019 were significantly lower than HCN planned, resulting
in a significant decline in revenue in our HCN Segment. We believe the decline in enrollments is likely partly
associated with the implementation of new academic achievement and admissions requirements, as well
as negative perceptions by certain current and prospective student cohorts, among other potential factors.
While we work on identifying the appropriate balance of academic achievement requirements, admissions
requirements, and attracting appropriate students, as well as identifying and remediating the factors impacting
enrollments, there may continue to be a negative impact on enrollments at HCN. We cannot predict whether
our initiatives and efforts will be successful over the long term and cannot guarantee that we will be able to
reverse the enrollment and revenue decline in our HCN Segment or return to our prior level of enrollments.
Although we cannot predict what adjustments may be necessary or costs may be incurred as a result of the
decline in enrollment at HCN, any such adjustments and costs may have an adverse impact on our results of

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operations or financial condition. In addition, with the opening of HCN’s fifth campus in Toledo in January 2017
and the planned opening of HCN’s sixth campus in Indianapolis, Indiana in the second quarter of 2020, we
have been marketing in geographic areas in which HCN did not previously have a campus. If in the future we
are unable to effectively market HCN’s programs, we may not be able to successfully maintain and increase
HCN enrollments, which would negatively affect our operating results.

Changes our institutions may make to their operations to improve the student experience and enhance
their ability to identify and enroll students who are likely to succeed may adversely affect our institutions’
enrollment, profitability, financial condition, results of operations, and cash flows.

In order to improve the learning experience of our students and to attract students who are likely to persist in
our institutions’ programs, we have identified, and continue to work to identify, potential changes and initiatives
that we believe will more effectively attract and enroll college-ready students, support those students, and
help improve those students’ educational outcomes, including through systems, faculty-related initiatives
and co-curricular initiatives to increase the level of engagement and collaboration in the classroom and to
strengthen the bond between APUS and its students. APUS has made multiple changes to its admissions
assessment process and may further modify it in the future in order to better identify college-ready students.
For example, APUS implemented a process in 2017 requiring enhanced certification of prospective non-military
students’ prior transcripts to confirm their authenticity and evaluate them for transfer credit.

Additional initiatives may include the following:

• further changing admissions standards and requirements;

• updates to the admissions process and procedures;

• implementing more stringent satisfactory academic progress standards;

• changing tuition costs and payment options;

• experimenting with additional CBE programs and other alternative delivery methods; and

• altering our institutions’ marketing efforts to target the appropriate prospective students.

HCN has also been implementing changes, including changes to its curriculum, admissions, and academic
achievement and course retake policies, that are designed to improve NCLEX scores and retention rates over time.

These initiatives may adversely impact our institutions’ business, financial condition, results of operations, and
cash flows, particularly in the near term. These initiatives require significant time, energy, and resources. We
may not succeed in achieving our objectives due to organizational, operational, regulatory, resource, or other
constraints. If our efforts are not successful, we may experience reduced enrollment, increased expense, or
other impacts on our business that materially and 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 to improvements in student experience, they could result in adverse impacts on
enrollments. Due to the many factors that can impact enrollments, we may not appropriately identify the cause
of any adverse impacts, and therefore may not be able to appropriately modify our initiatives.

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If APUS does not have strong relationships with, and access to, various military installations and
installation education centers, our ability to maintain enrollments from military students and our future
growth may be impaired.

As of December 31, 2019, approximately 57% of APUS’s students self-reported that they served in the military
on active duty at the time of initial enrollment, and a significant portion of APUS students rely on DoD tuition
assistance programs to pay for their education. We are highly dependent on our relationship with the military
and its members, and our ability to attract and retain military service members as students. Because APUS
relies on referrals and personal relationships for recruiting, impediments to access can have an adverse effect
on maintaining and generating registrations from military students.

DoD has issued briefings that prohibit base commanders from authorizing educational institutions to hold
regular or recurring office hours solely to provide counseling and prohibit former military members from
accessing installations to represent an educational institution using their government ID card privileges.
This has adversely affected our efforts to support existing students and recruit new students. If we are not
able to improve our access to military installations and our existing students on those installations, or find
alternative methods to serve those students, our military enrollments could continue to decline. Furthermore,
the DoD MOU, which specifies terms and conditions of participation in DoD tuition assistance programs and is
discussed in more depth in “Regulatory Environment—Department of Defense” in Part I, Item 1 of this Annual
Report, and the related increased focus by DoD on relationships with and oversight of educational providers,
or additional DoD restrictions, could lead to further adverse changes in the nature of our relationships with
military installations and their education centers and our access to military service members.

An inability to maintain strong relationships with installation education centers and with military service
members would have an adverse effect on APUS’s ability to attract and retain qualified students, resulting in an
adverse effect on our financial condition.

Enrollments and course registrations by active duty service members may be adversely affected by
a variety of factors not directly related to education programs, including changes in military activity
and budgets.

Events not directly related to education programs that could occur in the future could lead to a reduction in
registrations from students on active duty. For example, large-scale personnel reductions or other significant
drawdowns of U.S. active duty military forces would likely have a negative effect on enrollment and course
registrations. Increased operations and overseas deployments across all branches of the military and the
related increased demands on many active duty service members, combined with limited internet access
associated with some deployments, could also negatively impact the ability of certain active duty military
students to pursue higher education.

Military budget cuts or constraints could also negatively affect us by leading to force reductions or cuts to
services and tools that we or APUS’s students rely upon for recruitment, enrollment, access, and tuition
assistance. Even temporary changes to military activity and budgets may adversely affect operations. For
example, funding for the federal government, including the DoD, lapsed in January 2018 and February 2018,
resulting in partial shutdowns that lasted for a few days and several hours, respectively. Funding for some
portions of the federal government, not including DoD, lapsed on December 22, 2018, resulting in a partial
government shutdown that lasted for 35 days. In addition, as a result of increased demand stemming from
improvements in service delivery and raised limits on annual benefits available per sailor, tuition assistance
benefits available to sailors for the fiscal year ending September 30, 2019 were exhausted by the end of May
2019, and effective May 28, 2019 the Navy ceased approving tuition assistance program funds for eligible

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sailors until the start of the new government fiscal year on October 1, 2019. 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. Any future
government shutdown or suspension of DoD tuition assistance programs could have a material adverse effect
on APUS’s enrollments.

We will remain subject to the risk of events that occur within and with respect to the military, even where they
do not directly relate to the use of DoD tuition assistance programs. Because of our dependence on active
duty military students, changes that occur within and with respect to the military could have a material adverse
effect on our operations.

DoD tuition assistance programs offered to service members of the U.S. Armed Forces constituted
approximately 39% of APUS’s adjusted net course registrations for 2019, and our revenue and number
of students would decrease if APUS is no longer able to receive funds under these tuition assistance
programs or if tuition assistance is reduced, eliminated, or suspended.

Service members of the U.S. Armed Forces are eligible to receive tuition assistance from their branch of
service through the DoD tuition assistance programs. Service members may use DoD tuition assistance
programs to pursue postsecondary education at institutions that are accredited by an accrediting agency
recognized by ED and that satisfy other requirements, including execution of, and compliance with, an MOU
that specifies terms and conditions of participation in DoD tuition assistance programs. Students participating
in DoD tuition assistance programs constituted approximately 39% of APUS’s adjusted net course registrations
for 2019.

We do not know the scale or nature of future actions that may be taken with respect to DoD tuition assistance
programs, which could include eliminating those programs, reducing the funds, benefits, or level of
reimbursement available thereunder, changing the eligibility criteria for beneficiaries, enacting new restrictions
on institutional participation or imposing other eligibility criteria on institutions, all of which could impact
enrollments from service members. Other administrative changes to DoD programs could also have negative
effects on our enrollments. For example, as discussed in “Regulatory Environment—Department of Defense,”
in March 2013, DoD restricted the ability of service members who have not previously taken a postsecondary
education course and are in certain overseas duty locations to receive DoD tuition assistance for courses
offered by institutions of higher education, such as APUS, that are not parties to contracts with DoD to provide
DoD voluntary education programs at those locations. As a result, our ability to retain existing students or
enroll new students who are service members at those locations was curtailed.

Changes to eligibility requirements under the DoD tuition assistance programs have already occurred, and
we expect there could be additional changes to the programs in the future. For example, as discussed in
“Regulatory Environment—Department of Defense,” several of the military services announced changes to
their tuition assistance programs that took effect in federal fiscal years 2014 and 2018. In addition, effective
October 1, 2019, all Navy service members must have a minimum of two years of service before becoming
eligible to use tuition assistance or the Navy College Program for Afloat College Education, funding is capped
at twelve semester hours per fiscal year, and career funding is capped at 120 semester hours. These policies
could have a negative impact on our enrollments. Additional changes to DoD tuition assistance programs
could occur due to Congressional action or DoD policy and funding changes. Annual tuition assistance
funding is limited and could be exhausted in any given year due to budget constraints or changes in demand
or policy. For example, as a result of increased demand stemming from improvements in service delivery
and raised limits on annual benefits available per sailor, tuition assistance benefits available to sailors for the
fiscal year ending September 30, 2019 were exhausted by the end of May 2019, and effective May 28, 2019

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the Navy ceased approving tuition assistance program funds for eligible sailors until the start of the new
government fiscal year on October 1, 2019. 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 tuition assistance 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. While the details and impact of this
particular strategy are still uncertain, 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 our institutions. Changes in funding allocations could have a material
adverse effect on APUS’s enrollments.

If we are no longer able to receive funds from DoD tuition assistance programs, or if those programs are
modified, reduced, eliminated, or temporarily suspended, our enrollments and revenue could be significantly
reduced, which would result in a material adverse effect on our results of operations and financial condition.

We have limited experience participating in the DoD’s credentialing assistance programs, and changes to
credentialing assistance programs or funding could have an adverse impact on our business strategy and
results of operations.

As discussed in “Regulatory Environment—Student Financing Sources and Related Regulations/
Requirements—Department of Defense” in Part I, Item 1 of this Annual Report, branches of the U.S. military
offer credentialing assistance, which links soldiers to and in many cases provides funds for approved training
courses or exams related to occupational certifications, and associated books, supplies and materials.
While benefits vary by service, service members may be eligible for assistance in paying for certifications,
including by vouchers, reimbursement, or grants. Our ability to comply with regulatory requirements related
to credentialing assistance and to enroll students in programs eligible for credentialing assistance remains
uncertain. We have limited experience in offering programs eligible for credentialing assistance and have
few current offerings in credentialing assistance, and as a result may not be as recognized for credentialing
assistance as other providers that have developed or may develop a stronger brand. Failure to comply with
applicable regulatory requirements or to enroll students in credentialing assistance programs could have
an adverse effect on our results of operations, our financial condition, and our plans to increase the use of
credentialing assistance at APUS.

The Army is now offering an expanded credentialing program called the Army Credentialing Assistance
Program, or CA. Students in the Army may use both DoD tuition assistance and credentialing assistance for
CA, subject to a combined cap on benefit amounts. As a result, soldiers that take advantage of one of these
forms of assistance may not be able to use the other form to the extent that they otherwise might, which could
adversely impact enrollments and our results of operations. Over time, it is possible that increased use of
credentialing assistance could result in fewer funds being used or available for tuition assistance. In addition, to
be eligible for credentialing assistance, students must meet certain eligibility requirements, including in some
cases service time, experience and DoD tuition assistance eligibility requirements, and the training program
must also be eligible.

While we believe other service branches may follow the Army’s example in expanding their credentialing
programs or pursue other approaches to enhancing support for credentialing, there can be no assurance
that they will do so or that we will benefit from any such expansion or enhancement. In addition, the DoD and
military branches could eliminate credentialing assistance programs, reducing the funds, benefits, or level of
reimbursement available for credentialing, change the eligibility criteria for beneficiaries, enact new restrictions

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on institutional participation or impose other eligibility criteria on institutions, all of which could impact
enrollments from service members. Changes to DoD tuition assistance programs and funds could also have an
impact on credentialing assistance programs and funds, and vice versa.

If our institutions are unable to successfully adjust to future market demands by updating and expanding
the content of existing programs and developing new programs, specializations, and modes of teaching
on a timely basis and in a cost-effective manner, our performance may be impaired.

We believe that our institutions need to continuously update and expand the content of their existing programs
and develop new programs, specializations, and modes of teaching in order to continue to retain and attract
qualified students. However, the updates and expansions of our institutions’ existing programs and the
development of new programs and specializations may not be accepted by their accreditors, state regulators,
ED, existing or prospective students, or employers. If we cannot respond to changes in market requirements,
our business may be adversely affected. Even if our institutions are able to develop acceptable new programs,
they may not be able to introduce these new programs as quickly as students require or as quickly as
competitors introduce competing programs. To offer a new academic program, our institutions may be required
to obtain appropriate federal, state, and accrediting agency approvals, which may be conditioned or delayed in
a manner that could significantly affect our growth plans. If we are unable to respond adequately to changes in
market requirements due to financial constraints, regulatory limitations, or other factors, our institutions’ ability
to attract and retain students could be impaired and our financial results could suffer.

Establishing new academic programs, specializations, and modes of teaching or modifying or eliminating
existing programs requires our institutions to make investments in management, academic resources including
faculty, and capital expenditures, incur marketing expenses, and reallocate other resources. Our institutions
may have limited experience providing courses in new fields of study or new modes of teaching (such as CBE,
micro-credentials, or other non-degree credentials) and may need to modify systems and strategies or enter
into arrangements with other institutions and organizations to provide new programs effectively and profitably.
If our institutions are unable to establish new academic programs, increase the number of students enrolling
in new academic programs, offer programs in a cost-effective manner, or otherwise manage effectively the
operations of those programs, our results of operations and financial condition could be adversely affected.

If we are unable to successfully pursue HCN’s program initiatives and expansions, including opening new HCN
campuses, our future growth may be impaired.

We experienced decreases in enrollment at HCN in 2019, which resulted in a significant decline in revenue
in our HCN Segment. The success of HCN will depend on our ability to maintain and increase student
enrollments in HCN’s programs and grow HCN’s on-campus offerings. As part of our strategy, we intend to
open new campuses for HCN, such as the new campus in suburban Toledo, Ohio that began operations in
early 2017, and the new campus in Indianapolis, Indiana that we expect to begin operations in the second
quarter of 2020. Such actions require us to obtain appropriate federal, state, and accrediting agency approvals
and to comply with any requirements from those agencies related to a new location. For example, under
ABHES rules, HCN was not permitted to seek ABHES approval for a new location until twelve months after
HCN received its initial ABHES accreditation in June 2018. Adding new locations may also require significant
financial investments, human resource capabilities, and new clinical placement relationships. In addition,
regulatory authorities may place limitations or restrictions on new programs or campuses, including by only
provisionally accrediting programs or limiting the number of initial enrollees. For example, in November 2019,
the Indiana State Board of Nursing voted to grant initial accreditation for a PN Program at HCN’s Indianapolis
campus, but growth beyond an initial cohort of up to 30 students for the first year is subject to HCN’s ability
to petition to increase the number of admissions after a site visit that will occur upon graduation of the first

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cohort. The Indiana State Board of Nursing will not grant the Indianapolis campus full accreditation status until
the first cohort graduates, and may not grant full accreditation at that time if the program has a pass rate lower
than one standard deviation below the average national pass rate.

If we are unable to, or suffer any delay in our ability to, obtain appropriate approvals, attract additional students
to new campus locations, offer programs at new campuses in a cost-effective manner, identify appropriate
clinical placements, or otherwise manage effectively the operations of newly established campuses, our
results of operations and financial condition could be adversely affected. In addition, the inability to expand
efficiently or successfully existing programs, pursue new program initiatives, and add new campuses would
harm our ability to grow the business and could have an adverse impact on our financial condition.

Strong competition in the postsecondary education market could decrease our institutions’ market share
and increase our cost of acquiring students.

Within the postsecondary education market, our institutions compete primarily with not-for-profit public and
private two-year and four-year colleges, as well as other for-profit schools, particularly those that offer online
learning programs. Public institutions receive substantial government subsidies, and public and private not-for-
profit institutions have access to government and foundation grants, tax-deductible contributions, and other
financial resources generally not available to for-profit schools. These institutions may have instructional and
support resources, or course delivery tools, that are superior to those of our institutions and other for-profit
schools. Many of these competitors, whether for-profit, not-for-profit, or public, are also able to leverage their
greater scale and size to more efficiently compete. Many of our competitors also have substantially greater
name recognition and financial and other resources than we have, which may enable them to compete more
effectively for potential students, or to provide instructional and support resources that are superior to those
of our institutions and other for-profit schools. In addition, the DoD and military services may establish their
own undergraduate education programs and begin offering distance learning for graduate degrees through
their own institutions. Within the postsecondary education market generally, we have experienced increased
competition, including the entrance of additional providers of online and non-traditional programs, a shift of
for-profit institutions to not-for-profit status, and declines or slower growth in the total postsecondary student
population. According to the National Student Clearinghouse, enrollment in Title IV postsecondary degree-
granting institutions in the fall of 2019 decreased 1.3%, compared to the fall of 2018, with a decrease of 2.1%
taking place among four-year for-profit schools. Longer term projections suggest that previous growth in
enrollment in postsecondary degree-granting institutions is slowing. According to a May 2019 report from
ED, such enrollment was projected to grow 3% over the 11-year period ending in fall of 2028, compared to
27% growth over the 17-year period that ended in 2017. The combination of reduced growth or declines in
the postsecondary student population and the entrance of additional providers in the online postsecondary
education market will further intensify competition, and any decline in the number of enrollments could have
an adverse effect on our results of operations. In addition, increased competition for college-ready students
has led to an increase in the cost of advertising in certain marketing channels. Continued increases in the cost
of advertising may adversely impact our ability to attract college-ready students and/or increase our student
acquisition costs.

We expect to continue to face greater competition from non-traditional offerings, provided by both
educational institutions and non-traditional providers.

In recent years, competing institutions and others have started providing non-traditional education programs
without charge or at low costs, including CBE programs, coding bootcamps, and micro-credentialing. We
believe that our institutions will continue to face new competition from non-traditional programs, including
lower cost programs. While we are working to develop our own alternatives in some of these areas, including

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through the launch of Momentum, a collection of CBE programs at APUS, in the first quarter of 2017,
other institutions have programs that are more fully developed, and our offerings may not receive market
acceptance. Since May 2018, APUS has limited enrollments in Momentum until system infrastructure is
upgraded. Our institutions may not be able to compete successfully against current or future competitors and
may face competitive pressures that could adversely affect their business or results of operations. Increased
availability of federal student financial aid for CBE programs could create additional competition and drive
additional students toward non-traditional education programs. These competitive factors could cause our
institutions’ enrollments, revenue, and profitability to decrease significantly.

Strong competition in the military market could decrease our institutions’ market share and increase our
cost of acquiring students.

We anticipate that APUS will continue to see strong competition within the military market, which continues to be
a primary market for APUS. There are a number of for-profit schools and not-for-profit institutions that focus on
the military market because of the size of the market and the availability of funding, and some for-profit schools
seek to attract students eligible for DoD tuition assistance programs, VA education benefits, or both, at least in
part as a strategy of those institutions to satisfy the 90/10 Rule, which is described in “Regulatory Environment—
Student Financing Sources and Related Regulations/Requirements—Department of Education—Regulation of
Title IV Financial Aid Programs—The ‘90/10 Rule.’” Some of these institutions may develop relationships with
the military and education service officers that are stronger than APUS’s, which could have an adverse effect on
APUS’s ability to attract and retain qualified students, and ultimately, on our financial condition.

RISKS RELATED TO THE REGULATION OF OUR INDUSTRY

If we or our institutions fail to comply with the extensive regulatory requirements for the operation of
postsecondary education institutions, we and our institutions could face penalties and significant
restrictions on operations, including loss of access to DoD tuition assistance programs and federal
student loans and grants.

We and our institutions are subject to extensive regulation by (i) accrediting agencies, (ii) state regulatory
bodies, and (iii) the federal government through ED. APUS and HCN also are subject to DoD and VA oversight
because APUS and HCN participate in DoD tuition assistance programs and veterans’ education benefits
programs administered by the VA. Regulations, standards, and policies of these organizations address the
vast majority of our institutions’ operations, including their educational programs, facilities, instructional
and administrative staff, administrative procedures, marketing, recruiting, financial operations, and financial
condition. These regulatory requirements can also affect our ability to acquire new institutions, open new
locations, add new or expand existing educational programs, change our corporate structure or ownership,
and make other substantive changes. These requirements can also increase our cost of operations.

Findings of noncompliance with these laws, regulations, standards, and policies could result in any of the
relevant regulatory agencies taking action including: imposing monetary fines, penalties, or injunctions;
limiting operations, including restricting our institutions’ ability to offer new programs of study or to open new
locations, or imposing limits on our growth; limiting or terminating our ability to grant degrees; restricting
or revoking our institutions’ accreditation, licensure, or other approval to operate; limiting, suspending, or
terminating our institutions’ eligibility to participate in Title IV programs, DoD tuition assistance programs, or VA
education benefit programs; requiring us to repay funds, post a letter of credit, or become subject to payment
methods for Title IV programs that are not the advance payment system; subjecting us to civil or criminal
penalties; or other actions that could have a material adverse effect on our business.

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The regulations, standards, and policies of ED, state regulatory bodies, and our institutions’ accrediting
agencies change frequently and are subject to interpretive ambiguities. Recent and pending changes in, or
new interpretations of, applicable laws, regulations, standards, or policies, or our noncompliance with any
applicable laws, regulations, standards, or policies, could have a material adverse effect on our accreditation,
authorization to operate in various states, permissible activities, receipt of funds under DoD tuition assistance
programs, ability to participate in Title IV programs, ability to participate in VA education benefit programs, or
costs of doing business. We cannot predict with certainty how these regulatory requirements will be applied or
whether we will be able to comply, or will be deemed by others to have complied, with all of the requirements.

In addition, in some circumstances of noncompliance or alleged noncompliance, we may be subject to lawsuits
under the Federal False Claims Act, similar state false claim statutes, or various “whistleblower” statutes. These
lawsuits in some cases can be prosecuted by a private plaintiff in respect of some action taken by us, even
if ED or another regulatory body does not agree with the plaintiff’s theory of liability, or the government can
intervene and become a party to the lawsuit. These lawsuits have the potential to generate significant financial
liability linked to our receipt of government funds, including Title IV funding and DoD tuition assistance funds.

If our institutions fail to maintain their institutional accreditation, they would lose the ability to participate
in DoD tuition assistance programs and Title IV programs.

Accreditation by an accrediting agency that is recognized by ED is required for participation in DoD tuition
assistance programs and Title IV programs. APUS and HCN participate in DoD tuition assistance programs
and Title IV programs. As described more fully in each operating segment’s section in “Our Institutions—
Accreditation” and “Regulatory Environment—Accreditation,” APUS is accredited by HLC and HCN is
accredited by ABHES, which are institutional accrediting agencies recognized by ED.

Our institutions’ accrediting agencies may impose restrictions on their accreditation or may terminate their
accreditation. To remain accredited, our institutions must continuously meet certain criteria and standards
relating to, among other things, performance, governance, institutional integrity, educational quality, faculty,
administrative capability, resources, and financial stability. Our institutions also must comply with accrediting
agency policies and requirements, such as the requirements to apply and wait for approval before making
certain changes. For example, in connection with the implementation of a shared services model with APEI,
APUS was required to submit a change in structure application to HLC. In November 2018, HLC approved the
change in structure application and extended APUS’s accreditation following adoption of the shared services
model, and we entered into intercompany agreements to implement the model.

Failure to meet accreditation criteria or standards or to comply with accreditation policies and requirements
could result in the loss of accreditation at the discretion of the accrediting agency. The complete loss of
institutional accreditation at one of our institutions would, among other things, render the institution and its
students ineligible to participate in DoD tuition assistance programs and Title IV programs, and have a material
adverse effect on our enrollments, revenue, and results of operations.

HCN recently changed accrediting bodies and must satisfy accreditation standards, including specific
student achievement indicators, with which it has not historically had to comply.

HCN is accredited by ABHES. Some of the ABHES accreditation standards differ from those HCN historically
needed to meet under the requirements of ACICS, HCN’s former accreditor, which accredited HCN until
October 1, 2018. We have limited experience complying with ABHES requirements. ABHES imposes certain
limitations on newly accredited institutions, including a prohibition on applying for a new non-main or satellite
campus during the first twelve months after receiving initial accreditation.

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In addition, ABHES annually reviews student achievement indicators, including retention rate, placement
rate, and licensing and credentialing examination pass rate. Under ABHES policy, ABHES may withdraw
accreditation at any time if it determines that an institution fails to demonstrate at least a 70% retention rate
for each program, a 70% placement rate for each program, and a 70% pass rate on mandatory licensing and
credentialing examinations, or fails to meet state-mandated results for credentialing or licensure. Alternatively,
ABHES may in its discretion provide an opportunity for a program to come into compliance within a period
of time specified by ABHES, and ABHES may extend the period for achieving compliance if a program
demonstrates improvement over time or other good cause. For the reporting year ended June 30, 2018,
several HCN programs did not satisfy ABHES’s threshold requirements for retention rates or placement
rates. As a result, in February 2019, ABHES directed HCN to provide evidence to ABHES that the relevant
programs had achieved a retention rate of at least 70% for the period from July 1, 2018 through March 31,
2019 and a placement rate of at least 70% for the reporting year ended June 30, 2018, along with additional
documentation and analysis related to those rates and pertinent action plans. HCN timely submitted the
required progress report. For the reporting year ending 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 August 2019, ABHES notified HCN that ABHES had placed HCN’s Cleveland, Columbus, Dayton, and Toledo
locations on outcomes reporting status, which requires submission of additional documentation regarding
student outcomes and action plans for improving these outcomes, with respect to the reporting year ended
June 30, 2018. ABHES determined that the PN Program at each of the Columbus, Dayton, and Toledo
campuses did not satisfy ABHES’s retention rate requirement and that it was unable to verify that the ADN
Program at each of the Cleveland and Toledo campuses had met ABHES’s placement rate requirement. In
August 2019, ABHES notified HCN that the relevant programs at the Cleveland, Dayton, and Toledo campuses
must come into compliance by May 1, 2020 and that the PN Program at the Columbus campus must come
into compliance by May 1, 2021. In October 2019, HCN notified ABHES that the PN Programs at each of the
Dayton, Toledo, and Columbus campuses failed to satisfy ABHES’s threshold requirements for retention rates
for the reporting year ended June 30, 2019. In February 2020, ABHES notified HCN that it had taken additional
actions with respect to certain HCN programs at certain locations related to those programs’ performance
in relation to ABHES student achievement indicators. Specifically, ABHES: (i) placed the PN programs at the
Dayton and Toledo campuses on program specific warning status because the programs have failed to meet
the 70% retention rate threshold since HCN’s 2017-2018 annual report and informed HCN that those programs
must meet the retention rate threshold by May 1, 2020; (ii) removed the ADN programs at the Cleveland
and Toledo campuses from outcomes reporting status after placement rates for those programs at those
locations met the 70% compliance threshold; (iii) continued outcomes reporting status for the PN program at
the Columbus campus because it has not met the retention rate compliance threshold and reconfirmed that
it has until May 1, 2021 to do so; and (iv) directed HCN to provide evidence to ABHES that the ADN programs
at each of the Columbus, Cleveland, Cincinnati, Dayton, and Toledo campuses and the PN programs at the
Cleveland and Cincinnati campuses met the retention rate compliance threshold for the period from July 1,
2019 through March 31, 2020 and informed HCN that those programs must meet the compliance threshold
by May 1, 2021. There can be no assurance that HCN will be able to demonstrate compliance by the relevant
deadlines in all cases. If HCN is unable to bring the programs into compliance during the 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. In addition, 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.”

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If any HCN campus or program fails to satisfy ABHES achievement measures, enrollment in such HCN campus
or program could decline, or we could be forced to cease enrollments at that campus or in that program, which
could have a material adverse impact on HCN’s student enrollment and our and HCN’s revenue, cash flows,
and results of operations. The actions HCN takes to comply with ABHES requirements may not be successful
in resolving existing issues and, if those actions are targeted at specific campuses or programs, may fail to
prevent additional issues arising with respect to those or other campuses or programs. Similarly, even if HCN is
successful in the long term in complying with these standards, the actions HCN takes to comply could result in
increased costs or decreased enrollments.

Participation in the DoD tuition assistance programs requires compliance with numerous regulations with
respect to which the failure to comply could lead to a loss of an ability to participate in these programs or
other adverse events.

In order to participate in the DoD tuition assistance programs, institutions must, among other things, comply
with an MOU that specifies terms and conditions of participation in DoD tuition assistance programs. By
signing the MOU, APUS and HCN have agreed to participate in DoD’s Voluntary Education Institutional
Compliance Program, or ICP. An institution that is found noncompliant with DoD requirements through the ICP
and demonstrates an unwillingness to resolve a finding may be subject to a range of penalties from a written
warning to termination of the institution’s participation in the DoD tuition assistance programs. For example,
as more fully described in “Regulatory Environment—Compliance with Regulatory Standards and the Effect of
Regulatory Violations—Compliance Reviews,” in February 2018, DoD issued a report that made two findings
about APUS. First, DoD found that attire worn by an individual providing testimonials on APUS’s public-facing
website could be construed as similar to a distinctive part of a military uniform. Second, DoD found that
APUS had failed to provide sufficient information relating to the financial aid process, including a timeline for
applying for financial aid. APUS submitted a corrective action plan and evidence of corrective actions, and in
December 2018, DoD notified APUS that all corrective actions had been reviewed and accepted by DoD. If we
are no longer able to receive funds from DoD tuition assistance programs, or if those programs are reduced,
eliminated, or temporarily suspended, our enrollments and revenue could be significantly reduced, which
would result in a material adverse effect on our results of operations and financial condition.

Our institutions’ student enrollments could decline if they fail to maintain accreditation.

Institutional accreditation is an important attribute of our institutions. Colleges and universities depend, in
part, on accreditation in evaluating transfers of credit and applications to graduate schools. Many institutions
will only accept transfer credit from regionally accredited institutions. Students and sponsors of tuition
reimbursement programs look to accreditation for quality assurance, and employers rely on institutions’
accredited status when evaluating a candidate’s credentials. Failure to maintain our institutional accreditation
would have a material adverse effect on our enrollments, revenue, and results of operations. In addition,
certain of our programs are accredited by specialized accrediting agencies, or recognized by professional
organizations. If our institutions fail to satisfy the standards of these specialized accrediting agencies and
professional organizations, the relevant programs could lose the specialized accreditation or professional
recognition, which could result in materially reduced student enrollments in those programs and have a
material adverse effect on us. In addition, in certain cases, professional licensure will not be granted if an
applicant for licensure earned the relevant educational credential from an institution or educational program
that lacks regional or specialized accreditation. Failure to obtain or maintain specialized accreditation or
professional recognition for certain programs could result in materially reduced student enrollments in affected
programs and have a material adverse effect on us.

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If the accrediting agency of one of our institutions was to lose its ability to serve as an accrediting agency
for Title IV program purposes and the institution was unable to obtain recognition from another
recognized accrediting agency, that institution would lose its ability to participate in Title IV programs
and DoD tuition assistance programs.

APUS is accredited by HLC. In February 2018, NACIQI, the panel charged with advising ED on whether to
recognize accrediting agencies for Title IV purposes, voted to recommend that ED renew HLC’s recognition
for five years. If HLC were to lose its recognition as an accrediting agency and APUS was unable to obtain
recognition from another recognized accrediting agency, APUS would lose its eligibility to participate in Title IV
programs and DoD tuition assistance programs. The inability of APUS to participate in Title IV programs would
have a material adverse effect on enrollments, revenue, financial condition, and results of operations.

HCN is accredited by ABHES. In 2016, NACIQI voted to recommend that ED renew ABHES’s recognition for five
years. If ABHES were to lose its recognition as an accrediting agency and HCN was unable to obtain recognition
from another recognized accrediting agency, HCN would lose its eligibility to participate in Title IV programs
and DoD tuition assistance programs. The ineligibility of HCN to participate in Title IV programs would have a
material adverse effect on HCN’s enrollments, revenue, financial condition, and results of operations.

The failure of our institutions or their accrediting agencies to comply with Department of Education
regulations setting forth new standards and procedures related to institutional eligibility to participate in
Title IV and ED’s recognition of accrediting agencies could affect our institutions’ eligibility to participate
in Title IV programs.

In October 2018, ED announced that it would establish the Accreditation and Innovation Committee to prepare
proposed regulations related to, among other things, ED’s recognition of accrediting agencies and institutional
and program eligibility issues, including state authorization and programs offered through distance education.
In April 2019, the Accreditation and Innovation Committee reached consensus on the package of proposed
regulatory language. In June 2019, ED published certain portions of the agreed-upon regulatory language,
including those provisions related to accreditation and state authorization, in a notice of proposed rulemaking.
On November 1, 2019, ED published final regulations concerning accreditation and state authorization, portions
of which relating to accreditation generally will be effective on July 1, 2020. The final regulations revise ED’s
process for recognition and review of accrediting agencies and the criteria used by ED to recognize accrediting
agencies. The regulations also revise ED’s requirements for accrediting agency oversight of accredited
institutions and programs by generally providing accrediting agencies with greater autonomy and flexibility.
On December 11, 2019, in a notice of proposed rulemaking, ED published additional portions of the agreed-
upon regulatory language, including provisions related to the participation of faith-based entities in the Title
IV programs and certain rules related to the TEACH Grant program. ED has indicated that it will issue an
additional notice of proposed rulemaking to address other provisions in the agreed-upon regulatory language
developed as part of the negotiated rulemaking. We are unable to predict the result of any other current or
future rulemakings, or the impact of such rulemakings on our business. However, the failure of our institutions
or their accrediting agencies to comply with any final regulations could affect our institutions’ eligibility
to participate in Title IV programs and therefore have a material adverse effect on our business, financial
condition, and results of operations.

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National or regional accreditation agencies may prescribe more rigorous accreditation standards or
special forms of monitoring or action plans for our institutions, which could have a material adverse effect
on our student enrollment, revenue, and cash flows.

The accreditation standards of the regional or national accreditation agencies that accredit our institutions can
and do vary, and the accreditation agencies may prescribe more rigorous standards than are currently in place.
Complying with more rigorous accreditation standards could require significant changes to the way we operate
our business and increase our administrative and other costs. No assurances can be given that our institutions
would be able to comply with more rigorous accreditation standards in a timely manner or at all. If one of
our institutions does not meet its accreditation requirements, its accreditation could be limited, modified,
suspended, or terminated. Failure to maintain accreditation would make such institution ineligible to participate
in DoD tuition assistance programs and Title IV programs, which could have a material adverse effect on the
institution’s student enrollment and revenue.

Accrediting bodies may adopt new or revised criteria, standards, and policies that are intended to monitor,
regulate, or limit the growth of for-profit institutions like ours. For example, as discussed more fully in
“Regulatory Environment—Accreditation,” HLC has adopted a policy to allow HLC to designate publicly
an institution as “in financial distress” or “under governmental investigation” where such situations have
the potential to impact the institution’s operations and HLC believes the public should have information in
making a decision to attend or continue to attend the institution. As discussed in “Regulatory Environment—
Accreditation,” HLC imposed a “governmental investigation” designation on APUS in February 2018 in
connection with a CID issued to APUS by the Attorney General of Massachusetts in July 2017. HLC removed
the governmental investigation designation in August 2018 in light of action taken to resolve the CID.

If our institutions fail to maintain state authorization in the states where they are physically located, the
institutions would lose their ability to grant degrees and other credentials in that state and to participate
in Title IV programs and DoD tuition assistance programs.

As discussed in “Regulatory Environment—State Licensure/Authorization,” to participate in Title IV programs
and DoD tuition assistance programs, an institution must be legally authorized by the relevant education
agency of the state in which it is physically located. Loss of state authorization by one of our institutions in
the state in which it is physically located would cause that institution to be ineligible to participate in Title IV
programs and DoD tuition assistance programs and to be unable to operate in the state and grant credentials.
In addition, if one of our institutions were to lose its state authorization, it would lose its institutional
accreditation, and if HCN were to lose approval from OBN for the Diploma in Practical Nursing or the Associate
Degree in Nursing, or from the Indiana Board of Nursing for the Diploma in Practical Nursing, students in the
program lacking approval would not be eligible to apply for licensure by examination to practice nursing in
Ohio or Indiana, respectively.

ED regulations provide that an institution is considered legally authorized by a state if the state has a process
to review and appropriately act on complaints concerning the institution, including enforcing applicable state
laws, and the institution complies with any applicable state approval or licensure requirements. If a state
in which one of our institutions is located fails in the future to satisfy the provisions of that regulation, our
institutions’ ability to operate in that state and to participate in Title IV programs could be limited or terminated.

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Our institutions’ failure to comply with the requirements of the State Authorization Reciprocity
Agreement, or SARA, or regulations of ED or various states related to state authorization could result in
actions that would have a material adverse effect on our enrollments, revenue, and results of operations.

Various states impose regulatory requirements on educational institutions operating within their boundaries,
including registration requirements applicable to online educational institutions that have no physical location
or other presence in the state but offer educational services to students who reside in the state or advertise
to or recruit prospective students in the state. SARA is a voluntary agreement among member states, districts,
and territories that establishes national standards for interstate offering of postsecondary distance education.
For U.S. jurisdictions that are not members of SARA (namely, at this time, California), our institutions must
satisfy the requirements of those individual jurisdictions with regard to online education in order to enroll
students in those jurisdictions. Those requirements may change from time to time and, in some instances, are
ambiguous or are left to the interpretative discretion of state regulators.

Changes in requirements to participate in SARA or changes to state laws and regulations and the interpretation
of those laws and regulations by the applicable regulators may limit our ability to offer educational programs
and award degrees. If one of our institutions were to fail to comply with SARA requirements or state licensing
or authorization requirements to provide distance education in a non-SARA jurisdiction, the institution could
lose its ability to participate in SARA or may be subject to the loss of state licensure or authorization to provide
distance education in that non-SARA jurisdiction, respectively. If one of our institutions were to fail to comply
with state requirements to obtain licensure or authorization, it could be subject to injunctive actions or penalties.

On December 19, 2016, ED published the Distance Education Rule, which is more fully described in “Regulatory
Environment State Licensure/Authorization”, addressing, among other issues, state authorization of programs
offered through distance education. After a delay and subsequent court order, the Distance Education Rule
took effect on May 26, 2019. The Distance Education Rule requires an institution offering distance education
programs to be authorized on a state-by-state basis, if such authorization is required by the state, in order
to award Title IV aid to such students. If one of our institutions fails to obtain or maintain required state
authorization to provide postsecondary distance education in a specific state, the institution could lose
its ability to award Title IV aid to students in that state and to provide distance education in that state. The
Distance Education Rule also requires an institution to provide public and individualized disclosures to enrolled
and prospective students regarding its programs that are provided or can be completed solely through
distance education or correspondence courses, excluding internships and practicums.

In October 2018, ED announced its intent to establish a negotiated rulemaking committee to prepare proposed
regulations related to, among other things, disclosure and other requirements of state authorization. On
November 1, 2019, ED published final regulations concerning accreditation and state authorization, which
generally will be effective on July 1, 2020, except that institutions may in their discretion implement early
regulations relating to state authorization and institutional information disclosures. The final regulations
related to state authorization effectively replace the Distance Education Rule. APUS implemented early these
regulations effective November 1, 2019. The final regulations clarify the required methodology for determining
the state in which a student is located for purposes of satisfying state authorization requirements for distance
education courses, and require an institution to disclose certain information related to whether programs
leading to professional licensure meet applicable state requirements, regardless of program modality. Failure
to make the disclosures required by the Distance Education Rule or its replacement regulations could put
us at risk of administrative enforcement action or related litigation, including claims from students related to
misrepresentation and other matters. In addition, we cannot predict whether, or to what extent, such disclosure
requirements will have an effect on our enrollment processes and results.

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The inability of our institutions’ graduates to obtain professional licensure, employment or other
outcomes in their chosen fields of study could reduce our enrollments and revenue, limit our ability to
offer educational programs, and potentially lead to litigation that could be costly to us.

HCN graduates and certain APUS graduates seek professional licensure, employment or other outcomes in
their chosen fields following graduation. Their success in obtaining these outcomes depends on numerous
factors, including: the individual merits of the graduate; whether the institution and the program were approved
by the state in which the graduate seeks licensure, or by a professional association; whether the program
meets all state requirements for professional licensure; and whether the institution or program has any
required accreditation. For example, certain states have refused to license or certify students from particular
APUS initial teacher licensure programs on grounds that the program did not meet one or more of the state’s
specific licensure requirements or was not approved by the state for purposes of professional licensure. APUS
has determined not to enroll new students in any of its initial teacher licensure programs.

To apply for licensure to practice nursing in Ohio, an applicant must have successfully completed a nursing
education program that is approved by the OBN. The OBN requires that nursing education programs such
as HCN’s PN and ADN Programs have a pass rate on the relevant NCLEX that is at least 95% of the national
average for first-time candidates in a calendar year. As discussed more fully in “Regulatory Environment—State
Authorization/Licensure of Our Institutions,” failure to satisfy that requirement can result in the OBN taking
certain adverse actions, including placement of a program on provisional status or withdrawal of approval
pursuant to an adjudication proceeding. In March 2017, the OBN placed HCN’s ADN Program on provisional
approval because the ADN Program has not met the OBN pass rate standard for four consecutive years.
In March 2019, the OBN found that HCN’s ADN Program did not meet the OBN pass rate standard in 2018
for a sixth consecutive year. HCN has been implementing changes, including curriculum, admissions, and
academic achievement and course retake policy changes that are designed to improve NCLEX scores over
time, but there is no assurance that these changes will be successful or will not have negative effects on
HCN’s enrollment. For example, enrollments in HCN’s ADN Program in 2019 were significantly lower than HCN
planned, which we believe is likely partly associated with the implementation of new academic achievement
and admissions standards that had the effect of reducing enrollments from qualified students. If HCN is
unable to improve NCLEX scores over time, this situation could have an adverse impact on our ability to enroll
students and eventually our ability to continue HCN’s ADN Program, any of which would have an adverse
effect on our results of operations, cash flows, and financial condition. The Indiana State Board of Nursing also
requires that nursing education programs have a pass rate on the relevant NCLEX exam that satisfies certain
requirements. The Indiana State Board of Nursing may not grant full accreditation to an initially accredited
program that has a pass rate is lower than one standard deviation below the average national pass rate, and
if the program’s pass rate is lower than one standard deviation below the average national pass rate for three
consecutive years, a program may be subject to additional oversight or a change in accreditation status.

State requirements for licensure are subject to change, as are professional certification standards, and we
may not become aware of changes that may impact our students in certain instances. In the event that one or
more states refuse to recognize our institutions’ students for professional licensure based on factors relating to
our institutions or programs, the potential growth of our institutions’ programs would be negatively impacted,
which could have a material adverse effect on our business, financial condition, results of operations, and cash
flows. In addition, requirements for employment vary from employer to employer and from field to field. To
the extent our graduates fail to satisfy requirements for employment by particular employers or in a particular
profession based on characteristics of our programs, the ability to maintain enrollments, as well as the potential
for growth of our institutions’ programs would be negatively impacted, which could have a material adverse
effect on our business, financial condition, results of operations, and cash flows. In addition, if our institutions’

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graduates fail to obtain professional licensure, employment or other outcomes in their chosen fields of study,
we and our institutions could be exposed to litigation, including class-action litigation, claiming that we are at
fault for such failure, which would force us to incur legal and other expenses that could have a material adverse
effect on our business, financial condition, results of operations, and cash flows.

Our institutions must periodically seek recertification to participate in Title IV programs, and may, in
certain circumstances, be subject to review by the Department of Education prior to seeking
recertification, and our future success may be adversely affected if our institutions are unable to
successfully maintain certification or obtain recertification.

An institution generally must seek recertification from ED at least every six years and possibly more frequently
depending on various factors, such as whether it is provisionally certified. ED may also review an institution’s
continued eligibility and certification to participate in Title IV programs, or scope of eligibility and certification,
in the event the institution undergoes a change in ownership resulting in a change of control, or expands its
activities in certain ways. In certain circumstances, ED must provisionally certify an institution, such as when it
is an initial participant in Title IV programs or has undergone a change in ownership and control.

A provisionally-certified institution must apply for and receive ED approval of substantial changes and must
comply with any additional conditions included in its program participation agreement. If ED determines that
a provisionally-certified institution is unable to meet its responsibilities, it may seek to revoke the institution’s
certification to participate in Title IV programs with fewer due process protections for the institution than if it
were fully-certified.

APUS is certified to participate in Title IV programs through September 30, 2020 and will be required to apply
timely for recertification in order to continue to participate in the Title IV programs after that date. As discussed
more fully in “Regulatory Environment—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 remains
open and ongoing. If the program review and any associated liabilities remain unresolved at the time ED acts
on APUS’s recertification application and ED decides to recertify APUS, we believe such recertification is
likely to be on a provisional basis because of the unresolved program review and associated liabilities. HCN is
certified to participate in Title IV programs through September 30, 2021 and will be required to apply timely for
recertification in order to continue to participate in the Title IV programs after that date.

If ED were to withdraw or not renew our institutions’ certification to participate in Title IV programs, our students
would no longer be able to receive Title IV program funds or DoD tuition assistance program funds, which would
have a material adverse effect on our enrollments, revenue, results of operations, and financial condition.

If our institutions are unable to successfully maintain certification or obtain recertification to participate
in Title IV programs they will not be able to participate in DoD tuition assistance programs.

If our institutions are unable to successfully maintain certification or obtain recertification to participate in ED’s
Title IV programs, they will not be able to participate in DoD tuition assistance programs because the DoD
MOU requires an institution to be certified to participate in Title IV programs in order to participate in DoD
tuition assistance programs. Loss of participation in the DoD tuition assistance programs would have a material
adverse effect on our enrollments, revenue, results of operations, and financial condition.

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A failure to demonstrate “administrative capability” may result in the loss of eligibility to participate in
Title IV programs.

ED’s regulations specify extensive criteria an institution must satisfy to establish that it has the requisite
“administrative capability” to participate in Title IV programs and the sanctions ED may impose if an institution
fails to satisfy any of those criteria. To meet the administrative capability standards, an institution must, among
other things, comply with all applicable Title IV requirements, including with respect to the administration
of Title IV programs and the processing of Title IV program funds. If an institution fails to satisfy any of the
administrative capability requirements, ED may require the repayment of Title IV program funds, transfer the
institution from the “advance” system of payment of Title IV program funds to heightened cash monitoring
status, or to the “reimbursement” method of payment, place the institution on provisional certification status, or
commence a proceeding to impose a fine or to limit, suspend, or terminate the participation of the institution in
Title IV programs.

If one of our institutions is found not to have satisfied ED’s “administrative capability” requirements, it could be
limited in its access to, or lose, Title IV program funding or certain Title IV-related conditions or fines could be
imposed, which would adversely affect our enrollment, revenue, results of operations, and financial condition.

A failure to demonstrate “financial responsibility” may result in the loss of eligibility by one of our
institutions to participate in Title IV programs or require the posting of an irrevocable letter of credit in
order to maintain eligibility to participate in Title IV programs.

To participate in Title IV programs, an eligible institution must satisfy specific measures of financial
responsibility prescribed by ED, or post a letter of credit in favor of ED, and possibly accept other conditions,
such as provisional certification, additional reporting requirements, or regulatory oversight of its participation
in Title IV programs. ED may also apply such measures of financial responsibility to a parent company of an
eligible institution and, if such measures are not satisfied by the parent company, require the institution to post
a letter of credit in favor of ED, and possibly accept other conditions on its participation in Title IV programs.
For our institutions, ED applies its measures of financial responsibility at the level of the parent company, APEI.
An obligation to post a letter of credit, or to accept other conditions, such as a change in our system of Title IV
payment from ED for purposes of disbursement, could increase our costs of regulatory compliance, or affect
our cash flow.

In the 2016 Borrower Defense Regulations, ED modified its financial responsibility standards to provide that
an institution (other than a public institution) may not be able to meet its financial or administrative obligations,
and is therefore not financially responsible, if it is subject to one or more triggering events occurring on or
after July 1, 2017. On September 23, 2019, ED published the 2020 Borrower Defense Regulations, which,
among other things, amend ED’s financial responsibility provisions in several respects. Like the 2016 Borrower
Defense Regulations, the 2020 Borrower Defense Regulations identify certain conditions or other triggering
events that have or may have an adverse material effect on the institution’s financial condition, in response to
which ED would or could require that the institution submit some form of financial protection to ED. For more
on the financial responsibility provisions of the 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.”

If, under the Borrower Defense Regulations, ED determines that one of our institutions is not financially
responsible because of one or more triggering events, the institution would be required to provide an
irrevocable letter of credit equal to at least 10% of the amount of federal student financial aid funds received
by the institution for the past year. If one of our institutions is found not to have satisfied ED’s financial

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responsibility requirements, it could be limited in its access to, or lose, Title IV program funds, which would limit
our potential for growth and adversely affect our enrollment, revenue, and results of operations. If we, as the
parent company of an eligible institution, are found not to have satisfied ED’s financial responsibility measures,
all of our institutions could be limited in their access to, or lose, Title IV program funds, which would limit our
potential for growth and adversely affect our enrollment, revenue, results of operations, and financial position.

ED rules now in effect and subsequent rules that take effect July 1, 2020, each setting forth new standards
and procedures related to borrower defense-to-repayment claims, and requirements related to dispute
resolution, may create significant liability that could have a material adverse effect on our business.

Under the HEA, ED is authorized to specify in regulations which acts or omissions of an institution of higher
education a borrower may assert as a defense to repayment of a Direct Loan. Regulations in effect prior to the
2016 Defense Regulations permitted a borrower to assert a borrower defense to repayment of a Direct Loan
if the institution’s acts or omissions give rise to a cause of action against the institution under state law. The
2016 Borrower Defense Regulations, which in part govern which acts or omissions of an institution of higher
education a student borrower may assert as a defense to repayment of a loan made under the Direct Loan
Program, or a Direct Loan, and certain other matters, create a new federal standard for borrower defenses,
new limitation periods for borrower defense claims, and new processes for resolution of such claims. Certain
portions of the 2016 Borrower Defense Regulations became effective October 16, 2018 after ED’s delay of the
effective date of those regulations and a court decision in legal challenges to the delay. On September 23,
2019, ED published the 2020 Borrower Defense Regulations, which among other things establish a new federal
standard for evaluating, and a new process for adjudicating, borrower defenses to repayment of loans made
under the Direct Loan Program on or after July 1, 2020. The 2016 Borrower Defense Regulations thereafter
will continue to apply to all loans made under the Direct Loan Program on or after July 1, 2017 and before July
1, 2020. For more information on the 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.”

Under the Borrower Defense Regulations, ED may initiate a separate proceeding to collect from an institution
the amount of relief resulting from a borrower defense brought by an individual borrower, and as part of group-
process hearings under the 2016 Borrower Defense Regulations, ED will collect from the institution any liability
for amounts discharged or reimbursed to borrowers under the group process. The 2020 Borrower Defense
Regulations eliminate the process available under the 2016 Borrower Defense Regulations for a group of
borrowers. If ED determines that borrowers of Direct Loans who attended our institutions have a defense to
repayment of their Direct Loans, we could be subject to repayment liability to ED that could have a material
adverse effect on our financial condition, results of operations, and cash flows.

The 2016 Borrower Defense Regulations also prohibit institutions from requiring students to engage in the
institutions’ internal complaint processes before contacting other agencies, prohibit the use of pre-dispute
arbitration agreements by institutions, prohibit class action lawsuit waivers, and require institutions to notify
ED of arbitration filings and awards, for claims that may form the basis for a borrower defense to repayment of
a Direct Loan. As a result of the 2016 Borrower Defense Regulations’ dispute resolution provisions, we could
incur claims and expenses that we have not previously incurred, and which could have a material adverse
effect on our business, financial condition, and results of operations. The 2020 Borrower Defense Regulations
generally remove the prohibitions contained in the 2016 Borrower Defense Regulations but require institutions
whose students must enter into pre-dispute arbitration agreements or class action waivers as a condition
of enrollment to disclose publicly those requirements in an easily accessible format, and prohibit such an
institution to require a student to participate in arbitration or any internal dispute resolution process prior to
filing a borrower defense to repayment application with ED.

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If one or more of our institutions does not comply with the 90/10 Rule, it or they will lose eligibility to
participate in federal student financial aid programs.

The HEA requires all for-profit education institutions to comply with what is commonly referred to as the
90/10 Rule, which imposes sanctions on institutions that derive more than 90% of their total revenue on a
cash accounting basis from Title IV programs, as calculated under ED’s regulations. In recent years, Congress
has considered various proposals that would modify the 90/10 Rule. At this time we cannot predict whether
Congress will pass legislation to modify the 90/10 Rule. Such proposals, or other similar legislation, should they
become law, could have a material adverse impact on the operations of our institutions.

The 90/10 Rule percentage for our institutions could increase in the future, depending on the impact of future
changes in our enrollment mix, and regulatory and other factors outside our control, including, for APUS, any
reduction in tuition assistance provided by DoD for service members and education benefits provided by
the VA for veterans, or changes in the treatment of such funding for purposes of the 90/10 Rule calculation.
Currently, DoD tuition assistance and VA education benefits are not treated as Title IV revenue under the 90/10
Rule and, therefore, such funding is included in the “10%” portion of the rule calculation. A reduction in the
availability of this type of funding, or a change (through legislation, regulatory action, or an executive order)
that requires that those funds be treated in the same manner as Title IV funding under the 90/10 Rule, would
increase our institutions’ 90/10 Rule percentage. For the past three years, HCN has derived more than 80%
of its total revenue on a cash accounting basis from Title IV programs as calculated under ED’s regulations. If
HCN is unable to attract students who do not depend on Title IV program aid, such as students who finance
their own education or receive full or partial tuition reimbursement from their employers, or through VA
benefits, HCN’s 90/10 Rule percentage may increase.

If any of our institutions violates the 90/10 Rule and loses eligibility to participate in Title IV programs, it would
also lose the ability to participate in the DoD tuition assistance programs because DoD requires institutions to
participate in the Title IV programs in order to participate in the tuition assistance programs, and ineligibility
of either or both of our institutions to participate in Title IV programs and DoD tuition assistance would have a
material adverse effect on our enrollments, revenue, results of operations, and cash flows.

A failure by our institutions to comply with the Department of Education’s incentive payment rule could
result in sanctions.

If one of our institutions pays a bonus, commission, or other incentive payment in violation of the HEA’s
prohibition on such payments, commonly referred to as the incentive payment rule, the institution could be
subject to sanctions, which could have a material adverse effect on our business. If ED determines that one
of our institutions violated the incentive payment rule, it may require the institution to modify its payment
arrangements to ED’s satisfaction. ED may also fine the institution or initiate action to limit, suspend, or
terminate the institution’s participation in Title IV programs. ED may also seek to recover Title IV funds
disbursed in connection with the prohibited incentive payments. In June 2015, ED announced that it will
calculate institutional liability for noncompliance with the incentive payment rule by calculating the cost to ED
of the Title IV funds improperly received by the institution, including the cost to ED of all of the Title IV funds
received by the institution over a particular period of time if those funds were obtained through implementation
of a policy or practice in which students were recruited in violation of the incentive payment rule. As
described in “Regulatory Environment—Student Financing Sources and Related Regulations/Requirements—
Department of Education—Regulation of Title IV Financial Aid Programs—Incentive Payment Rule,” changes
in the interpretation of the regulation may create uncertainty about what constitutes impermissible incentive
payments. Ambiguities as to how the incentive payment rule is interpreted also may influence our approach,
or limit our alternatives, with respect to employment policies and practices and consequently may negatively

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affect our ability to recruit and retain employees, and, as a result, our business could be materially and
adversely affected.

The DoD MOU requires that institutions participating in the DoD tuition assistance programs have policies in
place compliant with regulations issued by ED related to restrictions on payment of incentive compensation.
In addition, the Improving Transparency of Education Opportunities for Veterans Acts bans incentive
compensation based on success in securing enrollments or financial aid with regard to VA benefits.

In addition, third parties may file “qui tam” or “whistleblower” suits on behalf of the federal government under
the Federal False Claims Act alleging violation of the incentive payment provision. Such suits may prompt
ED investigations, and the federal government may determine to intervene in the lawsuits. Particularly in
light of ED’s June 2015 announcement discussed above and the uncertainty surrounding interpretation
of the incentive payment rule, the existence of, the costs of responding to, and the outcome of, qui tam or
whistleblower suits or ED investigations could have a material adverse effect on our reputation causing our
enrollments to decline, could cause us to incur costs that are material to our business, and could impact the
ability of our institutions to participate in Title IV programs, among other things. As a result, our business could
be materially and adversely affected.

Our institutions may lose eligibility to participate in Title IV programs if their student loan default rates
are too high, and our future growth could be impaired as a result.

To remain eligible to participate in Title IV programs, an educational institution’s federal student loan cohort
default rates must remain below certain specified levels. Each cohort is the group of students who first enter
into student loan repayment during a federal fiscal year. If an institution’s cohort default rate equals or exceeds
30% for any given year, it must establish a default prevention task force and develop a default prevention plan
with measurable objectives for improving the cohort default rate. Educational institutions will lose eligibility
to participate in Title IV programs if their cohort default rate exceeds 40% for any given year or is equal to or
greater than 30% for three consecutive years.

If one of our institutions is required to develop a formal default prevention plan, it may increase our
administrative costs which would adversely impact our results of operations. In the past there has been
increased attention by members of Congress and others on default prevention activities of for-profit education
institutions. If such attention leads to Congressional or regulatory action restricting the types of default
prevention assistance that educational institutions are permitted to provide, the default rates of our former
students may be negatively impacted. Such attention could also lead to Congressional proposals to increase
the measuring period, which could negatively impact our default rates. In the past, members of Congress
have also introduced proposed legislation that would assess institutions a share of the costs associated with
default of student loans by students who were enrolled in the institutions’ education programs and would tie
an institution’s obligation to make such “risk-sharing” payments to the institution’s eligibility to participate in the
Title IV programs. If one of our institutions loses its eligibility to participate in Title IV programs because of high
student loan default rates, students would no longer be eligible to use Title IV program funds at that institution,
which would significantly reduce that institution’s enrollments and revenue and have a material adverse effect
on our results of operations.

We rely on third parties to administer our institutions’ participation in Title IV programs and their failure
to perform services as agreed or to comply with applicable regulations could cause us to lose our
eligibility to participate in Title IV programs.

ED’s regulations permit an institution to enter into a written contract with a third-party servicer for the
administration of any aspect of the institution’s participation in Title IV programs. The third-party servicer

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must, among other obligations, comply with Title IV requirements and be jointly and severally liable with the
institution to ED for any violation by the servicer of any Title IV provision. Our institutions utilize third-party
servicers for some services and in the future may consider using third-party servicers for other functions that
are currently managed directly by our institutions. If any third-party servicer that we have engaged does not
comply with applicable statutes and regulations including the HEA, our institutions may be liable for its actions,
and our institutions could lose eligibility to participate in Title IV programs. The failure of one of our third-
party servicers to perform the services as agreed may adversely impact our ability to operate, our eligibility to
participate in Title IV programs, and our financial condition. Further, in the event that our institutions transition
to or from a third-party servicer for any of its services, there would be costs and risks related to the transition,
which could have a material adverse effect on our financial condition.

Our institutions will be subject to sanctions that could be material to our results and damage our reputation
if the Department of Education determines that our institutions failed to correctly calculate and timely return
Title IV program funds for students who withdraw before completing their educational program.

An institution participating in Title IV programs must correctly calculate the amount of unearned Title IV
program funds that have been disbursed to students who withdraw from their educational programs before
completion, and must return those unearned funds to the Title IV programs in a timely manner, generally
within 45 days after the date the school determines that the student has withdrawn. Under ED regulations, late
returns of Title IV program funds for 5% or more of students sampled in connection with the institution’s annual
Title IV compliance audit constitute material noncompliance for which an institution generally must submit an
irrevocable letter of credit.

HCN’s Title IV compliance audit for the year ended December 31, 2012, identified a deficiency related
to timely return of Title IV program funds. In a Final Audit Determination Letter in February 2014, ED
determined that HCN was not required to repay the liability to ED and directed HCN to adopt procedures to
prevent reoccurrence. However, HCN was required to post an irrevocable letter of credit in the amount of
approximately $130,000, which was released by ED in February 2018.

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 dated
January 29, 2018, ED conveyed its finding that funds had not been returned timely. ED also noted that a similar
finding had been made in an open program review with respect to which APUS has not yet received a program
review report. In connection with the finding, ED required APUS to post a letter of credit in the amount of
approximately $700,000. APUS posted the letter of credit on March 28, 2018 and it expired December 31, 2019.

Our institutions’ failure to comply with ED’s substantial misrepresentation rules could result in
material sanctions.

ED may take action against an institution in the event of substantial misrepresentation by the institution
concerning the nature of its educational programs, its financial charges, or the employability of its graduates.
An institution engages in substantial misrepresentation when the institution itself, one of its representatives,
or an organization or person with which the institution has an agreement to provide educational programs,
marketing, advertising, or admissions services, makes a substantial misrepresentation directly or indirectly to a
student, prospective student or any member of the public, or to an accrediting agency, a state agency, or to ED.

If ED determines that an institution has engaged in substantial misrepresentation, ED may: (i) if the institution
is provisionally certified, revoke an institution’s program participation agreement or impose limitations on
its participation in Title IV programs; (ii) deny participation applications made on behalf of the institution;
or (iii) initiate a proceeding against the institution to fine the institution or to limit, suspend or terminate

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the institution’s participation in Title IV programs. If administrative actions or litigation claiming substantial
misrepresentation were brought against our institutions, we could incur legal costs related to their investigation
and defense, which could materially and adversely impact our financial condition.

Failure to comply with the Jeanne Clery Disclosure of Campus Security Policy and Campus Crime
Statistics Act as implemented by ED could result in sanctions.

Our institutions must comply with certain campus safety and security reporting requirements as well as other
requirements in the Clery Act. The Clery Act requires an institution to report to ED and disclose in its annual
security report, for the three most recent calendar years, statistics concerning the number of certain crimes
that occurred within the institution’s so-called “Clery geography.” APUS historically has not had to comply
with the Clery Act because it is a wholly online institution. As a result of opening a Veteran’s Center in Charles
Town, WV, APUS determined that it is no longer subject to that exclusion and issued its first annual security
report in 2016. HCN publishes an annual security report as required by the Clery Act. Our institutions’ failure
to comply with the Clery Act requirements or regulations promulgated by ED could result in our institutions
being fined or having their eligibility to participate in Title IV programs limited, suspended, or terminated, could
lead to litigation, or could harm our institutions’ reputation, each of which could, in turn, adversely affect our
institutions’ enrollments and revenue and have a material effect on our business.

Enforcement of laws related to the accessibility of technology continues to evolve, which could result in
increased information technology development costs and compliance risks.

APUS’s educational programs are made available to students through personal computers, mobile devices
and other technological devices. For each of these programs, the curriculum makes use of a combination of
graphics, pictures, videos, animations, sounds, and interactive content. Federal agencies including ED and
the Department of Justice have considered or are considering how electronic and information technology
should be made accessible to persons with disabilities, such as in the terms of specific technical standards.
For example, Section 504 of the Rehabilitation Act of 1973, or Section 504, prohibits discrimination against
a person with a disability by any organization that receives federal financial assistance. ED’s Office for Civil
Rights, which enforces Section 504, together with the Department of Justice assert that requiring the use of
technology in a classroom environment when such technology is inaccessible to individuals with disabilities
violates Section 504, unless those individuals are provided accommodations or modifications that permit
them to receive all the educational benefits provided by the technology in an equally effective and integrated
manner. In recent years, ED’s Office for Civil Rights has taken enforcement action against several institutions
of higher education, including primarily online institutions, after determining that their websites and online
learning management platforms were not accessible to persons with a disability. If one of our institutions
is found to have violated Section 504, it may be required to modify existing content and functionality of its
online classroom or other uses of technology, including through adoption of specific technical standards. As a
result of such enforcement action or as a result of new laws and regulations that require greater accessibility
or accessibility in accordance with specific technical standards, our institutions may have to modify their
online classrooms and other uses of technology to satisfy applicable requirements, which could require
substantial financial investment. As with all nondiscrimination laws that apply to recipients of federal financial
assistance, an institution may lose access to federal financial assistance if it does not comply with Section 504
requirements. In addition, private parties may file or threaten to file lawsuits alleging failure to comply with
laws that prohibit discrimination on the basis of disability, and defending against such actions may require our
institutions to incur costs to modify their online classrooms and other uses of technology and costs of litigation.

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Government and regulatory agencies and third parties may conduct compliance reviews, bring claims,
or initiate enforcement actions or litigation against us, any of which could disrupt our institutions’
operations and adversely affect their performance.

Because our institutions operate in a highly-regulated industry, we are subject to audits, compliance reviews,
inquiries, complaints, investigations, claims of noncompliance, enforcement proceedings, and lawsuits by
government agencies, regulatory agencies, students, employees, and third parties, including claims brought
by third parties on behalf of the federal government. For example, ED regularly conducts program reviews of
educational institutions that are participating in Title IV programs and the ED OIG regularly conducts audits
and investigations of such institutions. Institutions that participate in the Title IV programs also must have an
independent auditor conduct an annual audit of the institution’s compliance with the laws and regulations that
are applicable to the Title IV programs in which the school participates and must submit the results of the audit to
ED. In addition, the Federal Trade Commission has investigated and in some cases brought lawsuits against for-
profit institutions alleging that the institutions engaged in deceptive trade practices, and the Consumer Financial
Protection Bureau has sued for-profit institutions for engaging in allegedly illegal predatory lending practices.

If the results of compliance reviews or other proceedings are unfavorable to us, or if we are unable to defend
successfully against lawsuits or claims, our institutions may be required to pay monetary damages or be
subject to fines, limitations, loss of Title IV funding, injunctions, or other penalties, including the requirement
to make refunds. Even if our institutions adequately address issues raised by an agency review or successfully
defend a lawsuit or claim, we may have to divert significant financial and management resources from our
ongoing business operations to address issues raised by those reviews or to defend against those lawsuits
or claims. Claims and lawsuits brought against us or one of our institutions may result in reputational damage,
even if such claims and lawsuits are without merit. Any one of these sanctions could materially adversely affect
our business, financial condition, results of operations, and cash flows and result in the imposition of significant
restrictions on us and our institutions, which may materially adversely affect our ability to operate.

ED is currently conducting a program review of APUS’s administration of the Title IV programs, and we
cannot predict the outcome of the review.

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. As part of the program review, ED conducted a site visit in
September 2016. The program review remains open and ongoing. We anticipate that certain findings
addressed in the 2016 Title IV compliance audit Final Audit Determination letter dated January 29, 2018 will
be resolved through the program review process, including a finding that return of Title IV funds calculations
were incorrectly computed for some students and a finding that APUS had incorrectly reported the students’
enrollment status to the National Student Loan Data System for some students. In addition, APUS is certified
to participate in Title IV programs through September 30, 2020 and will be required to apply timely for
recertification in order to continue to participate in the Title IV programs after that date. If the program review
and any associated liabilities remain unresolved at the time ED acts on APUS’s recertification application and
ED decides to recertify APUS, we believe such recertification is likely to be on a provisional basis because of
the unresolved program review and associated liabilities. At this time, we cannot predict the outcome of the
program review, when it will be completed, or whether it will impose any liability or other limitations on APUS
as a result of the review.

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Investigations by state Attorneys General, Congress, and governmental agencies may result in increased
regulatory burdens and costs.

We and other for-profit postsecondary education providers have been subject to increased regulatory scrutiny
and litigation in recent years. State attorneys general have increasingly focused on allegations of improper
recruiting, compensation, and deceptive marketing practices, among other issues. States may also have
consumer disclosure laws, including laws specifically applicable to for-profit institutions, and a state attorney
general may take the position that any such laws apply to institutions that offer wholly online education
to students in the state. A number of state attorneys general have launched investigations into for-profit
postsecondary education institutions. In August 2017, we received from the Attorney General of Massachusetts
a CID relating to an investigation of alleged unfair or deceptive acts or practices by American Military
University in connection with the recruitment and retention of students and the financing of education. The
CID required the production of documents and information relating to recruitment, enrollment, job placement
and other matters. On August 6, 2018, APUS entered into an AOD to resolve the inquiry. Pursuant to the terms
of the AOD, and without any finding or admission of wrongdoing on APUS’s part, APUS paid $270,000 to the
Attorney General and agreed to otherwise comply with applicable Massachusetts regulations. Other state
attorneys general may also initiate inquiries into us or our subsidiaries. Actions by state attorneys general and
other governmental agencies, whether or not involving us or our institutions, could damage our reputation and
the reputation of our institutions and limit the ability to recruit and enroll students, which could reduce student
demand for our institutions’ programs and adversely impact our revenue and cash flow from operations.

Our regulatory environment and our reputation may be negatively influenced by the actions of other
for-profit institutions.

Our institutions are two of a much larger number of for-profit institutions serving the postsecondary education
market. Regulatory investigations and civil litigation have been brought against several for-profit educational
institutions. These investigations and lawsuits have alleged, among other things, deceptive trade practices,
and noncompliance with ED regulations. These allegations have attracted adverse media and social media
coverage, have been the subject of federal and state legislative hearings, and have in some cases resulted in
legislation or rulemaking. In some cases, institutions have ceased operations, including while under multiple
government investigations. Broader allegations against the overall for-profit school sector have negatively
affected public perceptions of for-profit educational institutions, including our institutions, and this trend could
continue or broaden. In addition, reports on student lending practices of various lending institutions and
schools, including for-profit schools, and investigations by a number of state attorneys general, Congress, and
governmental agencies have led to adverse media and social media coverage of postsecondary and for-profit
education. Adverse media or social media coverage regarding others in our industry, or regarding us or our
institutions directly, could damage our reputation, could result in lower enrollments at our institutions, lower
revenue and increased expenses, and could have a negative impact on our stock price. Such allegations could
also result in increased scrutiny and regulation by ED, Congress, accrediting bodies, state legislatures, state
attorneys general, or other governmental authorities with respect to all for-profit institutions, including us and
our institutions. For these reasons or others, not-for-profit or public educational institutions may take actions
to differentiate themselves from the for-profit educational institutions, including by choosing not to enter into
collaborations with for-profit institutions, including us, or by excluding for-profit institutions from membership in
industry groups. Similarly, some corporations may choose not to collaborate with for-profit providers such as us
for programs for their employees or for other training purposes. For example, when Walmart announced that it
will not be renewing its partnership agreement with APUS, it announced a new program that only involved not-
for-profit institutions.

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If we undergo a change in ownership or control, the Department of Education will place our institutions on
provisional certification, and the terms of that provisional certification could limit our institutions’ potential
for growth and adversely affect our institutions’ enrollment, our revenue, and results of operations.

ED’s regulations provide that a change of control of a publicly-traded corporation occurs if: (i) there is an event
that would obligate the corporation to file a Current Report on Form 8-K with the SEC disclosing a change of
control; or (ii) the corporation has a stockholder that owns at least 25% of the total outstanding voting stock of
the corporation and is the largest stockholder of the corporation, and that stockholder ceases to own at least
25% of such stock or ceases to be the largest stockholder. A significant purchase or disposition of our voting
stock could be determined by ED to be a change in ownership and control under this standard. Under the
HEA, an institution whose parent undergoes a change in ownership resulting in a change of control loses its
eligibility to participate in Title IV programs and must apply to ED in order to reestablish such eligibility.

Future transactions could constitute a change in ownership or control under ED’s regulations and could cause
ED to place our institutions on provisional certification as required by the HEA. The conditions of provisional
certification or heightened scrutiny by ED could impact, among other things, our institutions’ ability to add
educational programs, or additional locations, our ability to acquire other institutions, or our ability to make
other significant changes. In addition, if ED were to determine that our institutions were unable to meet their
responsibilities while they were provisionally-certified, ED could seek to revoke our institutions’ certification to
participate in Title IV programs with fewer due process protections than if they were fully-certified. Limitations
on our institutions’ operations could, and the loss of our institutions’ certification to participate in Title IV
programs would adversely affect our institutions’ enrollments, and our revenue and results of operations.

If regulators do not approve or delay their approval of transactions involving a change of control of our
Company or of institutions that we own or acquire, our and our institutions’ ability to operate could be impaired.

If we or one of our institutions experiences a change of ownership or control under the standards of applicable
state regulatory bodies, accrediting agencies, ED, or other regulators, we or the institution governed by such
agencies must notify or seek the approval of each relevant regulatory agency. Transactions or events that
constitute a change of control include significant acquisitions or dispositions of an institution’s common stock,
significant changes in the composition of an institution’s Board of Directors, internal restructurings, acquisitions
of institutions from other owners, or certain other transactions. Some of these transactions or events may be
beyond our control. Our or our institutions’ failure to obtain, or a delay in receiving, approval of any change
of control from the relevant regulatory agencies following a transaction involving a change of ownership or
control could result in a suspension of operating authority, loss of accreditation, or suspension or loss of ability
to participate in Title IV programs, which could have a material adverse effect on our institutions and our
financial condition. Our failure to obtain, or a delay in receiving, approval of any change of control from other
states in which we are currently licensed or authorized could require our institutions to suspend activities in
that state or otherwise impair our institutions’ operations. The potential adverse effects of a change of control
could influence, among other things, future decisions by us and our stockholders regarding the sale, purchase,
transfer, issuance, or redemption of our stock. In addition, the regulatory burdens and risks associated with a
change of control also could have an adverse effect on the market price of our common stock.

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Certain contingents of Congress continue to examine the for-profit postsecondary education sector,
which could result in targeted legislation, heightened oversight, or additional Department of Education
rulemaking that may limit or condition Title IV program participation of for-profit schools in a manner
that may materially and adversely affect our business.

While in recent years the focus of Congress on for-profit educational institutions has declined, certain
contingents of Congress continue to examine institutions like ours. This focus has resulted in the introduction
of various pieces of legislation, the holding of several hearings by various Congressional committees, and
Congressional investigations and inquiries. We have previously incurred significant legal and other costs to
respond to Congressional inquiries, and could incur significant legal and other costs to respond to any future
inquiries. We cannot predict the extent to which, or whether, these hearings and investigations will result in
legislation, further rulemaking affecting our participation in Title IV programs, or litigation alleging statutory
violations, regulatory infractions, or common law causes of action.

Congress currently is in the process of considering comprehensive legislation to reauthorize the HEA. We
cannot predict whether, in what form, or when, the two houses of Congress will reauthorize the HEA or
whether, or when, the President will sign reauthorization legislation. Amendments to the HEA could occur as
part of reauthorization, which could require us to modify our business practices and increase administrative
costs, thereby negatively impacting our results of operations.

The adoption of any law or regulation that reduces funding for federal student financial aid programs or the
ability of our institutions or students to participate in these programs could have a material adverse effect
on our student population and revenue. Legislative action also may increase our administrative costs and
require our institutions to modify their practices in order to comply with applicable requirements. Additionally,
members of Congress have also from time to time encouraged ED to adopt additional regulations for
participation in Title IV programs that could increase our cost of operations or expose us to additional risks.

Congressional examination of DoD oversight of tuition assistance used for distance education and for-
profit institutions could result in legislative or regulatory changes that may materially and adversely
affect our business.

In recent years, Congress has considered various proposals that would modify the 90/10 Rule. One current
proposal would decrease the limit on Title IV funds from 90% to 85% and another current proposal would
maintain the 90% limit but count DoD tuition assistance and VA education benefits toward that limit. Such
a proposal or other similar legislation, should it become law, could have a material adverse impact on the
operations of our institutions. In contrast, another proposal would have eliminated the 90/10 Rule. At this
time we cannot predict the likelihood that Congress or the President will modify the 90/10 Rule or take some
other action to limit the use of DoD tuition assistance and VA education benefits at for-profit institutions. To
the extent that any laws or regulations are adopted that limit or condition the participation of for-profit schools
or distance education programs in DoD tuition assistance programs or in Title IV programs, or that limit or
condition the amount of DoD tuition assistance for which for-profit schools or distance education programs are
eligible to receive, our financial condition could be materially and adversely affected.

Congress has in the past changed, and may in the future change, eligibility standards and funding levels for
federal student financial aid programs, DoD tuition assistance, and other programs. Other governmental or
regulatory bodies may also change similar laws or regulations relating to such programs, which could
adversely affect our student population, revenue, and financial condition.

Political and budgetary concerns can significantly affect Title IV programs, military tuition assistance programs,
and other laws and regulations governing federal and state aid programs.

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Title IV programs are made available pursuant to the provisions of the HEA, and the HEA comes up for
reauthorization by Congress approximately every five to six years. In the recent past, Congress has passed
short-term non-substantive extensions of the HEA pending comprehensive reauthorization legislation. Further,
when Congress does not act on comprehensive reauthorization through a single piece of legislation, it may act
through multiple pieces of legislation. Congress completed the most recent reauthorization through multiple
pieces of legislation and may reauthorize the HEA in a piecemeal manner in the future. Congress currently is in
the process of considering legislation to reauthorize the HEA. Additionally, Congress determines the funding
level for each Title IV program on an annual basis.

Future Congressional action, including in reauthorizations or appropriations acts, may result in numerous
legislative changes, including those that could adversely affect the ability of our institutions to participate
in Title IV programs, DoD tuition assistance programs, and the availability of such funding sources for our
students. Members of Congress frequently propose legislation to alter or amend the terms under which our
institutions participate in the federal student financial aid programs. Any action by Congress that significantly
reduces funding for Title IV programs or the ability of our institutions or students to participate in these
programs could materially harm our institutions’ business. A reduction in government funding levels could
lead to lower enrollments at our institutions and require our institutions to arrange for alternative sources
of financial aid for their students. Lower student enrollments at our institutions or their students’ inability to
arrange alternative sources of funding could adversely affect our financial condition. Congressional action may
also require our institutions to modify their practices in ways that could result in increased administrative and
regulatory expenses.

We are not in a position to predict whether any legislation will be passed by Congress or signed into law in
the future. The reallocation of funding among Title IV programs, material changes in the requirements for
participation in such programs, or the substitution of materially different Title IV programs could reduce the
ability of certain students to finance their education at our institutions and adversely affect our revenue and
results of operations.

Recent and future regulatory developments may adversely impact our institutions’ enrollment, financial
condition, results of operations, expenses, and cash flows.

ED has in the past published and in the future may publish additional rules that affect our institutions. For example,
on October 15, 2018, ED published in the Federal Register a notice of its intent to establish the Accreditation and
Innovation Committee, including three subcommittees, to prepare proposed regulations on several topics related
to the Title IV programs. In April 2019, the Accreditation and Innovation Committee reached consensus on the
package of proposed regulatory language. Subsequently, ED has issued proposed and, in some cases, final rules
related to the topics addressed by that committee. For more information about the rulemaking processes currently
underway, see “Regulatory Environment—Regulatory Activity—Federal Rulemakings.”

In addition to publishing rules, ED has in the past and may in the future take other actions that affect our
institutions. For example, in September 2015, ED publicly released its “College Scorecard” website, as discussed
in more detail in “Regulatory Environment—Student Financing Sources and Related Regulations/Requirements—
Regulation of Title IV Financial Aid Programs—College Scorecard.” Among other characteristics, the College
Scorecard allows users to search for schools based upon programs offered, location, size, tax status, mission, and
religious affiliation. In May 2019, ED updated the College Scorecard to include additional information, including
program-level outcomes data such as earnings and loan debt, and in November 2019 ED supplemented the
College Scorecard to include program-level outcomes data such as median earnings and median loan debt.
We cannot determine the extent to which data collected and published by ED has impacted or may impact
our institution’s enrollments, reputation, or operating results, including if students exclude our institutions from

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consideration because of the College Scorecard’s presentation of our graduation rate, the focus on tax status and
our status as a for-profit business, or because of other factors.

We cannot predict the nature of any future rulemakings, actions, or interpretations that may be implemented
or adopted by ED. However, these and future regulatory developments may adversely impact our institutions’
enrollments, financial condition, results of operations, expenses, and cash flows.

Failure to comply with the various federal and state laws and regulations governing HCN’s recently
launched program to extend credit to its students could subject us to fines, penalties, obligations to
discharge loans and other injunctive requirements, which could have a material adverse effect on our
financial condition, results of operations, and cash flows and result in the imposition of significant
restrictions on us and our ability to operate.

In July 2018, HCN began offering extended payment plan options, and beginning with enrollments for the term
beginning in January 2020, HCN added an additional extended payment program. The extended payment
plan options are designed to assist students with educational costs consisting of tuition, textbooks, and fees.
Payment plans require monthly payments while the student is enrolled in a program and extend for a period
up to six months after the last day of attendance or graduation. The extended payment plans are subject to
various federal and state laws and regulations, such as the Truth in Lending Act as implemented in Regulation Z,
the Equal Credit Opportunity Act as implemented in Regulation B, and the Unfair, Deceptive or Abusive Acts
or Practices provisions of Title X of the Dodd-Frank Act. For more on these extended payment plan options
and their regulation, see “Our Institutions—Hondros College of Nursing—Sources of Student Financing” and
“Regulatory Environment—Student Financing Sources and Related Regulations / Requirements—Additional
Sources of Student Payments” in Part I, Item 1 of this Annual Report. We have limited experience in extending
credit to our students and therefore in complying with these laws and regulations. If we do not comply with
laws and regulations applicable to this financing program, we could be subject to fines, penalties, obligations to
discharge loans and other injunctive requirements, which could have a material adverse effect on our financial
condition, results of operations, and cash flows and result in the imposition of significant restrictions on us and
our ability to operate. Additionally, an adverse allegation, finding or outcome in any of these matters could also
materially and adversely affect our ability to maintain, obtain or renew licenses, approvals or accreditation and
maintain eligibility to participate in Title IV programs or serve as a basis for ED to discharge certain Title IV
student loans and seek recovery for some or all of its resulting losses from us, either of which could have a
material adverse effect on our business, financial condition, results of operations, and cash flows, and result in
the imposition of significant restrictions on us and our ability to operate.

RISKS RELATED TO OUR BUSINESS

DoD’s MOU includes terms and conditions that impose extensive regulatory requirements on our
institutions with respect to participation in DoD tuition assistance programs.

Each institution participating in DoD tuition assistance programs is required to sign an MOU outlining certain
commitments and agreements between the institution and DoD prior to accepting funds from DoD tuition
assistance programs. In 2014, DoD promulgated new regulations and institutions were required to sign a
new MOU, which we refer to as the DoD MOU, in order to continue to participate in DoD tuition assistance
programs. For more information about the requirements imposed by the DoD MOU, see “Regulatory
Environment—Department of Defense.” We cannot predict precisely what type of immediate sanctions, if any,
will be implemented before an institution loses the ability to participate in DoD tuition assistance programs for
failure to comply with the DoD MOU. We believe that DoD may also impose sanctions other than denying an
institution the ability to participate in tuition assistance programs, including restricting student enrollment in

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tuition assistance programs, suspending an institution from enrolling new students, limiting access to military
installations, subjecting the institution to heightened compliance oversight, or otherwise limiting an institution’s
ability to participate in tuition assistance programs. If we fail to comply with the requirements of the DoD MOU
or any successor MOU, we will not be able to participate in DoD tuition assistance programs, which could have
a significant adverse effect on our results of operations and financial condition.

Our business could be harmed if our institutions experience a disruption in their ability to process Title IV
financial aid.

We collected a substantial portion of our fiscal year 2019 consolidated revenue from receipt of Title IV financial
aid program funds. Any processing disruptions by ED, by our institutions, or by third-party service providers may
impact the ability of our institutions’ students to obtain Title IV financial aid on a timely basis. If our institutions
experience a disruption in their ability to process Title IV financial aid, either because of administrative challenges
on their part or the part of their vendors, or the inability of ED to process Title IV funds on a timely basis, it could
have a material adverse effect on our institutions’ business and on our financial condition, results of operations,
and cash flows. If our institutions experience a disruption in their ability to process Title IV financial aid because of
administrative challenges on their part or the part of their vendors, ED could require that our institutions become
subject to payment methods for Title IV programs that are not the advance payment system, which could have a
material adverse effect on our institutions’ cash flows.

We have recently implemented a shared services model for services between APEI and APUS, and APEI
and HCN, and challenges encountered due to the implementation of this model may cause strategic or
operational challenges and adversely impact us.

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 will provide 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. We also separated the roles of President of APUS and CEO of APEI, although subsequently our CEO,
Dr. Wallace E. Boston, resumed both positions until a new CEO of APEI was appointed effective September 23,
2019. In December 2016, APUS submitted a change of structure application to HLC in connection with the
proposed implementation of the shared services model.

In November 2018, HLC notified APUS that the HLC Board of Trustees approved the change in structure
application and extended APUS’s accreditation following adoption of the shared services model, which we
subsequently implemented. As required by HLC policy and ED regulation, HLC conducted a focused site visit
in May 2019. The site visit team found that evidence of compliance with the commitments APUS made in its
application and with HLC’s Eligibility Requirements and Criteria for Accreditation was sufficiently demonstrated
and no further follow up was recommended. In August 2019, HLC notified APUS that HLC’s Institutional Actions
Council, which conducts reviews and takes action on accreditation recommendations, concurred with the site
visit team’s findings.

As with any operational change, the implementation of the shared services model, and the evaluation and
implementation of any leadership changes, 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.

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Efforts to diversify our business outside of the traditional areas served by our institutions may provide
strategic and operational challenges that we are not prepared or able to address.

We intend 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.
As we seek opportunities to expand our business and serve markets beyond those traditionally served
by our institutions, we may encounter strategic and operational challenges different from those within our
existing institutions. Our institutions may have limited experience operating in new businesses and markets
or new modes of teaching (such as CBE, micro-credentials, or other non-degree credentials) and may need
to modify systems and strategies or enter into arrangements with other institutions and organizations. In
addition, our systems and infrastructure may not be able to respond quickly enough to support new business
opportunities, or we may not otherwise be able to address the strategic or operational differences of these
new opportunities. If we are unable to successfully capitalize on new opportunities, the value of our common
stock may decline over time, including because of the challenges of growing our core business under our
current model.

As part of our business strategy, we have entered into, and may enter into or seek to enter into, business
combinations and acquisitions that may be difficult to integrate, disrupt our business, dilute stockholder
value, or divert management attention.

We may seek to enter into business combinations or acquisitions in the future. Acquisitions are typically
accompanied by a number of risks, including:

• difficulties consolidating operations and integrating information technology and other systems, as well as the

inability to maintain uniform standards, controls, policies and procedures;

• distraction of management’s attention from normal business operations during the acquisition and

integration processes;

• inability to obtain, or delay in obtaining, approval of the acquisition from the necessary regulatory agencies, or
the imposition of operating restrictions or a letter of credit requirement on us or on the acquired institution;

• challenges relating to conforming non-compliant financial reporting procedures to those required of a
subsidiary of a U.S. reporting company, including procedures required by the Sarbanes-Oxley Act;

• expenses associated with the integration efforts; and

• unidentified issues not discovered in the due diligence process, including legal contingencies.

Any inability to integrate completed acquisitions in an efficient and timely manner could have an adverse
impact on our results of operations. Further, many acquisitions result in the acquirer recording goodwill. If
any acquisitions for which we record goodwill are not successful or experience challenges, that goodwill may
become impaired and have an adverse impact on our results of operations. For example, we recorded pretax,
non-cash charges of $7.3 million during the fiscal year ended December 31, 2019 to reduce the carrying value
of our goodwill as a result of determinations that the fair value of HCN was less than its carrying value because
of circumstances including HCN’s underperformance against 2019 internal targets and overall 2019 financial
performance. We also previously recorded a charge in 2016 to reduce the carrying value of our goodwill as a
result of a determination that the fair value of HCN was less than its carrying value.

Our acquisition of an educational institution would also likely be considered a change in ownership and
control of the acquired institution under applicable regulatory standards, as in the HCN acquisition. For such

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an acquisition, we may need approval from ED, applicable state agencies and accrediting agencies, and
possibly other regulatory bodies, a number of which can only be requested after completion of the acquisition.
Our inability to obtain such approvals with respect to a completed acquisition could have a material adverse
effect on our business, financial condition, results of operations, and cash flows. If we are not successful in
completing acquisitions, we may incur substantial expenses and devote significant management time and
resources without a productive result. In addition, future acquisitions could result in dilutive issuances of
securities or could require use of substantial portions of our available cash, as in the HCN acquisition, or
issuances of debt, which could adversely affect our financial condition.

We have limited experience in making investments in other entities, and any such investments may not
result in strategic benefits for our business or could expose us to other risks.

To assist us in achieving elements of our business strategy or to further develop our business capabilities, from
time to time we will consider and may pursue strategic investments and acquisitions. These transactions could
include, among other things, investments in, partnerships or joint ventures with, or the acquisition of, other
schools, service providers or education technology related companies, among other types of entities. Investing
in another entity requires expertise in evaluating another entity’s business and identifying strategic benefits
of a potential investment in such entity, among other expertise. These types of investments involve significant
challenges and risks, including that the investment does not advance our business strategy, that we do not
realize a satisfactory return on our investment, that we acquire unknown liabilities, or that management’s
attention is diverted from our core business. These events could harm our operating results or financial
condition. Any investments in other entities may also subject us to the operating and financial risks of such
entities, and we rely on the internal controls and financial reporting controls of such entities.

We have made minority investments in entities in which we do not have sole control, which present risks in
addition to those that apply to other investments or acquisitions. These investments include our investment
in a holding company that acquired and now operates New Horizons Worldwide, Inc., or New Horizons, our
investment in preferred stock of Fidelis Education, Inc., or Fidelis Education, our investment in preferred stock
of Second Avenue Software, Inc., or Second Avenue, and our investment in preferred stock of RallyPoint, an
online social network for members of the military. Although we have the right to representation on the Board
of Directors of the holding company of New Horizons, the Board of Directors of Fidelis Education, and the
Board of Directors of Second Avenue, and have observer rights for the Board of Directors of RallyPoint, we
do not have the ability to control the policies, management or affairs of these entities, and generally we would
not have that ability in any minority investment in an entity. The interests of persons who control the entities
in which we have invested and may invest may differ from our interests, and they may cause such entities to
take actions that are not in our best interest, and we may become involved in disputes with such persons. Our
inability to control entities in which we make minority investments could negatively affect our ability to realize
the strategic benefits of those investments.

We have made these minority investments to realize strategic benefits for our business, rather than to generate
income or capital gains from these investments, and we may make future minority investments for similar
purposes. We cannot ensure that we will realize any strategic benefits from these investments in the near-term
or at all. To the extent that the strategic benefits of any investment are not timely realized, or the investment
otherwise underperforms, we may wish to dispose of the investment. Because our interests in entities in which
we have made minority investments, such as New Horizons, Fidelis Education, Second Avenue, and RallyPoint
are highly illiquid and not traded in any public market, we may not be able to timely dispose of these interests,
or may have to sell at less than our carrying value. Further, should the value of these investments become
impaired, we may be required to reduce the carrying value of these investments. For example, we recorded a

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non-cash, pretax impairment charge of $0.5 million for the fiscal year ended December 31, 2018, to reduce the
carrying value of certain minority investments to their fair value.

Our inability to dispose of our interest in such an entity, or a reduction in the carrying value of such an entity on
our books, would negatively affect our operating results.

We may not be able to successfully manage and limit our exposure to bad debt.

We experienced an increase in bad debt in our HCN segment for the year ended December 31, 2019 and
have experienced increases in other recent interim periods in both our HCN and APUS segments. We believe
these increases in bad debt in our HCN segment have been primarily driven by HCN’s implementation of
extended payment plan options in 2018. For more information on the extended payment plan options, see
“Our Institutions—Hondros College of Nursing—Sources of Student Financing” and “Regulatory Environment—
Student Financing Sources and Related Regulations / Requirements—Additional Sources of Student Payments”
in Part I, Item 1 of this Annual Report.

We also experienced increases in our bad debt expense over several years prior to 2015, particularly at
APUS. We believe those increases were primarily driven by an increase in the number of students using Title
IV program funds, operational policies, processing challenges, and challenges collecting funds primarily
related to students who did not complete courses. In September 2015, APUS changed the method by which it
disburses Title IV program funds in an effort to lower bad debt expense and to reduce the attractiveness of our
programs to students who are seeking to abuse the Title IV programs. While we have experienced decreases
in bad debt expense at APUS during each of the last several years, there is no assurance that these changes
caused the reductions.

There is no assurance that we will be able to limit our exposure to bad debt or that steps we take to limit bad
debt will be effective. Continued bad debt increases in our HCN segment or bad debt expense increases at
APUS could have a material adverse effect on our financial condition, cash flows, and results of operations.

We rely on third-party vendors whose service may be of lower quality than ours, whose responsiveness
may be less timely than ours, and whose compliance practices may increase our operational and
compliance risk.

We rely on third-party vendors to provide certain services to our institutions and their students primarily
related to information technology services and financial aid processing, and expect to rely more heavily on
such vendors, particularly through cloud computing services, for certain information technology services in
the future. While we monitor and assess the service of these vendors, it is possible that the quality of their
service and the timeliness of their responses may be less than the service and responsiveness that we or
our institutions would provide. These third-party vendors may lack adequate business continuity planning.
Using third-party vendors increases compliance risk that the vendors may not adequately protect personal
information regarding our institutions’ students and their families, or that they may not comply with applicable
federal or state regulations applicable to our institutions’ business. Further, transitioning from existing vendors
or from in-house processes to new providers or from third-party providers to in-house processes involves
inherent risks, including the risk of significant disruptions of integral processes. In the event third-party vendors
fail to provide services, lack adequate continuity planning, or fail to provide necessary implementation or
transition services, our financial condition and results of operations could be adversely affected.

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If our institutions fail to maintain adequate systems and processes to detect and prevent fraudulent
activity in student enrollment and financial aid, our institutions may lose the ability to participate in
Title IV programs or Department of Defense tuition assistance programs, or have participation in these
programs conditioned or limited.

Our institutions, in particular APUS, have been the target of fraudulent and abusive activity related to Title
IV program funds, as well as other fraudulent or abusive activities. We believe the risk of outside parties
attempting to perpetrate fraud in connection with the award and disbursement of Title IV program funds at
APUS, including as a result of identity theft, is heightened due to its being an exclusively online education
provider and its relatively low tuition. Our institutions must maintain systems and processes to identify and
prevent fraudulent applications for enrollment and financial aid. We cannot be certain that our institutions’
systems and processes will continue to be adequate in the face of increasingly sophisticated fraud schemes,
or that we will be able to expand such systems and processes at a pace consistent with the changing nature of
these fraud schemes.

ED requires institutions that participate in Title IV programs to refer to the ED OIG credible information about
fraud or other illegal conduct involving Title IV programs, and in the past our institutions have referred to the
OIG information with respect to potential fraud by applicants and students. If the systems and processes that
our institutions have established to detect and prevent fraud are inadequate, ED may find that our institutions
do not satisfy ED’s “administrative capability” requirements. If our institutions fail to satisfy the administrative
capability requirements, ED may require the repayment of Title IV program funds, transfer our institutions from
the “advance” system of payment of Title IV program funds to heightened cash monitoring status, or to the
“reimbursement” system of payment, place our institutions on provisional certification status, or commence
a proceeding to impose a fine or to limit, suspend, or terminate our institutions’ participation in Title IV
programs, which would adversely affect our institutions’ enrollment, revenue, and results of operations. In
addition, our institutions’ ability to participate in Title IV programs and DoD tuition assistance programs is
conditioned on maintaining accreditation by an accrediting agency that is recognized by ED. Any significant
failure to adequately detect fraudulent activity related to student enrollment and financial aid could cause
our institutions to fail to meet their accreditors’ standards. Furthermore, accrediting agencies that evaluate
institutions offering online programs, like APUS’s programs, must require such institutions to have processes
through which the institution establishes that a student who registers for such a program is the same student
who participates in and receives credit for the program. Failure to meet the requirements of our institutions’
accrediting agencies could result in the loss of accreditation of one or more of our institutions, which could
result in their loss of eligibility to participate in Title IV programs, DoD tuition assistance programs, or both.

We may have unanticipated tax liabilities that could adversely impact our results of operations and
financial condition.

We and our institutions are subject to multiple types of taxes in the U.S. and may be subject to taxation in
the future in various foreign jurisdictions. The determination of our provision for income taxes and other tax
accruals involves various estimates and judgments, and therefore the ultimate tax determination is subject
to uncertainty. In addition, changes in tax laws, regulations, or rules, or application of state sales taxes, may
adversely affect our future reported financial results, may impact the way in which we conduct our business, or
may increase the risk of audit by the Internal Revenue Service or other tax authorities. Although we believe our
tax accruals are reasonable, the final determination of tax returns under review or returns that may be reviewed
in the future and any related litigation could result in tax liabilities that materially differ from our historical
income tax provisions and accruals. In addition, an increasing number of states are adopting new laws or
changing their interpretation of existing laws regarding the apportionment factors used for state corporate
income tax purposes in a manner that could result in a larger proportion of our income being taxed by the

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states in which we are required to file state tax returns. These legislative and administrative changes could
have a material adverse effect on our business and financial condition.

We rely on dividends, distributions and other payments, advances and transfers of funds from our
operating subsidiaries to meet our obligations and to fund acquisitions and certain investments.

We rely on dividends, distributions and other payments, advances and transfers of funds from our operating
subsidiaries to meet our obligations and to fund acquisitions and certain investments and generate all of
our operating income through our subsidiaries. As a result, we rely on dividends and other payments or
distributions from our operating subsidiaries to meet our obligations and to fund acquisitions and investments.
The ability of our operating subsidiaries to pay dividends or to make distributions or other payments to us
depends on their respective operating results and may be restricted by, among other things, the laws of
their respective jurisdictions of organization, regulatory requirements such as obligations to maintain certain
restricted cash or post letters of credit, accreditation requirements, agreements entered into by those
operating subsidiaries, and the covenants of any future obligations that we or our subsidiaries may incur.

If we are unable to attract and retain management, faculty, administrators, and skilled personnel, our
business and growth prospects could be severely harmed, and changes in management could cause
disruption and uncertainty.

Our success depends largely upon the continued services of our executive officers and other key management
and technical personnel. The loss of one or more of our key personnel could harm our business. While we have
employment agreements with our Chief Executive Officer, the President of APUS, our Chief Financial Officer,
and our Chief Technology Officer, we do not have employment agreements with other executives or personnel,
and the employment agreements that we do have do not prevent our executives from voluntarily ceasing to
work for us.

We must attract and retain diverse and highly qualified management, faculty, administrators, and skilled
personnel to our institutions. Competition for hiring these individuals is intense, especially with regard to
faculty in specialized areas, and executives with relevant industry expertise. We have had a number of other
executive officers retire or otherwise depart our Company over the last several years and we continually
evaluate our leadership structure. For instance, effective October 15, 2017, Dr. Karan Powell retired from her
role as President of APUS. Dr. Boston, who was at the time our Chief Executive Officer, was appointed to
serve as Interim President of APUS, and since August 2018 has served as President of APUS on a permanent
basis. In September 2019, Angela Selden was hired as our Chief Executive Officer, and Dr. Boston remained
in the role of President of APUS pending his expected retirement in June 2020. In addition, in May 2018, we
hired a new Chief Technology Officer, and in May 2019, we appointed a new interim Chief Executive Officer of
HCN, replacing the former Chief Executive Officer of HCN. In addition to these hires and changes, we are also
seeking a successor to Dr. Boston as President of APUS, and may otherwise continue to work to strengthen
our management team. As with any leadership changes, our past or future changes could lead to strategic and
operational challenges and uncertainties, 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.

If we fail to attract new management, faculty, administrators, or skilled personnel or fail to retain, develop,
and motivate our existing management, faculty, administrators, and skilled personnel, our institutions and our
ability to serve our students and expand our programs, open new locations, make investments or acquisitions,
and update or enhance our technology could be severely harmed, and changes in management could disrupt
our business and cause uncertainty.

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Our success depends on the contributions of our approximately 2,900 employees.

Our performance largely depends on the talents, experience, and efforts of our employees, and we believe that
we can be distinguished by our ability to foster a culture and practice of innovation, quality, communication,
cooperation, honesty, and respect. In addition, our strategic initiatives require our management, faculty, staff,
and skilled personnel to adapt and learn new skills and capabilities. Our failure to maintain a positive culture
or to continue fostering the growth and development of our personnel, including through the use of staff
performance evaluation systems and processes, could have a material adverse effect on our business and
results of operations.

We rely on key personnel to lead with integrity. To the extent our leaders behave in a manner that is not
consistent with our values, we could experience significant impact to our brand and reputation, as well as to
our culture.

We also must manage leadership development and succession planning throughout our business. To the
extent that we lose experienced personnel, it is critical that we develop other employees, hire new qualified
personnel, and successfully manage the transfer of critical knowledge. While we have processes in place for
management transition and the transfer of knowledge, the loss of key personnel, coupled with an inability to
adequately train other personnel, hire new personnel, or transfer knowledge, could significantly impact our
business and results of operations.

Our limited ability to obtain exclusive proprietary rights and protect our intellectual property, as well as
disputes we may encounter from time to time with third parties regarding our use of their intellectual
property, could harm our operations and prospects.

In the ordinary course of business, our institutions develop intellectual property of many kinds that is or
will be the subject of patents, copyrights, trademarks, service marks, domain names, agreements, and
other registrations. Our institutions rely on agreements under which we obtain rights to use course content
developed by faculty members and other third-party content experts.

We cannot ensure that any measures we and our institutions take to protect our intellectual property or obtain
rights to the intellectual property of others will be adequate, or that we have secured, or will be able to secure,
appropriate protections for all of our institutions’ proprietary rights in the United States or foreign jurisdictions,
or that third parties will not infringe upon or violate the proprietary rights of our institutions. Despite our efforts
to protect these rights, third parties may attempt to develop competing programs or copy aspects of our
institutions’ curriculum, online resource material, quality management, and other proprietary content. Any such
attempt, if successful, could adversely affect our institutions’ business. Protecting these types of intellectual
property rights can be difficult, particularly as it relates to the development by our institutions’ competitors of
competing courses and programs.

Our institutions may encounter disputes from time to time over rights and obligations concerning intellectual
property, and may not prevail in these disputes. Third parties may raise a claim against our institutions alleging
an infringement or violation of their intellectual property. Some third-party intellectual property rights may be
extremely broad, and it may not be possible for our institutions to conduct operations in such a way as to avoid
disputes regarding those intellectual property rights. Any such dispute could subject our institutions to costly
litigation and impose a significant strain on our financial resources and management personnel regardless of
whether that dispute has merit. Our insurance may not cover potential claims of this type adequately or at all,
and our institutions may be required to alter the content of their courses or pay monetary damages, which may
be significant.

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We may incur liability for the unauthorized duplication or distribution of course materials posted online
for course discussions.

In some instances, our institutions’ faculty members or students may post various articles or other third-party
content online in course discussion boards or in other venues. The laws governing the fair use of these third-
party materials are imprecise and adjudicated on a case-by-case basis, which makes it challenging to adopt
and implement appropriately balanced institutional policies governing these practices. We and our institutions
may incur liability for the unauthorized duplication or distribution of this material posted online. Third parties
may raise claims against us and our institutions for the unauthorized duplication of this material. Any such
claims could subject us and our institutions to costly litigation and impose a significant strain on financial
resources and management personnel regardless of whether the claims have merit. Our institutions’ faculty
members or students could also post classified material on course discussion boards, which could expose
us to civil and criminal liability and harm our institutions’ reputations and relationships with members of the
military and government. Our insurance may not cover potential claims of this type adequately or at all, and
we may be required to pay monetary damages and our institutions may be required to alter the content of
their courses.

Legal proceedings, particularly class action lawsuits, may require human and financial resources, distract
our management, and negatively affect our reputation and operating results.

From time to time, we and our institutions have been and may be involved in various legal proceedings. In
recent years, we have observed an increase in litigation brought against for-profit schools, including class
actions brought by students and prospective students based on alleged misrepresentations about a school’s
programs, an increase in “qui tam” lawsuits, and investigations by state attorneys general into for-profit
postsecondary education institutions, which are described above under the heading “Risks Related to the
Regulation of Our Industry.” For example, in November 2013, a putative class action was brought against
HCN relating to a time period prior to our ownership. The lawsuit asserted claims for fraud and fraudulent
inducement, negligent misrepresentation, breach of implied-in-fact contract, promissory estoppel, unjust
enrichment, and violation of the Ohio Consumer Sales Practices Act. While HCN admitted to no wrongdoing
in the eventual settlement agreement and the case was dismissed with prejudice after the payment of a de
minimis settlement, on December 4, 2015, ED sent HCN a letter informing HCN that ED had determined to fine
HCN $27,500 based on ED’s finding that HCN had substantially misrepresented its programmatic accreditation
status during a time period prior to our ownership of HCN. HCN informed ED in a letter that it disagreed with
ED’s findings but would pay the fine in order to resolve promptly the matter and to enable ED to finalize its
review of the application for a change in ownership. In the future, not all claims may be as easily resolved. The
significant human and financial resources required to investigate and respond to claims brought in any future
litigation may distract management’s attention from operating our business or lead to larger payments or
liabilities, including adverse regulatory action, and, as a result, negatively affect our operating results.

We may need additional capital in the future, but there is no assurance that funds will be available on
acceptable terms.

We may need additional capital in the future for various reasons, including to finance business acquisitions and
investments in technology or to achieve growth or fund other business initiatives, but there is no assurance
that capital will be available in sufficient amounts or on terms acceptable to us and may be dilutive to existing
stockholders. Additionally, any securities issued to raise capital may have rights, preferences, or privileges
senior to those of existing stockholders. If adequate capital is not available or is not available on acceptable
terms, our and our institutions’ ability to expand, develop or enhance services or products, or respond to
competitive pressures, will be limited.

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2019 ANNUAL REPORT

Our access to capital markets and sourcing for additional funding to expand or operate our business is subject
to market conditions. Credit concerns regarding the for-profit postsecondary education industry as a whole
also may impede our access to capital markets. If we are unable to obtain needed capital on terms acceptable
to us, we may have to limit strategic initiatives or take other actions that materially adversely affect our
business, financial condition, results of operations, and cash flows.

Economic and market conditions, including changes in interest rates, could affect our enrollments,
success with placement and persistence and cohort default rates in the U.S. or abroad.

Our business has been and may in the future be adversely affected by a general economic slowdown or
recession in the U.S. or abroad. Our institutions derive a significant portion of their revenue from Title IV
programs, which include student loans with interest rates subsidized by the federal government. Additionally,
some students finance their education through private loans that are not government subsidized. Historically
low interest rates have created a favorable borrowing environment for students. However, our students may
have to pay higher interest rates on their Title IV program loans and private loans as a result of recent interest
rate increases. Increases in applicable interest rates could result in a corresponding increase in educational
costs to our existing and prospective students, which could result in a reduction in our enrollment. Higher
interest rates could also contribute to higher default rates with respect to our students’ repayment of their
education loans. Higher default rates may in turn adversely impact our eligibility to participate in some Title IV
programs, which could adversely impact our operations and financial condition.

Adverse economic developments that affect the United States could also result in a reduction in the number
of jobs available to our graduates and lower salaries being offered in connection with available employment,
which, in turn, could result in declines in our success with placements and persistence. In addition, adverse
economic developments could adversely affect the ability or willingness of our former students to repay
student loans, which could increase our institutions’ student loan cohort default rates and require increased
time, attention, and resources to manage these defaults. Our institutions’ students are able to borrow Title IV
loans in excess of their tuition and fees. The excess is received by such students as a credit balance refund.
However, if a student withdraws, our institutions must return any unearned Title IV funds, which may include a
portion of the credit balance refund, and must seek to collect from the student any resulting amounts owed to
the institution. A protracted economic slowdown could negatively impact such students’ ability to satisfy debts
to the institution, including debts that result from returns of unearned Title IV amounts. As a result, the amount
of Title IV funds we would have to return without repayment from our institutions’ students could increase, and
our financial results could suffer.

RISKS RELATED TO OUR TECHNOLOGY INFRASTRUCTURE

We need to continue to invest, and may need to increase our level of investment in, our institutions’
information technology, which may place a strain on resources that could adversely affect our systems,
controls, and operating efficiency, and those of our institutions.

We need to invest capital, time, and resources to update our institutions’ information technology, including
our student-facing systems, in response to competitive pressures in the marketplace, including data analytics,
artificial intelligence, interactive and immersive user and learning experience technologies such as those that
leverage virtual and augmented reality, multi-channel customer engagement, and robotic process automation,
to update or replace older systems, and to enhance functionality. We incurred approximately $2.1 million during
2019 to evaluate and invest in replacements or upgrades to our information technology systems, including our
learning management system, and to inform the scope and duration of our larger overall information technology
transformation program. We also anticipate spending between approximately $6.0 million and $8.0 million in

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2020, focusing on specific information technology projects, including replacements of our learning management
and customer relationship management systems. While we estimate 80% of this anticipated spending to be
one-time spending with respect to the projects and systems to which the expenditures relate, we expect to make
similar expenditures in future years, but we have not estimated any future amounts at this time. We would likely
also have to make investments to integrate the technology systems of any business we may acquire in the future.
Our efforts to improve our information technology systems may not be successful, may cost more than expected,
may increase our level of spending, not all of which can be capitalized, or may otherwise adversely affect our
financial condition. We may also be unable to address all of the initiatives that we would like to pursue, or find that
the number of projects we are working on impacts our ability to adequately address critical areas. As a result of
unsuccessful development efforts, or as a result of replacing outdated technology, software or other technology
related assets, we may have assets that become impaired. For example, for the year ended December 31, 2016,
we recorded a pretax, non-cash charge of $5.1 million in long-lived assets, primarily consisting of a loss that resulted
from the abandonment of development of a new student course registration system.

If we are unable to increase the capacity of our institutions’ technology resources or update their resources
appropriately, their ability to handle future growth, to attract or retain students, and our financial condition
and results of operations could be adversely affected. Similarly, even if we are able to increase the capacity
of our institutions’ resources and update their resources appropriately, our financial condition and results of
operations could be adversely affected by an increased level of spending.

System disruptions to our online computer networks, technology infrastructure, or online classroom
infrastructure, or to the networks, infrastructure and systems of third parties, could negatively impact
our ability to generate revenue and could damage our reputation, limiting our ability to attract and
retain students.

The performance and reliability of our and our institutions’ networks and technology infrastructure, including
those of third parties systems we use, is critical to our institutions’ reputation and ability to attract and retain
students. Any system error or failure, or a sudden and significant increase in bandwidth usage, could interrupt
our or our institutions’ ability to operate and could result in the unavailability of APUS’ online classrooms,
preventing students from accessing their courses and adversely affecting our results of operations. In addition,
our institutions’ technology infrastructure, and the technology infrastructure of our third-party vendors, could
be vulnerable to interruption or malfunction due to events beyond our control, including natural disasters,
cyber-attacks, terrorist activities, and telecommunications failures.

Our systems at APUS, particularly those proprietary information systems and processes that we refer to as
Partnership at a DistanceTM, or PAD, have been predominantly developed in-house, with limited support
from outside vendors. To the extent that we have utilized third-party vendors to provide certain software
products for our systems, we have generally needed to integrate those products into, and ensure that they
function with, PAD. We continuously work on upgrades to PAD, and our employees devote substantial time
to its development and to the successful integration of third-party products into PAD. To the extent that we
face system disruptions or malfunctions with PAD or lose employees with experience on our systems, we
may not have the capacity to address such disruptions or malfunctions or to continue to administer PAD with
our internal resources, and we may not be able to identify outside contractors with expertise relevant to our
custom system.

We also use third party services such as cloud computing and software as a service for certain aspects of
our operations and are reliant on the capabilities of vendors for such functions. We expect to increasingly
rely on cloud computing and software as a service providers for our information technology operations in
the future. Cloud computing and third party service providers may take actions beyond our control that could

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adversely affect our access to the provider’s service, including discontinuing or limiting our access to its
platform or modifying or interpreting its terms of service or other policies in a manner that impacts our ability
to run our business and operations. In addition, any transition of cloud computing and third party services that
we use to another vendor could be difficult to implement and cause us to incur significant time and expense.
Any significant downtime or other interruption or disruption of these services could adversely impact our
operations and our business.

Any significant interruption in the operation of our institutions’ data centers or server rooms or those of our third
party service providers could cause a loss of data. Even with redundancy, a significant interruption in the operation
of these facilities or the loss of institutional and operational data due to a natural disaster, fire, power interruption,
act of terrorism, or other unanticipated catastrophic event may not be preventable. Any significant interruption
in the operation of these facilities, including an interruption caused by the failure to successfully expand or
upgrade systems, or to manage transitions and implementations, could reduce the ability to manage network and
technological infrastructure, which could adversely affect our institutions’ operations and reputations. Additionally,
our institutions do not necessarily control the operation of the facilities hosting our technology infrastructure and
may be required to rely on other parties to provide physical security, facilities management, and communications
infrastructure services. If any third party vendors encounter financial difficulty such as bankruptcy or other events
beyond our control that causes them to fail to adequately secure and maintain their facilities or provide necessary
connectivity or capacity, our institutions and their students may experience interruptions in service or the loss or
theft of important data, which could adversely affect our financial condition.

Data security breaches and cyber-attacks could compromise sensitive information and cause system
disruptions and significant damage to our business and reputation.

In the ordinary course of our business, we maintain on our network systems, and on the networks of our third-
party providers, certain information that is confidential, proprietary, personal (such as student information),
or otherwise sensitive in nature, including financial information and confidential business information. Our
computer networks, and the networks of our third-party vendors, may be vulnerable to unauthorized access or
disruptions by computer hackers, phishing, ransom-ware, computer viruses, denial of service attacks, malicious
social engineering and other security attacks or security problems. A user who circumvents security measures
could misappropriate confidential or proprietary information or personal information about our students
or employees, or could cause interruptions or malfunctions in operations. Our systems and the systems
maintained by our third-party providers, have been in the past, and may be in the future, subject to attempts
to gain unauthorized access, breach or other system disruptions. In some cases, it is difficult to anticipate
or to detect immediately such incidents and the damage caused thereby. If we or third parties with access
to our systems, or to our proprietary information or personal information about our students or employees,
experience security breaches in the future, we may be required to expend significant resources to protect
against the threat of these security breaches or to alleviate problems caused by such breaches, which could
include litigation brought by affected individuals or other parties, the impositions of penalties, disruption to our
operations, and damage to our reputation. Our planned increased use and reliance on cloud computing could
expose us to additional risks. While our contractual arrangements with cloud computing vendors provide for
the protection of information, we cannot control these vendors or their systems and cannot guarantee that a
data security or privacy breach of their systems will not occur in the future.

We use external vendors to perform security assessments on a periodic basis to review and assess our
information security. We utilize this information to audit ourselves to ensure that we are adequately monitoring
the security of our technology infrastructure. However, we cannot ensure that these security assessments
and audits will protect our computer networks against the threat of security breaches. Similarly, although we
require our third-party vendors to maintain a level of security that is acceptable to us and work closely with

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our third-party vendors to address potential and actual security concerns and attacks, we cannot ensure that
we and our systems and proprietary information or personal information about our students or employees
will be protected against the threat of security attacks on our third-party vendors that affect our systems or
such information. System disruptions and security breaches to our online computer networks, technology
infrastructure, or online classroom infrastructure, or to the networks, infrastructures and systems of third
parties could have an adverse effect on our financial condition.

The personal information that we collect may be vulnerable to breach, theft or loss that could adversely
affect our reputation and operations.

Possession and use of personal information in our institutions’ operations subjects us to risks and costs that
could harm our business. Our institutions or, in some cases, certain third-party vendors hired by our institutions,
collect, use, and retain large amounts of personal information regarding our students and their families,
including social security numbers, tax return information and personal and family financial data. Our institutions
also collect and maintain personal information of employees in the ordinary course of our business. Some of
this personal information is held and managed by certain third-party vendors, including our third-party servicers
and information technology vendors. Although our institutions use security and business controls to limit
access and use of personal information, a third party may be able to circumvent those security and business
controls, which could result in a breach of student or employee privacy. In addition, errors in the storage,
use, or transmission of personal information or intentional or unintentional misuse could result in a breach of
student or employee privacy. Possession and use of personal information in our institutions’ operations also
subjects us to legislative and regulatory burdens that could restrict the use of personal information and require
notification of data breaches. We cannot guarantee that a breach, loss, or theft of personal information will not
occur. A violation of any laws or regulations relating to the collection or use of personal information could result
in the imposition of fines or lawsuits against us or our institutions. As a result, we may be required to expend
significant resources to protect against the threat of these security breaches or to alleviate problems caused by
such breaches. Given the evolving nature of security threats and evolving safeguards, we cannot be sure that
our chosen safeguards will protect against security threats to our systems, data, and business. Even security
measures that are appropriate, reasonable, or in accordance with applicable legal requirements may not be able
to protect the information we maintain. A breach, theft, or loss of personal information regarding our institutions’
students and their families or our institutions’ employees or other data that is held by our institutions or third-
party vendors could have a material adverse effect on our institutions’ reputations and results of operations and
result in legal actions by regulators, state attorneys general, and private litigants, any of which actions could
divert management’s attention and have a material adverse effect on our business, financial condition, results
of operations, and cash flows.

We face an ever-increasing number of threats to our computer systems, including unauthorized activity and
access, malicious penetration, system viruses, ransomware, phishing and other malicious code and organized
cyber-attacks, which could breach our security and disrupt our systems. These risks increase when we make
changes to our information technology systems or implement new ones. Our size makes us a prominent
target for hacking and other cyber-attacks within the education industry. From time to time we experience
security events and incidents, and these reflect an increasing level of malicious sophistication, organization,
and innovation. We have devoted and will continue to devote significant resources to the security of our
computer systems, but they may still be vulnerable to these threats and may subsequently be deemed to
have been inadequate by regulators or courts given the lack of prescriptive measures in data security and
cybersecurity laws. A user who circumvents security measures could misappropriate proprietary information or
cause interruptions or malfunctions in operations, perhaps over an extended period of time prior to detection.
As a result, we may be required to expend significant additional resources to protect against the threat of or

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alleviate problems caused by these system disruptions and security breaches. Any of these events could have
a material adverse effect on our business and financial condition. Although we maintain insurance in respect
of these types of events, there is no assurance that available insurance proceeds would be adequate to
compensate us for damages sustained due to these events.

Failure to comply with privacy laws or regulations could have an adverse effect on our business.

Various federal, state, and international laws and regulations govern the collection, use, retention, sharing,
and security of student and consumer data. These laws could be applied in a manner that results in costs, the
imposition of fines and operational conditions on our business. For example, if an institution fails to comply
with FERPA, ED may require corrective actions by the institution or may terminate an institution’s eligibility
to participate in Title IV programs. Failure to comply with the applicable GLBA requirements may result in
FTC enforcement, which could include the imposition of conditions, penalties, monitoring, and oversight.
In addition, this area of the law is evolving, and interpretations of applicable laws and regulations differ. In
addition, in the U.S., Congress and many state legislatures are considering legislation relating to privacy and
security of personal information as are other countries. These evolving laws and interpretations are difficult to
predict and could impact our business. Legislative activity in the privacy area may result in new laws that are
relevant to us and the operations of our institutions, for example, restricting use or sharing of consumer data,
including for marketing or advertising, and may lead to increases in the cost of compliance. For example, the
CCPA became effective January 1, 2020 and contains new disclosure obligations for businesses that collect
personal information about California residents, affords those individuals new rights relating to their personal
information that may affect our ability to use personal information and provides a private right to action for
certain data breaches. In addition, our institutions may be subject to the GDPR, which contains a number of
requirements that may apply when they collect or otherwise handle personal information about individuals
in the EU. These laws’ applicability to us could result in substantial compliance costs or liabilities. The GDPR
came into effect in May 2018, but enforcement priorities and interpretation of certain provisions remain unclear.
Non-compliance with the GDPR could result in a fine for certain activities of up to 20 million Euros or 4% of an
organization’s global annual revenue, whichever is higher, per violation. Claims of failure to comply with our
institutions’ privacy policies or applicable laws or regulations could form the basis of governmental or private-
party actions against us. Such claims and actions may cause damage to our institutions’ reputation and could
have an adverse effect on our financial condition. The enactment of laws similar to the GDPR or CCPA, or any
future changes in such laws or additional restrictions, could result in significant costs and require us to change
some of our business practices.

Government regulations relating to the internet could increase our cost of doing business and affect our
ability to grow.

Government regulations relating to the internet could increase our cost of doing business and affect our ability
to grow. The increasing reliance on and use of the internet and other online services has led and may continue
to lead to the adoption of new laws and regulatory practices in the United States or foreign countries and to
new interpretations of existing laws and regulations. These new laws and interpretations may relate to issues
such as online privacy, cybersecurity, internet neutrality, copyrights, trademarks and service marks, sales
taxes, fair business practices, and the requirement that online education institutions qualify to do business as
foreign corporations or be licensed in one or more jurisdictions where they have no physical location. New
laws, regulations or interpretations related to doing business over the internet could increase our costs of
compliance or doing business and materially affect our institutions’ ability to offer online courses, which would
have a material effect on our business and financial condition.

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RISKS RELATED TO OWNING OUR COMMON STOCK

The price of our common stock may be volatile, and as a result returns on an investment in our common
stock may be volatile.

Our stock has had relatively limited public float, and trading in our common stock has also been limited and, at
times, volatile. An active trading market for our common stock may not be sustained, and the trading price of
our common stock may fluctuate substantially.

The price of our common stock may fluctuate as a result of some or all of the following:

• price and volume fluctuations in the overall stock market from time to time;

• significant volatility in the market price and trading volume of comparable companies;

• actual or anticipated changes in our earnings, our institutions’ net course registrations or enrollments, or

fluctuations in our operating results or in the expectations of securities analysts;

• the actual, anticipated or perceived impact of changes in the political environment, government policies,

laws and regulations, or similar changes made by accrediting bodies;

• the depth and liquidity of the market for our common stock;

• general economic conditions and trends;

• catastrophic events;

• purchases or sales of large blocks of our stock;

• recruitment or departure of key personnel; or

• actions of others in our industry.

In the past, following periods of volatility in the market price of a company’s securities, securities class action
litigation has often been brought against that company. Because of the potential volatility of our stock price, we
may become the target of securities litigation in the future. Securities litigation could result in substantial costs
and monetary damages and could divert management’s attention and resources from our business.

Seasonal and other fluctuations in our results of operations could adversely affect the trading price of our
common stock.

Our quarterly results fluctuate and, therefore, the results in any quarter may not represent the results we may
achieve in any subsequent quarter or full year. Our revenue and operating results normally fluctuate as a result of
seasonal or other variations in our institutions’ enrollments and associated expenses. The student population at
our institutions varies as a result of new enrollments, graduations, student attrition, increased military operations
and deployments, the success of our marketing programs, and other reasons that we cannot always anticipate.
We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns at
our institutions and related fluctuations in expenses. These fluctuations may result in volatility in our results of
operations, have an adverse effect on the market price of our common stock, or both.

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If securities or industry analysts do not continue to publish research or reports about our business, or
if they issue an adverse or misleading opinion regarding our stock, our stock price or trading volume
could decline.

The trading market for our common stock is influenced by the research and reports that industry or securities
analysts publish about us or our business. We previously were covered by more analysts, but we currently
only have limited research coverage by analysts, which makes it more difficult to attract interest from investors.
Furthermore, if any of the analysts who cover us issue an adverse or misleading opinion regarding us, our
business, or our stock performance, or if our performance does not meet the expectations of analysts, our
stock price would likely decline. If one or more of the analysts covering us cease coverage of us or fail to
publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our
stock price or trading volume to decline.

Provisions in our organizational documents and in the Delaware General Corporation Law may prevent
takeover attempts that could be beneficial to our stockholders.

Provisions in our charter and bylaws and in the Delaware General Corporation Law may make it difficult
and expensive for a third party to pursue a takeover attempt we oppose even if a change of control of our
Company would be beneficial to the interests of our stockholders. These provisions include:

• the ability of our Board of Directors to issue up to 10,000,000 shares of preferred stock in one or more series and
to fix the powers, preferences, and rights of each series without stockholder approval, which may discourage
unsolicited acquisition proposals or make it more difficult for a third party to gain control of our Company;

• a requirement that stockholders provide advance notice of their intention to nominate a director or to

propose any other business at an annual meeting of stockholders;

• a prohibition against stockholder action by means of written consent unless otherwise approved by our

Board of Directors in advance; and

• Section 203 of the Delaware General Corporation Law, which generally prohibits us from engaging in

mergers and other business combinations with stockholders that beneficially own 15% or more of our voting
stock, or with their affiliates, unless our directors or stockholders approve the business combination in the
prescribed manner.

ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

ITEM 2. PROPERTIES
American Public Education, Inc., or APEI, and American Public University System, Inc., or APUS, together operate
administrative facilities in Charles Town, West Virginia, Manassas, Virginia, and Baltimore, Maryland, which
are within an approximate one-hour drive of one another and are located within the Baltimore-Washington
metropolitan area. The corporate headquarters and administrative offices are located in Charles Town and
consist of 11 owned facilities totaling approximately 233,000 square feet. Also in Charles Town, APUS owns two
and a half acres of land earmarked for future development. APUS’s student services, graduation, and marketing
operations are located in 25,000 square feet of leased space in Manassas under a lease that expires in 2023.
APEI’s administrative offices also include approximately 3,000 square feet of leased space in Baltimore, Maryland
under a lease that expires in 2022.

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In 2019, Hondros College of Nursing, or HCN, had five Ohio campuses which are located in the suburban areas
of Cincinnati (West Chester), Cleveland (Independence), Columbus (Westerville), Dayton (Fairborn) and Toledo
(Maumee), and an administrative office located in suburban Columbus. In May 2019, HCN entered into a lease
agreement for a new campus location in Indianapolis, Indiana opening in the second quarter of 2020. These
campuses and administrative office include a total of ten leased facilities with approximately 142,300 square
feet combined. The facilities are primarily used for instructional activities. HCN’s corporate offices are located
at an administrative facility near the Westerville campus with additional offices at the Westerville campus.
Lease terms and extension options vary by facility, with expiration dates ranging from 2023 to 2029.

We believe our existing facilities are in good operating condition and are adequate and suitable for the
conduct of our business.

ITEM 3. LEGAL PROCEEDINGS
From time to time, we have been and may be involved in various legal proceedings. We currently have no
material legal proceedings pending.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED

STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES

MARKET INFORMATION
Our common stock trades on the NASDAQ Global Select Market under the symbol “APEI.”

HOLDERS
As of March 6, 2020, there were approximately 463 holders of record of our common stock.

DIVIDENDS
We have not historically paid dividends on our common stock and do not anticipate declaring or paying any
cash dividends on our common stock in the foreseeable future. The payment of any dividends in the future
will be at the discretion of our Board of Directors and will depend upon our financial condition, results of
operations, earnings, capital requirements, contractual restrictions, outstanding indebtedness, and other
factors deemed relevant by our Board.

PERFORMANCE GRAPH
The graph below matches the cumulative five-year total return of holders of American Public Education, Inc.’s
common stock with the cumulative total returns of the S&P 500 index, the NASDAQ Composite index and a
customized peer group of five companies that includes: Adtalem Global Education Inc, Grand Canyon Education
Inc, Perdoceo Education Corp (formerly known as Career Education Corporation), Strategic Education Inc and
Zovio, Inc. (formally known as Bridgepoint Education, Inc.). National American University Holdings, Inc., which
was included in the performance graph in our annual report for the year ended December 31, 2018, has been
removed from the performance graph in this Annual Report as a result of its delisting from Nasdaq. The graph
assumes that the value of the investment in our common stock, in each index, and in the peer group (including
reinvestment of dividends) was $100 on December 31, 2014 and tracks the value of those investments,
respectively, through December 31, 2019.

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Comparison of 5-Year Cumulative Total Return*
Among American Public Education, Inc., the S&P 500 Index, the NASDAQ Composite Index and a Peer Group

$250

$200

$150

$100

$50

12/14

12/15

12/16

12/17

12/18

12/19

American Public Education, Inc.

S&P 500

NASDAQ Composite

Peer Group

*$100 invested on 12/31/14 in stock or index, including reinvestment of dividends.

Fiscal year ending December 31.

December 31,
2014

December 31,
2015

December 31,
2016

December 31,
2017

December 31,
2018

December 31,
2019

APEI

S&P 500

NASDAQ Composite

Peer Group

100.00

50.47

101.38

106.96

67.92

66.59

113.51

116.45

97.22

67.94

138.29

150.96

130.41

77.19

132.23

146.67

142.72

74.29

173.86

200.49

151.19

The stock price performance included in the graph and table above is not necessarily indicative of future stock price performance.

RECENT SALES OF UNREGISTERED SECURITIES
None.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
On May 2, 2019, our Board of Directors authorized the repurchase of up to $35.0 million of our common stock,
and on December 5, 2019, our Board approved an additional authorization to repurchase up to $25.0 million
of shares. Subject to market conditions, applicable legal requirements, and other factors, the repurchases may
be made from time to time in the open market or in privately negotiated transactions. The authorization does
not obligate us to acquire any shares, and purchases may be commenced or suspended at any time based on
market conditions and other factors as we deem appropriate.

As of December 31, 2019, approximately $22.0 million remained in the current purchase authorization.

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The following table presents our share repurchases during the quarter ended December 31, 2019. For additional
information regarding our share repurchases please refer to “Financial Statements and Supplementary Data—
Notes to Consolidated Financial Statements—Note 10. Stockholders’ Equity—Repurchase.”

Period

Total Number of
Shares Purchased

Average Price
Paid per Share

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs

Maximum
Number of Shares
that May Yet
Be Purchased
Under the Plans
or Programs(1)

Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
or Programs(2)(3)

October 1, 2019–October 31, 2019

November 1, 2019–November 30, 2019

December 1, 2019–December 31, 2019
Total

229,849

110,374

110,000
450,223

0.02

0.03
$23.75

229,849

110,374

110,000
450,223

352

352
352

2,562,453

673

22,004,700
$22,004,700

(1) On December 9, 2011, our Board of Directors approved a stock repurchase program for our common stock, under which we could

annually purchase up to the cumulative number of shares issued or deemed issued in that year under our equity incentive and stock

purchase plans. Repurchases may be made from time to time in the open market at prevailing market prices or in privately negotiated

transactions based on business and market conditions. The stock repurchase program does not obligate us to repurchase any

shares, may be suspended or discontinued at any time, and is funded using our available cash.

(2) On May 2, 2019, our Board of Directors authorized the repurchase of up to $35.0 million of our common stock, and on December 5,

2019, our Board approved an additional authorization of up to $25.0 million of shares. We may purchase shares at management’s

discretion in the open market, in privately negotiated transactions, in transactions structured through investment banking institutions,

or a combination of the foregoing. We may also, from time to time, enter into Rule 10b5-1 plans to facilitate repurchases of shares under

this authorization. The amount and timing of repurchases are subject to a variety of factors, including liquidity, cash flow, stock price

and general business and market conditions. We have no obligation to repurchase shares and may modify, suspend or discontinue the

repurchase program at any time. The authorization under this program is in addition to our repurchase program under which we may

annually purchase up to the cumulative number of shares issued or deemed issued in that year under our equity incentive and stock

purchase plan.

(3) During the three month period ended December 31, 2019, no shares of common stock were deemed to have been repurchased for

common stock forfeited by employees to satisfy minimum tax-withholding requirements in connection with the vesting of restricted

stock grants.

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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated financial and operating data as of the dates and for
the periods indicated. You should read this data together with “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and our Consolidated Financial Statements and related
notes, included elsewhere in this Annual Report. The selected consolidated statement of operations data for
each of the years in the three-year period ended December 31, 2019, and the selected Consolidated Balance
Sheet data as of December 31, 2018 and 2019 have been derived from our audited Consolidated Financial
Statements, which are included elsewhere in this Annual Report. The selected consolidated statements of
operations data for the years ended December 31, 2015 and 2016, and selected Consolidated Balance Sheet
data as of December 31, 2015, 2016, and 2017, have been derived from our audited Consolidated Financial
Statements not included in this Annual Report. Historical results are not necessarily indicative of the results of
operations that should be expected in future periods.

(In thousands, except per share and registration data)

2015

2016

2017

2018

2019

Year Ended December 31,

Statement of Operations Data:
Revenue(1)
Costs and expenses:

Instructional costs and services

Selling and promotional

General and administrative

Loss on disposals of long-lived assets

Impairment of goodwill

Depreciation and amortization

Total costs and expenses

Income from operations before interest income and income taxes

Interest income, net

Income from operations before income taxes

Income tax expense

Equity investment income (loss)

Net income

Net income per common share:

Basic

Diluted

Weighted average number of common shares outstanding:

Basic

Diluted
Other Data:

Net cash provided by operating activities

Capital expenditures

Stock-based compensation
APUS net course registrations(2)
HCN student enrollment(3)

$327,910

$313,139

$299,248

$297,687

$286,270

118,848

117,013

116,161

115,280

111,916

62,397

73,047

817

—

20,520

275,629

52,281

115

52,396

20,072

59,095

68,666

5,970

4,735

19,384

274,863

38,276

116

38,392

14,940

703

58,335

69,024

2,093

—

18,776

264,389

34,859

185

35,044

11,493

(2,430)

57,042

74,456

882

—

17,501

265,161

32,526

2,915

35,441

9,287

60,028

78,082

556

7,336

15,596

273,514

12,756

3,908

16,664

5,187

(515)

(1,464)

$ 32,414

$ 24,155

$ 21,121

$ 25,639

$ 10,013

$ 1.94

$ 1.93

$ 1.50

$ 1.49

$ 1.30

$ 1.29

$ 1.56

$ 1.54

$ 0.62

16,676

16,798

16,068

16,214

16,236

16,380

16,404

16,634

16,094

16,255

$ 57,012

$ 27,267

$ 5,912

375,100

1,968

$ 56,014

$ 16,399

$ 5,211

345,400

1,709

$ 47,938

$ 14,788

$ 6,246

325,000

2,107

$ 44,179

$ 9,430

$ 7,180

320,300

2,107

$ 38,370

$ 7,255

$ 5,960

316,700

1,595

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(In thousands)

2015

2016

2017

2018

2019

As of December 31,

Consolidated Balance Sheet Data:

Cash, cash equivalents, and restricted cash
Working capital(4)
Total assets

Stockholders’ equity

(In thousands)

Net income

Interest income, net

Income tax expense

Equity investment (income)/loss

Depreciation and amortization
EBITDA from operations(5)

$105,734

$ 73,598

$292,713

$237,153

2015

$32,414

(115)

20,072

(90)

20,520

$72,801

$146,351

$116,452

$315,620

$264,670

2016

$24,155

(116)

14,940

(703)

19,384

$57,660

$179,205

$147,782

$339,038

$289,406

Year Ended December 31,

2017

$21,121

(185)

11,493

2,430

18,776

$53,635

$212,131

$188,242

$370,958

$321,266

2018

$25,639

(2,915)

9,287

515

17,501

$50,027

$202,740

$177,631

$354,897

$296,733

2019

$10,013

(3,908)

5,187

1,464

15,596

$28,352

(1) Effective January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers. The Company elected to adopt

the accounting change using a modified retrospective approach. The impact of adoption on the Company’s Consolidated Statement

of Income for the years ended December 31, 2018 and 2019 was not material. For additional details refer to “Note 3. Revenue” below

in our Consolidated Financial Statements.

(2) APUS net course registrations represent the aggregate number of courses for which students remain enrolled after the date by which

they may drop a course without financial penalty.

(3) HCN student enrollment represents the total number of students enrolled in a course after the date by which students may drop a

course without financial penalty for the ending quarter in the annual period.

(4) Working capital is calculated by subtracting total current liabilities from total current assets.

(5) Earnings before interest, taxes, and depreciation and amortization, or EBITDA, consists of net income, less interest (income)

net, plus income tax expense, less equity investment (income)/loss, plus depreciation expense. The company uses EBITDA as a

supplementary measurement of operating performance. EBITDA is not a recognized measurement under U.S. generally accepted

accounting principles and may not be comparable to other companies. EBITDA has additional limitations as it is not intended to

measure free cash flow or certain cash payments including taxes.

We believe EBITDA may be useful to investors evaluating our operating performance because it is widely
used to measure a company’s operating performance without regard to certain non-cash expenses, including
depreciation expense and expenses that are not reflective of our core operating results over time. We believe
EBITDA, when combined with other measures of financial performance, may present a view of corporate
performance exclusive of a company’s capital structure and provides management useful information to
measure our performance.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with the consolidated financial statements and the related
notes included elsewhere in this Annual Report. This discussion contains forward-looking statements that are
based on management’s current expectations, estimates, and projections about our business and operations,
and involves risks and uncertainties. Our actual results may differ materially from those currently anticipated
and expressed in such forward-looking statements as a result of a number of factors, including those we
discuss under “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” and elsewhere in this
Annual Report.

OVERVIEW
American Public Education, Inc., or APEI, is a provider of online and on-campus postsecondary education to
approximately 82,600 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 ED. We provide on-campus nursing to students in Ohio, and,
beginning in the second quarter of 2020, Indiana, through National Education Seminars, Inc., which we refer to
as Hondros College of Nursing, or HCN. HCN is institutionally accredited by the Accrediting Bureau of Health
Education Schools, or ABHES. Additional information regarding our subsidiary institutions and their regulation
is included in the “Business—Company Overview” and “Business—Regulatory Environment” sections of this
Annual Report.

Our revenue is largely driven by the number of students enrolled at our institutions, the number of and
types of courses that they take, student payor source, and the mix of programs that students are attending.
Our consolidated revenue in 2019 was $286.3 million, representing an $11.4 million, or 3.8%, decrease from
$297.7 million in 2018. Our consolidated revenue in 2018 was $297.7 million, representing a $1.5 million, or
0.5%, decrease from $299.2 million in 2017. The 2019 revenue decrease was primarily due to a decrease in net
course registrations at APUS and a decline in student enrollment at HCN during that period. The 2018 revenue
decrease was due to a decrease in net course registrations at APUS partially offset by an increase in student
enrollment at HCN.

Our operations are organized into two reporting segments:

• American Public Education Segment, or APEI Segment. This segment reflects the operational activities of

APUS, other corporate activities, and minority investments.

• Hondros College of Nursing Segment, or HCN Segment. This segment reflects the operational activities

of HCN.

Financial information regarding each of our reportable segments is reported in this Annual Report in the
sections “Financial Statements and Supplementary Data,” “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Operating Results by Reportable Segment Year Ended
December 31, 2019 Compared to Year Ended December 31, 2018,” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Year Ended December 31, 2018 Compared to
Year Ended December 31, 2017.”

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Student Body. As of December 31, 2019, approximately 57% of APUS’s students self-reported that they served
in the military on active duty at the time of initial enrollment, and as a result APUS is particularly reliant on the
Department of Defense, or DoD’s, tuition assistance programs and DoD’s budget. At APUS, active duty military
students generally take fewer courses per year on average than non-military students. A significant portion of
APUS’s enrollments are also attributable to students using funds from ED’s Title IV financial aid programs, or
Title IV programs, and Veteran’s Affairs education benefits. HCN students generally attend classes at physical
campuses 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 in 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, and reallocate other resources. Initiatives to
attract and retain qualified students and control the growth of expenditures require significant time, energy,
and resources, and if our efforts are not successful, our results of operations, cash flows, and financial
condition may be adversely impacted. For more information about the risks related to these challenges please
see “Risk Factors—Risks Related to Attracting and Retaining Students.”

Increased Costs and Expenses; Our Initiatives. Our costs and expenses have increased over time due in part
to increased marketing expenditures, the addition of the HCN Toledo campus in January 2017, the addition
of a new HCN campus located in Indianapolis, Indiana expected to open in the second quarter of 2020, as
well as the changing needs of our students including costs for technology required to support students at
APUS. In addition, we incurred expenses in 2019 to evaluate and invest in replacements and upgrades to our
information technology systems, including one-time expenses to upgrade our learning management system,
and to inform the scope and duration of our larger overall information technology transformation program in
our APEI Segment. Lastly, we recorded pretax, non-cash impairment charges related to a goodwill impairment
in our HCN Segment and employee compensation costs for post-employment benefits that will be payable
to the APUS President upon retirement. For more information about HCN’s goodwill impairment please see
“Note 6 Goodwill and Intangible Assets” in our Consolidated Financial Statements.

Our revenue may continue to decline and our costs and expenses may increase as our institutions adjust to
changes in their student composition, undertake initiatives to improve the learning experience, and attract
students who are more likely to persist in their programs. Additional initiatives that we implement that may
increase costs and expenses or adversely affect our revenues may include the following:

• further changes to admissions standards and requirements;

• updates to the admissions process and procedures;

• implementing more stringent satisfactory academic progress standards;

• changing tuition costs and payment options;

• changing fund disbursement methods;

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• implementing alternative learning delivery methods;

• altering our institutions’ marketing programs to target the appropriate prospective students; and

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

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, we expect selling and promotional expenses as a percentage of revenue to
increase in 2020 as compared to 2019.

Information technology systems are an essential part of the APUS student experience and our business
operations. As part of our implementation of the shared services model discussed in “Reporting Segments”
above, we began providing information technology services to APUS and HCN through APEI. Previously, APUS
had managed its own information technology infrastructure and services and provided information technology
services to HCN through an intercompany arrangement. We believe we will need to continue, and potentially
increase, our investment of capital, time and resources, in technology operations and enhancements to support
our systems and mission, and evaluate when it is appropriate to make significant changes, modifications or
upgrades. We believe we will need to continue to make investments in information technology in response to
competitive pressures in the marketplace, including increased demands for interactive solutions and access
from multiple platforms, and to update older systems and to enhance functionality. We also expect operating
and capital expenditures to increase in future periods as we accelerate the investment in and refreshment of
our information technology systems.

Changes and upgrades to our information technology systems may result in us incurring significant costs,
including in the short term, and carry risk to our operations and financial results. We anticipate spending
between $6.0 million and $8.0 million in 2020, focusing on specific information technology projects, including
replacements of our Learning Management and Customer Relationship Management systems. 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. For example, in 2019 we incurred approximately $2.1 million
to evaluate and invest in replacements and upgrades to our information technology systems, including one-
time expenses to upgrade our learning management system and to inform the scope and duration of our larger
overall information technology transformation program. 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. For example, for
the year ended December 31, 2016, APUS disposed of approximately $5.1 million in long-lived assets,
primarily consisting of a loss that resulted from the abandonment of development of a new student course
registration system because it was no longer probable that development would be completed and the
software placed in service.

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. As
required by HLC policy, HLC conducted a focused site visit in May 2019. The site visit team found that evidence
of compliance with APUS’s commitments made in its application and with HLC’s Eligibility Requirements and

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Criteria for Accreditation was sufficiently demonstrated and no further follow up was recommended. In August
2019, HLC notified APUS that the Institutional Actions Council of the HLC, which conducts reviews and takes
action on accreditation recommendations, concurred with the site visit team’s findings. As with any operational
change, the implementation of the shared services model could lead to strategic and operational challenges,
distractions of management from other key initiatives, inefficiencies or increased costs, any of which could
adversely affect our business, financial condition, results of operations, and cash flows.

HCN Accreditation. HCN is institutionally accredited by ABHES, a national accrediting agency recognized
by ED. For the reporting year ended June 30, 2018, several HCN programs did not satisfy ABHES’s threshold
requirements for retention rates or placement rates and, for the reporting year ended June 30, 2019, each
of HCN’s programs at each of HCN’s campuses satisfied ABHES’s placement rate requirements but failed
to satisfy ABHES’s threshold requirements for retention rates. As described more fully in “Regulatory
Environment—Accreditation,” ABHES has notified HCN that it has taken actions with respect to certain
HCN programs at certain campuses related to those programs’ performance in relation to ABHES student
achievement indicators and has directed HCN in a number of those cases to demonstrate by a certain date that
those programs meet the applicable threshold requirements. There can be no assurance that HCN will be able
to demonstrate compliance by the relevant deadlines in all cases. If HCN is unable to bring the programs into
compliance during the 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. In addition,
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.”

ABHES also informed HCN in February 2020 that based on review of the visit report from its recently
completed unannounced visit to the Columbus campus, the response to the report, and ABHES program
approval information, it had acted to affirm the institution’s accreditation, which continues through February
28, 2021. The next comprehensive evaluation for renewal of ABHES accreditation, which will include HCN’s
submission of evidence related to its compliance with ABHES standards and a series of site visits, is scheduled
for April 2020. Renewal of accreditation is not guaranteed, and any failure to be renewed would have a
material adverse impact on HCN’s ability to enroll students.

Staffing Realignment and Management Transition. APUS implemented new general education requirements
during the first quarter of 2018. These new requirements changed the courses that are required of all students.
APUS incurred approximately $400,000 in costs related to the implementation of the new general education
requirements in the first quarter of 2018 related to faculty realignment. We cannot predict what additional
effects, if any, these new requirements will have on the total number of registrations, student persistence, or
our financial condition or results of operations.

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 in 2018 and
approximately $2.7 million in 2019. 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,

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will have the intended benefits of reducing costs and expenses over the long-term, or whether there will be
adverse impacts because of the loss of valuable employees.

In August 2019, after an extensive search, Angela Selden was appointed Chief Executive Officer of APEI,
effective September 23, 2019. APEI’s former Chief Executive Officer, Dr. Wallace E. Boston, will continue to
serve as President of APUS until his expected retirement in June 2020. In 2019 we recorded approximately
$2.8 million in employee compensation costs for post-employment benefits that will be payable to Dr. Boston
upon 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 April 2017, APUS continued to strengthen
its verification process by implementing new procedures for prospective non-military students, an effort
that originated in April 2015 with the implementation of a requirement for prospective students to complete
a free, noncredit admissions assessment. APUS has made multiple changes to the assessment process
since its original implementation and may further modify it in the future in order to better identify college-
ready students. For example, in July 2017, APUS implemented a process requiring enhanced certification
of prospective non-military students’ prior transcripts. 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.

HCN has made multiple changes to the 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 and have had a negative impact on our results of operations.
While we work on identifying an appropriate balance of admissions requirements, academic achievement
requirements and attracting appropriate students, there may continue to be a negative impact on enrollments
at HCN. 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 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, which is the type
of factor that can occur more easily at a land-based institution than an online institution. While we continue to

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work on implementing and enhancing our academic and achievement and admission requirements, identifying
and remediating the factors impacting our enrollments at HCN, 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 be able to reverse the revenue decline
in our HCN Segment or return to prior level of 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. Following a July 2015 tuition
increase, to support APUS’s active duty military and certain military-affiliated students, APUS implemented
a tuition grant that kept the cost of tuition for these students at its previous level. As a result, undergraduate
course tuition continued to be $250 per credit hour, and graduate course tuition continued to be $325 per
credit hour for U.S. Military active duty service members, National Guard members, reservists, military
spouses and dependents, and veterans.

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 is APUS’s first increase since the July 2015 tuition increase described above.

In support of APUS’s active duty military students using TA, APUS has increased the 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 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 who are
eligible for TA benefits and their spouses and dependents will pay a net tuition of $250 per credit hour. APUS
also extended its 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 also announced that the existing tuition grant for veterans will expire 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 estimates that the tuition grant applied to approximately 77%, and 78% of its total net course
registrations in 2018 and 2019, respectively, and will apply to approximately 60% of its total net course
registrations made on or after January 1, 2020.

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 APUS’s undergraduate book grant that
is provided to all undergraduate students, and beginning January 2020, to active duty graduate students and

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their spouses and dependents, results in significant savings for students. APUS has provided approximately
$140 million in book grant savings to undergraduate students since 2001, and will provide approximately
$0.4 million to $0.6 million in book grant savings to graduate students in 2020.

APUS has two applied doctoral programs, Strategic Intelligence and Global Security, that began instruction in
January 2018. 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 a book grant for course materials. In connection with our doctoral programs, we incurred approximately
$0.7 million and $0.3 million in capital expenditures in 2018 and 2019, 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.

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. HCN expects to award approximately $250,000 of institutional grants during 2020.

In November 2019, HCN entered into a memorandum of understanding, or MOU, to participate in the DoD
tuition assistance program 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 2019 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 HCN’s implementation of extended
payment plan options in 2018.

We also experienced increases in our bad debt expense over several years prior to 2015, particularly at
APUS. We believe those increases were primarily driven by an increase in the number of students using
Title IV program funds, operational policies, processing challenges, and challenges collecting funds primarily
related to students who did not complete courses. In September 2015, APUS changed the method by which it
disburses Title IV program funds in an effort to lower bad debt expense and to reduce the attractiveness of our
programs to students who are seeking to abuse the Title IV programs. While we have experienced decreases
in bad debt expense at APUS during each of the last several years, there is no assurance that these changes
caused the reductions.

Impact of Government Budgetary Pressures. Congressional inaction on budgetary matters has led to
lapses in funding, resulting government shutdowns, and subsequent policy changes that have affected tuition
assistance programs at DoD. For example, funding for the federal government, including the DoD, lapsed on
each of January 20, 2018 and February 9, 2018, resulting in partial shutdowns that lasted for a few days and
several hours, respectively. Funding for some portions of the federal government, not including the DoD,
lapsed on December 22, 2018, resulting in a partial government shutdown that lasted for 35 days. The Coast
Guard suspended its tuition assistance program during this partial government shutdown and the Marine
Corps began to require Marines to have 24 months on active duty prior to being eligible to apply for tuition

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assistance. A future government shutdown, particularly one that includes DoD or suspension or resulting
modification of DoD tuition assistance programs, 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 will be capped at twelve semester hours per fiscal year, and career funding
will be capped at 120 semester hours. Navy-related registrations were 10.3%, and 7.2% of total registrations for
the three months ended September 30, 2018 and 2019, respectively. 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. While the details and impact of this
particular strategy are still uncertain, 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 our institutions. Changes in funding allocations could have a material
adverse effect on APUS’s enrollments.

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 an open program review
with respect to which APUS has not yet received a program review report. 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 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 to its affiliates 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 2018 and 2019 approximately 1.1%, and 0.8%, respectively,
of our consolidated revenue was associated with students that enrolled with APUS in connection with its
partnership with Walmart.

Regulated Industry. Our institutions operate in a highly regulated industry. For more information on the
regulations to which our institutions are subject, please refer to the “Business—Company Overview” and
“Business—Regulatory Environment” section of this Annual Report. Such regulations may impact our financial
results in a way that we cannot predict, and may have an adverse impact on our financial condition.

Our Key Financial Results Metrics

Revenue

When reviewing our revenue we evaluate the following components: net course registrations and enrollment,
tuition rate, net tuition and other fees.

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Net course registrations and enrollment. For financial reporting and analysis purposes, APUS measures its
student population in terms of aggregate course enrollments, or net course registrations. Course enrollments,
or net course registrations, which include one-credit lab courses combined with their related three-credit
courses, represent the aggregate number of courses in which students remain enrolled after the date by which
they may drop the course without financial penalty. HCN measures its student population in terms of student
enrollments. Student enrollment represents the number of students enrolled in one or more courses after the
date by which they may drop the 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, revenue in a quarter reflects a portion of the revenue from courses that began
in a prior quarter and continued into the quarter, all revenue from courses that began and ended in the quarter,
and a portion of the revenue from courses that began but did not end in the quarter.

The average number of courses per term at APUS varies by payor type. For example, ED’s Title IV programs
require participating students to take more courses per term than students participating in DoD tuition
assistance programs. As a result, should the number of APUS’s students who utilize ED’s Title IV programs
decrease (or the number of students using DoD tuition assistance programs increase), we anticipate that it may
cause the average number of courses per student per term to decrease.

You should not rely on the results of any prior periods as an indication of future net course registrations at
APUS, student enrollments at HCN, or consolidated revenue. The composition of our students, changing
market demands and competition, make forecasting very difficult, and we are unable to determine if we will
return to growth or what level of growth we will achieve, if any. Similarly, you should not rely on our operating
margins in any prior periods as an indication of our future operating margins.

Tuition rate. Providing affordable certificate and degree programs is an important element of our competitive
strategy. We estimate that APUS’s tuition is lower than the average in-state rates at public universities. In
October 2019, APUS announced increases in tuition and technology fee for undergraduate and master’s
course registrations made on or after January 1, 2020, as discussed in “Overview” above. The January 2020
tuition increase is APUS’s first increase since July 2015 and is intended to help support increased investments
in academic learning and student operations. Prior to the 2015 increase, APUS had not raised undergraduate
tuition for 15 years or graduate tuition in four years. HCN’s tuition and fees are also designed to be affordable
and competitive when compared to the costs of similar institutions offering the same level of flexibility,
accessibility, and student experience.

Net tuition. Tuition revenue varies from period to period based on the aggregate number of students
attending courses and the number of courses they are attending during the period, the student payor source,
the mix of programs that students are attending during the period, as well as the number of students starting
courses each month during the period and the timing of the start of a course each month or term. Tuition
revenue is adjusted to reflect amounts for students who withdraw from a course in the month or term the
withdrawal occurs. We also provide tuition grants and scholarships to certain students to assist them financially
with their educational goals. The cost of these grants and scholarships is reported as a reduction of tuition
revenue in the period incurred for purposes of establishing net tuition revenue.

Other fees. In addition to tuition, APUS charges a per course technology fee. Prior to January 2020, the
technology fee per course was $50, and for registrations made on or after January 2020 the technology
fee per course was increased to $65. APUS may further alter this fee in the future. APUS students are also

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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 DoD
tuition assistance programs and other programs, as applicable. In 2018, and 2019, technology fee revenue
net of technology fee grants was approximately $7.2 million, or 2.4% of revenue, and $7.0 million, or 2.4%
of consolidated revenue, respectively. Until early 2019, APUS received purchase commissions for graduate
student book purchases and ancillary supply purchases that students make directly from our preferred book
vendor. HCN students are charged fees for various items such as application, testing, books and supplies, lab,
technology and graduation.

Costs and Expenses

We categorize our costs and expenses in the following categories: instructional costs and services expenses;
selling and promotional expenses; general and administrative expenses; loss on disposals of long-lived assets;
impairment of goodwill; and depreciation and amortization.

Instructional costs and services expenses. Instructional costs and services expenses are directly attributable
to the educational services our institutions provide to their students. Instructional costs and services expenses
include salaries and benefits for full-time faculty, administrators, and academic advisors, and costs associated
with part-time faculty. Instructional costs and services expenses also include costs associated with curriculum
development, academic records and graduation, as well as other services provided by our institutions, such
as evaluating transcripts. Instructional costs and services expenses are generally affected by the cost of
academic resources, the efficiency of delivering academic products and services to our students, salaries and
benefits for our faculty and other academic and administration personnel, and the level of expenditures for
initiatives for new and existing academic programs.

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

Selling and promotional expenses. Selling and promotional expenses includes salaries and benefits of
personnel engaged in student enrollment, advertising costs, and marketing material production costs. Our
selling and promotional expenses are generally affected by the cost of advertising media, the efficiency of our
selling efforts, salaries and benefits for our selling and admissions personnel, and the level of expenditures for
advertising initiatives for new and existing academic programs. We believe the availability of Title IV program
funds to students has increased our marketability in non-military markets, but the nature of these markets,
including the impact of competition, and the rising cost of internet search and other advertising media has
caused our student acquisition costs to increase. This trend may continue and our student acquisition costs
may increase.

General and administrative expenses. General and administrative expenses includes salaries and benefits
of employees engaged in corporate management, finance, financial aid processing, information technology,
human resources, facilities, compliance and other corporate functions, the cost of renting and maintaining
APUS’s administrative facilities, technology expenses, and costs for professional services. General and
administrative expenses also includes bad debt expense. General and administrative expenses are generally
affected by the costs of salaries and benefits for our general and administrative personnel, the efficiency of
delivering back-office support including technology services, and the level of expenditures for supporting
company initiatives.

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Loss on disposals of long-lived assets. Loss on disposals of long-lived assets is the difference between the
long-lived assets’ residual value and their book value at the time of the assets’ disposition or abandonment.

Impairment of goodwill. Impairment of goodwill recognizes the difference between the carrying value of
goodwill and the fair value of goodwill.

Depreciation and amortization. We incur depreciation and amortization expenses for costs related to the
capitalization of property, equipment, software, and program development on a straight-line basis over the
estimated useful lives of the assets. In addition, we incur amortization expense for the amortization of identified
intangible assets with a definite life resulting from our acquisition of HCN.

Interest Income, Net

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

Equity Investment Income/Loss

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

Critical Accounting Policies and Use of Estimates
The discussion of our financial condition and results of operations is based upon our Consolidated Financial
Statements, which have been prepared in accordance with accounting principles generally accepted in
the United States, or GAAP. During the preparation of these financial statements, we are required to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses,
and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions, including those
related to revenue recognition and goodwill and indefinite-lived intangible assets. We base our estimates
on historical experience and on various other assumptions that we believe are reasonable under the
circumstances. The results of our analysis form the basis for making assumptions about the carrying values
of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions, and the impact of such differences may be material to our
Consolidated Financial Statements.

The following discussion of accounting policies is intended to supplement the accounting policies presented in
“Note 2. Significant Accounting Policies” included in our Consolidated Financial Statements.

Revenue Recognition. Our revenue is primarily derived from the sale of instructional services and various
fees. Instructional services revenue includes tuition, technology, and laboratory fees. We generally recognize
revenue ratably as instructional services are provided over the period or term, which is, for APUS, either an
eight- or sixteen-week period, and for HCN, a quarterly term. Revenue is recognized when evidence of a
contract exists, delivery has occurred or as instructional 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 3. Revenue” included in our Consolidated Financial Statements.

Goodwill and indefinite-lived intangible assets. Goodwill represents the excess of the purchase price of an
acquired business over the amount assigned to the assets acquired and liabilities assumed. Goodwill is not
amortized. In connection with the November 1, 2013 acquisition of HCN, we recorded $38.6 million of goodwill,
representing the excess of the purchase price over the amount assigned to the new assets acquired and the

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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 31st, or more
frequently if events and circumstances indicate that goodwill might be impaired. If the carrying value exceeds
fair value, the asset is considered impaired and is reduced to fair value. In assessing goodwill impairment, we
may choose to initially evaluate qualitative factors to determine if it is more likely than not that the fair value is
less than its carrying amount. If the qualitative assessment is not conclusive, then the impairment analysis for
goodwill is performed using a quantitative approach.

The process of evaluating goodwill and indefinite-lived intangibles for impairment is subjective and requires
significant judgment at many points during the analysis. When performing an optional qualitative analysis, we
consider many factors including: general economic conditions, industry and market conditions, certain cost
factors, financial performance and key business drivers, long-term operating plans, and potential changes to
significant assumptions used in the most recent fair value analysis. We utilize the services of an independent
third-party valuation firm to complete the quantitative analysis and estimate fair value. In completing their
analysis, the valuation firm weights the results of four different valuation methods: (1) discounted cash flow;
(2) guideline company; (3) guideline transaction for comparable transactions; and (4) guideline transaction
for private equity transactions. Under the discounted cash flow method, cash flows are discounted by an
estimated risk weighted average cost of capital, which is intended to reflect the overall level of inherent risk
of HCN. Under the guideline company method, valuation metrics from other education companies are used
to determine the value. Under the comparable transaction method, pricing terms from other transactions in
the higher education market are used to determine the value. Under the private equity method, pricing terms
from private equity transactions are used to determine the value. Values derived under the four valuation
methods are then weighted to estimate HCN’s enterprise value. The analysis includes significant estimates and
assumptions from management, including revenue growth rates, operating margins and future economic and
market conditions, among others. Additionally, the valuation firm’s analysis includes significant assumptions
with respect to discount rates and assumed royalty rates. If the fair value is less than the carrying value, the
asset is reduced to fair value.

As of October 31, 2018 and 2019, we completed our annual assessment of goodwill and concluded that
HCN’s fair value was more than the carrying value; consequently, there was no impairment. Our October 31,
2019 annual assessment concluded that the fair value of HCN exceeded the carrying value by approximately
4%, or $1.5 million. 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 2018 and 2019 annual testing also concluded the indefinite-lived
assets were not impaired. For additional details regarding goodwill and indefinite-lived intangible assets 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. Significant Accounting Policies” included in our Consolidated Financial Statements.

Recent Accounting Pronouncements
We consider the applicability and impact of all Accounting Standards Updates, or ASUs. See “Note 2
Significant Accounting Policies” included in our Consolidated Financial Statements for information relating
to our discussion of the effects of recent accounting pronouncements.

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Results of Operations
The following table sets forth statements of income data as a percentage of revenue for each of the years ended:

Revenue

Costs and expenses:

Instructional costs and services

Selling and promotional

General and administrative

Loss on disposals of long-lived assets

Impairment of goodwill

Depreciation and amortization

Total costs and expenses

Income from operations before interest income and income taxes

Interest income, net

Income from operations before income taxes

Income tax expense

Equity investment loss

Net income

2017

100.0%

2018

100.0%

2019

100.0%

38.8%

19.5%

23.1%

0.7%

—%

6.3%

88.4%

11.6%

—%

11.6%

3.8%

(0.8%)

7.0%

38.7%

19.1%

25.0%

0.3%

—%

5.9%

89.0%

11.0%

1.0%

12.0%

3.1%

(0.2%)

8.7%

39.1%

21.0%

27.3%

0.2%

2.5%

5.4%

95.5%

4.5%

1.4%

5.9%

1.8%

(0.5%)

3.6%

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Revenue

Our consolidated revenue in 2019 was $286.3 million, a decrease of $11.4 million or 3.8%, compared to
$297.7 million in 2018.

The revenue decrease resulted from a decrease in net course registrations at APUS and a decrease in
student enrollment at HCN. APUS net course registrations decreased approximately 1.1% to approximately
316,700 in 2019 from approximately 320,300 in 2018. The decrease in APUS’s net course registrations was
due in part to the temporary exhaustion of Navy TA program funds, which resulted in registration declines
during the second and third quarters of 2019, and ongoing declines in new student course registrations
resulting in decreased student net course registrations. HCN average student enrollment decreased 23.1%
in 2019 compared to 2018. The decrease in HCN’s enrollment in 2019 was primarily attributable to changes
in academic standards and admissions policies instituted in 2018 and the first quarter of 2019, among other
factors. In addition, HCN enrollments appear to have been impacted by negative perceptions by certain and
prospective student cohorts.

Costs and Expenses

Costs and expenses were $273.5 million in 2019, an increase of $8.3 million, or 3.1%, compared to
$265.2 million in 2018. In 2019, costs and expenses include the following items on a pretax basis: a non-
cash impairment of goodwill of $7.3 million in our HCN Segment; $3.5 million increase in advertising costs
in our APEI and HCN Segments; $2.8 million in employee compensation costs in our APEI Segment for post-
employment benefits that will be payable to the APUS President upon retirement; $2.1 million in information
technology costs related to the evaluation and investment in replacements and upgrades to our information
technology systems, including one-time expenses to upgrade our learning management system, and to
inform the scope and duration of our larger overall information technology transformation program in our APEI
Segment; and $1.4 million in in professional fees associated with the evaluation of a potential acquisition in our

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APEI Segment. In 2018, costs and expenses include pretax expenses of approximately $1.7 million resulting
from the voluntary reduction in force program in our APEI Segment.

Costs and expenses as a percentage of revenue increased to 95.5% in 2019 from 89.0% in 2018. Our income
before interest and income taxes, or our operating margin, decreased to 4.5% from 11.0% compared to the
same period. Our costs and expenses as a percentage of revenue increased largely due to the changes in
costs and expenses described above.

Instructional costs and services expenses. Instructional costs and services expenses in 2019 were $111.9 million,
a decrease of approximately $3.4 million, or 2.9%, compared to $115.3 million in 2018. Instructional costs and
services expenses as a percentage of revenue were 39.1% in 2019, compared to 38.7% in 2018. The decrease
in instructional costs and services expenses was primarily due to a decrease in employee compensation
costs and instructional materials costs in both our APEI and HCN Segments, partially offset by an increase in
payment processing fees in our APEI Segment. In 2018, employee compensation costs include approximately
$0.8 million of pretax expenses from the voluntary reduction in force program in our APEI Segment. The increase
in instructional costs and services expenses as a percentage of revenue was primarily due to our consolidating
revenue decreasing at a rate greater than the decrease in instructional costs and services expenses.

Selling and promotional expenses. Selling and promotional expenses in 2019 were $60.0 million, an increase
of $3.0 million, or 5.3%, compared to $57.0 million in 2018. This increase was primarily the result of increased
advertising costs in our APEI and HCN Segments, partially offset by a decrease in employee compensation
costs in our APEI Segment. In 2018, employee compensation costs include approximately $0.5 million of
pretax expenses from the voluntary reduction in force program in our APEI Segment. Selling and promotional
expenses as a percentage of revenue were 21.0% in 2019 compared to 19.1% in 2018. The increase in selling
and promotional expenses as a percentage of revenue was primarily due to an increase in selling and
promotional expenses during a period when consolidated revenue decreased.

General and administrative expenses. General and administrative expenses in 2019 were $78.1 million, an
increase of $3.6 million, or 4.8%, compared to $74.5 million in 2018. The increase in general and administrative
expenses was primarily related to the following items on a pretax basis: $2.8 million in employee compensation
costs for post-employment benefits that will be payable to the APUS President upon retirement in our APEI
Segment; $1.4 million of professional fees related to the evaluation of an acquisition in our APEI Segment;
and $2.1 million in information technology costs related to the evaluation of replacements or upgrades to our
information technology systems, including one-time expenses to upgrade our learning management system
in our APEI Segment. In 2018, employee compensation costs include approximately $0.4 million of pretax
expenses from the voluntary reduction in force program in our APEI Segment. General and administrative
expenses as a percentage of revenue were 27.3% in 2019 compared to 25.0% in 2018. The increase in general
and administrative expenses as a percentage of revenue was primarily due to the increase in general and
administrative expenses during a period when consolidated revenue decreased.

Bad debt expense decreased to $3.9 million, or approximately 1.4% of revenue, in 2019, from $4.6 million, or
approximately 1.5% of revenue, in 2018. 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 primarily driven by the
implementation of the HCN extended payment program in 2018.

Loss on disposal of long-lived assets. The loss on disposal of long-lived assets was $0.6 million in 2019,
compared to $0.9 million in 2018.

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Impairment of goodwill. The Company completed interim goodwill impairment tests during the first and
third quarters of 2019 as a result of circumstances that included HCN’s continued underperformance against
revised 2019 internal targets and overall 2019 financial performance. The implied fair value of goodwill was
calculated and compared to the recorded goodwill, and the Company determined the fair value of goodwill
was $26.6 million, or $7.3 million less than its carrying value. There was no impairment of the indefinite-lived
intangible assets. As a result, the Company recorded a pretax, non-cash charge of $7.3 million to reduce the
carrying value of its goodwill in the HCN Segment in 2019. Our October 31, 2019 annual assessment concluded
there was no additional impairment.

Depreciation and amortization. Depreciation and amortization expenses were $15.6 million in 2019, compared
to $17.5 million in 2018, a decrease of $1.9 million or 10.9%. When compared to the prior year, the decrease in
depreciation and amortization was due to lower capital expenditures, lower amortization of intangible assets
and lower total investment in property and equipment net of depreciation.

Stock-based compensation. Stock-based compensation expenses included in instructional costs and services,
selling and promotional, and general and administrative expenses in 2019 were $6.0 million in the aggregate,
representing a decrease of $1.2 million, or 17.0%, compared to $7.2 million in 2018. Stock-based compensation
costs include accelerated expense for retirement-eligible employees and additional performance stock unit
incentive costs. The decrease in stock-based compensation costs was due to decrease in performance-based
stock unit costs.

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 2018 and 2019 (in thousands):

Instructional costs and services

Selling and promotional

General and administrative

Total stock-based compensation expense

Interest income

Year Ended December 31,

2018

$1,610

512

5,058

$7,180

2019

$1,570

766

3,624

$5,960

Interest income was $3.9 million in 2019, compared to income of $2.9 million in 2018. The increase is due to an
increase in the average rate of interest earned on invested funds during 2019.

Income Tax Expense

We recognized tax expense from operations for 2019 and 2018 of $5.2 million and $9.3 million, respectively,
or an effective tax rate of 34.1% and 26.6% in 2019 and 2018, respectively. The increase in our effective tax
rate for 2019 is primarily due to a higher amount of non-deductible expenses compared to 2018 in our APEI
Segment, and lower pretax income in our APEI and HCN Segments, partially offset by the benefit from ASU No.
2016-09 Compensation—Stock Compensation (Topic 718) in our APEI Segment. The effective tax rate for 2019
includes a benefit of approximately $0.4 million related to ASU No. 2016-09, compared to additional income
tax expense of $0.1 million for 2018.

Equity Investment Loss

Equity investment loss was $1.5 million in 2019, compared to equity investment loss of $0.5 million in 2018, an
increase of $1.0 million. For additional information on our investments please refer to “Note 5. Investments” in
our Consolidated Financial Statements.

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Net Income

Net income was $10.0 million in 2019, compared to net income of $25.6 million in 2018, a decrease of
$15.6 million, or 60.9%. This decrease was related to the factors discussed above.

Operating Results by Reportable Segment—Year Ended December 31, 2019
Compared to Year Ended December 31, 2018
The table below details our operating results by reportable segment for the periods indicated (in thousands):

Revenue

American Public Education Segment

Hondros College of Nursing Segment

Intersegment elimination
Total Revenue

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

American Public Education Segment

Hondros College of Nursing Segment

Intersegment elimination
Total income from operations before
interest income and income taxes

Year Ended December 31,

2018

2019

$ Change

% Change

$260,062

37,625

—

$256,899

$ (3,163)

29,479

(108)

(8,146)

(108)

$297,687

$286,270

$(11,417)

$ 28,561

3,965

—

$ 23,522

(10,768)

$ (5,039)

(14,733)

(1.2%)

(21.7%)

(3.8%)

(17.6%)

(371.6%)

$ 32,526

$ 12,756

$(19,770)

(60.8%)

Effective January 1, 2019, the APEI Segment began charging the HCN Segment for the value of courses taken
by HCN Segment employees at APUS. Intersegment elimination represents the elimination of this intersegment
revenue in consolidation.

APEI Segment

Our APEI Segment revenue was approximately $256.9 million in 2019, a decrease of $3.2 million, or 1.2%,
compared to $260.1 million in 2018, which is primarily attributable to lower net course registrations. Net course
registrations at APUS decreased 1.1% to approximately 316,700 in 2019 compared to the same period in 2018.
The decrease in APUS’s net course registrations was primarily attributable to the temporary exhaustion of Navy
TA program funds, which resulted in registration declines during the second and third quarter of 2019, and
ongoing declines in new student course registration resulting in decreased student net course registrations.
Income from operations before interest income and income taxes was approximately $23.5 million in 2019, a
decrease of $5.0 million, or 17.6%, compared to 2018, as a result of the decrease in revenue resulting from lower
net course registrations and increases in selling and promotional expenses and general and administrative
expenses. For information regarding the APEI Segment’s net course registrations please refer to “Year Ended
December 31, 2019 Compared to Year Ended December 31, 2018—Revenue” above.

HCN Segment

Our HCN Segment revenue was approximately $29.5 million in 2019, a decrease of $8.1 million, or 21.7%
compared to $37.6 million in 2018, due to a decrease in student enrollment. HCN average student enrollment
decreased 23.1% in 2019 compared to 2018. We believe that the decrease in HCN’s enrollment in 2019 was
primarily attributable to changes in academic standards and admissions policies instituted in the first quarter
of 2019, among other factors. Additionally, our enrollments appear to have been impacted by negative
perceptions by certain current and prospective student cohorts. The loss from operations before interest
income and income taxes in the HCN Segment was approximately $10.8 million in 2019 compared to income

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from operations before income tax of $4.0 million in 2018, as a result of the goodwill impairment of $7.3 million
and decrease in revenue due to lower enrollment in 2019.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Revenue

Our consolidated revenue for the year ended December 31, 2018 was $297.7 million, a decrease of $1.5 million
or 0.5%, compared to $299.2 million for the year ended December 31, 2017.

The decrease in revenue was a result of a decrease in net course registrations and lower revenue per net
course registration at APUS, due, in part, to changes in the general education requirements, partially offset by
an increase in average student enrollments at HCN. APUS net course registrations decreased to approximately
320,300 in the year ended December 31, 2018 from approximately 325,000 in the year ended December 31,
2017, a decrease of approximately 1.4%. We believe that the decrease in APUS’s net course registrations for
the year ended December 31, 2018, was primarily attributable to challenges associated with competition for
students, the continuing effects of prior periods of decreased registrations and ongoing declines in new student
course registrations resulting in decreased returning student net course registrations. We believe that HCN’s
average student enrollment increase is attributable to the opening of the Toledo campus in January 2017.

Costs and Expenses

Costs and expenses were $265.2 million for the year ended December 31, 2018, an increase of $0.8 million,
or 0.3%, compared to $264.4 million for the year ended December 31, 2017. The increase in costs and
expenses was primarily due to increased employee compensation costs in both our APEI Segment and our
HCN Segment, including severance costs related to the voluntary reduction in force program in our APEI
Segment during the three months ended March 31, 2018, increases in stock-based compensation expense,
and professional fees associated with an acquisition we are no longer pursuing in our APEI Segment. These
increased costs were partially offset by decreases in advertising expense and instructional materials costs in
our APEI Segment.

Costs and expenses as a percentage of revenue increased to 89.0% in the year ended December 31, 2018 from
88.4% in the year ended December 31, 2017. Our income before interest and income taxes, or our operating
margin, decreased to 11.0% from 11.6% over that same period. Our costs and expenses as a percentage of
revenue increased due to increased general and administrative costs as a percentage of revenue partially
offset by decreases in instructional costs and services expenses as a percentage of revenue and selling and
promotional expenses as a percentage of revenue.

Instructional costs and services. Instructional costs and services expenses for the year ended December 31,
2018 were $115.3 million, a decrease of approximately $0.9 million, or 0.8%, compared to $116.2 million for the
year ended December 31, 2017. Instructional costs and services expenses as a percentage of revenue were
38.7% for the year ended December 31, 2018, compared to 38.8% for the year ended December 31, 2017.
The decrease in instructional costs and services expenses is primarily the result of decreased instructional
materials costs in our APEI Segment, partially offset by increases in stock compensation costs in our APEI
Segment and employee compensation costs in our HCN Segment. Our instructional costs and services
expenses as a percentage of revenue decreased primarily due to our instructional costs and services
expenses decreasing at a rate greater than the decrease in consolidated revenue.

Selling and promotional. Selling and promotional expenses for the year ended December 31, 2018 were
$57.0 million, a decrease of $1.3 million, or 2.2%, compared to $58.3 million for the year ended December 31,
2017. This decrease was primarily due to decreases in advertising costs and marketing support materials

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costs in our APEI Segment partially offset by increased advertising costs in our HCN Segment. Selling and
promotional expenses as a percentage of revenue were 19.1% for the year ended December 31, 2018 compared
to 19.5% for the year ended December 31, 2017. Selling and promotional expenses as a percentage of revenue
decreased year over year due to our selling and promotional expenses decreasing at a rate greater than the
decrease in consolidated revenue.

General and administrative. General and administrative expenses for the year ended December 31, 2018 were
$74.5 million, an increase of $5.5 million, or 8.0% compared to $69.0 million for the year ended December 31,
2017. The increase in general and administrative expenses was primarily related to increases in employee
compensation costs including the voluntary reduction in force program, reduced capitalized labor for APUS
capital projects, stock-based and other incentive compensation expense, and professional fees in our APEI
Segment and increased bad debt expense in our HCN Segment partially offset by decreases in bad debt
expense in our APEI Segment. General and administrative expenses as a percentage of revenue were 25.0%
for the year ended December 31, 2018, compared to 23.1% for the year ended December 31, 2017. The increase
in general and administrative expenses as a percentage of revenue was primarily due to the increase in general
and administrative expenses during a period when consolidated revenue decreased.

Bad debt expense decreased to $4.6 million, or approximately 1.5% of revenue, for the year ended December 31,
2018, from $4.7 million, or approximately 1.6% of revenue, in the year ended December 31, 2017. We believe
the decrease in bad debt expense was primarily due to changes in student mix, changes in admissions and
verification, and other changes, partially offset by increases in bad debt expense in our HCN Segment.

Loss on disposal of long-lived assets. The loss on disposal of long-lived assets was $0.9 million in the year
ended December 31, 2018, compared to $2.1 million in the year ended December 31, 2017.

Depreciation and amortization. Depreciation and amortization expenses were $17.5 million for the year ended
December 31, 2018, compared to $18.8 million for the year ended December 31, 2017, a decrease of $1.3 million
or 6.9%. When compared to the prior year, the decrease in depreciation and amortization was due to lower
capital expenditures, lower amortization of intangible assets and lower total investment in property and
equipment net of depreciation.

Stock-based compensation. Stock-based compensation expenses included in instructional costs and services,
selling and promotional, and general and administrative expenses for the year ended December 31, 2018 were
$7.2 million in the aggregate, representing an increase of $1 million or 15.0%, compared to $6.2 million for the
year ended December 31, 2017. The increase in stock-based compensation was primarily due to the accelerated
stock-based compensation expense of awards to employees who reached retirement eligibility and additional
performance unit incentive costs.

The table below reflects our stock-based compensation expense recognized in our Consolidated Statements
of Income for the years ended December 31, 2017 and 2018 (in thousands):

Instructional costs and services

Selling and promotional

General and administrative

Total stock-based compensation expense

Year Ended December 31,

2017

$1,310

789

4,147

$6,246

2018

$1,610

512

5,058

$7,180

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Interest income

Interest income was $2.9 million for the year ended December 31, 2018 compared to income of $0.2 million
for the year ended December 31, 2017. The increase was related to an increase in interest rates and larger
invested balances in cash and cash equivalents during the year ended December 31, 2018.

Income Tax Expense

We recognized tax expense from operations for the years ended December 31, 2018 and 2017 of $9.3 million
and $11.5 million, respectively, or an effective tax rate of 26.6% and 35.2% in 2018 and 2017, respectively. The
decrease in our effective tax rate for the year ended December 31, 2018 is primarily due to the reduction in the
federal corporate tax rate to 21% from the prior maximum rate of 35% effective January 1, 2018 under the U.S
Tax Cuts and Jobs Act, or the Tax Act and favorable adjustments related to taxes paid for the 2017 tax year,
partially offset by additional income tax expense of approximately $0.1 million related to the adoption of ASU
2016-09. The effective tax rate for the year ended December 31, 2017 includes approximately $0.5 million in
additional income tax expense due to the adoption of ASU 2016-09.

Equity Investment Loss

Equity investment loss was $0.5 million for the year ended December 31, 2018, compared to equity investment
loss of $2.4 million for the year ended December 31, 2017, an increase of $1.9 million. The investment loss
was due to other-than-temporary impairments totaling $0.5 million on certain minority investments during
the year ended December 31, 2018 compared to other-than-temporary impairments totaling $2.7 million on
certain minority investments during the year ended December 31, 2017. For additional information on our
investments and other than temporary impairments please refer to “Note 5. Investments” in our Consolidated
Financial Statements. At December 31, 2017 and December 31, 2018 our total equity method investments were
$12.5 million and $12.0 million, respectively.

Net Income

Net income was $25.6 million for the year ended December 31, 2018, compared to net income of $21.1 million
for the year ended December 31, 2017, an increase of $4.5 million, or 21.3%. This increase was related to the
factors discussed above.

Operating Results by Reportable Segment—Year Ended December 31, 2018
Compared to Year Ended December 31, 2017
The table below details our operating results by reportable segment for the periods indicated (in thousands):

Revenue

American Public Education Segment

Hondros College of Nursing Segment
Total Revenue

Income from operations before interest

income and income taxes

American Public Education Segment

Hondros College of Nursing Segment
Total income from operations before
interest income and income taxes

Year Ended December 31,

2017

2018

$ Change

% Change

$265,246

34,002

$299,248

$260,062

37,625

$297,687

$(5,184)

3,623

$(1,561)

$ 30,873

3,986

$ 28,561

3,965

$(2,312)

(21)

(2.0%)

10.7%

(0.5%)

(7.5%)

(0.5%)

$ 34,859

$ 32,526

$(2,333)

(6.7%)

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APEI Segment

For the year ended December 31, 2018, our APEI Segment earned approximately $260.1 million in revenue, a
$5.2 million, or 2.0%, decrease as compared to the year ended December 31, 2017, which is primarily attributable
to lower net course registrations and lower revenue per net course registration, due in part to changes in the
general education requirements. Net course registrations at APUS decreased 1.4% to approximately 320,300 for
the year ended December 31, 2018 compared to the same period in 2017. We believe the decrease in APUS’s
net course registrations was primarily attributable to challenges associated with competition for students, the
continuing effects of prior periods of decreased registrations, and ongoing declines in new student net course
registrations resulting in decreased returning student net course registrations. Income from operations before
interest income and income taxes was approximately $28.6 million for the year ended December 31, 2018, a
decrease of $2.3 million, or 7.5%, compared to the year ended December 31, 2017, as a result of the decrease in
revenue resulting from lower net course registrations and increases in general and administrative expenses. For
information regarding the APEI Segment’s net course registrations please refer to “Year Ended December 31,
2018 Compared to Year Ended December 31, 2017—Revenue” above.

HCN Segment

For the year ended December 31, 2018, the HCN Segment earned approximately $37.6 million in revenue, a
$3.6 million, or 10.7% increase as compared to the year ended December 31, 2017, which is due to the opening
of the Toledo campus during 2017. HCN student enrollment was approximately 2,100 for the year-ended
December 31, 2018 and December 31, 2017 with higher average enrollment during 2018 primarily as a result of
the new Toledo campus. Income from operations before interest income and income taxes was approximately
$4.0 million for the years ended December 31, 2018 and December 31, 2017 as a result of an increase in
revenue from higher enrollments offset by increased employee compensation, advertising, and bad debt
expense during the year ended December 31, 2018.

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Quarterly Results
The following table presents our unaudited quarterly results of operations for the last eight quarters, and
should be reviewed in conjunction with our Consolidated Financial Statements and related notes contained
elsewhere in this Annual Report. We have prepared the unaudited information on the same basis as our
audited Consolidated Financial Statements. Results of operations for any quarter are not necessarily indicative
of results for any future quarters or for a full year (in thousands).

(Unaudited)

March 31,
2018

June 30,
2018

September 30,
2018

December 31,
2018

March 31,
2019

June 30,
2019

September 30,
2019

December 31,
2019

Statement of Operations Data:

Quarter Ended

Revenue

Costs and expenses:

Instructional costs
and services

Selling and promotional

General and administrative

Loss on disposals of
long-lived assets

Impairment of goodwill

Depreciation and
amortization

Total costs and expenses

Income from operations
before interest income
and income taxes

Interest income, net

Income from operations
before income taxes

Income tax expense

Equity investment
income (loss)

Net income (loss)
Other Data:

$74,967

$72,798

$72,992

$76,930

$73,441

$70,560

$67,888

$74,381

29,686

15,581

18,888

128

—

28,967

13,284

17,594

558

—

28,186

14,139

19,298

196

—

28,441

14,038

18,676

—

4,522

68,805

4,347

64,750

4,289

66,108

4,343

65,498

6,162

493

6,655

1,865

8,048

661

8,709

2,280

6,884

774

7,658

1,848

11,432

987

12,419

3,294

27,915

15,047

19,065

126

5,855

4,051

72,059

1,382

1,053

2,435

(63)

28,725

14,087

18,123

—

3,943

64,882

5,678

1,135

6,813

1,898

27,268

15,873

22,021

394

1,481

3,764

70,801

(2,913)

1,019

(1,894)

(239)

28,008

15,021

18,873

—

3,838

65,772

8,609

701

9,310

3,591

(201)

(311)

(32)

(1,487)

—

$ 4,589

$ 6,458

$ 5,499

$ 9,093

$ 1,011

$ 4,921

$ (1,638)

$ 5,719

Stock-based compensation

$ 1,843

$ 1,597

$ 2,084

$ 1,656

$ 1,689

$ 1,630

$ 1,712

$ 929

Net cash provided by
operating activities

Capital expenditures

APUS net course
registrations

$10,244

$ 1,666

$ 9,322

$ 1,893

$ 5,989

$ 1,790

$18,624

$ 4,081

$ 7,895

$ 1,585

$15,825

$ 1,372

$ 8,216

$ 1,194

$ 6,434

$ 3,104

83,300

76,800

80,800

79,400

84,300

75,900

76,700

79,800

Liquidity and Capital Resources
We financed our operating activities and capital expenditures in 2018 and 2019 primarily with cash provided
by operating activities. Cash, cash equivalents, and restricted cash were $212.1 million and $202.7 million at
December 31, 2018 and December 31, 2019, respectively, representing a decrease of $9.4 million, or 4.4%, in
2019. The decrease in cash, cash equivalents, and restricted cash in 2019 was primarily due to the repurchase
of our common stock during the period. Cash, cash equivalents, and restricted cash increased by $32.9 million,
or 18.4%, to $212.1 million in 2018, which was due to cash provided by operating activities exceeding cash used
in investing and financing activities.

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We derive a significant portion of our revenue from tuition assistance programs from the DoD in our APEI
Segment. We also participate in programs from the U.S. Department of Veterans Affairs, or VA. Generally,
these funds are received within 60 days of the start of the applicable course. In both our APEI and HCN
Segments, another significant source of revenue is derived from our participation in ED’s Title IV programs, for
which disbursements are governed by federal regulations. We have typically received disbursements under
Title IV programs within 30 days of the start of the applicable course or term. These factors, together with the
number of courses starting each month, affect our operating cash flow.

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. In 2019 we incurred approximately $2.1 million to evaluate and invest in replacements
and upgrades to our information technology systems, including one-time expenses to upgrade our learning
management system, and to inform the scope and duration of the larger overall information technology
transformation program. We anticipate spending between approximately $6.0 million and $8.0 million in 2020,
focusing on specific information technology projects, including replacements of our learning management and
customer relationship management systems. We estimate 80% of this anticipated spending to be one-time
spending, with respect to the projects and systems to which these expenditures relate. APUS signed a contract
for a replacement customer relationship management system in the first quarter of 2020 and began its first
cohort of students in a new learning management system in March 2020. We will continue to evaluate our PAD
system for possible changes and upgrades and anticipate that we will eventually make significant changes
to that system, as well. In addition, our Board of Directors approved an increase in marketing expenditures
for 2020, including in support of a planned advertising campaign focusing on affordability and return on
investment for learners. As a result of these increased marketing expenses, we expect selling and promotional
expenses as a percentage of revenue to increase in 2020 as compared to 2019. 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. For example, in 2019 we incurred approximately
$0.5 million in capital expenditures related to a new HCN campus in Indianapolis, Indiana. We also expect
that we will continue to make expenditures to invest in strategic opportunities and to enhance our business
capabilities. We will 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 may need additional capital in connection with any change in our current level of operations, including if
we were to pursue significant business acquisitions or investment opportunities, or determine to make other
significant investments in our business.

Operating Activities

Net cash provided by operating activities was $44.2 million and $38.4 million in 2018 and 2019, respectively.
The decrease from 2018 to 2019 was primarily due to changes in working capital due to the timing of
receipts and payments. Accounts receivable at December 31, 2019, was approximately $2.7 million lower
than December 31, 2018 primarily due to improved payment processing by DoD tuition assistance programs.
Accounts payable at December 31, 2019 was approximately $5.6 million lower than December 31, 2018
primarily due to the timing of processing of purchases and payments.

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Investing Activities

Net cash used in investing activities was $9.4 million and $7.3 million in 2018, and 2019, respectively. The
decrease from 2018 to 2019 was primarily related to a decrease in technology-related capital expenditures
partially offset by capital expenditures related to software development and program development within our
APEI Segment and capital expenditures related to the new Indianapolis, Indiana campus in our HCN Segment.
In 2019, cash used in investing activities for capital expenditures was primarily for software development,
including software development related to PAD, furniture and fixtures, and program development within our
APEI Segment and capital expenditures related to the new Indianapolis, Indiana campus in our HCN Segment.
In 2018, 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.

Financing Activities

Net cash used in financing activities was $1.8 million and $40.5 million in 2018 and 2019, respectively. The
increase in cash used in financing activities in 2019 was related to $39.0 million used to repurchase our
common stock in accordance with our share repurchase programs and increased 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. The decrease in cash used in financing activities in 2018 was primarily due
to excess tax expense related to stock-based compensation recorded as a component of income tax expense,
partially offset by increased 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.

Contractual Obligations

We have various contractual obligations consisting of operating leases and purchase obligations. Purchase
obligations include agreements with consultants, contracts with third-party service providers, and other future
contracts or agreements. The following table sets forth our future contractual obligations as of December 31,
2019 (in thousands):

Operating lease obligations

Purchase obligations

Total contractual obligations

Total

$13,671

7,833

$21,504

Less than 1 Year

1–3 Years

3–5 Years

More than 5 Years

$2,835

5,007

$7,842

$5,759

1,770

$7,529

$2,837

1,056

$3,893

$2,240

—

$2,240

Payments Due by Period

In February 2020, APUS entered into a 48 month agreement with a customer relationship management
platform provider. The total value of the contract over that 48 month period is approximately $3.5 million.

Off-Balance Sheet Arrangements

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

Impact of Inflation

We do not believe that inflation had a material impact on our results of operations in 2018 or 2019. There
can be no assurance that future inflation will not have an adverse impact on our operating results and
financial condition.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

We are subject to the impact of interest rate changes and may be subject to changes in the market values of
future investments. We invest our excess cash in bank overnight deposits, money market funds invested in
federal securities, and short-term U.S. Treasuries with original maturities of three months or less when purchased.

MARKET RISK
We maintain our cash and cash equivalents in bank deposit accounts, money market funds invested in
federal securities, and short-term U.S. Treasuries. The bank deposits exceed federally insured limits. We have
historically not experienced any losses in such accounts. We believe we are not exposed to any significant
credit risk on cash and cash equivalents. Due to the short-term duration of our investment portfolio and the low
risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material
effect on the fair market value of our portfolio.

INTEREST RATE RISK
We are subject to risk from adverse changes in interest rates, primarily relating to our investment of funds in
short-term U.S. treasury bills issued at a discount to their par value. Our future investment income will vary due
to changes in interest rates. At December 31, 2019, a 10% increase or decrease in interest rates would not have
a material impact on our future earnings, fair values, or cash flows.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

American Public Education, Inc. and Subsidiaries
Report of Independent Registered Public Accounting Firm 2018 and 2019

Report of Independent Registered Public Accounting Firm 2017

Consolidated Balance Sheets as of December 31, 2018 and 2019

Consolidated Statements of Income for the years ended December 31, 2017, 2018 and 2019

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2018 and 2019

Consolidated Statements of Cash Flows for the years ended December 2017, 2018 and 2019

Notes to Consolidated Financial Statements

Page
137

138

139

140

141

142

143

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of American Public Education, Inc.

OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying consolidated balance sheets of American Public Education, Inc. and
subsidiaries (the “Company”) as of December 31, 2018 and 2019, the related consolidated statements of
income, stockholders’ equity, and cash flows, for each of the two years in the period ended December 31,
2019, and the related notes. In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2018 and 2019, and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting
principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019,
based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2020, expressed an
unqualified opinion on the Company’s internal control over financial reporting.

BASIS FOR OPINION
These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement, whether due to error or fraud. Our audits included performing procedures to assess
the risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP

McLean, VA
March 10, 2020

We have served as the Company’s auditor since 2018.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of American Public Education, Inc.

OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying consolidated statements of income, stockholders’ equity, and cash flows
for the year ended December 31, 2017 of American Public Education, Inc. and Subsidiaries (the Company), and
the related notes to the consolidated financial statements and schedule (collectively, the financial statements).
In our opinion, the financial statements present fairly, in all material respects, the results of operations and cash
flows of the Company for the year ended December 31, 2017, in conformity with accounting principles generally
accepted in the United States of America.

BASIS FOR OPINION
These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess
the risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ RSM US LLP

Richmond, Virginia
February 27, 2018

We served as the Company’s auditor from 2003 to 2018

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CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

Assets

Current assets:

Cash, cash equivalents, and restricted cash (Note 2)

Accounts receivable, net of allowance of $6,648 in 2018 and $6,174 in 2019

Prepaid expenses

Income tax receivable

Total current assets

Property and equipment, net

Operating lease assets, net

Investments

Goodwill

Other assets, net

Total assets

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

Accrued compensation and benefits

Accrued liabilities

Deferred revenue and student deposits

Operating lease liabilities, current

Total current liabilities

Operating lease liability, long term

Deferred income taxes

Total liabilities

Commitments and contingencies (Notes 7 and 11)

Stockholders’ equity:

Preferred Stock, $.01 par value; authorized shares—10,000;
no shares issued or outstanding

Common Stock, $.01 par value; authorized shares—100,000; 16,425

issued and outstanding in 2018; 15,178 issued and outstanding in 2019

Additional paid-in capital

Retained earnings

Total stockholders’ equity

Total liabilities and stockholders’ equity

The accompanying notes are an integral part of these consolidated statements.

As of December 31,

2018

2019

$212,131

14,059

5,482

898

232,570

86,881

—

11,966

33,899

5,642

$202,740

11,325

7,087

1,757

222,909

78,495

11,658

10,502

26,563

4,770

$370,958

$354,897

$9,110

13,100

3,808

18,310

—

44,328

—

5,364

49,692

—

164

187,172

133,930

321,266

$370,958

$3,546

13,753

8,270

17,426

2,283

45,278

9,495

3,391

58,164

—

152

190,620

105,961

296,733

$354,897

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CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31,

(In thousands, except per share amounts)

Revenue

Costs and expenses:

Instructional costs and services

Selling and promotional

General and administrative

Loss on disposals of long-lived assets

Impairment of goodwill

Depreciation and amortization

Total costs and expenses

Income from operations before interest

income and income taxes

Interest income, net

Income from operations before income taxes

Income tax expense

Equity investment loss

Net income

Net income per common share:

Basic

Diluted

Weighted average number of shares outstanding:

Basic

Diluted

2017

$299,248

116,161

58,335

69,024

2,093

—

18,776

264,389

34,859

185

35,044

11,493

(2,430)

2018

$297,687

115,280

57,042

74,456

882

—

17,501

265,161

32,526

2,915

35,441

9,287

(515)

2019

$286,270

111,916

60,028

78,082

556

7,336

15,596

273,514

12,756

3,908

16,664

5,187

(1,464)

$ 21,121

$ 25,639

$ 10,013

$ 1.30

$ 1.29

16,236

16,380

$ 1.56

$ 1.54

16,404

16,634

$ 0.62

16,094

16,255

The accompanying notes are an integral part of these consolidated statements.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except shares)

Amount

Preferred Stock

Common Stock

Additional
Paid-In
Capital

Retained
Earnings

Total
Stockholders’
Equity

$ —

16,108,893

$161

$177,061

$ 87,448

$264,670

Impact of adoption of ASC 606

(278)

Balance as of December 31, 2016

Issuance of common stock under

employee benefit plans

Deemed repurchased shares
of common and restricted
stock for tax withholding

Stock-based compensation

Net income

Balance as of December 31, 2017

—

Issuance of common stock under

employee benefit plans

Deemed repurchased shares
of common and restricted
stock for tax withholding

Stock-based compensation

Net income

Balance as of December 31, 2018

Issuance of common stock under

employee benefit plans

Deemed repurchased shares
of common and restricted
stock for tax withholding

Stock-based compensation

Repurchased and retired shares

of common stock

Net income

Balance as of December 31, 2019

—

226,986

(68,065)

—

(1,587)

5,104

—

16,267,814

163

180,674

223,059

(2)

(66,088)

—

(1)

—

(1,822)

8,322

—

16,424,785

164

187,172

252,597

(3)

—

21,121

108,569

—

25,639

133,930

—

(1,587)

5,104

21,121

289,406

—

(1,823)

8,322

25,639

321,266

—

(2,510)

5,960

(2,509)

5,960

(83,214)

—

(1,416,304)

—

(1)

—

(14)

—

(37,982)

(37,996)

10,013

$ —

15,177,864

$152

$190,620

$105,961

$296,733

The accompanying notes are an integral part of these consolidated statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Operating activities

Net income

Adjustments to reconcile net income to net
cash provided by operating activities:

Depreciation and amortization

Stock-based compensation

Equity investment loss

Deferred income taxes

Loss on disposal of long-lived assets

Impairment of goodwill

Other

Changes in operating assets and liabilities:

Accounts receivable, net of allowance for bad debt

Prepaid expenses

Income tax receivable

Operating lease assets, net

Other assets

Accounts payable

Accrued compensation and benefits

Accrued liabilities

Income tax payable

Deferred revenue and student deposits

Net cash provided by operating activities

Investing activities

Capital expenditures

Proceeds from the sale of real property

Equity investments

Net cash used in investing activities

Financing activities

Cash paid for repurchase of common/restricted stock

Cash received from issuance of common stock

Net cash used in financing activities

Net increase (decrease) in cash, cash
equivalents, and restricted cash

Cash, cash equivalents, and restricted

cash at beginning of period

Cash, cash equivalents, and restricted cash at end of period

Supplemental disclosures of cash flow information

Year Ended December 31,

2017

2018

2019

$ 21,121

$ 25,639

$ 10,013

18,776

6,246

2,430

(2,494)

2,093

—

353

(187)

571

—

(653)

1,991

(1,455)

(740)

1,151

(1,265)

47,938

(14,788)

1,493

(300)

(13,595)

(1,587)

(1,489)

32,854

146,351

$179,205

17,501

7,180

515

(917)

882

—

302

(6,923)

(560)

(898)

—

266

3,298

875

(1,710)

(1,342)

44,179

(9,430)

—

(9,430)

(1,823)

—

(1,823)

32,926

179,205

$212,131

15,596

5,960

1,464

(1,973)

556

7,336

145

2,734

(1,149)

(859)

120

550

(5,564)

653

3,672

—

(884)

38,370

(7,255)

—

(7,255)

(40,506)

—

(40,506)

(9,391)

212,131

$202,740

Income taxes paid

$ 12,836

$ 12,712

$ 8,019

The accompanying notes are an integral part of these consolidated statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF BUSINESS
American Public Education, Inc., or APEI, which together with its subsidiaries is referred to as the “Company,”
is a provider of online and campus-based postsecondary education to approximately 82,600 students through
two subsidiary institutions:

• American Public University System, Inc., or APUS, provides online postsecondary education directed

primarily at the needs of the military, military-affiliated, public service and service-minded communities
through American Military University, or AMU, and American Public University, or APU. APUS is institutionally
accredited by the Higher Learning Commission.

• National Education Seminars, Inc., which is referred to herein as Hondros College of Nursing, or HCN,

provides nursing education to students at five campuses in Ohio, and, beginning in the second quarter of
2020, at a campus in Indianapolis, Indiana, to serve the needs of the nursing and healthcare communities.
HCN is institutionally accredited by the Accrediting Bureau for Health Education Schools, or ABHES.

The Company’s institutions are licensed or otherwise authorized, or are in the process of obtaining such
licenses or authorizations, to offer postsecondary education programs by state authorities to the extent the
institutions believe such licenses or authorizations are required, and are certified by the U.S. Department
of Education, or ED, to participate in student financial aid programs authorized under Title IV of the Higher
Education Act of 1965, as amended, or Title IV programs.

The Company’s operations are organized into two reportable segments:

• American Public Education Segment, or APEI Segment. This segment reflects the operational activities at

APUS, other corporate activities, and minority investments.

• Hondros College of Nursing Segment, or HCN Segment. This segment reflects the operational activities

of HCN.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company’s significant accounting policies follows:

Basis of presentation and accounting. The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the United States of America,
or GAAP. Certain prior year amounts have been reclassified for comparative purposes to conform to the
2019 presentation.

Principles of consolidation. The accompanying consolidated financial statements include the accounts
of APEI and its wholly owned subsidiaries. All material intercompany transactions and balances have been
eliminated in consolidation.

Use of estimates. In preparing financial statements in conformity with GAAP, the Company is required to
make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue
and expenses during the reporting period. The Company evaluates these estimates and judgments on an
ongoing basis and bases its estimates on experience, current and expected future conditions and various
other assumptions that the Company believes are reasonable under the circumstances. Actual results may

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differ from those estimates under different assumptions or conditions, and the impact of such differences may
be material to the Company’s Consolidated Financial Statements.

Cash and cash equivalents. The Company considers all short-term highly liquid investments with maturities
of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of demand
deposits with financial institutions, money market funds invested in securities backed by the U.S. government
and U.S. Treasury bills. Cash and cash equivalents are Level 1 assets in the fair value reporting hierarchy.

Restricted cash. Cash and cash equivalents includes funds held for students for unbilled educational services
that were received from Title IV programs. As a trustee of these Title IV program funds, the Company is
required to maintain and restrict these funds pursuant to the terms of the program participation agreement
with the U.S. Department of Education. Restricted cash on the Company’s Consolidated Balance Sheets as of
December 31, 2018 and 2019 was $1.7 million and $1.3 million, respectively.

Accounts receivable. The Company accounts for receivables in accordance with Financial Accounting
Standards Board, or FASB, Accounting Standards Codification Subtopic 310, or ASC 310, Receivables. Course
tuition is recorded as accounts receivable and deferred revenue at the time students begin a course or term.
Students may remit tuition payments at any time or they may elect various other payment options with payment
terms extending beyond the start of the course or term. These other payment options include payments by
sponsors, financial aid, alternative loans, or tuition assistance programs that remit payments directly to the
subsidiary. HCN also offers extended payment plan options.

When a student remits payment after a course or term has begun, accounts receivable is reduced. If payment
is made prior to the start of a course or term, the payment is recorded as a student deposit, and the student
is provided access to the online classroom when courses start, in the case of APUS, or allowed to start the
term, in the case of HCN. If a payment option is confirmed, the student is allowed to start the course or term.
Generally, if no receipt is confirmed or payment option secured, the student will be dropped from the online
course or not allowed to start the term. Therefore, billed amounts represent charges that have been prepared
and sent to students or the applicable third-party payor according to the terms agreed upon in advance.

DoD tuition assistance programs are billed by branch of service on a course-by-course basis when a student
starts a course, whereas Title IV programs are billed based on the courses included in a student’s term. Billed
accounts receivable are considered past due if the invoice has been outstanding for more than 30 days.

Allowance for doubtful accounts. The allowance for doubtful accounts is based on management’s evaluation
of the status of existing accounts receivable. Among other factors, management considers the age of the
receivable, the anticipated source of payment, and historical allowance considerations. Consideration is
also given to any specific known risk areas among the existing accounts receivable balances. Recoveries
of receivables previously written off are recorded when received. APUS does not charge interest on past
due accounts receivable. HCN charges interest on payment plans when a student leaves the payment plan
program upon graduation or exits the program. The interest earned in 2019 was approximately $15,000.

Property and equipment. All property and equipment is carried at cost less accumulated depreciation and
amortization. Depreciation and amortization are calculated on a straight-line basis over the estimated useful
lives of the assets. Leasehold improvement depreciation is calculated on a straight-line basis over the lesser
of the estimated useful life of the asset or the term of the lease. For tax purposes, different methods are used.
Maintenance and repairs are expensed as incurred, while other costs are capitalized if they extend the useful
life of the asset.

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The Company’s Partnership At a Distance system, or PAD, is a customized student information and services
system used by APUS to manage admissions, online orientation, course registrations, tuition payments,
grade reporting, progress toward degrees, and various other functions. Costs associated with this system
have been capitalized in accordance with FASB ASC 350-40, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, and classified as property and equipment. These costs are amortized
over the estimated useful life of five years. The Company also capitalizes certain costs for academic program
development, and these costs are amortized over an estimated life not to exceed three years.

Leases. In February 2016 FASB issued Accounting Standards Update, or ASU, No. 2016-02, Leases
(Topic 842). This standard requires entities to recognize most operating leases on their balance sheets as
right-of-use assets, or ROU assets, with a corresponding lease liability, in addition to disclosing certain key
information about leasing arrangements. The Company adopted the standard effective January 1, 2019 using
the cumulative-effect adjustment transition method, which applies the provisions of the standard at the
effective date without adjusting the comparative periods presented. The Company adopted the following
practical expedients and elected the following accounting policies related to this standard:

• Carry forward of historical lease classification;

• Short-term lease accounting policy election allowing lessees to not recognize ROU assets and lease

liabilities for leases with a term of 12 months or less; and

• Not separate lease and non-lease components for office space and campus leases.

The adoption of this standard resulted in the recognition of operating lease ROU assets and corresponding
lease liabilities of approximately $12.1 million on the Consolidated Balance Sheet as of January 1, 2019. There
was no impact to the Company’s net income or liquidity as a result of the adoption of this ASU. Disclosures
related to the amount, timing, and uncertainty of cash flows arising from leases are included in “Note 7.
Leases” below.

Investments. The Company accounts for its investments in less than majority owned companies in accordance
with FASB ASC 323, Investments—Equity Method and Joint Ventures and FASB ASC 321, Investments—
Equity Securities. The Company applies the equity method to investments when it has the ability to exercise
significant influence, but does not control the operating and financial policies of the company. This is generally
represented by equity ownership of at least 20 percent but not more than 50 percent. Investments accounted
for under the equity method are initially recorded at cost and subsequently adjusted by the Company’s share
of equity in income or losses after the date of acquisition. The pro-rata share of the operating results of the
investee is reported in the Consolidated Statements of Income as “Equity investment loss.” Investments that
do not meet the equity method requirements are accounted for under ASC 321, Investments—Equity Securities,
with changes in the fair value of the investment reported in the Consolidated Statements of Income as “Equity
investment loss.”

The Company periodically evaluates equity method investments for indicators of other-than-temporary
impairments. Factors the Company considers when evaluating for other-than-temporary impairments
include the duration and severity of the impairment, the reasons for the decline in value, and the potential
recovery period. For an investee with impairment indicators, the Company measures fair value on the basis
of discounted cash flows or other appropriate valuation methods. If it is probable that the Company will not
recover the carrying amount of the investment, the impairment is considered other-than-temporary and
recorded in equity earnings, and the equity investment balance is reduced to its fair value accordingly.

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Each reporting period the Company evaluates its cost method investments for observable prices changes.
Factors the Company may consider when evaluating an observable price may include significant changes in
the regulatory, economic or technological environment, changes in the general market condition, bona fide
offers to purchase or sell similar investments, and other criteria.

Management must exercise significant judgment in evaluating the potential impairment of its equity investments.

The Company’s investments are presented on a one-line basis as “Investments” in the accompanying
Consolidated Balance Sheets. Additional information regarding the Company’s investments is located in
“Note 5. Investments” below, in these Consolidated Financial Statements.

Goodwill and indefinite-lived intangible assets. Goodwill represents the excess of the purchase price of
an acquired business over the amount assigned to the assets acquired and liabilities assumed. Goodwill is
not amortized. The Company accounts for goodwill and indefinite-lived intangible assets in accordance with
FASB ASC 350, Intangibles Goodwill and Other, and in 2018 adopted ASU 2017-04, Intangibles—Goodwill and
Other (Topic 350): Simplifying the Test for Goodwill Impairment. The Company annually assesses goodwill for
impairment on October 31st, or more frequently if events and circumstances indicate that goodwill might be
impaired. In connection with the Company’s November 1, 2013 acquisition of HCN, the Company recorded
$38.6 million of goodwill, representing the excess of the purchase price over the amount assigned to the
new assets acquired and the fair value assigned to identified intangible assets. The Company also recorded
$3.7 million of indefinite-lived intangible assets as part of the HCN acquisition.

During the year ended December 31, 2019, the Company used an independent valuation firm to complete
interim assessments of goodwill after qualitative analysis indicated that goodwill might be impaired. The
valuations performed during the first and third quarters of 2019, determined that the fair value was less than
the carrying value. As a result, the Company recorded pretax, non-cash impairment charges of $7.3 million
during the year ended December 31, 2019.

Indefinite-lived intangible assets are tested at least annually for impairment by comparing the fair value of the
asset to the carrying value. APEI utilizes the services of an independent valuation firm to estimate fair value
of goodwill and indefinite-lived intangibles. In completing their analysis, the valuation firm uses a discounted
cash flow analysis as well as other valuation methods. The discounted cash flow analysis includes significant
estimates and assumptions from management, including revenue growth rates, operating margins and future
economic and market conditions, among others. Additionally, the valuation firm’s analysis includes significant
assumptions with respect to discount rates and assumed royalty rates. If the fair value is less than the carrying
value, the asset is reduced to fair value. The 2018 and 2019 annual testing, and 2019 interim testing, concluded
the indefinite-lived assets were not impaired.

For additional details regarding goodwill and indefinite-lived intangible assets refer to “Note 6. Goodwill and
Intangible Assets” below in these Consolidated Financial Statements.

Valuation of long-lived assets. The Company accounts for the valuation of long-lived assets under FASB
ASC 360, Accounting for the Impairment or Disposal of Long-Lived Assets. ASC 360 requires that long-lived
assets and certain identifiable definite-lived intangible assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of the long-lived asset is measured by a comparison of the carrying amount of the asset to future undiscounted
net cash flows expected to be generated by the asset.

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If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the estimated fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value, less costs to sell.

Deferred revenue and student deposits. Deferred revenue and student deposits at December 31, 2018 and
2019 was $18.3 million and $17.4 million, respectively. Deferred revenue includes payments that have been
received from students for courses that are still in process and student deposits represent cash received from
students prior to the commencement of a course and are refundable to the student in the event the student
withdrawals before the start of the course. Student deposits at December 31, 2018 and 2019 were $8.4 million
and $7.8 million, respectively.

Revenue recognition. The Company adopted FASB ASC 606, Revenue from Contracts with Customers, with
a date of initial application of January 1, 2018. For periods prior to January 1, 2018, the Company recognized
revenue in accordance with the previous accounting standard, ASC 605, Revenue Recognition. Under
ASC 606, revenue is recognized when evidence of a contract exists, delivery has occurred or as instructional
services are delivered, the price is determinable, and collectability is reasonably assured. Revenue from fees
is recognized as information or services are delivered to customers, assuming all other revenue recognition
criteria are met. For additional information regarding the Company’s adoption of ASC 606 and revenue
recognition refer to “Note 3. Revenue” below in these Consolidated Financial Statements.

The Company provides scholarships and technology fee grants to certain students to assist them financially
and promote their registration. Scholarship assistance and technology fee grants of $26.7 million, $26.7 million
and $26.1 million were provided for the years ended December 31, 2017, 2018 and 2019, respectively, and are
included as a reduction to revenue in the accompanying Consolidated Statements of Income.

Advertising costs. Advertising costs are expensed as incurred during the year pursuant to FASB ASC 720-35.
Advertising expenses for the years ended December 31, 2017, 2018 and 2019 were $37.7 million, $37.4 million
and $40.9 million, respectively, and are included in selling and promotional expenses in the accompanying
Consolidated Statements of Income.

Income taxes. Deferred taxes are determined using the liability method, whereby deferred tax assets are
recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax basis. As these differences reverse, they will enter into the determination of
future taxable income. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of
enactment of such changes. As a result of the U.S. Tax Cuts and Jobs Act, or Tax Act, the Company revalued
its net deferred tax liability and recorded a $3.7 million reduction in income tax expense for the year ended
December 31, 2017.

There were no material uncertain tax positions as of December 31, 2017, 2018 or 2019. Interest and penalties
associated with uncertain income tax positions would be classified as income tax expense. The Company has
not recorded any material interest or penalties during any of the years presented.

Stock-based compensation. The Company accounts for stock-based compensation in accordance with FASB
ASC 718, Stock Compensation, which requires companies to expense share-based compensation based
on fair value, and adopted ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting in January 2017. Stock-based payments may include: incentive
stock options or non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units,

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dividend equivalent rights, performance shares, performance units, cash-based awards, other stock-based
awards, including unrestricted shares, or any combination of the foregoing.

Stock-based compensation cost is recognized as expense generally over a three-year vesting period using the
straight-line method for employees and the graded-vesting method for members of the Board of Directors, and
is measured using APEI’s stock price on the date of grant. An accelerated one-year period is used to recognize
stock-based compensation cost for employees who have reached certain service and retirement eligibility
criteria on the date of grant. The fair value of each option award is estimated at the date of grant using a Black-
Scholes option-pricing model that uses certain assumptions, which have been noted in “Note 10. Stockholders’
Equity” in these Consolidated Financial Statements. The Company makes assumptions with respect to
expected stock price volatility based on the average historical volatility of APEI’s common stock. In addition,
the Company determines the risk-free interest rate by selecting the U.S. Treasury constant maturity for the
same maturity as the estimated life of the option quoted on an investment basis in effect at the time of grant for
that business day. Judgment is required in estimating the percentage of share-based awards that are expected
to vest, and in the case of performance stock units, or PSUs, the level of performance that will be achieved
and the number of shares that will be earned. If actual results differ significantly from these estimates, stock-
based compensation expense could be higher and have a material impact on the Company’s consolidated
financial statements. The Company estimates forfeitures of share-based awards at the time of grant and
revise such estimates in subsequent periods if actual forfeitures differ from original estimates. The forfeiture
assumption is ultimately adjusted to the actual forfeiture rate. For additional information regarding stock-
based compensation, refer to “Note 10. Stockholders’ Equity” in these Consolidated Financial Statements. If
actual results differ significantly from these estimates, stock-based compensation expense could be higher
and have a material impact on the Company’s consolidated financial statements. Estimates of fair value are
subjective and are not intended to predict actual future events, and subsequent events are not indicative of
the reasonableness of the original estimates of fair value made under ASC 718.

Income per common share. Basic net income per common share is based on the weighted average number
of shares of common stock outstanding during the period. Diluted net income per common share increases the
shares used in the per share calculation by the dilutive effects of options, warrants, and restricted stock.

Fair value of financial instruments. Cash equivalents are measured and recorded at fair value. The Company
also measures certain financial assets at fair value for disclosure purposes, as well as on a nonrecurring basis
when they are deemed to be other-than-temporary impairments.

Fair value represents the amount that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants. As such, fair value is a market-based measurement that is
determined based on assumptions that market participants would use in pricing an asset. Assets recorded
at fair value are measured and classified in accordance with a three-tier fair value hierarchy based on the
observability of the inputs available in the market used to measure fair value:

Level 1—inputs to the valuation techniques that are quoted prices in active markets for identical assets
or liabilities;

Level 2—inputs to the valuation techniques that are other than quoted prices but are observable for the
assets or liabilities, either directly or indirectly; or

Level 3—inputs to the valuation techniques that are unobservable for the assets or liabilities.

The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value.

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The Company’s cash, cash equivalents, and restricted cash, accounts receivable, accounts payable and
accrued liabilities are all short-term in nature. As such, their carrying amounts approximate fair value and fall
within Level 1 of the fair value hierarchy.

Concentration of credit risk. The Company maintains its cash, cash equivalents, and restricted cash in bank
deposit accounts with various financial institutions. Cash, cash equivalents, and restricted cash balances may
exceed the FDIC insurance limit. The Company has historically not experienced any losses in such accounts.

Recent Accounting Pronouncements. The Company considers the applicability and impact of all ASUs. ASUs
issued but not listed below were assessed and determined to be either not applicable or expected to have
minimal impact on its consolidated financial position and/or results of operations.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard requires entities
that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations
created by those leases in addition to disclosing certain key information about leasing arrangements. Entities
may elect not to recognize lease assets and liabilities for most leases with terms of 12 months or less. ASU
2016-02 required lessees and lessors to recognize and measure leases at the beginning of the earliest
period presented using a modified retrospective approach. In July 2018, the FASB issued ASU No. 2018-11,
which allows companies to apply the requirements of ASU 2016-02 retrospectively, either in all prior periods
presented, or through a cumulative adjustment in the year of adoption. This standard is effective for fiscal
years, and the interim periods within those fiscal years, beginning after December 15, 2018. Early adoption
was permitted. The Company adopted this standard effective January 1, 2019 using a cumulative effect
adjustment transition method and recognized an increase in assets and liabilities due to the recording of the
required right-of-use-asset and corresponding liability for all lease obligations that were previously classified
as operating leases. The increase in assets and liabilities was approximately $12.1 million. There was no impact
to the Company’s net income or liquidity as a result of the adoption of this ASU.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses, which is included
in ASC Topic 326, Measurement of Credit Losses on Financial Instruments with certain amendments made
to the standard in November 2018 through ASU No. 2018-9, Codification Improvements to Topic 326,
Financial Instruments—Credit Losses. The new guidance revises the accounting requirements related to
the measurement of credit losses and will require entities to measure all expected credit losses for financial
assets based on historical experience, current conditions, and reasonable and supportable forecasts about
collectability. Assets must be presented in the financial statements at the net amount expected to be collected.
The guidance will be effective for the fiscal years beginning after December 15, 2019, including interim periods
within those fiscal years. Early adoption was permitted with fiscal years beginning after December 15, 2018.
The Company adopted this standard effective January 1, 2020 and does not expect the adoption of this ASU to
have a material impact on its Consolidated Financial Statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software
(Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing
Arrangement That is a Service Contract, which amends ASC 350-40 to address a customer’s accounting for
implementation costs incurred in a cloud computing arrangement that is a service contract. The amendments
in this ASU provide clarifications which align the requirements for capitalizing implementation costs incurred
in a hosting arrangement that is a service contract with the requirements for capitalizing implementation
costs incurred to develop or obtain internal-use software or software licenses. The accounting for the service
element of a hosting arrangement that is a service contract is not affected by these amendments. The
guidance will be effective for fiscal years beginning after December 15, 2019, including interim periods within
those fiscal years. Early adoption was permitted. The Company adopted this standard effective January 1,

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2020 using the prospective approach, and will evaluate future implementation costs incurred after January 1,
2020 under the new standard.

NOTE 3. REVENUE
On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, using the
modified retrospective approach. Results for reporting periods beginning after January 1, 2018 are presented
under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with
previous accounting under ASC 605, Revenue Recognition.

The following is a description of principal activities from which the Company generates its revenue.

Instructional services. Instructional services revenue includes tuition, technology, and laboratory fees. The
Company generally recognizes revenue ratably as instructional services are provided over the period or term,
which is, for APUS, either an eight- or sixteen-week period, and for HCN, a quarterly term. Tuition is charged
by course or term, technology fees are charged to APUS students on a per course basis, and technology and
laboratory fees are charged to HCN students on a per term basis, when applicable. Generally, instructional
services are billed when a course or term begins, and paid within thirty days of the bill date.

Graduation fees. APUS graduation fee revenue represents a one-time, non-refundable $100 fee per degree,
charged to students upon submission of a program graduation application. The fee covers administrative costs
associated with completing a review of the student’s academic and financial standing prior to graduation. The
Company recognizes revenue once graduation review services are completed. Generally, graduation fees are
billed and paid when the student submits the graduation application.

Textbook and other course material fees. Textbook and other course materials revenue represent fees
related to the sale of textbooks and other course materials to HCN students. Revenue is recognized at the
beginning of the term when the textbooks and other course materials fees are billed. Payment is generally
received within thirty days of the bill date. Sales tax collected from students on the sale of textbooks and other
course materials is excluded from revenue.

Other fees. Other fees revenue represents one-time, non-refundable fees such as application, enrollment,
transcript, and other miscellaneous fees. Generally other fees revenue is recognized when the fee is charged
to the student, which coincides with the completion of the specific performance obligation to the student.

APUS provides a tuition grant to support students who are U.S. Military active-duty service members, National
Guard members, reservists, military spouses and dependents, and, until January 2020, veterans, as well as
a grant to cover the technology fee for students using Department of Defense, or DoD, tuition assistance
programs. APUS and HCN also provide scholarships to certain students to assist them financially with their
educational goals.

The statement of retained earnings at January 1, 2018 was adjusted by $278,000 to reflect the after tax impact
of the adoption of ASC 606, related to the recognition of graduation fee revenue at APUS. There were no
adjustments to any other revenue type as a result of the adoption of ASC 606. The impact of adoption on the
Company’s Consolidated Statement of Income of the twelve months ended December 31, 2018 and 2019 was
not material.

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Disaggregation of Revenue
In the following table, revenue, shown net of grants and scholarships, is disaggregated by type of service
provided. The table also includes a reconciliation of the disaggregated revenue with the reportable segments:

(In thousands)

Instructional services, net of grants and scholarships

Graduation fees

Textbook and other course materials

Other fees

Total Revenue

(In thousands)

Instructional services, net of grants and scholarships

Graduation fees

Textbook and other course materials

Other fees

Total Revenue

Twelve Months Ended December 31, 2018

APEI

$258,253

1,069

—

740

HCN

$32,468

—

4,678

479

$260,062

$37,625

Intersegment

Consolidated

$—

—

$—

$290,721

1,069

4,678

1,219

$297,687

Twelve Months Ended December 31, 2019

APEI

$254,961

1,138

—

800

HCN

$25,369

—

3,650

460

Intersegment

Consolidated

$(108)

$280,222

—

1,138

3,650

1,260

$256,899

$29,479

$(108)

$286,270

Effective January 1, 2019, the APEI Segment began charging the HCN Segment for the value of courses
taken by HCN Segment employees at APUS. The intersegment elimination represents the elimination of this
intersegment revenue in consolidation.

Contract Balances and Performance Obligations
The Company has no contract assets or deferred contract costs as of December 31, 2019.

The Company recognizes a contract liability, or deferred revenue, when a student begins an online course, in
the case of APUS, or starts a term, in the case of HCN, and revenue is recognized as described earlier in this
footnote. Deferred revenue at December 31, 2018 was $18.3 million and includes $9.9 million in future revenue
that has not yet been earned for courses and terms that are in progress, as well as $8.4 million in consideration
received in advance for future courses or terms, or student deposits, and represents the Company’s performance
obligation to transfer future instructional services to students. Deferred revenue at December 31, 2019 was
$17.4 million and includes $9.6 million in future revenue that has not yet been earned for courses and terms
that are in progress as well as $7.8 million in student deposits.

The Company has elected, as a practical expedient, not to disclose additional information about unsatisfied
performance obligations for contracts with customers that have an expected duration of one year or less.

When the Company begins providing the performance obligations, a contract receivable is created, resulting in
accounts receivable on the Company’s Consolidated Balance Sheets. The Company accounts for receivables
in accordance with ASC 310, Receivables. The Company uses the portfolio approach, a practical expedient,
to evaluate if a contract exists and to assess collectability at the time of contract inception based on historical
experience. Contracts are subsequently reviewed for collectability if significant events or circumstances
indicate a change.

The allowance for doubtful accounts is based on management’s evaluation of the status of existing accounts
receivable. Among other factors, management considers the age of the receivable, the anticipated source
of payment, and historical allowance considerations. Consideration is also given to any specific known risk

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areas among the existing accounts receivable balances. Recoveries of receivables previously written off are
recorded when received. APUS does not charge interest on past due accounts receivable. HCN charges
interest on payment plans when a student leaves the payment plan program upon graduation or exit of the
program. The interest earned in 2019 was approximately $15,000.

Refund Policies
The Company provides a stated period of time during which students may withdraw from a course, for APUS,
or a term, for HCN, without further financial obligation resulting in a refund liability. The refund policy for each
company is as follows:

American Public University System

APUS’s tuition revenue varies from period to period based on the number of students enrolled, the number of
net course registrations, the volume of undergraduate versus graduate registrations, and student payor source.
Students may remit tuition payments through the online registration process at any time or they may elect
various payment options, including payments by sponsors, alternative loans, financial aid, or the DoD tuition
assistance program, which remits payments directly to APUS. If one of the various other payment options is
confirmed as secured, the student is allowed to start the course. These other payment options can delay the
receipt of payment up until the course starts or longer, resulting in the recording of an account receivable at
the beginning of each session. Tuition revenue that has not yet been earned by APUS is presented as deferred
revenue in the accompanying Consolidated Balance Sheets.

APUS refunds 100% of tuition for courses that are dropped before the conclusion of the first seven days of a
course. The Company does not recognize revenue for dropped courses. After a course begins, APUS uses the
following refund policy:

8-Week Course—Tuition Refund Schedule

Withdrawal Date

Before or During Week 1

During Week 2

During Weeks 3 through 4

During Weeks 5 through 8

16-Week Course—Tuition Refund Schedule

Withdrawal Date

Before or During Week 1

During Week 2

During Weeks 3 through 4

During Weeks 5 through 8

During Weeks 9 through 16

Tuition Refund Percentage

100%

75%

50%

No Refund

Tuition Refund Percentage

100%

75%

50%

No Refund

Students affiliated with certain organizations may have an alternate refund policy.

If a student withdraws during the academic term, APUS calculates the portion of instructional services and
technology fees that are non-refundable based on the tuition refund policy and recognizes it as revenue in the
period the withdrawal occurs.

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Hondros College of Nursing

HCN’s tuition revenue varies from period to period based on the number of students enrolled and the
programs in which they are enrolled. Students may remit tuition payments at any time, or they may elect
various payment options that can delay receipt of payment up until the term starts or longer. These other
payment options include payments by sponsors, financial aid, alternative loans, and payment plan options.
Beginning July 1, 2018, HCN began offering its students extended payment plan options, and with enrollments
beginning in January 2020, HCN will add an additional extended payment program. The extended payment
plan options are designed to assist students with educational costs consisting of tuition, textbooks, and fees,
and are only available after all other student financial assistance has been applied to those costs. Payment
plans require monthly payments while the student is enrolled in a program and extend for a period up to six
months after the last day of attendance or graduation. To the extent interest is applied, it is generally fixed and
does not accrue until the student departs the program or graduates. The extended payment plan options do
not impose any origination fees. Borrowers are advised about the terms of the loans and counseled to use all
federal funding options. In addition, beginning January 1, 2020, HCN will begin offering an institutional grant
to students demonstrating financial need to cover the difference between the total cost of tuition and fees less
the amount of all eligible financial aid resources. The grant is designed to limit a student’s monthly payment
to $200 through an award of up to $200 per month or $600 per term after consideration of financial aid,
employer tuition reimbursement, and other financial resources.

Generally, financial aid is awarded prior to the start of the term and requests for authorization of disbursement
begin in the second week of the term. Tuition revenue that has not yet been earned by HCN is presented as
deferred revenue in the accompanying Consolidated Balance Sheets.

HCN’s refund policy complies with the rules of the Ohio State Board of Career Colleges and Schools and is
applicable to each term. For a course with an on-campus or other in-person component, the date of withdrawal
is determined by a student’s last attended day of clinical offering, laboratory session, or lecture. For an online
course, the date of withdrawal is determined by a student’s last submitted assignment in the course. HCN uses
the following refund policy:

Quarterly Term

Withdrawal Date

Before first full calendar week of the quarter

During first full calendar week of the quarter

During second full calendar week of the quarter

During third full calendar week of the quarter

During fourth full week of the quarter

Tuition Refund Percentage

100%

75%

50%

25%

No Refund

If a student withdraws during the term, HCN calculates the portion of tuition that is non-refundable based on
the tuition refund policy and recognizes it as revenue in the period the withdrawal occurs.

Refund Liability

APUS uses the portfolio approach and applies the expected value method to determine if a refund liability
exists. This requires management judgment and the use of estimates and historical data to assess the
likelihood and magnitude of a revenue reversal due to a refund liability. Due to the short duration of the
courses, and the refund policy described above, any uncertainty regarding a student’s withdrawal is resolved
in a short time period. Based on measurement and analysis, the Company determined that a significant
reversal in the cumulative amount of revenue recognized is not expected. The Company includes this estimate
in the transaction price. At December 31, 2018 and 2019, there was approximately $12,000 and $9,000,

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respectively, of refund liabilities for APUS included in deferred revenue. APUS updates the measurement of
the refund liability at the end of each reporting period for changes in expectations, and if the reversal becomes
significant, recognizes corresponding adjustments to revenue.

Because each HCN term coincides with the Company’s fiscal quarter period, there is no refund liability as of
December 31, 2018 and December 31, 2019.

NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2018 and 2019 consisted of the following:

(in thousands)

Land

Building and building improvements

Leasehold improvements

Office equipment

Computer equipment

Furniture and fixtures

Other capital assets

Software development

Program development

Accumulated depreciation and amortization

Useful Life

—

15—39 years

up to 15 years

5 years

3 years

7 years

5 years

3 years

2018

$ 9,244

54,496

1,473

2,240

25,618

8,391

128

87,058

12,597

201,245

114,364

$ 86,881

2019

$ 9,244

54,592

1,536

911

22,090

9,035

128

87,774

13,103

198,413

119,918

$ 78,495

The Company disposed of long-lived assets resulting in a loss of $2.1 million, $0.9 million, and $0.6 million
during the years ended December 31, 2017, 2018, and 2019, respectively. The loss was primarily related to
assets no longer in use. The losses on long-lived assets are included as loss on disposals of long-lived assets
in these Consolidated Financial Statements.

During the years ended December 31, 2017, 2018 and 2019, the Company recorded depreciation expense of
$18.2 million, $16.9 million and $15.3 million, respectively. In addition, the Company recorded amortization
expense related to other assets of $0.6 million, $0.6 million, and $0.3 million during the years ended
December 31, 2017, 2018 and 2019, respectively.

NOTE 5. INVESTMENTS
On September 30, 2012, the Company made a $6.8 million investment in preferred stock, treated as
in-substance common stock, of NWHW Holdings, Inc., or NWHW Holdings, a holding company that operates
an information technology training company, New Horizons Worldwide, Inc., or New Horizons, representing
approximately 20% of the fully diluted equity of NWHW Holdings. The Company initially accounted for its
investment in New Horizons under ASC 323, Investments—Equity Method and Joint Ventures. Therefore,
the Company recorded the investment at cost and recognized its share of earnings or losses in the investee
in the periods for which they were reported with a corresponding adjustment in the carrying amount of the
investment. During the first quarter of 2019, the Company determined that it no longer qualified to account
for its investment in NWHW Holdings under ASC 323 because the Company is unable to exercise significant
influence over operating and financial policies of NWHW Holdings; therefore, the Company elected to account
for the investment under ASC 321, Equity Investments. Under ASC 321, for each reporting period, the Company
completes a qualitative assessment considering impairment indicators to evaluate whether the investment is
impaired. There were no indicators of impairment for the year ended December 31, 2019. Earnings or losses that

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were previously recorded remain as part of the carrying amount of the investment. As of December 31, 2018
and 2019, the carrying value of the investment was approximately $6.7 million and $5.2 million, respectively.

On February 20, 2013, the Company made a $4.0 million investment in preferred stock of Fidelis Education,
Inc., or Fidelis Education, representing approximately 22% of its fully diluted equity. On February 1, 2016, the
Company made an additional $950,000 investment in preferred stock increasing its investment in Fidelis
Education to approximately 23% of its fully diluted equity. Fidelis Education offers a learning relationship
management platform that has the goal of improving education advising and career mentoring services
offered to students as they pursue college degrees. In connection with the investment, the Company is
entitled to certain rights, including the right to representation on the Board of Directors of Fidelis Education.
The Company accounts for its investment in Fidelis Education under ASC 323, Investments—Equity Method
and Joint Ventures. Therefore, the Company recorded the investment at cost and recognizes its share of
earnings or losses in the investee in the periods for which they are reported with a corresponding adjustment
in the carrying amount of the investment. During the fourth quarter of 2017, the Company determined that the
fair value of its investment in Fidelis Education was less than its carrying value and that the impairment was
other-than-temporary. As a result, an approximately $2.2 million non-cash impairment charge was recorded
for the year ended December 31, 2017. This impairment charge is included in equity investment loss in the
Consolidated Statements of Income. As of December 31, 2018 and 2019, the carrying value of the investment
was approximately $1.2 million and $1.1 million, respectively.

On April 2, 2014, the Company made a $1.5 million investment in preferred stock of Second Avenue Software,
Inc., or Second Avenue Software, representing approximately 26% of its fully diluted equity. Second Avenue
Software is a game-based education software company that develops software on a proprietary and “work-
for-hire” basis. The Company initially accounted for its investment in Second Avenue under ASC 323,
Investments—Equity Method and Joint Ventures. Therefore, the Company recorded the investment at cost
and recognized its share of earnings or losses in the investee in the periods for which they were reported
with a corresponding adjustment in the carrying amount of the investment. During the fourth quarter of 2017
and 2018, the Company determined that the fair value of its investment in Second Avenue Software was
less than its carrying value and that the impairment was other-than-temporary. As a result, the Company
recorded approximately $0.2 million and $0.1 million pretax non-cash impairment charges for the years ended
December 31, 2017 and 2018, respectively. These impairment charges are included in equity investment loss
in the Consolidated Statements of Income. During the first quarter of 2019, the Company determined that it
no longer qualified to account for its investment in Second Avenue Software under ASC 323 because the
Company is no longer able to exercise significant influence over operating and financial policies of Second
Avenue Software; therefore, the Company has elected to account for the investment under ASC 321, Equity
Investments. Under ASC 321, for each reporting period, the Company completes a qualitative assessment
considering impairment indicators to evaluate whether the investment is impaired. There were no indicators
of impairment for the year ended December 31, 2019. Earnings or losses that were previously recorded remain
as part of the carrying amount of the investment. The carrying value of the investment is approximately
$0.8 million as of December 31, 2018 and 2019.

On December 21, 2015, the Company made a $3.5 million investment in preferred stock of RallyPoint, an
online social network for members of the military, representing approximately 14% of its fully diluted equity.
The Company accounts for its investment in RallyPoint using ASC 321, Investments—Equity Securities. On
October 24, 2017, the Company made an additional $0.3 million investment in preferred stock of Rally Point.
Subsequent to the additional investment, the Company’s fully diluted ownership was unchanged. Under
ASC 321, for each reporting period, the Company completes a qualitative assessment considering impairment
indicators to evaluate whether the investment is impaired. During the year ended December 31, 2018, the

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Company determined that impairment indicators existed and utilized an independent valuation firm to assess
the fair value of the investment. The assessment concluded that the fair value of its investment was less than
the carrying amount resulting in a pretax non-cash impairment charge of approximately $0.5 million. This
impairment charge is included in equity investment loss in the Consolidated Statements of Income. There was
no impairment for the year ended December 31, 2019. The carrying value of the investment was approximately
$3.3 million as of December 31, 2018 and 2019.

The Company evaluated its equity method investment for impairment as of December 31, 2019 and determined
the investment was not impaired. During the years ended December 31, 2017, and 2018, the Company recorded
impairment charges of approximately $2.4 million, and $0.1 million on its equity method investments, respectively.

The Company evaluated its cost method investments for impairment as of December 31, 2019 and determined none
of the investments were impaired. During the years ended December 31, 2017 and 2018 the Company recorded
impairment charges of approximately $0.3 million and $0.5 million on its cost method investments, respectively.

The aggregate carrying amount of the Company’s investments accounted for under ASC 321, Investments—
Equity Securities, presented on its Consolidated Balance Sheet on a one-line basis as “Investments”, was
approximately $3.3 million and $9.4 million as of December 31, 2018 and 2019, respectively.

NOTE 6. GOODWILL AND INTANGIBLE ASSETS
In connection with its November 1, 2013 acquisition of HCN, the Company applied ASC 805, Business
Combinations, using the acquisition method of accounting. The Company recorded $38.6 million of goodwill,
representing the excess of the purchase price over the amount assigned to the net assets acquired and the fair
value assigned to identified intangible assets, and recorded $8.1 million of identified intangible assets.

The Company accounts for goodwill and indefinite-lived intangible assets in accordance with FASB ASC 350,
Intangibles Goodwill and Other, and in 2018 adopted ASU 2017-04, Intangibles—Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment. The Company annually assesses goodwill for impairment on
October 31st, or more frequently if events and circumstances indicate that goodwill might be impaired. Goodwill
impairment testing consists of an optional qualitative assessment as well as a quantitative test. The quantitative
test compares the fair value of the reporting unit to its carrying value. If the carrying value of the reporting unit
is greater than zero and its fair value is greater than its carrying amount, there is no impairment. If the carrying
value is greater than the fair value, the difference between the two values is recorded as an impairment.

In addition to goodwill, HCN recorded identified intangible assets with an indefinite useful life in the aggregate
amount of $3.7 million, which includes trade names, accreditation, licensing and Title IV, and affiliate agreements,
and recorded $4.4 million of identified intangible assets with a definite useful life. At the acquisition date, the
useful life assigned to each type of intangible asset with a definite useful life was as follows:

Student contracts and relationships

Curricula

Non-compete agreements

Useful Life

6 years

3 years

5 years

At December 31, 2019, all identified intangible assets with a useful life were fully amortized.

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

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goodwill was calculated and compared to the recorded goodwill, and the Company determined the fair value
of goodwill was $26.6 million, or $7.3 million less than its carrying value. There was no impairment of the
intangible assets. As a result, the Company recorded a pretax, non-cash charge of $7.3 million to reduce the
carrying value of its goodwill in the HCN Segment during 2019.

The Company engaged an independent valuation firm to assist with the valuation and determination of the
fair value of HCN for both assessments. The independent valuation firm weighted the results of four different
valuation methods: (1) discounted cash flows; (2) guideline company; (3) guideline transaction for comparable
transactions; and (4) guideline transaction for private equity transactions. Under the discounted cash flow
method, cash flows were discounted by an estimated risk weighted average cost of capital, which was intended
to reflect the overall level of inherent risk of HCN. Under the guideline company method, valuation metrics
from other education companies were used to determine the value. Under the comparable transaction method,
pricing terms from other transactions in the higher education market were used to determine the value. Under
the private equity method, pricing terms from private equity transactions were used to determine the value.
Values derived under the four valuation methods were then weighted to estimate HCN’s enterprise value.

The goodwill impairment charges recorded in the quarters ended March 31, 2019 and September 30, 2019
eliminated the difference between the fair value of goodwill and the carrying value of goodwill. As such,
future changes, including even minor changes in revenue, operating income, market multiples, discount
rates, and other inputs to the valuation process may result in future impairment charges and those charges
could be material.

As of October 31, 2018 and 2019, the Company completed its annual assessment of goodwill and concluded
that HCN’s fair value was more than the carrying value; consequently, there was no impairment. The Company’s
October 31, 2019 annual assessment concluded that the fair value of HCN exceeded the carrying value by
approximately 4%, or $1.5 million.

Changes in the carrying amount of goodwill by reportable segment during the year ended December 31, 2019
are as follows (in thousands):

Goodwill as of December 31, 2018

Impairment
Goodwill as of December 31, 2019

APEI Segment

HCN Segment

Total Goodwill

$—

—

$—

$33,899

(7,336)

$26,563

$33,899

(7,336)

$26,563

There were no changes in the carrying amount of goodwill by reportable segment during the years ended
December 31, 2017 and 2018.

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Other intangible assets, included in Other Assets on the Consolidated Balance Sheets in these Consolidated
Financial Statements, consist of the following as of December 31, 2018 (in thousands):

Finite-lived intangible assets

Curricula

Non-compete agreements

Student contracts and relationships
Total finite-lived intangible assets

Indefinite-lived intangible assets

Trade name

Accreditation, licensing and Title IV

Affiliation agreements
Total indefinite-lived intangible assets

Total intangible assets

Gross
Carrying Amount

2018

Accumulated
Amortization

Net
Carrying Amount

$ 405

3,870

4,361

1,998

1,686

3,721

$8,082

$ 405

3,548

4,039

—

$4,039

$ —

—

322

1,998

1,686

3,721

$4,043

Other intangible assets consist of the following as of December 31, 2019 (in thousands):

Finite-lived intangible assets

Curricula

Non-compete agreements

Student contracts and relationships
Total finite-lived intangible assets

Indefinite-lived intangible assets

Trade name

Accreditation, licensing and Title IV

Affiliation agreements
Total indefinite-lived intangible assets

Total intangible assets

Gross
Carrying Amount

2019

Accumulated
Amortization

Net
Carrying Amount

$ 405

3,870

4,361

1,998

1,686

3,721

$8,082

$ 405

3,870

4,361

—

$4,361

$ —

—

1,998

1,686

3,721

$3,721

Identified intangible assets are amortized in a manner that reflects the estimated economic benefit of the
intangible assets. Curricula and Non-compete agreements were amortized on a straight-line basis. Student
contracts and relationships were amortized using an accelerated method.

Determining the fair value of HCN requires judgment and the use of significant estimates and assumptions,
including fluctuations in enrollments, revenue growth rates, EBITDA margins, discount rates, and future market
conditions, among others. Given the current competitive and regulatory environment, and the uncertainties
regarding the related impact on HCN’s business, there can be no assurance that the estimates and
assumptions made for purposes of the Company’s interim and annual goodwill impairment tests will prove to
be accurate predictions of the future. If the Company’s assumptions are not realized, the Company may record
additional goodwill impairment charges in future periods. It is not possible at this time to determine if any such
future impairment charge would result or whether such charge would be material.

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NOTE 7. LEASES
The Company has operating leases for office space and campus facilities. Some leases include options to
terminate or extend for one or more years. These options are included in the lease term when it is reasonably
certain that the option will be exercised.

Operating lease assets are ROU assets, which represent the right to use an underlying asset for the lease term.
Operating lease liabilities represent the obligation to make lease payments arising from the lease. Operating
leases are included in the Operating lease assets, net, and Operating lease liabilities, current and long-term on
the Consolidated Balance Sheet as of December 31, 2019. These assets and lease liabilities are recognized at
the lease commencement date based on the present value of lease payments over the lease term. When the
lease does not provide an implicit interest rate, the Company uses an incremental borrowing rate based on
information available at lease commencement to determine the present value of the lease payments. The ROU
asset includes all lease payments and excludes lease incentives.

Lease expense for operating leases is recognized on a straight-line basis over the lease term. There are no
variable lease payments. Lease expense for the year ended December 31, 2019 was approximately $2.6 million.
These costs are primarily related to long-term operating leases, but also include amounts for short-term leases
with terms greater than 30 days that are not material.

The following tables present information about the amount and timing of cash flows arising from the Company’s
operating leases as of December 31, 2019 (dollars in thousands):

Maturity of Lease Liabilities

Lease Payments

2020

2021

2022

2023

2024

2025 and beyond

Total future minimum lease payments

Less imputed interest

Present value of operating lease liabilities

Balance Sheet Classification

Operating lease liabilities, current

Operating lease liabilities, long-term

Total operating lease liabilities

Other Information

Weighted average remaining lease term (in years)

Weighted average discount rate

2,835

2,903

2,857

1,909

928

2,239

$13,671

(1,893)

$11,778

$ 2,283

9,495

$11,778

5.53

5.1%

The APEI Segment leases corporate and administrative office space in Maryland and Virginia under operating
leases that expire through June 2023. Lease expense related to the APEI Segment’s operating leases was
$0.7 million, $0.6 million and $0.5 million for the years ended December 31, 2017, 2018 and 2019, respectively.
HCN operates five campuses, which are located in the suburban areas of Cincinnati, Cleveland, Columbus,
Dayton, and Toledo, Ohio, a new campus planned in Indianapolis, Indiana is expected to open in the
second quarter of 2020, and one administrative office in suburban Columbus under operating leases that

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expire through June 2029. Lease expense related to the HCN Segment’s operating leases was $2.7 million,
$2.8 million, and $2.1 million for the years ended December 31, 2017, 2018 and 2019, respectively. A majority
of the leases provide for the payment of taxes, maintenance, insurance and certain other operating expenses
applicable to the leased premises.

NOTE 8. INCOME TAXES
The components of income tax expense for the years ended December 31, 2017, 2018 and 2019 were as
follows (in thousands):

Current income tax expense:

Federal

State

Deferred tax expense:

Federal

State

Income Tax Expense

2017

$11,989

1,998

13,987

(2,810)

316

(2,494)

$11,493

2018

$ 8,034

2,170

10,204

(776)

(141)

(917)

$ 9,287

The tax effects of principal temporary differences are as follows (in thousands):

Deferred tax assets

Operating lease liability

Allowance for doubtful accounts

Restricted stock

Accrued vacation and severance

Investment

Other

Deferred rent

Stock option compensation expense

Total deferred tax assets

Deferred tax liabilities

Income tax deductible capitalized software development costs

Operating lease asset

Property and equipment

Prepaid expenses

Goodwill and intangibles

Total deferred tax liabilities

Deferred tax liabilities, net

2018

$ —

1,637

1,625

571

—

3,971

(4,701)

—

(1,484)

(1,259)

(1,891)

(9,335)

$(5,364)

2019

$ 5,803

1,425

7,228

(1,766)

(275)

(2,041)

$ 5,187

2019

$ 2,912

1,528

1,232

660

304

232

—

6,869

(3,330)

(2,882)

(1,670)

(1,607)

(771)

(10,260)

$ (3,391)

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Income tax expense differs from the amount of tax determined by applying the United States Federal income
tax rates to pretax income and loss due to the application of state apportionment laws, permanent tax
differences, and the impact of the change in the federal statutory rate as follows (in thousands):

Tax expense at statutory rate

State taxes, net

Permanent differences

Change in statutory rate

Equity-based compensation benefits

Post-employment benefits

Uncertain tax position

Valuation allowance on capital loss

Other

2017

2018

2019

Amount

$11,415

1,626

2,060

35.00%

4.98%

6.31%

(3,741)

(11.47%)

—

133

$11,493

—%

0.42%

35.24%

Amount

$7,320

1,575

433

—

(126)

—

154

—

(69)

$9,287

21.00%

4.51%

1.24%

—%

(0.36%)

—%

0.44%

—%

(0.19%)

26.64%

Amount

$3,192

852

244

—

371

345

213

(123)

$5,187

21.00%

5.60%

1.61%

—%

2.44%

2.27%

0.61%

1.40%

(0.80%)

34.13%

On December 22, 2017 the Tax Act was enacted by the U.S. government. Among other provisions, the Tax Act
reduced the federal corporate tax rate to 21% from the existing maximum rate of 35%, effective January 1, 2018.
The Company recorded a tax benefit of $3.7 million related to the revaluation of its net deferred tax liabilities
for the year ended December 31, 2017.

Permanent differences in the table above are mainly attributable to executive and stock compensation,
minority investment earnings and/or losses including other-than-temporary impairment charges, nondeductible
meals and entertainment expenses, and non-deductible employer contributions to the American Public
Education, Inc. Employee Stock Purchase Plan, or ESPP.

The Company is subject to U.S. federal income taxes as well as income tax of multiple state jurisdictions. For
U.S. federal and state tax purposes, tax years 2016-2018 remain open to examination.

NOTE 9. OTHER EMPLOYEE BENEFITS
The Company has established a tax deferred 401(k) retirement plan that provides retirement benefits to
its eligible employees. Participants may elect to contribute up to 60% of their gross annual earnings not
to exceed ERISA and IRS limits. The plan provides for Company discretionary profit sharing contributions
at matching percentages. Employees immediately vest 100% in all salary reduction contributions and
employer contributions.

The Company made discretionary contributions to the plan of $3.8 million, $3.7 million and $3.7 million for the
years ended December 31, 2017, 2018 and 2019, respectively.

In November 2007, the Company adopted the American Public Education, Inc. Employee Stock Purchase
Plan, or the ESPP, which was implemented effective July 1, 2008 with quarterly enrollment periods. Eligible
participants may only enter the plan and establish their withholdings at the start of an enrollment period.
Participating employees may withdraw from the plan and end payroll deductions at any time up to five days
before the share purchase date and funds will be returned to them. Under the ESPP, participating employees

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may purchase shares of the Company’s common stock, subject to certain limitations, at 85% of its fair market
value on the last day of the quarterly period. The total value of contributions per participant may not exceed
$21,000 annually or the value of the common stock purchased per participant cannot exceed $25,000. There
were initially 100,000 shares of common stock available for purchase by participating employees under the
ESPP. On June 13, 2014, the Company’s stockholders approved an amendment to the ESPP to increase the
number of shares of the Company’s common stock available for issuance under the plan by 100,000 shares,
extend the term of the ESPP to March 7, 2024, and make other administrative changes. Shares purchased in
the open market for issuance to employees pursuant to the plan for the years ended December 31, 2017, 2018
and 2019 were as follows:

Purchase Date

March 31, 2017

June 30, 2017

September 30, 2017

December 31, 2017

Total/Weighted Average

March 31, 2018

June 30, 2018

September 30, 2018

December 31, 2018

Total/Weighted Average

March 31, 2019

June 30, 2019

September 30, 2019

December 31, 2019

Total/Weighted Average

4,161

3,535

4,613

3,065

15,374

1,931

1,661

2,779

2,475

8,846

2,905

2,465

4,511

3,339

13,220

Common Stock
Fair Value

Purchase
Price

Compensation
Expense

$22.90

$23.65

$21.15

$25.80

$23.13

$42.15

$43.15

$32.17

$28.46

$35.37

$30.74

$29.35

$22.34

$27.39

$26.77

$19.47

$20.10

$17.98

$21.93

$19.66

$35.83

$36.68

$27.34

$24.19

$30.07

$26.13

$24.94

$18.99

$23.28

$22.75

$14,272

$12,549

$14,623

$11,862

$53,306

$12,209

$10,751

$13,410

$10,566

$46,936

$13,395

$10,873

$15,116

$13,723

$53,107

NOTE 10. STOCKHOLDERS’ EQUITY

Stock Incentive Plans
The American Public Education, Inc. 2017 Omnibus Incentive Plan, or 2017 Incentive Plan, became effective on
May 12, 2017, or the Effective Date. Upon effectiveness of the 2017 Incentive Plan, the Company ceased making
awards under the American Public Education, Inc. 2011 Omnibus Incentive Plan, or the 2011 Incentive Plan. The
2017 Incentive Plan allows the Company to grant up to 1,675,000 shares, as well as shares of the Company’s
common stock that were available for issuance under the 2011 Incentive Plan as of the Effective Date. In
addition, the number of shares of common stock available under the 2017 Incentive Plan will be increased from
time to time by the number of shares subject to outstanding awards granted under the 2011 Incentive Plan
that terminate by expiration, forfeiture, cancellation or otherwise without issuance of such shares following the
Effective Date. The 2017 Incentive Plan includes a provision that allows individuals who have reached certain
service and retirement eligibility criteria on the date of grant an accelerated service period of one year. The
Company recognizes compensation expense for these individuals over the accelerated period.

Restricted Stock and Restricted Stock Unit Awards
The fair value of APEI’s restricted stock and restricted stock unit awards is calculated based on the closing
price of APEI’s stock on the date of grant. The estimated fair value of these awards is recognized as stock-
based compensation expense and is expensed over the vesting period using the straight-line method for
Company employees and the graded-vesting method for members of the Board of Directors. APEI recognizes

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the estimated fair value of performance-based restricted stock units by assuming the satisfaction of any
performance-based objectives at the “target” level, which is the most probable outcome determined for
accounting purposes at the time of grant, and multiplying the corresponding number of shares earned based
upon such achievement by the closing price of APEI’s stock on the date of grant. To the extent performance
goals are not met, compensation cost is not ultimately recognized against the goals and, to the extent
previously recognized, compensation cost is reversed. The Company also estimates forfeitures of share-based
awards at the time of grant and revises such estimates in subsequent periods if actual forfeitures differ from
original estimates.

The table below sets forth the restricted stock and restricted stock unit activity for the year ended
December 31, 2017:

Non vested, December 31, 2016

Shares granted

Vested shares

Shares forfeited

Non vested, December 31, 2017

Number
of Shares

437,971

279,729

(212,984)

(43,454)

461,262

Weighted Average Grant
Price and Fair Value

$21.54

23.35

25.98

21.04

$20.91

The table below sets forth the restricted stock and restricted stock unit activity for the year ended
December 31, 2018:

Non vested, December 31, 2017

Shares granted

Vested shares

Shares forfeited

Non vested, December 31, 2018

Number
of Shares

461,262

302,781

(222,069)

(51,632)

490,342

Weighted Average Grant
Price and Fair Value

$20.91

27.00

21.33

22.94

$24.23

The table below sets forth the restricted stock and restricted stock unit activity for the year ended
December 31, 2019:

Non vested, December 31, 2018

Shares granted

Vested shares

Shares forfeited

Non vested, December 31, 2019

Number
of Shares

490,342

333,635

(255,918)

(21,119)

546,940

Weighted Average Grant
Price and Fair Value

$24.23

29.48

22.98

26.86

$27.81

There were no shares of restricted stock or restricted stock units excluded in the computation of diluted net
income per share for the year ended December 31, 2017. There were 35,688 and 37,738 shares of restricted
stock or restricted stock units excluded in the computation of diluted net income per common share for the
years ended December 31, 2018 and 2019, respectively.

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At December 31, 2019, total unrecognized compensation expense in the amount of $7.3 million relates to non-
vested restricted stock, restricted stock units, and stock options, which will be recognized over a weighted
average period of 1.8 years.

As a result of termination of employment, the Company accepted the following common shares for forfeiture:
43,454 shares for $914,272 in 2017, 48,814 shares for $1,118,842 in 2018, and 17,825 shares for $488,974 in 2019.

Option Awards
The fair value of each option award is estimated at the date of grant using a Black-Scholes option-pricing model.
The Company makes assumptions with respect to expected stock price volatility based on the average historical
volatility of the Company’s common stock. In addition, the Company determines the risk-free interest rate by
selecting the U.S. Treasury constant maturity for the same maturity as the estimated life of the option, quoted
on an investment basis in effect at the time of grant for that business day. Estimates of fair value are subjective
and are not intended to predict actual future events, and subsequent events are not necessarily indicative of
the reasonableness of the original estimates of fair value made under FASB ASC Topic 718. Prior to 2012, the
Company issued a mix of stock options and restricted stock, but since 2011 the Company did not issue any
stock options until 2019 when options were issued to the Company’s new Chief Executive Officer. Options
currently outstanding vest ratably over a period of three years and expire in ten years from the date of grant.

A summary of the status of the Company’s Stock Incentive Plans as of December 31, 2017 and the changes
during the periods then ended is as follows:

Outstanding, December 31, 2016

Options granted

Awards exercised

Options forfeited

Outstanding, December 31, 2017

Exercisable, December 31, 2017

Number
of Options

259,969

—

(14,002)

(136,351)

109,616

Weighted Average
Exercise Price

Weighted Average
Contractual Life
(years)

Aggregate
Intrinsic Value
(in thousands)

$34.68

—

6.99

35.24

$37.52

0.01

$—

A summary of the status of the Company’s Stock Incentive Plans as of December 31, 2018 and the changes
during the periods then ended is as follows:

Outstanding, December 31, 2017

Options granted

Awards exercised

Options forfeited

Outstanding, December 31, 2018

Exercisable, December 31, 2018

Number
of Options

109,616

—

(109,616)

—

Weighted Average
Exercise Price

Weighted Average
Contractual Life
(years)

Aggregate
Intrinsic Value
(in thousands)

$37.52

—

37.52

$—

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A summary of the status of the Company’s Stock Incentive Plans as of December 31, 2019 and the changes
during the periods then ended is as follows:

Number
of Options

Weighted Average
Exercise Price

Weighted Average
Contractual Life
(years)

Aggregate
Intrinsic Value
(in thousands)

Outstanding, December 31, 2018

Options granted

Awards exercised

Options forfeited

Outstanding, December 31, 2019

Exercisable, December 31, 2019

—

43,134

—

43,134

—

$—

23.77

—

$23.77

$—

9.73

$156

$ —

The following table sets forth the assumptions used in calculating the fair value at the date of grant of each
option award granted:

Expected volatility

Expected dividends

Expected term, in years

Risk-free interest rate

Weighted-average fair value of options granted during the year

Year Ended December 31,

2017

—%

$—

2018

—%

$—

The following table summarizes information regarding stock option exercises:

(In thousands)

Proceeds from stock options exercised

Intrinsic value of stock options exercised

Tax benefit from exercises

Year Ended December 31,

2017

$ 98

$194

$ 60

2018

$—

2019

47.37%

—%

1.74%

$13.91

2019

$—

There were 123,267 anti-dilutive stock options excluded from the calculation of diluted net income per
common share for the year ended December 31, 2017. There were no anti-dilutive stock options excluded from
the calculation of diluted net income per common share for the year ended December 31, 2018. There were
43,134 anti-dilutive stock options excluded from the calculation of diluted net income per share for the year
ended December 31, 2019.

Stock-Based Compensation Expense
As of December 31, 2019, there were 484,400 and 62,540 shares subject to outstanding awards under the
2017 Incentive Plan and the 2011 Incentive Plan, respectively.

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For the years ended December 31, 2017, 2018 and 2019, the Company recognized stock-based compensation
expense as follows:

(In thousands)

Instructional costs and services

Selling and promotional

General and administrative

Total stock-based compensation expense

Year Ended December 31,

2017

$1,310

789

4,147

$6,246

2018

$1,610

512

5,058

$7,180

2019

$1,570

766

3,624

$5,960

The Company recognized income tax benefits of $2.5 million, $1.9 million, and $2.0 million from vested
restricted stock and restricted stock units for the years ended December 31, 2017, 2018 and 2019, respectively.

Repurchase
During the years ended December 31, 2017 and 2018, the Company did not repurchase shares of the
Company’s common stock, par value $0.01 per share, other than shares deemed to have been repurchased
to satisfy employee minimum tax withholding requirements in connection with the vesting of restricted
stock grants. During the year ended December 31, 2019, the Company repurchased 1,416,304 shares of the
Company’s common stock, par value $0.01 per share. The chart and footnotes below provide the detail as to
the Company’s repurchases during the period.

Total Number of
Shares Purchased

Average Price
Paid per Share

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs

Maximum
Number of Shares
that May Yet
Be Purchased
Under the Plans
or Programs(1)

Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
or Programs(2)(3)

January 1, 2019

January 1, 2019–January 31, 2019

February 1, 2019–February 28, 2019

March 1, 2019–March 31, 2019

April 1, 2019–April 30, 2019

May 1, 2019–May 31, 2019

June 1, 2019–June 30, 2019

July 1, 2019–July 31, 2019

August 1, 2019–August 31, 2019

September 1, 2019–September 30, 2019

October 1, 2019–October 31, 2019

November 1, 2019–November 30, 2019

December 1, 2019–December 31, 2019

—

129,973

197,488

218,699

220,000

199,921

229,849

110,374

110,000

$ —

—

29.38

29.03

30.79

28.16

24.12

22.34

23.21

27.23

—

129,973

197,488

218,699

220,000

199,921

229,849

110,374

110,000

Total

1,416,304

$26.83

1,416,304

—

$ 148,008

283,876

284,252

299,060

299,436

352,104

352,480

148,008

31,181,393

25,448,317

18,714,574

12,519,374

7,697,280

2,562,453

673

22,004,700

$22,004,700

• On December 9, 2011, our Board of Directors approved a stock repurchase program for our common stock,

under which we could annually purchase up to the cumulative number of shares issued or deemed issued in
that year under our equity incentive and stock purchase plans. Repurchases may be made from time to time
in the open market at prevailing market prices or in privately negotiated transactions based on business and
market conditions. The stock repurchase program does not obligate us to repurchase any shares, may be
suspended or discontinued at any time, and is funded using our available cash.

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• On May 2, 2019, the Company’s Board of Directors authorized the repurchase of up to $35.0 million of the

Company’s common stock, and on December 5, 2019, the Board approved an additional authorization of up
to $25.0 million of shares. Subject to market conditions, applicable legal requirements, and other factors,
the repurchases may be made from time to time in the open market or in privately negotiated transactions.
The authorization does not obligate the Company to acquire any shares, and purchases may be commenced
or suspended at any time based on market conditions and other factors the Company deem appropriate.
The Company may purchase shares at management’s discretion in the open market, in privately negotiated
transactions, in transactions structured through investment banking institutions, or a combination of the
foregoing. The Company may also, from time to time, enter into Rule 10b5-1 plans to facilitate repurchases
of shares under this authorization. The amount and timing of repurchases are subject to a variety of factors,
including liquidity, cash flow, stock price and general business and market conditions. The Company has
no obligation to repurchase shares and may modify, suspend or discontinue the repurchase program at any
time. The authorization under this program is in addition to the Company’s repurchase program under which
we may annually purchase up to the cumulative number of shares issued or deemed issued in that year
under our equity incentive and stock purchase plan.

• During the year-ended December 31, 2019, the Company was deemed to have repurchased 83,214 shares of
common stock forfeited by employees to satisfy minimum tax-withholding requirements in connection with
the vesting of restricted stock grants. These repurchases were not part of the stock repurchase programs
authorized by our Board of Directors as described in footnotes 1 and 2 of this table.

NOTE 11. CONTINGENCIES
The Company accrues for costs associated with contingencies including, but not limited to, regulatory
compliance and legal matters when such costs are probable and can be reasonably estimated. Liabilities
established to provide for contingencies are adjusted as further information develops, circumstances change,
or contingencies are resolved. The Company bases these accruals on management’s estimate of such costs,
which may vary from the ultimate costs and expenses, associated with any such contingency.

From time to time the Company may be involved in legal matters in the normal course of its business.

NOTE 12. CONCENTRATION
APUS students utilize various payment sources and programs to finance their education expenses, including
funds from: Department of Defense, or DoD, tuition assistance programs; federal student aid from Title IV
programs; and education benefit programs administered by the U.S. Department of Veteran’s Affairs, or VA,
education benefit programs; as well as cash and other sources. Reductions in or changes to DoD tuition
assistance, VA education benefits, Title IV programs and other payments sources could have a significant
impact on the Company’s operations. As of December 31, 2019 approximately 57% of APUS students self-
reported that they served in the military on active duty at the time of initial enrollment. Active duty military
students generally take fewer courses per year on average than non-military students.

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A summary of APEI Segment revenue derived from students by primary funding source for the years ended
December 31, 2017, 2018 and 2019 is as follows:

DoD tuition assistance programs

Title IV programs

VA education benefits

Cash and other sources

2017

37%

27%

23%

13%

Year Ended December 31,

2018

37%

26%

23%

14%

2019

39%

25%

23%

13%

A summary of HCN Segment revenue derived from students by primary funding source for the years ended
December 31, 2017, 2018 and 2019 is as follows:

Title IV programs

Cash and other sources

VA education benefits

2017

83%

14%

Year Ended December 31,

2018

82%

16%

2019

80%

18%

A reduction in, or change to, any of these programs could have a significant impact on the Company’s
operations and financial condition.

NOTE 13. SEGMENT INFORMATION
The Company has two operating segments that are managed in the following reportable segments:

• American Public Education Segment, or APEI Segment, and

• Hondros College of Nursing Segment, or HCN Segment.

In accordance with FASB ASC Topic 280, Segment Reporting, the chief operating decision-maker has been
identified as the Chief Executive Officer. The Chief Executive Officer reviews operating results to make
decisions about allocating resources and assessing performance for APEI and HCN.

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A summary of financial information by reportable segment is as follows (in thousands):

Revenue

American Public Education Segment

Hondros College of Nursing Segment

Intersegment elimination
Total Revenue

Depreciation and Amortization

American Public Education Segment

Hondros College of Nursing Segment
Total Depreciation and Amortization

Income from operations before interest

income and income taxes

American Public Education Segment

Hondros College of Nursing Segment

Intersegment elimination
Total income from operations before
interest income and income taxes

Interest Income, Net

American Public Education Segment

Hondros College of Nursing Segment
Total Interest Income, Net

Income Tax Expense (Benefit)

American Public Education Segment

Hondros College of Nursing Segment
Total Income Tax Expense

Capital Expenditures

American Public Education Segment

Hondros College of Nursing Segment
Total Capital Expenditures

Year Ended December 31,

2017

2018

2019

$265,246

34,002

—

$299,248

$ 17,376

1,400

$ 18,776

$ 30,873

3,986

—

$260,062

37,625

—

$297,687

$ 16,175

1,326

$ 17,501

$ 28,561

3,965

—

$256,899

29,479

(108)

$286,270

$ 14,659

937

$ 15,596

$ 23,522

(10,768)

$ 34,859

$ 32,526

$ 12,756

$ 185

—

$ 185

$ 10,289

1,204

$ 11,493

$ 14,347

441

$ 14,788

$ 2,867

$ 2,915

$ 8,267

1,020

$ 9,287

$ 8,793

637

$ 9,430

$ 3,866

$ 3,908

$ 7,754

(2,567)

$ 5,187

$ 6,479

776

$ 7,255

Effective January 1, 2019, the APEI Segment began charging the HCN Segment for the value of courses taken
by HCN Segment employees at American Public University System. Intersegment elimination represents the
elimination of this intersegment revenue in consolidation.

A summary of the Company’s consolidated assets by reportable segment is as follows (in thousands):

Assets

American Public Education Segment

Hondros College of Nursing Segment
Total Assets

As of December 31,

2018

2019

$322,523

48,435

$370,958

$305,896

49,001

$354,897

NOTE 14. SUBSEQUENT EVENTS
The Company has reviewed its business activities and has no subsequent events to report.

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NOTE 15. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
The following unaudited consolidated interim financial information presented should be read in conjunction
with other information included in the Company’s consolidated financial statements. In the opinion of
management, the following unaudited consolidated financial information reflects all adjustments necessary
for the fair presentation of the results of interim periods. Historical results are not necessarily indicative of
the results of operations to be expected for future periods. The following tables set forth selected unaudited
quarterly financial information for each of the Company’s last eight quarters:

(in thousands, except per share data)

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

2019

Revenue

Income (loss) from operations before income taxes

Net income (loss)

Net income (loss) per common share:

Basic

Diluted

2018

Revenue

Income from operations before income taxes

Net income

Net income per common share:

Basic

Diluted

$73,441

2,435

1,011

$ 0.06

$74,967

6,655

4,589

$ 0.28

$70,560

6,813

4,921

$ 0.30

$72,798

8,709

6,458

$ 0.39

$67,888

(1,894)

(1,638)

$ (0.10)

$72,992

7,658

5,499

$ 0.33

$74,381

9,310

5,719

$ 0.37

$76,930

12,419

9,093

$ 0.55

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We have carried out an evaluation, under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, of the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended, or the Securities Exchange Act), as of December 31, 2019. Based upon that evaluation,
our principal executive officer and principal financial officer concluded that, as of the end of that period, our
disclosure controls and procedures were effective.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Beginning January 1, 2018, we implemented ASC 606, Revenue from Contracts with Customers. Although the
new revenue standard has had an immaterial impact on our ongoing revenue and net income, we implemented
changes to our processes related to revenue recognition and the related control activities. These included
the development of new policies based on the five-step model provided in the new revenue standard, new
training, ongoing contract review requirements, and gathering information provided for disclosures.

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171

Beginning January 1, 2019, we implemented ASC 842, Leases. We implemented changes to our processes
related to contract evaluations, operating lease asset and liability recognition, and the related control activities.
These included the development of new policies, training, ongoing contract review requirements, and
gathering information provided for disclosures.

There were no other changes in our internal control over financial reporting identified in connection with
the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the fourth
quarter of 2019 that has materially affected or is reasonably likely to materially affect our internal control over
financial reporting.

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f)
promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under
the supervision of, the Company’s Principal Executive and Principal Financial Officers and effected by the
Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles and includes those policies and procedures that:

• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions

and dispositions of the assets of the Company;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of the
Company; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or

disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

Under the supervision and with the participation of our Principal Executive Officer and Principal Financial
Officer, our management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2019. In making this assessment, our management used the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013.

Based on its assessment, management concluded that, as of December 31, 2019, our internal control over
financial reporting is effective based on those criteria. Management reviewed the results of its assessment with
the Audit Committee of our Board of Directors.

Our independent registered public accounting firm, Deloitte & Touche LLP, who audited and reported on the
Consolidated Financial Statements of the Company included in this Annual Report, have also audited the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, as stated in
its report that appears below.

170

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171

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of American Public Education Inc.

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of American Public Education Inc. and subsidiaries
(the “Company”) as of December 31, 2019, based on criteria established in Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework
(2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31,
2019, of the Company and our report dated March 10, 2020, expressed an unqualified opinion on those
financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are
a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the company’s assets that could have a material effect on the financial statements.

172

AMERICAN PUBLIC EDUCATION, INC.

2019 ANNUAL REPORT

173

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

/s/ Deloitte & Touche LLP

McLean, Virginia
March 10, 2020

ITEM 9B. OTHER INFORMATION
None.

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2019 ANNUAL REPORT

173

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS,

AND CORPORATE GOVERNANCE

EXECUTIVE OFFICERS
Pursuant to General Instruction G(3) of Form 10-K and the Instruction to Item 401 of Regulation S-K, information
regarding our executive officers is set forth in Item 1 of Part I of this Annual Report under the caption
“Information about our Executive Officers.”

CODE OF ETHICS
As part of our system of corporate governance, our Board of Directors has adopted a Code of Business
Conduct and Ethics that is applicable to all of our employees, officers and directors and also contains
provisions only applicable to our principal executive officer and senior financial officers. Our Code of Business
Conduct and Ethics is available on the Governance page of our website at http://www.apei.com. We intend to
satisfy any disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a
provision of the Code of Business Conduct and Ethics that applies to our principal executive officer or senior
financial officers, by posting such information on our website at the address above. The information on our
website is expressly not incorporated by reference in this Annual Report on Form 10-K.

ADDITIONAL INFORMATION
The additional information regarding directors, executive officers, and corporate governance required by
this Item is hereby incorporated by reference from the information contained under the captions “Corporate
Governance Standards and Director Independence,” “Board Committees and Their Functions,” “Director
Nominations and Communication with Directors,” “Proposal No. 1—Election of Directors” and “Delinquent
Section 16(a) Reports” in our Proxy Statement, which will be filed with the SEC no later than 120 days following
December 31, 2019 with respect to our 2020 Annual Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is hereby incorporated by reference from the information contained
under the captions “Director Compensation,” “Executive Compensation,” and “Compensation Committee
Report” in our Proxy Statement, which will be filed with the Securities and Exchange Commission no later than
120 days following December 31, 2019 with respect to our 2020 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL

OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS

The information required by this Item is hereby incorporated by reference from the information contained
under the captions “Beneficial Ownership of Common Stock” and “Equity Compensation Plan Information” in
our Proxy Statement, which will be filed with the Securities and Exchange Commission no later than 120 days
following December 31, 2019 with respect to our 2020 Annual Meeting of Stockholders.

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2019 ANNUAL REPORT

175

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY

TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item is hereby incorporated by reference from the information contained
under the captions “Certain Relationships and Related Person Transactions” and “Board Independence and
Leadership Structure” in our Proxy Statement, which will be filed with the Securities and Exchange Commission
no later than 120 days following December 31, 2019 with respect to our 2020 Annual Meeting of Stockholders.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is hereby incorporated by reference from the information contained
under the captions “Principal Accountant Fees and Services” and “Audit Committee’s Pre-Approval Policies
and Procedures” in our Proxy Statement, which will be filed with the Securities and Exchange Commission no
later than 120 days following December 31, 2019 with respect to our 2020 Annual Meeting of Stockholders.

174

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2019 ANNUAL REPORT

175

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) List of documents filed as part of this Annual Report:

(1) The required financial statements are included in Item 8 of Part II of this Annual Report.

(2) The required financial statement schedules are included in Item 8 of Part II of this Annual Report.

(3) See the Index to Exhibits included in this Annual Report and incorporated herein by reference.

(b) See the Index to Exhibits included in this Annual Report and incorporated herein by reference.

herein by reference.

Other schedules are omitted because they are not required.

ITEM 16. FORM 10-K SUMMARY
None.

176

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2019 ANNUAL REPORT

177

INDEX TO EXHIBITS

Exhibit No.

Exhibit Description

3.1

3.2

4.1

4.2

10.1+

10.2+

10.3+

10.4+

10.5+

10.6+

10.7+

10.8+

10.9+

10.10+

10.11+

21.1

23.1

23.2

31.1

31.2

32.1

32.2

Fifth Amended and Restated Certificate of Incorporation of the Company(1)

Fourth Amended and Restated Bylaws of the Company(7)

Form of certificate representing the Common Stock, $0.01 par value per share, of the Company(2)

Description of Securities (filed herewith)

American Public Education, Inc. 2011 Omnibus Incentive Plan(5)

American Public Education, Inc. 2017 Omnibus Incentive Plan(8)

American Public Education, Inc. Executive Severance Plan(8)

American Public Education, Inc. Employee Stock Purchase Plan(2)

Amendment to the American Public Education, Inc. Employee Stock Purchase Plan(4)

APUS Non-Qualified Plan(6)

Form of Indemnification Agreement with directors and executive officers(2)

Executive Employment Agreement, dated August 21, 2019, by and between

American Public Education, Inc. and Angela Selden(10)

Amended and Restated Employment Agreement, dated August 21, 2019, by and among American
Public University System, Inc., American Public Education, Inc. and Wallace E. Boston, Jr.(10)

Employment Agreement dated August 1, 2014, by and among American Public University

System, Inc., American Public Education, Inc. and Richard W. Sunderland, Jr.(3)

Employment Agreement dated May 3, 2018, by and among American Public Education,

Inc., American Public University System, Inc. and Patrik Dyberg(9)

List of Subsidiaries (filed herewith)

Consent of Deloitte & Touche LLP (filed herewith)

Consent of RSM US LLP (filed herewith)

Certification of Chief Executive officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of

1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of

1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant

to Section 906 of the Sarbanes-Oxley Act of 2002 (filed furnished herewith)

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

EX-101.INS

XBRL Instance Document

EX-101.SCH

XBRL Taxonomy Extension Schema Document

EX-101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

EX-101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

EX-101.LAB

XBRL Taxonomy Extension Label Linkbase Document

EX-101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

176

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2019 ANNUAL REPORT

177

+ Management contract or compensatory plan or arrangement.

(1)

Incorporated by reference to exhibit filed with Registrant’s Current Report on Form 8-K (File No. 001-33810), filed with the

Commission on November 14, 2007.

(2) Incorporated by reference to exhibit filed with Registrant’s Registration Statement on Form S-1 (File No. 333-145185).

(3) Incorporated by reference to exhibit filed with Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30,

2014 (File No. 001-33810), filed with the Commission on August 5, 2014.

(4) Incorporated by reference to exhibit filed with Registrant’s Current Report on Form 8-K (File No. 001-33810), filed with the

Commission on June 17, 2014.

(5) Incorporated by reference to exhibit filed with Registrant’s Current Report on Form 8-K (File No. 001-33810), filed with the

Commission on May 10, 2011.

(6) Incorporated by reference to exhibit filed with Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 (File

No. 001-33810), filed with the Commission on February 27, 2014.

(7) Incorporated by reference to exhibit filed with Registrant’s Current Report on Form 8-K (File No. 001-33810), filed with the

Commission on December 15, 2016.

(8) Incorporated by reference to exhibit filed with Registrant’s Current Report on Form 8-K (File No. 001-33810), filed with the

Commission on May 15, 2017.

(9) Incorporated by reference to exhibit filed with Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30,

2018 (File No. 001-33810), filed with the Commission on August 8, 2018.

(10) Incorporated by reference to exhibit filed with Registrant’s Current Report on Form 8-K (File No. 001-33810), filed with the

Commission on August 22, 2019.

178

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2019 ANNUAL REPORT

179

AMERICAN PUBLIC EDUCATION, INC.

SCHEDULE II

Valuation and Qualifying Accounts

(in thousands)

Year ended December 31, 2019:

American Public Education Segment

Hondros College of Nursing Segment

Allowance for receivables
Year ended December 31, 2018:

American Public Education Segment

Hondros College of Nursing Segment

Allowance for receivables
Year ended December 31, 2017:

American Public Education Segment

Hondros College of Nursing Segment

Allowance for receivables

Balance at
Beginning of Period

Additions/
(Reductions)

Write-Offs

Balance at End
of Period

$2,669

3,979

$6,648

$3,253

3,023

$6,276

$4,712

3,365

$8,077

$2,004

2,174

$4,178

$1,937

2,634

$4,571

$2,631

2,040

$4,671

$(2,433)

(2,219)

$(4,652)

$(2,521)

(1,678)

$(4,199)

$(4,090)

(2,382)

$(6,472)

$2,240

3,934

$6,174

$2,669

3,979

$6,648

$3,253

3,023

$6,276

178

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2019 ANNUAL REPORT

179

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 10, 2020

AMERICAN PUBLIC EDUCATION, INC.

/s/ Angela Selden

By:
Name: Angela Selden
Title: President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the date indicated.

Name

Date

Title

/s/ Angela Selden

Angela Selden

March 10, 2020

President, Chief Executive Officer and Director
(Principal Executive Officer)

/s/ Richard W. Sunderland, Jr., CPA

March 10, 2020

Richard W. Sunderland, Jr., CPA

Executive Vice President and Chief Financial
Officer (Principal Financial Officer and Principal
Accounting Officer)

/s/ Barbara G. Fast

Barbara G. Fast

/s/ Eric C. Andersen

Eric C. Andersen

/s/ Dr. Wallace E. Boston

Dr. Wallace E. Boston

/s/ Jean C. Halle

Jean C. Halle

/s/ Dr. Barbara Kurshan

Dr. Barbara Kurshan

/s/ Timothy J. Landon

Timothy J. Landon

March 10, 2020

Chairperson of the Board of Directors

March 10, 2020

Director

March 10, 2020

Director

March 10, 2020

Director

March 10, 2020

Director

March 10, 2020

Director

/s/ William G. Robinson, Jr.

William G. Robinson, Jr.

March 10, 2020

Director

180

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2019 ANNUAL REPORT

181

CORPORATE INFORMATION

Corporate and
Administrative Offices
American Public Education, Inc.
111 West Congress Street
Charles Town, WV 25414
Phone: (304) 724-3700
Toll Free: (877) 468-6268

Stock Exchange Listing
The NASDAQ Global Select Market
under the symbol “APEI”.

Annual Shareholder Meeting
The Annual Meeting of American Public Education
shareholders will be held virtually on May 15, 2020
at 8:00 a.m. Eastern time.

virtualshareholdermeeting.com/APEI2020

Investor Relations
Chris Symanoskie, IRC
Vice President, Investor Relations
American Public Education, Inc.
111 West Congress Street
Charles Town, WV 25414
Phone: (703) 334-3880
csymanoskie@apei.com

Accountants
Deloitte & Touche LLP
7900 Tysons One Place
McLean, VA 22102
Phone: (703) 251-1000

Transfer Agent
American Stock Transfer &
Trust Company
6201 15th Avenue
Brooklyn, NY 11219
Attn: Shareholder Services
Toll Free: (800) 937-5449

Legal
Hogan Lovells US LLP
William Intner
Harbor East
100 International Drive, Suite 2000
Baltimore, MD 21202
Phone: (410) 659-2700
hoganlovells.com

Online Information
Investor Relations
AmericanPublicEducation.com
APEI.com

APEI BOARD OF DIRECTORS

Eric C. “Ric” Andersen, Director
Partner, Peak Equity

Jean C. Halle, Director
Independent Consultant

Dr. Wallace E. Boston, Director
President, American Public University System

Major General (US Army, Retired)
Barbara G. Fast, Chairperson
President and CEO, BGF Enterprises, LLC

Dr. Barbara L. Kurshan, Director
Senior Fellow and Innovation Advisor,
University of Pennsylvania Graduate School
of Education

Timothy J. Landon, Director
Managing Partner,
Ergo Ventures & Advisers, LLC

William G. Robinson, Jr., Director
President, Broadgate Human Capital, LLC

Angela K. Selden, Director
Chief Executive Officer,
American Public Education, Inc.

APUS BOARD OF TRUSTEES

Dr. Wallace E. Boston, Member
President, American Public University System

Frank Ball, Member Emeritus
Independent Consultant and Executive Coach

Lieutenant General (USMC, Retired)
Thomas L. Conant, Vice Chairman
Former Deputy Commander, United States
Pacific Commander

General (USMC, Retired)
Alfred M. Gray, Chairman
Chairman, Board of Regents,
Potomac Institute for Policy Studies
Chancellor, Marine Military Academy
29th Commandant of the Marine Corps
Trustee Emeritus, Norwich University

Lieutenant Colonel (US Army, Retired)
Jim Herhusky, Member Emeritus
Managing Partner, The Herhusky Group, LLC.

Angela K. Selden, Member
Chief Executive Officer,
American Public Education, Inc.

Lieutenant General (US Army, Retired)
David H. Huntoon Jr., Member
The Spectrum Group

Dr. Lucie Lapovsky, Member
Principal, Lapovsky Consulting
Former President, Mercy College

Dr. Katy E. Marre, Member
Professor Emerita
Former Associate Vice President, Graduate
Studies & Research, University of Dayton

Dr. J. D. Polk, Member
Senior Medical Officer,
National Aeronautics and Space
Administration (NASA)

Lieutenant General (US Army, Retired)
Richard G. Trefry, Member Emeritus
Senior Fellow, Institute of Land Warfare
Former Program Manager, The Army Force
Management School

Mary Kim Ward, Member
Former Colonel, Baltimore County
Police Department

Dr. Katherine Zatz, Member
Assistant Dean, Petrocelli College,
Fairleigh Dickinson University
Member and Consultant,
The Registry of College Presidents
Senior Consultant, Toolpack.com

111 West Congress Street‚ Charles Town‚ West Virginia 25414
APEI.com

Visit our social communities for APUS, AMU & APU
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