Note 8.7. Income Taxes 

     

The Company is subject to U.S. Federal income taxes as well as income taxes of multiple state jurisdictions. For Federal and state tax purposes, the tax years from 20132014 to 20162017 remain open to examination.

    

On March 31, 2017 the Company’s Board of Directors adopted the American Public Education, Inc. 2017 Omnibus Incentive Plan, or the 2017 Incentive Plan, and on May 12, 2017, or the Effective Date, the Company’s stockholders approved the 2017 Incentive Plan, at which time the 2017 Incentive Plan became effective. 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 American Public Education, Inc. 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 the American Public Education, Inc. 2007 Omnibus Incentive Plan and the American Public Education, Inc. 2002 Stock Incentive Plan that terminate by expiration or forfeiture, cancellation or otherwise without issuance of such shares following the Effective Date. Prior to 2012, the Company issued a mix of stock options and restricted stock, but since 2011 the Company has not issued any stock options. 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

 

Option Awards

 

Stock-Based Compensation Expense

As of June 30, 2017,March 31, 2018, there was $8.5$11.1 million of total unrecognized compensation cost, representing unrecognized compensation cost associated with non-vested restricted stock and restricted stock units. The total remaining cost is expected to be recognized over a weighted average period of 2.22.3 years.

 

 

 

A summary of financial information by reportable segment is as follows (unaudited):

 

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.

 

 

In this Quarterly Report on Form 10-Q, “we,” “our,” “us,” “the Company” and similar terms refer to American Public Education, Inc., or “APEI,” and its subsidiary institutions collectively unless the context indicates otherwise. The following discussion of our historical results of operations and our liquidity and capital resources should be read in conjunction with the Consolidated Financial Statements and related notes that appear elsewhere in this reportQuarterly Report on Form 10-Q and the audited financial information and related notes, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations and other disclosures, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2017, or theour Annual Report.

Some of the statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We intend such forward-looking statements, including statements regarding our operations, performance and financial condition, strategic initiatives, and the regulatory and competitive environments affecting our business, to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Quarterly Report on Form 10-Q is filed with the Securities and Exchange Commission, or the SEC. 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 that convey uncertainty of future events or outcomes to identify these forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, our business, financial condition and results of operations may vary materially from those expressed in our forward-looking statements. There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. These important factors include those that we discuss in this section of this Quarterly Report on Form 10-Q, in the “Risk Factors” section of this Quarterly Report on Form 10-Q, in the “Risk Factors” section of theour Annual Report, and in our various filings with the SEC. You should read these factors and the other cautionary statements made in this Quarterly Report on Form 10-Q in combination with the more detailed description of our business in theour Annual Report as being applicable to all related forward-looking statements wherever they appear in this Quarterly 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 undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

We are a provider of online and on-campus postsecondary education to approximately 86,00084,700 students through two subsidiary institutions. Our subsidiary institutions offer programs designed to prepare individuals for productive contributions to their professions and society, and to offer opportunities that may advance students in their current professions or help them prepare for their next career. Our subsidiary institutions are licensed or otherwise authorized by state authorities, or are in the process of obtaining such licenses or authorizations, to offer postsecondary education programs to the extent the institutions believe such licenses or authorizations are required, and are certified by the United States Department of Education, or ED, to participate in student financial aid programs authorized under Title IV of the Higher Education Act of 1965, as amended, or Title IV programs.

APUS has approximately 84,30082,700 students and offers 108109 degree programs and 103109 certificate programs in diverse fields of study including business administration, health science, technology, criminal justice, education and liberal arts, as well as national security, military studies, intelligence, and homeland security. APUS is regionally accredited by the Higher Learning Commission, or HLC.

In December 2016, APUS submitted a change in structure application to HLC in connection with the previously disclosed organizational realignment of APUS, HLC requested that APUS submit an application to enable HLC to determine whether APUS’s proposalplan to enter into a shared services model with APEI constitutes a change in organization or structure that requires HLC prior approval. On December 22, 2016, APUS submitted the requested change-of-structure application. HLC is currently reviewing APUS’s application and as part of the review process conducted an on-site visit to APUS in early May 2017. On June 26,APEI. In November 2017, HLC notifiedinvited APUS thatto submit updates to the application to address new HLC has delayed completing and issuing a reportguidelines for review of its on-site visit because HLC staff believes that HLC’s Criteria for Accreditation and related policies do not provide an explicit frame of reference for how the Criteria for Accreditation should be applied to a shared services model between an accredited institution and a related entity. On July 7, 2017, HLC notified APUS that at its June 29, 2017 meeting the HLC Board of Trustees authorized the commencement of a process to develop a framework for applying the Criteria of Accreditation to such shared services models through HLC’s Change of Control, Structure or Organization process. HLC indicated that a group of HLC Board of Trustees members and HLC staff will present a proposed framework to the full HLC Board of Trustees for its consideration at its November 2017 meeting. HLC indicated that APUS will have an opportunity to update its application after a framework is approved, and HLC staff will issue its report after reviewing any such updates.arrangements. The HLC Board of Trustees planswas tentatively scheduled to consider APUS’sthe application at its next scheduledJune 2018 meeting, after adoptionbut on April 26, 2018, HLC notified APUS that consideration of the framework, whichapplication would be postponed until HLC’s November 2018 meeting. On February 7, 2018, HLC imposed a “governmental investigation” designation on APUS in connection with the Civil Investigative Demand described below, but notified APUS that it will continue to review APUS’s change in structure application while the governmental investigation designation remains active. HLC may, however, defer action on the application while the investigation is scheduledpending. HLC has indicated that it will review findings related to the designation, if any, when they occur and will determine whether such findings impact the change in February 2018.structure application at that time. HLC hadpreviously planned to visit APUS in February 2017 as part of a standard mid-cycle review. However, as a result of the change-of-structure application process, HLC postponedcomprehensive evaluation, but agreed to postpone that mid-cycle reviewcomprehensive evaluation until the third quarter of 2018.2018 in light of the change in structure application process. We are unable to predict whether HLC will approve APUS’s application and whether or not such approval will be subject to limitations or conditions.conditions, including as related to the governmental investigation designation. Further, we are unable to predict what changes, if any, HLC may require to APUS’s organizational realignment and how such changes may impact our business, operations, financial condition, results of operations, and cash flows. The next comprehensive evaluation for reaffirmation of accreditation is scheduled for the 2020-2021 academic year.

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. The program review remains open and ongoing. At this time, we cannot predict the outcome of the program review, when it will be completed, or whether ED will place any liability or other limitations on APUS as a result of the review.

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 an admissionsa 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, we expect that in July 2017, APUS will implementimplemented a process requiring enhanced verification of prospective non-military students’ prior transcripts. Even if our admissions process initiatives are successful in achieving the desired result of identifying and enrolling students that are likely to succeed and improving the student experience, they could result in adverse impacts on APUS enrollments. 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 improving student experience, they could result in adverse impacts on APUS enrollments.

In July 2017, APUS began accepting applications for two applied doctoral programs in Strategic Intelligence and Global Security with theSecurity. The first cohorts beginningbegan in January 2018. The programs meet the need for higher-level education and research combined with professional practice in these fields. We expect to incur start-up costs ranging from approximately $0.8 million to $1.1 million during the remainder of 2017. We cannot predict whether APUS’s new programs will be successful or how they will impact our results of operations, cash flows, or financial condition.

On January 29, 2018, ED issued a Final Audit Determination letter in connection with APUS’s Title IV compliance audit for the year ended December 31, 2016, which identified a finding related to return of Title IV funds calculations that were not properly computed. In July 2017, the Councilletter, ED conveyed its finding that Title IV funds had not been returned timely for a sufficient percentage of students. Under ED regulations, if the institution’s annual Title IV compliance audit for either of its two most recently completed fiscal years finds that Title IV funds were not

returned timely for 5% or more of students sampled in the audit, the institution generally must submit an irrevocable letter of credit. ED also noted that a similar finding had been made in an open program review with respect to which the Company has not yet received a program review report. In connection with the finding, ED indicated that the Company must post an irrevocable letter of credit equal to 25% of the total amount of Title IV program funds that should have been returned during calendar year 2016, which results in a requirement for a letter of credit of approximately $700,000. On February 15, 2018, the Company requested that ED reconsider its finding that the Company had made untimely returns. On March 27, 2018, ED responded confirming the requirement for a letter of credit, and on Education for Public Health, or CEPH,March 28, 2018, the Company posted the required letter of credit.

On February 7, 2018, HLC notified APUS that it is imposing a “governmental investigation” designation on APUS in connection with the CEPH BoardCID. The designation is expected to remain in place until the office of Councilors actedthe Attorney General of Massachusetts concludes its investigation, at which time HLC will review the circumstances of the situation and determine what further action HLC will take, if any. In imposing the designation, HLC reaches no conclusions about the merits of the investigation or its possible outcome. Imposition of the designation is accompanied by monitoring and a notice on HLC’s website that APUS is currently under governmental investigation. APUS must submit an interim report no later than June 4, 2018 providing an update regarding the status of the investigation. We cannot predict what actions HLC will take with respect to the designation, including whether it will have an effect on APUS’s pending change in June 2017structure application.

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 accredit the Masterimplementation of Public Healththe new general education requirements in the first quarter of 2018 related to faculty realignment. While we believe the changes in the general education requirements are beneficial for our students and will result in a better and more positive educational experience, we cannot predict what effect, if any, these new requirements will have on the total number of registrations, student persistence, or our financial position or results of operations.

In January 2017, DoD announced that its Third Party Education Assessment will take the form of a new Voluntary Education Institutional Compliance Program, or ICP, which replaces the former process, the Military Voluntary Education Review. The ICP is an iterative process with three stages. APUS was notified on May 8, 2017 that it was included in the first set of 250 institutions selected to participate in the ICP. On May 29, 2017, APUS submitted a self-assessment as part of the first stage of the ICP. On February 9, 2018, DoD issued an Iteration 1 Report for APUS that made two findings. With respect to recruiting, marketing, and advertising, DoD found some instances where 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. With respect to financial matters, DoD found a lack of information relating to the financial aid process, including the lack of a timeline for applying for financial aid. APUS was required develop a corrective action plan to address each of the findings within 30 days after receipt of the Iteration 1 Report and must resolve the findings and provide information to DoD about corrective actions taken within six months after receipt of the Iteration 1 Report. If the resolution cannot be completed within six months, APUS must submit a status report every three months until July 1, 2022.the finding is resolved. APUS submitted a corrective action plan to DoD on March 15, 2018. An educational institution that demonstrates an unwillingness to resolve a finding may be subject to a range of penalties from a written warning to revocation of the Memorandum of Understanding, or MOU, and termination of the institution’s participation in the DoD tuition assistance programs. 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.

For more information on the potential risks associated with thesethe above APUS initiatives, APUS more generally, and applicable accreditation matters, please refer to our Annual Report.

We acquired HCN on November 1, 2013. In January 2016, we received a letter from ED approving the change in ownership and control of HCN and granting HCN provisional certification to participate in Title IV programs until December 31, 2018. HCN received a fully executed Provisional Program Participation Agreement, or PPPA, in February 2016. While provisionally certified, HCN operates under the PPPA, which requires HCN to apply for and receive approval from the Secretary of Education before initiating any substantial changes, such as establishing an additional location at which at least 50% of an eligible program will be offered and Title IV program funds will be disbursed, offering academic programs at higher than the bachelor’s degree level, or adding a new education program. In June 2016, ED approved HCN’s application to open a new campus in suburban Toledo, Ohio. HCN had previously obtained required approvals fromis nationally accredited by the Accrediting Council of Independent Colleges and Schools, or ACICS, the StateACICS. As a result of Ohio Board of Nursing, or OBN, and the Ohio State Board of Career Colleges and Schools. Theopening its new Toledo campus began operations in January 2017.2017, HCN incurred expensesapplied to have the campus included in its accreditation with HCN. Acting on that application, ACICS included the Toledo campus in HCN’s accreditation through April 30, 2018 and conducted a site visit to the Toledo campus on January 31 - February 1, 2018. Subsequent to that site visit, HCN issued a number of findings related to a Campus Effectiveness Plan and a faculty development plan for the Toledo campus, and on May 8, 2018, ACICS notified HCN that the Toledo campus’s inclusion in HCN’s accreditation was extended until September 10, 2018, that HCN is required to submit additional materials in connection with the Toledo campus by the end of June 2018 and that HCN is on a compliance warning. If ACICS finds that the Toledo campus has failed to come into compliance with ACICS’s accreditation criteria related to the start-upfindings within a time frame established by ACICS, absent a finding of good cause for failure to do so, ACICS may take adverse action. Additional information on accreditation and risks of accreditation, including the new campus. We cannot predict whether HCN’s new campus willloss of accreditation, can be successful or how it will impactfound in our results of operations, cash flows, or financial condition.Annual Report.

Each of HCN’s campuses is nationally accredited by ACICS. By decision dated December 12, 2016, the Secretary of ED withdrew and terminated ED’s recognition of ACICS. On March 23, 2018, the United States District Court for the District of Columbia issued a Memorandum Opinion that remanded the December 2016 decision to the Secretary of ED for further proceedings. On April 4, 2018, the Secretary of ED issued a letter explaining that as a result of the remand, there is currently no final decision on the recognition petition that ACICS submitted to ED in January 2016, and accordingly ACICS’s status as discussed more fullya federally recognized accrediting agency is restored and effective as of December 12, 2016. ACICS will remain in “Regulatory and Legislative Activity” below in this Quarterly Report and in our Annual Report.that status until the Secretary of ED issues a final decision on ACICS’s recognition petition. We cannot predict what action the Secretary will take on ACICS’s recognition petition.

To apply for licensure to practice nursing in Ohio, an applicant must have successfully completed a nursing education program that is approved by the Ohio Board of Nursing, or the OBN. Regulations of the OBN, which approve the Diploma in Practical Nursing, or the PN Program, and the Associate Degree in Nursing, or the ADN Program, require 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 suchthis pass rate, the program may face various consequences. On March 8, 2017, the OBN placed HCN’s ADN Program on provisional approval because the ADN Program has not met the OBN pass rate standard for fourfive consecutive years, which we believe has been negatively affected by the pass rates at HCN’s Cleveland campus over the last several years. The OBN will consider restoring a program to Full Approval status after a program is placed on provisional status due to low NCLEX scores if the program attains a pass rate that meets or exceeds 95% of the national average for first-time candidates for at least two consecutive years. If a program on provisional approval continues to failfails to meet and maintain the requirements of the OBN 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 its approval of the program pursuant to an adjudication proceeding. On March 8, 2018, the OBN released a final report of the ADN Program’s performance for calendar year 2017, which found that HCN’s ADN Program did not meet the OBN pass rate standard in 2017. HCN has been implementing changes, including the curriculum changes discussed in our Annual Report, that are designed to help increaseimprove NCLEX scores over time but there is no assurance that these changes will be successful. Similarly, the actions HCN is taking to improve its student achievement measures may not be successful in resolving existing issues or may fail to prevent additional issues from arising with respect to other campuses or programs. Any consequences that result from failure to meet testing standards or student achievement measures mayThis 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.

For more information on the potential risks associated with these HCN initiatives and HCN more generally, please refer to our Annual Report.

    

We believe these changes in revenue and operating margins are primarily due to the factors discussed below in the “Results of Operations” section of this Management’s Discussion and Analysis.