UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
		SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, ~~2018~~2019



o		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	01-0724376
(State or other jurisdiction of	(I.R.S. Employer
Incorporation or organization)	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)

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 o

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files). Yes x No o

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 o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o
~~(Do not check if a smaller reporting company)~~	Emerging growth company o

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. o

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

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



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $.01 par value	APEI	NASDAQ Global Select Market

The total number of shares of common stock outstanding as of May ~~4, 2018~~3, 2019 was ~~16,399,199.~~16,586,160.

Index

AMERICAN PUBLIC EDUCATION, INC.

FORM 10-Q

INDEX

Index

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN PUBLIC EDUCATION, INC.

Consolidated Balance Sheets ~~(Current Period Unaudited)~~

(In thousands)


	As of March 31, 2018		As of December 31, 2017
	(Unaudited)				As of March 31, 2019		As of December 31, 2018
ASSETS					(Unaudited)
Current assets:
Cash and cash equivalents (Note 2)	$	186,168	$	179,205
Accounts receivable, net of allowance of $6,181 in 2018 and $6,276 in 2017	7,924		7,136
Cash, cash equivalents, and restricted cash (Note 2)					$	215,928	$	212,131
Accounts receivable, net of allowance of $6,661 in 2019 and $6,648 in 2018					14,103		14,059
Prepaid expenses	7,409		4,792		6,692		5,482
Income tax receivable					1,721		898
Total current assets	201,501		191,133		238,444		232,570
Property and equipment, net	90,247		92,374		84,156		86,881
Operating lease assets, net					11,248		—
Investments	12,280		12,481		10,479		11,966
Goodwill	33,899		33,899		28,044		33,899
Other assets, net	8,304		9,151		5,376		5,642
Total assets	$	346,231	$	339,038	$	377,747	$	370,958

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,952	$	8,844	$	2,403	$	9,110
Accrued compensation and benefits					6,655		13,100
Accrued liabilities	15,744		13,423		8,524		3,808
Deferred revenue	21,957		19,374
Income tax payable	2,668		1,710
Deferred revenue and student deposits					21,023		18,310
Operating lease liabilities, current					1,925		—
Total current liabilities	45,321		43,351		40,530		44,328
Operating lease liabilities, long-term					9,688		—
Deferred income taxes	7,131		6,281		6,076		5,364
Total liabilities	52,452		49,632		56,294		49,692

Commitments and contingencies (Note 10)
Commitments and contingencies (Note 8)

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; 16,399 issued and outstanding in 2018; 16,268 issued and outstanding in 2017	164		163
Common stock, $.01 par value; Authorized shares - 100,000; 16,586 issued and outstanding in 2019; 16,425 issued and outstanding in 2018					166		164
Additional paid-in capital	180,735		180,674		186,346		187,172
Retained earnings	112,880		108,569		134,941		133,930
Total stockholders’ equity	293,779		289,406		321,453		321,266
Total liabilities and stockholders’ equity	$	346,231	$	339,038	$	377,747	$	370,958

The accompanying notes are an integral part of these Consolidated Financial Statements.

Index

AMERICAN PUBLIC EDUCATION, INC.

Consolidated Statements of Income ~~(Unaudited)~~

(In thousands, except share and per share amounts)


	Three Months Ended March 31,					Three Months Ended March 31,
	2018			2017		2019			2018
	(Unaudited)					(Unaudited)
Revenue	$	74,967		$	75,688	$	73,441		$	74,967
Costs and expenses:
Instructional costs and services	29,686			28,956		27,915			29,686
Selling and promotional	15,581			15,435		15,047			15,581
General and administrative	18,888			17,756		19,065			18,888
Loss on disposals of long-lived assets	128			490		126			128
Impairment of goodwill						5,855			—
Depreciation and amortization	4,522			4,744		4,051			4,522
Total costs and expenses	68,805			67,381		72,059			68,805
Income from operations before interest income and income taxes	6,162			8,307		1,382			6,162
Interest income	493			11
Interest income, net						1,053			493
Income before income taxes	6,655			8,318		2,435			6,655
Income tax expense	1,865			3,849
Equity investment (loss) income	(201		)	40
Income tax expense (benefit)						(63		)	1,865
Equity investment loss						(1,487		)	(201		)
Net income	$	4,589		$	4,509	$	1,011		$	4,589

Net Income per common share:
Basic	$	0.28		$	0.28	$	0.06		$	0.28
Diluted	$	0.28		$	0.28	$	0.06		$	0.28
Weighted average number of common shares:
Basic	16,359,792			16,190,061		16,533,205			16,359,792
Diluted	16,534,053			16,320,858		16,662,366			16,534,053

The accompanying notes are an integral part of these Consolidated Financial Statements.

Index

AMERICAN PUBLIC EDUCATION, INC.

Consolidated Statements of ~~Cash Flows~~Stockholders’ Equity (Unaudited)

(In ~~thousands)~~thousands, except share and per share amounts)

Three Months Ended
March 31,
2018 2017
(Unaudited)
Operating activities
Net income $ 4,589
$ 4,509
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 4,522
4,744
Stock-based compensation 1,843
1,246
Equity investment loss (income) 201
(40 )
Deferred income taxes 850
2,588
Loss on disposals of long-lived assets 128
490
Other 38
20
Changes in operating assets and liabilities:
Accounts receivable, net of allowance for bad debt (788 ) 749
Prepaid expenses and other assets (2,380 ) (2,196 )
Income tax receivable —
(4,233 )
Accounts payable (3,892 ) (2,016 )
Accrued liabilities 1,870
(2,783 )
Income taxes payable 958
(559 )
Deferred revenue 2,305
2,535
Net cash provided by operating activities 10,244
5,054
Investing activities

Capital expenditures (1,427 ) (1,670 )
Capitalized program development costs and other assets (239 ) (627 )
Net cash used in investing activities (1,666 ) (2,297 )
Financing activities

Cash paid for repurchase of common stock (1,615 ) (1,402 )
Cash received from issuance of common stock —
98
Net cash used in financing activities (1,615 ) (1,304 )
Net increase in cash and cash equivalents 6,963
1,453
Cash and cash equivalents at beginning of period 179,205
146,351
Cash and cash equivalents at end of period $ 186,168
$ 147,804

Supplemental disclosure of cash flow information

Income taxes paid $ —
$ 6,052



						Additional Paid-in Capital			Retained Earnings			Total Stockholders’ Equity
	Common Stock
	Shares		Amount
Balance as of December 31, 2017	16,267,814		$	163		$	180,674		$	108,569		$	289,406
Impact of adoption of ASC 606	—		—			—			(278		)	(278		)
Issuance of common stock under employee benefit plans	192,600		2			(2		)	—			—
Repurchased shares of common and restricted stock from stockholders	(61,215	)	(1		)	(1,615		)	—			(1,616		)
Stock-based compensation	—		—			1,678			—			1,678
Net income	—		—			—			4,589			4,589
Balance as of March 31, 2018	16,399,199		$	164		$	180,735		$	112,880		$	293,779



						Additional Paid-in Capital			Retained Earnings		Total Stockholders’ Equity
	Common Stock
	Shares		Amount
Balance as of December 31, 2018	16,424,785		$	164		$	187,172		$	133,930	$	321,266
Issuance of common stock under employee benefit plans	244,589		3			(3		)	—		—
Repurchased shares of common and restricted stock from stockholders	(83,214	)	(1		)	(2,512		)	—		(2,513		)
Stock-based compensation	—		—			1,689			—		1,689
Net income	—		—			—			1,011		1,011
Balance as of March 31, 2019	16,586,160		$	166		$	186,346		$	134,941	$	321,453

The accompanying notes are an integral part of these Consolidated Financial Statements.

Index

AMERICAN PUBLIC EDUCATION, INC.

Consolidated Statements of Cash Flows

(In thousands)



	Three Months Ended March 31,
	2019			2018
	(Unaudited)
Operating activities
Net income	$	1,011		$	4,589
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	4,051			4,522
Stock-based compensation	1,689			1,843
Equity investment loss	1,487			201
Deferred income taxes	712			850
Loss on disposals of long-lived assets	126			128
Impairment of goodwill	5,855			—
Other	37			38
Changes in operating assets and liabilities:
Accounts receivable, net of allowance for bad debt	(44		)	(788		)
Prepaid expenses	(923		)	(2,380		)
Income tax receivable/payable	(823		)	958
Operating leases, net	365			—
Other assets	170			—
Accounts payable	(6,707		)	(3,892		)
Accrued compensation and benefits	(6,445		)	(572		)
Accrued liabilities	4,621			2,442
Deferred revenue and student deposits	2,713			2,305
Net cash provided by operating activities	7,895			10,244
Investing activities
Capital expenditures	(1,585		)	(1,666		)
Net cash used in investing activities	(1,585		)	(1,666		)
Financing activities
Cash paid for repurchase of common stock	(2,513		)	(1,615		)
Net cash used in financing activities	(2,513		)	(1,615		)
Net increase in cash and cash equivalents	3,797			6,963
Cash and cash equivalents at beginning of period	212,131			179,205
Cash and cash equivalents at end of period	$	215,928		$	186,168

Supplemental disclosure of cash flow information
Income taxes paid	$	48		$	—

The accompanying notes are an integral part of these Consolidated Financial Statements.

Index

AMERICAN PUBLIC EDUCATION, INC.

Notes to Consolidated Financial Statements

Note 1. Nature of the 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 ~~84,700~~82,900 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, and public service communities through American Military University, or AMU, and American Public University, or APU. APUS is regionally accredited by the Higher Learning ~~Commission.~~Commission and several of its academic programs have specialized accreditation granted by industry-governing organizations.

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 ~~as well as online,~~ to serve the needs of the nursing and healthcare communities. HCN is nationally accredited by the Accrediting ~~Council of Independent Colleges and~~Bureau for Health Education Schools, or ~~ACICS,~~ABHES. In April 2019, HCN began offering classes in its Medical Laboratory Technician program, or MLT Program, at its Cincinnati and ~~the RN-to-BSN Program is accredited by the Commission on Collegiate Nursing Education.~~Columbus campuses.

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 United States Department of Education, or ED, to participate in student financial aid programs authorized under Title IV of the Higher Education Act of 1965, as amended, or Title IV programs.

The 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. Summary of Significant Accounting Policies

Basis of Presentation and Accounting

The accompanying unaudited, interim Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. Certain prior period amounts have been reclassified for comparative purposes to conform to the 2019 presentation.

Principles of Consolidation

The accompanying unaudited, interim Consolidated Financial Statements include accounts of APEI and its ~~wholly owned~~wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.

Unaudited Interim Financial Information

The unaudited, interim Consolidated Financial Statements do not include all of the information and notes required by GAAP for audited annual financial statement presentations. In the opinion of management, these statements include all adjustments (consisting of normal recurring adjustments) considered necessary to present a fair statement of the Company’s ~~consolidated~~financial position, results of operations, ~~financial position,~~ and cash flows. Operating results for any interim period are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2018.~~2019. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Consolidated Financial Statements and accompanying notes in its audited financial statements included in ~~its~~the Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, or the Annual Report.

Index

Use of Estimates

~~The preparation of the Consolidated Financial Statements~~In preparing financial statements in ~~accordance~~conformity with GAAP, ~~requires management~~the Company is required to make estimates and assumptions that affect the reported amounts inof 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 ~~unaudited interim Consolidated Financial Statements~~estimates and ~~accompanying notes.~~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 could differ from ~~those~~these estimates.

Restricted Cash

Cash, ~~and~~ cash equivalents, and restricted cash 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 each subsidiary institution’s~~the program participation agreement with ED. Restricted cash on the Company’s Consolidated Balance Sheets ~~was approximately $2.0 million at~~as of March 31, ~~2018~~2019 and ~~$2.3 million at~~ December 31, ~~2017.~~2018 was $1.5 million and $1.7 million, respectively. Changes in restricted cash that represent funds held for students as described above are included in cash flows from operating activities on the ~~Company’s~~ Consolidated Statements of Cash Flows because these restricted funds are ~~related to~~ a core activity of ~~its~~ operations.

~~Revenue~~

Leases

~~The Company adopted~~In February 2016, the Financial Accounting Standards Board, ~~or FASB, Accounting Standards Codification, or ASC, 606,~~ ~~Revenue from Contracts with Customers,~~ ~~with a date~~ of ~~initial application of January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition.~~

The Company applied ASC 606 using the modified retrospective approach. The cumulative effect of initially applying ASC 606 was recognized as an adjustment to retained earnings at January 1, 2018. Prior periods have not been adjusted, and therefore comparative information continues to be reported under Topic 605, ~~Revenue Recognition. The adoption of ASC 606 had the following impacts on the Company’s Consolidated Balance Sheet (unaudited):~~

Balance at December 31, 2017 Adjustments from adoption of ASC 606 Balance at January 1, 2018
(In thousands)
Consolidated Balance Sheet
Deferred revenue $ 19,374
$ 379
$ 19,753
Deferred income taxes 6,281
(101 ) 6,180
Retained earnings 108,569
(278 ) 108,291

In accordance with the new revenue standard’s requirements, the impact of adoption on the Company’s Consolidated Balance Sheet at March 31, 2018 and its Consolidated Statement of Income of the three months ended March 31, 2018 were as follows (unaudited):

As of March 31, 2018
As Reported Adjustment Balance without adoption
Consolidated Balance Sheet (In thousands)
Liabilities
Deferred revenue $ 21,957
$ (423 ) $ 22,380
Deferred income taxes 7,131
113
7,244
Equity
Retained earnings 112,880
310
113,190

~~Index~~

Three Months Ended March 31, 2018
As Reported Adjustment Balance without adoption
Consolidated Statement of Income (In thousands)
Revenue $ 74,967
$ (44 ) $ 75,011
Income tax expense 1,865
12
1,877

~~Recent Accounting Pronouncements~~

~~In January 2016, the~~ FASB, issued Accounting Standards Update, or ASU, No. ~~2016-01,~~2016-02, ~~Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities~~Leases (Topic 842). ~~The~~This standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. These changes will require an entity to measure, at fair value, investments in equity securities and other ownership interests in an entity andrequires entities to recognize ~~the changes~~most operating leases on their balance sheets as right-of-use assets, or ROU assets, with a corresponding lease liability, in ~~fair value within net income. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption was not permitted.~~addition to disclosing certain key information about leasing arrangements. The Company adopted ~~this~~the standard effective January 1, ~~2018.~~ 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 4. Leases” below.

Investments

The Company accounts for its ~~investment~~investments in ~~RallyPoint Networks, Inc., or RallyPoint,~~less than majority owned companies in accordance with ~~ASU 2016-01~~FASB Accounting Standards Codification, or ASC, 323, Investments - Equity Method and Joint Ventures andFASB 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 ~~each~~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.

Index

Each reporting period the Company ~~completes a qualitative assessment considering impairment indicators~~evaluates its cost method investment 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 ~~evaluate whether~~purchase or sell similar investments, and other criteria.

On September 30, 2012, the Company made an investment ~~is impaired.~~in preferred stock, treated as in-substance common stock, of NWHW Holdings, Inc., or NWHW Holdings, representing approximately 20% of the fully diluted equity of NWHW Holdings. During the three months ended March 31, ~~2018,~~2019, the Company determined that ~~impairment indicators existed~~it no longer qualified to account for its investment in NWHW Holdings under the equity method of accounting because at this time the Company is unable to exercise significant influence over operating and ~~utilized an independent valuation firm~~financial policies of NWHW Holdings. The Company has elected to ~~assess~~account for the ~~fair~~investment under ASC 321, Equity Investments. Earnings or losses that relate to the stock retained and that were previously accrued remain as part of the carrying amount of the investment. As of March 31, 2019, the carrying value of the ~~investment.~~investment was $5.2 million.

Stock-based compensation

Stock-based compensation expense related to restricted stock grants is recognized over the vesting period using the straight-line method for the Company’s employees and the graded-vesting method for members of the Board of Directors, and is measured using the Company’s stock price on the date of the grant. The ~~interim assessment concluded~~Company estimates forfeitures of stock-based awards at the time of grant and revises such estimates in subsequent periods if actual forfeitures differ from the original estimates. Additionally, 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 or lower 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.

Stock-based compensation expense for the three months ended March 31, 2019 and 2018 is as follows (in thousands):



	2019		2018
	(Unaudited)
Instructional costs and services	$	403	$	377
Selling and promotional	194		240
General and administrative	1,092		1,226
Stock-based compensation expense in operating income	$	1,689	$	1,843

Incentive-based compensation

We provide incentive-based compensation opportunities to certain employees through cash incentive and equity awards. The expense associated with these awards is reflected within our operating expenses. For the years ending December 31, 2019 and 2018, our Compensation Committee has approved an annual incentive arrangement for senior management employees. The aggregate amount of any awards payable is dependent upon the achievement of certain Company financial and operational goals, as well as individual performance goals. Given that the ~~fair value~~awards are generally contingent upon achieving annual objectives, determination regarding current year incentive awards is not expected to be made until after the results for the year ending December 31, 2019 are finalized. Because assessing actual performance against many of these objectives cannot generally occur until at or near year-end, determining the amount of expense that we incur in our interim financial statements for incentive-based compensation involves the judgment of management. Amounts accrued are subject to change in future interim periods if actual future financial results or operational performance are better or worse than expected. We recognized an aggregate expense of approximately $0.6 million during the three month period ended March 31, 2019, compared to an aggregate expense of $1.1 million for the three months ended March 31, 2018 associated with our incentive-based compensation plans.

Income Taxes

The Company determines its ~~investment was less than~~interim tax provision by applying the ~~carrying amount resulting in a non-cash pre-tax impairment charge of $0.5 million. This impairment charge is included in equity investment loss in~~estimated income tax rate expected for the ~~interim Consolidated Statements of Income.~~full calendar year to income before income taxes for the period adjusted for discrete items.

Index

Recent Accounting Pronouncements

The Company considers the applicability and impact of all ASUs issued by the FASB. All other ASUs issued subsequent to the filing of the Annual Report on ~~February 27, 2018~~March 12, 2019 were assessed and determined to be either inapplicable or not expected to have ~~minimal~~a material impact on the Company’s consolidated financial position and/or results of operations.

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 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 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 represent 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 specific obligation to the student.

~~Index~~

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 ~~(unaudited).~~(in thousands):


	Three Months Ended March 31, 2018						Three Months Ended March 31, 2019
	(In thousands)						(Unaudited)
	APEI		HCN		Consolidated		APEI		HCN		Intersegment			Consolidated
Instructional services, net of grants and scholarships	$	65,206	$	8,061	$	73,267	$	65,198	$	6,775	$	(27	)	$	71,946
Graduation fees	276		—		276		310		—		—			310
Textbook and other course materials	—		1,122		1,122		—		862		—			862
Other fees	186		116		302		213		110		—			323
Total Revenue	$	65,668	$	9,299	$	74,967	$	65,721	$	7,747	$	(27	)	$	73,441

APUS provides a tuition grant to support students who are U.S. Military active-duty service members, National Guard, reservists, military spouses and dependents, and veterans as well as a grant to cover the technology fee for students using DoD tuition assistance programs. APUS and HCN also provide scholarships to certain students to assist them financially with their educational goals.



	Three Months Ended March 31, 2018
	(Unaudited)
	APEI		HCN		Intersegment		Consolidated
Instructional services, net of grants and scholarships	$	65,206	$	8,061	$	—	$	73,267
Graduation fees	276		—		—		276
Textbook and other course materials	—		1,122		—		1,122
Other fees	186		116		—		302
Total Revenue	$	65,668	$	9,299	$	—	$	74,967

~~The statement of retained earnings at~~Effective January 1, ~~2018 was adjusted~~2019, the APEI Segment began charging the HCN Segment for the value of courses taken by ~~$278,000 to reflect~~HCN Segment employees at American Public University System. The intersegment revenue elimination is the ~~after tax impact related to the adoption~~elimination of ~~ASC 606, related to the recognition of graduation fees~~this intersegment revenue ~~at APUS. There were no adjustments to any other revenue type as a result of the adoption of ASC 606.~~in consolidation.

Contract Balances and Performance Obligations

The Company has no contract assets or deferred contract costs as of March 31, ~~2018~~2019 and December 31, ~~2017.~~2018.

The Company recognizes a contract liability, or deferred revenue, when a student begins an online course or term, in the case of APUS, or starts a term, in the case of ~~HCN, and revenue is recognized as described earlier in this footnote.~~HCN. Deferred revenue at March 31, ~~2018~~2019 was ~~$22.0~~$21.0 million and includes ~~$13.0~~$12.7 million in future revenue that has not yet been earned for courses and terms that are in progress, as well as ~~$9.0~~$8.3 million in ~~advanced~~ consideration received in advance for future courses or terms, or student ~~deposits,~~deposits. 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 student deposits. Deferred revenue represents the Company’s performance obligation to transfer future instructional services to students. The Company’s remaining performance obligations represent the transaction price allocated to future reporting periods.

The Company has elected, as a practical expedient, not to ~~not~~ disclose ~~the value of~~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 obligation, a contract receivable is created, resulting in accounts receivable on the Company’s Consolidated Balance Sheets. The Company accounts for receivables in accordance with

Index

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 the 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. The Company does not charge interest on past due receivables.

~~Refund Policies~~

Note 4. Leases

The Company ~~provides a stated period of time during which students may withdraw from a class,~~has operating leases for ~~APUS,~~office space and campus facilities. Some leases include options to terminate or aextend for one or more years. These options are included in the lease term ~~for~~when it is reasonably certain that the option will be exercised. The APEI Segment leases corporate and administrative office space in Maryland and Virginia under operating leases that expire through June 2023. The HCN ~~without further financial obligation resulting~~Segment leases administrative office space and five campuses in ~~a refund liability. The refund policy for each company is as follows:~~

~~American Public University System~~

~~Index~~

Ohio under operating leases that expire through June 2029.

~~APUS’s tuition revenue varies~~Operating lease assets are ROU assets, which represent the right to use an underlying asset for the lease term, and operating lease liabilities which represent the obligation to make lease payments arising from ~~period to period~~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 at March 31, 2019. These assets and lease liabilities are recognized at the lease commencement date based on the ~~number~~present value of ~~net course registrations and~~lease payments over the ~~volume of undergraduate versus graduate registrations. Students may remit tuition payments through~~lease term. When the ~~online registration process~~lease does not provide an implicit rate, the Company uses an incremental borrowing rate based on information available at ~~any time or they may elect various payment options, including payments by sponsors, alternative loans, financial aid, or~~lease commencement to determine the ~~DoD tuition assistance program which remits payments directly to APUS. If one~~present value of the ~~various other payment options~~lease payments. The ROU asset includes any lease payments made and excludes lease incentives.

Lease expense for operating leases is ~~confirmed as secured,~~recognized on a straight-line basis over the ~~student is allowed~~lease term. There are no variable lease payments. Lease expense for the three months ended March 31, 2019 was $617,000. These costs are primarily related 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 revenuelong-term operating leases, but also include amounts for ~~sessions in progress~~short-term leases with terms greater than 30 days that are not material.

At March 31, 2019, no leases exist that have not ~~been earned by APUS is presented~~yet commenced and create significant rights and obligations for the Company.

The following tables present information about the amount, timing, and uncertainty of cash flows arising from the Company’s operating leases as ~~deferred revenue~~of March 31, 2019 (dollars in ~~the accompanying Consolidated Balance Sheets.~~thousands):

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~~		~~Tuition Refund Percentage~~
	~~Before or During Week 1~~		~~100%~~
	~~During Week 2~~		~~75%~~
	~~During Weeks 3 and 4~~		~~50%~~
	~~During Weeks 5 through 8~~		~~No Refund~~

	~~16-Week Course- Tuition Refund Schedule~~

	~~Withdrawal Date~~		~~Tuition Refund Percentage~~
	~~Before or During Week 1~~		~~100%~~
	~~During Week 2~~		~~100%~~
	~~During Weeks 3 and 4~~		~~75%~~
	~~During Weeks 5 through 8~~		~~50%~~
	~~During Weeks 9 through 16~~		~~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 other fees that are non-refundable based on the tuition refund policy and recognizes it as revenue in the period the withdrawal occurs.

~~Hondros College of Nursing.~~

HCN’s tuition revenue varies from period to period based on the number of students enrolled and the programs they are enrolled in. 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, or payment plan options. If a payment option is confirmed, the student is allowed to start the term. Generally, financial aid is awarded prior to the start of the term and requests for authorization of disbursement begin in the first week of the term. Tuition revenue for the term in progress that has not yet been earned by HCN is presented as deferred revenue in the accompanying Consolidated Balance Sheets.



Maturity of Lease Liabilities	Lease Payments
2019 (remaining)	$	1,849
2020	2,517
2021	2,537
2022	2,481
2023	1,523
2024	566
2025 and beyond	2,239
Total future minimum lease payments	13,712
Less imputed interest	(2,099		)
Present value of operating lease liabilities	$	11,613

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:



Balance Sheet Classification
Operating lease liabilities, current	$	1,925
Operating lease liabilities, long-term	9,688
Total operating lease liabilities	$	11,613

Index



Other Information
Weighted average remaining lease term (in years)	~~Quarterly Term~~6.2
Weighted average discount rate	5.1
	~~Withdrawal Date~~	~~Tuition Refund Percentage~~
	~~Before first full calendar week of the quarter~~	~~100%~~
	~~During first full calendar week of the quarter~~	~~75%~~
	~~During second full calendar week of the quarter~~	~~50%~~
	~~During third full calendar week of the quarter~~	~~25%~~
	~~During fourth full week of the quarter~~	~~No Refund~~%

~~Students affiliated with certain organizations may have an alternate refund policy.~~

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. There are approximately $15,000 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 would recognize the corresponding adjustments to revenue.

~~Because each HCN term coincides with the Company’s fiscal quarter period, there is no refund liability as of March 31, 2018.~~

~~Note 4. Property and Equipment~~

All property and equipment is recorded at cost less accumulated depreciation and amortization, except the acquired assets of HCN, which were recorded at fair value at the acquisition date. Depreciation and amortization are calculated on a straight-line basis over the estimated useful lives of the assets. Different depreciation and amortization methods are used for tax purposes. Maintenance and repairs are expensed as incurred, while other costs are capitalized if they extend the useful life of the asset.

~~The Company’s Partnership At a Distance~~Cash^TM 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 Subtopic 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. These costs are transferred to property and equipment upon completion of each program and amortized over an estimated life not to exceed three years.Flows

~~The carrying~~An initial ROU asset of $11.8 million was recognized as a non-cash asset addition with the adoption of the standard. There were no additional ROU assets recognized as non-cash asset additions during the three months ended March 31, 2019. Cash paid for amounts included in the present value of ~~long-lived assets are reviewed whenever certain events or changes~~operating lease liabilities at adoption was $609,000 during the three months ended March 31, 2019 and is included in circumstances indicate that the carrying amounts may not be recoverable. Losses incurred on long-lived assets are reported as loss on disposals of long-lived assets in these unaudited interim Consolidated Financial Statements.operating cash flows.

Note 5. ~~Investments~~Goodwill and Intangible Assets

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 12% of its fully diluted equity. 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 and the Company continues to be entitled to two board observer seats. The Company accounts for its investment in RallyPoint in accordance with ASC 321, ~~Investments - Equity Securities. At each reporting period the Company completes a qualitative assessment considering impairment indicators to~~

~~Index~~

~~evaluate whether the investment is impaired.~~ During the three months ended March 31, ~~2018,~~2019, the Company completed a qualitative assessment to determine if an interim goodwill impairment test was necessary. The Company concluded it was more likely than not the fair value of HCN was less than its carrying amount as a result of circumstances that included HCN’s underperformance against 2019 internal targets and overall 2019 financial performance. Therefore, the Company proceeded with a quantitative impairment test as of March 31, 2019. The implied fair value of goodwill was calculated and compared to the recorded goodwill, and the Company determined ~~that~~the fair value of goodwill was $28.0 million, or $5.9 million less than its carrying value. There was no impairment ~~indicators existed and~~of the intangible assets. As a result, the Company recorded a pretax, non-cash charge of $5.9 million to reduce the carrying value of its goodwill in our HCN Segment.

The Company utilized an independent valuation firm to ~~assess~~determine the fair value of HCN. The independent valuation firm weighted the ~~investment.~~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 income approach, fair value was determined based on estimated discounted future cash flows of HCN. The ~~interim assessment concluded that~~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 market approach, pricing terms from other transactions in the higher education market were used to determine the value of HCN. Values derived under the four valuation methods were then weighted to estimate HCN’s enterprise value.

The goodwill impairment charge recorded in the quarter ended March 31, 2019 eliminated the difference between the fair value of ~~its investment was less than~~goodwill and the ~~carrying amount resulting~~book value of goodwill. As such, future changes, including minor changes in ~~a non-cash pre-tax~~revenue, operating income, valuation multiples, discount rates, and other inputs to the valuation process may result in future impairment ~~charge of $0.5 million. This impairment charge is included in equity investment loss in the interim Consolidated Statements of Income.~~charges and those charges could be material.

Determining the fair value of ~~our investments is judgmental in nature~~HCN requires judgment and ~~requires~~ the use of significant estimates and assumptions, ~~from management,~~ including ~~with respect to~~fluctuations in enrollments, revenue growth rates, operating margins, discount rates and future economic market conditions, among others. ~~Additionally,~~Given the ~~valuation firm’s analysis includes significant assumptions about discount rates~~current competitive and ~~valuation multiples. There~~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 ~~our investment~~the Company’s interim and annual goodwill impairment ~~testing~~tests will prove to be accurate predictions of the future. If ~~our~~the Company’s assumptions are not realized, wethe Company may record additional ~~impairments~~goodwill impairment charges in future periods. It is not possible at this time to determine if any such future impairment charge would result or ~~if it does,~~ whether such charge would be material.

For additional information on goodwill and intangible assets see the Company’s Consolidated Financial Statements and accompanying notes in its audited financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2018.

Index

Note 6. Net 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 and~~ restricted stock awards. ~~Stock options~~The table below reflects the calculation of the weighted average number of common shares outstanding, on an as if converted basis, used in computing basic and diluted net income per common share.



	Three Months Ended
	March 31,
	2019	2018
	(Unaudited)
Basic weighted average shares outstanding	16,533	16,360
Effect of dilutive restricted stock	129	174
Diluted weighted average shares outstanding	16,662	16,534

Share awards are not included in the computation of diluted ~~earnings~~net income per share when their effect is anti-dilutive. There were no37,738 and 36,861 anti-dilutive restricted stock ~~options~~awards excluded from the calculation ~~for the three months ended March 31, 2018. There were 134,747 anti-dilutive stock options excluded from the calculation for the three months ended~~ ~~March 31, 2017~~.

~~Note 7. Income Taxes~~

~~The Company determines its interim tax provision by applying the estimated income tax rate expected for the full calendar year to income before income taxes for the period adjusted for discrete items.~~

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 2014 to 2017 remain open to examination.

The Company recognized tax expense for the three months ended March 31, 2018 and March 31, 2017 of $1.9 million and $3.8 million, respectively, or effective tax rates of 28.9% and 46.1%, respectively. The effective tax rate for the three months ended March 31, 2018 reflects the reduction in the federal corporate tax rate to 21% from the prior existing maximum rate of 35% effective January 1, 2018 under the U.S. Tax Cuts and Jobs Act, or the Tax Act. The effective tax rate for the three months ended March 31, 2018 includes approximately $0.2 million in additional income tax expense due to ASU 2016-09, ~~Compensation - Stock Compensation (Topic 718)~~.~~The effective tax rate for the three months ended March 31, 2017 includes approximately $0.5 million in additional income tax expense due to ASU 2016-09.~~

~~Note 8. Stock-Based Compensation~~

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 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 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~~

~~Index~~

Stock-based compensation expense related to restricted stock and restricted stock unit grants 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, and is measured using the Company’s stock price on the date of grant. The Company 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 summarizes the restricted stock and restricted stock unit awards activity for the three months ended March 31, 2019 and 2018, ~~(unaudited):~~respectively.

Number
of Shares

Weighted-Average
Grant Price
and Fair Value
Non-vested, December 31, 2017 461,262
$ 20.91
Shares granted 274,723
$ 25.60
Vested shares (191,280 ) $ 20.95
Shares forfeited (9,254 ) $ 23.04
Non-vested, March 31, 2018 535,451
$ 23.23

~~Option Awards~~

The fair value of each option award is estimated at the date of grant using a Black-Scholes option-pricing model. Prior to 2012, the Company calculated the expected term of stock option awards using the “simplified method” in accordance with ~~Securities and Exchange Commission Staff Accounting Bulletins No. 107 and 110~~ because the Company lacked historical data and was unable to make reasonable assumptions regarding the future. The Company makes assumptions with respect to expected stock price volatility based on the average historical volatility of peers with similar attributes. In addition, the Company determines the risk-free interest rate by selecting the U.S. Treasury five-year constant maturity, 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 718, ~~Stock Compensation.~~ Options previously granted vested ratably over periods of three to five years and expired seven to ten years from the date of grant. All of the Company’s remaining outstanding stock options expired during the three months ended March 31, 2018. Option activity is summarized as follows (unaudited):

Number
of Options

Weighted
Average
Exercise Price

Weighted-Average
Contractual
Life (Years)

Aggregate
Intrinsic
Value
(In thousands)
Outstanding, December 31, 2017 109,616
$ 37.52
0.01 —
Options granted —
$ —

Awards exercised —
$ —

Awards forfeited (109,616 ) $ 37.52

Outstanding, March 31, 2018 —
$ —

$ —

Exercisable, March 31, 2018 —
$ —

$ —

~~Index~~

~~Stock-Based Compensation Expense~~

~~Stock-based compensation expense charged against income during the three months ended March 31, 2018 and 2017 is as follows (unaudited):~~

Three Months Ended
March 31,
2018
2017
(In thousands)
Instructional costs and services $ 377
$ 312
Selling and promotional 240
175
General and administrative 1,226
759
Stock-based compensation expense in operating income 1,843
1,246
Tax benefit (490 ) (494 )
Stock-based compensation expense, net of tax $ 1,353
$ 752

As of March 31, 2018, there was $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 2.3 years.

Note 9.7. Segment Information

The Company has two operating segments that are managed in the following reportable segments:

•American Public Education Segment, or APEI ~~Segment;~~Segment; and

•Hondros College of Nursing Segment, or HCN ~~Segment.~~Segment.

In accordance with FASB ASC 280, Segment Reporting, the chief operating decision-maker has been identified as the Company’s Chief Executive Officer. The Company’s Chief Executive Officer reviews operating results to make decisions about allocating resources and assessing performance for the APEI ~~Segment~~ and HCN ~~Segment.~~Segments.

Index

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


	Three Months Ended March 31,				Three Months Ended March 31,
	2018		2017		2019			2018
	(In thousands)				(Unaudited)
Revenue:
American Public Education Segment	$	65,668	$	68,129	$	65,721		$	65,668
Hondros College of Nursing Segment	9,299		7,559		7,747			9,299
Intersegment elimination					(27		)	—
Total Revenue	$	74,967	$	75,688	$	73,441		$	74,967
Depreciation and amortization:
American Public Education Segment	$	4,168	$	4,406	$	3,782		$	4,168
Hondros College of Nursing Segment	354		338		269			354
Total Depreciation and amortization	$	4,522	$	4,744	$	4,051		$	4,522
Income from operations before interest income and income taxes:
Income (loss) from operations before interest income and income taxes:
American Public Education Segment	$	5,130	$	7,927	$	7,522		$	5,130
Hondros College of Nursing Segment	1,032		380		(6,146		)	1,032
Intersegment elimination					6			—
Total Income from operations before interest income and income taxes	$	6,162	$	8,307	$	1,382		$	6,162
Interest income, net:
American Public Education Segment	$	485	$	11	$	1,047		$	485
Hondros College of Nursing Segment	8		—		6			8
Total Interest income, net	$	493	$	11	$	1,053		$	493
Income tax expense:
Income tax expense (benefit):
American Public Education Segment	$	1,621	$	3,689	$	1,666		$	1,621
Hondros College of Nursing Segment	244		160		(1,729		)	244
Total Income tax expense	$	1,865	$	3,849
Total Income tax expense (benefit)					$	(63	)	$	1,865
Capital expenditures:
American Public Education Segment	$	1,394	$	1,566	$	1,345		$	1,633
Hondros College of Nursing Segment	33		104		240			33
Total Capital expenditures	$	1,427	$	1,670	$	1,585		$	1,666

A summary of the Company’s consolidated assets by reportable segment is as follows ~~(current period unaudited)~~(in thousands):


	As of March 31, 2018		As of December 31, 2017		As of March 31, 2019		As of December 31, 2018
	(In thousands)				(Unaudited)
Assets:
American Public Education Segment	$	294,315	$	287,656	$	326,768	$	322,523
Hondros College of Nursing Segment	51,916		51,382		50,979		48,435
Total Assets	$	346,231	$	339,038	$	377,747	$	370,958

Index

Note ~~10.~~8. Commitments and 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.

~~Index~~

On August 3, 2017, the Company received from the Attorney General of the Commonwealth of Massachusetts a Civil Investigative Demand, or CID, dated July 31, 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 requires the production of documents and information relating to recruitment, enrollment, job placement and other matters. The Company continues to cooperate with the Attorney General’s office and cannot predict the eventual scope, duration or outcome of the investigation at this time, including whether any potential loss, or range of potential losses, is probable or reasonably estimable.

In connection with APUS’s Title IV compliance audit for the year ended December 31, 2016, ED indicated that APUS must post an irrevocable letter of credit of approximately $700,000. APUS posted the letter of credit on March 28, 2018.

Note ~~11.~~9. Concentration

APUS students utilize various payment sources and programs to finance their educational 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 Veterans Affairs, or VA, education ~~benefits;~~benefit programs; as well as cash and other sources. Reductions in or changes to DoD tuition assistance, Title IV programs, VA education benefits, and other payment sources could have a significant impact on the Company’s ~~business, operations, financial condition and cash flows.~~operations. As of March 31, ~~2018~~2019 approximately ~~54%~~55% 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.

A summary of APEI Segment revenue derived from ~~APUS~~ students by primary funding source for the three months ended March 31, ~~2018~~2019 and ~~March 31, 2017~~2018 is included in the table below (unaudited).:


	Three Months Ended March 31,		Three Months Ended March 31,
	2018	2017	2019	2018
DoD tuition assistance programs	37%	37%	39%	37%
Title IV programs	26%	27%	24%	26%
VA education benefits	24%	22%	23%	24%
Cash and other sources	13%	14%	14%	13%

A summary of HCN Segment revenue derived from students by primary funding source for the three months ended March 31, ~~2018~~2019 and ~~March 31, 2017~~2018 is included in the table below (unaudited).:


	Three Months Ended March 31,				Three Months Ended March 31,
	2018		2017		2019	2018
Title IV programs	82	%	84	%	80%	82%
Cash and other sources	15	%	14	%	18%	15%
VA education benefits	3	%	2	%	2%	3%
	100	%	100	%

Index

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 Quarterly 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, ~~2017,~~2018, or our Annual Report.

Forward-Looking Statements

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 our 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 our 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.

Overview

Background

We are a provider of online and on-campus postsecondary education to approximately ~~84,700~~82,900 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.

Our ~~wholly owned~~wholly-owned operating subsidiary institutions include the following:

American Public University System, Inc., or APUS, provides online postsecondary education ~~directed primarily at~~to approximately 81,200 adult learners. APUS is an accredited university system with a history of serving the academic needs of the military, military-affiliated and public service ~~communities. APUS is an online university system, which includes:~~communities through two brands: American Military University, or AMU, ~~which is focused on educating military students,~~ and American Public University, or ~~APU, which is focused on educating non-military students.~~

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APU.

APUS ~~has approximately 82,700 students and~~ offers ~~109~~118 degree programs and 109 certificate programs in diverse fields of study, ~~including~~with a particular focus on those relevant to today’s job market and emerging fields. Fields of study include 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 APUS’s plan to enter into a shared services model with APEI. In November 2017, HLC invited APUS to submit updates to the application to address new HLC guidelines for review of shared services arrangements. The HLC Board of Trustees was tentatively scheduled to consider the application at its June 2018 meeting, but on April 26, 2018, HLC notified APUS that consideration of the application 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 pending. 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 structure application at that time. HLC previously planned to visit APUS in February 2017 as part of a standard comprehensive evaluation, but agreed to postpone that comprehensive evaluation until the third quarter of 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, 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 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 verification 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 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. The first cohorts began in January 2018. The programs meet the need for higher-level education and research combined with professional practice in these fields. 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 August 3, 2017, we received from the Attorney General of Massachusetts a Civil Investigative Demand, or CID, dated July 31, 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 requires the production of documents and information relating to recruitment, enrollment, job placement and other matters. We continue to cooperate with the Attorney General’s office and cannot predict the eventual scope, duration or outcome of the investigation at this time, including whether any potential loss, or range of potential losses, is probable or reasonably estimable. Furthermore, we cannot predict what affect, if any, the CID will have on our financial position or results of operations.

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 the letter, 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

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~~returned timely for 5%~~intelligence, and homeland security. APUS has regional accreditation from the Higher Learning Commission, or ~~more~~HLC, and several 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 shouldits academic programs 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 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 CID. The designation is expected to remain in place until the office of the 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 accompaniedspecialized accreditation granted 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 structure 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 the implementation of the 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.

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. APUS recorded expenses for termination benefits related to the workforce reduction in the first quarter of 2018 in accordance with FASB ASC 420, ~~Exit or Disposal Cost Obligations~~. The Company incurred an aggregate of approximately $1.7 million of pre-tax expenses associated with employee severance benefits. APUS expects the reduction in force to result in pre-tax labor and benefits costs savings in 2018 to be in the range of approximately $1.7 million to $2.1 million, and in the range of approximately $2.1 million to $2.8 million on an annualized basis. These cost savings do not include expenses associated with employee severance benefits. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material. There is no certainty that the voluntary program, or any other expense reduction initiative, will have the intended benefits of reducing costs and expenses over the long-term, or whether there will be adverse impacts, including because of the loss of valuable employees.

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 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.

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industry-governing organizations.

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

National Education Seminars, Inc., which we refer to as Hondros College of Nursing, or HCN,, provides nursing education to approximately ~~2,040~~1,700 students at five campuses in Ohio, ~~as well as online.~~to serve the needs of the nursing and healthcare communities. HCN offers a Diploma in Practical Nursing, or PN, ~~Program, and~~ an Associate Degree in Nursing, or ADN, ~~Program.~~and a newly offered Associate Degree in Medical Laboratory Technology, or MLT. The campuses are located in the suburban areas of Cincinnati, Cleveland, Columbus, Dayton, and Toledo. ~~HCN also offers an online Registered Nurse to Bachelor of Science in Nursing completion program, or RN-to-BSN Program, predominately to students in Ohio.~~

HCN is nationally accredited by the Accrediting Council of Independent Colleges and Schools, or ACICS. As a result of opening its new Toledo campus in January 2017, HCN applied 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 planBureau 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 findings 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 loss of accreditation, can be found in our Annual Report.

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 a federally recognized accrediting agency is restored and effective as of December 12, 2016. ACICS will remain in 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.

~~HCN has an in-process application for accreditation by Accrediting Bureau of~~ Health Education Schools, or ABHES, ~~an accrediting agency that~~and HCN’s locations and programs are approved by the Ohio State Board of Career Colleges and Schools. Portions of the PN and ADN Programs are online. HCN’s PN and ADN Programs are approved by the Ohio Board of Nursing, or OBN, the PN Program is ~~recognized~~accredited by ~~ED. On February 6, 2018, ABHES notified HCN that at its January 2018 meeting, ABHES acted to defer action on HCN’s application~~the National League for ~~initial~~Nursing Commission for Nursing Education Accreditation, or NLN CNEA, and the MLT Program is currently seeking accreditation ~~until ABHES’s May 2018 meeting. On March 30, 2018, HCN submitted to ABHES additional information in connection with ABHES’s consideration of HCN’s application.~~

by the National Accrediting Agency for Clinical Laboratory Science, or NAACLS.

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~~The OBN ~~which approve the Diploma in Practical Nursing, or the PN Program, and the Associate Degree in Nursing, or the ADN Program, require~~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. OnIn March 8, 2017, the OBN placed HCN’s ADN Program on provisional approval because the ADN Program ~~has~~had not met the ~~OBN~~ pass rate standard for ~~five~~four consecutive 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~~meets the pass rate ~~that meets or exceeds 95% of the national average for first-time candidates~~standard for at least two consecutive years. If a program on provisional approval fails to meet ~~and maintain the~~OBN 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 ~~approval pursuant to an adjudication proceeding. On~~approval. In March ~~8, 2018,~~2019, 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.~~2018 for a sixth consecutive year. HCN has been implementing changes, including ~~the~~ curriculum, admissions, and academic achievement and course retake policy changes, ~~discussed in our Annual Report,~~ that are designed to improve NCLEX scores over time, but there is no assurance that these changes will be ~~successful. This situation could~~successful or will not have ~~an adverse impact~~negative effects on ~~our ability~~HCN’s enrollment.

Beginning with the July 2018 term, HCN implemented new academic achievement requirements and course retake policies for the PN and ADN Programs. Further, beginning with the January 2019 term, HCN implemented enhanced ADN Program admissions requirements, and beginning with the April 2019 term, HCN further changed its admissions standards to ~~enroll~~remove certain entrance exam requirements. While we believe changes in admissions requirements and academic achievement requirements are beneficial for our students and ~~eventually our ability~~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 ~~continue HCN’s ADN Program, any of which would~~a decline in enrollment at HCN and have ~~an adverse effect~~had a negative impact on our results of ~~operations, cash flows,~~operations. For example, enrollments in HCN’s ADN Program for the terms beginning in January 2019 and ~~financial condition.~~

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April 2019 were significantly lower than HCN expected, which we believe is likely associated with the implementation of new admissions requirements among other potential factors. While we work on identifying the appropriate balance of admissions requirements and attracting appropriate students, there may continue to be a negative impact on enrollment at HCN. We cannot predict whether these initiatives will be successful over the long term and cannot guarantee that we will be able to reverse the revenue decline in our HCN Segment.

HCN’s PN Program was granted initial programmatic accreditation through the National League for Nursing Commission for Nursing Education, or 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.

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

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Regulatory and Legislative Activity

~~By decision dated~~In December ~~12,~~ 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 ~~Secretary~~effective date of ~~ED withdrew and terminated ED’s recognition~~the distance education portion of ~~ACICS.~~the state authorization final regulations, or the Distance Education Rule, until July 1, 2020. On ~~March 23, 2018, the United States~~April 26, 2019, a U.S. District Court ~~for~~judge found that 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 thatdelayed implementation was improper, and as a result of the ~~remand, there~~court’s related order, the Distance Education Rule will take effect on May 26, 2019.

The Distance Education Rule requires an institution offering distance education programs to be authorized by each state in which the institution enrolls students in such programs, if such authorization is ~~currently no final decision~~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 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. The public disclosures must include information on state authorization for the ~~recognition petition that ACICS submitted~~program, the process for submitting complaints to relevant states, any adverse actions by a state or accrediting agency related to the ~~Department~~distance education program within the past five years, refund policies, as well as applicable licensure or certification requirements for a career a student prepares to enter and the program’s sufficiency to meet those requirements. Under the Distance Education Rule, an institution is required to disclose directly and individually to all prospective students when a distance education program does not meet the licensure or certification requirements for the state in ~~January 2016. Accordingly, ACICS’s status as~~which the student resides, when an adverse action is taken against the program by a ~~federally recognized~~state agency or accrediting agency, ~~is restored~~ and ~~effective as of December 12, 2016. ACICS will remain in~~when an institution determines that ~~status until the Secretary of ED issues~~ a ~~final decision on ACICS’s recognition petition. See “Overview - Background - National Education Seminars, Inc.”~~program has ceased to meet licensure and certification requirements.

~~On June 16, 2017,~~In October 2018, ED announced that it would ~~convene~~establish a negotiated rulemaking committee broadly focused on accreditation and innovation, or the Accreditation and Innovation Committee, to ~~develop~~prepare proposed regulations related to, ~~revise the Final Gainful Employment, or GE, Regulations. ED held two public hearings~~among other things, ED’s recognition of accrediting agencies and solicited written comment from the public with respect to the agenda for the negotiated rulemaking committee, which met for the first time in December 2017. We submitted written comments on the agenda for the negotiated rulemaking committee on July 12, 2017.institutional and programmatic eligibility issues, including state authorization and programs offered through distance education, respectively. In April 2019, The ~~negotiated rulemaking committee held meetings in December 2017, February 2018,~~Accreditation and ~~March 2018, but the members of the committee did not reach~~Innovation Committee reached consensus on proposed regulatory language. ~~As a result,~~ ED ~~may propose~~will publish the agreed-upon regulatory language ~~with no obligation~~in a notice of proposed rulemaking and accept public comment on the proposal; that notice is expected in the coming months. Under the Higher Education Act, ED must publish a final rule on or before November 1, 2019 in order for the regulations to ~~use language negotiated or agreed-upon during the committee meetings.~~be effective on July 1, 2020. We cannot predict what regulations will be ~~proposed or~~ ultimately adopted following the notice-and-comment process.

On March 15, 2019, ED issued guidance to colleges and universities about how to comply with selected provisions contained in the Borrower Defense Regulations that took effect as of October 16, 2018. For more detail about the Borrower Defense Regulations, please refer to our Annual Report, including “Business - Regulatory Environment - Student Financing Sources and Related Regulations/Requirements - Department of Education - Regulation of Title IV Financial Aid Programs - Borrower Defenses” in Part I, Item 1. As described in the guidance, ED will apply the federal standard for borrower defense to repayment applications set forth in the Borrower Defense Regulations for claims asserted as to Direct Loans first disbursed on or after July 1, 2017. In the guidance, ED explained that institutions should handle reporting for events, actions, or conditions that occurred after July 1, 2017 by making required reports to ED no later than May 13, 2019. ED also indicated that because the Borrower Defense Regulations are now in effect, institutions must implement the Borrower Defense Regulations’ prohibitions related to dispute resolution between institutions and students with respect to claims that are or could be asserted as a ~~result of this rulemaking process.~~borrower defense claim under ED’s administrative process, including by making any required modifications to enrollment agreements or by beginning to implement required notification procedures by May 13, 2019.

We cannot predict the extent to which the aforementioned regulatory activity or any other potential regulatory or legislative activity may impact us or our institutions, nor can we predict the possible associated burdens and costs. Additional information regarding the regulatory and legislative environment and potential risks associated with it is available in our Annual Report.

Reportable Segments

Our operations are organized into two reportable segments:

American Public Education Segment, or APEI Segment. This segment reflects the operational activities of APUS, other corporate activities, and minority ~~investments.~~investments; and

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

Summary of Results

For the three month period ended March 31, ~~2018,~~2019, our consolidated revenue decreased from ~~$75.7~~$75.0 million to ~~$75.0~~$73.4 million, or by ~~1.0%~~2.0%, ~~over~~compared to the comparable prior year period. Our operating margins decreased from ~~11.0%~~8.2% to ~~8.2%~~1.8% for the three month period ended March 31, 2019, compared to the comparable prior year period. The three month period ended March 31, 2019 includes a $5.9 million pretax, non-cash impairment of goodwill and approximately $1.3 million in pretax professional fees associated with the evaluation of an acquisition.

For each of the three month periods ended March 31, 2019 and 2018, APEI Segment revenue was $65.7 million. APEI Segment operating margins increased from 7.8% to 11.4% for the three month period ended March 31, 2019, compared to the comparable prior year period. For the three month period ended March 31, 2019, APEI Segment expenses include approximately $1.3 million in pretax professional fees associated with the evaluation of an acquisition. For the three month period ended March 31, 2018, ~~over the comparable prior year period. The three month period ended March 31, 2018 includes pre-tax~~APEI Segment expenses include pretax expenses of approximately $1.7 million ~~associated with~~resulting from the voluntary reduction in force program announced on March 12, 2018. ~~The workforce reduction was substantially completed as of April 1, 2018.~~

~~For the three months ended March 31, 2018, the Company recognized pre-tax expense as follows for the voluntary reduction in force program:~~

Three Months Ended
March 31, 2018
Instructional costs and services $ 765
Selling and promotional 494
General and administrative 455
Total voluntary reduction in force expense $ 1,714

For the three month period ended March 31, 2018, APEI Segment revenue decreased from $68.1 million to $65.7 million, or by 3.6%, over the comparable prior year period. APEI Segment operating margins decreased from 11.6% to 7.8% for

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~~the three month period ended March 31, 2018, over the comparable prior year period.~~ Net course registrations at APUS for the three month period ended March 31, ~~2018 decreased~~2019 increased from ~~86,800~~83,300 to ~~83,300,~~84,300, or approximately ~~4.0%~~1.2%, ~~over~~compared to the comparable prior year period. Net course registrations represent the total number of courses for which students remain enrolled after the date by which they may drop a course without financial penalty.

For the three month period ended March 31, 2018, APEI Segment expenses include pre-tax expenses of approximately $1.7 million associated with the voluntary reduction in force program announced on March 12, 2018. The workforce reduction was substantially completed on April 1, 2018.

~~For the three month period ended March 31, 2018,~~2019, HCN Segment revenue ~~increased~~decreased from ~~$7.6~~$9.3 million to ~~$9.3~~$7.7 million, or by ~~23.0%~~16.7%, over the comparable prior year period. HCN Segment operating margins ~~increased~~decreased from ~~5.0%~~11.1% to ~~11.1%~~negative 79.3% for the three month period ended March 31, ~~2018 over~~2019 compared to the comparable prior year period. Enrollment at HCN for the three month period ended March 31, ~~2018 increased~~2019 decreased from ~~1,710~~2,000 to ~~2,040,~~1,700, or approximately ~~19.3%~~15.0%, ~~over~~as compared to the comparable prior year period. New student enrollment at HCN for the three month period ended March 31, 2019 decreased from 502 to 339, or approximately 32.5%, as compared to the comparable prior year period. HCN student enrollment represents the total number of students enrolled in a course immediately after the date by which students may drop a course without financial penalty. HCN voluntarily discontinued new enrollments in its Registered Nurse to Bachelor of Science in Nursing program, or RN-to-BSN Program, subsequent to the start of the July 2018 term, at which time there were approximately 65 students enrolled in the program, and there were approximately 20 students enrolled in the January 2019 term. Those currently enrolled in the RN-to-BSN Program may elect to complete the program at HCN or transfer to another institution, including APUS.

During the three month period ended March 31, 2019, the Company completed a qualitative goodwill assessment and concluded it was more likely than not the fair value of HCN was less than its carrying amount as a result of circumstances that included HCN’s underperformance against 2019 internal targets and overall 2019 financial performance. The assessment was completed after enrollment at HCN was 14.0% below internal targets for the three month period ended March 31, 2019, and 20.0% below internal targets for the term beginning April 2019, respectively. The Company proceeded with a quantitative impairment test as of March 31, 2019. As a result, the Company recorded a pretax, non-cash charge of $5.9 million to reduce the carrying value of its goodwill in our HCN Segment. For additional information regarding our goodwill impairment, please refer to “Note 5. Goodwill and Intangible Assets” in the Notes to the Consolidated Financial Statements in this Quarterly 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.

Critical Accounting Policies and Use of Estimates

For information regarding our Critical Accounting Policies and Use of Estimates, see the “Critical Accounting Policies and Use of Estimates” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.

We provide incentive-based compensation opportunities to certain employees through cash incentive and equity awards. The expense associated with these awards is reflected within our operating expenses. For the year ending December 31, 2018, our Compensation Committee approved an annual incentive arrangement generally applicable to senior management employees, with the aggregate amount of any awards payable dependent upon the achievement of certain Company financial and operational goals as well as individual performance goals. Given that the awards are generally contingent upon achieving annual objectives, determination regarding incentive awards is not expected to be made until after the results for the year ending December 31, 2018 are finalized. Because assessing actual performance against many of these objectives cannot generally occur until at or near year-end, determining the amount of expense that we incur in our interim financial statements for incentive-based compensation involves the judgment of management. Amounts accrued are subject to change in future interim periods if actual future financial results or operational performance are better or worse than expected. During the three months ended March 31, 2018 and March 31, 2017, we recognized an aggregate expense of approximately $1.1 million and $0.6 million, respectively, associated with our 2018 and 2017 incentive-based compensation plans.

Index

Results of Operations

Below we have included a discussion of our operating results and material changes in our operating results during the three months ended March 31, ~~2018~~2019 compared to the three months ended March 31, ~~2017.~~2018. Our revenue and operating results normally fluctuate as a result of seasonal or other variations in our enrollments and the level of expenses in our APEI and HCN Segments. Our student population varies as a result of new enrollments, graduations, student attrition, the success of our marketing programs, and other reasons that we cannot always anticipate. We expect quarterly fluctuations in operating results to continue as a result of various enrollment patterns and changes in expenses.

~~The higher education industry has experienced rapid changes due~~Beginning with the July 2018 term, HCN implemented new academic achievement requirements and course retake policies for the PN and ADN Programs. Further, beginning with the January 2019 term, HCN implemented enhanced ADN Program admissions requirements, requiring external ADN applicants to ~~technological developments, evolving student needs, regulatory challenges, increased competition,~~have an active unencumbered PN license and ~~challenges in~~to have graduated from an approved PN program. Beginning with the ~~military markets.~~April 2019 term, HCN further changed its admissions standards to remove certain entrance exam requirements. We believe ~~that~~ these ~~factors~~academic and admissions requirements have contributed to a decline in ~~net course registrations~~enrollment at ~~APUS~~HCN and have had a negative impact on our results of operations. ~~As discussed in this Quarterly Report~~While we work on ~~Form 10-Q~~identifying the appropriate balance of admissions requirements and ~~in our Annual Report, we are undertaking certain strategic initiatives,including those discussed above in the “Overview” section of this Management’s Discussion and Analysis, that we believe over the long term~~attracting appropriate students, there may ~~increase our ability~~continue to ~~compete for new students, enroll students who are more college ready, and retain existing and future students.~~be a negative impact on enrollment at HCN. We cannot predict whether these initiatives will be successful over the long term and cannot guarantee that we will be able to reverse the revenue decline in our ~~revenue decline.~~HCN Segment. Although we cannot predict what adjustments may be necessary or costs may be incurred as a result of ~~our institutions’~~the decline in ~~enrollments and revenue,~~enrollment at HCN, any such adjustments and costs may have an adverse impact on our results of operations or financial condition.

For more information on the initiatives discussed above, our operations, and related risk factors, please refer to our Annual Report and the “Overview” section of this Management’s Discussion and Analysis.

~~Index~~

Our consolidated results for the three months ended March 31, ~~2018~~2019 and ~~2017~~2018 reflect the operations of our APEI and HCN Segments. For a more detailed discussion of our results by reportable segment, refer to our Analysis of Operating Results by Reportable Segment.

Analysis of Consolidated Statements of Income

For the Consolidated Statements of Income, refer to our Financial Statements: Consolidated Statements of Income. The following table sets forth statements of income data as a percentage of revenue for each of the periods ~~indicated (unaudited):~~indicated:

Index


					Three Months Ended March 31,
					2019		2018
	Three Months Ended March 31,				(Unaudited)
	2018		2017
Revenue	100.0	%	100.0	%	100.0	%	100.0	%
Costs and expenses:
Instructional costs and services	39.6		38.3		38.0		39.6
Selling and promotional	20.8		20.4		20.5		20.8
General and administrative	25.2		23.4		26.0		25.2
Loss on disposals of long-lived assets	0.2		0.6		0.2		0.2
Impairment of goodwill					8.0		—
Depreciation and amortization	6.0		6.3		5.5		6.0
Total costs and expenses	91.8		89.0		98.2		91.8

Income from operations before interest income and income taxes	8.2		11.0		1.8		8.2
Interest income	0.7		—
Interest income, net					1.4		0.7

Income from operations before income taxes	8.9		11.0		3.2		8.9
Income tax expense	2.5		5.1
Equity investment (loss) income	(0.3	)	0.1
Income tax expense (benefit)					(0.1	)	2.5
Equity investment loss					(2.0	)	(0.3	)
Net Income	6.1	%	6.0	%	1.3	%	6.1	%

Three Months Ended March 31, ~~2018~~2019 Compared to Three Months Ended March 31, ~~2017~~2018

Revenue. Our consolidated revenue for the three months ended March 31, ~~2018~~2019 was ~~$75.0~~$73.4 million, a decrease of ~~$0.7~~$1.6 million, or ~~1.0%~~2.0%, compared to ~~$75.7~~$75.0 million for the three months ended March 31, ~~2017.~~2018. The revenue decrease iswas due to a ~~$2.4~~$1.6 million, or ~~3.6%~~16.7%, revenue decrease in our HCN Segment. Revenue in our APEI Segment ~~partially offset by a $1.7~~was unchanged at $65.7 million ~~or 23.0%, revenue increase in our~~for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. The HCN ~~Segment. The APEI~~ Segment revenue decrease was primarily due to a ~~4.0%~~15.0% decrease in student enrollment. Net course registrations in our APEI Segment increased 1.2%, offset by lower revenue per net course ~~registrations. The HCN Segment revenue increase was primarily due to a 19.3% increase in student enrollment and an increase in revenue per student due to a change in student mix and other factors.~~registration.

Costs and expenses. Costs and expenses for the three months ended March 31, ~~2018~~2019 were ~~$68.8~~$72.1 million, an increase of ~~$1.4~~$3.3 million, or ~~2.1%~~4.7%, compared to ~~$67.4~~$68.8 million for the three months ended March 31, ~~2017.~~2018. The increase in costs and expenses was primarily due to a goodwill impairment of $5.9 million in our HCN Segment and increased professional fees in our APEI Segment partially offset by a decrease in employee compensation costs in ~~both~~ our APEI ~~Segment and our HCN Segment, including costs related to the voluntary reduction in force program implemented during the~~Segment. The three months ended March 31, 2018 ~~and additional stock-based compensation related to certain employees reaching retirement eligibility~~includes pretax expenses of approximately $1.7 million resulting from the voluntary reduction in ~~our APEI Segment. These increased costs were partially offset by decreases~~force program. The three months ended March 31, 2019 includes approximately $1.3 million in ~~instructional materials costs, legal costs, bad debt expense and advertising costs in our APEI Segment.~~pretax professional fees associated with the evaluation of an acquisition. Costs and expenses as a percentage of revenue increased to 98.2% for the three months ended March 31, 2019, from 91.8% for the three months ended March 31, ~~2018, from 89.0% for the three months ended March 31, 2017.~~2018. The increase in costs and expenses as a percentage of revenue was primarily due to ~~the~~an increase in costs and expenses during a period when consolidated revenue decreased.

Instructional costs and services expenses. Our instructional costs and services expenses for the three months ended March 31, ~~2018~~2019 were ~~$29.7~~$27.9 million, ~~representing an increase~~a decrease of ~~$0.7~~$1.8 million, or ~~2.5%~~6.0%, from ~~$29.0~~$29.7 million for the three months ended March 31, ~~2017.~~2018. The ~~increase~~decrease in instructional costs and services expenses was primarily due to ~~an increase~~a decrease in employee compensation costs and instructional materials costs in both our APEI ~~Segment~~ and HCN ~~Segment, including~~Segments. For the three months ended March 31, 2018, employee compensation costs ~~related to~~include approximately $0.8 million of pretax expenses from the voluntary reduction in force

~~Index~~

program ~~in our APEI Segment, partially offset by decreases in instructional materials expense~~ in our APEI Segment. Instructional costs and services expenses as a percentage of revenue ~~increased~~decreased to 38.0% for the three months ended March 31, 2019, from 39.6% for the three months ended March 31, ~~2018, from 38.3% for the three months ended March 31, 2017.~~2018. The ~~increase~~decrease in instructional costs and services expenses as a percentage of revenue was primarily due to ~~the increase in~~ instructional costs and services expenses ~~during~~decreasing at a ~~period when~~rate greater than consolidated ~~revenue decreased.~~revenue.

Index

Selling and promotional expenses. Our selling and promotional expenses for the three months ended March 31, ~~2018~~2019 were ~~$15.6~~$15.0 million, ~~representing an increase~~a decrease of ~~$0.1~~$0.6 million, or ~~0.9%~~3.4%, from ~~$15.4~~$15.6 million for the three months ended March 31, ~~2017.~~2018. The ~~increase~~decrease in selling and promotional expenses was primarily the result of ~~an increase~~a decrease in employee compensation costs ~~related to the voluntary reduction in force program~~ in our APEI Segment partially offset by ~~decreases~~an increase in advertising costs ~~and marketing support materials expense~~in our APEI Segment. For the three months ended March 31, 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 ~~increased~~decreased to 20.5% for the three months ended March 31, 2019, from 20.8% for the three months ended March 31, ~~2018, from 20.4% for the three months ended March 31, 2017.~~2018. The ~~increase~~decrease in selling and promotional expenses as a percentage of revenue was primarily due to ~~the increase in~~ selling and promotional expenses ~~during~~decreasing at a ~~period when~~rate greater than consolidated ~~revenue decreased.~~revenue.

General and administrative expenses. Our general and administrative expenses for the three months ended March 31, ~~2018~~2019 were ~~$18.9~~$19.1 million, ~~representing~~ an increase of ~~$1.1~~$0.2 million, or ~~6.4%~~0.9%, from ~~$17.8~~$18.9 million for the three months ended March 31, ~~2017.~~2018. The increase in general and administrative expenses was primarily related to ~~increases~~an increase in professional fees in our APEI segment partially offset by a decrease in employee compensation costs in our APEI Segment. For the three month period ended March 31, 2019, our APEI Segment incurred approximately $1.3 million of pretax professional fees related to the evaluation of an acquisition. For the three months ended March 31, 2018, employee compensation costs include approximately $0.4 million of pretax expenses from the voluntary reduction in force program ~~and additional stock-based compensation costs for retirement eligible employees in our APEI Segment partially offset by decreases in bad debt expense~~ in our APEI Segment. ~~Bad~~Consolidated bad debt expense for the three months ended March 31, ~~2018~~2019 was $1.0 million, or 1.4% of revenue, compared to $1.1 million, or 1.5% of revenue ~~compared to $1.4 million, or 1.9% of revenue~~ in the prior year period. ~~The decrease in bad debt expense was primarily due to changes in student mix, prior changes in admissions and verification processes, and changes in other processes.~~ General and administrative expenses as a percentage of revenue increased to 26.0% for the three months ended March 31, 2019, from 25.2% for the three months ended March 31, ~~2018, from 23.4% for the three months ended March 31, 2017.~~2018. The increase in general and administrative expenses as a percentage of revenue was primarily due to ~~the~~an increase in general and administrative expenses during a period when consolidated revenue decreased.

Loss on disposals of long-lived assets. The loss on disposals of long-lived assets for each of the three months ended March 31, 2019 and 2018 was $0.1 ~~million as compared to $0.5 million~~million.

Impairment of goodwill. The pretax non-cash impairment of goodwill for the three months ended March 31, ~~2017.~~2019 of $5.9 million resulted from the reduction of the carrying value of goodwill in our HCN Segment. For additional information regarding the impairment of goodwill, and a discussion of the potential for future impairment charges for goodwill, please refer to the discussion in “Note 5. Goodwill and Intangible Assets, Notes to Consolidated Financial Statements” in this Quarterly Report.

Depreciation and amortization expenses. Depreciation and amortization expenses were ~~$4.5~~$4.1 million and ~~$4.7~~$4.5 million for the three months ended March 31, ~~2018~~2019 and ~~2017,~~2018, respectively. Depreciation and amortization expenses as a percentage of revenue decreased to 5.5% for the three months ended March 31, 2019, from 6.0% for the three months ended March 31, ~~2018, from 6.3% for the three months ended March 31, 2017.~~2018. The decrease in depreciation and amortization expenses as a percentage of revenue was due to ~~our~~ depreciation and amortization expenses decreasing at a rate greater than ~~our~~ consolidated revenue.

Stock-based compensation expenses. Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses were $1.7 million and $1.8 million for the three months ended March 31, 2019 and ~~$1.2~~2018, respectively. Stock-based compensation costs include accelerated expense for retirement-eligible employees and additional performance stock unit incentive costs.

Interest income. Interest income was $1.1 million for the three months ended March 31, 2019, compared to income of $0.5 million for the three months ended March 31, 2018. The increase was related to an increase in interest rates and an increase in average invested balances in cash and cash equivalents.

Income tax expense (benefit). We recognized an income tax benefit for the three months ended March 31, 2019 of $0.1 million and income tax expense of $1.9 million for the three months ended March 31, 2018, and 2017, respectively. Stock-based compensation expense for the three months ended March 31, 2018 includes approximately $1.0 million of accelerated expense for employees who have reached retirement eligibility in our APEI Segment. For additional information regarding our stock-based and other compensation expenses, please refer to “Note 8. Stock-Based Compensation” in the Notes to Consolidated Financial Statements in this Quarterly Report.

~~Voluntary Reduction in Force expenses.~~ Voluntary reduction in force expenses included in instructional costs and services, selling and promotional, and general and administrative expenses were $1.7 million for the three months ended March 31, 2018. There were no voluntary reduction in force expenses during the three months ended March 31, 2017.

~~Income tax expense.~~ ~~We recognized income tax expense for the three months ended March 31, 2018 and March 31, 2017 of $1.9 million and $3.8 million, respectively,~~ or effective tax rates of ~~28.9%~~(6.6)% and ~~46.1%~~28.9%, respectively. The decrease in our effective tax rate for the three months ended March 31, 2018 is primarily due to the reduction in the federal corporate tax rate to 21% from the prior existing maximum rate of 35% effective January 1, 2018 under the U.S. Tax Cuts and Jobs Act, or Tax Act, partially offset by additional income tax expense of approximately $0.2 million related to ASU 2016-09 ~~Compensation - Stock Compensation (Topic 718). We anticipate that our effective tax rate prior to discrete tax benefits, may range from approximately 27% to 29% for 2018.~~ The effective tax rate for the three months ended March 31, ~~2017~~2019 includes a benefit of approximately $0.5 million inrelated to ASU 2016-09 compared to additional income tax expense ~~due to ASU 2016-09. For additional information regarding our income tax expense, please refer to “Note 7. Income Taxes” in the Notes to Consolidated Financial Statements in this Quarterly Report.~~

~~Equity investment (loss)/income.~~ ~~Equity investment loss was~~of $0.2 million for the three months ended March 31, ~~2018 compared to income of $0.04~~2018.

Equity investment loss. Equity investment loss was $1.5 million for the three months ended March 31, ~~2017. The investment~~2019 compared to a loss of $0.2 million for the three months ended March 31, 2018. During the three months ended March 31, 2019, the Company recognized a $1.5 million loss related to its pro rata share of the operating results of NWHW Holdings, Inc. associated with an impairment charge recognized by the investee.

Index

~~ended March 31, 2018 was due to an impairment on our investment in RallyPoint of $0.5 million partially offset by our share of earnings from other investments.~~

Net income. Our net income was $1.0 million for the three months ended March 31, 2019, compared to net income of $4.6 million for the three months ended March 31, 2018, ~~compared to net income~~a decrease of ~~$4.5 million for the three months ended March 31, 2017, an increase of $0.1~~$3.6 million. This ~~increase~~decrease was related to the factors discussed above.

Analysis of Operating Results by Reportable Segment

The following table provides details on our operating results by reportable segment for the respective periods ~~(unaudited)~~(in thousands):


	Three Months Ended March 31,				Three Months Ended March 31,
	2018		2017		2019			2018
	(In thousands)				(Unaudited)
Revenue:
American Public Education Segment	$	65,668	$	68,129	$	65,721		$	65,668
Hondros College of Nursing Segment	9,299		7,559		7,747			9,299
Intersegment elimination					(27		)	—
Total Revenue	$	74,967	$	75,688	$	73,441		$	74,967
Income from operations before interest income and income taxes:
Income (loss) from operations before interest income and income taxes:
American Public Education Segment	$	5,130	$	7,927	$	7,522		$	5,130
Hondros College of Nursing Segment	1,032		380		(6,146		)	1,032
Intersegment elimination					6			—
Total Income from operations before interest income and income taxes	$	6,162	$	8,307	$	1,382		$	6,162

APEI Segment

For each of the three months ended March 31, 2019 and 2018, ~~the $2.5 million decrease to approximately $65.7 million in~~ revenue in our APEI Segment was ~~primarily attributable to lower~~approximately $65.7 million with higher net course ~~registrations.~~registrations in the 2019 period offset by lower revenue per net course registration. Net course registrations at APUS ~~decreased 4.0%~~increased 1.2% to approximately ~~83,300~~84,300 during the three months ended March 31, ~~2018~~2019 compared to the same period in 2017. We believe that the decrease in APUS’s net course registrations for the three months ended March 31, 2018 was primarily attributable to challenges associated with competition for students and challenges in the military market, 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.2018. Income from operations before interest income and income taxes in our APEI Segment was ~~$5.1~~$7.5 million during the three months ended March 31, ~~2018, a decrease~~2019, an increase of ~~35.3%~~46.6% compared to the same period of ~~2017, primarily~~2018, as a result of ~~the decrease in revenue resulting from lower net course registrations and increases~~decreases in costs and expenses ~~during~~including lower employee compensation costs and costs associated with the voluntary reduction in force program for the three month period ended March 31, 2018 partially offset by increase in professional fees for the three months ended March 31, ~~2018, including expenses associated with the voluntary reduction in force.~~2019.

HCN Segment

For the three months ended March 31, ~~2018,~~2019, the ~~$1.7~~$1.6 million, ~~increase~~or 16.7%, decrease to approximately ~~$9.3~~$7.7 million in revenue in our HCN Segment was primarily attributable to ~~an increase~~a decrease in student enrollment. HCN student enrollment ~~increased 19.3%~~decreased 15.0% to approximately ~~2,040~~1,700 students during the three months ended March 31, ~~2018~~2019 compared to the same period in ~~2017. Income~~2018. New student enrollment at HCN for the three month period ended March 31, 2019 decreased from 502 to 339, or approximately 32.5%, as compared to the comparable prior year period. We believe that the decrease in HCN’s enrollment for the three months ended March 31, 2019 was primarily attributable to changes in academic standards and admissions policies instituted in 2018 and the first quarter of 2019. The loss from operations before interest income and income taxes in our HCN Segment was ~~$1.0~~$6.1 million during the three months ended March 31, ~~2018,~~2019, compared to ~~$0.4~~income of $1.0 million in the same period of ~~2017~~2018, primarily as a result of ~~an increase~~the goodwill impairment and decrease in revenue ~~from higher enrollments~~due to lower enrollment during the three months ended March 31, ~~2018.~~2019.

Liquidity and Capital Resources

Liquidity

We financed operating activities and capital expenditures during the three months ended March 31, ~~2018~~2019 and ~~March 31, 2017~~2018 with cash provided by operating ~~income.~~activities. Cash and cash equivalents were ~~$186.2~~$215.9 million and ~~$179.2~~$212.1 million at March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, representing an increase of ~~$6.9~~$3.8 million, or ~~3.8%~~1.8%. Cash and cash equivalents at March 31, ~~2018~~2019 increased by ~~$38.4~~$29.8 million from ~~$147.8~~$186.2 million, or ~~26.0%~~16.0%, as compared to March 31, ~~2017.~~2018.

Index

We derive a significant portion of our revenue from tuition assistance programs from ~~the~~ DoD. Generally, these funds are received within 60 days of the start of the courses to which they relate. Another significant source of revenue is derived from our participation in ED’s Title IV programs, for which disbursements are governed by federal regulations. We have typically received disbursements under Title IV programs within 30 days of the start of the applicable ~~course.~~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. Capital expenditures could be higher in the future as a result of, among other things, 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. We 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 ~~$10.2~~$7.9 million and ~~$5.1~~$10.2 million for the three months ended March 31, ~~2018~~2019 and ~~March 31, 2017,~~2018, respectively. The ~~increase~~decrease in cash from operating activities was primarily due to ~~timing of estimated tax payments, higher net income and other~~ changes in working capital due to the timing of ~~payments~~receipts and ~~receipts. For the three months ended~~payments. Accounts payable at March 31, 2019, is approximately $6.7 million lower than December 31, 2018 primarily due to the ~~Company made no estimated tax payments compared to $6.1 million~~timing and processing of aggregate estimated tax payments during the three months ended March 31, 2017. The Company expects to make estimated tax payments in the aggregate amount of $5.5 million during the second quarter of 2018 related to tax extensionspurchases and ~~first quarter estimates. In connection with the voluntary reduction in force, the Company expects to pay approximately $1.7 million in employee severance costs during the second quarter of 2018.~~payments.

Investing Activities

Net cash used in investing activities was ~~$1.7~~$1.6 million and ~~$2.3~~$1.7 million for the three months ended March 31, ~~2018~~2019 and ~~March 31, 2017,~~2018, respectively. This decrease was primarily related to decreased capital ~~expenditures and capitalized program development costs.~~ expenditures.

Financing Activities

Net cash used in financing activities was ~~$1.6~~$2.5 million and ~~$1.3~~$1.6 million for the three months ended March 31, ~~2018~~2019 and ~~March 31, 2017,~~2018, respectively. The increase in cash used in financing activities for the three months ended March 31, ~~2018~~2019 was primarily related to 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.

At March 31, 2019, we had approximately $148,000 of remaining availability under our cash based stock repurchase program, which we had not utilized since 2015. On May 2, 2019, our Board of Directors authorized a replacement program to repurchase up to $35.0 million of our common stock. 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.

For additional information on our repurchases of our common stock, please refer to “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of Part II of our Annual Report and “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - Repurchases” of Part II of this Quarterly Report on Form 10-Q.

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.

Index

Contractual Commitments

There were no material changes to our contractual commitments outside of the ordinary course of our business during the three months ended March 31, ~~2018~~2019.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

~~Index~~

Market Risk

We had no material derivative financial instruments or derivative commodity instruments as of March 31, ~~2018.~~2019. We maintain our cash and cash equivalents in bank deposit accounts, money market funds and short-term U.S. treasury bills. 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 impact on the fair market value of our portfolio.

Interest Rate Risk

We are subject to risk from 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 March 31, ~~2018~~2019, a 10% increase or decrease in interest rates would not have a material impact on our future earnings, fair values, or cash flows.

There has been no material change to our market risk or interest rate risk during the three months ended March 31, ~~2018~~2019.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated 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 Exchange Act) as of March 31, ~~2018~~2019. Based upon the evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, ~~2018~~2019.

Changes in Internal Control over Financial Reporting

Beginning January 1, ~~2018,~~2019, we implemented ASC ~~606,~~842, ~~Revenue from Contracts with Customers~~Leases (Topic 842). ~~Although the new revenue standard is expected to have an immaterial impact on our ongoing revenue and net income, we~~We implemented changes to our processes related to ~~revenue~~contract evaluations, operating lease asset and liability 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.

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 period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

~~See Item 3 of Part I of our Annual Report. See also Note 10, “Commitments~~From time to time, we have been and ~~Contingencies,” to our Consolidated Financial Statements included elsewhere~~may be involved in ~~this Quarterly Report on Form 10-Q.”~~various legal proceedings. We currently have no material legal proceedings pending.

Index

Item 1A. Risk Factors

An investment in our stock involves a high degree of risk. You should carefully consider the risks set forth in the Risk Factors section of our Annual Report and all of the other information set forth in this Quarterly Report on Form 10-Q, our Annual Report, and the additional information in the other reports we file with the SEC. If any of the risks contained in those reports actually occur, our business, results of operation, financial condition and liquidity could be harmed, the value of our securities could decline and you could lose all or part of your investment. With the exception of the following, there have been no material changes in the risk factors set forth in the Risk Factors section of our Annual Report.

ED rules setting forth new standards and procedures related to borrower defense-to-repayment claims, standards related to financial responsibility, and requirements related to dispute resolution may create significant liability that could have a material adverse effect on our business.

On November 1, 2016, ED published final regulations concerning 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, which we refer to as the Borrower Defense Regulations. Certain portions of the Borrower Defense Regulations, which initially were scheduled to become effective July 1, 2017, became effective October 16, 2018 as a result of court decisions in legal challenges to the Borrower Defense Regulations and ED’s delay of the effective date of those regulations.

The Borrower Defense Regulations create a new federal standard for borrower defenses, new limitation periods for borrower defense claims, and new processes for resolution of such claims. 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, ED will collect from the institution any liability for amounts discharged or reimbursed to borrowers under the group process. If ED determines that borrowers of Direct Loans who attended our institutions ~~fail~~have a defense to ~~maintain~~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.

ED’s financial responsibility standards have been modified by the Borrower Defense Regulations 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. If ED determines that one of our institutions is not financially responsible, because of one or more triggering events, to continue participating in Title IV programs, the institution must 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 and may be required to disclose to students information about the letter of credit.

The 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 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.

On March 15, 2019, ED issued guidance on how to comply with selected provisions contained in the Borrower Defense Regulations. As described in the guidance, ED will apply the federal standard for borrower defense to repayment applications set forth in the Borrower Defense Regulations for claims asserted as to Direct Loans first disbursed on or after July 1, 2017. In the guidance, ED explained that institutions should handle reporting for events, actions, or conditions that occurred after July 1, 2017 by making required reports to ED no later than May 13, 2019. ED also indicated that because the Borrower Defense Regulations are now in effect, institutions must implement the Borrower Defense Regulations’ prohibitions related to dispute resolution between institutions and students with respect to claims that are or could be asserted as a borrower defense claim under ED’s administrative process, including by making any required modifications to enrollment agreements or by beginning to implement required notification procedures by May 13, 2019.

ED has proposed regulations setting forth new standards and procedures related to institutional ~~accreditation, they would lose the ability~~eligibility to participate in ~~DoD tuition assistance programs~~Title IV and ED’s recognition of accrediting agencies. While the scope of the final regulations remains unclear, 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.

Index

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 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. ED will publish the agreed-upon regulatory language in a notice of proposed rulemaking and accept public comment on the proposal; that notice is expected in the coming months. The effective date of any final regulations cannot be determined at this time, but final regulations promulgated by anNovember 1, 2019 would likely be effective July 1, 2020. We are unable to predict what such final regulations may contain, 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 ~~agency that is recognized by the Secretary of Education is required for participation in DoD tuition assistance programs and for an institution~~agencies to ~~become and remain eligible~~comply with any final regulations could affect our institutions’ eligibility to participate in Title IV ~~programs. APUS participates in DoD tuition assistance~~ programs and ~~Title IV programs,~~therefore have a material adverse effect on our business, financial condition, and HCN participates in Title IV programs. As described more fully in each operating segment’s section in “Our Institutions - Accreditation” and “Regulatory Environment - Accreditation” in our Annual Report, APUS is accredited by HLC, an institutional accrediting agency recognized by the Secretaryresults of Education, and HCN is accredited by ACICS, an institutional accrediting agency that until December 2016 was recognized by the Secretary of Education. By decision dated December 12, 2016 the Secretary of ED withdrew and terminated ED’s recognition of ACICS. On December 15, 2016, ACICS filed a motion for a temporary restraining order and preliminary injunction against ED in the United States District Court for the District of Columbia. 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 the Department in January 2016, and accordingly, ACICS’s status as a federally recognized accrediting agency is restored and effective as of December 12, 2016. ACICS will remain in 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.

HCN continues to seek additional accreditation from the Accrediting Bureau of Health Education Schools, or ABHES, a national accreditor for allied health schools that is recognized by ED. On February 6, 2018, ABHES notified HCN that at its January 2018 meeting, ABHES acted to defer action on HCN’s application for initial accreditation until ABHES’s May 2018 meeting. On March 30, 2018, HCN submitted to ABHES additional information in connection with ABHES’s consideration of HCN’s application.operations.

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 to apply and wait for approval before making certain changes. For example, in connection with our organizational realignment, HLC requested that APUS submit an application to enable HLC to determine whether APUS’s proposal to enter into a shared services model with APEI constitutes a change in organization or structure that requires HLC’s prior approval. APUS asked HLC to consider the change in structure application at the HLC Board of Trustees’ June 2018 meeting, subject to submission of updates to the application, and the HLC Board of Trustees was tentatively scheduled to consider the application at that meeting. However, on April 26, 2018, HLC notified APUS that consideration of the application would be postponed to HLC’s November 2018 meeting. In its February 7, 2018 letter to APUS imposing a governmental investigation designation, HLC notified APUS that it will continue to review APUS’s change in structure application while that designation remains active; however, HLC may defer action on the application while the investigation is pending. 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 structure application at that time. For more information about the current status of the change of structure application, see “Regulatory Environment - Accreditation” in Part I, Item 1 of our Annual Report.

ACICS requires accredited institutions to submit annually certain campus-level and program-level data for purposes of monitoring student achievement against established requirements, and a campus or program that fails to satisfy the requirements may be subject to various actions up to withdrawal of accreditation or may be required to cease enrollment in the program. Failure to meet any of these criteria or standards orfailure to comply with ~~these policies and requirements~~ED’s regulations related to state authorization or regulations of various states, could result in ~~the loss of accreditation at the discretion of the accrediting agencies. The complete loss of accreditation~~actions that would ~~among other things, render our institutions and their 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.

IfVarious 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 ~~accrediting agency of one of our institutions was~~state but offer educational services to ~~lose its ability~~students who reside in the state or advertise to ~~serve as an accrediting agency for Title IV program purposes and~~or recruit prospective students in 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.state.

APUS is accredited by HLC. In June 2015, the National Advisory Committee on Institutional Quality and Integrity, or 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 as an accrediting agency through December 2017. ED subsequently accepted NACIQI’s recommendation and scheduled HLC for consideration during NACIQI’s February 2018 meeting. At the February 2018 meeting, NACIQI 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

~~Index~~

~~to participate in Title IV programs would have a material adverse effect on enrollments, revenue, and results of operations.~~

~~HCN is accredited by ACICS. By decision dated December 12, 2016 the Secretary of ED withdrew and terminated ED’s recognition of ACICS.~~ On December ~~15,~~19, 2016, ~~ACICS filed~~ED published final regulations addressing, among other issues, state authorization of programs offered through distance education. On June 29, 2018, ED announced that it would delay the effective date of the distance education portion of the final regulations, or the Distance Education Rule, until July 1, 2020. On April 26, 2019, a ~~motion for a temporary restraining order and preliminary injunction against ED in the~~ U.S. District Court ~~for~~judge found that the District of Columbia. 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 thatdelay was improper, and as a result of the ~~remand, there~~court’s related order, the Distance Education Rule will take effect on May 26, 2019. The Distance Education Rule requires an institution offering distance education programs to be authorized by each state in which the institution enrolls students in such programs, if such authorization is ~~currently no final decision~~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. 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 could lose its ability 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. The public disclosures must include information on state authorization for the program, the process for submitting complaints to relevant states, any adverse actions by a state or accrediting agency related to the distance education program within the past five years, and refund policies, as well as applicable licensure or certification requirements for a career a student prepares to enter and the program’s sufficiency to meet those requirements. Under the Distance Education Rule, an institution is required to disclose directly and individually to all prospective students when a distance education program does not meet the licensure or certification requirements for the state in which the student resides, when an adverse action is taken against the program by a state agency or accrediting agency, and when an institution determines that a program has ceased to meet licensure and certification requirements. If one of our institutions were to fail to make the disclosures that will be required under the new rule, we could be at risk of administrative enforcement action or related litigation, including claims from students related to misrepresentation and other matters. In addition, at this time we cannot predict the additional regulatory burden the disclosure requirements will entail, nor can we predict whether or to what extent such disclosure requirements will have an effect on our enrollment processes and results.

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. In April 2019, the committee reached consensus on proposed regulatory language. ED will publish the agreed-upon regulatory language in a notice of proposed rulemaking and accept public comment on the ~~recognition petition~~proposal; that ~~ACICS submitted to~~notice is expected in the ~~Department in January 2016, and accordingly, ACICS’s status as a federally recognized accrediting agency is restored and effective as of December 12, 2016. ACICS will remain in that status until~~coming months. Under the ~~Secretary of~~Higher Education Act, ED ~~issues~~must publish a final ~~decision~~rule on ~~ACICS’s recognition petition.~~or before November 1, 2019 in order for the regulations to be effective on July 1, 2020. We cannot predict what action the Secretary of ED will take on ACICS’s recognition petition. The ineligibility of HCN to participate in Title IV programs would have a material adverse effect on HCN’s enrollments and on our revenue, results of operations, and financial condition.

~~Our institutions~~regulations will be ~~subject~~ultimately adopted following the notice-and-comment process. However, until those rules are effective, if ever, we will have 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 connectioncomply with the ~~institution’s annual Title IV compliance audit constitute material noncompliance for which an institution generally must submit an irrevocable letter of credit.~~previously approved final rules effective May 26, 2019.

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. 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 APUS has not yet received a program review report. In connection with the finding, ED indicated that APUS 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, APUS requested that ED reconsider its finding that APUS had made untimely returns and the related requirement to submit a letter of credit. On March 27, 2018, ED responded confirming the requirement for a letter of credit, and on March 28, 2018, the Company posted the required letter of credit.

Participation in the tuition assistance programs of the DoD requires compliance with numerous regulations, with 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 a Memorandum of Understanding, or MOU, that specifies terms and conditions of participation in DoD tuition assistance programs. By signing the MOU, APUS agreed to participate in DoD’s Third Party Education Assessment. 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 utilizes a sampling approach to regularly review the 2,700 educational institutions that participate in the DoD tuition assistance programs. 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 must 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 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 MOU and termination of the institution’s participation in the DoD tuition assistance programs. If we are no

~~Index~~

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.

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.

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 this 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 four consecutive 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 fails 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 approval pursuant to an adjudication proceeding. On March 8, 2018 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 improve NCLEX scores over time but there is no assurance that these changes will be successful. 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.

Index

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Repurchases

During the ~~period~~three months ended March 31, ~~2018~~2019, we did not repurchase any shares of our common stock other than shares that were deemed to have been repurchased to satisfy employee minimum tax withholding requirements in connection with the vesting of restricted stock grants. The table and footnotes below provide details regarding our repurchase programs (unaudited):

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) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2)(3)
January 1, 2018 —
$ —
—
780,725
$ 148,008
January 1, 2018 - January 31, 2018 —
—
—
1,044,116
148,008
February 1, 2018 - February 28, 2018 —
—
—
1,044,116
148,008
March 1, 2018 - March 31, 2018 —
—
—
1,044,116
148,008
Total —
$ —
—
1,044,116
$ 148,008



	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	—	$	—	—	—	$	148,008
January 1, 2019 - January 31, 2019	—	—		—	283,876	148,008
February 1, 2019 - February 28, 2019	—	—		—	283,876	148,008
March 1, 2019 - March 31, 2019	—	—		—	283,876	148,008
Total	—	$	—	—	283,876	$	148,008

(1)

On December 9, 2011, the Company’s Board of Directors approved a stock repurchase program for its common stock, under which the Company may annually purchase up to the cumulative number of shares issued or deemed issued in that year under the Company’s 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 the Company’s available cash.

(2)

On May 14, 2012, the Company’s Board of Directors authorized a program to repurchase up to $20 million of shares of the Company’s common stock. On each of March 14, 2013, June 13, 2014, and June 12, 2015 the Company’s Board of Directors increased the authorization by an additional $15 million of shares, for a cumulative increase of $45 million of shares and a total authorization of $65 million of shares. As of December 31, 2018 and March 31, 2019, there was $148,008 of shares authorized remaining. Subject to market conditions, applicable legal requirements and other factors, the repurchases may be made from time to time in the open market or 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 as the Company deems appropriate.

(3)

During the three month period ended March 31, ~~2018,~~2019, we were deemed to have repurchased ~~61,215~~83,095 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 program authorized by our Board of Directors as described in footnotes 1 and 2 to this table.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Index

Item 6. Exhibits



Exhibit No.	Exhibit Description

31.1	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.
31.2	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~~2002..
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

Index

SIGNATURES

Pursuant to the requirements 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.



		AMERICAN PUBLIC EDUCATION, INC.
	/s/ Dr. Wallace E. Boston	May ~~8, 2018~~7, 2019
	Dr. Wallace E. Boston
	President and Chief Executive Officer
	(Principal Executive Officer)


	/s/ Richard W. Sunderland, Jr.	May ~~8, 2018~~7, 2019
	Richard W. Sunderland, Jr.
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

3330




	Page
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1716
Item 3. Quantitative and Qualitative Disclosures About Market Risk	2625
Item 4. Controls and Procedures	2725


PART II – OTHER INFORMATION


Item 1. Legal Proceedings	2725
Item 1A. Risk Factors	2726
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3128
Item 3. Defaults Upon Senior Securities	3128
Item 4. Mine Safety Disclosures	3128
Item 5. Other Information	3128
Item 6. Exhibits	3229

SIGNATURES	3330



	Balance at December 31, 2017		Adjustments from adoption of ASC 606			Balance at January 1, 2018
	(In thousands)
Consolidated Balance Sheet
Deferred revenue	$	19,374	$	379		$	19,753
Deferred income taxes	6,281		(101		)	6,180
Retained earnings	108,569		(278		)	108,291



	As of March 31, 2018
	As Reported		Adjustment			Balance without adoption
Consolidated Balance Sheet	(In thousands)
Liabilities
Deferred revenue	$	21,957	$	(423	)	$	22,380
Deferred income taxes	7,131		113			7,244
Equity
Retained earnings	112,880		310			113,190



	Number of Shares		Weighted-Average Grant Price and Fair Value
Non-vested, December 31, 2017	461,262		$	20.91
Shares granted	274,723		$	25.60
Vested shares	(191,280	)	$	20.95
Shares forfeited	(9,254	)	$	23.04
Non-vested, March 31, 2018	535,451		$	23.23



	Number of Options		Weighted Average Exercise Price		Weighted-Average Contractual Life (Years)	Aggregate Intrinsic Value (In thousands)
Outstanding, December 31, 2017	109,616		$	37.52	0.01	—
Options granted	—		$	—
Awards exercised	—		$	—
Awards forfeited	(109,616	)	$	37.52
Outstanding, March 31, 2018	—		$	—		$	—

Exercisable, March 31, 2018	—		$	—		$	—




	Three Months Ended March 31, 2018
Instructional costs and services	$	765
Selling and promotional	494
General and administrative	455
Total voluntary reduction in force expense	$	1,714