PERDOCEO EDUCATION Corp: Form 10-Q for the period ended Jun 30, 2020

The discussion below and other items in this Quarterly Report on Form 10-Q contain “forward-looking statements,” as defined in Section 21E of the Securities Exchange Act of 1934, as amended, that reflect our current expectations regarding our future growth, results of operations, cash flows, performance and business prospects and opportunities, as well as assumptions made by, and information currently available to, our management. We have tried to identify forward-looking statements by using words such as “anticipate,” “believe,” “expect,” “plan,” “seek,” “should,” ”will,” “continue to,” “outlook,” “focused on” and similar expressions, but these words are not the exclusive means of identifying forward-looking statements. These statements are based on information currently available to us and are subject to various risks, uncertainties, and other factors, including, but not limited to, those matters discussed in Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A, “Risk Factors,” in this Quarterly Report on Form 10-Q that could cause our actual growth, results of operations, financial condition, cash flows, performance, business prospects and opportunities to differ materially from those expressed in, or implied by, these statements. Except as expressly required by the federal securities laws, we undertake no obligation to update such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events, developments, or changed circumstances or for any other reason. Among the factors that could cause actual results to differ materially from those expressed in, or implied by, our forward-looking statements are the following:

• declines in enrollment or interest in our programs;
• our continued compliance with and eligibility to participate in Title IV Programs under the Higher Education Act of 1965, as amended, and the regulations thereunder (including 90-10, financial responsibility and administrative capability standards prescribed by the U.S. Department of Education (“ED”)), as well as applicable accreditation standards and state regulatory requirements;
• the impact of various versions of “borrower defense to repayment” regulations;
• rulemaking by ED or any state or accreditor and increased focus by Congress and governmental agencies on, or increased negative publicity about, for-profit education institutions (in particular as these risks and uncertainties may be exacerbated leading up to and following the 2020 Presidential election);
• the operating impact of the settlements with the U.S. Federal Trade Commission (“FTC”) and state attorneys general;
• the success of our initiatives to improve student experiences, retention and academic outcomes;
• the ability of our student admissions and advising functions to achieve anticipated operating performance;
• our continued eligibility to participate in educational assistance programs for veterans and other military personnel;
• the impact of the COVID-19 pandemic;
• difficulties with integrating the assets of Trident University International into AIU’s operations;
• increased competition;
• the impact of management changes; and
• changes in the overall U.S. economy.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. The MD&A is intended to help investors understand the results of operations, financial condition and present business environment. The MD&A is organized as follows:

• Overview
• Consolidated Results of Operations
• Segment Results of Operations
• Summary of Critical Accounting Policies and Estimates
• Liquidity, Financial Position and Capital Resources

OVERVIEW

Our academic institutions offer a quality postsecondary education primarily online to a diverse student population, along with campus-based and blended learning programs. Our two regionally accredited universities – Colorado Technical University (“CTU”) and American InterContinental University (“AIU”) – provide degree programs through the master’s or doctoral level as well as associate and bachelor’s levels. Both universities offer students industry-relevant and career-focused degree programs that are designed to meet the educational needs of today’s busy adults. CTU and AIU continue to show innovation in higher education, advancing personalized learning technologies like their intellipath® learning platform and using data analytics and technology to support students and enhance learning. Perdoceo is committed to providing quality education that closes the gap between learners who seek to advance their careers and employers needing a qualified workforce.

Our reporting segments are determined in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280 – Segment Reporting and are based upon how the Company analyzes performance and makes decisions. Each segment represents a postsecondary education provider that offers a variety of academic programs. We organize our business across two reporting segments: CTU and AIU (collectively referred to as the “University Group”). These segments are organized by key market segments and to enhance brand focus within each segment to more effectively execute our strategic plan.

In 2020, the Company acquired substantially all of the assets of Trident University International (“Trident University”), a regionally accredited university offering online undergraduate, master’s and doctoral programs with a strong focus on graduate programs. Trident University’s operations were brought within the scope of the state licensure, accreditation and Department of Education approval of AIU, with Trident University relinquishing its accreditor and Department approvals. Trident University’s programs are now offered by AIU under the “Trident” name. The combined institution continues to serve existing and future students with a broader range of program offerings and resources.

Regulatory Environment and Political Uncertainty

We operate in a highly regulated industry, which has significant impacts on our business and creates risks and uncertainties. In recent years, Congress, ED, states, accrediting agencies, the CFPB, the FTC, state attorneys general and the media have scrutinized the for-profit postsecondary education sector. Congressional hearings and roundtable discussions were held regarding various aspects of the education industry and reports were issued that are highly critical of for-profit colleges and universities. A group of influential U.S. senators, consumer advocacy groups and some media outlets have strongly and repeatedly encouraged the Departments of Education, Defense and Veterans Affairs to take action to limit or terminate the participation of for-profit educational institutions, including Perdoceo, in existing tuition assistance programs. Most recently, in March 2020, we received a letter from the Committee on Education and Labor of the U.S. House of Representatives requesting information in order to better understand Perdoceo’s compliance with the 90-10 Rule, which we have responded to.

Both major political parties have conveyed significantly different views on how they would propose to reauthorize the Title IV Programs and the various conditions on program or institutional eligibility they would require. As a result, the outcome of the 2020 Presidential and Congressional elections is likely to significantly impact the outcome of future legislative and regulatory actions affecting our business. A loss or material reduction in Title IV Programs or the amount of student financial aid for which our students are eligible would materially impact our student enrollments and profitability and could impact the continued viability of our business as currently conducted.

We encourage you to review Item 1, “Business,” and Item 1A, “Risk Factors,” in our Annual Report on Form 10-K to learn more about our highly regulated industry and related risks and uncertainties, in addition to the MD&A and Risk Factors in our 2020 Quarterly Reports on Form 10-Q.

Note Regarding Non-GAAP measures

We believe it is useful to present non-GAAP financial measures which exclude certain significant and non-cash items as a means to understand the performance of our core business. As a general matter, we use non-GAAP financial measures in conjunction with results presented in accordance with GAAP to help analyze the performance of our core business, assist with preparing the annual operating plan, and measure performance for some forms of compensation. In addition, we believe that non-GAAP financial information is used by analysts and others in the investment community to analyze our historical results and to provide estimates of future performance.

We believe certain non-GAAP measures allow us to compare our current operating results with respective historical periods and with the operational performance of other companies in our industry because it does not give effect to potential differences caused by items we do not consider reflective of underlying operating performance, such as restructuring charges and significant legal reserves. In evaluating the use of non-GAAP measures, investors should be aware that in the future we may incur expenses similar to the adjustments presented below. Our presentation of non-GAAP measures should not be construed as an inference that our future results will be unaffected by expenses that are unusual, non-routine or non-recurring. A non-GAAP measure has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for net income (loss), operating income (loss), earnings per diluted share, or any other performance measure derived in accordance with and reported under GAAP or as an alternative to cash flow from operating activities or as a measure of our liquidity.

Non-GAAP financial measures, when viewed in a reconciliation to respective GAAP financial measures, provide an additional way of viewing the Company's results of operations and the factors and trends affecting the Company's business. Non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, the respective financial results presented in accordance with GAAP.

2020 Second Quarter Overview

The second quarter of 2020 (“current quarter”) reflected continued positive financial results with revenue and operating income increasing as compared to the prior year quarter. The financial results for the second quarter of 2020 were benefitted by the Trident acquisition in the current year as well as growth in student enrollments for the current quarter as compared to the prior year quarter. We continued to execute against our objective of sustainable and responsible growth while remaining focused on delivering quality academic outcomes for our students.

During the quarter, we continued to operate in a remote environment as a result of the COVID-19 pandemic with all of our students taking classes online and our employees working remote, supported by our scalable and innovative technology infrastructure. The health and well-being of our students, employees and communities remain our top priority. For the current quarter we did not have a material impact on our operating results as a result of the COVID-19 pandemic but we continue to monitor the impact of the pandemic on our business processes and operating results. We discuss matters relating to the COVID-19 pandemic below under the heading “COVID-19 Pandemic.”

During the first quarter of 2020, we completed the acquisition of substantially all of the assets of Trident University (the “Trident acquisition”). During the second quarter of 2020 we have continued our efforts to integrate Trident’s unique academic programs along with its students, faculty and staff into AIU’s operations. Trident’s unique academic model and its masters and doctoral programs will continue within AIU providing a diversification of educational learning models and programs to better serve students’ needs. Trident students and faculty, now a part of AIU, will also benefit over time from AIU’s technology investments and operations support.

For the second quarter of 2020, we experienced an increase in total student enrollments of 20.1% as of June 30, 2020 as compared to June 30, 2019 and an increase in new student enrollments of 45.3% for the current quarter as compared to the prior year quarter. This enrollment growth was supported by consistent levels of prospective student interest that were well served by our student enrollment processes. We believe our continued focus on student experiences, retention and academic outcomes, including the technology investments we have made, have contributed to this positive total student enrollment growth, in addition to the Trident acquisition.

New student enrollments within CTU increased 4.5% for the current quarter as compared to the prior year quarter, contributing to total student enrollment growth of 4.0% as of June 30, 2020 as compared to June 30, 2019. This enrollment growth was supported by our investments in technology and student-serving functions which continue to enable our admissions, financial aid and advising staff to support our students effectively throughout the enrollment, orientation and learning processes. Additionally, our faculty and advising teams further increased their student outreach efforts by optimizing faculty scheduling and focusing on the needs of students participating in beginning general education courses. CTU’s mobile app continues to be widely used and we are making investments in technology that use predictive analytics allowing further customization of our student engagement process that we believe will improve student experiences and ultimately academic outcomes. Lastly, CTU continues to focus on its corporate partnership program, and an increase in student enrollments from corporate partnerships contributed to the increase in total student enrollments as of June 30, 2020.

Total student enrollments for AIU increased by 52.7% as of June 30, 2020 as compared to June 30, 2019 as a result of the Trident acquisition and underlying organic growth in new student enrollments for the current year to date as compared to the prior year to date. New student enrollments increased 118.8% for the current quarter as compared to the prior year quarter. The new student enrollment growth for the current quarter was positively impacted by several factors, including, the Trident acquisition, approximately 50% more enrollment days for the current quarter as compared to the prior year quarter and underlying organic growth. Enrollment days attributable to any given quarter are the available days in the quarter during which a prospective student may apply to start school during that quarter, and AIU’s quarterly enrollment results can be significantly impacted by AIU’s academic calendar. AIU’s non-acquisition related enrollment growth was well served by AIU’s student support teams which are centered on student engagement across the entire student life cycle, from enrolling and orientation to ongoing learning and graduation. Additionally, our investments in technology are enabling AIU’s student support teams to provide enhanced support to our students through customized student enrollment and outreach.

Financial Highlights

Revenue for the current quarter increased $19.6 million or 12.5% as compared to the prior year quarter, reflecting revenue growth at both universities as a result of the positive enrollment results discussed above and, for AIU, the Trident acquisition. Operating income for the current quarter increased to $37.4 million as compared to operating income of $0.2 million for the prior year quarter. This improvement was primarily driven by reduced legal settlements within the current quarter as compared to the prior year quarter. The prior year quarter results included $30.0 million of expense related to the FTC settlement as compared to no significant legal settlements during the current quarter. Excluding the impact of the legal settlement, the operating income improvement reflects the revenue growth at CTU and AIU and reduced operating losses within Corporate and Other as well as pandemic-related savings associated with reduced employee health insurance expenses, occupancy-related expenses, travel and events, partially offset with increased expenses relating to marketing as well as student-serving functions, costs associated with compliance and monitoring efforts and legal expenses related to the recently resolved VA matter. Lastly, we reported cash provided by operations for the current year to date of $109.4 million as compared to cash provided by operations of $53.4 million in the prior year to date. The current year to date cash provided by operations was driven by the positive operating results at both universities and timing of Title IV Program funds received in January 2020, partially offset with a settlement payment related to the Oregon arbitrations matter and annual and long-term incentive compensation payments.

Revenue within our CTU segment increased $3.6 million or 3.8% for the current quarter as compared to the prior year quarter reflecting the increase in new and total student enrollments. Operating income for CTU increased to $33.1 million for the current quarter as compared to operating income of $12.1 million in the prior year quarter driven by decreased legal settlements in the current quarter as compared to the prior year quarter which contained $18.6 million of legal settlement expenses for the FTC matter. Increased expenses relating to marketing and student-serving functions were partially offset with operating efficiencies across various administrative functions as well as reduced expenses associated with pandemic-related savings.

Revenue within our AIU segment increased $16.0 million or 26.7% for the current quarter as compared to the prior year quarter reflecting the Trident acquisition as well as underlying organic growth in new and total student enrollments. Operating income for AIU increased to $10.5 million for the current quarter as compared to an operating loss of $4.2 million in the prior year quarter driven by decreased legal settlements in the current quarter as compared to the prior year quarter which contained $11.4 million of legal settlement expenses for the FTC matter. AIU continues to focus on achieving operating efficiencies across various administrative processes and experienced reduced expenses associated with pandemic-related savings while marketing expenses increased during the current quarter as compared to the prior year quarter.

Within our Corporate and Other category, operating loss of $6.2 million improved by $1.5 million or 19.8% compared to the prior year quarter driven by reduced operating losses associated with our closed campuses.

The Company believes it is useful to present non-GAAP financial measures, which exclude certain significant and non-cash items, as a means to understand the performance of its operations. (See tables below for a GAAP to non-GAAP reconciliation.) Adjusted operating income for the total company was $41.7 million for the current quarter as compared to $32.8 million in the prior year quarter with the improvement primarily driven by revenue gowth at both universities along with pandemic related cost savings partially offset with increased expenses related to student-serving functions and marketing, costs associated with compliance and monitoring efforts and legal expenses related to the recently resolved VA matter.

Adjusted operating income and adjusted earnings per diluted share for the quarters and years to date ended June 30, 2020 and 2019 is presented below (dollars in thousands, unless otherwise noted):

(1) Asset impairment relates to a right of use asset for one of our vacated facilities for which the sublease income was deemed no longer recoverable.

(2) Lease expenses for vacated space include both fixed and variable lease costs offset with sublease income for our closed campuses.

(3) Significant legal settlements relate to the FTC matter recorded during 2019.

(4) Amortization amounts relate to definite-lived intangible assets associated with the Trident acquisition.

(5) The tax effect of adjustments was calculated by multiplying the pre-tax adjustments with a tax rate of 25%. This tax rate is intended to reflect federal and state taxable jurisdictions as well as the nature of the adjustments.

(6) A legal settlement of $30.0 million related to the FTC matter was an adjustment from operating income during the second quarter of 2019 to calculate adjusted operating income. However, only $6.7 million of this adjustment met the criteria for tax deductibility during the second quarter of 2019. During the fourth quarter of 2019, an additional $23.0 million related to the FTC settlement met the criteria to be deductible for tax purposes. This amount was previously considered a non-deductible permanent item for tax purposes through September 30, 2019. As a result, the tax benefit of the change in deductibility for the $23.0 million, reflected during the fourth quarter of 2019 has been adjusted to fully reflect the proportional impact of the tax non-deductibility on the second and third quarters of 2019. The impact of the non-deductibility was not proportionally reflected in the originally reported adjusted earnings per diluted share for the second and third quarters of 2019 which would have decreased by $0.05 and increased by $0.02, respectively. The second quarter and year to date 2019 now reflect this adjustment. For the full year 2019, approximately $29.7 million was considered deductible for tax purposes. The quarterly reversals and adjustments of the proportional impacts of the non-deductibility had no effect for the full year 2019.

(7) 2020 results include the Trident acquisition commencing on the March 2, 2020 date of acquisition.

COVID-19 Pandemic

The COVID-19 pandemic has impacted economies and various industries worldwide in 2020. The analysis of the overall impact of COVID-19 on various businesses, markets and economies continues to be assessed as this pandemic is unprecedented during our recent history. We are closely monitoring the impact of COVID-19 on our educational institutions’ operations, including the impact on our students, employees and third-party service vendors. While we have not experienced any material disruptions to date, it is impossible to predict all of the effects and the ultimate impact that COVID-19 may have on our business and results of operations due to uncertainties, including the severity and duration of the outbreak, governmental, regulatory, business or other actions, the effect on our students, impacts on our third-party service vendors and current and potential corporate partners, and other changes to our operations as a result of COVID-19.

The health and well-being of our workforce and our ability to continue to serve students is vital to our operations. In response to the stay at home order issued during the first quarter across multiple states and counties, we were able to respond quickly by providing our employees the necessary tools to work remotely. Our employees have continued to efficiently and effectively serve our students remotely throughout the second quarter. Additionally, we continue to provide our employees with support and resources during this critical time so that they have the tools and information they need to continue supporting our students. Our benefit programs provide support for employees during the COVID-19 pandemic and leaves are also available to eligible employees through the Family Medical Leave Act (FMLA), the Americans with Disabilities Act (ADA), other applicable state leave laws and/or the Company’s short-term disability, long-term disability or personal leave benefits.

Students who are enrolled at our campus-based locations continue to take classes virtually utilizing our online platform and are proceeding with their academic studies with no major disruption to the level of service they are used to experiencing from our institutions and support staff. In certain cases, related to degree programs which require students to complete laboratory or similar tasks, we have arranged for access to the campus for students in these programs. Costs related to maintaining our workforce in a remote environment and continuing to educate our campus-based students via our online platform have thus far not been material to our operating results.

Our strong balance sheet continues to provide us with the financial stability and flexibility to operate during these unprecedented times. While we have not experienced any significant impacts to our operating results to date, the future impacts of a potential worsening of global economic conditions and the disruptions to, and volatility in, the credit and financial markets as well as other unanticipated consequences remain unknown. In addition, the future impacts that COVID-19 may have on our students, employees, third-party service vendors and corporate partners are unknown; however, any material effect on these parties could adversely impact us. See Part II, Item 1A, “Risk Factors - The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business and results of operations,” in this Quarterly Report on Form 10-Q.

Regulatory Updates

VA Letter. As previously disclosed, on March 9, 2020, the Company received a letter from the U.S. Department of Veterans Affairs (the “VA”) notifying the Company that if it fails to remedy its deficiency through corrective action, the VA will disapprove, for purposes of VA educational assistance programs, the enrollment of individuals not already enrolled in programs at the Company’s institutions. The Company provided detailed responses to the VA, including information about its current compliance processes which incorporate enhanced operational and compliance commitments made in agreements with the FTC and multiple state attorneys general. The enrollment of individuals in programs at the Company’s institutions was not suspended by the VA during the period of its review. On July 2, 2020, the VA notified the Company that this matter has been satisfactorily resolved and that the VA will continue the approval of enrollments for new students.

Borrower Defense to Repayment Regulations. On October 28, 2016, ED adopted new regulations that cover multiple issues including the processes and standards for the discharge of federal student loans, which are commonly referred to as “borrower defense to repayment” regulations. ED initially delayed the effective date of these regulations; however, after a successful legal challenge against the delay, ED published guidance to institutions on March 15, 2019 regarding how to implement the 2016 regulations while noting that a new set of regulations was forthcoming. On September 23, 2019, ED published new final “borrower defense to repayment” regulations that became effective on July 1, 2020. The new 2019 final borrower defense to repayment regulations include a distinct loan discharge process and standards applicable to federal student loans first disbursed after July 1, 2020. Although the U.S. House of Representatives and Senate voted to approve a resolution under the Congressional Review Act to disapprove of the 2019 final borrower defense to repayment regulations, President Trump subsequently vetoed this resolution. An attempt to override the President’s veto in the U.S. House of Representatives was unsuccessful. As a result, the 2019 borrower defense to repayment regulations are now effective. See Item 1, “Business—Student Financial Aid and Related Federal Regulation—Compliance with Federal Regulatory Standards and Effect of Federal Regulatory Violations - Borrower Defense to Repayment,” and Item 1A, “Risk Factors – Risks Related to the Highly Regulated Field in Which We Operate - ‘Borrower defense to repayment’ regulations, including closed school discharges, may subject us to significant repayment liability to ED for discharged federal student loans and posting of substantial letters of credit that may limit our ability to make investments in our business which could negatively impact our future growth,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for more information about the borrower defense to repayment regulations and the risks associated therewith.

2020 Outlook

We are providing the following outlook, subject to the key assumptions identified below. Please see the GAAP to non-GAAP reconciliation for adjusted operating income and adjusted earnings per diluted share below for further details.

The outlook reflects our expectation of achieving growth in new and total student enrollments at both universities for the full year 2020. Further, for the third quarter of 2020, we expect growth in new student enrollments as compared to the prior year quarter for both universities, with the number of AIU’s enrollment days for the third and fourth quarters of 2020 relatively comparable to the respective prior year periods.

• Full year 2020 – total company:
• Operating income in the range of $135.0 million to $139.0 million
• Adjusted operating income in the range of $151.0 million to $155.0 million
• Earnings per diluted share in the range of $1.44 to $1.48
• Adjusted earnings per diluted share in the range of $1.48 to $1.52
• Third quarter 2020 – total company:
• Operating income in the range of $31.0 to $32.0 million
• Adjusted operating income in the range of $35.0 million to $36.0 million
• Earnings per diluted share in the range of $0.33 to $0.34
• Adjusted earnings per diluted share in the range of $0.34 to $0.35

(Dollars In Thousands, unless otherwise noted)

Amortization amounts relate to definite-lived intangible assets associated with the Trident acquisition.

(1)Amortization amounts relate to definite-lived intangible assets associated with the Trident acquisition.

(2) Asset impairment relates to a right of use asset for one of our vacated facilities for which the sublease income was deemed no longer recoverable.

(3) Lease expenses for vacated space include both fixed and variable lease costs offset with sublease income for closed campuses.

(4) Significant legal settlements relate to the FTC and Oregon arbitration matters recorded during 2019.

(5) The tax effect of adjustments was calculated by multiplying the pre-tax adjustments with a tax rate of 25%. This tax rate is intended to reflect federal and state taxable jurisdictions as well as the nature of the adjustments.

(6) A legal settlement of $30.0 million related to the FTC matter was an adjustment from operating income during the second quarter of 2019 to calculate adjusted operating income. However, only $6.7 million of this adjustment met the criteria for tax deductibility during the second quarter of 2019. During the fourth quarter of 2019, an additional $23.0 million related to the FTC settlement met the criteria to be deductible for tax purposes. This amount was previously considered a non-deductible permanent item for tax purposes through September 30, 2019. As a result, the tax benefit of the change in deductibility for the $23.0 million, reflected during the fourth quarter of 2019 has been adjusted to fully reflect the proportional impact of the tax non-deductibility on the second and third quarters of 2019. The impact of the non-deductibility was not proportionally reflected in the originally reported adjusted earnings per diluted share for the second and third quarters of 2019 which would have decreased by $0.05 and increased by $0.02, respectively. The third quarter of 2019 now reflects this adjustment. For the full year 2019, approximately $29.7 million was considered deductible for tax purposes. The quarterly reversals and adjustments of the proportional impacts of the non-deductibility had no effect for the full year 2019.

(7) 2020 results include the Trident acquisition commencing on the March 2, 2020 date of acquisition.

Forward looking adjusted operating income and adjusted earnings per diluted share are presented in the reconciliation of GAAP to non-GAAP tables above. Operating income, which is the most directly comparable GAAP measure to adjusted operating income, and earnings per diluted share may not follow the same trends stated in the outlook above because of adjustments made for certain significant and non-cash items such as lease expenses for vacated space offset with any sublease income as well as depreciation, amortization, asset impairment charges, significant restructuring charges and significant legal settlements. The operating income, adjusted operating income, earnings per share, adjusted earnings per share and enrollment outlook provided above for 2020 are based on the following key assumptions and factors, among others: (i) prospective student interest in the Company’s programs remains consistent with recent experience, (ii) initiatives and investments in student-serving operations continue to positively impact enrollment trends, (iii) no material changes in the current legal or regulatory environment, and excludes legal and regulatory liabilities and other related impacts which are not probable and estimable at this time, and any impact of new or proposed regulations, including the “borrower defense to repayment” regulations, (iv) no significant operating impacts from the settlements with the FTC and state attorneys general or other legal or regulatory matters, (v) no significant operating or financial impacts from the COVID-19 pandemic beyond known costs which have been incorporated in the outlook, (vi) earnings per diluted share outlook assumes an effective income tax rate of approximately 26% for the third quarter and the full year, and (vii) any future impact from the Company’s stock repurchase program is excluded. Although these estimates and assumptions are based upon management’s good faith beliefs regarding current and future circumstances and actions that may be undertaken, actual results could differ materially from these estimates. In addition, decisions we make in the future as we continue to evaluate diverse strategies to enhance shareholder value may impact the outlook provided above.

CONSOLIDATED RESULTS OF OPERATIONS

The summary of selected financial data table below should be referenced in connection with a review of the following discussion of our results of operations for the quarters and years to date ended June 30, 2020 and 2019 (dollars in thousands):

(1) Educational services and facilities expense includes costs attributable to the educational activities of our institutions, including: salaries and benefits of faculty, academic administrators and student support personnel, and costs of educational supplies and facilities, such as rents on leased facilities and certain costs of establishing and maintaining computer laboratories. Also included in educational services and facilities expense are rents on leased administrative facilities, such as our corporate headquarters, and costs of other goods and services provided by our campuses, including costs of textbooks and laptop computers.

(2) General and administrative expense includes salaries and benefits of personnel in corporate and campus administration, marketing, admissions, information technology, financial aid, accounting, human resources, legal and compliance. Other expenses within this expense category include costs of advertising and production of marketing materials and bad debt expense.

Revenue

Current quarter and year to date revenue increased by 12.5% or $19.6 million and 10.4% or $32.7 million, respectively, as compared to the prior year periods supported by a 20.1% increase as of June 30, 2020 in total student enrollments as compared to the prior year period. CTU’s and AIU’s new and total student enrollments are discussed in the segment results of operations section below. The current quarter and year to date revenue increase was also benefitted by the Trident acquisition.

Educational Services and Facilities Expense (dollars in thousands)

The educational services and facilities expense for the current quarter and year to date increased by 13.1% or $3.3 million and 7.6% or $3.9 million, respectively, as compared to the prior year periods. The increase was driven by academics and student related expense which increased for the current quarter and year to date by 18.7% or $3.6 million and 13.4% or $5.3 million, respectively, as compared to the prior year periods, primarily as a result of the Trident acquisition. Occupancy expense for the current quarter and year to date improved by 5.6% or $0.3 million and 11.3% or $1.4 million, respectively, as compared to the prior year periods, primarily driven by decreases associated with our closed campuses as those leased facilities reach the end of their lease terms.

General and Administrative Expense (dollars in thousands)

The general and administrative expense for the current quarter and year to date improved by 17.7% or $22.8 million and 8.2% or $18.6 million, respectively, as compared to the prior year periods. The current quarter and year to date decreases were primarily related to lower administrative expense, which was partially offset with increases in advertising, admissions and bad debt expense. The decreased administrative expense for the current quarter and year to date was due to the prior year legal settlement of $30.0 million recorded in the second quarter of 2019 for the FTC matter. The advertising expense for the current quarter and year to date increased by 12.2% or $3.8 million and 9.6% or $6.2 million, respectively, as compared to the prior year periods, partially due to the Trident acquisition as well as supporting student enrollment growth within our universities. As a percentage of revenue, advertising expense remained relatively flat for the current quarter and year to date as compared to the prior year periods. Admissions expense increased by 6.9% or $1.6 million for the current quarter as compared to the prior year period primarily as a result of the Trident acquisition and increased 6.7% or $3.1 million for the current year to date as compared to the prior year period primarily due to the Trident acquisition as well as increased staffing to support the prospective student interest we are experiencing.

Bad debt expense incurred by each of our segments during the quarters and years to date ended June 30, 2020 and 2019 was as follows (dollars in thousands):

27

Bad debt expense increased by 7.8% or $0.9 million and 8.8% or $2.0 million for the current quarter and year to date, respectively, as compared to the prior year periods. The increased bad debt expense within both CTU and AIU for the current quarter and year to date was in line with the revenue increases at both universities with total bad debt expense as a percentage of revenue decreasing slightly for the current quarter and year to date periods as compared to the prior year periods. We regularly monitor our reserve rates, which includes a review of our analysis of historical student receivable collectability which we update quarterly based on the most recent data available, along with current known factors which we believe could affect collectability of our student receivables, including the number of students that do not complete the financial aid process. Our student support teams have maintained their focus on financial aid documentation collection and are counseling students through the Title IV process so that they are better prepared to start school. Lastly, we have focused on emphasizing employer-paid and other direct-pay education programs such as corporate partnerships as students within these programs typically have lower bad debt expense associated with them.

Asset Impairment

For the current year to date, we recorded $0.6 million of asset impairment related to one of our previously vacated leased facilities as a result of non-payment from the sub-lessee. We determined that the right of use asset carrying value was not recoverable through the end of the lease for this facility.

Operating Income

Operating income increased by $37.2 million and $44.5 million for the current quarter and year to date, respectively, as compared to the prior year periods. The current quarter and year to date increase was primarily driven by reduced legal settlements as compared to the prior year periods. The prior year quarter and year to date operating results included a $30.0 million legal settlement for the FTC matter as compared to no significant legal settlements recorded during the current quarter and year to date. Additionally, operating income for the current quarter and year to date benefitted from increased revenue of $19.6 million and $32.7 million, respectively, as compared to the prior year periods, reduced operating losses within Corporate and Other for the current quarter and year to date and pandemic-related cost savings, which more than offset the increases in advertising, admissions and bad debt expenses. Operating margins improved by 21.1% and 11.9% for the current quarter and year to date, respectively, as compared to the prior year periods, as we continue to optimize non-student-serving expenses while supporting student enrollments.

Provision for Income Taxes

For the quarter and year to date ended June 30, 2020, we recorded a provision for income taxes of $10.3 million reflecting an effective tax rate of 26.7% and $19.9 million reflecting an effective tax rate of 25.7%, respectively, as compared to a provision for income taxes of $2.3 million reflecting an effective tax rate of 129.3% and $8.7 million reflecting an effective tax rate of 26.1% for the respective prior year periods. The effective tax rate for the quarter and year to date ended June 30, 2020 was impacted by the tax-effect of stock-based compensation and the release of previously recorded tax reserves. The effect of these discrete items increased the effective tax rate for the quarter by 0.3% and decreased the year to date rate by 0.8%. The effective tax rate for the quarter and year to date ended June 30, 2019 was primarily impacted by a $2.4 million unfavorable adjustment related to the expected partial non-deductibility of the FTC settlement, which increased the effective tax rate for the quarter and year to date by 132.5% and 7.1%, respectively, and a $0.5 million net benefit associated with results of a Florida income tax audit which decreased the effective tax rate by 28.2% and 1.5%, respectively. For the full year 2020, we expect our effective tax rate to be between 25.5% and 26.5%. As of December 31, 2019, we had $108.5 million of federal net operating loss carry forwards which will offset federal taxable income during 2020.

SEGMENT RESULTS OF OPERATIONS

The following tables present unaudited segment results for the reported periods (dollars in thousands):

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(1) An expense of $18.6 million was recorded within CTU related to the FTC settlement during the quarter and year to date ended June 30, 2019.

(2) An expense of $11.4 million was recorded within AIU related to the FTC settlement during the quarter and year to date ended June 30, 2019.

(3) AIU’s current quarter and year to date includes results of operations for the Trident acquisition commencing on the March 2, 2020 date of acquisition.

(4) Amounts that were historically reported within Corporate and Other prior to the segment change as of January 1, 2019.

Total student enrollments represent all students who are active as of the last day of the reporting period. Active students are defined as those students who are considered in good attendance by participating in class related activities. New student enrollments represent students who have started class at one of our academic institutions during the period, excluding students who were previously active at any point in time within the 365 days prior to the start of their course.

(1) AIU includes new and total student enrollments relating to the Trident acquisition commencing on the March 2, 2020 date of acquisition and as of June 30, 2020.

CTU. Current quarter and year to date revenue increased by 3.8% or $3.6 million and 5.3% or $10.2 million, respectively, as compared to the prior year periods. CTU experienced positive new student enrollment growth for the current quarter and year to date of 4.5% and 10.7%, respectively, as compared to the prior year periods, and increased total student enrollments by 4.0% as of the end of the quarter as compared to the prior year quarter. We believe this growth was supported by consistent levels of prospective student interest which were well served by CTU’s student enrollment processes and technology enhancements. Also contributing to the increase in total student enrollments was growth within the corporate partnership program.

Current quarter and year to date operating income for CTU increased by 173.1% or $21.0 million and 61.9% or $25.9 million, respectively, as compared to the prior year periods, primarily due to lower legal settlement expense in the current quarter and year to date as well as the increase in revenue discussed above. Excluding the legal settlement, operating margin improved for the current quarter and current year to date as compared to the prior year periods, primarily as a result of improved operating efficiencies which more than offset the increased bad debt and advertising expenses as well as increased admissions expense for the current year to date as compared to the prior year periods.

AIU. Current quarter and year to date revenue increased by 26.7% or $16.0 million and 18.7% or $22.6 million, respectively, as compared to the prior year periods. AIU experienced positive new student enrollment growth for the current quarter and year to date of 118.8% and 36.0%, respectively, as compared to the prior year periods, and positive total student enrollment growth of 52.7% as of the end of the quarter as compared to the prior year quarter end. These enrollment results were positively impacted by the Trident acquisition and organic enrollment growth as well as a positive impact for the current quarter new student enrollment growth related to 50% more enrollment days in the current quarter as compared to the prior year quarter. Enrollment days attributable to any given quarter are the available days in the quarter during which a prospective student may apply to start school during that quarter, and AIU’s quarterly enrollment results can be significantly impacted by AIU’s academic calendar.

Current quarter and year to date operating income for AIU increased by 348.4% or $14.7 million and 384.8% or $15.8 million, respectively, as compared to the prior year periods, primarily due to lower legal settlement expense in the current quarter and year to date as well as the increase in revenue discussed above, which more than offset the increase in advertising, admissions and bad debt expenses. Excluding the legal settlement, operating margin improved for the current quarter and current year to date as compared to the prior year periods, primarily as a result of improved operating efficiencies.

Corporate and Other. This category includes unallocated costs that are incurred on behalf of the entire company and remaining expenses associated with closed campuses. Total Corporate and Other operating loss for the current quarter and year to date improved by 19.8% or $1.5 million and 18.2% or $2.9 million, respectively, as compared to the prior year periods, primarily as a result of decreased expenses associated with our closed campuses partially offset with increased professional fees within Corporate for the current year to date as compared to the prior year to date.

SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A detailed discussion of the accounting policies and estimates that we believe are most critical to our financial condition and results of operations that require management’s most subjective and complex judgments in estimating the effect of inherent uncertainties is included under the caption “Summary of Critical Accounting Policies and Estimates” included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2019. Note 2 “Summary of Significant Accounting Policies” of the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019 also includes a discussion of these and other significant accounting policies, along with Note 4 "Recent Accounting Pronouncements" in this Form 10-Q for accounting policies adopted in 2020.

LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES

As of June 30, 2020, cash, cash equivalents, restricted cash and available-for-sale short-term investments (“cash balances”) totaled $345.8 million. Restricted cash as of June 30, 2020 was $4.0 million and relates to amounts held in an escrow account to secure post-closing indemnification obligations of the seller pursuant to the Trident acquisition. Our cash flows from operating activities have historically been adequate to fulfill our liquidity requirements. We have historically financed our operating activities, organic growth and acquisitions primarily through cash generated from operations and existing cash balances. We expect to continue to generate cash during 2020. The expectation is based upon, and subject to, the key assumptions and factors discussed above in this MD&A under the heading “2020 Outlook.” We anticipate that we will be able to satisfy the cash requirements associated with, among other things, our working capital needs, capital expenditures and lease commitments through at least the next 12 months primarily with cash generated by operations and existing cash balances.

Our credit agreement allows us to borrow up to a maximum amount of $50.0 million and is scheduled to mature on January 20, 2022. The credit agreement contains customary affirmative, negative and financial maintenance covenants, including a requirement to maintain a balance of cash, cash equivalents and marketable securities in our domestic accounts with the bank of at least $50.0 million at all times. Amounts borrowed under the credit agreement are required to be 100% secured with deposits of cash and marketable securities with the bank. Under the credit agreement, the Company’s ability to make restricted payments, including payments in connection with an acquisition or a repurchase of shares of our common stock, is subject to aggregate limitations which vary during the term of the credit agreement. Taking into consideration restricted payments made by the Company during the term of the credit agreement, the Company may make up to an additional $38.8 million of restricted payments through December 27, 2020. In addition, during this same period, the Company may also make up to an additional $61.2 million of restricted payments in connection with permitted acquisitions, subject to an aggregate cap of $125.0 million for acquisitions during the term of the credit agreement. Any restricted payments in excess of these permitted amounts would require consent of the applicable parties pursuant to the credit agreement.

We will continue to maintain a balanced capital allocation strategy that focuses on maintaining a strong balance sheet and adequate liquidity, while prudently investing in organic growth projects at our universities, such as student-serving initiatives, and evaluating diverse strategies to enhance shareholder value, including share repurchases and acquisitions of quality educational institutions and programs. As we evaluate factors when making determinations regarding capital allocation, we will also consider the COVID-19 pandemic and its related impacts. Ultimately, our goal is to deploy resources in a way that drives long term shareholder value while supporting and enhancing the academic value of our institutions.

On November 4, 2019, the Board of Directors of the Company approved a stock repurchase program which authorizes the Company to repurchase up to $50.0 million of our common stock from time to time depending on market conditions and other considerations. The program expires on December 31, 2021. Since the November 4, 2019 inception date, the Company repurchased approximately 1.5 million shares for $21.2 million. The Company did not repurchase any shares of our common stock during the quarter ended June 30, 2020. See Note 12 “Stock Repurchase Program” to our unaudited condensed consolidated financial statements for more information about this stock repurchase program.

On March 2, 2020, the Company acquired substantially all of the assets of Trident University. The final purchase price for the acquisition, including post-closing purchase price and working capital adjustments, was $43.8 million, based in part on Trident University’s financial results measured in terms of its revenue and EBITDA (as determined pursuant to the purchase agreement for the transaction) during the 12-month period ended December 31, 2019. The initial cash payment of $38.1 million was made on the date of acquisition. As mentioned above, approximately $4.0 million of this amount is held in an escrow account to secure post-closing indemnification obligations of the seller pursuant to the purchase agreement, and is reflected as restricted cash on our condensed consolidated balance sheet as of June 30, 2020. We paid an additional amount of $5.7 million, related to the final post-closing purchase price and working capital adjustments, during July 2020; this amount was funded with the Company’s available cash balances.

The discussion above reflects management’s expectations regarding liquidity; however, as a result of the significance of the Title IV Program funds received by our students, we are highly dependent on these funds to operate our business. Any reduction in the level of Title IV Program funds that our students are eligible to receive or any impact on timing or our ability to receive Title IV Program funds, or any requirement to post a significant letter of credit to ED, may have a significant impact on our operations and our financial condition. In addition, our financial performance is dependent on the level of student enrollments which could be impacted by external factors. See Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A, “Risk Factors,” in this Quarterly Report on Form 10-Q.

Sources and Uses of Cash

Operating Cash Flows

During the years to date ended June 30, 2020 and 2019, net cash flows provided by operating activities totaled $109.4 million and $53.4 million, respectively. The improvement in cash flow from operations as compared to the prior year quarter is primarily driven by the positive operating results at both universities as well as timing of receipt of $39.3 million of Title IV Program funds during the current period that historically was received in the fourth quarter of the prior year.

Our primary source of cash flows from operating activities is tuition collected from our students. Our students derive the ability to pay tuition costs through the use of a variety of funding sources, including, among others, federal loan and grant programs, state grant programs, private loans and grants, institutional payment plans, private and institutional scholarships and cash payments. For the year ended December 31, 2019, approximately 79% of our institutions’ aggregate cash receipts from tuition payments came from Title IV Program funding. For the year to date ended June 30, 2020, this percentage increased as a result of the timing of Title IV Program funds received in January 2020. This percentage differs from the Title IV Program percentage calculated under the 90-10 Rule due to the treatment of certain funding types and certain student level limitations on what and how much to count as prescribed under the rule.

For further discussion of Title IV Program funding and alternative funding sources for our students, see Item 1, “Business - Student Financial Aid and Related Federal Regulation,” in our Annual Report on Form 10-K for the year ended December 31, 2019.

Our primary uses of cash to support our operating activities include, among other things, cash paid and benefits provided to our employees for services, to vendors for products and services, to lessors for rents and operating costs related to leased facilities, to suppliers for textbooks and other institution supplies, and to federal, state and local governments for income and other taxes.

Investing Cash Flows

During the years to date ended June 30, 2020 and 2019, net cash flows used in investing activities totaled $105.5 million and $32.3 million, respectively.

Purchases and Sales of Available-for-Sale Investments. Purchases and sales of available-for-sale investments resulted in a net cash outflow of $64.0 million and $30.9 million for the years to date ended June 30, 2020 and 2019, respectively.

Business acquisition. During the year to date ended June 30, 2020, the Company completed the Trident acquisition and made an initial payment of $38.1 million. See Note 3 “Business Acquisition” for further information.

Capital Expenditures. Capital expenditures increased to $3.4 million for the year to date ended June 30, 2020 as compared to $1.4 million for the year to date ended June 30, 2019. Capital expenditures represented approximately 1.0% of total revenue for each of the years to date ended June 30, 2020 and 2019. For the full year 2020, we expect capital expenditures to be approximately 1.5% of revenue.

Financing Cash Flows

During the years to date ended June 30, 2020 and 2019, net cash flows used in financing activities totaled $17.0 million and $2.4 million, respectively.

Payments of employee tax associated with stock compensation. Payments of employee tax associated with stock compensation were $0.7 million for the year to date ended June 30, 2020 and $2.6 million for the year to date ended June 30, 2019.

Repurchase of Stock. During the year to date ended June 30, 2020, we repurchased 1.3 million shares of our common stock for approximately $17.3 million at an average price of $13.48 per share. Repurchases of stock during the current year were funded by cash generated from operating activities and existing cash balances.

Credit Agreement. On December 27, 2018, we entered into a $50.0 million credit agreement with BMO Harris Bank N.A. (“BMO Harris”), in its capacities as the sole lender and letter of credit issuer thereunder and the administrative agent for the lenders which from time to time may be parties to the credit agreement. The revolving credit facility under the credit agreement is scheduled to mature on January 20, 2022. Amounts borrowed under the credit agreement are required to be 100% secured with cash and marketable securities with the bank. The credit agreement, which includes certain financial covenants, requires that interest is payable at the end of each respective interest period or monthly in arrears, fees are payable quarterly in arrears and principal is payable at maturity. As of June 30, 2020 we had no outstanding borrowings under the revolving credit facility and we remain in compliance with the covenants of the credit agreement.

Changes in Financial Position

Selected condensed consolidated balance sheet account changes from December 31, 2019 to June 30, 2020 were as follows (dollars in thousands):

Total cash and cash equivalents, restricted cash and short-term investments: The increase is primarily driven by cash provided by operating activities as a result of the increase in total revenue within CTU and AIU during the current year to date and cash received from Title IV Program funding, partially offset with cash outflows related to the Trident acquisition, share repurchases, a legal settlement payment of $7.1 million related to the Oregon arbitrations, and the payment of annual and long-term incentive compensation.

Student receivables, net: The decrease is primarily due to receipt of $39.3 million for Title IV Program funding during the current year that in the past would have been received in the prior year.

Goodwill: The increase in goodwill is attributable to the Trident acquisition.

Intangible assets, net: The increase in intangible assets is attributable to the Trident acquisition.

Deferred income tax assets, net: The decrease is driven by the usage of deferred tax assets associated with the offset of income taxes payable.

Accrued expenses - payroll and related benefits: The decrease is driven primarily by the payments during the current year of annual incentive compensation.

Deferred revenue: The increase is partially driven by the Trident acquisition as well as the increase in total student enrollments at our universities.

Other non-current liabilities: The increase is driven by an escrow liability of $4.0 million and a reserve of $1.9 million for potential loan discharges associated with the Trident acquisition.

Treasury stock: The increase is driven primarily by the repurchase of the Company’s common stock during the current year for approximately $17.3 million.

Contractual Obligations

As of June 30, 2020, future minimum cash payments under contractual obligations for our non-cancelable operating lease arrangements were as follows (dollars in thousands):

(1) Amounts exclude certain costs associated with real estate leases, such as expense for common area maintenance (i.e., “CAM”) and taxes, as these amounts are undeterminable at this time and may vary based on future circumstances.

(2) Amounts relate to ongoing operations which include CTU, AIU and Corporate.

(3) Amounts relate to closed campuses.

(4) Amounts provided are for executed sublease arrangements.

(5) Amounts provided are for liabilities as of June 30, 2020.

We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. We use various techniques to manage our market risk. We have no derivative financial instruments or derivative commodity instruments, and believe the risk related to cash equivalents and available for sale investments is limited due to the adherence to our investment policy, which focuses on capital preservation and liquidity. In addition, we use asset managers who conduct initial and ongoing credit analysis on our investment portfolio and monitor that investments are in compliance with our investment policy. Despite the investment risk mitigation strategies we employ, we may incur investment losses as a result of unusual and unpredictable market developments and may experience reduced investment earnings if the yields on investments deemed to be low risk remain low or decline.

Interest Rate and Foreign Currency Exposure

We manage interest rate risk by investing excess funds in cash equivalents and available for sale investments bearing a combination of fixed and variable interest rates, which are tied to various market indices. Our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell investments that have declined in market value due to changes in interest rates. At June 30, 2020, a 10% increase or decrease in interest rates applicable to our investments or borrowings would not have a material impact on our future earnings, fair values or cash flows.

Any outstanding borrowings under our revolving credit facility bear annual interest at fluctuating rates under either the Base Rate Loan or as determined by the London Interbank Offered Rate (“LIBOR”) for the relevant currency, plus the applicable rate based on the type of loan. Under the credit agreement, if LIBOR cannot be determined or an announcement is made about a specific date after which LIBOR will no longer be used for determining interest rates for loans, an alternative to LIBOR or a mechanism to establish an alternate rate is specified. As of June 30, 2020, we had no outstanding borrowings under this facility.

During 2020 we were subject to foreign currency exchange exposures arising from transactions denominated in currencies other than the U.S. dollar, and from the translation of foreign currency balance sheet accounts into U.S. dollar balance sheet accounts, primarily related to an equity investment. We are subject to risks associated with fluctuations in the value of the Euro versus the U.S. dollar.

Our financial instruments are recorded at their fair values as of June 30, 2020 and December 31, 2019. We believe that the exposure of our consolidated financial position and results of operations and cash flows to adverse changes in interest rates applicable to our investments or borrowings or to foreign currency fluctuations is not significant.

Evaluation of Disclosure Controls and Procedures

We completed an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q (“Report”) under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2020, our disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in this Report was recorded, processed, summarized, and reported within the time periods specified in the rules and forms provided by the U.S. Securities and Exchange Commission (“SEC”) and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on the Effectiveness of Controls

Our management does not expect that our disclosure controls and procedures or our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our Company have been detected.

These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

In addition to the information set forth in this Quarterly Report on Form 10-Q, the reader should carefully consider the factors discussed in Part I, Item 1A “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the Securities and Exchange Commission on February 19, 2020. Except for the risk factor below, there have been no material changes to the risk factors previously disclosed in the Form 10-K.

The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business and results of operations.

In March 2020, the World Health Organization declared COVID-19 a global pandemic. This contagious outbreak, which has continued to spread, and the related adverse public health developments, including orders to shelter-in-place, travel restrictions and mandated business closures, have adversely affected workforces, organizations, their customers, economies and financial markets globally, leading to an economic downturn and increased market volatility. It has also disrupted the normal operations of many businesses, including ours.

We are closely monitoring the impact of COVID-19 on our educational institutions’ operations, including the impact on our students, employees and third-party service vendors. It is impossible to predict all of the effects and the ultimate impact of the COVID-19 pandemic, as the situation is rapidly evolving. We may in the future experience reduced student interest in our programs, whether due to funding constraints related to loss of employment, lack of interest in pursuing an education during a period of uncertainty or other reasons directly or indirectly related to the pandemic. Adverse economic circumstances may impact our current and prospective corporate partners, which could negatively impact current student enrollments and future growth at our institutions. The pandemic may also negatively impact collections of accounts receivable, whether due to an inability or unwillingness to make such payments.

We have transitioned almost all of our employees to remote work, as have a number of our third-party service vendors. This rapid transition to a remote work environment may exacerbate certain risks to our business, including increasing the stress on, and our vulnerability to disruptions of, our technology infrastructure and systems, and increased risk of phishing and other cybersecurity attacks, unauthorized dissemination of confidential information and social engineering attempts that seek to exploit the COVID-19 pandemic. If a natural disaster, power outage, connectivity issue or other event occurs that impacts the ability of employees to work remotely, it may be difficult or, in certain cases, impossible, for us to continue our business for a period of time, which could be substantial. While most of our operations can be performed remotely, there is no guarantee that we will be as effective while working remotely because our team is dispersed, many employees may have additional personal needs to attend to (such as looking after children as a result of school closures or family who become sick), and employees may become sick themselves and be unable to work.

Because of the size and breadth of the pandemic, all of the direct and indirect consequences of COVID-19 are not yet known and may not emerge for some time. As a result, there may be impacts on our business and results of operations that may be material and affect us in ways we do not foresee at this time. We therefore may have difficulty accurately forecasting our operating results. In addition, if we do not respond appropriately to the pandemic, or if students, regulators and the public do not perceive our response to be adequate, we could suffer damage to our reputation, which could adversely affect our business.

Moreover, the COVID-19 pandemic may also exacerbate many of the risks discussed in Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2019, such as those related to failure to comply with the extensive regulatory requirements applicable to our business, revised laws and regulations relating to Title IV Programs, student loan cohort default rates (with respect to those students who first enter into student loan repayment during the federal fiscal year ending September 30, 2020 and the following years), the level of enrollments in our institutions, competition, technology, our ability to hire, train and retain personnel, our ability to successfully identify and integrate acquisitions, privacy and information security, and the trading price of our common stock.

As a result of any one or more of these risks, COVID-19 could materially and adversely impact our business and results of operations in the future.