SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DCD.C. 20549

FORM 10-Q

(Mark One)

☒Quarterly Report Pursuant to Section 13 or 15 (d) of the

Securities Exchange Act of 1934

For the quarterly period ended September 30, ~~2017~~

2019

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

For the transition period from to

Commission File No. 0-21039

~~Strayer~~

Strategic Education, Inc.

(Exact name of registrant as specified in this charter)


~~Maryland~~		~~52-1975978~~
Maryland			52-1975978
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

2303 Dulles Station Boulevard ~~Herndon, VA~~			~~20171~~
Herndon,	VA		20171
(Address of principal executive offices)			(Zip Code)

Registrant’s telephone number, including area code: ~~(703)~~ (703) 561-1600

Securities Registered Pursuant to Section 12(b) of the Exchange Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	STRA	Nasdaq Global Select Market

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☒ No ☐

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☒ No ☐

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



Large accelerated filer	☐ ☒		Accelerated filer	☒ ☐
Non-accelerated filer	☐	~~(Do not check if a smaller reporting company)~~	Smaller reporting company	☐
Emerging growth company	☐

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

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

As of October ~~23, 2017,~~18, 2019, there were outstanding ~~11,167,425~~21,964,505 shares of Common Stock, par value $0.01 per share, of the Registrant.

STRATEGIC EDUCATION, INC.

INDEX

FORM 10-Q

~~Table of Contents~~

~~STRAYER EDUCATION, INC.~~

~~INDEX~~

~~FORM 10-Q~~




PART I — FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Unaudited Condensed Consolidated Balance Sheets at December 31, ~~2016~~2018 and September 30, ~~2017~~2019	3 3

		Unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, ~~2016~~2018 and ~~2017~~2019	4 4

		Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2019	4

		Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, ~~2016~~2018 and ~~2017~~2019	5 5

		Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2016~~2018 and ~~2017~~2019	7 6

		Notes to Unaudited Condensed Consolidated Financial Statements	8 7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32 22

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41 29

	Item 4.	Controls and Procedures	41 29

PART II — OTHER INFORMATION

	Item 1.	Legal Proceedings	43 30

	Item 1A.	Risk Factors	43 30

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43 31

	Item 3.	Defaults Upon Senior Securities	43 31

	Item 4.	Mine Safety Disclosures	43 31

	Item 5.	Other Information	43 31

	Item 6.	~~Exhibits~~	Exhibits 32	43

SIGNATURES			44 33

~~CERTIFICATIONS~~

~~Table of Contents~~

~~STRAYER~~STRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

December 31, 2016

September 30, 2017

ASSETS

Current assets:

Cash and cash equivalents

$
129,245

$
150,483

Tuition receivable, net

20,532

20,626

Income taxes receivable

—

2,734

Other current assets

10,766

12,917

Total current assets

160,543

186,760

Property and equipment, net

73,124

74,335

Deferred income taxes

31,096

34,609

Goodwill

20,744

20,744

Other assets

13,189

12,127

Total assets

$
298,696

$
328,575

LIABILITIES & STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable and accrued expenses

$
41,132

$
50,514

Income taxes payable

1,883

—

Deferred revenue

16,691

21,784

Other current liabilities

133

—

Total current liabilities

59,839

72,298

Other long-term liabilities

50,483

40,788

Total liabilities

110,322

113,086

Commitments and contingencies

Stockholders’ equity:

Common stock, par value $0.01; 20,000,000 shares authorized; 11,093,489 and 11,167,425 shares issued and outstanding at December 31, 2016 and September 30, 2017, respectively

111

112

Additional paid-in capital

35,453

44,021

Retained earnings

152,810

171,356

Total stockholders’ equity

188,374

215,489

Total liabilities and stockholders’ equity

$
298,696

$
328,575



	December 31, 2018		September 30, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	311,732	$	397,094
Marketable securities	37,121		33,455
Tuition receivable, net	55,694		50,964
Income taxes receivable	—		6,970
Other current assets	15,814		17,130
Total current assets	420,361		505,613
Property and equipment, net	122,677		116,489
Right-of-use lease assets	—		93,208
Marketable securities, non-current	37,678		26,532
Intangible assets, net	328,344		286,844
Goodwill	732,540		732,075
Other assets	19,429		20,435
Total assets	$	1,661,029	$	1,781,196

LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	85,979	$	86,092
Income taxes payable	419		—
Contract liabilities	38,733		45,571
Lease liabilities	—		26,167
Total current liabilities	125,131		157,830
Deferred income tax liabilities	59,358		57,016
Lease liabilities, non-current	—		83,067
Other long-term liabilities	51,316		38,624
Total liabilities	235,805		336,537
Commitments and contingencies
Stockholders’ equity:
Common stock, par value $0.01; 32,000,000 shares authorized; 21,743,498 and 21,964,505 shares issued and outstanding at December 31, 2018 and September 30, 2019, respectively	217		220
Additional paid-in capital	1,306,653		1,306,353
Accumulated other comprehensive income	32		447
Retained earnings	118,322		137,639
Total stockholders’ equity	1,425,224		1,444,659
Total liabilities and stockholders’ equity	$	1,661,029	$	1,781,196

The accompanying notes are an integral part of these condensed consolidated financial statements.

~~Table of Contents~~

~~STRAYER~~STRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

For the three months ended

For the nine months ended

September 30,

September 30,

2016

2017

2016

2017

Revenues

$
102,156

$
108,512

$
321,809

$
336,144

Costs and expenses:

Instruction and educational support

56,295

56,987

176,175

180,059

Marketing

25,388

26,790

61,434

64,734

Admissions advisory

4,691

5,318

13,171

14,813

General and administration

10,952

11,193

33,211

36,017

Total costs and expenses

97,326

100,288

283,991

295,623

Income from operations

4,830

8,224

37,818

40,521

Investment income

115

303

327

737

Interest expense

161

162

481

481

Income before income taxes

4,784

8,365

37,664

40,777

Provision for income taxes

1,906

2,138

14,580

13,670

Net income

$
2,878

$
6,227

$
23,084

$
27,107

Earnings per share:

Basic

$
0.27

$
0.58

$
2.18

$
2.54

Diluted

$
0.27

$
0.56

$
2.14

$
2.43

Weighted average shares outstanding:

Basic

10,616

10,701

10,608

10,671

Diluted

10,828

11,210

10,803

11,174



	For the three months ended September 30,					For the nine months ended September 30,
	2018			2019		2018			2019
Revenues	$	160,945		$	241,747	$	392,082		$	733,365
Costs and expenses:
Instructional and support costs	103,079			132,527		240,830			397,281
General and administration	61,976			72,303		125,494			204,816
Amortization of intangible assets	10,278			15,417		10,278			46,251
Merger and integration costs	29,620			1,500		37,791			11,698
Impairment of intangible assets	13,119			—		19,304			—
Total costs and expenses	218,072			221,747		433,697			660,046
Income (loss) from operations	(57,127		)	20,000		(41,615		)	73,319
Other income	1,110			3,243		1,846			10,695
Income (loss) before income taxes	(56,017		)	23,243		(39,769		)	84,014
Provision (benefit) for income taxes	(3,236		)	6,551		(1,643		)	31,413
Net income (loss)	$	(52,781	)	$	16,692	$	(38,126	)	$	52,601
Earnings (loss) per share:
Basic	$	(2.97	)	$	0.77	$	(2.90	)	$	2.42
Diluted	$	(2.97	)	$	0.75	$	(2.90	)	$	2.38
Weighted average shares outstanding:
Basic	17,799			21,806		13,141			21,694
Diluted	17,799			22,129		13,141			22,096

STRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)



	For the three months ended September 30,						For the nine months ended September 30,
	2018			2019			2018			2019
Net income (loss)	$	(52,781	)	$	16,692		$	(38,126	)	$	52,601
Other comprehensive income (loss):
Unrealized gains (losses) on marketable securities, net of tax	(22		)	(2		)	(22		)	415
Comprehensive income (loss)	$	(52,803	)	$	16,690		$	(38,148	)	$	53,016

The accompanying notes are an integral part of these condensed consolidated financial statements.

~~Table of Contents~~

~~STRAYER~~STRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY

(in thousands, except share data)

Additional

Common Stock

Paid-in

Retained


Shares

Par Value

Capital

Earnings

Total

Balance at December 31, 2015

11,027,177

$
110

$
24,738

$
118,008

$
142,856

Tax shortfall associated with stock-based compensation arrangements

—

—

(51)

—

(51)

Restricted stock grants, net of forfeitures

66,781

1

(1)

—

—

Stock-based compensation

—

—

7,330

—

7,330

Net income

—

—

—

23,084

23,084

Balance at September 30, 2016

11,093,958

$
111

$
32,016

$
141,092

$
173,219

Additional

Common Stock

Paid-in

Retained

Shares

Par Value

Capital

Earnings

Total

Balance at December 31, 2016

11,093,489

$
111

$
35,453

$
152,810

$
188,374

Restricted stock grants, net of forfeitures

73,936

1

(1)

—

—

Stock-based compensation

—

—

8,569

—

8,569

Common stock dividends

—

—

—

(8,561)

(8,561)

Net income

—

—

—

27,107

27,107

Balance at September 30, 2017

11,167,425

$
112

$
44,021

$
171,356

$
215,489



	For the three months ended September 30, 2018
	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
	Shares	Par Value		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance at June 30, 2018	11,306,527	$	113	$	53,015		$	170,712		$	—		$	223,840
Issuance of stock in connection with the acquisition of Capella Education Company	10,263,775	103		1,236,858			—			—			1,236,961
Filing fee related to new stock issuance	—	—		(147		)	—			—			(147		)
Stock-based compensation	—	—		5,098			—			—			5,098
Exercise of stock options, net	131,779	1		6,830			—			—			6,831
Issuance of restricted stock, net	5,518	—		(426		)	—			—			(426		)
Common stock dividends ($0.50 per share)	—	—		—			(11,024		)	—			(11,024		)
Unrealized losses on marketable securities, net of tax	—	—		—			—			(22		)	(22		)
Net loss	—	—		—			(52,781		)	—			(52,781		)
Balance at September 30, 2018	21,707,599	$	217	$	1,301,228		$	106,907		$	(22	)	$	1,408,330



	For the three months ended September 30, 2019
	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
	Shares	Par Value		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance at June 30, 2019	21,948,563	$	219	$	1,305,148		$	132,060		$	449		$	1,437,876
Stock-based compensation	—	—		3,021			—			—			3,021
Exercise of stock options, net	12,795	1		(1,565		)	—			—			(1,564		)
Issuance of restricted stock, net	3,147	—		(251		)	—			—			(251		)
Common stock dividends ($0.50 per share)	—	—		—			(11,113		)	—			(11,113		)
Unrealized losses on marketable securities, net of tax	—	—		—			—			(2		)	(2		)
Net income	—	—		—			16,692			—			16,692
Balance at September 30, 2019	21,964,505	$	220	$	1,306,353		$	137,639		$	447		$	1,444,659

The accompanying notes are an integral part of these condensed consolidated financial statements.

~~Table of Contents~~

~~STRAYER~~STRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~

STOCKHOLDERS’EQUITY

(in ~~thousands)~~

thousands, except share data)

For the Nine Months Ended

September 30,


2016

2017

Cash flows from operating activities:

Net income

$
23,084

$
27,107

Adjustments to reconcile net income to net cash provided by operating activities:

Amortization of gain on sale of assets

(211)

(133)

Amortization of deferred rent

(919)

(1,351)

Amortization of deferred financing costs

197

197

Depreciation and amortization

13,276

13,718

Deferred income taxes

(5,543)

(3,728)

Stock-based compensation

7,330

8,569

Changes in assets and liabilities:

Tuition receivable, net

425

(454)

Other current assets

(3,895)

(2,151)

Other assets

(2,264)

1,200

Accounts payable and accrued expenses

2,825

9,711

Income taxes payable and income taxes receivable

(4,854)

(4,401)

Deferred revenue

5,940

5,386

Other long-term liabilities

(5,284)

(9,298)

Net cash provided by operating activities

30,107

44,372

Cash flows from investing activities:

Purchases of property and equipment

(7,501)

(14,573)

Cash used in acquisition, net of cash acquired

(7,635)

—

Net cash used in investing activities

(15,136)

(14,573)

Cash flows from financing activities:

Payments of contingent consideration

(1,358)

—

Common dividends paid

—

(8,561)

Net cash used in financing activities

(1,358)

(8,561)

Net increase in cash and cash equivalents

13,613

21,238

Cash and cash equivalents — beginning of period

106,889

129,245

Cash and cash equivalents — end of period

$
120,502

$
150,483

Noncash transactions:

Purchases of property and equipment included in accounts payable

$
112

$
749



	For the nine months ended September 30, 2018
	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
	Shares	Par Value		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance at December 31, 2017	11,167,425	$	112	$	47,079		$	162,006		$	—		$	209,197
Impact of adoption of new accounting standard	—	—		—			(171		)	—			(171		)
Issuance of stock in connection with the acquisition of Capella Education Company	10,263,775	103		1,236,858			—			—			1,236,961
Filing fee related to new stock issuance	—	—		(147		)	—			—			(147		)
Stock-based compensation	—	—		11,035			—			—			11,035
Exercise of stock options, net	131,779	1		6,830			—			—			6,831
Issuance of restricted stock, net	144,620	1		(427		)	—			—			(426		)
Common stock dividends ($1.00 per share)	—	—		—			(16,802		)	—			(16,802		)
Unrealized losses on marketable securities, net of tax	—	—		—			—			(22		)	(22		)
Net loss	—	—		—			(38,126		)	—			(38,126		)
Balance at September 30, 2018	21,707,599	$	217	$	1,301,228		$	106,907		$	(22	)	$	1,408,330



	For the nine months ended September 30, 2019
	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)		Total
	Shares	Par Value		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)		Total
Balance at December 31, 2018	21,743,498	$	217	$	1,306,653		$	118,322		$	32	$	1,425,224
Stock-based compensation	—	—		8,947			83			—		9,030
Exercise of stock options, net	103,364	2		(1,774		)	—			—		(1,772		)
Issuance of restricted stock, net	117,643	1		(7,473		)	—			—		(7,472		)
Common stock dividends ($1.50 per share)	—	—		—			(33,367		)	—		(33,367		)
Unrealized gains on marketable securities, net of tax	—	—		—			—			415		415
Net income	—	—		—			52,601			—		52,601
Balance at September 30, 2019	21,964,505	$	220	$	1,306,353		$	137,639		$	447	$	1,444,659

The accompanying notes are an integral part of these condensed consolidated financial statements.

STRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



	For the nine months ended September 30,
	2018			2019
Cash flows from operating activities:
Net income (loss)	$	(38,126	)	$	52,601
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization of deferred financing costs	209			250
Amortization of investment discount/premium	132			286
Depreciation and amortization	29,107			78,862
Deferred income taxes	(4,443		)	971
Stock-based compensation	11,781			9,075
Impairment of intangible assets	19,304			—
Changes in assets and liabilities:
Tuition receivable, net	8,227			2,258
Other current assets	2,223			(921		)
Other assets	(581		)	(727		)
Accounts payable and accrued expenses	(8,949		)	(2,022		)
Income taxes payable and income taxes receivable	(7,868		)	(7,125		)
Contract liabilities	(21,946		)	10,311
Other long-term liabilities	(3,717		)	(2,412		)
Net cash provided by (used in) operating activities	(14,647		)	141,407

Cash flows from investing activities:
Net cash acquired in acquisition	168,387			—
Purchases of property and equipment	(16,028		)	(27,769		)
Purchases of marketable securities	(11,346		)	(17,769		)
Maturities of marketable securities	5,842			32,860
Other investments	(167		)	(878		)
Net cash provided by (used in) investing activities	146,688			(13,556		)

Cash flows from financing activities:
Common dividends paid	(16,802		)	(33,297		)
Net payments for stock awards	6,372			(9,195		)
Payment of deferred financing costs	(1,162		)	—
Net cash used in financing activities	(11,592		)	(42,492		)
Net increase in cash, cash equivalents, and restricted cash	120,449			85,359
Cash, cash equivalents, and restricted cash — beginning of period	156,448			312,237
Cash, cash equivalents, and restricted cash — end of period	$	276,897		$	397,596
Noncash transactions:
Purchases of property and equipment included in accounts payable	$	2,975		$	1,821

~~Table~~The accompanying notes are an integral part of ~~Contents~~

these condensed consolidated financial statements.

~~STRAYER~~

STRATEGIC EDUCATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~(UNAUDITED)~~

~~1. Nature of Operations~~

~~Strayer~~


1.	Nature of Operations

Strategic Education, Inc. ~~(the~~(“Strategic Education” or the “Company”), a Maryland corporation ~~conducts~~formerly known as Strayer Education, Inc., is a national leader in education innovation, dedicated to enabling economic mobility for working adults through education. As further discussed in Note 2 and Note 3, the Company completed its ~~operations through its wholly-owned subsidiaries,~~merger with Capella Education Company (“CEC”) on August 1, 2018. The accompanying condensed consolidated financial statements and footnotes include the results of the Company’s 3 reportable segments: Strayer University, ~~(the “University”)~~Capella University and ~~New York Code and Design Academy (“NYCDA”).~~Non-Degree Programs. The ~~University is an accredited institution of higher education that provides undergraduate and graduate degrees~~Company’s reportable segments are discussed further in various fields of study through physical campuses, predominantly located in the eastern United States, and online. NYCDA is a New York City-based provider of web and application software development courses. NYCDA courses are delivered primarily on-ground to students seeking to further their career in software application development. The Company has only one reportable segment.

~~2. Significant Accounting Policies~~

Note 15.


2.	Significant Accounting Policies

Financial Statement Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. ~~On January 13, 2016, the Company acquired all of the outstanding stock of NYCDA, and the results of NYCDA are included with the Company from the acquisition date.~~ All intercompany accounts and transactions have been eliminated in the consolidated financial statements.

On August 1, 2018, the Company completed its merger with CEC, whereby the Company was deemed the acquirer in the business combination for accounting purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Therefore, Strayer Education, Inc. is considered Strategic Education’s predecessor, and its historical financial statements prior to the merger date are reflected in this Quarterly Report on Form 10-Q as the historical financial statements of the Company. Accordingly, the financial results of the Company as of and for any periods ended prior to August 1, 2018 do not include the financial results of CEC and therefore are not directly comparable.

All information as of ~~December 31, 2016 and~~ September 30, ~~2016~~2018 and ~~2017,~~2019, and for the three and nine months ended September 30, ~~2016~~2018 and ~~2017~~2019 is unaudited but, in the opinion of management, contains all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the condensed consolidated financial position, results of operations, and cash flows of the Company. ~~Certain amounts in~~The condensed consolidated balance sheet as of December 31, 2018 has been derived from the ~~prior period~~audited consolidated financial statements ~~have been reclassified to conform to the current period’s presentation.~~at that date. Certain information and footnote disclosures normally included in financial statements prepared in accordance with ~~generally accepted accounting principles~~GAAP have been condensed or omitted. ~~In addition, the Company had no items of other comprehensive income in the periods presented and accordingly comprehensive income is equal to net income.~~ These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~2018. The results of operations for the three and nine months ended September 30, ~~2017~~2019 are not necessarily indicative of the results to be expected for the full fiscal year.

~~Revenue Recognition~~

Certain amounts in the prior period financial statements have been reclassified to conform to the current period's presentation. Effective during the first quarter of 2019, the Company made changes in its presentation of operating expenses and reclassified prior periods to conform to the current presentation. The Company determined that these changes aligned with its organizational structure and will improve comparability with several of its peer companies. There were no changes to total operating expenses or operating income as a result of these reclassifications. Below is a description of the nature of the costs included in the Company’s operating expense categories.

Instructional and support costs ("I&SC") generally contain items of expense directly attributable to activities of Strayer University and Capella University (the "Universities") that support students and learners. This expense category includes salaries and benefits of faculty and academic administrators, as well as admissions and administrative personnel who support and serve student interests. Instructional and support costs also include course development costs and costs associated with delivering course content, including educational ~~programs typically are offered on a quarterly basis~~supplies, facilities, and ~~such periods coincide~~all other physical plant and occupancy costs, with the ~~Company’s quarterly financial reporting periods. During the nine months ended September 30, 2017, most~~exception of the Company’s revenue came from the University, which derived approximately 96% of its revenues from tuition revenue, which is recognized in the quarter of instruction. Tuition revenue is assessed for collectibility on a student-by-student basis throughout the quarter of instruction, and is shown net of any refunds, withdrawals, corporate discounts, scholarships, and employee tuition discounts. This collectibility assessment considers available sources of funds for the student including financial aid programs provided through Title IV of the Higher Education Act. The Company reassesses the collectibility of tuition revenue that it may earn based on new information and changes in the facts and circumstances relevant to a student’s ability to pay, including the timing of a student’s withdrawal from a program of study.

At the start of each academic term or program, a liability (deferred revenue) is recorded for academic services to be provided and a tuition receivable is recorded for the portion of the tuition not paid in advance. Any cash received priorcosts attributable to the ~~start~~corporate offices. Bad debt expense incurred on delinquent student account balances is also included in instructional and support costs.

General and administration ("G&A") expenses include salaries and benefits of ~~an academic term or program is recorded~~management and employees engaged in finance, human resources, legal, regulatory compliance, marketing and other corporate functions. Also included are the costs of advertising and production of marketing materials. General and administration expense also includes the facilities occupancy and other related costs attributable to such functions.

The following table presents the Company's operating expenses as ~~deferred revenue. Some students may be eligible for scholarship awards, the estimated value of which will be realized in the future~~previously reported and ~~is deducted from revenue when earned, based~~as reclassified on ~~historical student attendance and completion behavior. Deferred revenue is recorded as a current or long-term liability in the~~its unaudited condensed consolidated ~~balance sheets based on when the benefit is expected to be realized. Revenues also include textbook-related~~statements of income ~~certificate revenue,~~ ~~certain academic fees, licensing revenue, and other income, which are recognized when earned.~~

The Company’s refund policy typically permits students who complete less than half of a course to receive a partial refund of tuition for that course. Refunds reduce the tuition revenue that would have otherwise been recognized for that student. Since the University’s academic terms coincide with the Company’s financial reporting periods, nearly all refunds are processed and

~~Table of Contents~~

~~recorded within~~ the same quarter as the corresponding revenue. The amount of tuition revenue refundable to students may vary based on the student’s state of residence. Unused books and related academic materials may be returned for a full refund ~~within 21 days of the start of class; however, purchases of electronic content are not refundable if downloaded. Revenues derived from fees are not eligible for a refund.~~

~~Graduation Fund~~

In the third quarter of 2013, the University introduced the Graduation Fund, which allows new undergraduate students to earn tuition credits that are redeemable in the final year of a student’s course of study if he or she successfully remains in the program. New students registering in credit-bearing courses in any undergraduate program receive one free course for every three courses that are successfully completed. Students must meet all of the University’s admission requirements, and must be enrolled in a bachelor’s degree program. The Company’s employees and their dependents are not eligible for the program. Students who have more than one consecutive term of non-attendance lose any Graduation Fund credits earned to date, but may earn and accumulate new credits if the student is reinstated or readmitted by the University in the future.

Revenue from students participating in the Graduation Fund is recorded in accordance with the Revenue Recognition Topic, ASC 605-50. The Company defers the value of benefits estimated to be redeemed in the future based on the underlying revenue transactions that result in progress by the student toward earning the benefit. The Company’s estimate of the benefits that will be redeemed in the future is based on its historical experience of student persistence toward completion of a course of study within this program and similar programs. Each quarter, the Company assesses its methodologies and assumptions underlying these estimates and, to date, any adjustments to the estimates have not been material. The amount estimated to be ~~redeemed in the next 12 months is $19.3 million and is included in deferred revenue as a current liability in the unaudited condensed consolidated balance sheets.~~

~~The table below presents activity in the Graduation Fund for the nine~~three months ended ~~September 30, 2016 and 2017~~ (in thousands):

September 30,


September 30,

2016


2017

Balance at beginning of period

$
20,937


$
29,499

Revenue deferred

14,753

17,494

Benefit redeemed

(9,139)

(12,551)

Balance at end of period

$
26,551

$
34,442



	New Classification
	March 31, 2018				June 30, 2018				September 30, 2018				December 31, 2018
Prior Classification	I&SC		G&A		I&SC		G&A		I&SC		G&A		I&SC		G&A
Instruction and educational support	$	63,776	$	—	$	64,690	$	—	$	93,290	$	—	$	118,320	$	—
Admissions advisory	4,676		—		4,609		—		9,789		—		12,392		—
Marketing	—		20,124		—		21,113		—		46,165		—		49,577
General and administration	—		11,218		—		11,063		—		15,811		—		18,964
Total reclassified costs and expenses⁽¹⁾	$	68,452	$	31,342	$	69,299	$	32,176	$	103,079	$	61,976	$	130,712	$	68,541

⁽¹⁾
This amount excludes the amortization of intangible assets, merger and integration costs, and impairment of intangible assets expense line items on the condensed consolidated statements of income as those expense line items were not impacted by the operating expense reclassification.

Restricted Cash

A significant portion of the Company’s revenues are funded by various federal and state government programs. The Company generally does not receive funds from these programs prior to the start of the corresponding academic term. The Company may be required to return certain funds for students who withdraw from the ~~University~~Universities during the academic term. The Company had approximately ~~$13,000~~$5,000 and ~~$8,000~~$2,000 of these unpaid obligations as of December 31, ~~2016~~2018 and September 30, ~~2017,~~2019, respectively, ~~of these unpaid obligations,~~ which are recorded as restricted cash and included in other current assets in the unaudited condensed consolidated balance sheets.

As part of commencing operations in Pennsylvania in 2003, the Company ~~was~~is required to maintain a “minimum protective endowment” of at least $0.5 million in an interest-bearing ~~account. These funds are required~~account as long as the Company operates its campuses in the state. The Company holds these funds in an interest-bearing account which is included in other assets.

The following table illustrates the reconciliation of cash, cash equivalents, and restricted cash shown in the unaudited condensed consolidated statements of cash flows as of September 30, 2018 and 2019 (in thousands):



	As of September 30,
	2018		2019
Cash and cash equivalents	$	276,382	$	397,094
Restricted cash included in other current assets	15		2
Restricted cash included in other assets	500		500
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	$	276,897	$	397,596

Tuition Receivable and Allowance for Doubtful Accounts

The Company records tuition receivable and ~~deferred revenue~~contract liabilities for its students upon the start of the academic term or course of instruction. Therefore, at the end of the quarter (and academic term), tuition receivable generally represents amounts due from students for educational services already provided and deferred revenue generally represents advance payments from students for academic services to be provided in the future.program. Tuition receivables are not collateralized; however, credit risk is minimized as a result of the diverse nature of the ~~University’s~~Universities' student ~~base.~~bases and through the participation of the majority of the students in federally funded financial aid programs. An allowance for doubtful accounts is established primarily based upon historical collection rates by age of receivable, net of estimated recoveries. These collection rates incorporate historical performance based on a student’s current enrollment status and likelihood of future enrollment. The Company periodically assesses its methodologies for estimating bad debts in consideration of actual experience.

~~Table of Contents~~

The Company’s tuition receivable and allowance for doubtful accounts were as follows as of December 31, ~~2016~~2018 and September 30, ~~2017~~2019 (in thousands):



	December 31, 2016		September 30, 2017		December 31, 2018			September 30, 2019
Tuition receivable	$	30,733	$	33,183	$	84,151		$	82,494
Allowance for doubtful accounts		(10,201)		(12,557)	(28,457		)	(31,530		)
Tuition receivable, net	$	20,532	$	20,626	$	55,694		$	50,964

Approximately ~~$2.3 million and $2.6~~$1.1 million of tuition receivable isare included in other assets as of December 31, ~~2016~~2018 and September 30, ~~2017, respectively,~~2019 because these amounts are expected to be collected after 12 months.

The following table illustrates changes in the Company’s allowance for doubtful accounts for the three and nine months ended September 30, ~~2016~~2018 and ~~2017~~2019 (in thousands):


	For the three months ended				For the nine months ended
	September 30,				September 30,				For the three months ended September 30,						For the nine months ended September 30,
	2016		2017		2016		2017		2018			2019			2018			2019
Allowance for doubtful accounts, beginning of period	$	9,981	$	11,760	$	10,024	$	10,201	$	15,048		$	30,733		$	12,687		$	28,457
Additions charged to expense		3,865		5,364		11,069		14,835	9,864			12,111			22,851			35,893
Adjustment to value of acquired receivables									6,601			—			6,601			2,207
Write-offs, net of recoveries		(4,052)		(4,567)		(11,299)		(12,479)	(6,118		)	(11,314		)	(16,744		)	(35,027		)
Allowance for doubtful accounts, end of period	$	9,794	$	12,557	$	9,794	$	12,557	$	25,395		$	31,530		$	25,395		$	31,530

~~Fair Value~~

~~The Fair Value Measurement Topic, ASC 820-10 (“ASC 820-10”), establishes a framework for measuring fair value, establishes a fair value hierarchy based upon~~

Leases

In February 2016, the ~~observability~~Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 is intended to improve financial reporting of ~~inputs used~~leasing transactions by requiring organizations that lease assets to ~~measure fair value, and expands disclosures about fair value measurements. Assets~~recognize assets and liabilities for the rights and obligations created by leases with a term longer than 12 months. ASU 2016-02 also requires additional quantitative and qualitative disclosures surrounding the amount, timing, and uncertainty of cash flows arising from leases. During 2018 and 2019, the FASB issued additional ASUs amending certain aspects of ASU 2016-02. On January 1, 2019, the Company adopted the new accounting standard and all of the related amendments ("ASC 842") using the modified retrospective method. The Company applied ASU 2016-02 to all leases that had commenced as of January 1, 2019. In addition, as permitted by ASU 2016-02, comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company elected the package of practical expedients permitted under ASU 2016-02, which allowed the Company to not reassess prior conclusions regarding lease identification, lease classification, and initial direct costs under the new standard. As a result of adopting the new standard, the Company recognized a lease liability of $123 million and a right-of-use ("ROU") lease asset of $107 million on January 1, 2019. The standard did not materially impact the Company's condensed consolidated statements of income and cash flows.

The Company determines if an arrangement is a lease at inception. Leases with an initial term longer than 12 months are ~~classified~~included in ~~their entirety within~~right-of-use lease assets, lease liabilities, and lease liabilities, non-current on the ~~fair value hierarchy~~Company's condensed consolidated balance sheets. The Company combines lease and non-lease components for all leases.

ROU lease assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU lease assets and lease liabilities are recognized at the commencement date based on the ~~lowest level input that is significant to the fair value measurement. Under ASC 820-10, fair~~present value of ~~an investment is~~lease payments over the ~~price that would be received to sell an asset or to transfer a liability to an entity in an orderly transaction between market participants at~~lease term. As the measurement date. The hierarchy gives the highest priority to assets and liabilities with readily available quoted prices in an active market and lowest priority to unobservable inputs which require a higher degree of judgment when measuring fair value, as follows:

~~Level 1 assets or liabilities use quoted prices in active markets for identical assets or liabilities as of the measurement date;~~

Level 2 assets or liabilities use observable inputs, other than quoted market prices, that are either directly or indirectly observable in the marketplace for identical or similar assets and liabilities; and

~~Level 3 assets or liabilities use unobservable inputs that are supported by little or no market activity.~~

~~The Company’s assets and liabilities that are subject to fair value measurement are categorized in one~~implicit interest rate for most of the ~~three levels above. Fair values are~~Company's leases cannot be readily determined, the Company uses its incremental borrowing rate based on ~~the inputs~~information available at the ~~measurement dates,~~commencement date in determining the present value of lease payments. Lease expense for lease payments is recognized on a straight-line basis over the lease term for operating leases.

Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company subleases certain building space to third parties and ~~may rely~~sublease income is recognized on ~~certain assumptions that may affect~~a straight-line basis over the ~~valuation of fair value~~lease term. See Note 7 for ~~certain assets or liabilities.~~

additional information.

Goodwill and ~~Indefinite-Lived~~ Intangible Assets

Goodwill represents the excess of the purchase price of an acquired business over the amount assigned to the assets acquired and liabilities ~~assumed.~~assumed in a business combination. Indefinite-lived intangible assets, which include trade names, are recorded at fair ~~market~~ value on their acquisition date. An indefinite life was assigned to the trade names because they have the continued ability to generate cash flows indefinitely.

Goodwill and the indefinite-lived intangible assets are assessed at least annually for impairment during the fourth quarter, or more frequently if events occur or circumstances change between annual tests that would more likely than not reduce the fair value of the respective reporting unit or indefinite-lived intangible asset below its carrying amount.

~~During~~

Finite-lived intangible assets that are acquired in business combinations are recorded at fair value on their acquisition dates and are amortized on a straight-line basis over the ~~three months ended September 30, 2017,~~estimated useful life of the asset. Finite-lived intangible assets consist of student relationships.

The Company ~~updated~~reviews its ~~revenue projections used~~finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are not recoverable, a potential impairment loss is recognized to ~~estimate~~the extent the carrying amount of the assets exceeds the fair value of ~~contingent consideration related to its acquisition of NYCDA (see Note 3). Accordingly,~~ the ~~Company reassessed the~~

assets.

~~Table of Contents~~

recoverability of goodwill assigned to NYCDA and performed Step 1 of the goodwill impairment test as well as a quantitative impairment test of the indefinite-lived intangible asset. Based on these tests, the Company determined the fair value of NYCDA exceeded its carrying value and there was no impairment of the goodwill and indefinite-lived intangible asset assigned to NYCDA as of September 30, 2017.

Authorized Stock

The Company has authorized ~~20,000,000~~32,000,000 shares of common stock, par value ~~$.01,~~$0.01, of which ~~11,093,489~~21,743,498 and ~~11,167,425~~21,964,505 shares were issued and outstanding as of December 31, ~~2016~~2018 and September 30, ~~2017,~~2019, respectively. The Company also has authorized 8,000,000 shares of preferred stock, none of which ~~has been~~is issued or ~~outstanding since 2004.~~outstanding. Before any preferred stock may be issued in the future, the Board of Directors would need to establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, and the terms or conditions of the redemption of the preferred stock.

In July ~~2017,~~2019, the Company’s Board of Directors declared a regular, quarterly cash dividend of ~~$0.25~~$0.50 per share of common stock. The dividend was paid on September ~~18, 2017.~~

~~Stock-Based Compensation~~

��

As required by the Stock Compensation Topic, ASC 718, the Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors, including employee stock options, restricted stock, restricted stock units, and employee stock purchases related to the Company’s Employee Stock Purchase Plan, based on estimated fair values. Stock-based compensation expense recognized in the unaudited consolidated statements of income for each of the three and nine months ended September 30, 2016 and 2017 is based on awards ultimately expected to vest and, therefore, has been adjusted for estimated forfeitures. The Company estimates forfeitures at the time of grant and revises the estimate, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The forfeiture rate used is based on historical experience. The Company also assesses the likelihood that performance criteria associated with performance-based awards will be met. If it is determined that it is more likely than not that performance criteria will not be achieved, the Company revises its estimate of the number of shares it believes will ultimately vest.

~~Effective January 1, 2017, the Company adopted ASU No. 2016-09,~~ ~~Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting~~ (“ASU 2016-09”). ASU 2016-09 impacts several aspects of the accounting for share-based payment transactions, including classification of certain items on the consolidated statement of cash flows and accounting for income taxes. Specifically, ASU 2016-09 requires excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in earnings, which may introduce significant volatility to the Company’s provision for income taxes. Also, all tax-related cash flows resulting from share-based payments will now be reported as operating activities in the statement of cash flows. The Company has elected to apply this cash flow guidance prospectively and there was no impact to the prior period presentation. In addition, pursuant to ASU 2016-09 the Company has elected to continue to estimate forfeitures ratably over the life of awards. The adoption of ASU 2016-09 has not materially impacted the Company’s financial statements. See note 6 for additional information.

16, 2019.

Net Income (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the periods. Diluted earnings (loss) per share reflects the potential dilution that could occur assuming conversion or exercise of all dilutive unexercised stock options, restricted stock, and restricted stock units. The dilutive effect of stock awards was determined using the treasury stock method. Under the treasury stock method, all of the following are assumed to be used to repurchase shares of the Company’s common stock: (1) the proceeds received from the exercise of stock options, and (2) the amount of compensation cost associated with the stock awards for future service not yet recognized by the Company. Stock options are not included in the computation of diluted earnings (loss) per share when the stock option exercise price of an individual grant exceeds the average market price for the period.

~~Table of Contents~~

Set forth below is a reconciliation of shares used to calculate basic and diluted earnings (loss) per share for the three and nine months ended September 30, ~~2016~~2018 and ~~2017~~2019 (in thousands):


	For the three months ended		For the nine months ended
	September 30,		September 30,		For the three months ended September 30,		For the nine months ended September 30,
	2016	2017	2016	2017	2018	2019	2018	2019
Weighted average shares outstanding used to compute basic earnings per share	10,616	10,701	10,608	10,671
Weighted average shares outstanding used to compute basic earnings (loss) per share					17,799	21,806	13,141	21,694
Incremental shares issuable upon the assumed exercise of stock options	—	38	—	38	—	44	—	65
Unvested restricted stock and restricted stock units	212	471	195	465	—	279	—	337
Shares used to compute diluted earnings per share	10,828	11,210	10,803	11,174
Shares used to compute diluted earnings (loss) per share					17,799	22,129	13,141	22,096

During the three and nine months ended September 30, 2019, the Company had approximately 3,000 and 21,000 shares of restricted stock, respectively, excluded from the diluted earnings (loss) per share calculation because the effect would have been antidilutive. During the three and nine months ended September 30, 2018, the Company had 681,000 and 583,000 issued and outstanding awards that were excluded from the calculation.

Comprehensive Income ~~Taxes~~

~~The Company provides for deferred~~(Loss)

Comprehensive income ~~taxes based on temporary differences between financial statement~~(loss) includes net income (loss) and ~~income tax bases of assets and liabilities using enacted tax rates in effect~~all changes in the ~~year in~~Company’s equity during a period from non-owner sources, which ~~the differences are expected to reverse.~~

The Income Taxes Topic, ASC 740, requires the company to determine whether uncertain tax positions should be recognized within the Company’s financial statements. The Company recognizes interest and penalties, if any, related to uncertain tax positions in income tax expense. Uncertain tax positions are recognized when a tax position, based solely on its technical merits, is determined to be more likely than not to be sustained upon examination. Upon determination, uncertain tax positions are measured to determine the amount of benefit that is greater than 50% likely to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. A tax position is derecognized if it no longer meets the more likely than not threshold of being sustained.

~~The tax years 2014-2016 remain open~~ for ~~Federal tax examination and the tax years 2013-2016 remain open to examination by state and local taxing jurisdictions in which~~ the Company ~~is subject.~~

consists of unrealized gains and losses on available-for-sale marketable securities, net of tax. As of December 31, 2018 and September 30, 2019, the balance of accumulated other comprehensive income was $32,000, net of tax of $10,000 and $447,000, net of tax of $157,000, respectively. There were 0 reclassifications out of accumulated other comprehensive income to net income (loss) for the three and nine months ended September 30, 2019.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the period reported. The most significant management estimates include allowances for doubtful accounts, useful lives of property and equipment and intangible assets, fair value of future contractual operating lease obligations, incremental borrowing rates, potential sublease income and vacancy periods, accrued expenses, forfeiture rates and the likelihood of achieving performance criteria for stock-based awards, value of free courses earned by students that will be redeemed in the future, valuation of goodwill and intangible assets, ~~fair value of contingent consideration,~~ and the provision for income taxes. Actual results could differ from those estimates.

~~Recent~~

Recently Adopted Accounting Pronouncements

In ~~May 2014,~~June 2018, the FASB issued ASU No. ~~2014-09, Revenue from Contracts with Customers~~2018-07, Compensation – Stock Compensation (Topic ~~606)~~718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU ~~2014-09”~~2018-07”), which ~~supersedes~~simplifies the ~~revenue recognition requirements in Topic 605, Revenue Recognition,~~accounting for share-based payments granted to nonemployees for goods and ~~most industry-specific guidance. The core principle of~~services. ASU ~~2014-09 is for a company~~2018-07 aligns guidance on share-based payments to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The effective date of ASU 2014-09 is for fiscal years, and interim periods within those years, beginning after December 15, 2017. During 2016 and 2017, the FASB issued additional ASUs amending certain aspects of ASU 2014-09. ASU 2014-09 allows either a full retrospective adoption to all periods presented or a modified retrospective adoption approach,nonemployees with the ~~cumulative effect of initial application~~requirements for share-based payments granted to employees, including determination of the ~~revised guidance recognized at the~~measurement date ~~of initial application.~~

and accounting for performance conditions and for share-based payments after vesting. The Company ~~is finalizing its assessment~~adopted this guidance as of key revenue streams, including a comparison of current accounting policies and practices to the new standard, and is determining the appropriate changes to business processes and controls. Based on its evaluation to date, the Company believes that under the new standard the allocation of revenue to certain performance obligations may result in changes in the timing of revenue recognition between interim periods for one of its performance obligations. However, any changes associatedJanuary 1, 2019 with ~~the adoption of ASU 2014-09 are not expected to have a significant impact on annual revenue recognized, and are not expected to have a~~no material impact on ~~the Company’s~~its unaudited condensed consolidated financial statements. ~~The Company plans to adopt ASU 2014-09 using the modified retrospective approach and accordingly will complete the analysis of~~

~~Table of Contents~~

~~the cumulative effect adjustment to retained earnings and prepare enhanced disclosures pertaining to revenue recognition for the quarterly and annual filings beginning in the first quarter of 2018.~~

~~In February 2016, the FASB issued~~Recently Issued Accounting Standards ~~Update (“ASU”) No. 2016-02,~~ ~~Leases (Topic 842)~~ (“ASU 2016-02”). The new guidance requires the recognition of right-of-use assets and lease liabilities on the balance sheet for most leases. Under current guidance, operating leases are off-balance sheet. ASU 2016-02 also requires more extensive quantitative and qualitative disclosures about leasing arrangements. ASU 2016-02 applies to fiscal periods beginning after December 15, 2018, using the modified retrospective method, with early adoption permitted. The Company anticipates that the impact of ASU 2016-02 on its consolidated balance sheet will be material as the Company will record significant asset and liability balances in connection with its leased properties.

Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments -– Credit Losses~~, which applies to ASC Topic 326,~~ (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance revises the accounting requirements related to the measurement of credit losses and will require organizations to measure all expected credit losses for financial assets based on historical experience, current conditions, and reasonable and supportable forecasts about collectibility. Assets must be presented in the financial statements at the net amount expected to be collected. During 2019, the FASB issued additional ASUs amending certain aspects of ASU 2016-13. The guidance will be effective for the Company's annual and interim reporting periods beginning January 1, 2020, with early adoption permitted. The Company is evaluating the impact this standard will have on its financial condition, results of operations, and disclosures.

~~In November 2016, the FASB issued ASU No. 2016-18,~~ ~~Statement of Cash Flows: Restricted Cash (Topic 230)~~ (“ASU 2016-18”). Under ASU 2016-18, an entity should include in its cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. The standard will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and the Company does not expect adoption of ASU 2016-18 to have a material impact on its consolidated financial statements.

~~In January 2017, the FASB issued ASU No. 2017-04,~~ ~~Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment~~, which simplifies the subsequent measurement of goodwill. The amendments in this update should be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15, 2019, though early adoption is permitted. The Company is evaluating the impact this standard will have on its financial condition, results of operations, and disclosures.

Other ASUs issued by the FASB but not yet effective are not expected to have a material effect on the Company’s consolidated financial statements.

~~3. Acquisition of New York Code and Design Academy~~


3.	Merger with Capella Education Company

On ~~January 13, 2016,~~August 1, 2018, the Company ~~acquired all~~completed its merger with CEC and its wholly-owned subsidiaries, pursuant to a merger agreement dated October 29, 2017. The merger enabled the Company to become a national leader in education innovation that improves affordability and enhances career outcomes by offering complementary programs and sharing academic and technological best practices, through a best-in-class corporate platform supporting 2 independent universities.

Pursuant to the merger agreement, the Company issued 0.875 shares of the Company’s common stock for each issued and outstanding ~~stock~~share of ~~New York Code~~CEC common stock. Outstanding equity awards held by existing CEC employees and ~~Design Academy, Inc. (“NYCDA”), a provider~~certain non-employee directors of ~~web~~CEC were assumed by the Company and ~~application software development courses primarily based~~converted into comparable Company awards at the exchange ratio. Outstanding equity awards held by CEC non-employee directors who did not serve as directors of the Company after completion of the merger were converted to Company awards and settled. Outstanding equity awards held by former CEC employees were settled upon completion of the merger in exchange for cash payments as specified in the ~~New York City area (the “Acquisition”).~~ merger agreement.

The ~~Acquisition supports~~following table summarizes the ~~Company’s strategy~~components of the aggregate consideration transferred for the acquisition of CEC (in thousands):



Fair value of Company common stock issued in exchange for CEC outstanding shares⁽¹⁾	$	1,209,483
Fair value of Company equity-based awards issued in exchange for CEC equity-based awards	27,478
Total fair value of consideration transferred	$	1,236,961


⁽¹⁾	The Company issued 10,263,775 common shares at a market price of $117.84 in exchange for each issued and outstanding share of CEC common stock.

The Company applied the acquisition method of accounting to ~~complement its traditional degree offerings with a broader platform~~CEC’s business, whereby the excess of ~~educational services.~~ the acquisition date fair value of consideration transferred over the fair value of identifiable net assets was allocated to goodwill. Goodwill reflects workforce and synergies expected from cost savings, operations, and revenue enhancements of the combined company that are expected to result from the acquisition. The goodwill recorded as part of the merger was allocated to the Strayer University and Capella University reportable segments in the amount of $330.6 million and $394.7 million, respectively, and is not deductible for tax purposes.

The Company incurred ~~transaction~~$20.1 million of acquisition-related costs ~~of approximately $0.2 million,~~ which ~~were~~are included in ~~general~~Merger and ~~administrative~~integration costs in the unaudited condensed consolidated statements of ~~income~~income. Issuance costs of $0.1 million were recognized in additional paid-in capital in the ~~period those costs were incurred. The Acquisition was accounted for as a business combination.~~

The purchase price included $2.4 million paid up front in cash, plus contingent cash payments of (a) up to $12.5 million payable based on NYCDA’s results of operations over a five-year period (the “Earnout”), and (b) $5.5 million payable based on NYCDA’s receipt of state regulatory permits. Pursuant to the Acquisition, $1.0 million of the Earnout may be accelerated upon receipt of one of the state regulatory permits. The Company recorded total contingent consideration of $14.5 million at the time of acquisition. In April 2016 and August 2016, NYCDA received the state regulatory permits and the Company paid $6.0 and $0.5 million of contingent consideration to the sellers, respectively.

In addition, the Company paid a total of $4.6 million to two of NYCDA’s founders who are required to remain employed for at least three years from the acquisition date. If either of them terminates employment voluntarily, or is terminated for cause (as defined), he is required to reimburse the Company his respective portion of the retention amount. This amount was classified as prepaid compensation and is amortized to compensation expense over three years.

~~Total potential cash payments for the Acquisition, including the contingent cash payments and prepaid compensation, could total $25.0 million.~~

unaudited condensed consolidated balance sheets.

~~Table of Contents~~

~~The allocation of the purchase price was as follows (in thousands):~~


		~~Purchase~~
		~~Price~~
		~~Allocation~~	~~Useful Life~~
~~Cash~~	$	~~790~~
~~Other assets~~		~~1,265~~
~~Intangibles:~~
~~Trade name~~		~~5,660~~	~~Indefinite~~
~~Goodwill~~		~~13,944~~
~~Liabilities assumed~~		~~(4,734)~~
~~Total assets acquired and liabilities assumed, net~~		~~16,925~~
~~Less: contingent consideration~~		~~(14,500)~~
~~Less: cash acquired~~		~~(790)~~
~~Cash paid for acquisition, net of cash acquired~~	$	~~1,635~~

The fair value of the Earnout was originally measured by applying a probability discounted cash flow model based on significant inputs not observable in the market (Level 3 inputs). Key assumptions include a discount rate of 4.5% and expected future value of payments, at the time, of $12.5 million. Following its initial recognition, the Company assesses the carrying value of the Earnout to the fair value of the remaining payments. Fair value is then adjusted as necessary to reflect revisions to the business plan, expectations relative to achieving the performance targets over the earnout period, and the impact of the discount rate. No adjustment to the Earnout was recorded in the three and nine months ended September 30, 2016. During the three months ended June 30, 2017, the Company updated its near-term revenue projections for NYCDA and reduced the balance of the contingent consideration by $2.3 million. During the three months ended September 30, ~~2017, following delays in implementing its marketing strategy to enroll new students,~~2019, the Company ~~further updated its revenue projections during~~finalized the ~~Earnout measurement period resulting in a reduction in the contingent consideration balance by an additional $5.5 million. The~~ fair value of assets acquired and liabilities assumed. Measurement period adjustments were reflected in the ~~Earnout at~~periods in which the adjustments occurred. During the three months ended December 31, 2018, the Company recorded measurement period adjustments that reduced cash and cash equivalents, other assets, and deferred income taxes by $0.5 million, $1.4 million, and $0.1 million, respectively. These adjustments resulted in a $1.8 million increase to goodwill recognized in connection with the CEC merger during the three months ended December 31, 2018. During the nine months ended September 30, ~~2017 is zero,~~2019, the Company recorded measurement period adjustments that reduced deferred income taxes and current assets by $3.8 million and $1.9 million, respectively, and increased current liabilities and long-term liabilities by $1.3 million and $0.1 million, respectively. These adjustments resulted in a $0.5 million decrease to goodwill recognized in connection with the ~~maximum possible amount that could be paid is $11.5 million.~~

CEC merger during the nine months ended September 30, 2019. All measurement period adjustments are reflected in the fair value of assets acquired and liabilities assumed in the table below.

The fair value of assets acquired and liabilities assumed, ~~was~~as well as a reconciliation to consideration transferred, is presented in the table below (in thousands):



Cash and cash equivalents	$	167,859
Marketable securities	31,419
Tuition receivable	36,716
Income taxes receivable	163
Other current assets	9,041
Marketable securities, non-current	34,700
Property and equipment, net	53,182
Other assets	14,556
Intangible assets	349,800
Goodwill	725,275
Total assets acquired	1,422,711
Accounts payable and accrued expenses	(48,103		)
Contract liabilities	(39,000		)
Deferred income taxes	(96,320		)
Other long-term liabilities	(2,327		)
Total liabilities assumed	(185,750		)
Total consideration	$	1,236,961

The table below presents a summary of intangible assets acquired (in thousands) and the weighted average useful lives of these assets:



	Fair Value		Weighted Average Useful Life in Years
Trade names	$	183,800	Indefinite
Student relationships	166,000		3
	$	349,800

The Company determined the fair value of assets acquired and liabilities assumed based on assumptions that reasonable market participants would use while employing the concept of highest and best use of the ~~respective items.~~assets and liabilities. The Company utilized the following assumptions, ~~were used, the majority~~some of which include significant unobservable inputs ~~(Level 3),~~which would qualify the valuations as Level 3 measurements, and valuation methodologies to determine fair value:

Intangible assets - To determine the fair value of the trade name, the Company used the relief from royalty approach. The excess earnings method was used to estimate the fair value of student relationships.

Property and equipment - Included in property and equipment is course content of $14.0 million, valued using the relief from royalty approach, and internally developed software of $5.0 million, valued using the cost approach. Each will be amortized over three years. All other property and equipment was valued at estimated cost.

Contract liabilities - The Company estimated the fair value of contract liabilities using the cost build-up method, which represents the cost to deliver the services plus a normal profit margin.

Other current and noncurrent assets and liabilities - The carrying value of all other assets and liabilities approximated fair value at the time of acquisition.

The operations of CEC were included in the consolidated financial statements as of the acquisition date. The revenue and net loss for CEC reported within the consolidated financial statements for the three and nine months ended September 30, 2018 were $46.1 million and $43.1 million, respectively.

Pro Forma Financial Information

The following unaudited pro forma information has been presented as if the CEC acquisition occurred on January 1, 2017. The information is based on the historical results of operations of the acquired business, adjusted for:

The allocation of purchase price and related adjustments, including the adjustments to amortization expense related to the fair value of intangible assets acquired;

The exclusion of acquisition-related costs incurred during the three and nine months ended September 30, 2018;

Associated tax-related impacts of adjustments; and

Changes to align accounting policies.

The pro forma results do not necessarily represent what would have occurred if the acquisition had actually taken place on January 1, 2017, nor do they represent the results that may occur in the future. The pro forma adjustments are based on available information and upon assumptions that the Company believes are reasonable to reflect the impact of this acquisition on the Company’s historical financial information on a supplemental pro forma basis. The following table presents the Company's pro forma combined revenues and net income (in thousands). Pro forma results for the three and nine months ended September 30, 2019 are not presented below because the results of CEC are included in the Company's September 30, 2019 unaudited condensed consolidated statement of income.



	Three Months Ended September 30, 2018			Nine Months Ended September 30, 2018
Revenue	$	224,641		$	679,309
Net income (loss)	(14,146		)	10,606

	·
4.		Intangibles – Income approaches were used to value the substantial majority of the acquired intangibles. The trade name was valued using the relief-from-royalty method, which represents the benefit of owning these intangible assets rather than paying royalties for their use. Revenue Recognition

The Company’s revenues primarily consist of tuition revenue arising from educational services provided in the form of classroom instruction and online courses. Tuition revenue is deferred and recognized ratably over the period of instruction, which varies depending on the course format and chosen program of study. Strayer University’s educational programs and Capella University’s GuidedPath classes typically are offered on a quarterly basis and such periods coincide with the Company’s quarterly financial reporting periods, while Capella University’s FlexPath courses are delivered over a twelve-week subscription period.

The following table presents the Company’s revenues from contracts with customers disaggregated by material revenue category for the three and nine months ended September 30, 2018 and 2019 (in thousands):



	For the three months ended September 30,				For the nine months ended September 30,
	2018		2019		2018		2019
Strayer University Segment
Tuition, net of discounts, grants and scholarships	$	107,773	$	123,259	$	328,476	$	371,176
Other⁽¹⁾	6,698		4,578		15,168		13,630
Total Strayer University Segment	114,471		127,837		343,644		384,806
Capella University Segment
Tuition, net of discounts, grants and scholarships	40,749		105,623		40,749		322,157
Other⁽¹⁾	3,043		4,926		3,043		15,261
Total Capella University Segment	43,792		110,549		43,792		337,418
Non-Degree Programs Segment⁽²⁾	2,682		3,361		4,646		11,141
Consolidated revenue	$	160,945	$	241,747	$	392,082	$	733,365

	·
⁽¹⁾		Other ~~assets~~revenue is primarily comprised of academic fees, sales of course materials, and ~~liabilities – The carrying value of all~~ other ~~assets and liabilities approximated fair value at the time of acquisition.~~ revenue streams.

~~4. Restructuring~~
⁽²⁾
Non-Degree Programs revenue is primarily comprised of tuition revenue and placement fee revenue.

Revenues are recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those goods and ~~Related Charges~~

services. The Company applies the five-step revenue model under ASC 606 to determine when revenue is earned and recognized.

Arrangements with students may have multiple performance obligations. For such arrangements, the Company allocates net tuition revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on the prices charged to customers and observable market prices. The standalone selling price of material rights to receive free classes in the future is estimated based on class tuition prices and likelihood of redemption based on historical student attendance and completion behavior.

At the start of each academic term or program, a contract liability is recorded for academic services to be provided and a tuition receivable is recorded for the portion of the tuition not paid in advance. Any cash received prior to the start of an academic term or program is recorded as a contract liability. Some students may be eligible for scholarship awards, the estimated value of which will be realized in the future and is deducted from revenue when earned, based on historical student attendance and completion behavior. Contract liabilities are recorded as a current or long-term liability in the unaudited condensed consolidated balance sheets based on when the benefit is expected to be realized.

Course materials available through Capella University enable students to access electronically all required materials for courses in which they enroll during the quarter. Revenue derived from course materials is recognized ratably over the duration of the course as the Company provides the student with continuous access to these materials during the term. For sales of certain other course materials, the Company is considered the agent in the transaction, and as such, the Company recognizes revenue net of amounts owed to the vendor at the time of sale. Revenues also include certain academic fees recognized within the quarter of instruction, and certificate revenue and licensing revenue, which are recognized as the services are provided.

Contract Liabilities – Graduation Fund

In 2013, Strayer University introduced the Graduation Fund, which allows new undergraduate students to earn tuition credits that are redeemable in the final year of a student’s course of study if he or she successfully remains in the program. New students registering in credit-bearing courses in any undergraduate program receive 1 free course for every 3 courses that are successfully completed. Students must meet all of Strayer University’s admission requirements and must be enrolled in a bachelor’s degree program. The Company’s employees and their dependents are not eligible for the program. Students who have more than 1 consecutive term of non-attendance lose any Graduation Fund credits earned to date, but may earn and accumulate new credits if the student is reinstated or readmitted by Strayer University in the future.

Revenue from students participating in the Graduation Fund is recorded in accordance with ASC 606. The Company defers the value of the related performance obligation associated with the credits estimated to be redeemed in the future based on the underlying revenue transactions that result in progress by the student toward earning the benefit. The Company’s estimate of the benefits that will be redeemed in the future is based on its historical experience of student persistence toward completion of a course of study within this program and similar programs. Each quarter, the Company assesses its methodologies and assumptions underlying these estimates, and to date, any adjustments to the estimates have not been material. The amount estimated to be redeemed in the next 12 months is $20.5 million and is included as a current contract liability in the unaudited condensed consolidated balance sheets. The remainder is expected to be redeemed within two to four years.

The table below presents activity in the contract liability related to the Graduation Fund (in thousands):



	For the nine months ended September 30,
	2018			2019
Balance at beginning of period	$	37,400		$	43,329
Revenue deferred	18,791			21,358
Benefit redeemed	(15,792		)	(17,947		)
Balance at end of period	$	40,399		$	46,740

Unbilled receivables – Student tuition

Academic materials may be shipped to certain students in advance of the term of enrollment. Under ASC 606, the materials represent a performance obligation to which the Company allocates revenue based on the fair value of the materials relative to the total fair value of all performance obligations in the arrangement with the student. When control of the materials passes to the student in advance of the term of enrollment, an unbilled receivable and related revenue is recorded. The balance of unbilled receivables related to such materials was $2.1 million as of September 30, 2019, and is included in tuition receivable.


5.	Restructuring and Related Charges

In October 2013, the Company implemented a restructuring to better align the Company’s resources with student enrollments at the time. This restructuring included the closing of 20 physical locations and reductions in the number of campus-based and corporate employees. AAt the time of this restructuring, a liability for lease obligations, some of which continue through 2022, was recorded and is measured at fair value using a discounted cash flow approach encompassing significant unobservable inputs (Level 3). The estimation of future cash flows ~~includes~~included non-cancelable contractual lease costs over the remaining terms of the leases discounted at the Company’s marginal borrowing rate of 4.5%, partially offset by estimated future sublease rental income discounted at credit-adjusted rates. ~~The Company’s estimates, which involve significant judgment, also consider~~

In addition, the ~~amount~~Company has incurred personnel-related restructuring charges due to cost reduction efforts and ~~timing of sublease rental income based on subleases that have been executed~~management changes. These changes are primarily intended to integrate CEC successfully and ~~subleases expected to be executed based on current commercial real estate market data and conditions, and other qualitative factors specific to~~establish an efficient ongoing cost structure for the ~~facilities. The estimates are subject to adjustment as market conditions change or as new information becomes available, including the execution of additional sublease agreements.~~

Company.

~~Table of Contents~~

The following details the changes in the Company’s restructuring liability ~~for lease and related costs~~ during the nine months ended September 30, ~~2016~~2018 and ~~2017~~2019 (in thousands):

September 30,

September 30,

2016

2017

Balance at beginning of period(1)
$
20,055

$
11,985

Adjustments(2)

(1,695)

375

Payments

(4,434)

(2,884)

Balance at end of period(1)
$
13,926

$
9,476



	Lease and Related Costs, Net			Severance and Other Employee Separation Costs			Total
Balance at December 31, 2017	$	8,781		$	—		$	8,781
Restructuring and other charges⁽¹⁾	—			13,088			13,088
Payments	(2,069		)	(439		)	(2,508		)
Adjustments⁽²⁾	107			—			107
Balance at September 30, 2018	$	6,819		$	12,649		$	19,468

Balance at December 31, 2018⁽³⁾	$	6,540		$	14,347		$	20,887
Restructuring and other charges⁽¹⁾	—			2,334			2,334
Payments	—			(7,841		)	(7,841		)
Adjustments⁽²⁾	(6,540		)	—			(6,540		)
Balance at September 30, 2019⁽³⁾	$	—		$	8,840		$	8,840


⁽¹⁾	Restructuring and other charges were $0.2 million and $2.3 million for the three and nine months ended September 30, 2019, respectively, and $13.1 million for both the three and nine months ended September 30, 2018. Restructuring and other charges are included in Merger and integration costs on the unaudited condensed consolidated statements of income.

⁽²⁾

For the three and nine months ended September 30, 2018, adjustments include accretion of interest on lease costs, partially offset by changes in the timing and expected income from subleases. For the three and nine months ended September 30, 2019, adjustments represent the impact of adopting ASC 842 on January 1, 2019. In accordance with ASC 842, the lease related restructuring liability balance as of December 31, 2018 was netted against the initial ROU lease asset recognized upon adoption. Asset retirement obligations related to these restructured properties are also included in the adjustments amount.


⁽³⁾	The current portion of restructuring liabilities was ~~$4.2~~$9.8 million and ~~$3.2~~$6.2 million as of December 31, ~~2016~~2018 and September 30, ~~2017,~~2019, respectively, which are included in accounts payable and accrued expenses. The long-term portion is included in other long-term liabilities.

6. Marketable Securities

The following is a summary of available-for-sale securities as of September 30, 2019 (in thousands):



	Amortized Cost		Gross Unrealized Gain		Gross Unrealized (Losses)			Estimated Fair Value
Corporate debt securities	$	40,148	$	207	$	(6	)	$	40,349
Tax-exempt municipal securities	13,936		131		(29		)	14,038
Variable rate demand notes	5,600		—		—			5,600
Total	$	59,684	$	338	$	(35	)	$	59,987

The following is a summary of available-for-sale securities as of December 31, 2018 (in thousands):



	Amortized Cost		Gross Unrealized Gain		Gross Unrealized (Losses)			Estimated Fair Value
Corporate debt securities	$	48,202	$	12	$	(284	)	$	47,930
Tax-exempt municipal securities	22,858		45		(34		)	22,869
Variable rate demand notes	4,000		—		—			4,000
Total	$	75,060	$	57	$	(318	)	$	74,799

The unrealized gains and losses on the Company’s investments in municipal and corporate debt securities as of December 31, 2018 and September 30, 2019 were caused by changes in market values primarily due to interest rate changes. As of September 30, 2019, the fair value of the Company’s securities which were in an unrealized loss position for a period longer than twelve months was $6.3 million. The Company does not intend to sell these securities, and it is not more likely than not that the Company will be required to sell these securities prior to the recovery of their amortized cost basis, which may be at maturity. NaN other-than-temporary impairment charges were recorded during the three and nine months ended September 30, 2018 and 2019.

The following table summarizes the maturities of the Company’s marketable securities as of December 31, 2018 and September 30, 2019 (in thousands):



	December 31, 2018		September 30, 2019
Due within one year	$	37,121	$	33,455
Due after one year through five years	37,678		26,532
Total	$	74,799	$	59,987

Amounts due within one year in the table above included $5.6 million of variable rate demand notes, which have contractual maturities ranging from 18 years to 26 years as of September 30, 2019. The variable rate demand notes are floating rate municipal bonds with embedded put options that allow the Company to sell the security at par plus accrued interest on a settlement basis ranging from one day to seven days. The Company has classified these securities based on their effective maturity dates, which ranges from one day to seven days from the balance sheet date.

The following table summarizes the proceeds from the maturities of available-for-sale securities for the three and nine months ended September 30, 2018 and 2019 (in thousands):



	For the three months ended September 30,				For the nine months ended September 30,
	2018		2019		2018		2019
Maturities of marketable securities	$	5,842	$	10,300	$	5,842	$	32,860
Total	$	5,842	$	10,300	$	5,842	$	32,860

The Company did not record any gross realized gains or gross realized losses in net income during the three and nine months ended September 30, 2018 and 2019. Additionally, there were 0 proceeds from sales of marketable securities prior to maturity during the three and nine months ended September 30, 2018 and 2019.

7. Leases

The Company has long-term, non-cancelable operating leases for campuses and other administrative facilities. These leases generally range from one to 10 years and may include renewal options to extend the lease term. In addition, the leases commonly include lease incentives in the form of rent abatements and tenant improvement allowances ("TIAs"). The Company subleases certain portions of unused building space to third parties. During the three and nine months ended September 30, 2019, the Company recognized $6.6 million and $21.1 million of lease costs, respectively.

The components of lease costs were as follows for the three and nine months ended September 30, 2019 (in thousands):



	For the three months ended September 30,			For the nine months ended September 30,
	2019			2019
Lease cost:
Operating lease cost	$	7,022		$	22,520
Short-term lease cost	234			674
Sublease income	(681		)	(2,128		)
Total lease costs	$	6,575		$	21,066



	As of September 30, 2019
Lease term and discount rate:
Weighted-average remaining lease term (years)	5.7
Weighted-average discount rate	4.20	%



	For the nine months ended September 30,
	2019
Other information (in thousands):
Cash paid for amounts included in the measurement of lease liabilities	$	24,982
Right-of-use assets obtained in exchange for operating lease liabilities	$	4,082
Leasehold improvements obtained in exchange for TIAs paid directly to third parties	$	2,156

Maturities of lease liabilities (in thousands):



Year Ending September 30,
2020	$	30,365
2021	25,692
2022	17,443
2023	12,121
2024	10,442
Thereafter	27,470
Total lease payments⁽¹⁾	$	123,533
Less: interest	(14,299		)
Present value of lease liabilities	$	109,234


⁽²⁾⁽¹⁾		~~Adjustments include accretion~~Operating lease payments exclude $6.0 million of ~~interest on lease costs, partially offset by changes in the timing and expected income from sublease agreements~~. legally binding minimum payments for leases signed but not yet commenced.

The minimum rental commitments for the Company as of December 31, 2018 were as follows (in thousands):



	Minimum Rental Commitments⁽¹⁾
2019	$	33,600
2020	28,399
2021	23,485
2022	13,770
2023	10,316
Thereafter	32,745
Total	$	142,315

~~5. Fair Value Measurement~~

⁽¹⁾
Amounts are based on the accounting guidance in ASC 840, Leases, that was superseded upon the Company's adoption of ASC 842 on January 1, 2019.


8.	Fair Value Measurement

Assets and liabilities measured at fair value on a recurring basis consist of the following as of September 30, ~~2017~~2019 (in thousands):

Fair Value Measurements at Reporting Date Using




Quoted Prices in

Significant


Active Markets

Other

Significant

for Identical

Observable

Unobservable

September 30,

Assets/Liabilities

Inputs

Inputs

2017

(Level 1)

(Level 2)

(Level 3)

Assets:

Money market funds

$
15,199

$
15,199

$
—

$
—

Liabilities:

Deferred payments

$
4,424

$
—

$
—

$
4,424



			Fair Value Measurements at Reporting Date Using
	September 30, 2019		Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds	$	41,818	$	41,818	$	—	$	—
Marketable securities:
Corporate debt securities	40,349		—		40,349		—
Tax-exempt municipal securities	14,038		—		14,038		—
Variable rate demand notes	5,600		—		5,600		—
Total assets at fair value on a recurring basis	$	101,805	$	41,818	$	59,987	$	—

Liabilities:
Deferred payments	$	3,558	$	—	$	—	$	3,558

Assets and liabilities measured at fair value on a recurring basis consist of the following as of December 31, ~~2016~~2018 (in thousands):


			Fair Value Measurements at Reporting Date Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	December 31,		Assets/Liabilities		Inputs		Inputs				Fair Value Measurements at Reporting Date Using
	2016		(Level 1)		(Level 2)		(Level 3)		December 31, 2018		Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds	$	5,103	$	5,103	$	—	$	—	$	1,791	$	1,791	$	—	$	—
Marketable securities:
Corporate debt securities									48,430		—		48,430		—
Tax-exempt municipal securities									22,869		—		22,869		—
Variable rate demand notes									4,000		—		4,000		—
Total assets at fair value on a recurring basis									$	77,090	$	1,791	$	75,299	$	—

Liabilities:
Deferred payments	$	11,741	$	—	$	—	$	11,741	$	4,120	$	—	$	—	$	4,120

The Company measures the above items on a recurring basis at fair value as follows:

Money market funds – Classified in Level 1 is excess cash the Company holds in both taxable and tax-exempt money market funds and are included in cash and cash equivalents in the accompanying unaudited condensed consolidated balance sheets. The Company records any net unrealized gains and losses for changes in fair value as a component of accumulated other comprehensive income in stockholders' equity. The Company's cash and cash equivalents held at December 31, 2016 and September 30, 2017 approximate fair value and are not disclosed in the above tables because of the short-term nature of the financial instruments.

Deferred payments – The Company acquired certain assets and entered into deferred payment arrangements with the sellers in transactions that occurred in 2011 and 2016. The deferred payments are classified within Level 3 as there is no liquid market for similarly priced instruments and are valued using models that encompass significant unobservable inputs to estimate the operating results of the acquired assets. The assumptions used to prepare the discounted cash flows include estimates for interest rates, enrollment growth, retention rates, obtaining regulatory approvals for expansion into

Money market funds – Classified in Level 1 is excess cash the Company holds in both taxable and tax-exempt money market funds, which are included in cash and cash equivalents in the accompanying unaudited condensed consolidated balance sheets. The Company records any net unrealized gains and losses for changes in fair value as a component of accumulated other comprehensive income in stockholders' equity. The Company's cash and cash equivalents held at December 31, 2018 and September 30, 2019 approximate fair value and are not disclosed in the above tables because of the short-term nature of the financial instruments.

Marketable securities – Classified in Level 2 and valued using readily available pricing sources for comparable instruments utilizing observable inputs from active markets. The Company does not hold securities in inactive markets.

~~Table~~Deferred payments – The Company acquired certain assets and entered into deferred payment arrangements with the sellers in transactions that occurred in 2011 and 2016. The deferred payments are classified within Level 3 as there is no liquid market for similarly priced instruments and are valued using discounted cash flow models that encompass significant unobservable inputs. The assumptions used to prepare the discounted cash flows include estimates for interest rates, enrollment growth, retention rates, and pricing strategies. These assumptions are subject to change as the underlying data sources evolve and the programs mature. The short-term portion of ~~Contents~~

deferred payments was $1.2 million as of September 30, 2019 and is included in accounts payable and accrued expense.

new markets, and pricing strategies. These assumptions are subject to change as the underlying data sources evolve and the programs mature. The short-term portion of deferred payments was $1.4 million as of September 30, 2017 and is included in accounts payable and accrued expense.

The Company did not change its valuation techniques associated with recurring fair value measurements from prior periods and nodid not transfer assets or liabilities ~~were transferred~~ between levels of the fair value hierarchy during the nine months ended September 30, ~~2016~~2018 or ~~2017.~~

2019.

Changes in the fair value of the Company’s Level 3 ~~deferred payment~~ liabilities during the nine months ended September 30, ~~2016~~2018 and ~~2017~~2019 are as follows (in thousands):



	September 30, 2016		September 30, 2017		As of September 30,
Balance at beginning of period	$	3,278	$	11,741
					2018			2019
Balance as of the beginning of period					$	4,514		$	4,120
Amounts paid		(7,358)		(1,133)	(1,412		)	(1,579		)
Contingent consideration in connection with NYCDA acquisition		14,500		—
Other adjustments to fair value		1,920		(6,184)	1,264			1,017
Balance at end of period	$	12,340	$	4,424	$	4,366		$	3,558

~~6. Stock Options, Restricted Stock and Restricted Stock Units~~

~~On May 5, 2015,~~


9.	Goodwill and Intangible Assets

Goodwill

The following table summarizes the Company’s shareholders approved the Strayer Education, Inc. 2015 Equity Compensation Plan (the “2015 Plan”), which provides for the granting of restricted stock, restricted stock units, stock options intended to qualify as incentive stock options, options that do not qualify as incentive stock options, and other forms of equity compensation and performance-based awards to employees, officers and directors of the Company, or to a consultant or advisor to the Company, at the discretion of the Board of Directors. Vesting provisions are at the discretion of the Board of Directors. Options may be granted at option prices based at or above the fair market value of the shares at the date of grant. The maximum term of the awards granted under the 2015 Plan is ten years. The number of shares of common stock reserved for issuance under the 2015 Plan is 500,000 authorized but unissued shares, plus the number of shares available for grant under the Company’s previously existing equity compensation plans at the time of stockholder approval of the 2015 Plan, and plus the number of shares which maychanges in the ~~future become available under any previously existing equity compensation plan due to forfeitures~~carrying amount of ~~outstanding awards.~~

~~In February 2017, the Company’s Board~~goodwill by segment as of Directors approved grants of 67,599 shares of restricted stock to certain employees. These shares, which vest over a four-year period, were granted pursuant to the 2015 Plan. The Company’s stock price closed at $81.66 on the date of these grants.

In May 2017, the Company’s Board of Directors approved grants of 7,541 shares of restricted stock. These shares, which vest annually over a three-year period, were awarded to non-employee members of the Company’s Board of Directors, as part of the Company’s annual director compensation program and the 2015 Plan. The Company’s stock price closed at $86.83 on the date of these grants.

Dividends paid on unvested restricted stock are reimbursed to the Company if the recipient forfeits his or her shares as a result of termination of employment prior to vesting in the award, unless waived by the Board of Directors.

~~Restricted Stock and Restricted Stock Units~~

~~The table below sets forth the restricted stock and restricted stock units activity for~~September 30, 2019 (in thousands):



	Strayer University		Capella University			Non-Degree Programs		Total
Balance as of December 31, 2018	$	337,381	$	395,159		$	—	$	732,540
Additions	—		—			—		—
Impairments	—		—			—		—
Adjustments	—		(465		)	—		(465		)
Balance as of September 30, 2019	$	337,381	$	394,694		$	—	$	732,075

During the nine months ended September 30, ~~2017:~~

Number of
shares or units

Weighted-
average
Grant price

Balance, December 31, 2016

727,100

$
97.53

Grants

75,140

82.18

Vested shares

(84,718)

66.60

Forfeitures

(1,204)

62.28

Balance, September 30, 2017

716,318

$
99.64

2019, the Company recorded $0.5 million net measurement period adjustments, as discussed in Note 3.

~~Table~~The Company assesses goodwill at least annually for impairment during the fourth quarter, or more frequently if events occur or circumstances change between annual tests that would more likely than not reduce the fair value of ~~Contents~~

~~Stock Options~~

~~The table~~the respective reporting unit below ~~sets forth~~its carrying amount. No events or circumstances occurred in the ~~stock option activity~~three and ~~other stock option information as of and for the~~ nine months ended September 30, ~~2017:~~

Weighted-


average

Weighted-

remaining

Aggregate

Number of

average

contractual

intrinsic value(1)


shares

exercise price

life (years)

(in thousands)

Balance, December 31, 2016

100,000

$
51.95

4.1

$
2,868

Grants

—

—

Exercises

—

—

Forfeitures/Expirations

—

—

Balance, September 30, 2017

100,000

$
51.95

3.3

$
3,532

Exercisable, September 30, 2017

100,000

$
51.95

3.3

$
3,532

2019 to indicate an impairment to goodwill. Accordingly, there were 0 impairment charges related to goodwill recorded during the three and nine months ended September 30, 2019. During the three and nine months ended September 30, 2018, the Company recorded goodwill impairment charges of $11.1 million and $13.9 million, respectively, related to its New York Code and Design Academy ("NYCDA") reporting unit (which, following the merger, is included in the Non-Degree Programs segment) based on a quantitative impairment analysis performed. The goodwill impairment charge represented the excess of the carrying value of the net assets of the NYCDA reporting unit over its estimated fair value and is reflected within the Impairment of intangible assets line in the unaudited condensed consolidated statements of income.

Intangible Assets

⁽¹⁾

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the respective trading day and the exercise price, multiplied by the number of in-the-money options)The following table represents the balance of the Company’s intangible assets as of December 31, 2018 and September 30, 2019 (in thousands):



	December 31, 2018							September 30, 2019
	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Subject to amortization
Student relationships	$	166,000	$	(23,056	)	$	142,944	$	166,000	$	(64,556	)	$	101,444
Not subject to amortization
Trade names	185,400		—			185,400		185,400		—			185,400
Total	$	351,400	$	(23,056	)	$	328,344	$	351,400	$	(64,556	)	$	286,844

The Company’s finite-lived intangible assets are comprised of student relationships, which are being amortized on a straight-line basis over a three-year useful life. Straight-line amortization expense for finite-lived intangible assets reflects the pattern in which the assets' economic benefits are consumed over their estimated useful lives. Amortization expense related to finite-lived intangible assets was $13.8 million and $41.5 million for the three and nine months ended September 30, 2019, respectively.

Indefinite-lived intangible assets not subject to amortization consist of trade names. The Company assigned an indefinite useful life to its trade name intangible assets, as it is believed these assets have the ability to generate cash flows indefinitely. In addition, there are no legal, regulatory, contractual, economic or other factors to limit the useful life of the trade name intangibles.

The Company assesses indefinite-lived intangible assets at least annually for impairment during the fourth quarter, or more frequently if events occur or circumstances change between annual tests that would have been received by the option holder had all options been exercised on the respective trading day. The amount of intrinsic value will change based on the fair market value of the Company’s common stock.

~~Valuation and Expense Information under Stock Compensation Topic ASC 718~~

At September 30, 2017, total stock-based compensation cost which has not yet been recognized was $17.8 million for unvested restricted stock, restricted stock units, and stock option awards. This cost is expected to be recognized over the next 24 months on a weighted-average basis. Awards of approximately 561,000 shares of restricted stock and restricted stock units are subject to performance conditions. The accrual for stock-based compensation for performance awards is based on the Company’s estimates that such performance criteria are probable of being achieved over the respective vesting periods. Such a determination involves judgment surrounding the Company’s ability to maintain regulatory compliance. If the performance targets are not reached during the respective vesting period, or it is determined it is more likely than not reduce the fair value of the respective asset below its carrying amount. No events or circumstances occurred in the three and nine months ended September 30, 2019 to indicate an impairment to indefinite-lived intangible assets. Accordingly, there were 0 impairment charges related to indefinite-lived intangible assets recorded during the three and nine months ended September 30, 2019. During the three and nine months ended September 30, 2018, the Company recorded impairment charges of $2.0 million and $5.4 million, respectively, related to the NYCDA trade name based on a quantitative impairment analysis performed. The indefinite-lived intangible asset impairment charge represented the excess of the carrying value of the NYCDA trade name over its estimated fair value and is reflected within the Impairment of intangible assets line in the unaudited condensed consolidated statements of income.


10.	Long-Term Debt

On August 1, 2018, the Company entered into an amended credit facility (the “Amended Credit Facility”), which provides for a senior secured revolving credit facility (the “Revolver”) in an aggregate principal amount of up to $250 million. The Amended Credit Facility provides the Company with an option, under certain conditions, to increase the commitments under the Revolver or establish one or more incremental term loans (each, an “Incremental Facility”) in an amount up to the sum of (x) $150 million and (y) if such Incremental Facility is incurred in connection with a permitted acquisition, any amount so long as the Company’s leverage ratio (calculated on a trailing four-quarter basis) on a pro forma basis will be no greater than 1.75:1.00. The maturity date of the Amended Credit Facility is August 1, 2023. The Company paid approximately $1.2 million in debt financing costs associated with the Amended Credit Facility, and these costs are being amortized on a straight-line basis over the five-year term of the Amended Credit Facility.

Borrowings under the Revolver will bear interest at a per annum rate equal to, at the Company’s election, LIBOR or a base rate, plus a margin ranging from 1.50% to 2.00% depending on the Company’s leverage ratio. The Company also is subject to a quarterly unused commitment fee ranging from 0.20% to 0.30% per annum depending on the Company’s leverage ratio, times the daily unused amount under the Revolver.

The Amended Credit Facility is guaranteed by all domestic subsidiaries, subject to certain exceptions, and secured by substantially all of the assets of the Company and its subsidiary guarantors. The Amended Credit Facility contains customary affirmative and negative covenants, representations, warranties, events of default, and remedies upon default, including acceleration and rights to foreclose on the collateral securing the Amended Credit Facility. In addition, the Amended Credit Facility requires that the ~~performance criteria~~Company satisfy certain financial maintenance covenants, including:

A leverage ratio of not greater than 2 to 1. Leverage ratio is defined as the ratio of total debt to trailing four-quarter EBITDA (earnings before interest, taxes, depreciation, amortization, and noncash charges, such as stock-based compensation).

A coverage ratio of not less than 1.75 to 1. Coverage ratio is defined as the ratio of trailing four-quarter EBITDA and rent expense to trailing four-quarter interest and rent expense.

A U.S. Department of Education (“Department” or "Department of Education") Financial Responsibility Composite Score of not less than 1.5.

The Company was in compliance with all the terms of the Amended Credit Facility and had 0 borrowings outstanding under the Revolver as of September 30, 2019.


11.	Other Long-Term Liabilities

Other long-term liabilities consist of the following as of December 31, 2018 and September 30, 2019 (in thousands):



	December 31, 2018		September 30, 2019
Contract liabilities, net of current portion	$	23,880	$	27,233
Deferred payments related to acquisitions	5,904		4,837
Employee separation costs	6,800		2,681
Deferred rent and other facility costs	6,837		1,880
Loss on facilities not in use	4,332		—
Lease incentives	2,300		—
Other	1,263		1,993
Other long-term liabilities	$	51,316	$	38,624

Contract Liabilities

As discussed in Note 4, in connection with its student tuition contracts, the Company has an obligation to provide free classes in the future should certain eligibility conditions be maintained (the Graduation Fund). Long-term contract liabilities represent the amount of revenue under these arrangements that the Company expects will be realized after one year.

Employee Separation Costs

Severance and other employee separation costs to be paid after one year.

Deferred Rent and Other Facility Costs and Loss on Facilities Not in Use

Prior to the adoption of ASC 842 on January 1, 2019, the Company recorded a liability for lease costs of campus and non-campus facilities that are not currently in use (see Note 5). For facilities still in use, the Company recorded rent expense on a straight-line basis over the initial term of a lease. The difference between the rent payment and the straight-line rent expense was recorded as a liability. Upon adoption of ASC 842, these liability balances were netted against the ROU asset recognized on January 1, 2019. As such, there are no long-term liability balances for deferred rent and loss on facilities not in use as of September 30, 2019. At December 31, 2018 and September 30, 2019, the Company had $1.9 million and $2.0 million, respectively, included in the deferred rent and other facility costs balances, which relate to asset retirement obligations for lease agreements requiring the leased premises to be ~~achieved, related compensation expense~~returned in a predetermined condition.

Deferred Payments Related to Acquisitions

In connection with previous acquisitions, the Company acquired certain assets and entered into deferred payment arrangements with the sellers. The deferred payment arrangements are valued at approximately $3.1 million and $2.0 million as of December 31, 2018 and September 30, 2019, respectively. In addition, one of the sellers contributed $2.8 million to the Company representing the seller’s continuing interest in the assets acquired.

Lease Incentives

In conjunction with the opening of new campuses or renovation of existing campuses, the Company, in some instances, was reimbursed by the lessors for improvements made to the leased properties. Prior to the adoption of ASC 842 on January 1, 2019, the underlying assets were capitalized as leasehold improvements and a liability was established for the reimbursements in accordance with ASC 840-20. The leasehold improvements and the liability are amortized on a straight-line basis over the corresponding lease terms, which generally range from five to 10 years. Upon adoption of ASC 842, the liability balance associated with the reimbursement was netted against the ROU asset recognized on January 1, 2019. As such, there is ~~adjusted.~~

0 lease incentive long-term liability balance as of September 30, 2019.


12.	Equity Awards

The following table sets forth the amount of stock-based compensation expense recorded in each of the expense line items for the three and nine months ended September 30, ~~2016~~2018 and ~~2017~~2019 (in thousands):


	For the three months ended				For the nine months ended
	September 30,				September 30,				For the three months ended September 30,					For the nine months ended September 30,
	2016		2017		2016		2017		2018		2019			2018		2019
Instruction and educational support	$	522	$	548	$	678	$	1,363
Marketing		—		—		—		—
Admissions advisory		—		—		—		—
Instructional and support costs									$	703	$	945		$	1,821	$	2,820
General and administration		1,882		2,366		6,652		7,206	2,869		2,077			7,688		5,888
Merger and integration costs									2,272		(523		)	2,272		367
Stock-based compensation expense included in operating expense		2,404		2,914		7,330		8,569	5,844		2,499			11,781		9,075
Tax benefit		957		1,151		2,857		3,384	1,607		651			3,253		2,333
Stock-based compensation expense, net of tax	$	1,447	$	1,763	$	4,473	$	5,185	$	4,237	$	1,848		$	8,528	$	6,742

During the nine months ended September 30, 2016, the Company recognized a tax shortfall related to share-based payment arrangements of approximately $51,000, which was recorded as an adjustment to additional paid-in capital. During the nine months ended September 30, 2017,2018 and 2019, the Company recognized a tax windfall related to share-based payment arrangements of approximately ~~$0.6~~$3.5 million and $4.0 million, respectively, which was recorded as an adjustment to the provision for income taxes.


13.	Income Taxes

During the nine months ended September 30, 2018 and 2019, the Company recorded a benefit for income taxes ~~following~~of $1.6 million and income tax expense of $31.4 million, reflecting an effective tax rate of 4.1% and 37.4%, respectively.

In February 2019, to align compensation and benefit plans after completion of the ~~adoption~~merger with CEC, the Compensation Committee of ~~ASU 2016-09. No stock options were exercised~~the Company’s Board of Directors took action to terminate all deferred compensation arrangements, including for employees already participating in such arrangements. These changes affect the tax deductibility of certain arrangements, which resulted in a discrete item recorded during the three months ended March 31, 2019, reducing the Company’s deferred tax assets by $11.5 million, and increasing the Company’s 2019 effective tax rate and future cash tax payments.

The Company had $0.7 million and $1.4 million of unrecognized tax benefits as of September 30, 2018 and 2019, respectively. Interest and penalties, including those related to uncertain tax positions, are included in the provision for income taxes in the unaudited condensed consolidated statements of income. The Company incurred 0 expense related to interest and penalties during the nine months ended September 30, ~~2016 or 2017.~~

~~Table of Contents~~

~~7. Other Long-Term Liabilities~~

~~Other long-term liabilities consist of the following (in thousands):~~

December 31, 2016

September 30, 2017

Deferred revenue, net of current portion

$
17,981

$
18,274

Deferred rent and other facility costs

8,251

7,406

Loss on facilities not in use

7,813

6,227

Deferred payments related to acquisitions

13,754

5,979

Lease incentives

2,684

2,902

Other long-term liabilities

$
50,483

$
40,788

~~Deferred Revenue~~

~~The Company provides for certain scholarship~~2018 and awards programs, such as the Graduation Fund (see Note 2 for additional information), that can be redeemed in the future by students after meeting certain eligibility requirements. The Company also has licensed certain of its non-credit bearing course content to a third party. Long-term deferred revenue represents the amount of revenue under these arrangements that the Company expects will be realized after one year.

~~Deferred Rent and Other Facility Costs and Loss on Facilities Not in Use~~

The Company records a liability for lease costs of campuses and non-campus facilities that are not currently in use (see Note 4). For facilities still in use, the Company records rent expense on a straight-line basis over the initial term of a lease. The difference between the rent payment and the straight-line rent expense is recorded as a liability.

~~Deferred Payments Related to Acquisitions~~

In the first quarter of 2016, the Company acquired NYCDA and entered into deferred payment arrangements with the sellers in connection with this transaction. In April and August 2016, NYCDA received state regulatory permits and the Company subsequently paid $6.0$0.2 million and $0.5 million of deferred payments to the sellers, respectively. The fair value of the deferred payment arrangements at September 30, 2017 is zero, and the maximum possible amount that could be paid is $11.5 million. See Note 3 for further information on the NYCDA deferred payments.

In 2011, the Company acquired certain assets and entered into deferred payment arrangements with the sellers. The deferred payment arrangements are valued at approximately $3.4 million and $3.2 million as of December 31, 2016 and September 30, 2017, respectively. In addition, one of the sellers contributed $2.8 million to the Company representing the seller’s continuing interest in the assets acquired.

~~Lease Incentives~~

In conjunction with the opening of new campuses or renovating existing ones, the Company, in some instances, was reimbursed by the lessors for improvements made to the leased properties. In accordance with ASC 840-20, the underlying assets were capitalized as leasehold improvements and a liability was established for the reimbursements. The leasehold improvements and the liability are amortized on a straight-line basis over the corresponding lease terms, which generally range from five to ten years.

8~~. Income Taxes~~

~~The Company had $0.3 million of unrecognized tax benefits at September 30, 2017, resulting from tax positions taken~~ during the nine months ended September 30, 2017. In addition, the Company recognized approximately $0.3 million of benefits in each of the nine months ended September 30, 2016 and 2017 related to tax positions taken during prior years. The Company did not incur expense for interest and penalties in the nine months ended September 30, 2017, and recorded approximately $0.1 million of expense for interest and penalties in the nine months ended September 30, 2016.

The Company does not expect its unrecognized tax benefits will be realized. If amounts accrued are different than amounts ultimately assessed by taxing authorities, the Company would record an adjustment to income tax expense. The Company does not anticipate significant changes to other unrecognized tax benefits.

2019.

~~Table of Contents~~

The Company paid ~~$25.0~~$10.9 million and ~~$21.8~~$36.6 million in income taxes during the nine months ended September 30, ~~2016~~2018 and ~~2017,~~2019, respectively.

9.~~Litigation~~

~~From time~~

The tax years since 2015 remain open for Federal tax examination and the tax years since 2014 remain open to ~~time,~~examination by state and local taxing jurisdictions in which the Company is subject.

14. Other Investments

At September 30, 2019, the Company held $15.6 million in investments in certain limited partnerships that invest in various innovative companies in the health care and education-related technology fields. The Company has commitments to invest up to an additional $1.9 million across these partnerships through 2027. The Company's investments range from 3%-5% of any partnership’s interest and are accounted for under the equity method. At December 31, 2018, the Company's investment in limited partnerships was $13.4 million.

The following table illustrates changes in the Company’s limited partnership investments for the three and nine months ended September 30, 2018 and 2019 (in thousands):



	For the three months ended September 30,				For the nine months ended September 30,
	2018		2019		2018		2019
Limited partnership investments, beginning of period	$	—	$	14,490	$	—	$	13,449
Additions from merger	14,153		—		14,153		—
Capital contributions	166		366		166		878
Equity in net income of limited partnerships	—		706		—		2,260
Distributions	—		—		—		(1,025		)
Limited partnership investments, end of period	$	14,319	$	15,562	$	14,319	$	15,562

15. Segment Reporting

Strategic Education is an educational services company that provides access to high-quality education through campus-based and online post-secondary education offerings, as well as through programs to develop job-ready skills for high-demand markets. Strategic Education’s portfolio of companies is dedicated to closing the skills gap by placing adults on the most direct path between learning and employment.

NaN of the Company’s operating segments that meet the quantitative thresholds to qualify as reportable segments are the Strayer University and Capella University segments. The Strayer University segment is comprised of Strayer University, including its programs offered through the Jack Welch Management Institute; the Capella University segment consists of Capella University. None of the Company’s other operating segments individually meet the quantitative thresholds to qualify as reportable segments; therefore, these other operating segments are combined and presented below as Non-Degree Programs. The Non-Degree Programs reportable segment is comprised of the DevMountain, Hackbright Academy, NYCDA, and Sophia Learning operations.

Revenue and operating expenses are generally directly attributable to the segments. Inter-segment revenues are not presented separately, as these amounts are immaterial. The Company’s Chief Operating Decision Maker does not evaluate operating segments using asset information.

A summary of financial information by reportable segment for the three and nine months ended September 30, 2018 and 2019 is presented in the following table (in thousands):



	For the three months ended September 30,						For the nine months ended September 30,
	2018			2019			2018			2019
Revenues
Strayer University	$	114,471		$	127,837		$	343,644		$	384,806
Capella University	43,792			110,549			43,792			337,418
Non-Degree Programs	2,682			3,361			4,646			11,141
Consolidated revenues	$	160,945		$	241,747		$	392,082		$	733,365
Income (loss) from operations
Strayer University	$	11,904		$	18,689		$	44,215		$	68,268
Capella University	(14,326		)	18,643			(14,326		)	63,918
Non-Degree Programs	(1,688		)	(415		)	(4,131		)	(918		)
Amortization of intangible assets	(10,278		)	(15,417		)	(10,278		)	(46,251		)
Merger and integration costs	(29,620		)	(1,500		)	(37,791		)	(11,698		)
Impairment of intangible assets	(13,119		)	—			(19,304		)	—
Consolidated income (loss) from operations	$	(57,127	)	$	20,000		$	(41,615	)	$	73,319


16.	Litigation

The Company is involved in litigation and other legal proceedings arising out of the ordinary course of its business. ~~There~~From time to time, certain matters may arise that are ~~no pending material legal proceedings to which~~other than ordinary and routine. The outcome of such matters is uncertain and the Company ~~is subject~~may incur costs in the future to defend, settle, or ~~to which~~otherwise resolve them. The Company currently believes that the ~~Company’s property is subject.~~

~~10. Regulation~~

ultimate outcome of such matters will not, individually or in the aggregate, have a material adverse effect on its consolidated financial position, results of operations or cash flows. However, depending on the amount and timing, an unfavorable resolution of some or all of these matters could materially affect future results of operations in a particular period.


17.	Regulation

The Company, the ~~University,~~Universities, Hackbright, and NYCDA are subject to significant state regulatory oversight, as well as accreditor and federal regulatory oversight, in the case of the Company and the ~~University.~~

~~Gainful Employment~~

~~Under~~Universities. While the Department of Education has recently issued revisions to its regulations, Congress is also considering reauthorization of the Higher Education Act of 1965, as amended (“HEA”). If Congress enacts amendments to the HEA, they may supersede the Department’s regulations in various respects and require further changes to those regulations.

Gainful Employment

Under the HEA, a proprietary institution offering programs of study other than a baccalaureate degree in liberal arts (for which there is a limited statutory exception) must prepare students for gainful employment in a recognized occupation. ~~On October 31, 2014, the~~The Department of Education ~~(the “Department”)~~ published final regulations related to gainful ~~employment. The regulations~~employment that went into effect on July 1, 2015 (the "2015 Regulations"), with the exception of new disclosure requirements, ~~that were originally scheduled to go~~which generally went into effect January 1, 2017, but which ~~have now been~~were delayed, to some extent, until July 1, 2018. Additionally, the Department announced, on June 16, 2017, its intention to conduct negotiated rulemaking proceedings to revise the gainful employment regulations. Those proceedings are expected to begin in December 2017.

2019.

The ~~gainful employment regulations include two~~2015 Regulations included 2 debt-to-earnings measures, consisting of an annual income rate and a discretionary income rate. The annual income rate ~~measures~~measured student debt in relation to earnings, and the discretionary income rate ~~measures~~measured student debt in relation to discretionary income. A program ~~passes~~passed if the program’s graduates:

	·
•		have an annual income rate that does not exceed 8%; or

have a discretionary income rate that does not exceed 20%.

~~have a discretionary income rate that does not exceed 20%.~~

In addition, a program that ~~does~~did not pass either of the debt-to-earnings metrics and ~~that has~~had an annual income rate between 8% and 12%, or a discretionary income rate between 20% and 30%, iswas considered to be in a warning zone. A program ~~fails~~failed if the program’s graduates ~~have~~had an annual income rate of 12% or greater and a discretionary income rate of 30% or greater. A program ~~would become~~became Title IV-ineligible for three years if it ~~fails~~failed both metrics for two out of three consecutive years, or ~~fails~~failed to pass at least ~~one~~1 metric for four consecutive award years. ~~The regulations provide a means by which an institution may challenge the Department’s calculation of any of the debt metrics prior to loss of Title IV eligibility.~~ On January 8, 2017, Strayer University and Capella University received ~~its~~ final 2015 debt-to-earnings measures. None of ~~Strayer’s~~Strayer University or Capella University programs failed the debt-to-earnings metrics. ~~Two~~NaN active Strayer University programs, the Associate in Arts in Accounting and Associate in Arts in Business Administration, ~~are~~and 1 active Capella University program, the Master of Science in Marriage and Family Counseling/Therapy, were “in the zone,” which means each ~~program remains~~of those 3 programs remained fully ~~eligible unless (1) either program~~eligible. The Department has announced that because it no longer has a ~~combination of zone and failing designations for four consecutive years, in which case~~data-sharing agreement with the U.S. Social Security Administration to receive earnings data, it would become Title IV-ineligible in the fifth year; or (2) either program fails the metrics for two out of three consecutive years, in which case the program could become ineligible for the following award year.

~~If an institution~~ is ~~notified by the Secretary of Education that a program could become ineligible, based on its final rates, for the next award year:~~

The institution must provide a warning with respect to the program to students and prospective students indicating, among other things, that students may not be able to use Title IV funds to attend or continue in the program; and

~~The institution must not enroll, register or enter into a financial commitment with a prospective student until a specified time after providing the warning to the prospective student.~~

~~The new regulations also require institutions annually~~unable to report student- and program-level data to the Department, and comply with additional disclosure requirements. Final regulations adopted by the Department, which generally became effective on July 1, 2011, require an institution to use a template designed by the Department to disclose to prospective students, with respect to

~~Table of Contents~~

each gainful employment program, occupations that the program prepares students to enter, total cost of the program, on-time graduation rate, job placement rate, if applicable, and the median loan debt of program completers for the most recently completed award year. The regulations that became effective July 1, 2015 expanded upon those existing disclosure requirements, and institutions were expected to update their disclosure templates to comply by January 1, 2017. However, the Department delayed the requirements until April 3, 2017 and then until July 1, 2017. On June 30, 2017, the Department further delayed, until July 1, 2018, the requirements that an institution include the disclosure template, or a link thereto, in its gainful employment program promotional materials and directly distribute the disclosure templates to prospective students. The Department did not change the July 1, 2017 effective date for the requirement to provide an updated disclosure template, or a link thereto, on gainful employment program web pages. The University is in compliance with that requirement.

~~In addition,~~calculate any subsequent debt-to-earnings measures under the gainful employment regulations ~~require~~in 2019.

On July 1, 2019, the Department of Education released final gainful employment regulations, which contain a full repeal of the 2015 Regulations, including all debt measures, reporting, disclosure, and certification requirements. Per the Department of Education's Master Calendar, these rules go into effect July 1, 2020. However, the Secretary used her authority under the HEA to allow institutions to ~~certify, among other things,~~implement the new rules early as of July 1, 2019. Those institutions that ~~each eligible~~implement early are not required to report gainful employment ~~program is programmatically accredited if required by a federal governmental entity or a state governmental entity of a state in which it is located or is otherwise~~data for the 2018-2019 award year, are not required to ~~obtain state approval. Institutions also must certify that each eligible~~comply with gainful employment disclosure and template publication requirements, and are not required to comply with the regulation’s certification requirements with respect to programmatic accreditation and program ~~satisfies the applicable educational~~satisfaction of prerequisites for professional ~~licensure or certification requirements in each~~ licensure/state ~~in which it is located or is otherwise~~certification. Both Capella University and Strayer University have elected to implement the July 2019 regulations early and have documented their decision to do so as required to obtain state approval, so that a student who completes the program and seeks employment in that state qualifies to take any licensure or certification exam that is needed for the student to practice or find employment in an occupation that the program prepares students to enter. The University has timely made the required certification.

~~Under the gainful employment regulations, an institution may establish a new program’s Title IV eligibility by updating the list of the institution’s programs maintained~~ by the ~~Department. However, an institution may not update its list~~Department of eligible programs to include a failing or zone program that the institution voluntarily discontinued or that became ineligible, or a gainful employment program that is substantially similar to such a program, until three years after the loss of eligibility or discontinuance.

The requirements associated with the gainful employment regulations may substantially increase the Company’s administrative burdens and could affect the University’s program offerings, student enrollment, persistence, and retention. Further, although the regulations provide opportunities for an institution to correct any potential deficiencies in a program prior to the loss of Title IV eligibility, the continuing eligibility of the University’s academic programs will be affected by factors beyond management’s control such as changes in the University’s graduates’ income levels, changes in student borrowing levels, increases in interest rates, changes in the percentage of former students who are current in the repayment of their student loans, and various other factors. Even if the University were able to correct any deficiency in the gainful employment metrics in a timely manner, the disclosure requirements associated with a program’s failure to meet at least one metric may adversely affect student enrollments in that program and may adversely affect the reputation of the University.

Education.

Borrower Defenses to Repayment

Pursuant to the ~~Higher Education Act~~HEA and following negotiated rulemaking, on November 1, 2016, the Department published final regulations that, ~~inter alia, would have specified~~among other things, specify the acts or omissions of an institution that a borrower may assert as a defense to repayment of a loan made under the Federal Direct Loan ~~Program.~~ Program (the “2016 BDTR Rule”) and the consequences of such borrower defenses for borrowers, institutions, and the Department. Under the 2016 BDTR Rule, for Direct Loans disbursed after July 1, 2017, a student borrower may

assert a defense to repayment if: (1) the student borrower obtained a state or federal court judgment against the institution; (2) the institution failed to perform on a contract with the student; and/or (3) the institution committed a “substantial misrepresentation” on which the borrower reasonably relied to his or her detriment. Borrowers assert these defenses through claims submitted to the Department, and the Department has the authority to issue a final decision. In addition, the regulation permits the Department to grant relief to an individual or group of individuals, including individuals who have not applied to the Department seeking relief. If a defense is successfully raised, the Department has discretion to initiate action to collect from an institution the amount of losses incurred based on the borrower defense. The 2016 BDTR Rule also amends the rules concerning discharge of federal student loans when a school or campus closes and prohibits pre-dispute arbitration agreements and class action waivers for borrower defense-type claims. On January 19, 2017, the Department issued a final rule updating the hearing procedures for actions to establish liability against an institution of higher education and establishing procedures for recovery proceedings under the 2016 BDTR Rule.

Although the ~~regulations were~~2016 BDTR Rule was scheduled to become effective on July 1, 2017, on June 16, 2017, the Department delayed indefinitely the effective date of selected provisions of the ~~regulations~~2016 BDTR Rule and announced its intention to conduct negotiated rulemaking proceedings to revise the regulations. ~~Those proceedings are expected to begin in November 2017.~~ On October 24, 2017, the Department published an interim final rule to delay ~~until July 1, 2018~~ the effective date of the selected ~~provisions.~~provisions until July 1, 2018. On February 14, 2018, the Department published a final rule to delay the effective date of the selected provisions until July 1, 2019.

On September 12, 2018, a federal judge ruled that the Department’s various delays of the 2016 BDTR Rule were contrary to law. On October ~~24, 2017,~~16, 2018, in a related case, the judge denied a request to delay implementation of portions of the 2016 BDTR Rule. As a result, the 2016 BDTR Rule came into effect. In March 2019, the Department issued guidance, clarifying that institutions should handle reporting for events, actions, or conditions that occurred after July 1, 2017 by making required reports to the Department no later than May 14, 2019. The Department also indicated that institutions must implement the prohibitions related to dispute resolution, including by making any required modifications to enrollment agreements or by beginning to implement required notification procedures by May 14, 2019. The Company believes that the Universities are in compliance with these requirements.

On September 23, 2019, the Department published final Borrower Defense to Repayment regulations (the “2019 BDTR Rule”), which will govern borrower defense to repayment claims in connection with loans first disbursed on or after July 1, 2020. The 2016 BDTR Rule continues to apply in the interim.

Under the 2019 BDTR Rule, an individual borrower can assert a defense to repayment and be eligible for relief if she or he establishes, by a preponderance of the evidence, that (1) the institution at which the borrower enrolled made a misrepresentation of material fact upon which the borrower reasonably relied in deciding to obtain a Direct Loan, or a loan repaid by a Direct Consolidation Loan; (2) the misrepresentation directly and clearly related to the borrower’s enrollment or continuing enrollment at the institution or the institution’s provision of education services for which the loan was made; and (3) the borrower was financially harmed by the misrepresentation. The Department will grant forbearance on all loans related to a claim at the time the claim is made.

The 2019 BDTR Rule defines a “misrepresentation” as: a statement, act, or omission by an eligible school to a borrower that (a) is false, misleading, or deceptive, (b) was made with knowledge of its false, misleading, or deceptive nature or with a reckless disregard for the truth, and (c) directly and clearly relates to either (1) enrollment or continuing enrollment at the institution; or (2) the provision of educational services for which the loan was made. “Financial harm” is defined as the amount of monetary loss that a borrower incurs as a consequence of a misrepresentation. The Department will determine financial harm based upon individual earnings and circumstances, which must include consideration of the individual borrower’s career experience subsequent to enrollment and may include, among other factors, evidence of program-level median or mean earnings. “Financial harm” does not include damages for nonmonetary loss, and the act of taking out a Direct Loan, alone, does not constitute evidence of financial harm. Financial harm also cannot be predominantly due to intervening local, regional, national economic or labor market conditions, nor can it arise from the borrower’s voluntary change in occupation or decision to pursue less than full-time work or not to work. The 2019 BDTR Rule contains certain limitations and procedural protections. Among the most prominent of these restrictions, the regulation contains a three-year limitation period of claims, measured from the student’s separation from the institution, does not permit claims to be filed on behalf of groups, and requires that institutions receive access to any evidence in the Department's possession to inform the institution's response.

The 2019 BDTR Rule permits the use of pre-dispute arbitration agreements as a condition of enrollment, so long as the institution provides plain-language disclosures to students and places the disclosure on the institution’s website. The regulations also allow for a borrower to choose whether to apply for a closed school loan discharge or accept a teach-out opportunity, and they provide that once a borrower has accepted a teach-out plan the student would not be eligible for a closed school loan discharge unless the institution fails to adhere to the terms of the teach-out plan. In addition, the closed school discharge window is expanded from 120 days to 180 days prior to the school’s closure, though unlike the 2016 BDTR Rule, the 2019 BDTR Rule does not include an automatic closed school loan discharge if the student does not enroll in another institution within three years of the date after the school closes.

The 2019 BDTR Rule also makes changes to the Department’s financial responsibility requirements, including establishing a more limited set, as compared to the 2016 BDTR Rule, of mandatory and discretionary triggering events that have, or could have, a materially adverse impact on the institution’s financial condition and therefore warrant financial protection. An institution determined not to be financially responsible because of one or more triggering events may be required to issue an irrevocable letter of credit for not less than 10% of the Federal Student Aid program funds received by the school for the most recently completed fiscal year and/or will be issued a provisional Program Participation Agreement. The 2019 BDTR Rule further updates the definitions of terms used to calculate an institution’s composite score and otherwise amends the composite score methodology to reflect changes in FASB accounting standards pertaining to new leases.

Institutions are required to accept responsibility for the repayment of amounts discharged by the Secretary pursuant to the borrower defense to repayment, closed school discharge, false certification discharge, and unpaid refund discharge regulations. The 2019 BDTR Rule may require the repayment of funds and the purchase of loans by the school if the Secretary determines that the school is liable as a result of a successful claim for which the Secretary discharged a loan, in whole or in part. The provisions of the regulation are effective July 1, 2020.

Current Negotiated Rulemaking

On July 31, 2018, the Department announced its intention to establish a negotiated rulemaking committee to prepare proposed regulations for the Federal Student Aid programs authorized under Title IV of the HEA. As described in the July 31 announcement and further detailed in a subsequent announcement on October 15, the Department indicated the proposed topics for negotiation include:

Requirements for accrediting agencies in their oversight of member institutions and programs.

Criteria used by the Secretary to recognize accrediting agencies, emphasizing criteria that focus on educational quality and deemphasizing those that are anti-competitive.

Simplification of the Department’s recognition and review of accrediting agencies.

Clarification of the core oversight responsibilities of each entity in the regulatory triad, including accrediting agencies, States, and the Department, to hold institutions accountable.

Clarification of the permissible arrangements between an institution of higher education and another organization to provide a portion of an education program (34 CFR 668.5).

The roles and responsibilities of institutions and accrediting agencies in the teach-out process (34 CFR 600.32(d) and 602.24).

Elimination of regulations related to programs that have not been funded in many years.

Needed technical changes and corrections to program regulations that have been identified by the Department.

Regulatory changes required to ensure equitable treatment of brick-and-mortar and distance education programs; enable expansion of direct assessment programs, distance education, and competency-based education; and clarify disclosure and other requirements of state authorization.

Protections to ensure that accreditors recognize and respect institutional mission, and evaluate an institution’s policies and educational programs based on that mission; and remove barriers to the eligibility of faith-based entities to participate in the Title IV, HEA programs.

Teacher Education Assistance for College and Higher Education (“TEACH”) Grant requirements and ways to reduce and correct the inadvertent conversion of grants to loans.

The Department also announced its intent to convene 3 subcommittees: one addressing proposed regulations related to distance learning and educational innovation, one addressing TEACH Grant conversions, and one to make recommendations to the committee regarding revisions to the regulations regarding the eligibility of faith-based entities to participate in the Title IV programs. The Department convened the distance learning and educational innovation subcommittee to address, among other topics, simplification of state authorization requirements, the definition of “regular and substantive interaction”, the definition of the term “credit hour”, direct assessment programs and competency-based education, and barriers to innovation in post-secondary education.

In connection with this negotiated rulemaking process, the Department convened 3 public hearings and accepted written comments through September 14, 2018. Strayer University and Capella University submitted written comments on September 14, and negotiations concluded in April 2019. On April 3, 2019, the Accreditation and Innovation negotiated rulemaking committee reached consensus on all topics being negotiated. This outcome means the Department, except in extraordinary circumstances, is bound to publish the consensus language as the notice of proposed rulemaking and accept public comment on that proposal.

On June 12, 2019, the Department published a notice of proposed rulemaking proposing to amend the regulations governing the recognition of accrediting agencies, certain student assistance provisions including state authorization rules, and institutional

eligibility, as well as make various technical corrections. Public comments were accepted through July 12, 2019, and the Department published final rules on those topics on November 1, 2019. The final regulations concerning accreditation and state authorization generally will be effective on July 1, 2020, except the Department announced that institutions may in their discretion implement early those regulations relating to state authorization and institutional information disclosures. The final regulations concerning state authorization for distance education are described more below. The final regulations also require an institution to make certain disclosures about educational programs leading to professional licensure, regardless of program modality. In addition, the final regulations revise in some respects the Department’s process for recognition and review of accrediting agencies, the criteria used by the Department to recognize accrediting agencies, and Department’s requirements for accrediting agencies in terms of their oversight of accredited institutions and programs.

In the Spring 2019 update to its Unified Agenda, the Department of Education indicated that it plans to release notices of proposed rulemaking with draft rules regarding distance education and innovation issues, eligibility of faith-based entities and activities and TEACH grant conversions in December 2019. Under the HEA, if the Department publishes final rules on these topics by November 1, 2020, they would become effective July 1, 2021.

State Education Licensure – Licensure of Online Programs

The increasing popularity and use of the internet and other technology for the delivery of education has led, and may continue to lead, to the adoption of new laws and regulatory practices in the United States or foreign countries or to the interpretation of existing laws and regulations to apply to such services. These new laws and interpretations may relate to issues such as the requirement that online education institutions be licensed as a school in 1 or more jurisdictions even where they have no physical location. New laws, regulations, or interpretations related to doing business over the internet could increase the Company’s cost of doing business, affect its ability to increase enrollments and revenues, or otherwise have a material adverse effect on our business.

In April 2013, the Department announced that it would address state authorization of distance education through negotiated rulemaking. While 4 negotiated rulemaking sessions were conducted from February through May 2014, no consensus was reached.

In June 2016, despite the lack of consensus at the negotiated rulemaking sessions, but as permitted by federal law, the Department issued a Notice of Proposed Rulemaking for public comment on the issue of state authorization for online programs. On December 19, 2016, the Department issued final regulations, which are described below and were scheduled to become effective on July 1, 2018. On May 25, 2018, the Department issued a Notice of Proposed Rulemaking to delay until July 1, ~~2019~~2020 the effective date of the ~~selected~~state authorization of distance education provisions of those final regulations based on concerns that were raised by regulated parties and to provide adequate time to conduct negotiated rulemaking to reconsider those provisions and, as necessary, develop revised regulations. On July 3, 2018, the Department published a final rule, which was made effective retroactively to June 29, 2018, to delay until July 1, 2020 the effective date of the state authorization of distance education provisions.

Certain other portions of the 2016 final regulations, which relate to authorization of foreign locations, went into effect on July 1, 2018. On April 26, 2019, in litigation brought to challenge the Department’s delayed implementation of the 2016 final regulations, a judge found that the delay was improper and ordered that the rules regarding state authorization of programs offered through distance education take effect on May 26, 2019. The 2016 final regulations remain in effect until the new final rules, described below, take effect.

As now in effect, the 2016 final regulations, among other things, require an institution offering Title IV-eligible distance education or correspondence courses to be authorized by each state in which the institution enrolls students, if such authorization is required by the state. Institutions can obtain such authorization directly from the state or through a state authorization reciprocity agreement. A state authorization reciprocity agreement is defined as an agreement between 2 or more states that authorizes an institution located and legally authorized in a state covered by the agreement to provide post-secondary education through distance education or correspondence courses to students in other states covered by the agreement and does not prohibit a participating state from enforcing its own laws with respect to higher education. On March 6, 2015, Capella University was approved as an institution participant in the State Authorization Reciprocity Agreement (“SARA”). On December 2, 2016, Strayer University became a participant in SARA. As participants in SARA, Strayer University and Capella University may offer online courses and other forms of distance education to students in any participating SARA state in which they do not have a physical location or a physical presence, as defined by the state, without having to seek any new state institutional approval beyond the Universities’ home states (Washington, D.C. and Minnesota, respectively). There are currently 49 SARA member states - all but California. The 2016 final regulations also require institutions to document the state process for resolving complaints from students enrolled in programs offered through distance education or correspondence courses for each state in which such students reside.

In addition, the 2016 final regulations require an institution to provide public and individualized disclosures to enrolled and prospective students regarding its programs offered solely through distance education or correspondence courses. The public disclosures include state authorization for the program or course, the process for submitting complaints to relevant states, any adverse actions by a state or accrediting agency related to the distance education program or correspondence course within the past five years, refund policies

specific to the state, and applicable licensure or certification requirements for a career that the program prepares a student to enter. An institution is required to disclose directly to all prospective students if a distance education or correspondence course does not meet the licensure or certification requirements for a state. An institution is required to disclose to each current and prospective student an adverse action taken against a distance education or correspondence program and any determination that a program ceases to meet licensure or certification requirements.

Under the 2016 final regulations, if an institution does not obtain or maintain state authorization for distance education or correspondence courses in any particular state that has authorization requirements, the institution may lose its ability to award Title IV funds for students in those programs who are residing in that state.

On October 15, 2018, the Department announced its intention to establish a negotiated rulemaking committee to prepare proposed regulations on a variety of topics, including state authorization of distance education programs. The Department included state authorization of distance education programs in the Accreditation and Innovation negotiated rulemaking that took place in early 2019. The committee agreed to language that would retain the requirement that institutions are authorized - including the option to be authorized via a reciprocity agreement - to operate in any state in which a student is located for the purposes of Title IV eligibility. However, the consensus language removed many of the public and individualized disclosures to enrolled and prospective students regarding programs offered solely through distance education or correspondence courses. On June 12, 2019, the Department released a notice of proposed rulemaking reflecting the consensus language on this topic, with public comments accepted through July 12, 2019. On November 1, 2019, the Department published new final rules concerning, among other topics, state authorization of distance education programs, which are generally effective July 1, 2020. The Department announced that institutions may in their discretion implement early those portions of the regulations relating to state authorization and institutional information disclosures. The regulations revise the definition of “state authorization reciprocity agreement” such that it does not prohibit any member state from enforcing its own general-purpose state laws and regulations, but member states cannot impose additional requirements related to state authorization of distance education directed at all or a subgroup of educational institutions. The regulations also clarify that state authorization requirements related to distance education courses are based on the state where a student is “located,” as determined by the institution, and not the state of the student’s “residence.” The final rules maintain the consensus language developed during negotiated rulemaking, which remove certain disclosure requirements related to programs offered solely through distance education, and they replace those requirements with certain disclosure requirements applicable to all programs that lead to professional licensure or certification, regardless of the delivery modality of those programs.

The Clery Act

~~The~~

Strayer University and Capella University must comply with the campus safety and security reporting requirements as well as other requirements in the Jeanne Clery Disclosure of Campus Security Policy and Campus Crime Statistics Act (the “Clery Act”), including changes made to the Clery Act by the Violence Against Women Reauthorization Act of 2013. On October 20, 2014, the Department promulgated regulations, effective July 1, 2015, implementing amendments to the Clery Act. In addition, the Department has interpreted Title IX to categorize sexual violence as a form of prohibited sex discrimination and to require institutions to follow certain disciplinary procedures with respect to such offenses. On September 22, 2017, the Department withdrew the statements of policy and guidance reflected in two guidance documents issued under the Obama administration and issued interim guidance about campus sexual misconduct. In the interim guidance, the Department announced that it intends to conduct negotiated rulemaking proceedings to revise its regulations related to institutions’ Title IX responsibilities. Failure by ~~the~~Strayer University or Capella University to comply with the Clery Act or Title IX requirements or regulations thereunder could result in action by the Department fining ~~the~~Strayer University or Capella University, or limiting or

~~Table of Contents~~

suspending ~~its~~ participation in Title IV programs, could lead to litigation, and could harm ~~the~~Strayer University or Capella University’s reputation. The Company believes that ~~the~~Strayer University isand Capella University are in compliance with these requirements.

Compliance Reviews

The ~~University is~~Universities are subject to announced and unannounced compliance reviews and audits by various external agencies, including the Department, its Office of Inspector General, state licensing agencies, guaranty agencies, and accrediting agencies. In 2014, the Department conducted ~~four~~4 campus-based program reviews of Strayer University locations in ~~three~~3 states and the District of Columbia. The reviews covered federal financial aid years 2012-2013 and 2013-2014, and ~~two~~2 of the reviews also covered compliance with the Clery Act, the Drug-Free Schools and Communities Act, and regulations related thereto. For ~~three~~3 of the program reviews, ~~the~~Strayer University received correspondence from the Department in 2015 closing the program reviews with no further action required by ~~the~~Strayer University. For the other program review, in 2016, ~~the~~Strayer University received a Final Program Review Determination Letter identifying a payment of less than $500 due to the Department based on an underpayment on a return to Title IV calculation, and otherwise closing the review. ~~The~~Strayer University remitted payment, and received a letter from the Department indicating that no further action was required and that the matter was closed.

In June 2019, the Department conducted an announced, on-site program review at Capella University, focused on Capella University’s FlexPath program. The review covered the 2017-2018 and 2018-2019 federal financial aid years. The program review has not concluded. In general, after the Department conducts its site visit and reviews data supplied by the institution, it sends the institution a program review report. The institution has the opportunity to respond to any findings in the report. The Department then issues a Final Program Review Determination, which identifies any liabilities. The institution may appeal any monetary liabilities specified in the Final Program Review Determination.

Program Participation Agreement

Each institution participating in Title IV programs must enter into a Program Participation Agreement with the Department. Under the agreement, the institution agrees to follow the Department’s rules and regulations governing Title IV programs. On October ~~13,~~11, 2017, the Department ~~informed the~~and Strayer University ~~that it was approved to participate~~executed a new Program Participation Agreement, approving Strayer University’s continued participation in Title IV programs with full certification through June 30, 2021.

As a result of the August 1, 2018 merger, Capella University experienced a change of ownership, with the Company as its new owner. On January 18, 2019, consistent with standard procedure upon a Title IV institution’s change of ownership, the Department and Capella University executed a new Provisional Program Participation Agreement, approving Capella’s continued participation in Title IV programs with provisional certification through December 31, 2022. As is typical, the Provisional Program Participation Agreement subjects Capella University to certain requirements during the period of provisional certification, including that Capella must apply for and receive approval from the Department in connection with new locations or addition of new Title IV-eligible educational programs.

NYCDA,

Hackbright Academy and DevMountain

NYCDA currently provides instruction through B2B relationships in various locations. Hackbright Academy currently provides on-ground courses in ~~New Jersey, New York, Pennsylvania, Utah,~~the San Francisco Bay Area. DevMountain currently provides on-ground courses in Lehi, Utah; Dallas, Texas; and ~~the District of Columbia,~~Phoenix, Arizona, and in ~~the Netherlands, but is~~2017, introduced its first online program in Web Development. NYCDA, Hackbright Academy and DevMountain are not accredited, ~~does~~do not participate in state or federal student financial aid programs, and isare not subject to the regulatory requirements applicable to accredited schools and schools that participate in ~~such~~ financial aid programs such as those described above. Programs such as those offered by NYCDA, Hackbright Academy, and DevMountain are regulated by each individual state.

~~11. Subsequent Event~~

On October 29, 2017, the Company, Sarg Sub Inc., a Minnesota corporation and a direct, wholly owned subsidiary of the Company (“Merger Sub”), and Capella Education Company, a Minnesota corporation (“Capella”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of the conditions specified therein, Merger Sub will be merged with and into Capella (the “Merger”), with Capella surviving as a direct, wholly owned subsidiary of the Company.

At the effective time of the Merger (the “Effective Time”), each share of common stock of Capella (“Capella Common Stock”) issued and outstanding immediately prior to the Effective Time (other than the shares that are owned by Capella, the Company, Merger Sub or any wholly owned subsidiary of Capella, the Company or Merger Sub) will be converted into the right to receive 0.875 of a newly issued share of common stock of the Company (the “Company Common Stock”) (“Merger Consideration”). No fractional shares of Company Common Stock will be issued in the Merger, and Capella shareholders will receive cash in lieu of fractional shares as part of the Merger Consideration, as specified in the Merger Agreement.

The respective boards of directors of the Company and Capella have unanimously approved the Merger Agreement, and the board of directors of Capella has agreed to recommend that Capella’s shareholders adopt the Merger Agreement. In addition, the board of directors of the Company has agreed to recommend that the Company’s stockholders approve the issuance of shares of Company Common Stock in the Merger and the amendment to the Company certificate of incorporation to, among other things (i) change the Company’s name to “Strategic Education, Inc.” and (ii) increase the number of shares of Company Common Stock that the Company is authorized to issue to 32,000,000 shares to, among other things, allow for the payment of the Merger Consideration.

The consummation of the Merger is subject to customary closing conditions, including, but not limited to, (i) the approval of Company stockholders and Capella stockholders, (ii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and (iii) the receipt of certain regulatory approvals from educational agencies

~~Table of Contents~~

~~(including the Department of Education and Capella University’s accreditor). The parties expect the Merger will be completed in the third quarter of 2018.~~

The Merger Agreement provides for certain termination rights for both Capella and the Company. Upon termination of the Merger Agreement under certain specified circumstances (including to accept a superior proposal), the Company may be required to pay Capella a termination fee of $25,000,000, and upon termination of the Merger Agreement under certain specified circumstances (including to accept a superior proposal), Capella may be required to pay the Company a termination fee of $25,000,000. In addition, if the Merger Agreement is terminated by either party as a result of Capella’s failure to obtain stockholder approval, or is terminated by the Company due to Capella’s breach of its representations and covenants and such breach would result in the closing conditions not being satisfied, then Capella may be required to reimburse transaction expenses up to $8,000,000. The Company may be required to reimburse transaction expenses up to $8,000,000 in reciprocal circumstances.

~~Table of Contents~~

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Notice Regarding Forward-Looking Statements

Certain of the statements included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as elsewhere in this Quarterly Report on Form 10-Q are forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995 (“Reform Act”). Such statements may be identified by the use of words such as “expect,” “estimate,” “assume,” “believe,” “anticipate,” “will,” “forecast,” “outlook,” “plan,” “project,” or similar words, and include, without limitation, statements relating to future enrollment, revenues, revenues per student, earnings growth, operating expenses and capital expenditures. These statements are based on the Company’s current expectations and are subject to a number of assumptions, risks and uncertainties. In accordance with the Safe Harbor provisions of the Reform Act, the Company has identified important factors that could cause the actual results to differ materially from those expressed in or implied by such statements. The assumptions, risks and uncertainties include ~~the pace of growth of student enrollment,~~ our continued compliance with Title IV of the Higher Education Act, and the regulations thereunder, as well as regional accreditation standards and state regulatory requirements, rulemaking by the Department ~~of Education~~ and increased focus by the ~~U. S.~~U.S. Congress on for-profit education institutions, the pace of growth of student enrollment, competitive factors, risks associated with the opening of new campuses, risks associated with the offering of new educational programs and adapting to other changes, risks associated with the acquisition of existing educational institutions, risks relating to the timing of regulatory approvals, our ability to implement our growth strategy, the risk that the benefits of the merger with Capella Education Company, including expected synergies, may not be fully realized or may take longer to realize than expected, the risk that the combined company may experience difficulty integrating employees or operations, risks associated with the ability of our students to finance their education in a timely manner, and general economic and market conditions. Further information about these and other relevant risks and uncertainties may be found in Part I, “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K and ~~its~~in the Company’s other filings with the Securities and Exchange Commission, including in Part II, “Item 1A. Risk Factors” in the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017, and in this Quarterly Report on Form 10-Q.Commission. The Company undertakes no obligation to update or revise forward-looking ~~statements.~~

statements, except as required by law.

Additional Information

We maintain a website at http://~~www.strayereducation.com.~~www.strategiceducation.com. The information on our website is not incorporated by reference in this Quarterly Report on Form 10-Q, and our web address is included as an inactive textual reference only. We make available, free of charge through our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

Background and Overview

~~We are~~

Strategic Education, Inc. (“SEI,” “we”, “us” or “our”) is an education services ~~holding~~ company that ~~owns~~seeks to provide the most direct path between learning and employment through campus-based and online post-secondary education offerings and through programs to develop job-ready skills for high-demand markets. We operate primarily through our wholly-owned subsidiaries Strayer University ~~(the “University”~~and Capella University, both accredited post-secondary institutions of higher education. Our operations also include certain non-degree programs, mainly focused on software and application development.

Acquisition of Capella Education Company

On August 1, 2018, we completed our merger with Capella Education Company (“CEC”) pursuant to a merger agreement dated October 29, 2017. The merger solidifies our position as a national leader in education innovation, and provides scale that will enable greater investment in improving student academic and career outcomes while maintaining our focus on affordability. The merger is also expected to create significant cost synergies for us.

Pursuant to the merger, we issued 0.875 shares of our common stock for each issued and outstanding share of CEC common stock. Outstanding equity awards held by CEC employees and certain nonemployee directors of CEC were assumed by us and converted into comparable SEI awards at the exchange ratio. Outstanding equity awards held by CEC nonemployee directors who did not serve as directors of ~~January 13, 2016,~~SEI after completion of the ~~New York Code~~merger, and ~~Design Academy (“NYCDA”). The~~awards held by former employees of CEC who left before completion of the merger were settled upon completion of the merger as specified in the merger agreement.

Our financial results for any periods ended prior to August 1, 2018 do not include the financial results of CEC, and are therefore not directly comparable.

During the three and nine months ended September 30, 2019, we incurred $1.5 million and $11.7 million, respectively, in expenses related to the merger, primarily attributable to personnel and other integration costs.

As of September 30, 2019, SEI had the following reportable segments:

Strayer University Segment

Strayer University is an institution of higher ~~education which~~learning that offers undergraduate and graduate degree programs in business administration, accounting, information technology, education, health services administration, public administration, and criminal justice at 76 physical campuses, predominantly located in the eastern United States, and online. ~~NYCDA~~Strayer University is accredited by the Middle States Commission on Higher Education (“Middle States” or “Middle States Commission”), one of the seven regional collegiate accrediting agencies recognized by the Department. By offering its programs both online and in physical classrooms, Strayer University provides ~~non-degree courses~~its working adult students flexibility and convenience.

The Jack Welch Management Institute (“JWMI”) offers an executive MBA online and is a Top 25 Princeton Review ranked online MBA program.

In the third quarter, Strayer University’s enrollment increased 11.3% to 50,582 compared to 45,431 for the same period in 2018. New student enrollment for the period increased 4.1% and continuing student enrollment for the period increased 13.3%.

Capella University Segment

Capella University is an online post-secondary education company that offers a variety of doctoral, master’s and bachelor’s degree programs, primarily for working adults, in the following primary disciplines: public service leadership, nursing and health sciences, social and behavioral sciences, business and technology, education, and undergraduate studies. Capella University focuses on master's and doctoral degrees, with approximately 70% of its learners enrolled in a master’s or doctoral degree program. Capella University's academic offerings are built with competency-based curricula and are delivered in an online format that is convenient and flexible. Capella University designs its offerings to help working adult learners develop specific competencies they can apply in their workplace. Capella University is accredited by the Higher Learning Commission ("HLC"), one of the seven regional collegiate accrediting agencies recognized by the Department.

On April 19, 2019, the HLC issued formal notification that its Institutional Action Council affirmed the appropriateness of the Change of Control arising out of the merger and further affirmed Capella University’s continued adherence to HLC’s Eligibility Requirements and Criteria for Accreditation. In addition, HLC specifically confirmed Capella University’s shared service relationship with the Company satisfies HLC’s Core Components related to HLC’s Guidelines for Shared Services Arrangements.

In the third quarter, Capella University’s enrollment increased 1.7% to 38,451 compared to 37,822 for the same period in 2018. New student enrollment for the period increased 6.9% and continuing student enrollment for the period increased 0.4%.

Non-Degree Programs Segment

DevMountain is a software development program offering affordable, high-quality, leading-edge software coding education at multiple campus locations and online.

Hackbright Academy is a software engineering school for women. Its primary offering is an intensive 12-week accelerated software development program, together with placement services and coaching.

The New York Code and Design Academy is a New York City-based provider of web and application software development ~~primarily~~courses.

Sophia Learning is an innovative learning company which leverages technology to support self-paced learning, including courses eligible for transfer into credit at ~~campuses~~over 2,000 colleges and universities.

We believe we have the right operating strategies in ~~New York City~~place to provide the most direct path between learning and ~~Philadelphia, PA. NYCDA’s results of operations are included~~employment for our students. We focus on innovation continually to differentiate ourselves in our ~~results from the acquisition date.~~

~~Most~~markets and drive growth by supporting student success, producing affordable degrees, optimizing our comprehensive marketing strategy, serving a broader set of our ~~revenue comes from~~students’ professional needs, and establishing new growth platforms. Technology and the ~~University, which derives approximately 96%~~talent of ~~its revenue from tuition for educational programs, whether delivered~~our faculty and employees enable these strategies. We believe these strategies and enablers will allow us to continue to deliver high quality, affordable education, resulting in person at a physical campus or delivered online. The academic year of the University is divided into four quarters, which approximately coincide with the four quarters of the calendar year. Students at the University and at NYCDA make payment arrangements for the tuition for each course at the time of enrollment. Tuition revenue is recognized ratablycontinued growth over the ~~course~~long-term. We will continue to invest in these enablers to strengthen the foundation and future of ~~instruction. If a student withdraws from a course prior~~our business. We also believe our enhanced scale and capabilities allow us to ~~completion,~~continue to focus on innovative cost and revenue synergies, while improving the University refunds a portion of the tuition depending on when the withdrawal occurs. Tuition revenue is shown net of any refunds, withdrawals, corporate discounts, employee tuition discounts and scholarships. The University also derives revenue from other sources such as textbook-related income, certificate revenue, certain academic fees, licensing revenue, and other income, which are all recognized when earned.

~~Tuition receivable and deferred revenue for~~value provided to our students are recorded upon the start of the course, which for the University is the start of the academic term. Because the University’s academic quarters coincide with the calendar quarters, at the end of the fiscal quarter (and academic term), tuition receivable generally represents amounts due from students for educational services already provided and deferred revenue generally represents advance payments for academic services to be provided in the future. Based upon past experience and judgment, the University establishes an allowance for doubtful accounts with respect to accounts

students.

~~Table of Contents~~

receivable. Any uncollected account more than one year past due is charged against the allowance. Accounts less than one year past due are reserved according to the length of time the balance has been outstanding. In establishing reserve amounts, we also consider the status of students as to whether or not they are currently enrolled for the next term, as well as the likelihood of recovering balances that have previously been written off, based on historical experience. Bad debt expense as a percentage of revenues for the third quarter of 2016 and 2017 was 3.8% and 4.9%, respectively.

~~Below is a description of the nature of the consolidated costs included in our operating expense categories:~~

~~Instruction and educational support expenses~~ generally contain items of expense directly attributable to educational activities. This expense category includes salaries and benefits of faculty and academic administrators, as well as administrative personnel who support faculty and students. Instruction and educational support expenses also include costs of educational supplies and facilities, including rent for campus facilities, certain costs of establishing and maintaining computer laboratories and all other physical plant and occupancy costs, with the exception of costs attributable to the corporate offices. Bad debt expense incurred on delinquent student account balances is also included in instruction and educational support expenses.

~~Marketing expenses~~ ~~include the costs of advertising and production of marketing materials and related personnel costs.~~

~~Admissions advisory expenses~~ ~~include salaries, benefits and related costs of personnel engaged in admissions.~~

~~General and administration expenses~~ include salaries and benefits of management and employees engaged in accounting, human resources, legal, regulatory compliance, and other corporate functions, along with the occupancy and other related costs attributable to such functions.

Investment income consists primarily of earnings and realized gains or losses on investments and interest expense consists of interest incurred on our outstanding borrowings, unused revolving credit facility fees, and amortization of deferred financing costs.

Critical Accounting Policies and Estimates

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates and judgments related to its allowance for doubtful accounts; income tax provisions; the useful lives of property and ~~equipment;~~equipment and intangible assets; redemption rates for scholarship ~~programs;~~programs and valuation of contract liabilities; fair value of future contractual operating lease obligations for facilities that have been closed; incremental borrowing rates; valuation of deferred tax assets, goodwill, and intangible assets; forfeiture rates and achievability of performance targets for stock-based compensation plans; and accrued expenses. Management bases its estimates and judgments on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments regarding the carrying values of assets and liabilities that are not readily apparent from other sources. Management regularly reviews its estimates and judgments for reasonableness and may modify them in the future. Actual results may differ from these estimates under different assumptions or conditions.

Management believes that the following critical accounting policies are its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Revenue recognition — Like many traditional institutions, ~~the~~Strayer University ~~offers its~~and Capella University offer educational programs primarily on a quarter system having four academic terms, which generally coincide with our quarterly financial reporting periods. ~~NYCDA’s revenues are recognized as services are provided, generally ratably over the length of a course.~~ Approximately 96% of ~~the University’s~~our revenues during the nine months ended September 30, ~~2017~~2019 consisted of tuition revenue. Capella University offers monthly start options for new students, who then transition to a quarterly schedule. Capella University also offers its FlexPath program, which allows students to determine their 12-week billing session schedule after they complete their first course. Tuition revenue for all students is recognized ratably over the course of instruction as the ~~University provides~~Universities and the schools offering non-degree programs provide academic services, ~~in a given term,~~ whether delivered in person at a physical campus or online. Tuition revenue is shown net of any refunds, withdrawals, corporate discounts, scholarships, and employee tuition discounts. The ~~University~~Universities also ~~derives~~derive revenue from other sources such as textbook-related income, certificate revenue, certain academic fees, licensing revenue, and other income, which are all recognized when earned. In accordance with ASC 606, materials provided to students in connection with their enrollment in a course are recognized as revenue when control of those materials transfers to the student. At the start of each academic term or program, a contract liability ~~(deferred revenue)~~ is recorded for academic services to be provided, and a tuition receivable is recorded for

~~Table of Contents~~

the portion of the tuition not paid in advance. Any cash received prior to the start of an academic term or program is recorded as ~~deferred revenue.~~

a contract liability.

Students of the ~~University~~Universities finance their education in a variety of ways, and historically about three quarters of our students have participated in one or more financial aid programs provided through Title IV of the Higher Education Act. In addition, many of our working adult students finance their own education or receive full or partial tuition reimbursement from their employers. Those students who are veterans or active duty military personnel have access to various additional government-funded educational benefit programs.

A typical class is offered in weekly increments over a ~~ten-week~~six- to twelve-week period, depending on the University and course type, and is followed by an exam. Students who withdraw from a course may be eligible for a refund of tuition charges based on the timing of the withdrawal. We use the student’s last date of attendance for this purpose. Student attendance is based on physical presence in class for on-ground classes. For online classes, attendance consists of logging into one’s course shell and performing an academically-related activity (e.g., engaging in a discussion post or taking a quiz).

If a student withdraws from a course prior to completion, a portion of the tuition may be refundable depending on when the withdrawal occurs. Our specific refund policies vary across Universities and non-degree programs. For students attending Strayer University, our refund policy typically permits students who complete less than half of a course to receive a partial refund of tuition for that course. For learners attending Capella University, our refund policy varies based on course format. GuidedPath learners are allowed a 100% refund through the first five days of the course, a 75% refund from six to twelve days, and 0% refund for the remainder of the period. FlexPath learners receive a 100% refund through the 12th calendar day of the course for their first billing session only and a 0% refund after that date and for all subsequent billing sessions. Refunds reduce the tuition revenue that otherwise would have ~~otherwise~~ been recognized for that student. Since the ~~University’s~~Universities’ academic terms coincide with our financial reporting periods for most programs, nearly all refunds are processed and recorded in the same quarter as the corresponding revenue. For certain programs where courses may overlap a quarter-end date, the Company estimates a refund rate and does not recognize the related revenue until the uncertainty related to the refund is resolved. The ~~amount~~portion of tuition revenue refundable to students may vary based on the student’s state of residence.

For ~~undergraduate~~ students who withdraw from all their courses during the quarter of instruction, we reassess collectibility of tuition and fees for revenue recognition purposes. In addition, we cease revenue recognition when a student fully withdraws from all of his or her courses in the academic term. Tuition charges billed in accordance with our billing schedule may be greater than the pro rata revenue amount, but the additional amounts are not recognized as revenue unless they are collected in ~~cash.~~

cash and the term is complete.

For students who receive funding under Title IV and withdraw, funds are subject to return provisions as defined by the Department of Education. The University is responsible for returning Title IV funds to the Department ~~of Education~~ and then may seek payment from the withdrawn student of prorated tuition or other amounts charged to him or her. Loss of financial aid eligibility during an academic term is rare and would normally coincide with the student’s withdrawal from the institution. As discussed above, we cease revenue recognition upon a student’s withdrawal from all of his or her classes in an academic ~~term.~~

term until cash is received and the term is complete.

New students at Strayer University registering in credit-bearing courses in any undergraduate program for the summer 2013 term (fiscal third quarter) and subsequent terms qualify for the Graduation Fund, whereby qualifying students earn tuition credits that are redeemable in the final year of a student’s course of study if he or she successfully remains in the program. Students must meet all of the University’s admission requirements and not be eligible for any previously offered scholarship program. Our employees and their dependents are not eligible for the program. To maintain eligibility, students must be enrolled in a bachelor’s degree program. Students who have more than one consecutive term of non-attendance lose any Graduation Fund credits earned to date, but may earn and accumulate new credits if the student is reinstated or readmitted by the University in the future. In their final academic year, qualifying students will receive one free course for every three courses that were successfully ~~completed. Revenue and the value of the benefit earned by students participating~~completed in prior years. The performance obligation associated with free courses that may be redeemed in the ~~Graduation Fund~~future is ~~recognized~~valued based on a systematic and rational allocation of the cost of honoring the benefit earned to each of the underlying revenue transactions that result in progress by the student toward earning the benefit. The estimated value of awards under the Graduation Fund that will be recognized in the future is based on historical experience of students’ persistence in completing their course of study and earning a ~~degree.~~degree and the tuition rate in effect at the time it was associated with the transaction. Estimated redemption rates of eligible students vary based on their term of enrollment. As of September 30, ~~2017,~~2019, we had deferred ~~$34.4~~$46.7 million for estimated redemptions earned under the Graduation Fund, as compared to ~~$29.5~~$43.3 million at December 31, ~~2016.~~2018. Each quarter, we assess our methodologies and assumptions underlying our estimates for persistence and estimated redemptions based on actual experience. To date, any adjustments to our estimates have not been material. However, if actual persistence or redemption rates change, adjustments to the reserve may be necessary and could be material.

Tuition receivable — We record estimates for our allowance for doubtful accounts for tuition receivable from students primarily based on our historical collection rates by age of receivable, net of recoveries, and consideration of other relevant factors. Our experience is that payment of outstanding balances is influenced by whether the student returns to the institution, as we require students to make payment arrangements for their outstanding balances prior to enrollment. Therefore, we monitor outstanding tuition receivable balances through subsequent terms, increasing the reserve on such balances over time as the likelihood of returning to the institution diminishes and our historical experience indicates collection is less likely. We periodically assess our

~~Table of Contents~~

methodologies for estimating bad debts in consideration of actual experience. If the financial condition of our students were to deteriorate, resulting in evidence of impairment of their ability to make required payments for tuition payable to us, additional allowances or write-offs may be required. For the third quarter of ~~2017,~~2019, our bad debt expense was ~~4.9%~~5.0% of revenue, compared to ~~3.8%~~6.1% for the same period in ~~2016.~~2018. A change in our allowance for doubtful accounts of 1% of gross tuition receivable as of September 30, ~~2017~~2019 would have changed our income from operations by approximately ~~$0.4~~$0.8 million.

~~Accrued lease~~

Goodwill and ~~related costs~~intangible assets — ~~We estimate potential sublease income~~Goodwill represents the excess of the purchase price of an acquired business over the amount assigned to the assets acquired and ~~vacancy periods~~liabilities assumed. Indefinite-lived intangible assets, which include trade names, are recorded at fair market value on their acquisition date. Goodwill and indefinite-lived intangible assets are assessed at least annually for ~~space that is not~~impairment. Through our acquisition of CEC in ~~use, adjusting our estimates when~~the third quarter of 2018, we had significant additions to goodwill and tradename intangible assets. The acquired goodwill was allocated to the Strayer University and Capella University reporting units. No events or circumstances ~~change. If our estimates change or if we enter into subleases at rates that are substantially different than our current estimates, we will adjust our liability for lease~~occurred in the three and ~~related costs. During the~~ nine months ended September 30, ~~2017~~2019 to indicate an impairment to goodwill or indefinite-lived intangible assets. Accordingly, no impairment charges related to goodwill or indefinite-lived intangible assets were recorded during the three and ~~2016, we reduced~~nine month periods ended September 30, 2019.

Finite-lived intangible assets that are acquired in business combinations are recorded at fair value on their acquisition dates and are amortized on a straight-line basis over the estimated useful life of the asset. Finite-lived intangible assets consist of student relationships. We review our ~~liability~~finite-lived intangible assets for ~~leases by approximately $0.3 million~~impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are not recoverable, a potential impairment loss is recognized to the extent the carrying amount of the assets exceeds the fair value of the assets. No impairment charges related to finite-lived intangible assets were recorded during the three and ~~$2.0 million, respectively.~~

nine month periods ended September 30, 2019.

Other estimates — We record estimates for ~~contingent consideration,~~ certain of our accrued expenses, and income tax liabilities. We estimate the useful lives of our property and equipment ~~assess goodwill~~ and intangible assets ~~for impairment,~~ and periodically review our assumed forfeiture rates and ability to achieve performance targets for stock-based awards and adjust them as necessary. Should actual results differ from our estimates, revisions to our ~~contingent consideration,~~ accrued expenses, carrying amount of goodwill and intangible assets, stock-based compensation expense, and income tax liabilities may be required.

Results of Operations

As discussed above, we completed our merger with CEC on August 1, 2018. Our results of operations for the three and nine months ended September 30, 2019 include the results of CEC, but the results of operations for the three and nine months ended September 30, 2018 do not include the financial results of CEC prior to August 1, 2018. Accordingly, the financial results of each period presented are not directly comparable. This discussion will highlight changes largely in the Strayer University segment, as those results are included in full in each period.

In the third quarter of ~~2017,~~2019, we generated ~~$108.5~~$241.7 million in revenue ~~a 6% increase~~ compared to ~~2016, principally due to a 7% increase~~$160.9 million in ~~total enrollment and partially offset by a 1% decline in revenue per student. Income~~2018. Our income from operations was ~~$8.2~~$20.0 million for the third quarter of ~~2017. During~~2019 compared to a loss from operations of $57.1 million in 2018 due primarily to the ~~third~~inclusion of a full quarter of ~~2017, we recorded approximately $2.1 million~~CEC's results in ~~net benefits~~our consolidated results of operations as well as higher revenues due to enrollment growth and lower merger related ~~to a reduction in the value of contingent consideration payable under the NYCDA acquisition, partially offset by nonrecurring personnel~~ costs associated with a one-time staff reduction program. Income from operations for the third quarter of 2016 was $4.8 million, which includes a $0.2 million noncash benefit to reduce our liability for leases on facilities no longer in use.and impairment charges. Net income in the third quarter of ~~2017~~2019 was ~~$6.2~~$16.7 million ~~including approximately $2.4~~ compared to net loss of $52.8 million for the same period in 2018. Diluted earnings per share was $0.75 compared to diluted loss per share of $2.97 for the same period in 2018. For the nine months ended September 30, 2019, we generated $733.4 million in ~~after-tax benefits from the nonrecurring adjustments described above,~~revenue, compared to ~~$2.9~~$392.1 million for the same period in ~~2016, which reflected approximately $0.1~~2018. Our income from operations was $73.3 million ~~in after-tax benefits from~~for the ~~nonrecurring adjustments described above. Diluted earnings per share was $0.56~~nine months ended September 30, 2019 compared to ~~$0.27~~a loss from operations of $41.6 million for the same period in ~~2016. Diluted~~2018. Net income was $52.6 million for the nine months ended September 30, 2019 compared to net loss of $38.1 million for the same period in 2018, and diluted earnings per share was $2.38 in the nine months ended September 30, 2019 compared to diluted loss per share of $2.90 for the ~~third quarter~~same period in 2018.

In the accompanying analysis of ~~2017~~financial information for 2019 and ~~2016 was $0.34~~2018, we use certain financial measures including Adjusted Income from Operations, Adjusted Net Income, and ~~$0.25~~Adjusted Diluted Earnings per ~~share, respectively, after~~Share that are not required by or prepared in accordance with accounting principles generally accepted in the ~~nonrecurring adjustments~~

~~Key enrollment trends~~United States of America (“GAAP”). These measures, which are considered “non-GAAP financial measures” under SEC rules, are defined by ~~quarter~~us to exclude the following:

a purchase accounting adjustment to record Capella University contract liabilities at fair value as a result of the Company's merger with Capella Education Company,

amortization and depreciation expense related to intangible assets and software assets acquired through the Company’s merger with Capella Education Company,

transaction and integration costs associated with the Company’s merger with Capella Education Company,

impairment charges for ~~the University were as follows:~~

~~Enrollment~~

~~% Change vs Prior Year~~

~~Table of Contents~~

~~Since 2013, we have introduced a number of initiatives in response~~intangible assets related to the ~~variability in~~Company's acquisition of the New York Code and Design Academy,

income from partnership and other investments that are not part of our ~~enrollment. Recognizing that affordability is~~core operations, and

discrete tax adjustments related to stock-based compensation and other adjustments.

When considered together with GAAP financial results, we believe these measures provide management and investors with an ~~important factor in a prospective student’s decision to seek a college degree, we reduced~~additional understanding of our business and operating results, including underlying trends associated with the University undergraduate tuition for new students by 20% beginning in our 2014 winter academic term. We also introduced the Graduation Fund in mid-2013, whereby qualifying students can receive one free course for every three courses successfully completed. The free coursesCompany’s ongoing operations.

Non-GAAP financial measures are ~~redeemable~~not defined in the ~~student’s final academic year. In 2015, we launched Strayer@Work, which works~~same manner by all companies and may not be comparable with ~~Fortune 1000 companies~~other similarly titled measures of other companies. Non-GAAP financial measures may be considered in addition to, ~~structure customized education and training programs~~but not as a substitute for ~~their employees, often with significant discounts~~or superior to, ~~our published tuition rates. In January 2016, we acquired NYCDA, which charges variable tuition by program based on~~GAAP results. A reconciliation of these measures to the ~~number of hours of instruction. These initiatives had a net negative impact on revenue per student, which declined 1% in 2016, and~~most directly comparable GAAP measures is ~~expected to decrease slightly in 2017, by approximately 2%.~~

~~Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016~~

~~Enrollment. Total enrollments at the University for the summer term 2017 increased to 41,679 students,~~provided below.

Adjusted income from ~~38,813 for the summer term 2016. New student enrollments increased by 7%, and continuing student enrollments increased by 8%.~~

~~Revenues. Revenues increased 6% to $108.5~~operations was $36.9 million in the third quarter of ~~2017 from $102.2~~2019 compared to $22.1 million in 2018. Adjusted net income was $28.4 million in the third quarter of ~~2016, principally due~~2019 compared to ~~total~~$16.9 million in 2018, and adjusted diluted earnings per share was $1.28 in the third quarter of 2019 compared to $0.92 in 2018. Adjusted income from operations was $131.3 million in the nine months ended September 30, 2019 compared to $52.0 million for the same period in 2018. Adjusted net income was $100.3 million in the nine months ended September 30, 2019 compared to $40.7 million for the same period in 2018, and adjusted diluted earnings per share was $4.54 in the nine months ended September 30, 2019 compared to $2.97 for the same period in 2018.

The tables below reconcile our reported results of operations to adjusted results (amounts in thousands, except per share data):

Reconciliation of Reported to Adjusted Results of Operations for the three months ended September 30, 2019



			Non-GAAP Adjustments
	As Reported (GAAP)		Contract liability adjustment⁽¹⁾		Amortization of intangible assets⁽²⁾		Merger and integration costs⁽³⁾		Impairment of intangible assets⁽⁴⁾		Income from other investments⁽⁵⁾			Tax adjustments⁽⁶⁾			As Adjusted (Non-GAAP)
Income (loss) from operations	$	20,000	$	—	$	15,417	$	1,500	$	—	$	—		$	—		$	36,917
Other income, net	3,243		—		—		—		—		(706		)	—			2,537
Income (loss) before income taxes	23,243		—		15,417		1,500		—		(706		)	—			39,454
Provision (benefit) for income taxes	6,551		—		—		—		—		—			4,496			11,047
Net income (loss)	$	16,692	$	—	$	15,417	$	1,500	$	—	$	(706	)	$	(4,496	)	$	28,407
Earnings per share:
Basic	$	0.77															$	1.30
Diluted	$	0.75															$	1.28
Weighted average shares outstanding:
Basic	21,806																21,806
Diluted	22,129																22,129

Reconciliation of Reported to Adjusted Results of Operations for the three months ended September 30, 2018



				Non-GAAP Adjustments
	As Reported (GAAP)			Contract liability adjustment⁽¹⁾		Amortization of intangible assets⁽²⁾		Merger and integration costs⁽³⁾		Impairment of intangible assets⁽⁴⁾		Income from other investments⁽⁵⁾		Tax adjustments⁽⁶⁾			As Adjusted (Non-GAAP)
Income (loss) from operations	$	(57,127	)	$	26,214	$	10,278	$	29,620	$	13,119	$	—	$	—		$	22,104
Other income, net	1,110			—		—		—		—		—		—			1,110
Income (loss) before income taxes	(56,017		)	26,214		10,278		29,620		13,119		—		—			23,214
Provision (benefit) for income taxes	(3,236		)	—		—		—		—		—		9,527			6,291
Net income (loss)	$	(52,781	)	$	26,214	$	10,278	$	29,620	$	13,119	$	—	$	(9,527	)	$	16,923
Earnings (loss) per share:
Basic	$	(2.97	)														$	0.95
Diluted	$	(2.97	)														$	0.92
Weighted average shares outstanding:
Basic	17,799																17,799
Diluted	17,799																18,480

Reconciliation of Reported to Adjusted Results of Operations for the nine months ended September 30, 2019



			Non-GAAP Adjustments
	As Reported (GAAP)		Contract liability adjustment⁽¹⁾		Amortization of intangible assets⁽²⁾		Merger and integration costs⁽³⁾		Impairment of intangible assets⁽⁴⁾		Income from other investments⁽⁵⁾			Tax adjustments⁽⁶⁾			As Adjusted (Non-GAAP)
Income (loss) from operations	$	73,319	$	—	$	46,251	$	11,698	$	—	$	—		$	—		$	131,268
Other income, net	10,695		—		—		—		—		(3,334		)	—			7,361
Income (loss) before income taxes	84,014		—		46,251		11,698		—		(3,334		)	—			138,629
Provision (benefit) for income taxes	31,413		—		—		—		—		—			6,907			38,320
Net income (loss)	$	52,601	$	—	$	46,251	$	11,698	$	—	$	(3,334	)	$	(6,907	)	$	100,309
Earnings per share:
Basic	$	2.42															$	4.62
Diluted	$	2.38															$	4.54
Weighted average shares outstanding:
Basic	21,694																21,694
Diluted	22,096																22,096

Reconciliation of Reported to Adjusted Results of Operations for the nine months ended September 30, 2018



				Non-GAAP Adjustments
	As Reported (GAAP)			Contract liability adjustment⁽¹⁾		Amortization of intangible assets⁽²⁾		Merger and integration costs⁽³⁾		Impairment of intangible assets⁽⁴⁾		Income from other investments⁽⁵⁾		Tax adjustments⁽⁶⁾			As Adjusted (Non-GAAP)
Income (loss) from operations	$	(41,615	)	$	26,214	$	10,278	$	37,791	$	19,304	$	—	$	—		$	51,972
Other income, net	1,846			—		—		—		—		—		—			1,846
Income (loss) before income taxes	(39,769		)	26,214		10,278		37,791		19,304		—		—			53,818
Provision (benefit) for income taxes	(1,643		)	—		—		—		—		—		14,749			13,106
Net income (loss)	$	(38,126	)	$	26,214	$	10,278	$	37,791	$	19,304	$	—	$	(14,749	)	$	40,712
Earnings (loss) per share:
Basic	$	(2.90	)														$	3.10
Diluted	$	(2.90	)														$	2.97
Weighted average shares outstanding:
Basic	13,141																13,141
Diluted	13,141																13,724


(1)	Reflects a purchase accounting adjustment to record Capella University contract liabilities at fair value as a result of the Company's merger with CEC.


(2)	Reflects amortization and depreciation expense of intangible assets and software assets acquired through the Company’s merger with CEC.


(3)	Reflects transaction and integration charges associated with the Company's merger with CEC.


(4)	Reflects impairment of goodwill and intangible assets related to the Company's acquisition of the New York Code and Design Academy.


(5)	Reflects income recognized from the Company's investments in partnership interests and other investments.


(6)	Reflects tax impacts of the adjustments described above and discrete tax adjustments related to stock-based compensation and other adjustments, utilizing an adjusted effective tax rate of 28.0% and 27.6% for the three and nine months ended September 30, 2019 and an adjusted effective tax rate of 27.1% and 24.4% for the three and nine months ended September 30, 2018, respectively.

Three Months Ended September 30, 2019 Compared to the Three Months Ended September 30, 2018

Revenues. The increase in consolidated revenues compared to the same period in the prior year was primarily related to the inclusion of CEC revenue for the full three month period. In the Strayer University segment for the three months ended September 30, 2019, enrollment grew 11.3% to 50,582 from 45,431 in the prior year. Revenue grew 11.7% to $127.8 million compared to $114.5 million in 2018 as a result of the increase in enrollment. Future enrollment and revenue growth ~~of 7%, partially offset~~may be impacted negatively by a ~~decline~~recent change in the tuition benefits policy of one of Strayer University’s largest corporate partners. Capella University segment revenue ~~per student~~was $110.5 million compared to $43.8 million in the prior year, which reflects activity after the completion of ~~1%. The decline~~the CEC merger on August 1, 2018, and includes a $26.2 million purchase accounting reduction related to contract liabilities acquired in ~~revenue per student is largely attributable to a new pricing structure which was implemented for~~ the first quarter of 2014 which reduced tuition for new undergraduate students by approximately 20%, and gave eligible students access to the Graduation Fund. Revenues for undergraduate students increased 11%merger. Non-Degree Programs segment revenues were $3.4 million in the three months ended September 30, ~~2017, driven by an~~2019, compared to $2.7 million in the three months ended September 30, 2018. The increase in ~~total undergraduate enrollment~~Non-Degree Programs revenues for the three month period was primarily attributable to incremental revenues generated from the operations of 13%, partially offset by a decline in revenue per student of 2%. We expect this decline in revenue per student to continue at the undergraduate level as we enroll more new undergraduate students. For graduate students, revenues decreased 5% in 2017, driven by a decline in total graduate enrollment of 6%.

~~Instruction~~Hackbright, DevMountain, and ~~educational support expenses.~~ ~~Instruction and educational support expenses increased $0.7 million to $57.0 million~~Sophia Learning, which were acquired in the ~~third quarter of 2017 from $56.3~~CEC merger.

Instructional and support costs. Consolidated instructional and support costs increased to $132.5 million, compared to $103.1 million in the ~~third quarter of 2016,~~same period in the prior year, principally due to ~~increases in bad debt expense~~the inclusion of instructional and ~~nonrecurring personnel~~support costs ~~associated with a one-time staff reduction program, offset by a noncash adjustment to reduce the value~~ of ~~contingent consideration related to our acquisition of NYCDA. Instruction~~CEC. Consolidated instructional and ~~educational~~ support ~~expenses~~costs as a percentage of revenues decreased to ~~52.5%~~54.8% in the third quarter of ~~2017~~2019 from ~~55.1%~~64.0% in the third quarter of ~~2016.~~

~~Marketing~~2018.

General and administration expenses. ~~Marketing~~Consolidated general and administration expenses increased ~~$1.4 million, or 6%,~~ to ~~$26.8~~$72.3 million in the third quarter of ~~2017 from $25.4~~2019 compared to $62.0 million in the ~~third quarter of 2016,~~prior year, principally due to the inclusion of general and administration expenses of CEC, as well as increased investments in branding ~~initiatives. Marketing expenses as a percentage of revenues decreased to 24.7% in 2017 from 24.9% in 2016.~~

~~Admissions advisory expenses~~. Admissions advisory expenses increased $0.6 million, or 13%, to $5.3 million in the third quarter of 2017 from $4.7 million in the third quarter of 2016 due primarily to increased personnel costs. Admissions advisory expenses as a percentage of revenues increased to 4.9% in the third quarter of 2017 from 4.6% in the third quarter of 2016.

~~General~~initiatives and ~~administration expenses~~. General and administration expenses increased $0.2 million to $11.2 million in the third quarter of 2017 from $11.0 million in the third quarter of 2016, related primarily to increased personnel and corporate compliance costs. Generalpartnerships with brand ambassadors. Consolidated general and administration expenses as a percentage of revenues decreased to ~~10.3%~~29.9% in the third quarter of ~~2017~~2019 from ~~10.7%~~38.5% in the third quarter of ~~2016.~~

~~Income from operations~~2018.

Amortization of intangible assets. ~~Income from operations increased $3.4 million, or 70%,~~Amortization expense related to ~~$8.2~~intangible assets acquired in the merger with CEC was $15.4 million in the third quarter of ~~2017~~2019 compared to $10.3 million in 2018.

Merger and integration costs. Merger and integration costs were $1.5 million in the third quarter of 2019 compared to $29.6 million in 2018, and reflect expenses for legal, accounting, integration support services and severance costs incurred in connection with the merger with CEC.

Impairment of intangible assets. In the three months ended September 30, 2018, we recorded a goodwill impairment loss of $11.1 million and an intangible asset impairment loss of $2.0 million based on an impairment analysis performed during the period related to the Company's acquisition of the New York Code and Design Academy.

Income (loss) from ~~$4.8~~operations. Income from operations was $20.0 million in the third quarter of 2019 compared to a loss from operations of $57.1 million in the third quarter of ~~2016.~~

~~Investment~~2018, principally due to the inclusion of a full quarter of CEC's results in our consolidated results of operations as well as higher revenues due to enrollment growth and lower merger related costs and impairment charges.

Other income ~~and interest expense~~. ~~Investment~~Other income increased to ~~$0.3~~$3.2 million in the third quarter of ~~2017~~2019 compared to ~~$0.1~~$1.1 million in the third quarter of ~~2016~~2018, as a result of the inclusion of $0.7 million of investment income from partnership interests acquired in the CEC merger and other investments, higher yields on money markets and marketable securities, and an increase in our cash balances. ~~Interest expense was $0.2 million in the third quarter of both 2017 and 2016.~~ We ~~have $150.0~~had $250.0 million available under our amended revolving credit facility and no borrowings outstanding as of September 30, ~~2017.~~

2019.

Provision (benefit) for income ~~taxes~~.taxes. Income tax expense was ~~$2.1~~$6.6 million in the third quarter of ~~2017,~~2019, compared to ~~$1.9~~a benefit for income taxes of $3.2 million in the third quarter of ~~2016.~~2018. Our effective tax rate for the quarter was ~~25.6% and was favorably impacted by~~28.2%, compared to 5.8% for the ~~reduction~~same period in ~~the value of contingent consideration related to the NYCDA acquisition, which is not subject to income tax. We expect our effective~~2018. The tax rate ~~including the effect of tax benefits~~in 2018 included certain nondeductible charges associated with the ~~vesting~~merger and for the impairment of ~~restricted stock and the impacts of the contingent consideration~~NYCDA goodwill. The tax rate for both periods reflects favorable discrete adjustments, ~~referenced above,~~primarily related to ~~be approximately 34.0% for 2017.~~

tax windfalls recognized through share-based payment arrangements.

~~Table of Contents~~

Net income (loss). Net income ~~increased $3.3 million to $6.2~~was $16.7 million in the third quarter of ~~2017 from $2.9~~2019 compared to net loss of $52.8 million in the third quarter of ~~2016~~2018 due to the factors discussed above.

Nine Months Ended September 30, ~~2017~~2019 Compared to the Nine Months Ended September 30, ~~2016~~

~~Enrollment. Average enrollments at the University increased 6% to 42,826 students for the nine months ended September 30, 2017~~2018

Revenues. The increase in consolidated revenues compared to ~~40,238 students for~~ the same period in ~~2016.~~

~~Revenues. Revenues increased 4%~~the prior year was primarily related to ~~$336.1~~the inclusion of CEC revenue. In the Strayer University segment, revenues grew 12.0% to $384.8 million in the nine months ended September 30, ~~2017~~2019 from ~~$321.8~~$343.6 million in the nine months ended September 30, ~~2016, principally~~2018, primarily due to ~~total~~ enrollment growth. Future enrollment and revenue growth ~~of 6%, partially offset~~may be impacted negatively by a ~~decline~~recent change in the tuition benefits policy of one of Strayer University’s

largest corporate partners. Capella University segment revenue ~~per student~~was $337.4 million compared to $43.8 million in the prior year, which reflects activity after the completion of ~~2%. The decline~~the CEC merger on August 1, 2018, and includes a $26.2 million purchase accounting reduction related to contract liabilities acquired in ~~revenue per student is largely attributable to a new pricing structure which was implemented for~~ the first quarter of 2014 which reduced tuition for new undergraduate students by approximately 20%, and gave eligible students access to the Graduation Fund. Revenues for undergraduate students increased 10%merger. Non-Degree Programs segment revenues were $11.1 million in the nine months ended September 30, 2017, driven by an increase in total undergraduate enrollment of 13%, partially offset by a decline in revenue per student of 3%. We expect this decline in revenue per student to continue at the undergraduate level as we enroll more new undergraduate students. For graduate students, revenues decreased 7% in 2017, driven by a decline in total graduate enrollment of 8%, partially offset by an increase in revenue per student of 1%. The increase in graduate revenue per student was due primarily to increased average tuition per class2019, compared to ~~2016.~~

~~Instruction and educational support expenses.~~ ~~Instruction and educational support expenses increased $3.9~~$4.6 million ~~or 2%, to $180.1 million~~ in the nine months ended September 30, ~~2017~~2018. The increase in revenues for the nine month period was primarily attributable to incremental revenues generated from ~~$176.2~~the operations of Hackbright, DevMountain, and Sophia Learning, which were acquired in the CEC merger.

Instructional and support costs. Consolidated instructional and support costs increased to $397.3 million in the nine months ended September 30, ~~2016. The increase primarily resulted~~2019 from ~~increases~~$240.8 million in ~~personnel~~the nine months ended September 30, 2018, principally due to the inclusion of instructional and support costs ~~associated~~of CEC. Consolidated instructional and support costs as a percentage of revenues decreased to 54.2% in the nine months ended September 30, 2019 from 61.4% in the nine months ended September 30, 2018.

General and administration expenses. Consolidated general and administration expenses increased to $204.8 million in the nine months ended September 30, 2019 from $125.5 million in the nine months ended September 30, 2018, principally due to the inclusion of general and administration expenses of CEC, as well as increased investments in branding initiatives and partnerships with ~~a one-time staff reduction program~~brand ambassadors. Consolidated general and ~~increased bad debt expense, offset by adjustments to reduce the value of contingent consideration related to our acquisition of NYCDA. Instruction and educational support~~administration expenses as a percentage of revenues decreased to ~~53.6%~~27.9% in the nine months ended September 30, ~~2017~~2019 from ~~54.7%~~32.0% in the nine months ended September 30, ~~2016.~~

~~Marketing expenses~~2018.

Amortization of intangible assets. ~~Marketing expenses increased $3.3~~Amortization expense related to intangible assets acquired in the merger with CEC was $46.3 million ~~or 5%, to $64.7 million~~ in the nine months ended September 30, ~~2017 from $61.4~~2019 compared to $10.3 million for the same period in 2018.

Merger and integration costs. Merger and integration costs were $11.7 million in the nine months ended September 30, ~~2016, principally due~~2019 compared to ~~increased investments in branding initiatives. Marketing expenses as a percentage of revenues increased to 19.3%~~$37.8 million in the nine months ended September 30, ~~2017~~2018, and reflect expenses for legal, accounting, integration support services and severance costs incurred in connection with the merger with CEC.

Impairment of intangible assets. In the nine months ended September 30, 2018 we recorded a goodwill impairment loss of $13.9 million and an intangible asset impairment loss of $5.4 million based on an impairment analysis performed during the period related to the Company's acquisition of the New York Code and Design Academy.

Income (loss) from ~~19.1%~~operations. Income from operations was $73.3 million in the nine months ended September 30, ~~2016.~~

~~Admissions advisory expenses. Admissions advisory expenses increased $1.6~~2019 compared to loss from operations of $41.6 million ~~or 12%, to $14.8 million~~ in the nine months ended September 30, ~~2017 from $13.2~~2018, principally due to the inclusion of CEC in our consolidated results of operations.

Other income. Other income increased to $10.7 million in the nine months ended September 30, ~~2016, primarily due~~2019 compared to ~~increased personnel costs. Admissions advisory expenses as a percentage of revenues increased to 4.4%~~$1.8 million in the nine months ended September 30, ~~2017 from 4.1% in the nine months ended September 30, 2016.~~

~~General and administration expenses~~. General and administration expenses increased $2.8 million to $36.0 million in the nine months ended September 30, 2017 from $33.2 million in the nine months ended September 30, 2016. During the nine months ended September 30, 2016, we recorded a $2.0 million noncash benefit associated with adjustments to our reserve for leases on facilities no longer in use. General and administration expenses as a percentage of revenues increased to 10.7% in the nine months ended September 30, 2017 from 10.3% in the nine months ended September 30, 2016.

~~Income from operations. Income from operations increased $2.7 million, or 7%, to $40.5 million in the nine months ended September 30, 2017 from $37.8 million in the nine months ended September 30, 2016.~~

~~Investment income and interest expense.~~ ~~Investment income increased to $0.7 million in the nine months ended September 30, 2017 compared to $0.3 million in the nine months ended September 30, 2016,~~2018, as a result of the inclusion of $3.3 million of investment income from partnership interests acquired in the CEC merger and other investments, higher yields on money markets and marketable securities, and an increase in our cash balances. ~~Interest expense was $0.5 million in both of the nine months ended September 30, 2017 and 2016.~~ We ~~have $150.0~~had $250.0 million available under our amended revolving credit facility and no borrowings outstanding as of September 30, ~~2017.~~

2019.

Provision (benefit) for income taxes.Income tax expense ~~decreased to $13.7~~was $31.4 million in the nine months ended September 30, ~~2017 from $14.6~~2019 compared to a benefit of $1.6 million in the nine months ended September 30, 2016. This decrease reflects a tax surplus recorded in the current year associated with the vesting of certain shares of restricted stock. In addition, we recognized tax benefits resulting from the reduction in the value of contingent consideration related to the NYCDA acquisition. We expect our2018. Our effective tax rate ~~including~~for the ~~effect of tax benefits associated with the vesting of restricted stock and the impacts of the contingent consideration adjustments referenced above, to be approximately 34.0% for 2017~~nine months ended September 30, 2019 was 37.4%, compared to ~~39.3%~~4.1% for the nine months ended September 30, 2018. The tax rate was unfavorably impacted by changes in ~~2016.~~

previously deferred compensation arrangements, resulting in a discrete charge of $11.5 million during the first quarter of 2019 to reduce the Company's deferred tax asset related to these arrangements. This charge is offset by favorable adjustments related to tax windfalls recognized through share-based payment arrangements.

~~Table of Contents~~

Net income (loss). Net income increased ~~$4.0~~to $52.6 million ~~to $27.1 million~~ in the nine months ended September 30, ~~2017~~2019 from ~~$23.1~~net loss of $38.1 million in the nine months ended September 30, ~~2016~~2018 due to the factors discussed above.

Liquidity and Capital Resources

At September 30, ~~2017,~~2019, we had cash, ~~and~~ cash equivalents, and marketable securities of ~~$150.5~~$457.1 million compared to ~~$129.2~~$386.5 million at December 31, ~~2016~~2018 and ~~$120.5~~$347.8 million at September 30, ~~2016.~~2018. At September 30, ~~2017,~~2019, most of our cash was held in demand deposit accounts at high credit quality financial institutions.

~~We are party to a~~

On August 1, 2018, the Company entered into an amended credit ~~agreement~~facility (the “Amended Credit Facility”), which provides for a ~~$150 million~~senior secured revolving credit facility ~~and~~(the “Revolver”) in an aggregate principal amount of up to $250 million. The Amended Credit Facility provides the Company with an option, under certain conditions, to increase the commitments under the Revolver or establish one or more incremental term loans ~~under certain conditions. The credit agreement has~~(each, an “Incremental Facility”) in an amount up to the sum of (x) $150 million and (y) if such Incremental Facility is incurred in connection with a ~~maturity date of July 2, 2020. We had~~permitted acquisition, any amount so long as the Company’s leverage ratio (calculated on a trailing four-quarter basis) on a pro forma basis will be no ~~borrowings outstanding under the revolving credit facility during each of the nine months ended September 30, 2016 and 2017, and as of September 30, 2017.~~

greater than 1.75:1.00. Borrowings under

the ~~revolving credit facility~~Amended Credit Facility bear interest at LIBOR or a base rate, plus a margin ranging from ~~1.75%~~1.50% to ~~2.25%~~2.00%, depending on our leverage ratio. An unused commitment fee ranging from ~~0.25%~~0.20% to ~~0.35%~~0.30%, depending on our leverage ratio, accrues on unused ~~amounts under the revolving credit facility.~~amounts. During ~~each of~~ the nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, we paid unused commitment fees of $0.4 million and $0.3 ~~million.~~million, respectively. We were in compliance with all applicable covenants related to the ~~credit agreement~~Amended Credit Facility as of September 30, ~~2017.~~

2019. We had no borrowings outstanding during each of the nine months ended September 30, 2019 and September 30, 2018.

Our net cash ~~from~~provided by operating activities for the nine months ended September 30, ~~2017 increased to $44.4~~2019 was $141.4 million, as compared to ~~$30.1~~net cash used in operating activities of $14.6 million for the same period in ~~2016.~~2018. The increase in net cash from operating activities was largely due to the ~~payment of retention agreements~~increase in ~~connection~~income from operations following the merger with ~~the NYCDA acquisition in January 2016, cash provided by changes in working capital,~~CEC, together with adjustments for non-cash charges for depreciation and ~~the timing of income tax payments in 2017 compared to 2016.~~

amortization expense.

Capital expenditures were ~~$14.6~~$27.8 million for the nine months ended September 30, ~~2017,~~2019, compared to ~~$7.5~~$16.0 million for the same period in ~~2016.~~

2018.

The Board of Directors declared ~~an annual~~a regular, quarterly cash dividend of ~~$1.00~~$0.50 per share of common ~~share, payable quarterly.~~stock for each of the first three quarters of 2019. During the nine months ended September 30, ~~2017,~~2019, we ~~have~~ paid a total of ~~$8.6~~$33.3 million in cash dividends on our common stock. For the nine months ended September 30, ~~2017,~~2019, we did not repurchase any shares of common stock and, at September 30, ~~2017,~~2019, had ~~$70~~$70.0 million in repurchase authorization to use through December 31, ~~2017.~~

2019.

For the third quarter of ~~2017,~~2019, bad debt expense as a percentage of revenue was ~~4.9%~~5.0% compared to ~~3.8%~~6.1% for the third quarter of ~~2016.~~

2018.

We believe that existing cash and cash equivalents, cash generated from operating activities, and if necessary, cash borrowed under our revolving credit facility, will be sufficient to meet our requirements for at least the next 12 months. Currently, we maintain our cash primarily in ~~mostly~~ demand deposit bank accounts and money market funds, which isare included in cash and cash equivalents at September 30, ~~2017~~2019 and ~~2016.~~2018. We also hold marketable securities, which primarily include tax-exempt municipal securities and corporate debt securities. During the nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, we earned interest income of ~~$0.7~~$8.0 million and ~~$0.3~~$2.4 million, respectively.

~~The table below sets forth our contractual commitments associated with operating leases, excluding subleases as of September 30, 2017 (in thousands):~~

Payments Due By Period




Less than 1

1-3

3-5

More than

Total

Year

Years

Years

5 Years

Operating leases

$
119,061

$
31,782

$
49,750

$
26,384

$
11,145

~~Table of Contents~~

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to the impact of interest rate changes and may be subject to changes in the market values of our future investments. We invest our excess cash in bank overnight deposits, money market funds and marketable securities. We have not used derivative financial instruments in our investment portfolio. Earnings from investments in bank overnight deposits, money market mutual funds, and marketable securities may be adversely affected in the future should interest rates decline, although such a decline may reduce the interest rate payable on any borrowings under our revolving credit facility. Our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates. As of September 30, ~~2017,~~2019, a 1% increase or decrease in interest rates would not have a material impact on our future earnings, fair values, or cash flows related to investments in cash equivalents or interest earning marketable securities.

~~Changing interest rates could also have a negative impact on~~

On August 1, 2018, the ~~amount~~Company amended its prior credit facility to extend the maturity date of interest expense we incur. On July 2, 2015, we used approximately $116 million of our existing cash and cash equivalents to prepay our term loan and terminate an interest rate swap as part of an amendment to our credit and term loan agreement. The credit agreement provides for a $150 millionthe revolving credit facility from July 2, 2020 to August 1, 2023, and to increase available borrowings from $150 million to $250 million, with an option, subject to obtaining additional loan commitments and satisfaction of certain conditions, to increase the commitments under the revolving facility or establish one or more incremental term loans ~~under certain conditions. The credit agreement has~~(each, an “Incremental Facility”) in an aggregate amount of up to the sum of (x) $150 million and (y) if such Incremental Facility is incurred in connection with a ~~maturity date of July 2, 2020.~~permitted acquisition, any amount so long as the Company’s leverage ratio (calculated on a trailing four-quarter basis) on a pro forma basis will be no greater than 1.75:1.00. We had no borrowings outstanding under the ~~revolving credit facility after prepayment of the term loan facility, and~~Amended Credit Facility as of September 30, ~~2017.~~2019. Borrowings under the ~~revolving credit facility~~Amended Credit Facility bear interest at LIBOR or a base rate, plus a margin ranging from ~~1.75%~~1.50% to ~~2.25%~~2.00%, depending on our leverage ratio. An unused commitment fee ranging from ~~0.25%~~0.20% to ~~0.35%~~0.30%, depending on our leverage ratio, accrues on unused amounts under the ~~revolving credit facility.~~Amended Credit Facility. An increase in LIBOR would affect interest expense on any outstanding balance of the revolving credit facility. For every 100 basis points increase in LIBOR, we would incur an incremental ~~$1.5~~$2.5 million in interest expense per year assuming the entire ~~$150~~$250 million revolving credit facility was utilized.

ITEM 4: CONTROLS AND PROCEDURES


a)		Disclosure Controls and Procedures. The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, ~~2017.~~2019. Based upon such review, the Chief Executive Officer and Chief Financial Officer have concluded that the Company had in place, as of September 30, 2017, effective disclosure controls and procedures designed to ensure that information required to be disclosed by the Company (including consolidated subsidiaries) in the reports it files or submits under the Securities Exchange Act of 1934, as amended, and the rules thereunder, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in reports it files or submits under the Securities Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

that the Company had in place, as of September 30, 2019, effective disclosure controls and procedures designed to ensure that information required to be disclosed by the Company (including consolidated subsidiaries) in the reports it files or submits under the Securities Exchange Act of 1934, as amended, and the rules thereunder, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in reports it files or submits under the Securities Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.


b)		Internal Control Over Financial Reporting. ~~There~~On August 1, 2018, the Company completed its acquisition of Capella Education Company. As noted under Item 9A, Controls and Procedures, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, management’s assessment of, and conclusion on, the effectiveness of internal control over financial reporting did not include the internal controls of Capella Education Company. See Note 3, Merger with Capella Education Company in the condensed consolidated financial statements appearing in Part I, Item 1 of this report for a discussion of the acquisition and related financial data. Under guidelines established by the SEC, companies are permitted to exclude acquisitions from their assessment of internal control over financial reporting for a period of up to one year following an acquisition while integrating the acquired company. The Company is in the process of integrating Capella Education Company’s and the Company’s internal controls over financial reporting. As a result of these integration activities, certain controls will be evaluated and may be changed. Except as noted above, there have not been any changes in the Company’s internal control over financial reporting during the quarter ended September 30, ~~2017~~2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~Table of Contents~~

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

~~From time to time, we~~

We are involved in litigation and other legal proceedings arising out of the ordinary course of our business. ~~There~~From time to time, certain matters may arise that are ~~no pending~~other than ordinary and routine. The outcome of such matters is uncertain and we may incur costs in the future to defend, settle, or otherwise resolve them. We currently believe that the ultimate outcome of such matters will not, individually or in the aggregate, have a material ~~legal proceedings to which we~~adverse effect on our consolidated financial position, results of operations or ~~our property are subject.~~

cash flows. However, depending on the amount and timing, an unfavorable resolution of some or all of these matters could materially affect future results of operations in a particular period.

Item 1A. Risk Factors

You should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2016, and in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017,~~2018, which could materially affect our business, adversely affect the market price of our common stock and could cause you to suffer a partial or complete loss of your investment. There have been no material changes to the risk factors previously described in Part I, “Item 1A. Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, and in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017, except that we have updated two of the risk factors to reflect recent developments occurring after the filing of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.2018. The risks described in our Annual Report on Form 10-K, ~~as updated by our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017, and this Quarterly Report on Form 10-Q,~~ are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also could materially adversely affect our business. See “Cautionary Notice Regarding Forward-Looking Statements.”

The following risk factors update and supersede the risk factors with the same captions in our Annual Report on Form 10-K for the year ended December 31, 2016, as updated by our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017.

~~We are subject to compliance reviews, which, if they resulted in a material finding of noncompliance, could affect our ability to participate in Title IV programs.~~

Because we operate in a highly regulated industry, we are subject to compliance reviews and claims of noncompliance and related lawsuits by government agencies, accrediting agencies and third parties, including claims brought by third parties on behalf of the federal government. For example, the Department of Education regularly conducts program reviews of educational institutions that are participating in Title IV programs, and the Office of Inspector General of the Department of Education regularly conducts audits and investigations of such institutions. The Department of Education could limit, suspend, or terminate our participation in Title IV programs, place us on a more restrictive, slower payment method for receipt of Title IV program funds, or impose other penalties such as requiring us to make refunds, pay liabilities, or pay an administrative fine upon a material finding of noncompliance.

The Department of Education conducted four campus-based program reviews of Strayer University’s administration of Title IV programs in three states and the District of Columbia, with one on-site review conducted August 18-20, 2014; one on-site review conducted September 8-11, 2014; and two on-site reviews conducted September 22-26, 2014. On October 21, 2014, the Department of Education issued an Expedited Final Program Review Determination Letter for one of the program reviews conducted the week of September 22, 2014, closing the program review with no further action required by us. On November 17, 2014, we received a Program Review Report for the program review conducted in August 2014, and provided a response to the Department of Education on December 15, 2014. On January 7, 2015, we received a Final Program Review Determination letter from that August 2014 review, closing the program review with no further action required by us. On March 24, 2015, the Company received a Program Review Report for another program review, and provided a response to the Department on April 21, 2015. On April 29, 2015, the Company received a Final Program Review Determination Letter closing the review and identifying a payment of less than $500 due to the Department of Education based on an underpayment on a return to Title IV calculation. The Company remitted payment, and received a letter from the Department on May 26, 2015, indicating that no further action was required and that the matter was closed. On September 15, 2015, the Company received a Program Review Report for the final program review, and provided a response to the Department on October 5, 2015. On January 5, 2016, the Company received a Final Program Review Determination Letter for the final program review, indicating that this program review was closed and no further action was required.

~~Table of Contents~~

~~If we fail to obtain recertification by the Department of Education when required, we would lose our ability to participate in Title IV programs.~~

An institution generally must seek recertification from the Department of Education at least every six years and possibly more frequently depending on various factors, such as whether it is provisionally certified. The Department of Education may also review an institution’s continued eligibility and certification to participate in Title IV programs, or scope of eligibility and certification, in the event the institution undergoes a change in ownership resulting in a change of control or expands its activities in certain ways, such as the addition of certain types of new programs, or, in certain cases, changes to the academic credentials that it offers. In certain circumstances, the Department of Education must provisionally certify an institution. The Department of Education may withdraw our certification if it determines that we are not fulfilling material requirements for continued participation in Title IV programs. If the Department of Education does not renew, or withdraws our certification to participate in Title IV programs, our students would no longer be able to receive Title IV program funds, which would have a material adverse effect on our business.

Each institution participating in Title IV programs must enter into a Program Participation Agreement with the Department of Education. Under the agreement, the institution agrees to follow the Department of Education’s rules and regulations governing Title IV programs. On October 13, 2017, the Department informed the University that it was approved to participate in Title IV programs with full certification through June 30, 2021.

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

During the three months ended September 30, ~~2017,~~2019, we did not repurchase any shares of common stock under our repurchase program. The remaining authorization for our common stock repurchases was $70.0 million as of September 30, ~~2017,~~2019, and is available for use through December 31, ~~2017.~~

2019.

Item 3. Defaults Upon Senior Securities

None

Item 4.Mine Safety Disclosures

Not applicable

Item 5. Other Information

~~None~~

None

~~Table of Contents~~

Item 6. Exhibits



3.1		Amended Articles of Incorporation and Articles Supplementary of the Company (incorporated by reference to Exhibit 3.01 of the Company’s Annual Report on Form 10-K (File No. 000-21039) filed with the Commission on March 28, 2002).
~~3.2~~		Amended and Restated ~~Bylaws~~Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Commission on ~~November 4, 2010)~~August 1, 2018).
~~3.3~~ 3.2		~~First Amendment to the~~ Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit ~~3.1~~3.2 of the Company’s Current Report on Form 8-K filed with the Commission on ~~April 17, 2017)~~August 1, 2018).
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.		INS XBRL Instance Document
101.		SCH XBRL Schema Document
101.		CAL XBRL Calculation Linkbase Document
101.		DEF XBRL Definition Linkbase Document
101.		LAB XBRL Label Linkbase Document
101.		PRE XBRL Presentation Linkbase Document
104.		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

SIGNATURES

~~Table of Contents~~

~~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.


	~~STRAYER~~
	STRATEGIC EDUCATION, INC.

	By:	/s/ Daniel W. Jackson
	Daniel W. Jackson
	Executive Vice President and Chief Financial Officer
	Date: ~~October 30, 2017~~ November 7, 2019



				Additional
	Common Stock			Paid-in		Retained
	Shares	Par Value		Capital		Earnings		Total
Balance at December 31, 2015	11,027,177	$	110	$	24,738	$	118,008	$	142,856
Tax shortfall associated with stock-based compensation arrangements	—		—		(51)		—		(51)
Restricted stock grants, net of forfeitures	66,781		1		(1)		—		—
Stock-based compensation	—		—		7,330		—		7,330
Net income	—		—		—		23,084		23,084
Balance at September 30, 2016	11,093,958	$	111	$	32,016	$	141,092	$	173,219


				Additional
	Common Stock			Paid-in		Retained
	Shares	Par Value		Capital		Earnings		Total
Balance at December 31, 2016	11,093,489	$	111	$	35,453	$	152,810	$	188,374
Restricted stock grants, net of forfeitures	73,936		1		(1)		—		—
Stock-based compensation	—		—		8,569		—		8,569
Common stock dividends	—		—		—		(8,561)		(8,561)
Net income	—		—		—		27,107		27,107
Balance at September 30, 2017	11,167,425	$	112	$	44,021	$	171,356	$	215,489


⁽¹⁾	This amount excludes the amortization of intangible assets, merger and integration costs, and impairment of intangible assets expense line items on the condensed consolidated statements of income as those expense line items were not impacted by the operating expense reclassification.


⁽²⁾	Non-Degree Programs revenue is primarily comprised of tuition revenue and placement fee revenue.


⁽¹⁾	Amounts are based on the accounting guidance in ASC 840, Leases, that was superseded upon the Company's adoption of ASC 842 on January 1, 2019.


	Number of shares or units	Weighted- average Grant price
Balance, December 31, 2016	727,100	$	97.53
Grants	75,140		82.18
Vested shares	(84,718)		66.60
Forfeitures	(1,204)		62.28
Balance, September 30, 2017	716,318	$	99.64


				Weighted-
				average
		Weighted-		remaining	Aggregate
	Number of	average		contractual	intrinsic value(1)
	shares	exercise price		life (years)	(in thousands)
Balance, December 31, 2016	100,000	$	51.95	4.1	$	2,868
Grants	—		—
Exercises	—		—
Forfeitures/Expirations	—		—
Balance, September 30, 2017	100,000	$	51.95	3.3	$	3,532
Exercisable, September 30, 2017	100,000	$	51.95	3.3	$	3,532


	December 31, 2016		September 30, 2017
Deferred revenue, net of current portion	$	17,981	$	18,274
Deferred rent and other facility costs		8,251		7,406
Loss on facilities not in use		7,813		6,227
Deferred payments related to acquisitions		13,754		5,979
Lease incentives		2,684		2,902
Other long-term liabilities	$	50,483	$	40,788


	Payments Due By Period
			Less than 1		1-3		3-5		More than
	Total		Year		Years		Years		5 Years
Operating leases	$	119,061	$	31,782	$	49,750	$	26,384	$	11,145