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~~June 30, ~~2017~~

2020

☐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) 561-1600~~

(703) 247-2500

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,~~July 17, 2020, there were outstanding ~~11,167,425~~22,222,672 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~~2019 and ~~September~~June 30, ~~2017~~2020	3 3

		Unaudited Condensed Consolidated Statements of Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2019 and ~~2017~~2020	4 4

		Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2020	4

		Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the ~~nine~~three and six months ended ~~September~~June 30, ~~2016~~2019 and ~~2017~~2020	5 5

		Unaudited Condensed Consolidated Statements of Cash Flows for the ~~nine~~three and six months ended ~~September~~June 30, ~~2016~~2019 and ~~2017~~2020	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	24 22

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33 29

	Item 4.	Controls and Procedures	33 29

PART II — OTHER INFORMATION

	Item 1.	Legal Proceedings	35 30

	Item 1A.	Risk Factors	35 30

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36 31

	Item 3.	Defaults Upon Senior Securities	36 31

	Item 4.	Mine Safety Disclosures	36 31

	Item 5.	Other Information	36 31

	Item 6.	~~Exhibits~~	Exhibits 32	36

SIGNATURES			37 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, 2019		June 30, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	419,693	$	470,319
Marketable securities	34,874		23,106
Tuition receivable, net	51,523		41,004
Other current assets	18,004		19,067
Total current assets	524,094		553,496
Property and equipment, net	117,029		117,247
Right-of-use lease assets	84,778		81,418
Marketable securities, non-current	36,633		31,917
Intangible assets, net	273,011		245,344
Goodwill	732,075		732,075
Other assets	21,788		30,067
Total assets	$	1,789,408	$	1,791,564

LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	90,828	$	67,258
Income taxes payable	1,352		16,722
Contract liabilities	39,284		40,052
Lease liabilities	25,284		24,852
Total current liabilities	156,748		148,884
Deferred income tax liabilities	47,942		40,107
Lease liabilities, non-current	80,557		77,458
Other long-term liabilities	41,451		40,565
Total liabilities	326,698		307,014
Commitments and contingencies
Stockholders’ equity:
Common stock, par value $0.01; 32,000,000 shares authorized; 21,964,809 and 22,222,936 shares issued and outstanding at December 31, 2019 and June 30, 2020, respectively	220		222
Additional paid-in capital	1,309,438		1,291,597
Accumulated other comprehensive income	233		659
Retained earnings	152,819		192,072
Total stockholders’ equity	1,462,710		1,484,550
Total liabilities and stockholders’ equity	$	1,789,408	$	1,791,564

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 June 30,				For the six months ended June 30,
	2019		2020		2019		2020
Revenues	$	245,110	$	255,831	$	491,618	$	521,133
Costs and expenses:
Instructional and support costs	130,704		125,544		264,754		258,480
General and administration	68,374		67,301		132,513		136,527
Amortization of intangible assets	15,417		15,417		30,834		30,834
Merger and integration costs	3,019		1,174		10,198		4,938
Total costs and expenses	217,514		209,436		438,299		430,779
Income from operations	27,596		46,395		53,319		90,354
Other income	4,125		1,639		7,452		3,762
Income before income taxes	31,721		48,034		60,771		94,116
Provision for income taxes	7,312		13,882		24,862		24,725
Net income	$	24,409	$	34,152	$	35,909	$	69,391
Earnings per share:
Basic	$	1.12	$	1.57	$	1.66	$	3.18
Diluted	$	1.10	$	1.55	$	1.63	$	3.15
Weighted average shares outstanding:
Basic	21,777		21,764		21,638		21,787
Diluted	22,109		22,012		22,079		22,041

STRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)



	For the three months ended June 30,				For the six months ended June 30,
	2019		2020		2019		2020
Net income	$	24,409	$	34,152	$	35,909	$	69,391
Other comprehensive income:
Unrealized gains on marketable securities, net of tax	183		406		417		426
Comprehensive income	$	24,592	$	34,558	$	36,326	$	69,817

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 June 30, 2019
	Common Stock				Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total
	Shares		Par Value		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total
Balance at March 31, 2019	21,923,800		$	219	$	1,304,170		$	118,783		$	266	$	1,423,438
Stock-based compensation	—		—		3,155			—			—		3,155
Exercise of stock options, net	38,680		—		1,491			—			—		1,491
Issuance of restricted stock, net	(13,917	)	—		(3,668		)	—			—		(3,668		)
Common stock dividends ($0.50 per share)	—		—		—			(11,132		)	—		(11,132		)
Unrealized gains on marketable securities, net of tax	—		—		—			—			183		183
Net income	—		—		—			24,409			—		24,409
Balance at June 30, 2019	21,948,563		$	219	$	1,305,148		$	132,060		$	449	$	1,437,876



	For the three months ended June 30, 2020
	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total
	Shares	Par Value		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total
Balance at March 31, 2020	22,213,587	$	222	$	1,287,406		$	171,266		$	253	$	1,459,147
Stock-based compensation	—	—		3,858			1			—		3,859
Exercise of stock options, net	5,252	—		339			—			—		339
Issuance of restricted stock, net	4,097	—		(6		)	—			—		(6		)
Common stock dividends ($0.60 per share)	—	—		—			(13,347		)	—		(13,347		)
Unrealized gains on marketable securities, net of tax	—	—		—			—			406		406
Net income	—	—		—			34,152			—		34,152
Balance at June 30, 2020	22,222,936	$	222	$	1,291,597		$	192,072		$	659	$	1,484,550

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 six months ended June 30, 2019
	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total
	Shares	Par Value		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total
Balance at December 31, 2018	21,743,498	$	217	$	1,306,653		$	118,322		$	32	$	1,425,224
Stock-based compensation	—	—		5,926			82			—		6,008
Exercise of stock options, net	90,569	1		(209		)	—			—		(208		)
Issuance of restricted stock, net	114,496	1		(7,222		)	—			—		(7,221		)
Common stock dividends ($1.00 per share)	—	—		—			(22,253		)	—		(22,253		)
Unrealized gains on marketable securities, net of tax	—	—		—			—			417		417
Net income	—	—		—			35,909			—		35,909
Balance at June 30, 2019	21,948,563	$	219	$	1,305,148		$	132,060		$	449	$	1,437,876



	For the six months ended June 30, 2020
	Common Stock				Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total
	Shares		Par Value		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total
Balance at December 31, 2019	21,964,809		$	220	$	1,309,438		$	152,819		$	233	$	1,462,710
Impact of adoption of new accounting standard	—		—		—			(3,311		)	—		(3,311		)
Stock-based compensation	—		—		6,883			1			—		6,884
Exercise of stock options, net	19,567		—		1,185			—			—		1,185
Issuance of restricted stock, net	240,329		2		(25,804		)	—			—		(25,802		)
Repurchase of common stock	(1,769	)	—		(105		)	(142		)	—		(247		)
Common stock dividends ($1.20 per share)	—		—		—			(26,686		)	—		(26,686		)
Unrealized gains on marketable securities, net of tax	—		—		—			—			426		426
Net income	—		—		—			69,391			—		69,391
Balance at June 30, 2020	22,222,936		$	222	$	1,291,597		$	192,072		$	659	$	1,484,550

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 six months ended June 30,
	2019			2020
Cash flows from operating activities:
Net income	$	35,909		$	69,391
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred financing costs	167			167
Amortization of investment discount/premium	220			68
Depreciation and amortization	52,497			51,981
Deferred income taxes	9,909			(6,736		)
Stock-based compensation	6,576			6,884
Impairment of right-of-use lease assets	—			453
Changes in assets and liabilities:
Tuition receivable, net	5,777			3,820
Other assets	(1,240		)	(6,338		)
Accounts payable and accrued expenses	229			(22,180		)
Income taxes payable and income taxes receivable	(10,673		)	15,303
Contract liabilities	4,778			2,053
Other long-term liabilities	(1,086		)	(2,925		)
Net cash provided by operating activities	103,063			111,941

Cash flows from investing activities:
Purchases of property and equipment	(18,859		)	(25,465		)
Purchases of marketable securities	(12,443		)	(1,863		)
Proceeds from marketable securities	22,560			18,869
Other investments	(740		)	(693		)
Net cash used in investing activities	(9,482		)	(9,152		)

Cash flows from financing activities:
Common dividends paid	(22,194		)	(26,662		)
Net payments for stock awards	(7,607		)	(24,758		)
Repurchase of common stock	—			(247		)
Net cash used in financing activities	(29,801		)	(51,667		)
Net increase in cash, cash equivalents, and restricted cash	63,780			51,122
Cash, cash equivalents, and restricted cash — beginning of period	312,237			420,497
Cash, cash equivalents, and restricted cash — end of period	$	376,017		$	471,619
Noncash transactions:
Non-cash additions to property and equipment	$	2,578		$	2,229
Right-of-use lease assets obtained in exchange for operating lease liabilities	$	2,298		$	7,870

~~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 its operations~~formerly known as Strayer Education, Inc., is a national leader in education innovation, dedicated to enabling economic mobility for working adults through education. The Company operates primarily through its wholly-owned subsidiaries Strayer University and Capella University (the ~~“University”~~"Universities") ~~and New York Code and Design Academy (“NYCDA”). The University is an~~, both accredited ~~institution~~post-secondary institutions of higher ~~education that provides undergraduate~~education. During the first quarter of 2020, the Company revised its reportable segments, as discussed further in Note 13. Prior period segment disclosures have been restated to conform to the current period presentation. The accompanying condensed consolidated financial statements and ~~graduate degrees in various fields~~footnotes include the results of ~~study through physical campuses, predominantly located in~~ the ~~eastern United States,~~Company’s 2 reportable segments: Strayer University 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~~

Capella University.


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.

All information as of ~~December 31, 2016~~June 30, 2019 and ~~September 30, 2016 and 2017,~~2020, and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2019 and ~~2017~~2020 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. The condensed consolidated balance sheet as of December 31, 2019 has been derived from the audited consolidated financial statements at that date. Certain amounts in the prior period financial statements have been reclassified to conform to the current ~~period’s~~period's presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted ~~accounting principles~~in the United States of America (“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.~~2019. The results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 are not necessarily indicative of the results to be expected for the full fiscal year.

~~Revenue Recognition~~

~~The~~

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 the Strayer University and Capella University segments 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~~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.

Amortization of intangibles assets consists of amortization and depreciation expense related to intangible assets and software assets acquired through the Company's merger with Capella Education Company ("CEC").

Merger and integration costs include integration expenses associated with the Company's merger with CEC, and transaction expenses associated with potential future business combinations.

New Accounting Standard for Credit Losses

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13" or ~~program is recorded as deferred revenue. Some students may be eligible~~"ASC 326"). ASU 2016-13 revises the accounting requirements related to the measurement of credit losses and requires organizations to measure all expected credit losses for ~~scholarship awards, the estimated value of which will be realized in the future and is deducted from revenue when earned,~~financial assets based on historical ~~student attendance~~experience, current conditions, and ~~completion behavior. Deferred revenue is recorded as a current or long-term liability~~reasonable and supportable forecasts about collectability. Assets must be presented in the ~~unaudited condensed consolidated balance sheets based on when~~financial statements at the ~~benefit is~~net amount expected to be ~~realized. Revenues also include textbook-related income, certificate revenue,~~ collected. During 2019, the FASB issued additional ASUs amending certain ~~academic fees, licensing revenue,~~aspects of ASU 2016-13.

On January 1, 2020, the Company adopted the new accounting standard 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

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~~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~~related amendments using 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.~~modified retrospective method. The Company ~~defers~~recognized the ~~value~~cumulative effect of ~~benefits estimated~~initially applying the new credit loss standard to its tuition receivables by recording a $3.3 million adjustment, net of tax, to the opening balance of retained earnings. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326. The comparative information has not been restated and continues to be ~~redeemed~~reported under the accounting standards in ~~the future based~~effect in those reporting periods.

The impact of adoption of ASC 326 on the ~~underlying revenue transactions that result in progress by the student toward earning the benefit.~~ Company's balance sheet was as follows (in thousands):



	As of January 1, 2020
	As Reported Under ASC 326		Pre-ASC 326 Adoption		Impact of ASC 326 Adoption
Tuition receivable, net	$	46,952	$	51,523	$	(4,571	)
Deferred income tax liabilities	$	46,681	$	47,942	$	(1,261	)
Retained earnings	$	149,509	$	152,819	$	(3,310	)

The ~~Company’s estimate of the benefits that will be redeemed in the future is based~~Company does not expect ASC 326 to have a significant impact on its ~~historical experience~~financial condition or results 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 months ended September 30, 2016 and 2017 (in thousands):~~

operations on an ongoing basis.

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

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~~$0.3 million and ~~$8,000~~$0.8 million of these unpaid obligations as of December 31, ~~2016~~2019 and ~~September~~June 30, ~~2017,~~2020, 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 June 30, 2019 and 2020 (in thousands):



	As of June 30,
	2019		2020
Cash and cash equivalents	$	375,515	$	470,319
Restricted cash included in other current assets	2		800
Restricted cash included in other assets	500		500
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	$	376,017	$	471,619

Tuition Receivable and Allowance for ~~Doubtful Accounts~~

Credit Losses

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~~credit losses is established ~~primarily~~ based upon historical collection rates by age of receivable and adjusted for reasonable expectations of future collection performance, net of estimated recoveries. These collection rates incorporate historical performance based on a student’s current enrollment status, ~~and~~ likelihood of future ~~enrollment.~~enrollment, degree mix trends and changes in the overall economic environment. The Company periodically assesses its methodologies for estimating ~~bad debts~~credit losses in consideration of actual experience.

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The Company’s tuition receivable and allowance for ~~doubtful accounts~~credit losses were as follows as of December 31, ~~2016~~2019 and ~~September~~June 30, ~~2017~~2020 (in thousands):



	December 31, 2016		September 30, 2017		December 31, 2019			June 30, 2020
Tuition receivable	$	30,733	$	33,183	$	82,454		$	83,960
Allowance for doubtful accounts		(10,201)		(12,557)
Allowance for credit losses					(30,931		)	(42,956		)
Tuition receivable, net	$	20,532	$	20,626	$	51,523		$	41,004

Approximately ~~$2.3~~$1.0 million and ~~$2.6~~$3.1 million of tuition receivable isare included in other assets as of December 31, ~~2016~~2019 and ~~September~~June 30, ~~2017,~~2020, respectively, because these amounts are expected to be collected after 12 months.

The following table illustrates changes in the Company’s allowance for ~~doubtful accounts~~credit losses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2019 and ~~2017~~2020 (in thousands):

For the three months ended

For the nine months ended


September 30,

September 30,

2016

2017

2016

2017

Allowance for doubtful accounts, beginning of period

$
9,981

$
11,760

$
10,024

$
10,201

Additions charged to expense

3,865

5,364

11,069

14,835

Write-offs, net of recoveries

(4,052)

(4,567)

(11,299)

(12,479)

   Allowance for doubtful accounts, end of period

$
9,794

$
12,557

$
9,794

$
12,557

~~Fair Value~~

. The ~~Fair Value Measurement Topic, ASC 820-10 (“ASC 820-10”), establishes a framework~~provision for ~~measuring fair value, establishes a fair value hierarchy based upon~~credit losses for the ~~observability of inputs used~~three and six months ended June 30, 2020 includes additional reserves to ~~measure fair value, and expands disclosures about fair value measurements. Assets and liabilities are classified~~account for projected deterioration in ~~their entirety within the fair value hierarchy based on the lowest level input that is significant~~collections performance in 2020 due to the fair value measurement. Under ASC 820-10, fair value of an investment is 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 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:

COVID-19 pandemic.

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



	For the three months ended June 30,						For the six months ended June 30,
	2019			2020			2019			2020
Allowance for credit losses, beginning of period	$	29,387		$	38,094		$	28,457		$	30,931
Impact of adopting ASC 326	—			—			—			4,571
Additions charged to expense	11,462			11,976			23,782			23,147
Adjustment to value of acquired receivables	2,207			—			2,207			—
Write-offs, net of recoveries	(12,323		)	(7,114		)	(23,713		)	(15,693		)
Allowance for credit losses, end of period	$	30,733		$	42,956		$	30,733		$	42,956

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 of the three levels above. Fair values are based on the inputs available at the measurement dates, and may rely on certain assumptions that may affect the valuation of fair value for certain assets or liabilities.

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~~ The Company identifies its reporting units by assessing whether the ~~three months ended September 30, 2017,~~components of its operating segments constitute businesses for which discrete financial information is available and management regularly reviews the operating results of those components.

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.

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.

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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~~21,964,809 and ~~11,167,425~~22,222,936 shares were issued and outstanding as of December 31, ~~2016~~2019 and ~~September~~June 30, ~~2017,~~2020, 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,~~April 2020, the Company’s Board of Directors declared a regular, quarterly cash dividend of ~~$0.25~~$0.60 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.

June 8, 2020.

Net Income Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the periods. Diluted earnings 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 per share when the stock option exercise price of an individual grant exceeds the average market price for the period.

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Set forth below is a reconciliation of shares used to calculate basic and diluted earnings per share for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2019 and ~~2017~~2020 (in thousands):


	For the three months ended		For the nine months ended
	September 30,		September 30,		For the three months ended June 30,		For the six months ended June 30,
	2016	2017	2016	2017	2019	2020	2019	2020
Weighted average shares outstanding used to compute basic earnings per share	10,616	10,701	10,608	10,671	21,777	21,764	21,638	21,787
Incremental shares issuable upon the assumed exercise of stock options	—	38	—	38	58	16	75	19
Unvested restricted stock and restricted stock units	212	471	195	465	274	232	366	235
Shares used to compute diluted earnings per share	10,828	11,210	10,803	11,174	22,109	22,012	22,079	22,041

Anti-dilutive shares of restricted stock excluded from the diluted earnings per share calculation					—	—	29	2

Comprehensive Income ~~Taxes~~

~~The Company provides for deferred~~

Comprehensive income ~~taxes based on temporary differences between financial statement~~includes net income 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, 2019 and June 30, 2020, the balance of accumulated other comprehensive income was $233,000, net of tax of $90,000 and $659,000, net of tax of $252,000, respectively. During the three and six months ended June 30, 2020, approximately $25,000, net of tax of $10,000, of unrealized gains on available-for-sale marketable securities was reclassified out of accumulated other comprehensive income to Other income on the unaudited condensed consolidated statements of income.

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,~~credit losses, useful lives of property and equipment ~~fair value of future contractual operating lease obligations,~~and intangible assets, 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. During the six months ended June 30, 2020, management estimates also include potential impacts the COVID-19 pandemic will have on student enrollment, tuition pricing, and collections in future periods. The duration and severity of the COVID-19 pandemic and its impact on the Company’s condensed consolidated financial statements is subject to uncertainty. Actual results could differ from those estimates.

~~Recent Accounting Pronouncements~~

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The core principle of ASU 2014-09 is for a company 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, with the cumulative effect of initial application of the revised guidance recognized at the date of initial application.

The Company is finalizing its assessment 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 associated 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 material impact on the Company’s 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.

~~In June 2016, the FASB issued ASU No. 2016-13,~~ ~~Financial Instruments - Credit Losses, which applies to ASC 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. 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~~ Not Yet Adopted

ASUs recently 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~~


3.	Revenue Recognition

The Company’s revenues primarily consist of ~~New York Code~~tuition revenue arising from educational services provided in the form of classroom instruction and ~~Design Academy~~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 six months ended June 30, 2019 and 2020 (in thousands):



	For the three months ended June 30,				For the six months ended June 30,
	2019		2020		2019		2020
Strayer University Segment
Tuition, net of discounts, grants and scholarships	$	126,932	$	133,544	$	252,915	$	274,042
Other⁽¹⁾	4,796		4,536		9,559		9,692
Total Strayer University Segment	131,728		138,080		262,474		283,734
Capella University Segment
Tuition, net of discounts, grants and scholarships	107,947		112,483		218,168		226,669
Other⁽¹⁾	5,435		5,268		10,976		10,730
Total Capella University Segment	113,382		117,751		229,144		237,399
Consolidated revenue	$	245,110	$	255,831	$	491,618	$	521,133

~~On January 13, 2016,~~
⁽¹⁾
Other revenue is primarily comprised of academic fees, sales of course materials, placement fees and other revenue streams.

Revenues are recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration the Company ~~acquired all of the outstanding stock of New York Code~~expects to be entitled to receive in exchange for those goods and Design Academy, Inc. (“NYCDA”), a provider of web and application software development courses primarily based in the New York City area (the “Acquisition”). The Acquisition supports the Company’s strategy to complement its traditional degree offerings with a broader platform of educational services. The Company ~~incurred transaction costs~~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 ~~approximately $0.2 million,~~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 ~~were included~~will be realized in ~~general~~the future and ~~administrative costs~~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 ~~statements~~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 ~~income~~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 ~~period those costs were incurred. The Acquisition was accounted for~~transaction, and as ~~a business combination.~~

~~The purchase price included $2.4 million paid up front in cash, plus contingent cash payments~~such, the Company recognizes revenue net 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. Pursuantamounts owed 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~~vendor at the time of ~~acquisition.~~ 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 ~~April 2016~~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 the student successfully completes. To be eligible, students must meet all of Strayer University’s admission requirements and ~~August 2016, NYCDA received~~must be enrolled in a bachelor’s degree program. The Company’s employees and their dependents are not eligible for the ~~state regulatory permits~~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 ~~Company paid $6.0 and $0.5 million of contingent consideration~~student is reinstated or readmitted by Strayer University in the future. In response to the ~~sellers, respectively.~~

~~In addition,~~COVID-19 pandemic, Strayer University is temporarily allowing students to miss two consecutive terms without losing their Graduation Fund credits.

Revenue from students participating in the Graduation Fund is recorded in accordance with ASC 606. 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~~defers 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.~~

~~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~~related performance obligation associated with the credits estimated to be redeemed in the future based on ~~significant inputs not observable~~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 ~~market (Level 3 inputs). Key assumptions include~~future is based on its historical experience of student persistence toward completion of a ~~discount rate~~course of ~~4.5%~~study within this program and ~~expected future value of payments, at the time, of $12.5 million. Following its initial recognition,~~similar programs. Each quarter, the Company assesses its methodologies and assumptions underlying these estimates, and to date, any adjustments to the ~~carrying value~~estimates have not been material. The amount estimated to be redeemed in the next 12 months is $21.0 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 six months ended June 30,
	2019			2020
Balance at beginning of period	$	43,329		$	49,641
Revenue deferred	14,787			13,942
Benefit redeemed	(12,025		)	(11,235		)
Balance at end of period	$	46,091		$	52,348

Unbilled receivables – Student tuition

Academic materials may be shipped to certain new undergraduate students in advance of the ~~Earnout~~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 ~~remaining payments. Fair value is then adjusted as necessary to reflect revisions~~materials relative 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, the Company further updated its revenue projections during the Earnout measurement period resulting in a reduction in the contingent consideration balance by an additional $5.5 million. Thetotal fair value of all performance obligations in the ~~Earnout at September 30, 2017 is zero, and~~arrangement with the ~~maximum possible amount that could be paid is $11.5 million.~~

~~The fair value of assets acquired and liabilities assumed was determined based on assumptions that reasonable market participants would use while employing the concept of highest and best use~~student. When control of the ~~respective items.~~materials passes to the student in advance of the term of enrollment, an unbilled receivable and related revenue are recorded. The ~~following assumptions were used, the majority~~balance of ~~which include significant unobservable inputs (Level 3),~~unbilled receivables related to such materials was $1.2 million as of June 30, 2020, and ~~valuation methodologies to determine fair value:~~

is included in tuition receivable.

	·
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. Restructuring and Related Charges

~~Other assets and liabilities – The carrying value of all other assets and liabilities approximated fair value at the time of acquisition.~~

~~4. 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 and subleases expected to be executed based on current commercial real estate market data and conditions, and other qualitative factors specificmanagement changes. These changes primarily related to the ~~facilities. The estimates are subject~~integration of CEC in order to ~~adjustment as market conditions change or as new information becomes available, including~~establish an efficient ongoing cost structure for 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~~six months ended ~~September~~June 30, ~~2016~~2019 and ~~2017~~2020 (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, 2018	$	6,540		$	14,347		$	20,887
Restructuring and other charges⁽¹⁾	—			2,086			2,086
Payments	—			(5,764		)	(5,764		)
Adjustments⁽²⁾	(6,540		)	—			(6,540		)
Balance at June 30, 2019	$	—		$	10,669		$	10,669

Balance at December 31, 2019⁽³⁾	$	—		$	8,283		$	8,283
Restructuring and other charges⁽¹⁾	—			—			—
Payments	—			(3,986		)	(3,986		)
Adjustments	—			—			—
Balance at June 30, 2020⁽³⁾	$	—		$	4,297		$	4,297


⁽¹⁾	Restructuring and other charges were $0.2 million and $2.1 million for the three and six months ended June 30, 2019, respectively. Restructuring and other charges are included in Merger and integration costs on the unaudited condensed consolidated statements of income. There were 0 restructuring and other charges for the three and six months ended June 30, 2020.


⁽²⁾	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~~$6.4 million and ~~$3.2~~$3.9 million as of December 31, ~~2016~~2019 and ~~September~~June 30, ~~2017,~~2020, respectively, which are included in accounts payable and accrued expenses. The long-term portion is included in other long-term liabilities.

5. Marketable Securities

The following is a summary of available-for-sale securities as of June 30, 2020 (in thousands):



	Amortized Cost		Gross Unrealized Gain		Gross Unrealized (Losses)			Estimated Fair Value
Corporate debt securities	$	26,920	$	480	$	(8	)	$	27,392
Tax-exempt municipal securities	21,890		215		(74		)	22,031
Variable rate demand notes	5,600		—		—			5,600
Total	$	54,410	$	695	$	(82	)	$	55,023

The following is a summary of available-for-sale securities as of December 31, 2019 (in thousands):



	Amortized Cost		Gross Unrealized Gain		Gross Unrealized (Losses)			Estimated Fair Value
Corporate debt securities	$	42,584	$	165	$	(40	)	$	42,709
Tax-exempt municipal securities	23,301		112		(215		)	23,198
Variable rate demand notes	5,600		—		—			5,600
Total	$	71,485	$	277	$	(255	)	$	71,507

The unrealized gains and losses on the Company’s investments in corporate debt and municipal securities as of December 31, 2019 and June 30, 2020 were caused by changes in market values primarily due to interest rate changes. As of June 30, 2020, there were 0 securities in an unrealized loss position for a period longer than twelve months. The Company has 0 allowance for credit losses related to its available-for-sale securities as all investments are in investment grade securities. 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 impairment charges were recorded during the three and six months ended June 30, 2019 and 2020.

The following table summarizes the maturities of the Company’s marketable securities as of December 31, 2019 and June 30, 2020 (in thousands):



	December 31, 2019		June 30, 2020
Due within one year	$	34,874	$	23,106
Due after one year through five years	36,633		31,917
Total	$	71,507	$	55,023

Amounts due within one year in the table above included $5.6 million of variable rate demand notes, which have contractual maturities ranging from 17 years to 26 years as of June 30, 2020. 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 range from one day to seven days from the balance sheet date.

The following table summarizes the proceeds from the maturities and sales of available-for-sale securities for the three and six months ended June 30, 2019 and 2020 (in thousands):



	For the three months ended June 30,				For the six months ended June 30,
	2019		2020		2019		2020
Maturities of marketable securities	$	9,650	$	7,500	$	22,560	$	17,405
Sales of marketable securities	—		1,464		—		1,464
Total	$	9,650	$	8,964	$	22,560	$	18,869

The Company recorded approximately $35,000 in gross realized gains in net income during the three and six months ended June 30, 2020 related to the sale of marketable securities. The Company did not record any gross realized gains or losses in net income during the three and six months ended June 30, 2019.

	⁽²⁾
6.		~~Adjustments include accretion of interest on lease costs, partially offset by changes in the timing and expected income from sublease agreements~~. Fair Value Measurement

~~5. Fair Value Measurement~~

Assets and liabilities measured at fair value on a recurring basis consist of the following as of ~~September~~June 30, ~~2017~~2020 (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
	June 30, 2020		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	$	5,876	$	5,876	$	—	$	—
Marketable securities:
Corporate debt securities	27,392		—		27,392		—
Tax-exempt municipal securities	22,031		—		22,031		—
Variable rate demand notes	5,600		—		5,600		—
Total assets at fair value on a recurring basis	$	60,899	$	5,876	$	55,023	$	—

Liabilities:
Deferred payments	$	2,428	$	—	$	—	$	2,428

Assets and liabilities measured at fair value on a recurring basis consist of the following as of December 31, ~~2016~~2019 (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, 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	$	5,103	$	5,103	$	—	$	—	$	30,693	$	30,693	$	—	$	—
Marketable securities:
Corporate debt securities									42,709		—		42,709		—
Tax-exempt municipal securities									23,198		—		23,198		—
Variable rate demand notes									5,600		—		5,600		—
Total assets at fair value on a recurring basis									$	102,200	$	30,693	$	71,507	$	—

Liabilities:
Deferred payments	$	11,741	$	—	$	—	$	11,741	$	3,257	$	—	$	—	$	3,257

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, 2019 and June 30, 2020 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. 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 $0.8 million as of June 30, 2020 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~~six months ended ~~September~~June 30, ~~2016 or 2017.~~

2019 and 2020.

Changes in the fair value of the Company’s Level 3 ~~deferred payment~~ liabilities during the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2019 and ~~2017~~2020 are as follows (in thousands):



	September 30, 2016		September 30, 2017		As of June 30,
Balance at beginning of period	$	3,278	$	11,741
					2019			2020
Balance as of the beginning of period					$	4,120		$	3,257
Amounts paid		(7,358)		(1,133)	(751		)	(808		)
Contingent consideration in connection with NYCDA acquisition		14,500		—
Other adjustments to fair value		1,920		(6,184)	295			(21		)
Balance at end of period	$	12,340	$	4,424	$	3,664		$	2,428

~~6. Stock Options, Restricted Stock~~


7.	Accounts Payable and Accrued Expenses

Accounts payable and ~~Restricted Stock Units~~

accrued expenses consist of the following as of December 31, 2019 and June 30, 2020 (in thousands):



	December 31, 2019		June 30, 2020
Trade payables	$	47,503	$	33,861
Accrued compensation and benefits	33,924		23,689
Accrued student obligations	4,580		4,261
Real estate liabilities	751		486
Other	4,070		4,961
Accounts payable and accrued expenses	$	90,828	$	67,258


8.	Long-Term Debt

On ~~May 5, 2015,~~August 1, 2018, the ~~Company’s shareholders approved the Strayer Education, Inc. 2015 Equity Compensation Plan~~Company entered into an amended credit facility (the ~~“2015 Plan”~~“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 ~~granting~~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 ~~restricted stock, restricted stock units, stock options intended~~(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, ~~qualify as incentive stock options, options that do not qualify as incentive stock options,~~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 ~~other forms~~secured by substantially all of ~~equity compensation and performance-based awards to employees, officers and directors~~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 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 June 30, 2020.


9.	Other Long-Term Liabilities

Other long-term liabilities consist of the following as of December 31, 2019 and June 30, 2020 (in thousands):



	December 31, 2019		June 30, 2020
Contract liabilities, net of current portion	$	30,925	$	32,210
Deferred payments related to acquisitions	4,963		4,232
Asset retirement obligations	1,961		1,902
Employee separation costs	1,838		361
Other	1,764		1,860
Other long-term liabilities	$	41,451	$	40,565

Contract Liabilities

As discussed in Note 3, in connection with its student tuition contracts, the Company has an obligation to ~~a consultant or advisor~~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.

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 $2.2 million and $1.4 million as of December 31, 2019 and June 30, 2020, respectively. In addition, one of the sellers contributed $2.8 million to the Company atrepresenting 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 mayseller’s continuing interest in the ~~future become available under any previously existing equity compensation plan due~~assets acquired.

Asset Retirement Obligations

Obligations related to ~~forfeitures of outstanding awards.~~

~~In February 2017,~~lease agreements that require the ~~Company’s Board of Directors approved grants of 67,599 shares of restricted stock~~leased premises to ~~certain employees. These shares, which vest over~~be returned in 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 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

predetermined condition.

Employee Separation Costs

~~Table of Contents~~

~~Stock Options~~

~~The table below sets forth the stock option activity~~Severance 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

⁽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) 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 expectedemployee separation costs 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 that the performance criteria will not be achieved, related compensation expense is adjusted.

paid after one year.


10.	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~~six months ended ~~September~~June 30, ~~2016~~2019 and ~~2017~~2020 (in thousands):


	For the three months ended				For the nine months ended
	September 30,				September 30,				For the three months ended June 30,				For the six months ended June 30,
	2016		2017		2016		2017		2019		2020		2019		2020
Instruction and educational support	$	522	$	548	$	678	$	1,363
Marketing		—		—		—		—
Admissions advisory		—		—		—		—
Instructional and support costs									$	1,017	$	1,356	$	1,875	$	2,386
General and administration		1,882		2,366		6,652		7,206	2,138		2,503		3,811		4,498
Merger and integration costs									411		—		890		—
Stock-based compensation expense included in operating expense		2,404		2,914		7,330		8,569	3,566		3,859		6,576		6,884
Tax benefit		957		1,151		2,857		3,384	923		993		1,682		1,770
Stock-based compensation expense, net of tax	$	1,447	$	1,763	$	4,473	$	5,185	$	2,643	$	2,866	$	4,894	$	5,114

During the ~~nine~~six months ended ~~September~~June 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, 2017,2019 and 2020, the Company recognized a tax windfall related to share-based payment arrangements of approximately ~~$0.6~~$3.5 million and $2.8 million, respectively, which was recorded as an adjustment to the provision for income ~~taxes following~~taxes.


11.	Income Taxes

During the ~~adoption~~six months ended June 30, 2019 and 2020, the Company recorded income tax expense of ~~ASU 2016-09. No stock options were exercised~~$24.9 million and $24.7 million, reflecting an effective tax rate of 40.9% and 26.3%, respectively.

In February 2019, to align compensation and benefit plans after completion of the merger with CEC, the Compensation Committee of the Company’s Board of Directors took action to terminate all deferred compensation arrangements, including for employees already participating in such arrangements. These changes affected the tax deductibility of certain arrangements, which resulted in a discrete item recorded during the ~~nine~~three months ended ~~September 30, 2016 or 2017.~~

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~~7. Other Long-Term Liabilities~~

~~Other long-term liabilities consist of~~March 31, 2019, reducing 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 and awards programs, such as the Graduation Fund (see Note 2 for additional information), that can be redeemed in the future~~Company’s deferred tax assets 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$11.5 million and ~~$0.5 million of deferred payments to~~increasing the ~~sellers, respectively. The fair value of the deferred payment arrangements at September 30, 2017 is zero,~~Company’s 2019 effective tax rate and ~~the maximum possible amount that could be paid is $11.5 million. See Note 3 for further information on the NYCDA deferred~~future cash tax 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~~$1.2 million of unrecognized tax benefits ~~at September~~as of December 31, 2019 and June 30, ~~2017, resulting from~~2020. Interest and penalties, including those related to uncertain tax positions, ~~taken during~~are included in the ~~nine months ended September 30, 2017. In addition,~~provision for income taxes in the ~~Company recognized approximately $0.3 million~~unaudited condensed consolidated statements of ~~benefits in each of the nine months ended September 30, 2016 and 2017 related to tax positions taken during prior years.~~income. The Company ~~did not incur expense for~~incurred approximately $105,000 and $39,000 related to interest and penalties induring the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019 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.

2020, respectively.

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The Company paid ~~$25.0~~$24.7 million and ~~$21.8~~$16.2 million in income taxes during the ~~nine~~six months ended ~~September~~June 30, 2019 and 2020, respectively.

The tax years since 2016 remain open for Federal tax examination and ~~2017, respectively.~~

9.~~Litigation~~

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

12. Other Investments

At June 30, 2020, the Company held $17.0 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, 2019, the Company's investment in limited partnerships was $15.8 million.

The following table illustrates changes in the Company’s limited partnership investments for the three and six months ended June 30, 2019 and 2020 (in thousands):



	For the three months ended June 30,					For the six months ended June 30
	2019			2020		2018			2019
Limited partnership investments, beginning of period	$	13,823		$	15,805	$	13,449		$	15,795
Capital contributions	245			175		513			293
Pro-rata share in the net income of limited partnerships	597			1,010		1,554			1,242
Distributions	(175		)	—		(1,026		)	(340		)
Limited partnership investments, end of period	$	14,490		$	16,990	$	14,490		$	16,990

13. 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. The Company merged DevMountain into Strayer University, which resulted in a change to the way management reviews financial information in 2020 and by which the Chief Operating Decision Maker evaluates performance and allocates the resources of the Company. Prior period segment disclosures have been recast to conform to the current period presentation.

The Company’s 2 operating segments, Strayer University and Capella University, meet the quantitative thresholds to qualify as reportable segments. The Strayer University segment is comprised of Strayer University, including its programs offered through the Jack Welch Management Institute and DevMountain, as well as Hackbright Academy. The Capella University segment consists of Capella University and Sophia Learning.

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 six months ended June 30, 2019 and 2020 is presented in the following table (in thousands):



	For the three months ended June 30,						For the six months ended June 30,
	2019			2020			2019			2020
Revenues
Strayer University	$	131,728		$	138,080		$	262,474		$	283,734
Capella University	113,382			117,751			229,144			237,399
Consolidated revenues	$	245,110		$	255,831		$	491,618		$	521,133
Income from operations
Strayer University	$	24,433		$	35,813		$	48,236		$	72,416
Capella University	21,599			27,173			46,115			53,710
Amortization of intangible assets	(15,417		)	(15,417		)	(30,834		)	(30,834		)
Merger and integration costs	(3,019		)	(1,174		)	(10,198		)	(4,938		)
Consolidated income from operations	$	27,596		$	46,395		$	53,319		$	90,354


14.	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 the Company’s property is subject.~~

~~10. Regulation~~

otherwise resolve them. The Company currently believes that the ~~University, and NYCDA are subject to significant state regulatory oversight, as well as federal regulatory oversight,~~ultimate outcome of such matters will not, individually or in the ~~case~~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.


15.	Regulation

CARES Act

On March 27, 2020, Congress passed and President Trump signed into law the Coronavirus Aid, Relief, and Economic Securities ("CARES") Act. Among other things, the $2.2 trillion bill established some flexibilities related to the processing of federal student financial aid, established a higher education emergency fund, and created relief for some federal student loan borrowers. Through the CARES Act, Congress provided institutions of higher education relief from conducting a return to Title IV (R2T4) calculation in cases where the student withdrew because of COVID-19, including removing the requirement that the institution return unearned funds to the Department of Education and providing loan cancellation for the portion of the ~~Company~~Direct Loan associated with a payment period that the student did not complete due to COVID-19. The CARES Act also allows institutions to exclude from satisfactory academic progress calculations any attempted credits that the student did not complete due to COVID-19, without requiring an appeal from the student. Additionally, under the legislation, institutions are permitted to transfer up to 100% of Federal Work Study funds into their Federal Supplemental Educational Opportunity Grant allocation and are granted a waiver of the ~~University.~~

2019/2020 and 2020/2021 non-federal share institutional match. Institutions may continue to make Federal Work Study payments to student employees who are unable to meet their employment obligations due to COVID-19. The CARES Act also suspends payments and interest accrual on federal student loans until September 30, 2020, in addition to suspending involuntary collections such as wage garnishment, tax refund reductions, and reductions of federal benefits like Social Security benefits during the same timeframe. The Department issued and will continue to issue sub-regulatory guidance to institutions regarding implementation of the provisions included in the CARES Act.

Finally, the CARES Act allocated $14 billion to higher education through the creation of the Education Stabilization Fund. Fifty percent of the emergency funds received by institutions must go directly to students in the form of emergency financial aid grants to cover expenses related to the disruption of campus operations due to COVID-19. Students who were previously enrolled in exclusively online courses prior to March 13, 2020 are not eligible for these grants. Institutions may use remaining emergency funds not given to students on costs associated with significant changes to the delivery of instruction due to COVID-19, as long as such costs do not include payment to contractors for the provision of pre-enrollment recruitment activities, including marketing and advertising; endowments; or capital outlays associated with facilities related to athletics, sectarian instruction, or religious worship.

Institutions receive funds under the Education Stabilization Fund based on a formula that factors in their relative percentage of full-time, Federal Pell Grant-eligible students who were not exclusively enrolled in online education prior to the emergency period. On April 9, 2020, the Department published guidance and funding levels for the Education Stabilization Fund, indicating that Strayer University was eligible to receive $5,792,122. Given that Strayer University is predominantly online, and very few students take only on-ground classes, Strayer declined to accept the funds allocated to it because most students would not have expenses related to the disruption of campus operations. Instead, Strayer University provided a $500 tuition grant for all students who had enrolled in on-ground classes for the Spring term, prior to the classes being converted to online. Because Capella University’s students are exclusively online, Capella was ineligible for Education Stabilization funding.

Gainful Employment

Under the Higher Education Act ("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, with the ~~exception of new~~additional disclosure requirements that ~~were originally scheduled to go into effect~~became effective January 1, 2017 ~~but which have now been delayed, to some extent, until~~and July 1, ~~2018. Additionally,~~2019 (the “2015 Regulations”).

On July 1, 2019, 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.~~

~~The~~of Education released final gainful employment regulations, ~~include two debt-to-earnings measures, consisting of an annual income rate and~~which contained a discretionary income rate. The annual income rate measures student debt in relation to earnings, and the discretionary income rate measures student debt in relation to discretionary income. A program passes 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%.~~

~~In addition, a program that does not pass either~~full repeal of the ~~debt-to-earnings metrics,~~2015 Regulations and that has an annual income rate between 8% and 12%, or a discretionary income rate between 20% and 30%, is considered to be in a warning zone. A program fails if the program’s graduates have an annual income rate of 12% or greater and a discretionary income rate of 30% or greater. A program would become Title IV-ineligible for three years if it fails both metrics for two out of three consecutive years, or fails to pass at least one 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 received its final 2015 debt-to-earnings measures. None of Strayer’s programs failed the debt-to-earnings metrics. Two active programs, the Associate in Arts in Accounting and Associate in Arts in Business Administration, are “in the zone,” which means each program remains fully eligible unless (1) either program has a combination of zone and failing designations for four consecutive years, in which case 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 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,~~2020. Both Capella University and Strayer University implemented the July 2019 regulations early, by means permitted by the Secretary, and accordingly were not required to report gainful employment data for the 2018-2019 award year. For the period between July 2019 and July 1, 2020, Capella and Strayer University were not required to comply with gainful employment disclosure and template publication requirements and were not required to comply with the

regulation’s certification requirements with respect to programmatic accreditation and program satisfaction of prerequisites for professional licensure/state certification.

Borrower Defenses to Repayment

On September 23, 2019, the Department published final Borrower Defense to Repayment regulations (the “2019 BDTR Rule”), which governs borrower defense to repayment claims in connection with loans first disbursed on or after July 1, 2020, the date the 2019 BDTR Rule became effective. The 2019 BDTR Rule supplants the 2016 Borrower Defense to Repayment rule.

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 “financial harm” 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 decision 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 its response. The 2019 BDTR Rule permits the usage of pre-dispute arbitration agreements and class action waivers as conditions of enrollment, so long as the institution provides plain-language disclosures to students and the disclosure is placed 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. In addition, the closed school discharge window is expanded from 120 days to 180 days prior to the school’s closure, though the final rule does not allow for an automatic closed school loan discharge. 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. If the Secretary discharges a loan in whole or in part, the Department of Education may require anthe school to repay the amount of the discharged loan.

On March 11, 2020, the 116^th Congress passed a joint resolution providing for Congressional disapproval of the 2019 BDTR Rule. President Trump vetoed the joint resolution on May 29, 2020, and the House subsequently failed to override the veto during a vote on June 26, 2020.

Accrediting Agencies and State Authorization

On November 1, 2019, the Department of Education published final rules amending regulations governing the recognition of accrediting agencies, certain student assistance provisions including state authorization rules, and institutional eligibility. Among other changes, the final rules revise the definition of “state authorization reciprocity agreement” such that member states may enforce their own general-purpose state laws and regulations, but may not 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.” In addition, the final rules remove certain disclosure requirements related to ~~use a template designed~~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 Department’s new rules also refine the process for recognition and review of accrediting agencies, the criteria used 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,~~recognize accrediting agencies, and the ~~median loan debt of program completers~~Department’s requirements 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,accrediting agencies 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, the gainful employment regulations require institutions to certify, among other things, that each eligible 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 required to obtain state approval. Institutions also must certify that each eligible program satisfies the applicable educational prerequisites for professional licensure or certification requirements in each state in which it is located or is otherwise 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 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 repaymentterms of their ~~student loans,~~oversight of accredited institutions 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.

~~Borrower Defenses to Repayment~~

~~Pursuant to the Higher Education Act and following negotiated rulemaking, on November 1, 2016, the Department published~~programs. The final regulations that, inter alia, would have specified the acts or omissions of an institution that a borrower may assert as a defense to repayment of a loan made under the Direct Loan Program. Although the regulations were scheduled to becomebecame effective on July 1, ~~2017,~~2020, excepting certain provisions which were eligible to be implemented early by institutions, and certain provisions relating to recognition of accrediting agencies effective January 1 or July 1, 2021. Neither Capella University nor Strayer University opted for early implementation.

On July 29, 2020, the National Advisory Committee on Institutional Quality and Integrity (“NACIQI”) held a meeting to review compliance by the Higher Learning Commission (“HLC”) with Department of Education requirements for recognized accrediting agencies. HLC is the institutional accreditor for Capella University. On June ~~16, 2017,~~30, 2020, the Department ~~delayed indefinitely~~released a staff report that outlined HLC’s alleged noncompliance with its own policies and the ~~effective date~~Department’s regulations with regard to a change of ~~selected provisions~~ownership

approval process for the acquisition of the Art Institute of Colorado and the Illinois Institute of Art, by Dream Center Educational Holdings. The staff report noted noncompliance in the areas of due process, consistency in decision making, and proper appeals procedures. The staff report proposed a one-year prohibition on HLC accrediting new institutions and a required compliance report on HLC’s remedial actions. NACIQI voted 9-2 to reject the staff report’s proposed sanctions, but NACIQI’s recommendation is non-binding. A Senior Department Official will make the decision on any action regarding HLC’s recognition by the Department. That decision can be appealed to the Secretary of Education. The Company cannot predict what conclusions the Department will reach regarding HLC.

Distance Education and Innovation

On April 2, 2020, the Department of Education published proposed regulations related to distance education and ~~announced its intention~~innovation to ~~conduct~~amend the sections of the institutional eligibility regulations issued under the HEA regarding establishing eligibility, maintaining eligibility, and losing eligibility. The proposed rules are the third package of regulations reflecting consensus language from the Accreditation and Innovation negotiated rulemaking, ~~proceedings~~which took place from January to ~~revise~~April, 2019. Among other changes, the ~~regulations. Those proceedings are expected to begin in November 2017. On October 24, 2017,~~proposed rules would establish an updated definition of distance education; amend the ~~Department published an interim final rule to delay until July 1, 2018 the effective date~~existing definition of the ~~selected provisions. On October 24, 2017,~~credit hour; create a definition of academic engagement; and update eligibility, program design, and disbursement rules for programs offered through the direct assessment of learning. The Department ~~also~~accepted public comments through May 4, 2020. If the final regulations are published ~~a notice of proposed rulemaking to delay until July~~by November 1, ~~2019 the effective date of the selected provisions.~~

~~The Clery Act~~

The 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,2020, they will be effective July 1, ~~2015, implementing amendments to the Clery Act. In addition,~~2021.

Title IX

On May 6, 2020, the Department ~~has interpreted~~of Education published final rules related to implementation of Title IX ~~to categorize~~of the Education Amendments of 1972 (“Title IX”), which prohibits discrimination on the basis of sex in education programs that receive funding from the federal government. The final rules define what constitutes sexual ~~violence as a form~~harassment for purposes 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~~in the ~~University~~administrative enforcement context, describe what actions trigger an institution’s obligation to ~~comply with~~respond to incidents of alleged sexual harassment, and specify how an institution must respond to allegations of sexual harassment. Among other things, the ~~Clery Act or~~new rules include a requirement for live hearings on Title IX ~~requirements~~sexual harassment claims, which includes direct and cross-examination of parties, university-provided advisors (in the event a student or ~~regulations thereunder could result in action~~party does not provide an advisor), rulings on questions of relevance by decision-makers, and the ~~Department fining~~creation and maintenance of a record of the ~~University~~live hearing proceedings. If pending litigation seeking court intervention to delay or ~~limiting or~~

vacate the final Title IX rule is unsuccessful, it will become effective August 14, 2020.

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suspending its participation in Title IV programs, could lead to litigation, and could harm the University’s reputation. The Company believes that the University is 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.~~regulations. 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~~that identified a payment of less than $500 due to the Department based on an underpayment on a return to Title IV calculation and otherwise ~~closing~~closed 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 student 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.

~~NYCDA~~

~~NYCDA currently provides on-ground courses~~ Strayer University is required to apply for recertification by March 31, 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. Capella will be required to apply for recertification by September 30, 2022.

16. Subsequent Events

On July 29, 2020, the Company announced it entered into a definitive agreement to acquire the Australia and New ~~Jersey, New York, Pennsylvania, Utah, and the District~~Zealand operations of ~~Columbia, and in the Netherlands, but~~Laureate Education, Inc. The transaction is ~~not accredited, does not participate in state or federal student financial aid programs, and is not~~valued at approximately $642.7 million, subject to potential adjustments, and has been unanimously approved by 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 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~~Boards of ~~the Company (“Merger Sub”), and Capella Education Company, a Minnesota corporation (“Capella”), entered into an Agreement and Plan~~Directors of ~~Merger (the “Merger Agreement”). Pursuant to the Merger Agreement, and~~both companies. The transaction is 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~~certain customary closing conditions ~~including, but not limited~~and regulatory approvals and is expected to ~~(i)~~close by the ~~approval~~first quarter of 2021. The Company ~~stockholders and Capella stockholders, (ii)~~has received commitments from its lenders to expand its existing revolving credit facility from $250 million to $350 million coinciding with the ~~expiration or termination~~close 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~~

transaction.

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~~(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.

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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,” "may," “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, capital expenditures and ~~capital expenditures.~~the ultimate effect of the COVID-19 pandemic on the Company's business and results. 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 student enrollment, competitive factors, risks associated with the further spread of COVID-19, including the ultimate effect of COVID-19 on people and economies, the effect of regulatory measures or voluntary actions that may be put in place to limit the spread of COVID-19, including restrictions on business operations or social distancing requirements, 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 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 II, “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q, 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 and Capella University (the ~~“University”~~"Universities"), both accredited post-secondary institutions of higher education. Our operations also include certain non-degree programs, mainly focused on software and application development.

Company Response to COVID-19

The ongoing COVID-19 pandemic has caused significant volatility and disruption to the United States and international economies. SEI took early action to protect the health and well-being of our students and employees in accordance with government mandates and informed by guidance from the Centers for Disease Control and Prevention. Specifically, we have instituted a work-from-home policy for the vast majority of our workforce, closed physical campus locations, moved our on-ground courses at Strayer University online, postponed large events such as graduation ceremonies, and prohibited non-essential employee travel.

We are taking measures to provide financial relief to our students and employer partners negatively affected by the COVID-19 crisis. Measures include payment flexibility, scholarship opportunities, and other pricing relief. We expect that these measures will enable more students to continue pursuing their education during and after the COVID-19 crisis, and that revenue-per-student will range from flat to down 2% compared to 2019. In addition, we have decided to pause planned 2020 new campus expansion for campus projects that have not yet started, although we have completed or executed leases on roughly half of the originally planned eight to twelve new campuses for 2020.

As the pandemic has continued, we have begun to see deterioration in overall demand, including lower new student enrollment and lower continuation rates, which has impacted our total enrollment results for the third quarter and likely for the fourth quarter as well. The weakness has been most pronounced at Strayer University, where we estimate new student enrollment for the third quarter to decline approximately 27%. While it is not possible to predict the magnitude or persistence of this deterioration, enrollment weakness that started in 2010, following the recession in 2008, impacted Strayer University’s new student enrollment for several quarters. Enrollment at Capella University also has been impacted by the pandemic, though not as severely as Strayer University. As a result of the near-term enrollment trends we have enhanced our cost management efforts to offset lower than expected revenue, and now project that revenue and adjusted operating income in the period ending September 30, 2020 will be flat compared to the prior year. If these trends continue through the balance of the year, we would project 2020 revenue to be flat to slightly up compared to 2019, and adjusted operating income and income before income taxes to increase in the low to mid-single digits from 2019. The Company does not intend to disclose anticipated enrollment figures or trends in future periodic filings or earnings releases, except as may be required by law.

We believe our current financial position and expected operating results, and ability to further control costs are sufficient to support the ongoing operation of SEI and its two Universities in a manner that protects the health and well-being of our employees, students, and partners.

Recent Developments

On July 29, 2020, the Company and its wholly owned subsidiary SEI Newco Inc. (the “Purchaser”) entered into a sale and purchase agreement (the “Purchase Agreement”) with LEI AMEA INVESTMENTS B.V. (the “Seller”) and, solely as guarantor of ~~January 13, 2016,~~certain of the Seller’s obligations thereunder, Laureate Education, Inc. (“Laureate”) pursuant to which, subject to the satisfaction or waiver of certain conditions, the Purchaser will acquire Laureate’s Australia and New ~~York Code~~Zealand operations by means of a purchase of all of the outstanding equity interests of certain subsidiaries held by the Seller. Pursuant to the Purchase Agreement, the Purchaser will pay a purchase price of approximately $642.7 million, subject to certain adjustments specified therein, including for working capital, indebtedness, and ~~Design Academy (“NYCDA”).~~cash at the closing of the transaction, and the forecasted performance of the acquired business. The Company has agreed to guarantee the obligations of the Purchaser under the Purchase Agreement. The transaction, which is expected to close by the first quarter of 2021, is subject to certain regulatory approvals and customary closing conditions. The Company has received commitments from its lenders to expand its existing revolving credit facility from $250 million to $350 million coinciding with the close of the transaction.

Company Overview

During the first quarter of 2020, the Company revised its reportable segments and restated the results for the prior period to conform to the current period presentation. As of June 30, 2020, 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 of Education. By offering its programs both online and in physical classrooms, Strayer University provides ~~non-degree courses in web~~its working adult students flexibility and ~~application~~convenience.

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

DevMountain is a software development ~~primarily~~program offering affordable, high-quality, leading-edge software coding education at ~~campuses~~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.

In the second quarter, Strayer University’s enrollment increased 6% to 53,782 compared to 50,713 for the same period in 2019. New ~~York City~~student enrollment for the period decreased 4% and ~~Philadelphia, PA. NYCDA’s results of operations are included~~continuing student enrollment for the period increased 8%. We believe new student enrollment at Strayer University is more volatile in ~~our results~~the current economic environment due to Strayer’s mostly undergraduate student mix, which includes many first-time college students. We project new student enrollment at Strayer University in the third quarter will be lower by approximately 27% from the ~~acquisition date.~~

~~Most~~prior year, and total enrollment will be lower by approximately 1%. In the first quarter of ~~our revenue comes from the~~2020, Strayer University adopted a new enrollment

reporting census date, which ~~derives~~occurs approximately 96% of its revenue from tuition for educational programs, whether delivered 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 ratably over the course of instruction. If a student withdraws from a course prior to completion, 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 our students are recorded upon the start of the course, which for the University is~~two weeks following the start of the academic term. ~~Because~~Previously the ~~University’s academic quarters coincide~~Strayer University enrollment census date coincided with ~~the calendar quarters, at~~ the end of the ~~fiscal quarter (and~~University’s “drop-add” period, approximately one week following the start of the academic ~~term), tuition receivable generally represents amounts due~~term. The new census date is consistent with the approach employed by Capella University. All historical enrollment data included in this Form 10-Q has been revised using the new census date. Year-over-year percentage change in enrollment for the new census date does not differ significantly from ~~students~~the prior approach.

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 ~~educational services already provided and deferred revenue generally represents advance payments for academic services to be provided~~working adults, in the ~~future. Based upon past experience~~following primary disciplines: public service leadership, nursing and ~~judgment,~~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, one of the seven regional collegiate accrediting agencies recognized by the Department of Education.

Sophia Learning is an innovative company which leverages technology and high quality academic content to provide self-paced online courses recommended by the American Council on Education for college credit.

In the second quarter, Capella University’s enrollment increased 1% to 39,341 compared to 38,979 for the same period in 2019. New student enrollment for the period increased 1% and continuing student enrollment for the period increased 1%. Capella University’s enrollment demand has also seen a slight contraction though less severe than at Strayer University, ~~establishes an allowance for doubtful accounts with respect to accounts~~

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~~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~~most likely attributable to the ~~length~~greater mix of ~~time~~graduate learners who are less sensitive to the ~~balance~~current economic downturn. We expect a new student enrollment decline from the prior year of between 5-10%, while total enrollment at Capella will increase approximately 1% from the prior year. In the first quarter of 2020, Capella University consolidated two different enrollment reporting census dates into a single date, which occurs approximately two weeks following the start of the academic term. All historical enrollment data included in this Form 10-Q has been ~~outstanding. In establishing reserve amounts, we also consider~~revised using the ~~status of students as to whether or not they are currently enrolled~~new census date. Year-over-year percentage change in enrollment for the ~~next term, as well as~~new census date does not differ significantly from the ~~likelihood of recovering balances that~~prior approach.

We believe we have ~~previously been written off, based~~the right operating strategies in place to provide the most direct path between learning and employment for our students. We focus 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~~innovation continually to differentiate ourselves 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~~markets and drive growth by supporting student success, producing affordable degrees, optimizing our comprehensive marketing strategy, serving a broader set of ~~earnings~~our students’ professional needs, and ~~realized gains or losses~~establishing new growth platforms. Technology and the talent of 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 continued growth over the long-term. We will continue to invest in these enablers to strengthen the foundation and future of our business. We also believe our enhanced scale and capabilities allow us to continue to focus on ~~investments~~innovative cost and ~~interest expense consists of interest incurred on~~revenue synergies, while improving the value provided to our ~~outstanding borrowings, unused revolving credit facility fees, and amortization of deferred financing costs.~~

students.

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;~~credit losses; 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~~right-of-use lease ~~obligations~~assets for facilities that have been ~~closed;~~vacated; 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~~six months ended ~~September~~June 30, ~~2017~~2020 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

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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 the 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~~collectability 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~~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 response to the COVID-19 pandemic, Strayer University is temporarily allowing students to miss two consecutive terms without losing their

Graduation Fund credits. In their final academic year, qualifying students will receive one free course for every three courses that ~~were~~the student successfully ~~completed. Revenue and the value of the benefit earned by students participating~~completed in prior years. The University's 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~~June 30, ~~2017,~~2020, we had deferred ~~$34.4~~$52.3 million for estimated redemptions earned under the Graduation Fund, as compared to ~~$29.5~~$49.6 million at December 31, ~~2016.~~2019. 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~~credit losses related to tuition receivable from students primarily based on our historical collection rates by age of receivable and adjusted for reasonable expectations of future collection performance, net of ~~recoveries, and consideration of other relevant factors.~~recoveries. 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

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methodologies for estimating ~~bad debts~~credit losses in consideration of actual experience. If the financial condition of our students were to deteriorate based on current or expected future events 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~~second quarter of ~~2017, our~~both 2020 and 2019, bad debt expense was ~~4.9%~~4.7% of ~~revenue, compared to 3.8% for the same period in 2016.~~revenue. A change in our allowance for ~~doubtful accounts~~credit losses of 1% of gross tuition receivable as of ~~September~~June 30, ~~2017~~2020 would have changed our income from operations by approximately ~~$0.4~~$0.8 million.

~~Accrued lease~~

Goodwill and 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. Indefinite-lived intangible assets, which include trade names, are recorded at fair market value on their acquisition date. At the time of acquisition, goodwill and indefinite-lived intangible assets are allocated to reporting units. Management identifies its reporting units by assessing whether the components of its operating segments constitute businesses for which discrete financial information is available and management regularly reviews the operating results of those components. Goodwill and indefinite-lived intangible assets are assessed at least annually for impairment. No events or circumstances occurred in the three and six months ended June 30, 2020 to indicate an impairment to goodwill or indefinite-lived intangible assets. Accordingly, no impairment charges related ~~costs~~ ~~— We estimate potential sublease income~~to goodwill or indefinite-lived intangible assets were recorded during the three and ~~vacancy~~six month periods ~~for space that is not in use, adjusting our estimates when circumstances change. If our estimates change or if we enter into subleases at rates~~ended June 30, 2020.

Finite-lived intangible assets that are ~~substantially different than~~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 ~~current estimates, we will adjust our liability~~finite-lived intangible assets for ~~lease~~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 ~~related costs. During the nine months~~six month periods ended ~~September~~June 30, ~~2017 and 2016, we reduced our liability for leases by approximately $0.3 million and $2.0 million, respectively.~~

2020.

Other estimates — We record estimates for ~~contingent consideration,~~ certain of our accrued expenses and for 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

In the ~~third~~second quarter of ~~2017,~~2020, we generated ~~$108.5~~$255.8 million in revenue ~~a 6% increase~~ compared to ~~2016, principally due to a 7% increase~~$245.1 million in ~~total enrollment and partially offset by a 1% decline in revenue per student. Income~~2019. Our income from operations was ~~$8.2~~$46.4 million for the ~~third~~second quarter of ~~2017. During the third quarter of 2017, we recorded approximately $2.1~~2020 compared to $27.6 million in ~~net benefits~~2019 due primarily to higher revenues driven by enrollment growth and lower merger and integration 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.costs. Net income in the ~~third~~second quarter of ~~2017~~2020 was ~~$6.2~~$34.2 million ~~including approximately $2.4~~ compared to $24.4 million for the same period in 2019. Diluted earnings per share was $1.55 compared to $1.10 for the same period in 2019. For the six months ended June 30, 2020, we generated $521.1 million in ~~after-tax benefits from the nonrecurring adjustments described above,~~revenue, compared to ~~$2.9~~$491.6 million for the same period in ~~2016, which reflected approximately $0.1~~2019. Our income from operations was $90.4 million ~~in after-tax benefits from~~for the ~~nonrecurring adjustments described above. Diluted earnings per share was $0.56~~six months ended June 30, 2020 compared to ~~$0.27~~$53.3 million for the same period in ~~2016. Diluted~~2019. Net income was $69.4 million for the six months ended June 30, 2020 compared to $35.9 million for the same period in 2019, and diluted earnings per share was $3.15 in the six months ended June 30, 2020 compared to $1.63 for the ~~third quarter~~same period in 2019.

In the accompanying analysis of ~~2017~~financial information for 2020 and ~~2016 was $0.34~~2019, we use certain financial measures including Adjusted Total Costs and ~~$0.25~~Expenses, Adjusted Income from Operations, Adjusted Operating Margin, Adjusted Net Income, and 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~~United States of America (“GAAP”). These measures, which are considered “non-GAAP financial measures” under SEC rules, are defined by us to exclude the following:

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

integration expenses associated with the Company's merger with Capella Education Company, and transaction expenses associated with potential future business combinations,

income from partnership and other investments that are not part of our core operations, and

discrete tax adjustments

~~Key enrollment~~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 additional understanding of our business and operating results, including underlying trends associated with the Company’s ongoing operations.

Non-GAAP financial measures are not defined in the same manner by ~~quarter~~all companies and may not be comparable with other similarly titled measures of other companies. Non-GAAP financial measures may be considered in addition to, but not as a substitute for ~~the University were as follows:~~

~~Enrollment~~

~~% Change vs Prior Year~~

~~Table~~or superior to, GAAP results. A reconciliation of ~~Contents~~

~~Since 2013, we have introduced a number of initiatives in response~~these measures to the ~~variability in our enrollment. Recognizing that affordability~~most directly comparable GAAP measures is an important factor in a prospective student’s decision to seek a college degree, we reduced 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 courses are redeemable in the student’s final academic year. In 2015, we launched Strayer@Work, which works with Fortune 1000 companies to structure customized education and training programs for their employees, often with significant discounts to our published tuition rates. In January 2016, we acquired NYCDA, which charges variable tuition by program based on the number of hours of instruction. These initiatives had a net negative impact on revenue per student, which declined 1% in 2016, and 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 $63.0 million in the ~~third~~second quarter of ~~2017~~2020 compared to $46.0 million in 2019. Adjusted net income was $45.4 million in the second quarter of 2020 compared to $35.2 million in 2019, and adjusted diluted earnings per share was $2.06 in the second quarter of 2020 compared to $1.59 in 2019. Adjusted income from ~~$102.2~~operations was $126.1 million in the ~~third quarter of 2016, principally due~~six months ended June 30, 2020 compared to ~~total enrollment growth of 7%, partially offset by a decline in revenue per student of 1%. The decline in revenue per student is largely attributable to a new pricing structure which was implemented~~$94.4 million for the ~~first quarter~~same period in 2019. Adjusted net income was $91.9 million in the six months ended June 30, 2020 compared to $71.9 million for the same period in 2019, and adjusted diluted earnings per share was $4.17 in the six months ended June 30, 2020 compared to $3.26 for the same period in 2019.

The tables below reconcile our reported results of ~~2014 which reduced tuition~~operations to adjusted results (amounts in thousands, except per share data):

Reconciliation of Reported to Adjusted Results of Operations for ~~new undergraduate students by approximately 20%, and gave eligible students access to the Graduation Fund. Revenues for undergraduate students increased 11% in~~ the three months ended ~~September~~June 30, ~~2017, driven by an increase in total undergraduate enrollment~~2020



			Non-GAAP Adjustments
	As Reported (GAAP)		Amortization of intangible assets⁽¹⁾			Merger and integration costs⁽²⁾			Income from other investments⁽³⁾			Tax adjustments⁽⁴⁾			As Adjusted (Non-GAAP)
Revenues	$	255,831	$	—		$	—		$	—		$	—		$	255,831
Total costs and expenses	209,436		(15,417		)	(1,174		)	—			—			192,845
Income from operations	46,395		15,417			1,174			—			—			62,986
Operating margin	18.1%														24.6%
Net income	$	34,152	$	15,417		$	1,174		$	(1,135	)	$	(4,213	)	$	45,395

Diluted earnings per share	$	1.55													$	2.06
Weighted average diluted shares outstanding	22,012														22,012

Reconciliation of ~~13%, partially offset by a decline~~Reported to Adjusted Results of Operations for the three months ended June 30, 2019



			Non-GAAP Adjustments
	As Reported (GAAP)		Amortization of intangible assets⁽¹⁾			Merger and integration costs⁽²⁾			Income from other investments⁽³⁾			Tax adjustments⁽⁴⁾			As Adjusted (Non-GAAP)
Revenues	$	245,110	$	—		$	—		$	—		$	—		$	245,110
Total costs and expenses	217,514		(15,417		)	(3,019		)	—			—			199,078
Income from operations	27,596		15,417			3,019			—			—			46,032
Operating margin	11.3%														18.8%
Net income	$	24,409	$	15,417		$	3,019		$	(1,605	)	$	(6,040	)	$	35,200

Diluted earnings per share	$	1.10													$	1.59
Weighted average diluted shares outstanding	22,109														22,109

Reconciliation of Reported to Adjusted Results of Operations for the six months ended June 30, 2020



			Non-GAAP Adjustments
	As Reported (GAAP)		Amortization of intangible assets⁽¹⁾			Merger and integration costs⁽²⁾			Income from other investments⁽³⁾			Tax adjustments⁽⁴⁾			As Adjusted (Non-GAAP)
Revenues	$	521,133	$	—		$	—		$	—		$	—		$	521,133
Total costs and expenses	430,779		(30,834		)	(4,938		)	—			—			395,007
Income from operations	90,354		30,834			4,938			—			—			126,126
Operating margin	17.3%														24.2%
Net income	$	69,391	$	30,834		$	4,938		$	(1,389	)	$	(11,898	)	$	91,876

Diluted earnings per share	$	3.15													$	4.17
Weighted average diluted shares outstanding	22,041														22,041

Reconciliation of Reported to Adjusted Results of Operations for the six months ended June 30, 2019



			Non-GAAP Adjustments
	As Reported (GAAP)		Amortization of intangible assets⁽¹⁾			Merger and integration costs⁽²⁾			Income from other investments⁽³⁾			Tax adjustments⁽⁴⁾			As Adjusted (Non-GAAP)
Revenues	$	491,618	$	—		$	—		$	—		$	—		$	491,618
Total costs and expenses	438,299		(30,834		)	(10,198		)	—			—			397,267
Income from operations	53,319		30,834			10,198			—			—			94,351
Operating margin	10.8%														19.2%
Net income	$	35,909	$	30,834		$	10,198		$	(2,628	)	$	(2,411	)	$	71,902

Diluted earnings per share	$	1.63													$	3.26
Weighted average diluted shares outstanding	22,079														22,079


⁽¹⁾	Reflects amortization and depreciation expense of intangible assets and software assets acquired through the Company’s merger with Capella Education Company.


⁽²⁾	Reflects integration expenses associated with the Company's merger with Capella Education Company, and transaction expenses associated with potential future business combinations.


⁽³⁾	Reflects income recognized from the Company's investments in partnership interests and other investments.


⁽⁴⁾	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 27.5% and 28.5% for the three and six months ended June 30, 2019 and 2020, respectively.

Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019

Revenues. Consolidated revenue ~~per student of 2%. We expect this decline in revenue per student~~increased 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 and educational support expenses.~~ ~~Instruction and educational support expenses increased $0.7~~$255.8 million, compared to ~~$57.0~~$245.1 million in the ~~third quarter~~same period in the prior year, primarily due to enrollment growth at the Universities. Future revenue growth at both Universities is expected to be affected negatively as a result of ~~2017~~the COVID-19 pandemic because of potential declines in enrollment as well as enhanced scholarships and discounts we are offering our students. In the Strayer University segment for the three months ended June 30, 2020, enrollment grew 6% to 53,782 from ~~$56.3~~50,713 for the same period in 2019. Revenue grew 4.8% to $138.1 million compared to $131.7 million in 2019 as a result of the increase in enrollment. In the Capella University segment for the three months ended June 30, 2020, enrollment grew 1% to 39,341 from 38,979 for the same period in 2019. Capella University segment revenue increased 3.9% to $117.8 million compared to $113.4 million in the ~~third quarter~~same period in the prior year as a result of ~~2016,~~the enrollment growth.

Instructional and support costs. Consolidated instructional and support costs decreased to $125.5 million, compared to $130.7 million in the same period in the prior year, principally due to ~~increases in bad debt expense~~efficiencies gained through our technology investments, which have also helped improve student success, and ~~nonrecurring personnel~~cost synergies realized as a result of the merger with CEC. Consolidated instructional and 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 and educational support expenses as a percentage of revenues decreased to ~~52.5%~~49.1% in the ~~third~~second quarter of ~~2017~~2020 from ~~55.1%~~53.3% in the ~~third~~second quarter of ~~2016.~~

~~Marketing~~2019.

General and administration expenses. ~~Marketing~~Consolidated general and administration expenses ~~increased $1.4 million, or 6%,~~decreased to ~~$26.8~~$67.3 million in the ~~third~~second quarter of ~~2017 from $25.4~~2020 compared to $68.4 million in the ~~third quarter of 2016,~~prior year, principally due to ~~increased investments in branding initiatives. Marketing expenses~~cost synergies realized as a ~~percentage~~result 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 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. Generalmerger with CEC. Consolidated general and administration expenses as a percentage of revenues decreased to ~~10.3%~~26.3% in the ~~third~~second quarter of ~~2017~~2020 from ~~10.7%~~27.9% in the ~~third~~second quarter of ~~2016.~~

2019.

Amortization of intangible assets. Amortization expense related to intangible assets acquired in the merger with CEC was $15.4 million in the second quarter of both 2020 and 2019.

Merger and integration costs. Merger and integration costs were $1.2 million in the second quarter of 2020 compared to $3.0 million for the same period in 2019 and reflect expenses for integration support services and severance costs incurred in connection with the merger with CEC as well as expenses associated with potential future business combinations incurred in the second quarter of 2020.

Income from operations. ~~Income~~Consolidated income from operations increased ~~$3.4~~to $46.4 million ~~or 70%,~~ in the second quarter of 2020 compared to ~~$8.2~~$27.6 million in the ~~third~~second quarter of ~~2017 from $4.8 million in the third quarter of 2016.~~

~~Investment income and interest expense. Investment income increased~~2019, principally due to ~~$0.3 million in the third quarter of 2017 compared to $0.1 million in the third quarter of 2016~~higher revenues as a result of ~~higher yields~~enrollment growth at both Universities and ~~an increase in our cash balances. Interest expense was $0.2~~lower merger and integration related costs. Strayer University segment income from operations increased 46.6% to $35.8 million in the ~~third~~second quarter of ~~both 2017~~2020, compared to $24.4 million in the second quarter of 2019, primarily due to higher revenues due to enrollment growth. Capella University segment income from operations increased 25.8% to $27.2 million in the second quarter of 2020 compared to $21.6 million for the same period in 2019, primarily due to higher revenues due to enrollment growth.

Other income. Other income decreased to $1.6 million in the second quarter of 2020 compared to $4.1 million in the second quarter of 2019, as a result of lower yields on money markets and ~~2016.~~marketable securities and a decrease in investment income from our limited partnership and other investments. We ~~have $150.0 million available under our revolving credit facility and no borrowings outstanding~~expect interest income in 2020 to be negatively affected by reductions in interest rates as a result of ~~September 30, 2017.~~

the COVID-19 crisis.

Provision for income ~~taxes~~.taxes. Income tax expense was ~~$2.1~~$13.9 million in the ~~third~~second quarter of ~~2017,~~2020, compared to ~~$1.9~~$7.3 million in the ~~third~~second quarter of ~~2016.~~2019. Our effective tax rate for the quarter was ~~25.6% and was favorably impacted by~~28.9%, compared to 23.1% for the ~~reduction~~same period in 2019. The increase in the ~~value of contingent consideration related to the NYCDA acquisition, which is not subject to income tax. We expect our~~ effective tax rate ~~including~~is due to an increase in state taxes in the ~~effect of~~current year period, and larger tax ~~benefits associated with~~windfalls on share-based compensation in the ~~vesting of restricted stock and the impacts of the contingent consideration adjustments referenced above, to be approximately 34.0% for 2017.~~

prior year period.

~~Table of Contents~~

Net income. Net income increased ~~$3.3 million~~ to ~~$6.2~~$34.2 million in the ~~third~~second quarter of ~~2017 from $2.9~~2020 compared to $24.4 million in the ~~third~~second quarter of ~~2016~~2019 due to the factors discussed above.

~~Nine~~

Six Months Ended ~~September~~June 30, ~~2017~~2020 Compared to ~~Nine~~the Six Months Ended ~~September~~June 30, ~~2016~~

~~Enrollment. Average enrollments at the University~~2019

Revenues. Consolidated revenue increased 6% to ~~42,826 students for the nine months ended September 30, 2017~~$521.1 million, compared to ~~40,238 students for~~$491.6 million in the same period in ~~2016.~~

~~Revenues. Revenues increased 4%~~the prior year, primarily due to ~~$336.1~~enrollment growth at the Universities. Future revenue growth at both Universities is expected to be affected negatively as a result of the COVID-19 pandemic because of potential declines in enrollment as well as enhanced scholarships and discounts we are offering our students. In the Strayer University segment, revenue grew 8.1% to $283.7 million in the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 from ~~$321.8~~$262.5 million in the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2019, primarily due to enrollment growth. In the Capella University segment, revenue increased 3.6% to $237.4 million in the six months ended June 30, 2020, compared to $229.1 million in the six months ended June 30, 2019, primarily due to enrollment growth.

Instructional and support costs. Consolidated instructional and support costs decreased to $258.5 million in the six months ended June 30, 2020 from $264.8 million in the six months ended June 30, 2019, principally due to ~~total enrollment growth~~efficiencies gained through our technology investments, which have also helped improve student success, and cost synergies realized as a result of ~~6%, partially offset by~~the merger with CEC. Consolidated instructional and support costs as a ~~decline in revenue per student~~percentage of ~~2%. The decline in revenue per student is largely attributable~~revenues decreased 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%49.6% in the ~~nine~~six months ended ~~September~~June 30, ~~2017, driven by an increase~~2020 from 53.9% in ~~total undergraduate enrollment of 13%, partially offset by a decline in revenue per student of 3%~~the six months ended June 30, 2019.

General and administration expenses. 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 class compared to 2016.

~~Instruction~~Consolidated general and ~~educational support expenses.~~ ~~Instruction and educational support~~administration expenses increased ~~$3.9 million, or 2%,~~ to ~~$180.1~~$136.5 million in the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 from ~~$176.2~~$132.5 million in the ~~nine~~six months ended ~~September~~June 30, ~~2016. The increase primarily resulted from increases~~2019, principally due to increased investments in ~~personnel costs associated~~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%~~26.2% in the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 from ~~54.7%~~27.0% in the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~

~~Marketing expenses~~2019.

Amortization of intangible assets. ~~Marketing expenses increased $3.3 million, or 5%,~~Amortization expense related to ~~$64.7~~intangible assets acquired in the merger with CEC was $30.8 million in the ~~nine~~six months ended ~~September~~June 30, ~~2017 from $61.4~~2020 and 2019.

Merger and integration costs. Merger and integration costs were $4.9 million in the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2020 compared to $10.2 million in for the same period in 2019 and reflect expenses for integration support services and severance costs incurred in connection with the merger with CEC as well as expenses associated with potential future business combinations incurred in 2020.

Income from operations. Consolidated income from operations increased to $90.4 million in the six months ended June 30, 2020 compared to $53.3 million in the six months ended June 30, 2019, principally due to ~~increased investments in branding initiatives. Marketing expenses as a percentage of~~higher revenues ~~increased to 19.3% in the nine months ended September 30, 2017 from 19.1% in the nine months ended September 30, 2016.~~

~~Admissions advisory expenses~~. Admissions advisory expenses increased $1.6 million, or 12%, to $14.8 million in the nine months ended September 30, 2017 from $13.2 million in the nine months ended September 30, 2016, primarily due to increased personnel costs. Admissions advisory expenses as a percentage of revenues increased to 4.4% 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,~~ as a result of ~~higher yields~~enrollment growth at both Universities and ~~an increase in our cash balances. Interest expense was $0.5~~lower merger and integration related costs. Strayer University segment income from operations increased 50.1% to $72.4 million in ~~both~~the six months ended June 30, 2020, compared to $48.2 million in the six months ended June 30, 2019, primarily due to higher revenues due to enrollment growth. Capella University segment income from operations increased 16.5% to $53.7 million in the six months ended June 30, 2020, compared to $46.1 million for the same period in 2019, primarily due to higher revenues due to enrollment growth.

Other income. Other income decreased to $3.8 million in the six months ended June 30, 2020 compared to $7.5 million in the six months ended June 30, 2019, as a result of lower yields on money markets and marketable securities and a decrease in investment income from our limited partnership and other investments. We expect interest income in 2020 to be negatively affected by reductions in interest rates as a result of the ~~nine months ended September 30, 2017 and 2016. We have $150.0 million available under our revolving credit facility and no borrowings outstanding as of September 30, 2017.~~

COVID-19 crisis.

Provision for income taxes. Income tax expense ~~decreased to $13.7~~was $24.7 million in the ~~nine~~six months ended ~~September~~June 30, ~~2017 from $14.6~~2020 compared to

$24.9 million in the ~~nine~~six months ended ~~September~~June 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 our2019. 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~~six months ended June 30, 2020 was 26.3% compared to ~~39.3%~~40.9% for the six months ended June 30, 2019. The tax rate in ~~2016.~~

2019 was unfavorably impacted by changes in previously deferred compensation arrangements, resulting in a discrete charge of $11.5 million to reduce the Company's deferred tax asset related to these arrangements. The tax rate for both periods reflects favorable discrete adjustments, primarily related to tax windfalls recognized through share-based payment arrangements.

~~Table of Contents~~

Net income. Net income increased ~~$4.0 million~~ to ~~$27.1~~$69.4 million in the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 from ~~$23.1~~$35.9 million in the ~~nine~~six months

ended ~~September~~June 30, ~~2016~~2019 due to the factors discussed above.

Liquidity and Capital Resources

At ~~September~~June 30, ~~2017,~~2020, we had cash, ~~and~~ cash equivalents, and marketable securities of ~~$150.5~~$525.3 million compared to ~~$129.2~~$491.2 million at December 31, ~~2016~~2019 and ~~$120.5~~$440.5 million at ~~September~~June 30, ~~2016.~~2019. At ~~September~~June 30, ~~2017,~~2020, 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~~amounts. During the ~~revolving credit facility. During each of the nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, we paid unused commitment fees of $0.3 million. We were in compliance with all applicable covenants related to the ~~credit agreement~~Amended Credit Facility as of ~~September~~June 30, ~~2017.~~

2020. We had no borrowings outstanding during each of the six months ended June 30, 2020 and June 30, 2019.

Our net cash ~~from~~provided by operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2017 increased to $44.4~~2020 was $111.9 million, as compared to ~~$30.1~~$103.1 million for the same period in ~~2016.~~2019. The increase in net cash from operating activities was largely due to the ~~payment~~increase in income from operations, partially offset by payments of ~~retention agreements in connection with the NYCDA acquisition in January 2016, cash provided by changes in~~ working capital ~~and~~in the ~~timing of income tax payments in 2017 compared to 2016.~~

second quarter.

Capital expenditures ~~were $14.6~~increased to $25.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to ~~$7.5~~$18.9 million for the same period in ~~2016.~~

2019, due to investments in new campuses and technologies.

The Board of Directors declared ~~an annual~~a regular, quarterly cash dividend of ~~$1.00~~$0.60 per share of common ~~share, payable quarterly.~~stock for each of the first two quarters of 2020. During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, we ~~have~~ paid a total of ~~$8.6~~$26.7 million in cash dividends on our common stock. ~~For~~During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, we ~~did not~~invested approximately $0.2 million to repurchase ~~any~~common shares in the open market under our repurchase program. As of ~~common stock and, at September~~June 30, ~~2017,~~2020, we had ~~$70~~$249.8 million inof share repurchase authorization remaining to use through December 31, ~~2017.~~

2020.

For the ~~third~~second quarter of ~~2017,~~both 2020 and 2019, bad debt expense as a percentage of revenue was ~~4.9% compared to 3.8%~~4.7%. Bad debt expense for the ~~third~~second quarter of ~~2016.~~

2020 includes additional reserves to account for projected deterioration in collections performance in 2020 due to the COVID-19 pandemic.

We believe that existing cash and cash equivalents, cash generated from operating activities, and if necessary, cash borrowed under our ~~revolving credit facility,~~Amended 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~~June 30, ~~2017~~2020 and ~~2016.~~2019. We also hold marketable securities, which primarily include tax-exempt municipal securities and corporate debt securities. During the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, we earned interest income of ~~$0.7~~$2.9 million and ~~$0.3~~$5.2 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~~June 30, ~~2017,~~2020, 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~~June 30, ~~2017.~~2020. 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~~June 30, ~~2017.~~2020. Based upon such review, the Chief Executive Officer and Chief Financial Officer have concluded that the Company had in place, as of ~~September~~June 30, ~~2017,~~2020, 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.

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 have not been any changes in the Company’s internal control over financial reporting during the quarter ended ~~September~~June 30, ~~2017~~2020 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, 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,~~2019, other than the additional and revised risk factors included below.

You should carefully consider the factors discussed below and in Part I, “Item 1A. Risk Factors” 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 QuarterlyAnnual Report on Form ~~10-Q~~10-K for the ~~quarter~~year ended ~~June 30, 2017.~~December 31, 2019, 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. 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~~current COVID-19 pandemic and ~~supersede~~other possible future public health emergencies may adversely affect our business, our future results of operations, and our overall financial performance.

The ongoing COVID-19 global and national pandemic has caused significant volatility and disruption to the ~~risk factors~~international and United States economies. Like many other companies, to comply with government mandates and to protect the ~~same captions~~safety and wellbeing of our students/learners, faculty and staff, and the communities in ~~our Annual Report on Form 10-K~~which we live, we have instituted a remote work policy for the ~~year ended December 31, 2016, as updated by~~vast majority of our ~~Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017~~workforce, closed physical campus locations, and ~~June 30, 2017.~~

~~We are subject~~moved our on-ground courses at Strayer University, which comprised less than 5% of total seat count, to ~~compliance reviews, which, if they resulted in a material finding of noncompliance, could~~online-only instruction. The transition to remote working involves many operational challenges and may adversely affect our ability to satisfy student needs. Remote working may increase the chance of successful cyber-attacks, including email phishing schemes targeting employees to give up their credentials. Preparing our offices in anticipation of a portion of our workforce returning to physical office locations also presents operational challenges as on-site staff adjust to new equipment, new protocols, and hybrid combinations of on-site and remote work.

The extent to which the COVID-19 pandemic and future public health emergencies will affect our business, operations and financial results is uncertain and will depend on numerous evolving factors that remain uncertain and are impossible to predict, including: the duration and scope of the pandemic; the impact on economic activity from the pandemic and actions taken in response, including those of governmental entities; the impact of the pandemic and the government response thereto on our employees, students, and business partners, including any suspensions or terminations of employer tuition reimbursement programs; our ability to operate and provide our services with employees working remotely and/or closures of our campus locations; potential exposure to claims for liability arising out of employees or students who may contract the virus; and the ability of our students/learners to continue their education notwithstanding the pandemic.

COVID-19 related regulatory and legislative changes may contain ambiguous provisions that could result in penalties in case of institutional noncompliance.

The CARES Act and subsequent guidance from the Department of Education create several changes with regard to the administration of federal financial assistance programs. All of these changes include several ambiguities that make compliance difficult. In case of noncompliance, the Universities may face administrative sanctions, including penalties, Title IV program participation restrictions, debarment, and liabilities under applicable law, such as the False Claims Act, any of which could have a material adverse effect on our business.

We are unable to predict whether Congress or the Department of Education plans to implement further changes related to federal financial assistance programs as a result of the COVID-19 pandemic.

Student loan defaults could result in the loss of eligibility to participate in Title IV programs.

~~Because we operate~~

In general, under the Higher Education Act, an educational institution may lose its eligibility to participate in some or all Title IV programs if, for three consecutive federal fiscal years, 30% or more of its students who were required to begin repaying their student

loans in the relevant federal fiscal year default on their payment by the end of the second federal fiscal year following that fiscal year. Institutions with a ~~highly regulated industry, we~~cohort default rate equal to or greater than 15% for any of the three most recent fiscal years for which data are available 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 participatinga 30-day delayed disbursement period for first-year, first-time borrowers. In addition, an institution may lose its eligibility to participate in some or all Title IV programs if its default rate for a federal fiscal year was greater than 40%.

The global spread of COVID-19 has created significant economic uncertainty and disrupted large portions of the economy. The pandemic and the ~~Office~~preventative measures taken to contain the pandemic have caused a substantial increase in unemployment and could cause a global recession, which could result in an increase in the number 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~~borrowers defaulting on their student loans, including among 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.

graduates.

~~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~~because of ~~eligibility and certification, in~~high student loan default rates, 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, whichloss 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 Strayer University’s three-year cohort default rates for federal fiscal years 2014, 2015 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.

2016, were 13.2%, 10.6%, and 10.4%, respectively. Capella University’s three-year cohort default rates for federal fiscal years 2014, 2015, and 2016 were 6.9%, 6.5%, and 6.8%, respectively. The average official cohort default rates for proprietary institutions nationally were 15.5%, 15.6%, and 15.2% for federal fiscal years 2014, 2015, and 2016, respectively.

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

During the three months ended ~~September~~June 30, ~~2017,~~2020, we did not repurchase any shares of common stock under our repurchase program. The remaining authorization for ~~our~~ common stock repurchases was ~~$70.0~~$249.8 million as of ~~September~~June 30, ~~2017,~~2020, and is available for use through December 31, ~~2017.~~

2020.

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 Inline XBRL Instance Document
101.		SCH Inline XBRL Schema Document
101.		CAL Inline XBRL Calculation Linkbase Document
101.		DEF Inline XBRL Definition Linkbase Document
101.		LAB Inline 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~~July 30, ~~2017~~ 2020



				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⁾	Other revenue is primarily comprised of academic fees, sales of course materials, placement fees and other revenue streams.


	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