Goodwill and Intangible Assets

In connection with its November 1, 2013 acquisition of HCN, the Company applied ASC 805, Business Combinations, using the acquisition method of accounting. The Company recorded $38.6 million of goodwill, representing the excess of the purchase price over the amount assigned to the net assets acquired and the fair value assigned to identified intangible assets, and recorded $8.1 million of identified intangible assets.

In accordance with ASC 350, Intangibles-Goodwill and Other, the Company assesses goodwill for impairment on or around each anniversary date of the acquisition, and more frequently if events and circumstances indicate that goodwill might be impaired. Goodwill impairment testing consists of an optional qualitative assessment as well as a quantitative test. The quantitative test compares the fair value of the reporting unit to its carrying value. If the carrying value of the reporting unit is greater than zero and its fair value is greater than its carrying amount, there is no impairment. If the carrying value is greater than the fair value, the difference between the two values is recorded as an impairment.

In addition to goodwill, HCN recorded $8.1 million of identifiable intangible assets at the acquisition date. HCN recorded identified intangible assets with an indefinite useful life in the aggregate amount of $3.7 million, which includes trade names, accreditation, licensing and Title IV, and affiliate agreements. HCN recorded $4.4 million of identified intangible assets with a definite useful life. At the acquisition date, the useful life assigned to each type of intangible asset with a definite useful life was as follows:



	Useful Life
Student contracts and relationships	6 years
Curricula	3 years
Non-compete agreements	5 years

The future amortization of intangible assets is as follows (in thousands):



2018	$	563
2019	322
2020 and beyond	—
Total	$	885

In August 2016, the Company completed a qualitative assessment to determine if an interim goodwill impairment test was necessary. Due to relevant circumstances that included: (1) HCN’s under performance against internal targets; (2) the challenging higher education competitive and regulatory environment, particularly for proprietary institutions; (3) overall financial performance; and (4) the uncertain status of ACICS, the Company concluded it was more likely than not the fair value of HCN was less than its carrying amount; therefore, the Company proceeded with step one of the goodwill impairment test as of August 31, 2016. Step one of the goodwill impairment test identified that HCN’s fair value was less than the carrying value. Accordingly, step two testing was completed in order to determine the amount of the impairment. In step two, the fair value of all assets and liabilities was estimated for the purpose of deriving an estimate of the implied fair value of goodwill. The implied fair value of goodwill was then compared to the recorded goodwill to determine the amount of impairment. Step two testing indicated that the fair value of goodwill was $33.9 million or $4.7 million less than its carrying value. There was no impairment of the intangible assets. As a result, the Company recorded a pretax, non-cash charge of $4.7 million to reduce the carrying value of its goodwill.

The Company utilized an independent valuation firm to determine the fair value of HCN. The independent valuation firm weighted the results of four different valuation methods: (1) discounted cash flow; (2) guideline company method; (3) guideline transaction method - comparable transactions; and (4) guideline transaction method - private equity transactions. Under the income approach, fair value was determined based on estimated discounted future cash flows of HCN. The cash flows were discounted by an estimated risk weighted-average cost of capital, which was intended to reflect the overall level of inherent risk of HCN. Under the market approach, pricing terms from other transactions in the higher education market were used to determine the value of HCN. Values derived under the four valuation methods were then weighted to estimate HCN’s enterprise value.

The goodwill impairment charge recorded in the quarter ended September 30, 2016 eliminated the difference between the fair value of goodwill and the book value of goodwill. As such, future changes, including minor changes, in revenue, operating income, valuation multiples, discount rates and other inputs to the valuation process may result in future impairment charges and those charges may be material.

As of October 31, 2016 and October 31, 2017, the Company completed its annual assessment of goodwill and concluded that HCN’s fair value was more than the carrying value; consequently, there was no impairment. The method and estimates used in the subsequent tests were consistent with those used in the August 31, 2016 impairment testing.

Changes in the carrying amount of goodwill by reportable segment during fiscal year ending December 31, 2016 and December 31, 2017 are as follows (in thousands):



	APEI Segment		HCN Segment			Total Goodwill
	APEI Segment		HCN Segment			Total Goodwill
Goodwill as of December 31, 2015	$	—	$	38,634		$	38,634
Impairment	—		(4,735		)	(4,735		)
Goodwill as of December 31, 2016	$	—	$	33,899		$	33,899
Impairment	—		—			—
Goodwill as of December 31, 2017	$	—	$	33,899		$	33,899

The following table presents the components of the net carrying amount of goodwill by reportable segment as of December 31, 2016 (in thousands):



	APEI Segment		HCN Segment			Total Goodwill
	APEI Segment		HCN Segment			Total Goodwill
Carrying amount of Goodwill as of December 31, 2016	$	—	$	38,634		$	38,634
Accumulated impairment	—		(4,735		)	(4,735		)
Carrying amount of Goodwill as of December 31, 2016	$	—	$	33,899		$	33,899

The following table presents the components of the net carrying amount of goodwill by reportable segment as of December 31, 2017 (in thousands):



	APEI Segment		HCN Segment		Total Goodwill
	APEI Segment		HCN Segment		Total Goodwill
Gross carrying amount of Goodwill as of December 31, 2017	$	—	$	33,899	$	33,899
Accumulated impairment	—		—		—
Net Carrying amount of Goodwill as of December 31, 2017	$	—	$	33,899	$	33,899

Other intangible assets, included in Other Assets on the Consolidated Balance Sheets in these Consolidated Financial Statements, consist of the following as of December 31, 2016 (in thousands):



	2016
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Finite-lived intangible assets
Curricula	$	405	$	405	$	—
Non-compete agreements	86		54		32
Student contracts and relationships	3,870		2,419		1,451
Total finite-lived intangible assets	4,361		2,878		1,483
Indefinite-lived intangible assets
Trade name	1,998		—		1,998
Accreditation, licensing and Title IV	1,686		—		1,686
Affiliation agreements	37		—		37
Total indefinite-lived intangible assets	3,721		—		3,721
Total intangible assets	$	8,082	$	2,878	$	5,204

Other intangible assets consist of the following as of December 31, 2017 (in thousands):



	2017
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Finite-lived intangible assets
Curricula	$	405	$	405	$	—
Non-compete agreements	86		72		14
Student contracts and relationships	3,870		2,999		871
Total finite-lived intangible assets	4,361		3,476		885
Indefinite-lived intangible assets
Trade name	1,998		—		1,998
Accreditation, licensing and Title IV	1,686		—		1,686
Affiliation agreements	37		—		37
Total indefinite-lived intangible assets	3,721		—		3,721
Total intangible assets	$	8,082	$	3,476	$	4,606

Identified intangible assets are amortized in a manner that reflects the estimated economic benefit of the intangible assets. Curricula and Non-compete agreements are amortized on a straight-line basis. Student contracts and relationships are amortized using an accelerated method.

Determining the fair value of HCN requires judgment and the use of significant estimates and assumptions, including revenue growth rates, EBITDA margins, discount rates and future market conditions, among others. Given the current competitive and regulatory environment, and the uncertainties regarding the related impact on HCN’s business, there can be no assurance that the estimates and assumptions made for purposes of the Company’s interim and annual goodwill impairment tests will prove to be accurate predictions of the future. If the Company’s assumptions are not realized, the Company may record additional goodwill impairment charges in future periods. It is not possible at this time to determine if any such future impairment charge would result or whether such charge would be material.