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.

The Company accounts for goodwill and indefinite-lived intangible assets in accordance with FASB ASC 350, Intangibles Goodwill and Other, and in 2018 adopted ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The Company annually assesses goodwill for impairment on October 31^st, or 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 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, and 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

At December 31, 2019, all identified intangible assets with a useful life were fully amortized.

During the year ended December 31, 2019, as a result of circumstances that included HCN’s continued underperformance against revised 2019 internal targets and overall 2019 financial performance, the Company completed interim goodwill impairment tests during the first and third quarters. The implied fair value of goodwill was calculated and compared to the recorded goodwill, and the Company determined the fair value of goodwill was $26.6 million, or $7.3 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 $7.3 million to reduce the carrying value of its goodwill in the HCN Segment during 2019.

The Company engaged an independent valuation firm to assist with the valuation and determination of the fair value of HCN for both assessments. The independent valuation firm weighted the results of four different valuation methods: (1) discounted cash flows; (2) guideline company; (3) guideline transaction for comparable transactions; and (4) guideline transaction for private equity transactions. Under the discounted cash flow method, 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 guideline company method, valuation metrics from other education companies were used to determine the value. Under the comparable transaction method, pricing terms from other transactions in the higher education market were used to determine the value. Under the private equity method, pricing terms from private equity transactions were used to determine the value. Values derived under the four valuation methods were then weighted to estimate HCN’s enterprise value.

The goodwill impairment charges recorded in the quarters ended March 31, 2019 and September 30, 2019 eliminated the difference between the fair value of goodwill and the carrying value of goodwill. As such, future changes, including even minor changes in revenue, operating income, market multiples, discount rates, and other inputs to the valuation process may result in future impairment charges and those charges could be material.

As of October 31, 2018 and 2019, 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 Company’s October 31, 2019 annual assessment concluded that the fair value of HCN exceeded the carrying value by approximately 4%, or $1.5 million.

Changes in the carrying amount of goodwill by reportable segment during the year ended December 31, 2019 are as follows (in thousands):



	APEI Segment		HCN Segment			Total Goodwill
	APEI Segment		HCN Segment			Total Goodwill
Goodwill as of December 31, 2018	$	—	$	33,899		$	33,899
Impairment	—		(7,336		)	(7,336		)
Goodwill as of December 31, 2019	$	—	$	26,563		$	26,563

There were no changes in the carrying amount of goodwill by reportable segment during the years ended December 31, 2017 and 2018.

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, 2018 (in thousands):



	2018
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Finite-lived intangible assets
Curricula	$	405	$	405	$	—
Non-compete agreements	86		86		—
Student contracts and relationships	3,870		3,548		322
Total finite-lived intangible assets	4,361		4,039		322
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	$	4,039	$	4,043

Other intangible assets consist of the following as of December 31, 2019 (in thousands):



	2019
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Finite-lived intangible assets
Curricula	$	405	$	405	$	—
Non-compete agreements	86		86		—
Student contracts and relationships	3,870		3,870		—
Total finite-lived intangible assets	4,361		4,361		—
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	$	4,361	$	3,721

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

Determining the fair value of HCN requires judgment and the use of significant estimates and assumptions, including fluctuations in enrollments, 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.