What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-04 compared with 2020-05-07 · 175 added, 89 removed, 111 unchanged (70% of the section changed)

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Important factors that could cause such differences include, but are not limited to:

● the harm to our business, results of operations, and financial condition, and harm to our most significant university partner in connection with the COVID-19 outbreak;

● the occurrence of any event change or other circumstance that could give rise to the termination of any of the key university partner agreements;

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● the impact of any natural disasters or public health emergencies;

● the harm to our business, results of operations, and financial condition, and harm to our most significant university partner in connection with the COVID-19 outbreak;

● general adverse economic conditions or other developments that affect the job prospects of our university partners’ students.

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In January 2019, GCE began providing education services to numerous university partners across the United States, through our wholly owned subsidiary, Orbis Education, which we acquired on January 22, 2019.

Acquisition to consolidated financial statements for a full description of the Acquisition.

See Note 2 - Acquisition to consolidated financial statements for a full description of the Acquisition.

Orbis Education works in partnership with a growing number of top universities and healthcare networks across the country to develop high-quality, career-ready graduates who enter the workforce and ease healthcare industry demands.

Orbis Education offers four primary academic programs with site simulation and skill labs located near healthcare providers.

Therefore, the results of operations for the three months ended March 31, 2019 include Orbis Education’s financial results for the period from January 22, 2019 to March 31, 2019.

Therefore, the results of operations for the six months ended June 30, 2019 include Orbis Education’s financial results for the period from January 22, 2019 to June 30, 2019.

SIGNIFICANT DEVELOPMENTS

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This contagious outbreak, which has continued to spread, and the related adverse public health developments, including orders to shelter-in-place, travel restrictions and mandated non-essential business closures, have adversely affected workforces, organizations, customers, economies and financial markets globally, leading to an economic downturn and increased market volatility.

It has also disrupted the normal operations of many businesses, including ours, and our most significant university partner.

It has also disrupted the normal operations of many businesses, including ours, and our university partners.

Due to the economic disruption caused by the COVID-19 pandemic, the National Bureau of Economic Research announced in June 2020 that the United States entered into a recession in February 2020.

The Company has a long-term master services agreement pursuant to which the Company provides education services to its most significant university partner, GCU, in return for 60% of GCU’s tuition and fee revenues, which includes fee revenues from room, board, and other ancillary businesses including a student-run golf course and hotel.

GCU has three types of students, traditional ground university students attending class on its campus in Phoenix, Arizona and of which approximately 70% live on campus in university owned residence halls, professional studies students which are working adult students that attend class one night a week on the Phoenix campus, and online students that attend class fully online.

GCU has three types of students, traditional ground university students attending class on its campus in Phoenix, Arizona and of which approximately 70% live on campus in university owned residence halls, professional studies students who are working adult students that attend class one night a week on the Phoenix campus, and online students that attend class fully online.

This outbreak, as well as measures taken to contain the spread of COVID-19, has impacted GCU’s students and its business in a number of ways.

GCU’s professional studies students and its traditional ground university students were immediately converted to an online learning environment and residential students were strongly encouraged to move off campus.

Given the Company’s historical experience delivering online education services and the fact that all of its students and faculty use the university’s online learning management system for at least some of the coursework, the transition thus far has been seamless and thus, the university has not incurred a significant decrease in tuition revenue or significant increase in costs associated with this transition although the university has seen an increase in Leave of Absence requests for professional studies and online students that need to take a break due to the pandemic.

In addition, the following impacts from the COVID-19 pandemic, which began in late March and have continued in our second fiscal quarter of 2020, have served to reduce GCU’s non-tuition revenue and, consequently, the service revenues we earn under the master services agreement:

● Traditional ground university students that elected to move off campus are receiving partial refunds for dormitory and meal payments related to the Spring semester, which has reduced GCU’s revenue and thus the service revenues earned by the Company in the last nine days of March and the month of April;

● Ancillary businesses such as the hotel, golf course, and merchandise shops were closed in late March, which reduced and will continue to reduce GCU’s revenues and thus the service revenues earned by the Company until these businesses are reopened;

● Summer semester classes will be moved to an online environment and limited residential students are expected;

Beginning in March 2020, GCU’s programs for its professional studies students and its traditional ground university students were immediately converted to an online learning environment and residential students were strongly encouraged to move off campus.

Given the Company’s historical experience delivering online education services and the fact that all of GCU’s students and faculty use the university’s online learning management system for at least some of the coursework, the transition thus far has been seamless and thus, the university has not incurred a significant decrease in tuition revenue or significant increase in costs associated with this transition.

In addition, the following impacts from the COVID-19 pandemic have served to reduce GCU’s non-tuition revenue during its Spring and Summer semesters and, consequently, the service revenues we earn under the master services agreement:

● Traditional ground university students who elected to move off campus near the end of the Spring semester received partial refunds for dormitory and meal payments, which reduced GCU’s revenue and thus the service revenues earned by the Company in the last nine days of March and the month of April;

● Ancillary businesses operated by GCU such as its hotel and merchandise shops were closed in late March, which reduced and will continue to reduce GCU’s revenues and thus the service revenues earned by the Company until these businesses are reopened;

● Summer semester classes were moved to an online environment and limited residential students remained on campus during the Summer semester;

● GCU’s doctoral students are required to attend two residencies on the university’s campus and at its hotel in Phoenix, Arizona as part of their dissertation.

On an annual basis approximately 3,000 learners attend the week-long residency, most of whom have historically attended in the Summer.

The residencies that were scheduled for the last week of March through the end of May have been cancelled and it is possible that the residencies scheduled during the rest of the Summer will be cancelled as well.

Most of the residencies that

were scheduled for the last week of March through the end of July were cancelled and it is likely that most of the residencies through the end of the calendar year will also be cancelled.

On July 17, 2020, GCU announced its plans for the traditional campus Fall semester.

Those plans include moving back the start of instruction for the Fall semester from August 24, 2020 to September 7, 2020, beginning the semester with online instruction for all students, providing for residential students to move in during the week of September 21, 2020, beginning face-to-face instruction on September 28, 2020, eliminating some holiday breaks, and adding an additional week of instruction in December.

The change in the start date for GCU’s ground traditional students will have the effect of moving tuition revenue for all GCU traditional students, and certain ancillary revenue for residential students, from the 3rd quarter of 2020 to the 4th quarter of 2020, and the change in the move-in date for GCU’s residential students will reduce Fall semester room and board revenue for the university by three weeks.

Although the complete financial impact of COVID-19 on GCU’s Fall semester enrollment will not be known until it begins the Fall semester, it is currently anticipated that GCU’s ground traditional enrollment will be higher than initially anticipated but that the number of students living on campus in the Fall semester will be less as a significant number of students have informed the university that they plan to take all of their Fall semester courses online and remain at home given COVID-19 health concerns.

The changes described above at GCU will impact the Company’s service revenue under its Master Services Agreement with GCU.

The Company also has long-term services agreements with numerous university partners across the United States through its wholly owned subsidiary, Orbis Education.

Orbis Education offers four primary academic programs with site simulation and skill labs located near healthcare providers.

The majority of Orbis Education’s students are studying in the Accelerated Bachelor of Science in Nursing program which is offered in a 12-16 month format in three or four academic semesters.

We currently believe the Spring semester will be completed without interruption and each university partner still plans to begin its Summer semester.

It is currently anticipated that some students that were scheduled to start in the Summer semester will delay their start until the Fall semester which will result in slightly lower enrollments and revenues in the Summer semester.

As a result of the items mentioned above, we expect lower service revenues under both the Master Services Agreement with GCU and under the Orbis Education’s services agreements for the second and third quarters of 2020, and due to the limited operating expenses that we incur to deliver those services, we expect there to be a direct reduction in our operating profit and operating margins.

The COVID-19 outbreak also presents operational challenges to the Company as approximately 90% of our entire workforce is currently working remotely.

The majority of Orbis Education university partners’ students are studying in the Accelerated Bachelor of Science in Nursing program which is offered in a 12-16 month format in three or four academic semesters.

The Spring semester was completed without interruption and each university partner is in its Summer semester.

Some students who were scheduled to start their program in the Summer semester delayed their start until the Fall semester which resulted in slightly lower enrollments and revenues in the Summer semester.

Although the complete financial impact of COVID-19 on our other university partners’ Fall semester enrollment will not be known until they begin the Fall semester, it is currently anticipated that all university partners will begin their Fall semesters on schedule and that new student starts in the Fall semester will meet or exceed our initial estimates.

However, we expect total Fall enrollment to be less than initially anticipated;

while additional students would like to start the program in the Fall semester, in most cases the university partner or hospital partner are not comfortable increasing the Fall cohort size to make up for the students that deferred their start from the Summer semester to the Fall semester primarily due to concerns around the availability of clinical rotations.

As a result of the items mentioned above, we expect lower service revenue for the third quarter of 2020 under both the Master Services Agreement with GCU and under the Orbis Education’s services agreements with our other university partners.

In addition, due to the limited operating expenses that we incur to deliver those services, we expect there to be a direct reduction in our operating profit and operating margins.

The COVID-19 outbreak also presents operational challenges to the Company as approximately 90% of our entire workforce is currently working remotely and is expected to continue doing so for the foreseeable future.

This degree of remote working could increase risks in the areas of internal control, cyber security and the use of remote technology, which could result in interruptions or disruptions in normal operational processes.

It is not possible for us to completely predict the duration or magnitude of the adverse results of the outbreak and its effects on our business, results of operations or financial condition at this time, but such effects may be material in future quarters.

If GCU is not able to fully open its campus to its traditional residential students for the Fall academic semester commencing in late August 2020, that will have a material impact on GCU’s revenue and thus the service revenue earned by the Company.

The decision by a number of the Orbis Education’s university partners to cancel or postpone the Summer and/or Fall semesters would have a material impact on the service revenue earned by the Company.

We believe that the reduction in our net revenue and operating profit in the first quarter of 2020 that resulted from the impacts of COVID-19 was $1.8 million.

We further believe that the potential reduction in net revenue in the second and third quarters of 2020 attributable to COVID-19, even assuming that none of Orbis Education’s university partners postpone or cancel the Summer semester, will range from $9.0 million to $10.0 million and from $4.0 million to $6.0 million, respectively, with a comparable reduction in operating profit during each period.

It is not possible for us to completely predict the duration or magnitude of the adverse results of the COVID-19 pandemic and its effects on our business, results of operations or financial condition at this time, but such effects may be material in future quarters.

If GCU is not able to fully open its campus to its traditional residential students for the Fall academic semester, now commencing in late September 2020, that will have a material impact on GCU’s revenue and thus the service revenue earned by the Company.

Any decision by a number of the Orbis Education’s university partners to cancel or postpone the Fall semester would also have a material impact on the service revenue earned by the Company.

We estimate that the shift in net revenue from the third quarter to the fourth quarter as a result of the shift in the start date of the GCU Fall semester is $9.9 million lower revenue in the third quarter and $9.9 million higher revenue in the fourth quarter.

We estimate that the potential reduction in net revenue attributable to COVID-19, even assuming that all of our university partners including GCU starts and completes their Fall semesters as planned, will be approximately $20 million in the second half of 2020, $13.1 million in the third quarter and $6.9 million in the fourth quarter with a comparable reduction in operating profit during each period.

Critical Accounting Policies and Use of Estimates

Our critical accounting policies are disclosed in the 2019 Form 10-K for the fiscal year ended December 31, 2019.

During the three months ended March 31, 2020, there have been no significant changes in our critical accounting policies.

During the six months ended June 30, 2020, there have been no significant changes in our critical accounting policies.

Results of Operations

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Three Months Ended

Six Months Ended

Costs and expenses

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General and administrative

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

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

Service revenue .

Our service revenue for the three months ended March 31, 2020 was $221.7 million, an increase of $24.4 million, or 12.4%, as compared to service revenue of $197.3 million for the three months ended March 31, 2019.

Our service revenue for the three months ended June 30, 2020 was $185.8 million, an increase of $11.0 million, or 6.3%, as compared to service revenue of $174.8 million for the three months ended June 30, 2019.

The increase year over year in service revenue was primarily due to an increase in university partner enrollments between years of 8.2% partially offset by a decrease in revenue per student year over year.

Partner enrollments in programs serviced by Orbis Education at June 30, 2020 were 3,720, an increase of 12.2% over 3,316 enrollments at June 30, 2019, while enrollments at GCU grew to 94,606, an increase of 8.0%.

The decrease in revenue per student is primarily due to the reduced Spring and Summer semester ancillary revenues at GCU resulting from COVID-19 and the fact that there were two less revenue producing days for GCU’s ground campus Spring semester in the second quarter of 2020 as compared to the second quarter of 2019 partially offset by the following factors (described below) that have historically produced an increase in revenue per student year over year.

The partnership agreements that were acquired as part of the Orbis Education acquisition generally generate a higher revenue per student than our agreement with GCU as these agreements generally have a higher percentage of service revenue, the partners have higher tuition rates than GCU and the majority of these students are studying in the Accelerated Bachelor of Science in Nursing program so these students take on average more credits per semester.

In addition, Orbis Education had five more locations opened in the second quarter of 2020 than it did in the prior year period, resulting in a 24.2% year over year increase in Orbis Education revenues.

Technology and academic services .

Our technology and academic services expenses for the three months ended June 30, 2020 were $27.2 million, an increase of $4.7 million, or 20.5%, as compared to technology and academic services expenses of $22.5 million for the three months ended June 30, 2019.

These increases were primarily due to increases in employee compensation and related expenses including share-based compensation, and in occupancy and depreciation including lease expenses of $3.9 million and $1.0 million, respectively, partially offset by a slight decrease in technology and academic supply costs of $0.2 million.

These increases were primarily due to increased headcount to support our 24 university partners, and their increased enrollment growth, tenure-based salary adjustments, an increase

in benefit costs, and the increased number of Orbis Education site location openings year over year.

Our technology and academic services expenses as a percentage of net revenue increased 1.7% to 14.6% for the three months ended June 30, 2020, from 12.9% for the three months ended June 30, 2019 primarily due to the Orbis Education university partnership agreements requiring a higher level of technology and academic services than our agreement with GCU and due to the reduced Spring and Summer semester ancillary revenues at GCU resulting from COVID-19.

Additionally, Orbis Education is incurring costs related to the planned opening of seven new locations in Fall 2020 and four more in the Spring of 2021 as compared to the five locations that were opened in the same period in the prior year.

Counseling services and support .

Our counseling services and support expenses for the three months ended June 30, 2020 were $57.6 million, an increase of $3.3 million, or 6.1%, as compared to counseling services and support expenses of $54.3 million for the three months ended June 30, 2019.

These increases were primarily attributable to increases in employee compensation and related expenses including share-based compensation, and in depreciation, amortization and occupancy costs of $5.1 million and $0.4 million, respectively, partially offset by a decrease in other counseling services and support expenses of $2.2 million.

The increases in employee compensation and related expenses were primarily due to increased headcount to support our 24 university partners, and their increased enrollment growth, tenure-based salary adjustments, an increase in benefit costs, and the increased number of Orbis Education site location openings year over year.

The decrease in other counseling services and support expenses is primarily the result of decreased travel costs to service our 24 university partners.

All non-essential travel ceased when the COVID-19 national emergency was announced in mid-March.

Our counseling services and support expenses as a percentage of net revenue decreased 0.1% to 31.0% for the three months ended June 30, 2020, from 31.1% for the three months ended June 30, 2019 primarily due to our ability to leverage our other counseling services and support expenses across an increasing revenue base partially offset by the reduced Spring and Summer semester ancillary revenues at GCU resulting from COVID-19.

Marketing and communication .

Our marketing and communication expenses for the three months ended June 30, 2020 were $41.1 million, an increase of $5.4 million, or 15.1%, as compared to marketing and communication expenses of $35.7 million for the three months ended June 30, 2019.

Our marketing and communication expenses as a percentage of net revenue increased by 1.7% to 22.1% for the three months ended June 30, 2020, from 20.4% for the three months ended June 30, 2019, primarily due to the increase in the number of new university partners and locations opening in the Fall of 2020 and Spring of 2021 as compared to the same period in the prior year and due to the reduced Spring and Summer semester ancillary revenues at GCU resulting from COVID-19.

General and administrative .

Our general and administrative expenses for the three months ended June 30, 2020 were $9.5 million, an increase of $0.3 million, or 3.1%, as compared to general and administrative expenses of $9.2 million for the three months ended June 30, 2019.

This increase was primarily due to increases in occupancy and depreciation of $0.3 million and an increase in professional fees of $0.2 million, partially offset by a decrease in other general and administrative expenses of $0.2 million.

Our increases in occupancy and depreciation are primarily related to the expansion of office space at our Orbis Education headquarters in Indianapolis, Indiana.

Our general and administrative expenses as a percentage of net revenue decreased by 0.2% to 5.1% for the three months ended June 30, 2020, from 5.3% for the three months ended June 30, 2019 due to our ability to leverage our other general and administrative expenses across an increasing revenue base partially offset by the reduced Spring and Summer semester ancillary revenues at GCU resulting from COVID-19.

Amortization of intangible assets .

Amortization of intangible assets for the three months ended June 30, 2020 was $2.1 million a decrease of $0.1 million as compared to amortization of intangible assets for the three months ended June 30, 2019 of $2.2 million.

As a result of the Orbis Education acquisition, certain identifiable intangible assets were created (primarily customer relationships) that will be amortized over their expected lives.

Loss on transaction .

$0.1 million of transaction expenses were reversed in the three months ended June 30, 2019 related to the GCU transaction.

Interest income on Secured Note .

Interest income on the secured note from GCU in the initial principal amount of $870.1 million (the “Secured Note”) for the three months ended June 30, 2020 was $14.7 million, an increase of $0.2 million, or 1.7%, as compared to $14.5 million for the three months ended June 30, 2019.

The Secured Note bears interest at 6% annually, and GCU makes monthly interest payments.

The increase over the prior year was primarily due to an increase in the average principal balance of the Secured Note between periods due to net capital expenditure loans made to GCU under the Secured Note during the past twelve months.

Interest expense .

Interest expense was $1.1 million for the three months ended June 30, 2020, a decrease of $1.8 million, as compared to interest expense of $2.9 million for the three months ended June 30, 2019.

The decrease in interest expense was primarily due to a decline in the average credit facility outstanding balance between periods due to the paydown of the credit facility during the past twelve months and an interest rate reduction of approximately 150 basis points since the end of 2019.

Investment interest and other .

Investment interest and other for the three months ended June 30, 2020 was $0.4 million, a decrease of $2.3 million, as compared to $2.7 million in the three months ended June 30, 2019.

This decrease was primarily attributable to a decline in interest income on excess cash as the average investment balance declined year over year and lower interest rates.

Income tax expense .

Income tax expense for the three months ended June 30, 2020 was $15.3 million, an increase of $1.2 million, or 8.6%, as compared to income tax expense of $14.1 million for the three months ended June 30, 2019.

This increase was the result of an increase in our effective tax rate between periods, partially offset by a decrease in taxable income.

Our effective tax rate was 24.6% during the second quarter of 2020 compared to 21.7% during the second quarter of 2019.

In the second quarter of 2020, the effective tax rate was impacted by higher state taxes and lower excess tax benefits of nil in the second quarter of 2020 as compared to $2.2 million in the same period in 2019 due to a lower stock price and lower stock option exercises in the second quarter of 2020.

The inclusion of excess tax benefits and deficiencies as a component of our income tax expense will increase volatility within our provision for income taxes as the amount of excess tax benefits or deficiencies from share-based compensation awards are dependent on our stock price at the date the restricted awards vest, our stock price on the date an option is exercised, and the quantity of options exercised.

Our restricted stock vests in March each year so the favorable benefit will primarily impact the first quarter each year.

Our net income for the three months ended June 30, 2020 was $47.0 million, a decrease of $4.1 million, or 8.0%, as compared to $51.1 million for the three months ended June 30, 2019, due to the factors discussed above.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Service revenue .

Our service revenue for the six months ended June 30, 2020 was $407.4 million, an increase of $35.3 million, or 9.5%, as compared to service revenue of $372.1 million for the six months ended June 30, 2019.

The increase year over year in service revenue was primarily due to an increase in university partner enrollments between years of 8.2% and an increase in revenue per student year over year.

Partner enrollments in programs serviced by Orbis Education at March 31, 2020 was 3,999, an increase of 18.2% over 3,384 enrollments at March 31, 2019 and due to an increase in enrollments at GCU to 103,592, an increase of 5.4%.

The increase in revenue per student is primarily due to the following factors.

The partnership agreements that were acquired as part of the acquisition generally generate a higher revenue per student than our agreement with GCU as these agreements generally have a higher percentage of service revenue, the partners have higher tuition rates than GCU and the majority of these students are studying in the Accelerated Bachelor of Science in Nursing program so these students take on average more credits per semester.

Also, we generated slightly more Spring semester revenues in the first quarter of 2020 as compared to the first quarter of 2019 due to the timing of the Orbis Education acquisition on January 22, 2019, due to 2020 being a Leap Year and thus providing an extra day of revenue in 2020 as compared to 2019, and because our most significant university partner, GCU, had residential student enrollment growth year over year of 10.0% and residential students generate higher revenue per student than other GCU students due to ancillary revenues such as room and board.

The increase in revenue per student is primarily due to the following factors (described below).

Also, we generated slightly more Spring semester revenues in the first half of 2020 as compared to the first half of 2019 due to the timing of the Orbis Education acquisition on January 22, 2019, due to 2020 being a Leap Year and thus providing an extra day of revenue in 2020 as compared to 2019, and because our most significant university partner, GCU, had residential student enrollment growth year over year of 10.0% and residential students generate higher revenue per student than other GCU students due to ancillary revenues such as room and board.

In addition, Orbis Education had five more locations opened in the second quarter of 2020 than it did in the prior year

period, resulting in a 37.6% year over year increase in Orbis Education revenues.

This was partially offset by reduced Spring and Summer semester ancillary revenues at GCU resulting from COVID-19.

Technology and academic services .

Our technology and academic services expenses for the three months ended March 31, 2020 were $26.3 million, an increase of $7.7 million, or 41.1%, as compared to technology and academic services expenses of $18.6 million for the three months ended March 31, 2019.

These increases were primarily due to increases in employee compensation and related expenses including share-based compensation, in occupancy and depreciation including lease expenses, and in technology and academic supply costs of $6.3 million, $1.2 million, and $0.2 million, respectively.

Our technology and academic services expenses for the six months ended June 30, 2020 were $53.4 million, an increase of $12.2 million, or 29.8%, as compared to technology and academic services expenses of $41.2 million for the six months ended June 30, 2019.

These increases were primarily due to increases in employee compensation and related expenses including share-based compensation and in occupancy and depreciation including lease expenses of $10.1 million and $2.2 million, respectively, partially offset by a slight decrease of $0.1 million in other technology and academic supply costs.

These increases were primarily due to increased headcount to support our 24 university partners, and their increased enrollment growth, tenure-based salary adjustments, an increase in benefit costs, the timing of the Orbis Education acquisition and the increased number of sites between years.

Our technology and academic services expenses as a percentage of net revenue increased 2.5% to 11.9% for the three months ended March 31, 2020, from 9.4% for the three months ended March 31, 2019 primarily due to the Orbis Education university partnership agreements requiring a higher level of technology and academic services than our agreement with GCU.

Our technology and academic services expenses as a percentage of net revenue increased 2.0% to 13.1% for the six months ended June 30, 2020, from 11.1% for the six months ended June 30, 2019 primarily due to the Orbis Education university partnership agreements requiring a higher level of technology and academic services than our agreement with GCU and due to the reduced Spring and Summer semester ancillary revenues at GCU resulting from COVID-19.

Counseling services and support .

Our counseling services and support expenses for the three months ended March 31, 2020 were $60.2 million, an increase of $7.1 million, or 13.4%, as compared to counseling services and support expenses of $53.1 million for the three months ended March 31, 2019.

These increases were primarily attributable to increases in employee compensation and related expenses including share-based compensation, in depreciation, amortization and occupancy costs of $7.0 million and $0.4 million, respectively.

These increases were partially offset by a slight decrease in other counseling services and support related expenses of $0.3 million.

The increases in employee compensation and related expenses were primarily due to increased headcount to support our 24 university partners, and their increased enrollment growth, tenure-based salary adjustments, an increase in benefit costs, the timing of the Orbis Education acquisition and the increased number of sites between years.

The decrease in other counseling services is primarily the result of decreased travel costs to service our 24 university partners.

Our counseling services and support expenses for the six months ended June 30, 2020 were $117.8 million, an increase of $10.4 million, or 9.7%, as compared to counseling services and support expenses of $107.4 million for the six months ended June 30, 2019.

These increases were primarily attributable to increases in employee compensation and related expenses including share-based compensation and in depreciation, amortization and occupancy costs of $12.3 million and $0.7 million, respectively, partially offset by a decrease in other counseling services and support expenses of $2.6 million.

The increases in employee compensation and related expenses were primarily due to increased headcount to support our 24 university partners, and their increased enrollment growth, tenure-based salary adjustments, an increase in benefit costs, the timing of the Orbis Education acquisition and the increased number of Orbis Education site location openings year over year.

The decrease in other counseling services and support expenses is primarily the result of decreased travel costs to service our 24 university partners.

All non-essential travel ceased when the COVID-19 national emergency was announced in mid-March.

Our counseling services and support expenses as a percentage of net revenue increased 0.3% to 27.2% for the three months ended March 31, 2020, from 26.9% for the three months ended March 31, 2019 primarily due to increased benefit costs as a percentage of revenue between years and the timing of the Orbis Education acquisition.

Our counseling services and support expenses as a percentage of net revenue stayed flat at 28.9% for both the six months ended June 30, 2020 and 2019 primarily due to our ability to leverage our other counseling services and support expenses across an increasing revenue base partially offset by the reduced Spring and Summer semester ancillary revenues at GCU resulting from COVID-19.

Marketing and communication .

Our marketing and communication expenses for the three months ended March 31, 2020 were $42.7 million, an increase of $6.7 million, or 18.7%, as compared to marketing and communication expenses of $36.0 million for the three months ended March 31, 2019.

This increase was primarily attributable to the increased cost to market our university partners’ programs and due to the marketing of new university partners and new locations which resulted in increased advertising of $6.5 million and increased employee compensation expenses and related expenses including share-based compensation of $0.2 million.

Our marketing and communication expenses as a percentage of net revenue increased by 1.1% to 19.3% for the three months ended March 31, 2020, from 18.2% for the

three months ended March 31, 2019 primarily due to the increase in the number of new university partners and locations opening between years.

Our marketing and communication expenses for the six months ended June 30, 2020 were $83.8 million, an increase of $12.1 million, or 16.9%, as compared to marketing and communication expenses of $71.7 million for the six months ended June 30, 2019.

This increase was primarily attributable to the increased cost to market our university partners’ programs and due to the marketing of new university partners and new locations which resulted in increased advertising of $12.0 million and increased employee compensation expenses and related expenses including share-based compensation of $0.2 million, partially offset by a slight decrease in other marketing supplies of $0.1 million.

Our marketing and communication expenses as a percentage of net revenue increased by 1.3% to 20.6% for the six months ended June 30, 2020, from 19.3% for the six months ended June 30, 2019, primarily due to the increase in the number of new university partners and locations opening between years and due to the reduced Spring and Summer semester ancillary revenues at GCU resulting from COVID-19.

General and administrative .

Our general and administrative expenses for the three months ended March 31, 2020 were $9.6 million, a decrease of $1.8 million, or 16.1%, as compared to general and administrative expenses of $11.4 million for the three months ended March 31, 2019.

This decrease was primarily due to decreases in professional fees of $2.1 million, partially offset by an increase in occupancy and depreciation of $0.3 million.

In the first quarter of 2019, our professional fees were significantly higher due to a payment made to an outside provider that assisted us in obtaining a state tax refund with a favorable impact of $5.9 million in the first quarter of 2019.

Our increases in occupancy and depreciation are primarily related to the timing of the acquisition resulting in higher costs such as the office space in Indianapolis, Indiana.

Our general and administrative expenses as a percentage of net revenue decreased by 1.5% to 4.3% for the three months ended March 31, 2020, from 5.8% for the three months ended March 31, 2019 due to lower professional fees and our ability to leverage our other general and administrative expenses across an increasing revenue base.

Our general and administrative expenses for the six months ended June 30, 2020 were $19.1 million, a decrease of $1.5 million, or 7.5%, as compared to general and administrative expenses of $20.6 million for the six months ended June 30, 2019.

This decrease was primarily due to decreases in professional fees of $1.8 million and other general and administrative expenses of $0.3 million, partially offset by an increase in occupancy and depreciation of $0.5 million and in employee compensation of $0.1 million.

In the first half of 2019, our professional fees were significantly higher due to a payment made to an outside provider that assisted us in obtaining a state tax refund with a favorable impact of $5.9 million in the first quarter of 2019.

Our increases in occupancy and depreciation are primarily related to the timing of the acquisition resulting in higher costs such as the office space at our Orbis

Education headquarters in Indianapolis, Indiana.

Our general and administrative expenses as a percentage of net revenue decreased by 0.8% to 4.7% for the six months ended June 30, 2020, from 5.5% for the six months ended June 30, 2019 due to lower professional fees and our ability to leverage our other general and administrative expenses across an increasing revenue base.

Amortization of intangible assets .

Amortization of intangible assets for the three months ended March 31, 2020 was $2.1 million, an increase of $0.4 million or 24.8% as compared to $1.7 million for the three months ended March 31, 2019.

Amortization of intangible assets for the six months ended June 30, 2020 was $4.2 million, an increase of $0.3 million or 8.9% as compared to $3.9 million for the six months ended June 30, 2019.

This increase is related to the timing of the Acquisition date of Orbis Education, which occurred on January 22, 2019.

As a result of the acquisition, certain identifiable intangible assets were created (primarily customer relationships) that will be amortized over their expected lives.

As a result of the Orbis Education acquisition, certain identifiable intangible assets were created (primarily customer relationships) that will be amortized over their expected lives.

Loss on transaction .

The loss on transaction for the three months ended March 31, 2019 was $4.1 million due to transaction costs related to the Acquisition of Orbis Education.

The loss on transaction for the six months ended June 30, 2019 was $4.0 million due to transaction costs related to the Acquisition of Orbis Education.

Interest income on Secured Note .

Interest income on the secured note from GCU in the initial principal amount of $870.1 million (the “Secured Note”) for the three months ended March 31, 2020 was $14.7 million, an increase of $1.0 million, or 7.1%, as compared to $13.7 million for the three months ended March 31, 2019.

As a result of the transaction with GCU on July 1, 2018, the Company recognizes interest income on its Secured Note with GCU, earning interest at 6%, with monthly interest payments.

Interest income on the secured note from GCU in the initial principal amount of $870.1 million (the “Secured Note”) for the six months ended June 30, 2020 was $29.4 million, an increase of $1.2 million, or 4.3%, as compared to $28.2 million for the six months ended June 30, 2019.

The Secured Note bears interest at 6% annually, and GCU makes monthly interest payments.

Interest expense .

Interest expense was $1.5 million for the three months ended March 31, 2020, a decrease of $1.1 million, as compared to interest expense of $2.6 million for the three months ended March 31, 2019.

Interest expense was $2.6 million for the six months ended June 30, 2020, a decrease of $2.9 million, as compared to interest expense of $5.5 million for the six months ended June 30, 2019.

Investment interest and other .

Investment interest and other for the three months ended March 31, 2020 was $.2 million, a decrease of $0.9 million, as compared to $1.1 million in the three months ended March 31, 2019.

Investment interest and other for the six months ended June 30, 2020 was $0.6 million, a decrease of $3.2 million, as compared to $3.8 million in the six months ended June 30, 2019.

This decrease was primarily attributable to a decline in interest income on excess cash as the average investment balance declined year over year and lower interest rates.

In addition, we recognized a decline in mark-to-market values on our bond investments of $0.2 million during the first quarter of 2020.

Income tax expense .

Income tax expense for the three months ended March 31, 2020 was $22.8 million, an increase of $11.3 million, or 98.9%, as compared to income tax expense of $11.5 million for the three months ended March 31, 2019.

Income tax expense for the six months ended June 30, 2020 was $38.1 million, an increase of $12.5 million, or 49.1%, as compared to income tax expense of $25.6 million for the six months ended June 30, 2019.

This increase was the result of an increase in our effective tax rate, and an increase in our taxable income between periods.

Our effective tax rate was 24.2% during the first quarter of 2020 compared to 13.5% during the first quarter of 2019.

Our effective tax rate was 24.4% during the six months ended June 30, 2020 compared to 17.1% during the six months ended June 30, 2019.

The lower effective tax rate in 2019 resulted from an agreement with the Arizona Department of Revenue regarding previously filed refund claims related to income tax obligations for prior calendar years, which resulted in a favorable tax impact of $5.9 million recorded as a discrete tax item in the first quarter of 2019.

Additionally, the increase in the effective tax rate resulted from lower excess tax benefits of $0.6 million in the first quarter of 2020 as compared to $4.5 million in the same period in 2019 primarily due to a decrease in our stock price between years.

based compensation awards are dependent on our stock price at the date the restricted awards vest, our stock price on the date an option is exercised, and the quantity of options exercised.

In the second quarter of 2020, the effective tax rate was impacted by higher state income taxes and lower excess tax benefits of $0.6 million in the first six months of 2020 as compared to $6.8 million in the same period in 2019.

The lower excess tax benefits is primarily due to a decrease in our stock price between years and lower stock option exercises.

Our restricted stock vests in March each year so the favorable benefit will primarily impact the first quarter each year.

Our net income for the three months ended March 31, 2020 was $71.4 million, a decrease of $1.8 million, or 2.5%, as compared to $73.2 million for the three months ended March 31, 2019, due to the factors discussed above.

Our net income for the six months ended June 30, 2020 was $118.4 million, a decrease of $6.0 million, or 4.8%, as compared to $124.4 million for the six months ended June 30, 2019, due to the factors discussed above.

Our net revenue and operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in our university partners’ enrollment.

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Liquidity and Capital Resources

Our unrestricted cash and cash equivalents and investments were $149.5 million at March 31, 2020.

Our credit facility had an available line of credit of $150.0 million as of March 31, 2020.

Our unrestricted cash and cash equivalents and investments were $187.2 million at June 30, 2020.

Our credit facility had an available line of credit of $150.0 million as of June 30, 2020.

Based on our current level of operations and anticipated growth, we believe that our cash flow from operations and other sources of liquidity, including cash and cash equivalents and our revolving line of credit, will provide adequate funds for ongoing operations, planned capital expenditures, and working capital requirements for at least the next 24 months.

Arrangements with GCU

In conjunction with the Asset Purchase Agreement with GCU, we received a secured note as consideration for the transferred assets (the “Transferred Assets”) in the initial principal amount of $870,097 (the “Secured Note”).

The Secured Note contains customary commercial credit terms, including affirmative and negative covenants applicable to GCU, and provides that the Secured Note bears interest at an annual rate of 6.0%, has a maturity date of June 30, 2025, and is secured by all of the assets of GCU.

The Secured Note provides for GCU to make interest only payments during the term, with all principal and accrued and unpaid interest due at maturity and also provides that we may loan additional amounts to GCU to fund approved capital expenditures during the first three years of the term.

As of June 30, 2020, the Company had loaned an additional $169,815 to GCU, net of repayments.

The additional amount loaned includes the $75.0 million borrowed by GCU in June 2020.

In practice, GCU pays for the service fees and its interest due on the secured note receivable for the month in arrears.

However, at the same time as the additional borrowing of $75.0 million, GCU paid its June 2020 estimated service fee and interest due on the secured note receivable of $50.0 million and $4.8 million, respectively, at the end of June 2020 thereby reducing the accounts receivable, net and interest receivable on secured note on our consolidated balance sheet at June 30, 2020.

GCU believes that its cash flows from operations are currently sufficient to fund all of its capital expenditures although it is possible that it will continue to borrow for short term cash flow needs.

The $75.0 million that was borrowed in June 2020 was repaid in July 2020 and GCU has returned to its practice of paying the service fee and interest due on the secured note receivable for the month in arrears.

GCU paid the June 2019 estimated service fee and interest due on the secured note receivable at the end of June 2019 so the impact on cash flows for the change in accounts receivable and interest receivable from university partners during the six months ended June 30, 2020 in comparison to the six months ended June 30, 2019 was not material.

Share Repurchase Program

Our Board of Directors has authorized the Company to repurchase up to an aggregate of $250.0 million of our common stock, from time to time, depending on market conditions and other considerations.

The current expiration date on the repurchase authorization by our Board of Directors is December 31, 2020.

In July 2020, our Board of Directors increased the authorization under its existing stock repurchase program by $50.0 million to a total of $300.0 million of our common stock we can repurchase, from time to time, depending on market conditions and other considerations.

The current expiration date on the repurchase authorization by our Board of

Directors is December 31, 2021.

Repurchases occur at the Company’s discretion and the Company may modify, suspend or discontinue the repurchase authorization at any time.

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The amount and timing of future share repurchases, if any, will be made as market and business conditions warrant.

During the three months ended March 31, 2020, 786,503 shares of common stock were repurchased by the Company.

At March 31, 2020, there remains $66.6 million available under our share repurchase authorization.

Subsequent to March 31, 2020, the Company repurchased 100,000 shares of common stock at an aggregate cost of $7.3 million.

During the three months ended June 30, 2020, 111,100 shares of common stock were repurchased by the Company.

At June 30, 2020, there remains $58.3 million available under our share repurchase authorization, prior to the increase made in July .

Operating Activities .

Net cash provided by operating activities for the three months ended March 31, 2020 was $85.7 million as compared to $76.3 million for the three months ended March 31, 2019.

The increase in cash generated from operating activities between the three months ended March 31, 2019 and the three months ended March 31, 2020 was primarily due to changes in other working capital balances.

As an education services company, we generally receive our service fees from our university partners in arrears.

Net cash provided by operating activities for the six months ended June 30, 2020 was $221.1 million as compared to $189.3 million for the six months ended June 30, 2019.

The increase in cash generated from operating activities between the six months ended June 30, 2019 and the six months ended June 30, 2020 was primarily due to changes in other working capital balances partially offset by the decrease in net income between periods.

We define working capital as the assets and liabilities, other than cash, generated through the Company’s primary operating activities.

Changes in these balances are included in the changes in assets and liabilities presented in the consolidated statement of cash flows.

Our income taxes payable balances increased $41.0 million between periods, primarily due to the Treasury Department extending the due date of certain estimated tax payments due to COVID-19 from April 15, 2020 to July 15, 2020.

Investing Activities .

Net cash used in investing activities was $1.9 million and $340.9 million for the three months ended March 31, 2020 and 2019, respectively.

The net cash used in investing activities in the three months ended March 31, 2020 was capital expenditures of $6.1 million, partially offset by proceeds from the sale of investments of $4.3 million.

During the three months ended March 31, 2019, we paid $361.2 million, net of cash acquired, to acquire Orbis Education on January 22, 2019.

Funding to GCU for capital expenditures during the first three months of 2019 totaled $29.9 million.

Proceeds from investments, net of purchases of short-term investments, was $55.0 million for the three months ended March 31, 2019.

Capital expenditures were $4.6 million for the three months ended March 31, 2019.

During the three-month period for 2020 and 2019, capital expenditures primarily consisted of leasehold improvements and equipment for new university partner locations, as well as purchases of computer equipment, other internal use software projects and furniture and equipment to support our increasing employee headcount.

Net cash used in investing activities was $80.6 million and $485.8 million for the six months ended June 30, 2020 and 2019, respectively.

The net cash used in investing activities in the six months ended June 30, 2020 was capital expenditures of $12.2 million, partially offset by proceeds from the sale of investments of $6.8 million.

Funding to GCU during the first six months of 2020 totaled $75.0 million.

During the six months ended June 30, 2019, we paid $361.2 million, net of cash acquired, to acquire Orbis Education on January 22, 2019.

Funding to GCU during the first six months of 2019 totaled $169.8 million.

Proceeds from investments, net of purchases of short-term investments, was $55.1 million for the six months ended June 30, 2019.

Capital expenditures were $9.7 million for the six months ended June 30, 2019.

During the six-month period for 2020 and 2019, capital expenditures primarily consisted of leasehold improvements and equipment for new university partner locations, as well as purchases of computer equipment, other internal use software projects and furniture and equipment to support our increasing employee headcount.

The increase in capital expenditures between periods is primarily due to the increase in the number of Orbis Education location openings.

Orbis Education invests approximately $1.5 million in leasehold improvements and equipment for each location.

Orbis Education plans to open seven new locations in the Fall of 2020 and another four new locations in the Spring of 2021 as compared to the five locations it opened in the Fall of 2019 and no new locations opened in the Spring of 2020.

Financing Activities .

Net cash used in financing activities was $73.9 million for the three months ended March 31, 2020.

Net cash provided by financing activities was $171.3 million for the three months ended March 31, 2019.

During the three months ended March 31, 2020, $5.0 million was used to purchase common shares withheld in lieu of income taxes resulting from the vesting of restricted share awards and $60.7 million was used to purchase treasury stock in accordance with the Company’s share repurchase program.

Principal payments on notes payable and capital leases totaled $8.3 million, partially offset by proceeds from the exercise of stock options of $0.1 million.

During the three months ended March 31, 2019, $250.0 million of proceeds was drawn on the credit facility, and the term loan balance of the prior credit agreement of $59.9 million was repaid along with $2.4 million of debt issuance costs.

$8.1 million was used to purchase common shares withheld in lieu of income taxes resulting from the vesting of restricted share awards and $10.0 million was used to purchase treasury stock in accordance with the Company’s share repurchase program.

Proceeds from the exercise of stock options of $1.6 million were received in the three months ended March 31, 2019.

Net cash used in financing activities was $90.5 million for the six months ended June 30, 2020.

Net cash provided by financing activities was $180.5 million for the six months ended June 30, 2019.

During the six months ended June 30, 2020, $5.0 million was used to purchase common shares withheld in lieu of income taxes resulting from the vesting of restricted share awards and $69.0 million was used to purchase treasury stock in accordance with the Company’s share repurchase program.

Principal payments on notes payable and capital leases totaled $16.6 million.

During the six months ended June 30, 2019, $270.0 million of proceeds was drawn on the credit facility, and the term loan balance of the prior credit agreement of $59.9 million was repaid along with $12.1 million of principal payments on the new credit facility.

In addition, $2.4 million of debt issuance costs were incurred on the new credit facility and $8.1 million was used to purchase common shares withheld in lieu of income taxes resulting from the vesting of restricted share awards and $10.4 million was used to purchase treasury stock in accordance with the Company’s share repurchase program.

Proceeds from the exercise of stock options of $3.4 million were received in the six months ended June 30, 2019.

Contractual Obligations

The following table sets forth, as of March 31, 2020, the aggregate amounts of GCE’s significant contractual obligations and commitments with definitive payment terms due in each of the periods presented (in millions).

Less than one year amounts represent payments due from April 1, 2020 through December 31, 2020.

The following table sets forth, as of June 30, 2020, the aggregate amounts of GCE’s significant contractual obligations and commitments with definitive payment terms due in each of the periods presented (in millions).

Less than one year amounts represent payments due from July 1, 2020 through December 31, 2020.

Payments Due by Period

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Total contractual obligations

(1) The purchase obligation amounts include expected spending by period under contracts for GCE that were in effect at March 31, 2020.

(1) The lease liabilities exclude $17.4 million of non-cancelable operating lease commitments for classroom site locations, that had not yet commenced.

(2) The purchase obligation amounts include expected spending by period under contracts for GCE that were in effect at June 30, 2020.

Off-Balance Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis