Grand Canyon Education, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes that appear elsewhere in this report. Forward-Looking Statements This Quarterly Report on Form 10-Q, including Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations , contains certain “forward-looking statements” within the meaning of Section 27A of Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include, without limitation, statements regarding: proposed new programs; whether regulatory developments or other matters may or may not have a material adverse effect on our financial position, results of operations, or liquidity; projections, predictions, expectations, estimates, or forecasts as to our business, financial and operational results, and future economic performance; and management’s goals and objectives and other similar expressions concerning matters that are not historical facts. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and similar expressions, the negative of these expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. 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 university partners resulting from 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; ● our ability to properly manage risks and challenges associated with strategic initiatives, including potential acquisitions or divestitures of, or investments in, new businesses, acquisitions of new properties and new university partners, and expansion of services provided to our existing university partners; ● our failure to comply with the extensive regulatory framework applicable to us either directly as a third-party service provider or indirectly through our university partners, including Title IV of the Higher Education Act and the regulations thereunder, state laws and regulatory requirements, and accrediting commission requirements; ● the ability of our university partners’ students to obtain federal Title IV funds, state financial aid, and private financing; ● potential damage to our reputation or other adverse effects as a result of negative publicity in the media, in the industry or in connection with governmental reports or investigations or otherwise, affecting us or other companies in the education services sector; ● risks associated with changes in applicable federal and state laws and regulations and accrediting commission standards, including pending rulemaking by the Department of Education applicable to us directly or indirectly through our university client; 24 Table of Contents ● competition from other education service companies in our geographic region and market sector, including competition for students, qualified executives and other personnel; ● our expected tax payments and tax rate, including the effect of the Tax Cuts and Jobs Act of 2017; ● our ability to hire and train new, and develop and train existing, employees; ● the pace of growth of our university partners’ enrollment and its effect on the pace of our own growth; ● fluctuations in our revenues due to seasonality; ● our ability to, on behalf of our university partners, convert prospective students to enrolled students and to retain active students to graduation; ● our success in updating and expanding the content of existing programs and developing new programs in a cost-effective manner or on a timely basis for our university partners; ● risks associated with the competitive environment for marketing the programs of our university partners; ● failure on our part to keep up with advances in technology that could enhance the experience for our university partners’ students; ● the extent to which obligations under our credit agreement, including the need to comply with restrictive and financial covenants and to pay principal and interest payments, limits our ability to conduct our operations or seek new business opportunities; ● our ability to manage future growth effectively; ● the impact of any natural disasters or public health emergencies; and ● general adverse economic conditions or other developments that affect the job prospects of our university partners’ students. Additional factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those described in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K (the “2019 Form 10-K”) for the fiscal year ended December 31, 2019, as updated in our subsequent reports filed with the Securities and Exchange Commission (“SEC”), including any updates found in Part II, Item 1A of this Quarterly Report on Form 10-Q or our other reports on Form 10-Q. You should not put undue reliance on any forward-looking statements. Forward-looking statements speak only as of the date the statements are made and we assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. Explanatory Note GCE is a publicly traded education services company dedicated to serving colleges and universities. GCE has developed significant technological solutions, infrastructure and operational processes to provide services to these institutions on a large scale. GCE’s most significant university partner is GCU, a comprehensive regionally accredited university that offers graduate and undergraduate degree programs, emphases and certificates across nine colleges both online and on ground at its campus in Phoenix, Arizona. 25 Table of Contents 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. See Note 2 - Acquisition to consolidated financial statements for a full description of the Acquisition. Together with Orbis Education, GCE 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 primarily by offering healthcare related academic programs at off-campus classroom and laboratory sites located near healthcare providers. As of September 30, 2020, GCE provides education services to 25 university partners across the United States. We plan to continue to add additional university partners and will roll out additional programs with both our existing partners and with new partners. Both new and existing university partners may be partnered for healthcare programs, online only or hybrid programs, or both healthcare and other programs as is our most significant partner GCU. Therefore, going forward we will refer to all university partners as GCE partners or our partners and will no longer differentiate between partners of GCE and partners of Orbis Education; we will, however, continue to disclose significant information for GCU, such as enrollments, due to its size in comparison to our other university partners. SIGNIFICANT DEVELOPMENTS Impact of COVID-19 In March 2020, the World Health Organization declared the novel coronavirus outbreak (“COVID-19”) a global pandemic. 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 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% have historically lived 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. ​ The COVID-19 outbreak, as well as measures taken to contain its spread, has impacted GCU’s students and its business in a number of ways. 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. Summer semester classes were moved to an online environment as well and most students were given the choice of attending the Fall semester in person or completely online. 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 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, Summer and Fall 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; ​ 26 Table of Contents ● Ancillary businesses operated by GCU such as its hotel and merchandise shops were closed in late March. Some of these businesses remain closed while other opened with scaled back operations in mid-September, which reduced and will continue to reduce GCU’s revenues and thus the service revenues earned by the Company until these businesses are fully reopened; ​ ● Limited residential students remained on campus during the Summer semester, which reduced GCU’s dormitory and ancillary revenues and thus the service revenues earned by the Company; ​ ● 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. Most of the residencies that were scheduled for the last week of March through the end of July were cancelled. The doctoral residencies scheduled for August and September were held at another location with lower than normal attendance. The residencies through the end of the calendar year will continue to be held at another location with expected lower than normal attendance which will result in lower GCU revenues including at its hotel, and thus reduce the service revenues earned by the Company; ​ ● GCU shifted its start date for the Fall semester for its traditional ground students from August 24, 2020 to September 8, 2020, which has the effect of moving tuition revenue for all GCU traditional students, and certain ancillary revenue for residential students, from the third quarter of 2020 to the fourth quarter of 2020; ​ ● GCU shifted its move-in date for its residential students to the week of September 21, 2020, which reduced housing revenue and certain ancillary revenue for residential students by three weeks. In addition, approximately 4,900 of GCU’s traditional campus students elected to attend the Fall semester entirely in the online modality. Residential enrollment for the Fall of 2020 was approximately 11,500 whereas residential bed capacity is approximately 14,500. This reduction in residential students caused a reduction in GCU’s revenue and thus the service revenues earned by the Company. ​ The changes described above at GCU have impacted or will impact the Company’s service revenue under its Master Services Agreement with GCU. In addition, due to the limited operating expenses that we incur to deliver those services, there has been or will be a direct reduction in our operating profit and operating margin. ​ The Company also has long-term services agreements with numerous university partners across the United States. Other than at GCU, the majority of these 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 and Summer 2020 semesters were completed without interruption and each university partner is in its Fall semester. Some students who were scheduled to start their program in the Summer 2020 semester delayed their start until the Fall 2020 which resulted in lower enrollments and revenues in the Summer 2020 semester than was planned. In a number of locations, the demand to start in the Fall 2020 semester was greater than initially planned but a number of our university or healthcare partners chose not to increase the Fall 2020 cohort size to make up for the Summer 2020 start shortfall due to concerns about clinical availability. The Fall 2020 enrollment was only slightly lower than our original expectations as we were able to make up for some of the Summer 2020 new start shortfall with higher retention rates and slightly higher than expected Fall 2020 new starts. ​ No other changes are currently anticipated related to the Fall 2020 semester that would have an impact on the Company’s service revenue, operating profit and operating margins. However, if GCU determines that it must send its students home prior to the end of the Fall semester and elects to give partial refunds for dormitory and meal payments or if one of our other university partners closes a location prior to the end of the Fall semester, such an event would reduce the service revenues earned by the Company. ​ 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, and thereby result in interruptions or disruptions in normal operational processes. 27 Table of Contents ​ 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. ​ 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. We estimate that the reduction in service revenue attributable to reduced tuition, fees and ancillary revenues of our university partners resulting from COVID-19 will be $8.5 million in the fourth quarter of 2020 with a comparable reduction in operating profit. ​ 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 nine months ended September 30, 2020, there have been no significant changes in our critical accounting policies. Results of Operations The following table sets forth certain income statement data as a percentage of net revenue for each of the periods indicated. Amortization of intangible assets and the loss on transaction have been excluded from the table below: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ Nine Months Ended ​ ​ ​ September 30, ​ ​ September 30, ​ ​ 2020 2019 2020 2019 Costs and expenses Technology and academic services 15.5 % 12.5 % 13.9 % 11.6 % Counseling services and support 29.3 29.1 29.1 28.9 Marketing and communication 21.3 19.3 20.8 19.3 General and administrative 7.1 7.0 5.5 6.0 ​ ​ Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019 Service revenue . Our service revenue for the three months ended September 30, 2020 was $198.4 million, an increase of $5.1 million, or 2.6%, as compared to service revenue of $193.3 million for the three months ended September 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 totaled 117,772 at September 30, 2020 as compared to 108,821 at September 30, 2019. Enrollments at GCU grew to 112,781 at September 30, 2020, an increase of 7.6% over enrollments at September 30, 2019, while enrollments at our other university partners were 4,991, an increase of 25.6% over enrollments at September 30, 2019. The decrease in revenue per student is primarily due to the revenue impacts caused by COVID-19 including the shift in start date for the Fall traditional campus at GCU, resulting in 13 fewer revenue producing days for GCU’s ground traditional campus Fall semester in the third quarter of 2020 as compared to the third quarter of 2019. Also, GCU shifted its move-in date for residential students back to the week of September 21, 2020, which reduced room and board revenue and certain other ancillary revenue for residential students for the Fall 2020 semester by three weeks. In addition, only a small number of GCU’s students remained on campus in the summer of 2020 and approximately 4,900 of GCU’s traditional campus students elected to attend the Fall semester entirely in the online modality. As a result, 2020 Summer and Fall semester fees, room and board and other ancillary revenues for the third quarter of 2020 at GCU were lower than in the comparable period in the prior year. These decreases were partially offset by the fact that our other university partners 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. Last, we opened seven new off-campus classroom and laboratory sites in the third quarter of 2020 bringing the total number of these sites to 30 as compared to 23 as of September 30, 2019. 28 Table of Contents Technology and academic services . Our technology and academic services expenses for the three months ended September 30, 2020 were $30.8 million, an increase of $6.6 million, or 26.9%, as compared to technology and academic services expenses of $24.2 million for the three months ended September 30, 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 $4.2 million, $1.5 million and $0.9 million, respectively. These increases were primarily due to increased headcount to support our 25 university partners, and their increased enrollment growth, tenure-based salary adjustments, an increase in benefit costs, an increase in COVID-19 related supply costs at all locations, and the increased number of off-campus classroom and laboratory sites year over year. Our technology and academic services expenses as a percentage of net revenue increased 3.0% to 15.5% for the three months ended September 30, 2020, from 12.5% for the three months ended September 30, 2019 primarily due to the partnership agreements that have off-campus classroom and laboratory sites requiring a higher level of technology and academic services than our agreement with GCU and due to the revenue impacts caused by COVID-19 as we incur limited operating expenses to deliver those services. Additionally, in the third quarter of 2020 we incurred costs related to the opening of seven off-campus classroom and laboratory sites in the second half of 2020 and we are incurring costs for four more locations that will open in the first half of 2021. GCE has 30 off-campus classroom and laboratory sites open as of September 30, 2020 as compared to the 23 sites that were open as of September 30, 2019. Counseling services and support . Our counseling services and support expenses for the three months ended September 30, 2020 were $58.2 million, an increase of $1.9 million, or 3.5%, as compared to counseling services and support expenses of $56.3 million for the three months ended September 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 $3.5 million and $0.4 million, respectively, partially offset by a decrease in other counseling services and support expenses of $2.0 million. The increases in employee compensation and related expenses were primarily due to increased headcount to support our 25 university partners, and their increased enrollment growth, tenure-based salary adjustments, and the increased number of off-campus classroom and laboratory sites open year over year. The decrease in other counseling services and support expenses is primarily the result of decreased travel costs to service our 25 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 slightly increased 0.2% to 29.3% for the three months ended September 30, 2020, from 29.1% for the three months ended September 30, 2019 primarily due to the revenue impacts caused by COVID-19 as we incur limited operating expenses to deliver those services, partially offset by the reduced travel and other costs and our ability to leverage our other counseling services and support expenses across an increasing revenue base. Marketing and communication . Our marketing and communication expenses for the three months ended September 30, 2020 were $42.2 million, an increase of $4.9 million, or 13.1%, as compared to marketing and communication expenses of $37.3 million for the three months ended September 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 $4.8 million. Our marketing and communication expenses as a percentage of net revenue increased by 2.0% to 21.3% for the three months ended September 30, 2020, from 19.3% for the three months ended September 30, 2019, primarily due to the increase in the number of new off-campus classroom and laboratory sites opened in the second half of 2020 and first half of 2021 as compared to those opened in the same period in the prior year and due to the revenue impacts caused by COVID-19 as we incur limited operating expenses to deliver those services. General and administrative . Our general and administrative expenses for the three months ended September 30, 2020 were $14.0 million, an increase of $0.4 million, or 3.5%, as compared to general and administrative expenses of $13.6 million for the three months ended September 30, 2019. This increase was primarily due to an increase in contributions made in lieu of state income taxes to school sponsoring organizations from $4.0 million for the three months ended September 30, 2019 to $5.0 million for the three months ended September 30, 2020 partially offset by a decrease in employee compensation and related expenses including share-based compensation of $0.7 million. The decrease in employee compensation and related expenses is primarily related to lower headcount at our office in Indiana as we have transitioned a number of back office functions to Arizona. Our general and administrative expenses as a percentage of net revenue increased by 0.1% to 7.1% for the three months ended September 30, 2020, from 7.0% for the three months ended September 30, 2019 due to the revenue impacts caused by COVID-19 as we incur limited 29 Table of Contents operating expenses to deliver those services, partially offset by 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 September 30, 2020 was $2.1 million a decrease of $0.1 million as compared to amortization of intangible assets for the three months ended September 30, 2019 of $2.2 million. As a result of the Acquisition, certain identifiable intangible assets were created (primarily customer relationships) that will be amortized over their expected lives. 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 September 30, 2020 was $14.9 million, a decrease of $1.3 million, or 8.2%, as compared to $16.2 million for the three months ended September 30, 2019. The Secured Note bears interest at 6% annually, and GCU makes monthly interest payments. The decrease over the prior year was primarily due to a decrease in the average principal balance of the Secured Note between periods due to net loan repayments made by GCU under the Secured Note during the past twelve months. In September 2019, GCU repaid $60.0 million and in October 2019 GCU repaid $40.0 million. The $75.0 million borrowed by GCU at the end of June 2020 was repaid in early July 2020. Interest expense . Interest expense was $0.9 million for the three months ended September 30, 2020, a decrease of $2.0 million, as compared to interest expense of $2.9 million for the three months ended September 30, 2019. The decrease in interest expense was primarily due to a decline in the average credit facility outstanding balance between periods due to paydowns 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 September 30, 2020 was $0.2 million, a decrease of $0.1 million, as compared to $0.3 million in the three months ended September 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 September 30, 2020 was $13.1 million, a decrease of $2.1 million, or 13.4%, as compared to income tax expense of $15.2 million for the three months ended September 30, 2019. This decrease was the result of lower taxable income and a slight decrease in our effective tax rate between periods. Our effective tax rate was 20.2% during the third quarter of 2020 compared to 20.7% during the third quarter of 2019. In the third quarter of 2020, the effective tax rate was impacted by a $1.0 million increase in contributions made in lieu of state income taxes to school sponsoring organizations from $4.0 million for the three months ended September 30, 2019 to $5.0 million for the three months ended September 30, 2020, partially offset by lower excess tax benefits, which declined to $0.1 million in the third quarter of 2020 as compared to $0.4 million in the same period in 2019 due to a lower stock price and fewer stock option exercises in the third 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. ​ Net income . Our net income for the three months ended September 30, 2020 was $52.0 million, a decrease of $6.2 million, or 10.5%, as compared to $58.2 million for the three months ended September 30, 2019, due to the factors discussed above. Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 Service revenue . Our service revenue for the nine months ended September 30, 2020 was $605.8 million, an increase of $40.4 million, or 7.1%, as compared to service revenue of $565.4 million for the nine months ended September 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 totaled 117,772 at September 30, 2020 as compared to 108,821 at September 30, 2019. Enrollments at GCU 30 Table of Contents grew to 112,781 at September 30, 2020, an increase of 7.6% over enrollments at September 30, 2019, while enrollments at our other university partners were 4,991, an increase of 25.6% over enrollments at September 30, 2019. The decrease in revenue per student is primarily due to the revenue impacts caused by COVID-19 including the shift in start date for the Fall traditional campus at GCU, resulting in 13 fewer revenue producing days for GCU’s ground traditional campus Fall semester in the third quarter of 2020 as compared to the third quarter of 2019. Also, GCU shifted its move-in date for its residential students back to the week of September 21, 2020, which reduced room and board revenue and certain other ancillary revenue for residential students for the Fall 2020 semester by three weeks. In addition, GCU recommended that traditional campus residential students move off campus near the end of the Spring semester, only a small number of GCU’s students remained on campus in the summer of 2020 and approximately 4,900 of GCU’s traditional campus students elected to attend the Fall semester entirely in the online modality. As a result, 2020 Spring, Summer and Fall semester fees, room and board and other ancillary revenues at GCU were lower than in the comparable periods in the prior year. These decreases were partially offset by the fact that our other university partners 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, we opened seven new off-campus classroom and laboratory sites in the third quarter of 2020 bringing the total number of these sites to 30 as compared to 23 at September 30, 2019. Last, we generated slightly more revenues in the first nine months of 2020 as compared to the same period in 2019 due to the timing of the Acquisition on January 22, 2019, and due to 2020 being a Leap Year and thus providing an extra day of revenue in 2020 as compared to 2019. Technology and academic services . Our technology and academic services expenses for the nine months ended September 30, 2020 were $84.2 million, an increase of $18.8 million, or 28.7%, as compared to technology and academic services expenses of $65.4 million for the nine months ended September 30, 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 other technology and academic supply costs of $14.3 million, $3.7 million and $0.8 million. These increases were primarily due to increased headcount to support our 25 university partners, and their increased enrollment growth, tenure-based salary adjustments, an increase in benefit costs, an increase in COVID-19 supply costs at all locations, the timing of the Acquisition and the increased number of off-campus classroom and laboratory sites open between years. Our technology and academic services expenses as a percentage of net revenue increased 2.3% to 13.9% for the nine months ended September 30, 2020, from 11.6% for the nine months ended September 30, 2019 primarily due to the partnership agreements that have off-campus classroom and laboratory sites requiring a higher level of technology and academic services than our agreement with GCU and due to the revenue impacts caused by COVID-19 as we incur limited operating expenses to deliver those services . Additionally, in the first nine months of 2020 we incurred costs related to the opening of seven off-campus classroom and laboratory sites in the second half of 2020 and we are incurring costs for four more locations that will open in the first half of 2021. GCE has 30 off-campus classroom and laboratory sites open as of September 30, 2020 as compared to the 23 sites that were open as of September 30, 2019. Counseling services and support . Our counseling services and support expenses for the nine months ended September 30, 2020 were $176.0 million, an increase of $12.4 million, or 7.6%, as compared to counseling services and support expenses of $163.6 million for the nine months ended September 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 $15.8 million and $1.0 million, respectively, partially offset by a decrease in other counseling services and support expenses of $4.4 million. The increases in employee compensation and related expenses were primarily due to increased headcount to support our 25 university partners, and their increased enrollment growth, tenure-based salary adjustments, an increase in benefit costs, the timing of the Acquisition and the increased number of off-campus classroom and laboratory sites open year over year. The decrease in other counseling services and support expenses is primarily the result of decreased travel costs to service our 25 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 slightly increased by 0.2% to 29.1% for the nine months ended September 30, 2020, from 28.9% for the nine months ended September 30, 2019 primarily due to the revenue impacts caused by COVID-19 as we incur limited operating expenses to deliver those services partially offset by our ability to leverage our other counseling services and support expenses across an increasing revenue base. 31 Table of Contents Marketing and communication . Our marketing and communication expenses for the nine months ended September 30, 2020 were $126.0 million, an increase of $17.0 million, or 15.6%, as compared to marketing and communication expenses of $109.0 million for the nine months ended September 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 off-campus classroom and laboratory sites which resulted in increased advertising of $16.8 million and increased employee compensation expenses and related expenses including share-based compensation of $0.3 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 1.5% to 20.8% for the nine months ended September 30, 2020, from 19.3% for the nine months ended September 30, 2019, primarily due to the increase in the number of new university partners and increased off-campus classroom and laboratory sites open between years and due to the revenue impacts caused by COVID-19 as we incur limited operating expenses to deliver those services. General and administrative . Our general and administrative expenses for the nine months ended September 30, 2020 were $33.1 million, a decrease of $1.1 million, or 3.1%, as compared to general and administrative expenses of $34.2 million for the nine months ended September 30, 2019. This decrease was primarily due to decreases in professional fees of $1.9 million, decreases in employee compensation and related expenses including share-based compensation of $0.5 million, and other general and administrative expenses of $0.3 million, partially offset by an increase in contributions in lieu of state income taxes to school sponsoring organizations of $1.0 million from $4.0 million in 2019 to $5.0 million in 2020 and an increase in occupancy and depreciation of $0.6 million. In 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. The decrease in employee compensation and related expenses is primarily related to lower headcount at our office in Indiana as we have transitioned a number of back office functions to Arizona. Our decrease in other general and administrative expenses is primarily related to reduced travel costs. Our increase in occupancy and depreciation are primarily related to the timing of the Acquisition and the increased lease expense for our office in Indiana. Our general and administrative expenses as a percentage of net revenue decreased by 0.5% to 5.5% for the nine months ended September 30, 2020, from 6.0% for the nine months ended September 30, 2019 due to the lower professional fees and our ability to leverage our other general and administrative expenses across an increasing revenue base, partially offset by the revenue impacts caused by COVID-19 as we incur limited operating expenses to deliver those services. Amortization of intangible assets . Amortization of intangible assets for the nine months ended September 30, 2020 was $6.3 million, an increase of $0.3 million or 4.5% as compared to $6.0 million for the nine months ended September 30, 2019. This increase is related to the timing of the Acquisition, 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. Loss on transaction . The loss on transaction for the nine months ended September 30, 2019 was $4.0 million due to transaction costs related to the Acquisition. Interest income on Secured Note . Interest income on the Secured Note from GCU for the nine months ended September 30, 2020 was $44.3 million, a decrease of $0.1 million, or 0.2%, as compared to $44.4 million for the nine months ended September 30, 2019. The Secured Note bears interest at 6% annually, and GCU makes monthly interest payments. The decrease over the prior year was primarily due to a slight decrease in the average principal balance of the Secured Note between periods due to repayments made by GCU under the Secured Note during the past twelve months. Interest expense . Interest expense was $3.5 million for the nine months ended September 30, 2020, a decrease of $4.9 million, as compared to interest expense of $8.4 million for the nine months ended September 30, 2019. The decrease in interest expense was primarily due to a decline in the average credit facility outstanding balance between periods due to paydowns 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 nine months ended September 30, 2020 was $0.8 million, a decrease of $3.2 million, as compared to $4.0 million in the nine months ended September 30, 2019. 32 Table of Contents 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 nine months ended September 30, 2020 was $51.3 million, an increase of $10.5 million, or 25.8%, as compared to income tax expense of $40.8 million for the nine months ended September 30, 2019. This increase was the result of an increase in our effective tax rate, partially offset by a slight decrease in our taxable income between periods. Our effective tax rate was 23.1% during the nine months ended September 30, 2020 compared to 18.3% during the nine months ended September 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. The effective tax rate has also been negatively impacted by lower excess tax benefits, which declined to $0.7 million in the first nine months of 2020 as compared to $7.2 million in the same period in 2019. The lower excess tax benefits are primarily due to a decrease in our stock price between years and fewer stock option exercises. 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. The increases in our effective tax rate were partially offset by an increase in our contributions made in lieu of state income taxes to school sponsoring organizations from $4.0 million for the nine months ended September 30, 2019 to $5.0 million for the nine months ended September 30, 2020. ​ Net income . Our net income for the nine months ended September 30, 2020 was $170.4 million, a decrease of $12.1 million, or 6.6%, as compared to $182.5 million for the nine months ended September 30, 2019, due to the factors discussed above. Seasonality 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. Our partners’ enrollment varies as a result of new enrollments, graduations, and student attrition. Revenues in the summer months (May through August) are lower primarily due to the majority of GCU’s traditional ground university students not attending courses during the summer months, which affects our results for our second and third fiscal quarters. Since a significant amount of our costs are fixed, the lower revenue resulting from the decreased summer enrollment has historically contributed to lower operating margins during those periods. Partially offsetting this summer effect has been the sequential quarterly increase in enrollments that has occurred as a result of the traditional fall school start. This increase in enrollments also has occurred in the first quarter, corresponding to calendar year matriculation. Thus, we experience higher net revenue in the fourth quarter due to its overlap with the semester encompassing the traditional fall school start and in the first quarter due to its overlap with the first semester of the calendar year. A portion of our expenses do not vary proportionately with these fluctuations in service revenue, resulting in higher operating income in the first and fourth quarters relative to other quarters. We expect quarterly fluctuation in operating results to continue as a result of these seasonal patterns. Liquidity and Capital Resources Liquidity . Our unrestricted cash and cash equivalents and investments were $179.8 million at September 30, 2020. Our credit facility had an available line of credit of $150.0 million as of September 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. 33 Table of Contents 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”). 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 September 30, 2020, the Company had loaned an additional $99,815 to GCU, net of repayments. 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 from us for short term cash flow needs. Share Repurchase Program 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. Under our share repurchase authorization, we may purchase shares in the open market or in privately negotiated transactions, pursuant to the applicable Securities and Exchange Commission rules. The amount and timing of future share repurchases, if any, will be made as market and business conditions warrant. During the three months ended September 30, 2020, 266,641 shares of common stock were repurchased by the Company. At September 30, 2020, there remains $85.0 million available under our share repurchase authorization . ​ Cash Flows Operating Activities . Net cash provided by operating activities for the nine months ended September 30, 2020 was $180.1 million as compared to $195.1 million for the nine months ended September 30, 2019. The decrease in cash generated from operating activities between the nine months ended September 30, 2019 and the nine months ended September 30, 2020 was primarily due to a decrease in net income between periods and changes in other working capital balances. 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. Investing Activities . Net cash used in investing activities was $13.7 million and $431.1 million for the nine months ended September 30, 2020 and 2019, respectively. The net cash used in investing activities in the nine months ended September 30, 2020 was capital expenditures of $22.2 million, partially offset by proceeds from the sale of investments of $8.7 million. Funding to GCU net of repayments during the first nine months of 2020 totaled nil. During the nine months ended September 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 nine months of 2019 totaled $109.8 million, net of repayments made by GCU. Proceeds from investments, net of purchases of short-term investments, was $55.3 million for the nine months ended September 30, 2019. Capital expenditures were $15.2 million for the nine months ended September 30, 2019. During the nine-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 sites opened. We invest approximately $1.5 million in leasehold improvements and equipment for each off-campus classroom and laboratory site. We opened seven new sites in the second half of 2020 and will open four additional sites in the first half of 2021 whereas we opened only four sites in the same period in the prior year. 34 Table of Contents Financing Activities . Net cash used in financing activities was $122.0 million for the nine months ended September 30, 2020. Net cash provided by financing activities was $174.0 million for the nine months ended September 30, 2019. During the nine months ended September 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 $92.3 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 $24.9 million. During the nine months ended September 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 $17.3 million was used to purchase treasury stock in accordance with the Company’s share repurchase program. Proceeds from the exercise of stock options of $3.7 million were received in the nine months ended September 30, 2019. Contractual Obligations The following table sets forth, as of September 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 October 1, 2020 through December 31, 2020. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Payments Due by Period ​ ​ ​ Less than ​ ​ ​ ​ More than ​ ​ Total ​ 1 Year ​ 2-3 Years ​ 4-5 Years ​ 5 Years Notes payable ​ $ 116.1 ​ $ 8.3 ​ $ 66.3 ​ $ 41.5 ​ $ — Lease liabilities (1) ​ ​ 61.4 ​ ​ 1.4 ​ ​ 13.9 ​ ​ 12.8 ​ ​ 33.3 Purchase obligations (2) ​ 10.1 ​ 0.7 ​ 8.4 ​ 1.0 ​ — Total contractual obligations ​ $ 187.6 ​ $ 10.4 ​ $ 88.6 ​ $ 55.3 ​ $ 33.3 (1) The lease liabilities exclude $1.4 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 September 30, 2020. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have had or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.