What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-17 compared with 2020-02-20 · 194 added, 128 removed, 117 unchanged (73% of the section changed)

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GCE has developed significant technological solutions, infrastructure and operational processes to provide services to these institutions on a large scale.

GCE’s primary 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.

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.

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 3 - 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 year ended December 31, 2019 include Orbis Education’s financial results for the period from January 22, 2019 to December 31, 2019.

Prior to July 1, 2018, GCE operated GCU.

On July 1, 2018, the Company sold GCU to an independent, nonprofit entity (the “Transaction”).

See Note 2- The Transaction to our consolidated financial statements for a full description of the Transaction.

Accordingly, the results of operations discussed herein for the twelve-month period ended December 31, 2018 reflect the Company’s operations prior to July 1, 2018 which were made up exclusively of the operations of GCU.

For the period from July 1, 2018 to December 31, 2018 and for the year ended December 31, 2019, results of operations do not include the operations of GCU but rather reflect the operations of the Company as an education services company.

In the healthcare field, GCE, together with Orbis Education, works in partnership with a growing number of top universities and healthcare networks across the country, offering health care related academic programs at off-campus classroom and laboratory sites located near healthcare providers and developing high-quality, career-ready graduates, who enter the workforce ready to meet the demands of the healthcare industry.

As of December 31, 2020, GCE provides education services to 25 university partners across the United States.

We plan to continue to add additional university partners and to introduce additional programs with both our existing partners and with new partners.

We may engage with both new and existing university partners to offer healthcare programs, online only or hybrid programs, or, as is the case for our most significant partner, GCU, both healthcare and other programs.

Therefore, 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.

Impact of COVID-19

In March 2020, the World Health Organization declared the COVID-19 outbreak to be 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 that of 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.

GCE has a long-term master services agreement with GCU (the “Master Services Agreement”) pursuant to which GCE provides education services to 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, who attend 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 who attend class one night a week on the Phoenix campus;

and online students who 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 2020 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 GCE’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.

The following impacts from the COVID-19 pandemic, however, did serve to reduce GCU’s non-tuition revenue during its Spring, Summer and Fall 2020 semesters and, consequently, the service revenues we earned under the Master Services Agreement:

● Traditional ground university students who elected to move off campus near the end of the Spring 2020 semester received partial refunds for dormitory and meal payments, which reduced GCU’s revenue and thus the service revenues earned by GCE 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.

Some of these businesses remain closed while others 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 GCE 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 GCE;

● 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 who were scheduled for the last week of March through the end of July were cancelled.

The doctoral residencies scheduled for August through December were held at another location with lower than normal attendance resulting in lower GCU revenues including at its hotel, and thus reduced the service revenues earned by GCE;

● GCU shifted its start date for the Fall semester for its traditional ground students from August 24, 2020 to September 8, 2020, which had 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 GCE.

In January 2021, GCU announced the first week of the Spring 2021 semester would be completed in an online modality to provide greater flexibility for students returning to campus after the holidays.

Face-to-face instruction for the Spring semester for its traditional ground students commenced on January 11, 2021.

Approximately 3,500 traditional ground students have elected to complete the Spring semester entirely in the online modality.

Spring semester face-to-face instruction will end April 1, 2021 for approximately 80% of classes, followed by two weeks of online instruction from April 5, 2021 through April 16, 2021 with Spring Break from April 19, 2021 to April 25, 2021.

These changes will have the effect of reducing GCU’s dormitory and ancillary revenues in the Spring of 2021 and thus the service revenues earned by GCE.

The changes described above at GCU have impacted or will impact GCE’s service revenue under the Master Services Agreement.

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.

GCE also has long-term services agreements with numerous other university partners across the United States.

The majority of these other 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, Summer and Fall 2020 semesters were completed without interruption and each university partner has started its Spring 2021 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 compensate 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 the Summer 2020 new start shortfall was offset by higher retention rates and slightly higher than expected Fall 2020 new starts.

No other changes are currently anticipated related to the Spring 2021 semester that would have an impact on GCE’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 Spring 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 Spring semester, such an event would reduce the service revenues earned by GCE.

The COVID-19 outbreak also presents operational challenges to GCE as approximately 90% of our 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.

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 reduction in service revenue attributable to reduced tuition, fees and ancillary revenues of our university partners resulting from COVID-19 will be $4.5 million in the first quarter of 2021 with a comparable reduction in operating profit.

Critical Accounting Policies and Estimates

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Revenue recognition .

Starting July 1, 2018, the Company generates all of its revenue through services agreements with its university partners (“Services Agreements”), pursuant to which the Company provides integrated technology and academic services, marketing and communication services, and as applicable, certain back office services to its university partners in return for a percentage of tuition and fee revenue.

The Company’s Services Agreements have a single performance obligation, as the promises to provide the identified services are not distinct within the context of these agreements.

Starting July 1, 2018, GCE generates all of its revenue through services agreements with its university partners (“Services Agreements”), pursuant to which GCE provides integrated technology and academic

services, marketing and communication services, and as applicable, certain back office services to its university partners in return for a percentage of tuition and fee revenue.

GCE’s Services Agreements have a single performance obligation, as the promises to provide the identified services are not distinct within the context of these agreements.

The single performance obligation is delivered as our partners receive and consume benefits, which occurs ratably over a series of distinct service periods (daily or semester).

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The service fees received from our partners over the term of the agreement are variable in nature in that they are dependent upon the number of students attending the university partner’s program and revenues generated from those students during the service period.

Due to the variable nature of the consideration over the life of the service arrangement, the Company considered forming an expectation of the variable consideration to be received over the service life of this one performance obligation.

However, since the performance obligation represents a series of distinct services, the Company recognizes the variable consideration that becomes known and billable because these fees relate to the distinct service period in which the fees are earned.

The Company meets the criteria in the standard and exercises the practical expedient to not disclose the aggregate amount of the transaction price allocated to the single performance obligation that is unsatisfied as of the end of the reporting period.

The Company does not disclose the value of unsatisfied performance obligations because the directly allocable variable consideration is allocated entirely to a wholly unsatisfied promise to transfer a service that forms part of a single performance obligation.

Due to the variable nature of the consideration over the life of the service arrangement, GCE considered forming an expectation of the variable consideration to be received over the service life of this one performance obligation.

However, since the performance obligation represents a series of distinct services, GCE recognizes the variable consideration that becomes known and billable because these fees relate to the distinct service period in which the fees are earned.

GCE meets the criteria in the standard and exercises the practical expedient to not disclose the aggregate amount of the transaction price allocated to the single performance obligation that is unsatisfied as of the end of the reporting period.

GCE does not disclose the value of unsatisfied performance obligations because the directly allocable variable consideration is allocated entirely to a wholly unsatisfied promise to transfer a service that forms part of a single performance obligation.

The service fees are calculated and settled per the terms of the Services Agreements and result in a settlement duration of less than one year for all partners.

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Any excess purchase price over the assigned values of net assets acquired is recorded as goodwill.

On January 22, 2019, the Company acquired, by merger, all of the outstanding equity interests of Orbis Education Services, LLC for $361.2 million, net of cash acquired.

As a result of this acquisition, the Company recorded $210.3 million of intangible assets, primarily customer relationships, and $157.8 million of goodwill.

On January 22, 2019, GCE acquired, by merger, all of the outstanding equity interests of Orbis Education for $361.2 million, net of cash acquired.

As a result of this acquisition, GCE recorded $210.3 million of intangible assets, primarily customer relationships, and $157.8 million of goodwill.

Refer to Note 3 – Acquisition within the footnotes to the consolidated financial statements for additional information.

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Derecognition of a tax position that was previously recognized occurs when we determine that a tax position no longer meets the more-likely-than-not threshold of being sustained upon examination.

As of December 31, 2019 and 2018, the Company has reserved approximately $6,773 and $1,960, respectively, for uncertain tax positions, including interest and penalties.

As of December 31, 2020 and 2019, GCE has reserved approximately $11,318 and $6,773, respectively, for uncertain tax positions, including interest and penalties.

Results of Operations

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33-10532, Disclosure Update and Simplification"

, which makes a number of changes meant to simplify certain disclosures in financial condition and

results of operations, particularly by eliminating year-to-year comparisons between prior periods previously disclosed.

, which makes a number of changes meant to simplify certain disclosures in financial condition and results of operations, particularly by eliminating year-to-year comparisons between prior periods previously disclosed.

In complying with the relevant aspects of the rule covering the current year annual report, we now include disclosures on results of operations for fiscal year 2020 versus 2019 only.

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The following table sets forth certain income statement data as a percentage of net revenue for each of the periods indicated.

University related expenses, amortization of intangible assets and the loss on transaction have been excluded from the table below:

Year Ended December 31,

Costs and expenses

Technology and academic services

Counseling services and support

Marketing and communication

General and administrative

As reflected in the table above, the income statement data as a percentage of revenue is not comparable between periods.

This is due to the reduction in revenues associated with the Company transitioning to an education service company as of July 1, 2018, the date of the Transaction.

As a result, the Company has also provided two additional tables to enhance comparability between periods by showing, on a comparable basis, the types of levels of operating expenses the Company currently incurs as compared to prior to the Transaction.

The Company uses 60% of university related revenues for periods prior to July 1, 2018, which is the percentage of GCU’s tuition and fee revenue to which the Company is entitled under the Master Services Agreement, to calculate the adjustment to university related revenue for purposes of deriving as adjusted “Non-GAAP” net revenue.

The percentages set forth below for periods prior to July 1, 2018 have been derived by dividing the indicated expense by as adjusted “Non-GAAP” net revenue.

University related expenses, amortization of intangible assets and the loss on transaction have been excluded from the table below:

Year Ended December 31,

As Adjusted “Non-GAAP” net revenue

Service revenue

University related revenue

60% of university related revenue

As adjusted “Non-GAAP” net revenue

Amortization of intangible assets and the loss on transaction have been excluded from the table below:

Year Ended December 31,

As % of As Adjusted "Non-GAAP"

Operating expenses

Costs and expenses

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Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Service revenue and University related revenue .

Our service revenue for the year ended December 31, 2019 was $778.6 million compared to service revenue and university related revenue of $333.0 million and $512.5 million, respectively, for the year ended December 31, 2018.

Commencing July 1, 2018, the results of our operations no longer include the operations of the University but rather reflect the operations of the Company as an education services company with 22 university partners.

As an education services company for GCU, our most significant university partner, the Company receives, as service revenue, 60% of GCU’s tuition and fee revenue and no longer has university related revenue, thus resulting in the decrease from the prior period.

The sum of service revenue for the six months ended December 31, 2018 of $333.0 million and 60% of university related revenue for the six months ended June 30, 2018 of $307.5 million, totals $640.5 million.

The 21.6% increase year over year in comparable service fee revenue was primarily due to our Orbis Education acquisition on January 22, 2019 and an increase in GCU enrollments between years of 5.9%.

Partner enrollments in programs serviced by Orbis Education at December 31, 2019 was 3,750.

The Orbis Education university partnership agreements 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.

We are also seeing an increase in revenue per student from our GCU partnership resulting from an increase in residential students who pay GCU not only tuition and fees but room and board.

Service revenue .

Our service revenue for the year ended December 31, 2020 was $844.1 million, an increase of $65.5 million, or 8.4%, as compared to service revenue of $778.6 million for the year ended December 31, 2019.

The increase year over year in service revenue was primarily due to an increase in university partner enrollments between years of 8.5% partially offset by a decrease in revenue per student year over year.

Partner enrollments totaled 115,997 at December 31, 2020 as compared to 106,861 at December 31, 2019.

Enrollments at GCU grew to 111,624 at December 31, 2020, an increase of 8.3% over enrollments at December 31, 2019, while enrollments at our other university partners were 4,373, an increase of 16.6% over enrollments at December 31, 2019.

The decrease in revenue per student is primarily due to the service revenue impact of the lower room, board, fee and ancillary revenues at GCU caused by COVID-19 (see - Impact of COVID-19 above).

This was partially offset by the fact that our services agreements with our other university partners generally generate a higher revenue per student than our agreement with GCU.

This higher revenue is due to our service agreements with other partners generally provide us with a higher revenue share percentage, the partners have higher tuition rates than GCU and the majority of their students are studying in the Accelerated Bachelor of Science in Nursing program so these students take more credits on average 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 December 31, 2019.

Last, we generated slightly more revenues in 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 year ended December 31, 2020 were $116.0 million, an increase of $25.5 million, or 28.2%, as compared to technology and academic services expenses of $90.5 million for the year ended December 31, 2019.

This increase was primarily attributable to the Orbis Education university partnership agreements, which require certain technology and academic services including headcount, as well as the use of classroom facilities and equipment to be provided to each university partner.

These costs along with the increased cost to service GCU resulted in 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 $36.4 million, $7.0 million, and $3.5 million, respectively.

The increase in employee compensation and related expenses is primarily due to the increase in the number of staff needed to support our 22 university partners, and their increased enrollment growth, tenure based salary adjustments and an increase in benefit costs between years.

Our technology and academic services expenses as a percentage of as adjusted non-GAAP net revenue increased 4.8% to 11.6% for the year ended December 31, 2019, from 6.8% for the year ended December 31, 2018 primarily due to the Orbis Education university partnership agreements acquired, which require a higher level of technology and academic services than our agreement with GCU.

This increase was 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 $19.7 million, $5.0 million and $0.8 million, respectively.

These increases, in turn, 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 between years.

Our technology and academic services expenses as a percentage of net revenue increased 2.1% to 13.7% for the year ended

December 31, 2020, from 11.6% for the year ended December 31, 2019 primarily due to our services agreements with university partners that provide for off-campus classroom and laboratory sites, which necessitate a higher level of technology and academic services than does 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, for the year ended December 31, 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 December 31, 2020 as compared to the 23 sites that were open as of December 31, 2019.

Counseling services and support .

Our counseling services and support expenses for the year ended December 31, 2020 were $234.5 million, an increase of $10.9 million, or 4.9%, as compared to counseling services and support expenses of $223.6 million for the year ended December 31, 2019.

This increase was primarily attributable to the Orbis Education university partnership agreements, which require certain counseling services and support, principally headcount to be provided to each university partner.

These costs along with the increased cost to service GCU resulted in increases in employee compensation and related expenses including share-based compensation, in other counseling services and support related expenses, and in depreciation, amortization and occupancy costs of $15.0 million, $2.9 million and $1.0 million, respectively.

The increase in employee compensation and related expenses is primarily due to increased headcount to support our university partners, and their increased enrollment growth, tenure-based salary adjustments and an increase in benefit costs between years.

The increase in other counseling services is primarily the result of increased travel costs to service our 22 university partners.

Our counseling services and support expenses as a percentage of as adjusted non-GAAP net revenue decreased 3.3% to 28.7% for the year ended December 31, 2019, from 32.0% for the year ended December 31, 2018 primarily due to the counseling services and support costs to service the Orbis Education partnership agreements being less as a percentage of revenue than the costs to service the GCU agreement and due to our ability to leverage our counseling services and support costs to service GCU across an increasing revenue base.

This increase was primarily attributable to increases in employee compensation and related expenses including share-based compensation and in depreciation, amortization and occupancy costs of $18.0 million and $1.2 million, respectively, partially offset by a decrease in other counseling services and support expenses of $8.3 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 an increase in benefit costs, while the increase in depreciation, amortization and occupancy costs were primarily due to 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 and only a small amount of travel has occurred subsequent to that date.

Our counseling services and support expenses as a percentage of net revenue decreased by 0.9% to 27.8% for the year ended December 31, 2020, from 28.7% for the year ended December 31, 2019 primarily due to the decrease in travel costs and our ability to leverage our other counseling services and support 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.

Marketing and communication .

Our marketing and communication expenses for the year ended December 31, 2019 were $142.9 million, an increase of $25.5 million, or 21.7%, as compared to marketing and communication

expenses of $117.4 million for the year ended December 31, 2018.

This increase was primarily attributable to the Orbis Education partnership agreements, which require marketing of the university partners’ programs.

These costs along with the increased cost to market GCU’s programs resulted in increased advertising, and in employee compensation and related expenses including share-based compensation of $22.5 million and $3.0 million, respectively.

Our marketing and communication expenses as a percentage of as adjusted non-GAAP net revenue increased slightly by 0.1% to 18.4% for the year ended December 31, 2019, from 18.3% for the year ended December 31, 2018.

Our marketing and communication expenses for the year ended December 31, 2020 were $164.3 million, an increase of $21.4 million, or 15.0%, as compared to marketing and communication expenses of $142.9 million for the year ended December 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 off-campus classroom and laboratory sites which resulted in increased advertising of $21.4 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 $0.2 million.

Our marketing and communication expenses as a percentage of net revenue increased by 1.1% to 19.5% for the year ended December 31, 2020, from 18.4% for the year ended December 31, 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 year ended December 31, 2019 were $44.3 million, an increase of $14.3 million, or 47.9%, as compared to general and administrative expenses of $30.0 million for the year ended December 31, 2018.

This increase was primarily due to increases in employee compensation including share-based compensation, in professional fees, in other general and administrative costs, and in occupancy and depreciation of $7.3 million, $3.0 million, $2.9 million, and $1.1 million, respectively.

Our increases in employee compensation, occupancy and depreciation, and other general and administrative costs are primarily related to the acquisition of Orbis Education, including additional headcount, and office space in Indianapolis, Indiana.

Our increase in professional fees is primarily related to a payment made to an outside provider that assisted us in obtaining a state tax refund with a favorable tax impact of $5.9 million in the first quarter of 2019 and higher legal fees.

Our increase in other general and administrative costs is primarily due to increases in travel costs and an increase in contributions made in lieu of state income taxes to school sponsoring organizations from $3.7 million for the year ended December 31, 2018 to $4.0 million for the year ended December 31, 2019.

Our general and administrative expenses as a percentage of as adjusted non-GAAP net revenue increased by 1.0% to 5.7% for the year ended December 31, 2019, from 4.7% for the year ended December 31, 2018 due to higher general and administrative costs at Orbis Education as a percentage of net revenue, partially offset by our ability to leverage our other general and administrative expenses across an increasing revenue base.

Our general and administrative expenses for the year ended December 31, 2020 were $43.4 million, a decrease of $0.9 million, or 2.2%, as compared to general and administrative expenses of $44.3 million for the year ended December 31, 2019.

This decrease was primarily due to decreases in professional fees of $1.8 million and in employee compensation and related expenses including share-based compensation of $1.3 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 increases in occupancy and depreciation of $0.8 million and in other general and administrative expenses of $0.4 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 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 0.6% to 5.1% for the year ended December 31, 2020, from 5.7% for the year ended December 31, 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 .

The amortization of intangible assets for the year ended December 31, 2019 was $8.2 million and is related to the acquisition of Orbis Education, which resulted in the creation of certain identifiable intangible assets that will be amortized over their expected lives.

University related expenses .

Our university related expenses for the year ended December 31, 2018 were $173.3 million.

These expenses represent the costs transferred to the university for the six months ended June 30, 2018 and in the six months ended December 31, 2018 are primarily due to the Company’s Board of Directors modifying the vesting condition for certain restricted stock awards for personnel that transferred to GCU, which resulted in $7.9 million of share-based compensation expense, and employer taxes of $0.2 million on such modification.

This amount was partially offset by reversals of employee related liabilities totaling $1.9 million that were not part of the transferred assets for the GCU transaction.

Amortization of intangible assets for the year ended December 31, 2020 was $8.4 million, an increase of $0.2 million, as compared to $8.2 million for the year ended December 31, 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 year ended December 31, 2019 was $4.0 million due to transaction costs related to the acquisition of Orbis Education.

Our loss on transaction expenses for the year ended December 31, 2018 was primarily related to the GCU transaction and totaled $18.4 million, which included third-party transaction costs of $5.8 million and an asset impairment of $3.0 million.

In addition, the Company transferred to GCU cash of $9.6 million to fund a deferred compensation plan for GCU employees who were formerly GCE employees and that held unvested restricted stock of GCE that was forfeited upon the Transaction.

The loss on transaction for the year ended December 31, 2019 was $4.0 million due to transaction costs related to the Acquisition.

Interest income on Secured Note .

As a component of the transaction with GCU, GCU issued a Secured Note to GCE on July 1, 2018.

Interest income on the Secured Note for the year ended December 31, 2019 was $59.3 million, an increase of $32.4 million, as compared to interest income on Secured Note of $26.9 million for the year ended December 31, 2018.

The Company recognizes interest income on its Secured Note with GCU including borrowings made for capital expenditures, earning interest at 6%, with monthly interest payments.

Interest income on the Secured Note for the year ended December 31, 2020 was $59.2 million, a decrease of $0.1 million, or 0.2%, as compared to $59.3 million for the year ended December 31, 2019.

GCE recognizes interest income on its Secured Note with GCU including borrowings made for capital expenditures, earning interest at 6%, with 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 repayments made by GCU under the Secured Note during the past 12 months.

Interest expense .

Interest expense was $11.3 million for the year ended December 31, 2019, an increase of $9.8 million, as compared to interest expense of $1.5 million for the year ended December 31, 2018.

The increase in interest expense is primarily due to the acquisition of Orbis Education, which resulted in a $190.1 million increase in our outstanding credit facility, a slightly higher interest rate on the credit facility, and additional fees on the revolving credit facility.

In addition, we had no capitalized interest as compared to the same period in the prior year due to the

significant decline in capital expenditures, and $1.1 million of interest expense was recognized in December 2019 due to the expiration of the interest rate corridor.

Interest expense was $4.4 million for the year ended December 31, 2020, a decrease of $6.9 million, as compared to interest expense of $11.3 million for the year ended December 31, 2019.

The decrease in interest expense is primarily due to a decline in the average credit facility outstanding balance between periods due to paydowns of the credit facility during the past 12 months and a decrease in the average borrowing rate between years of approximately 163 basis points.

Investment interest and other .

Investment interest and other for the year ended December 31, 2019 was $4.4 million, an increase of $1.0 million, as compared to $3.4 million for the year ended December 31, 2018.

Investment interest and other for the year ended December 31, 2020 was $0.9 million, a decrease of $3.5 million, as compared to $4.4 million for the year ended December 31, 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 significantly lower interest rates.

Income tax expense .

Income tax expense for the year ended December 31, 2020 was $75.9 million, an increase of $17.6 million, or 30.2%, as compared to income tax expense of $58.3 million for the year ended December 31, 2019.

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

Our effective tax rate was 18.4% during the year ended December 31, 2019 compared to 20.2% during the year ended December 31, 2018.

The decrease in the effective tax rate was primarily the result of 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.

In addition, the effective tax rate was favorably impacted by a law change with respect to Arizona state taxes, partially offset by a slight decrease in excess tax benefits to $7.2 million from $10.5 million for the year ended December 31, 2019 and 2018, respectively.

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

Our effective tax rate was 22.8% during the year ended December 31, 2020 as compared to 18.4% during the year ended December 31, 2019.

The 2019 effective tax rate was lower due to some large, one-time, favorable discreet items.

In 2019, an agreement was reached 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.

In addition, the effective tax rate in 2019 was favorably impacted by a law change with respect to Arizona state taxes and higher excess tax benefits of $7.2 million compared to excess tax benefits of $1.4 million for the year ended December 31, 2020.

The inclusion of excess tax benefits and deficiencies as a component of our income tax expense increases the 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 year months ended December 31, 2019 was $259.2 million, an increase of $30.2 million, or 13.2% as compared to $229.0 million for the year ended December 31, 2018, due to the factors discussed above.

Our net income for the year months ended December 31, 2020 was $257.2 million, a decrease of $2.0 million, or 0.8% as compared to $259.2 million for the year ended December 31, 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.

Our partners’ enrollment varies as a result of new enrollments, graduations, and student attrition.

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 students not attending courses during the summer months, which affects our results for our second and third fiscal quarters.

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Liquidity, Capital Resources, and Financial Position

Our unrestricted cash and cash equivalents and investments were $256.6 million and $143.9 million at December 31, 2020 and 2019, respectively.

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

During 2019, we financed our acquisition of Orbis Education for $361.2 million, net of cash acquired, from an increase in our credit facility of $190.1 million and the use of $171.1 million of operating cash on hand.

Our unrestricted cash and cash equivalents and investments were $143.9 million at December 31, 2019.

As of December 31, 2019, we had $300,000 of restricted cash and cash equivalents, for pledged collateral for a site lease.

Concurrent with the closing of the Acquisition, we entered into an amended and restated credit agreement dated January 22, 2019 and two related amendments dated January 31, 2019 and February 1, 2019, respectively, that together provided a credit facility of $325.0 million comprised of a term loan facility of $243.8 million and a revolving credit facility of $81.3 million, both with a five-year maturity date.

The term facility is subject to quarterly amortization of principal, commencing with the fiscal quarter ended June 30, 2019, in equal installments of 5% of the principal amount of the term facility per quarter.

Both the term loan and revolver have monthly interest payments currently at 30-Day

LIBOR plus an applicable margin of 2%.

The proceeds of the term loan, together with $6.3 million drawn under the revolver and cash on hand, were used to pay the purchase price in the Acquisition.

Concurrent with the entry into the amended and restated credit agreement and the completion of the Acquisition, we repaid our existing term loan of $59.9 million and our cash collateral of $61.7 million was released.

The Company entered into a further amendment to the credit facility on October 31, 2019.

GCE entered into a further amendment to the credit facility on October 31, 2019.

This amendment increased the revolving commitment by $68.8 million to $150.0 million, while reducing the term loan by the same $68.8 million to $150.6 million.

The Company elected to repay the $68.8 million revolver balance on November 1, 2019.

On July 1, 2018, in consideration for the transfer of assets under the Asset Purchase Agreement, we received a secured note from GCU in the initial principal amount of $870.1 million (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.

Funding net of repayments of $100.0 million for capital expenditures for GCU since July 1, 2018 totals $99.8 million as of December 31, 2019.

GCE elected to repay the $68.8 million revolver balance on November 1, 2019.

The amended facility is subject to quarterly amortization of principal, commencing with the fiscal quarter ended December 31, 2019, in equal quarterly payments of $8.4 million with a maturity date of January 2025.

Both the term loan and revolver have monthly interest payments currently at 30-Day LIBOR plus an applicable margin of 2%.

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”).

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%, has a maturity date of June 30, 2025, and is secured by all 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 December 31, 2020, GCE had loaned an additional $99,815 to GCU, net of repayments.

We believe that GCU’s cash flows from operations are currently sufficient to fund all of its capital expenditures although it is possible that GCU may make requests to borrow additional amounts from us for short term cash flow needs.

Share Repurchase Program

Our Board of Directors has authorized us to repurchase up to $175.0 million in aggregate of common stock, from time to time, depending on market conditions and other considerations.

In July 2020, December 2020 and January 2021, our Board of Directors increased the authorization under our existing stock repurchase program by $50.0 million, $100.0 million and $100.0 million, respectively, reflecting an aggregate authorization for share repurchases since the initiation of our program of $500.0 million.

As of December 31, 2020, we had a total remaining authorization of $148.3 million (which authorization was increased to $248.3 million in January 2021).

Pursuant to this authorization, in our discretion, we can repurchase our common stock, from time to time, in open market or in privately negotiated transactions, depending on market conditions and other considerations.

The amount and timing of future share repurchases, if any, will be made as market and business conditions warrant, and we may modify, suspend or discontinue repurchases at any time.

The current expiration date on the repurchase authorization by our Board of Directors is December 31, 2021.

Repurchases occur at our discretion.

Under our share purchase authorization, we may purchase shares in the open market or in privately negotiated transactions, pursuant to the applicable SEC Rules.

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

Since the approval of the initial share repurchase plan, we have purchased 4.0 million shares of common stock at an aggregate cost of $122.7 million, which includes 376,384 shares of common stock at an aggregate cost of $35.8 million during the year ended December 31, 2019.

At December 31, 2019, there remains $52.3 million available under our current share repurchase authorization.

Since 2011, we have purchased 5.6 million shares of common stock at an aggregate cost of $251.7 million, which includes 1,601,788 shares of common stock at an aggregate cost of $129.0 million during the year ended December 31, 2020.

Operating Activities.

Net cash provided by operating activities for the years ended December 31, 2020 and 2019 was $308.8 million and $306.3 million, respectively.

Cash provided by operations in 2019 and 2018 resulted from our net income adjusted for non-cash charges for share-based compensation, depreciation and amortization, timing of income tax and employee related payments and changes in other working capital.

The significant increase in net cash from operating activities between 2018 and 2019 is primarily due to the higher net income and changes in working capital balances.

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

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

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

Investing Activities .

Net cash used in investing activities was $19.4 million and $405.9 million for the years ended December 31, 2020 and 2019, respectively.

Our cash used in investing activities in 2020 was primarily related to capital expenditures of $29.4 million partially offset by proceeds from the sale of investments of $10.6 million.

Funding to GCU for the year ended December 31, 2020 net of repayments totaled nil.

Our cash used in investing activities in 2019 was primarily related to the Acquisition, the funding of capital expenditures to GCU, and the liquidation of short-term investments and capital expenditures.

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Funding to GCU for capital expenditures during the year ended December 31, 2019 totaled $69.8 million, net of repayments made by GCU of $100.0 million in 2019.

Proceeds from investments, net of purchases of short-term investments, was $47.8

million and $18.2 million for the years ended December 31, 2019 and 2018, respectively.

Cash used in investing activities for the year ended December 31, 2018 was primarily related to the GCU Transaction, which result in $131.6 million of cash being transferred to GCU at its close on July 1, 2018.

Capital expenditures were $22.4 million and $94.5 million for the years ended December 31, 2019 and 2018, respectively.

During the year ended December 31, 2019, capital expenditures primarily consisted of leasehold improvements and equipment for new partner locations, internally developed software, as well as purchases of computer equipment, other internal use software projects and furniture and equipment to support our increasing employee headcount.

During the year ended December 31, 2018, capital expenditures primarily consisted of the University’s ground campus construction projects incurred prior to June 30, 2018 as well as purchases of computer equipment, other internal use software projects and furniture and equipment to support our increasing employee headcount.

Proceeds from investments, net of purchases of short-term investments, was $47.8 million for the year ended December 31, 2019.

Capital expenditures were $22.4 million for the year ended December 31, 2019.

During the years ended December 31, 2020 and 2019, capital expenditures primarily consisted of leasehold improvements and equipment for new off-campus classroom and laboratory sites, internally developed software, 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 year over year is due to the increase in off-campus classrooms and laboratory sites between years.

As of December 31, 2020, 30 off-campus classroom and laboratory sites were opened compared to 23 as of December 31, 2019.

Financing Activities.

Net cash provided by financing activities was $40.1 million for the year ended December 31, 2019.

Net cash used in financing activities was $166.3 million for the year ended December 31, 2020.

During 2020, $129.0 million was used to purchase treasury stock in accordance with GCE’s share repurchase program and $5.0 million was used to purchase common shares withheld in lieu of income taxes resulting from the vesting of restricted share awards.

Principal payments on notes payable totaled $33.1 million, partially offset by proceeds from the exercise of stock options of $0.9 million.

Net cash provided by financing activities was $40.1 million for the year ended December 31, 2019.

During 2019, $243.8 million of proceeds was drawn on the term loan, and $26.3 million was drawn and repaid on the revolver in 2019, and the term loan balance of the prior credit agreement of $59.9 million was repaid along with the repayment of $101.3 million of principal and revolver 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 $35.8 million was used to purchase treasury stock in accordance with the Company’s share repurchase program.

Proceeds from the exercise of stock options of $3.8 million were received for the year ended December 31, 2019.

During 2018, $15.2 million was used to purchase common shares withheld in lieu of income taxes resulting from the vesting of restricted share awards and $9.6 million was used to purchase treasury stock in accordance with the Company’s share repurchase program.

Principal payments on notes payable totaled $6.7 million, partially offset by proceeds from the exercise of stock options of $4.6 million.

Contractual Obligations

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Payments Due by Period

Long term notes payable (1)

Notes payable (1)

Lease liabilities (2)

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Total contractual obligations

(1) See Note 10, “Notes Payable and Other Noncurrent Liabilities,” to our consolidated financial statements, included in Item 8, Consolidated Financial Statements and Supplementary Data , for a discussion of our long term notes payable and other obligations.

(2) See Note 9, “Leases,” to our consolidated financial statements, included in Item 8, Consolidated Financial Statements and Supplementary Data , for a discussion of our leases.

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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.

Non-GAAP Discussion

Adjusted EBITDA (Non-GAAP Financial Measure)

In addition to our GAAP results, we use Adjusted EBITDA as a supplemental measure of our operating performance and as part of our compensation determinations.

Adjusted EBITDA is not required by or presented in

accordance with GAAP and should not be considered as an alternative to net income, operating income, or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities or as a measure of our liquidity.

See Item 6, Selected Consolidated Financial and Other Data, for a discussion of our Adjusted EBITDA computation and reconciliation.

For information on how we calculate as adjusted net revenue for comparison purposes, see “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operation – Results of Operations.

Adjusted EBITDA is not required by or presented in accordance with GAAP and should not be considered as an alternative to net income, operating income, or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities or as a measure of our liquidity.

Adjusted EBITDA is defined as net income plus interest expense, less interest income and other gain (loss) recognized on investments, plus income tax expense, plus depreciation and amortization (EBITDA), as adjusted for (i) contributions to private Arizona school tuition organizations in lieu of the payment of state income taxes;

(ii) loss on transaction;

(iii) share-based compensation, and (iv) unusual charges or gains, such as litigation and regulatory reserves, impairment charges and asset write-offs, and exit or lease termination costs.

We present Adjusted EBITDA, a non-GAAP financial measure, because we consider it to be an important supplemental measure of our operating performance.

We also make certain compensation decisions based, in part, on our operating performance, as measured by Adjusted EBITDA, and our credit agreement requires us to comply with covenants that include performance metrics substantially similar to Adjusted EBITDA.

All of the adjustments made in our calculation of Adjusted EBITDA are adjustments to items that management does not consider to be reflective of our core operating performance.

Management considers our core operating performance to be that which can be affected by our managers in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period and does not consider the items for which we make adjustments (as listed above) to be reflective of our core performance.

We believe Adjusted EBITDA allows us to compare our current operating results with corresponding historical periods and with the operational performance of other companies in our industry because it does not give effect to potential differences caused by variations in capital structures (affecting relative interest expense, including the impact of write-offs of deferred financing costs when companies refinance their indebtedness), tax positions (such as the impact

on periods or companies of changes in effective tax rates or net operating losses), the book amortization of intangibles (affecting relative amortization expense), and other items that we do not consider reflective of underlying operating performance.

We also present Adjusted EBITDA because we believe it is frequently used by securities analysts, investors, and other interested parties as a measure of performance.

In evaluating Adjusted EBITDA, investors should be aware that in the future we may incur expenses similar to the adjustments described above.

Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by expenses that are unusual, non-routine, or non-recurring.

Adjusted EBITDA has limitations as an analytical tool in that, among other things, it does not reflect:

● cash expenditures for capital expenditures or contractual commitments;

● changes in, or cash requirements for, our working capital requirements;

● interest expense, or the cash required to replace assets that are being depreciated or amortized;

● the impact on our reported results of earnings or charges resulting from the items for which we make adjustments to our EBITDA, as described above and set forth in the table below.

In addition, other companies, including other companies in our industry, may calculate these measures differently than we do, limiting the usefulness of Adjusted EBITDA as a comparative measure.

Because of these limitations, Adjusted EBITDA should not be considered as a substitute for net income, operating income, or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities or as a measure of our liquidity.

We compensate for these limitations by relying primarily on our GAAP results and use Adjusted EBITDA only as a supplemental performance measure.

For more information, see our consolidated financial statements and the notes to those consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

The following table reconciles net income to Adjusted EBITDA for the periods indicated:

Year Ended December 31,

interest expense

interest income on Secured Note

investment interest and other

income tax expense

amortization of intangible assets

depreciation and amortization

contributions in lieu of state income taxes (a)

loss on transaction (b)

share-based compensation (c)

estimated litigation and regulatory reserves (d)

Adjusted EBITDA

(a) Represents contributions to various private Arizona school tuition organizations to assist with funding for education.

In connection with such contributions made, we received a dollar-for-dollar state income tax credit, which resulted in a reduction in our effective income tax rate to 22.8% and 18.4% for the years ended December 31, 2020 and 2019, respectively.

Had these contributions not been made, our effective tax rate would have been 23.9% and 19.3% for 2020 and 2019, respectively.

Such contributions are viewed by our management to be made in lieu of payments of state income taxes and are therefore excluded from evaluation of our core operating performance.

(b) Represents costs incurred related to the Acquisition, including legal and other third-party costs.

(d) Reflects primarily regulatory litigation as GCE retained responsibility for all liabilities of GCU arising prior to the closing date of the Transaction.

See Note 2 – The Transaction in our consolidated financial statements for a full description of the Transaction.

Recent Accounting Pronouncements

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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-K

Item 7. Management’s Discussion and Analysis