What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-05 compared with 2021-05-05 · 182 added, 84 removed, 142 unchanged (65% of the section changed)

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statements regarding proposed new programs;

statements as to whether regulatory developments or other matters may or may not have a material adverse effect on our financial position, results of operations, or liquidity;

statements as to whether regulatory, economic, or business developments or other matters may or may not have a material adverse effect on our financial position, results of operations, or liquidity;

statements concerning projections, predictions, expectations, estimates, or forecasts as to our business, financial and operational results, and future economic performance;

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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.

Currently, one of the most significant factors that could cause actual outcomes to differ materially from our forward-looking statements is the continuing potential adverse effects of the COVID-19 pandemic, and federal, state and/or local regulatory guidelines and private business actions to control it, on the global economy and the financial markets, the higher education industry in which we operate, our university partners, and, ultimately, on our financial condition, operating results and cash flows.

Currently, one of the most significant factors that could cause actual outcomes to differ materially from our forward-looking statements is the continuing, and potential future, adverse effects of the COVID-19 pandemic, and federal, state and/or local regulatory guidelines and private business actions to control it, on the global economy and the financial markets, the higher education industry in which we operate, our university partners, and, ultimately, on our financial condition, operating results and cash flows.

The extent to which the COVID-19 pandemic will continue to impact us and our university partners will depend on future developments, including the scope, severity and duration of the pandemic, and the resulting economic impacts and potential changes in behavior, among others, all of which are highly uncertain and cannot be predicted with confidence.

Important factors that could cause such differences, and which may be further heightened by the COVID-19 pandemic, include, but are not limited to:

Important factors that could cause our actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements, and which may be further heightened by the COVID-19 pandemic, 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 epidemics, pandemics, including the COVID-19 outbreak, or public health crises;

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● 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 “2020 Form 10-K”) for the fiscal year ended December 31, 2020, 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.

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 “2020 Form 10-K”) filed with the Securities and Exchange Commission (“SEC”) for the fiscal year ended December 31, 2020, as updated in our subsequent reports filed with the 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.

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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 healthcare-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 March 31, 2021, GCE provides education services to 26 university partners across the United States.

As of June 30, 2021, GCE provides education services to 27 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.

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;

Therefore, we refer to all university partners as “GCE partners” or “our partners” and 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.

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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.

Since March 2020, the world has been, and continues to be, impacted by the COVID-19 pandemic.

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

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Summer 2020 semester classes were moved to an online environment as well and most students were given the choice of attending the Fall 2020 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 2020 and the Spring semester of 2021 and, consequently, the service revenues we earned under the Master Services Agreement:

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 was seamless and thus, the university did not incur a significant decrease in tuition revenue or significant increase in costs associated with this transition in March 2020.

The following impacts from the COVID-19 pandemic, however, did serve to reduce GCU’s non-tuition revenue during 2020 and have or will reduce GCU’s revenue during 2021 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 2020 and the month of April 2020;

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Most of these businesses re-opened with scaled back operations in mid-September 2020, 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 2020 semester, which reduced GCU’s dormitory and ancillary revenues and thus the service revenues earned by GCE;

● Limited residential students remained on campus during the Summer 2020 semester, which reduced GCU’s dormitory and ancillary revenues and thus the service revenues earned by GCE in 2020.

The number of residential students that remained on campus during the Summer 2021 semester, however, was higher than in the Summer of 2019;

● 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 which were scheduled for the last week of March 2020 through the end of July 2020 were cancelled.

The doctoral residencies scheduled for August 2020 through December 2020 were held at another location with lower than normal attendance.

In the first quarter of 2021, doctoral residencies returned to the university’s campus and its hotel, although at lower than normal attendance.

This has reduced and will continue to reduce GCU’s revenues including at its hotel, and thus reduced service revenues earned by GCE until residencies return to normal attendance;

● 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.

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

Most of the residencies which were scheduled for the last week of March 2020 through the end of July 2020 were cancelled, and the residencies scheduled for August 2020 through December 2020 were held at another location with lower than normal attendance.

This reduced GCU’s revenues including at its hotel, and thus reduced service revenues earned by GCE until residencies returned to normal attendance.

In the first quarter of 2021, doctoral residencies returned to the university’s campus and its hotel, although at lower than normal attendance rates;

attendance at doctoral residencies in the second quarter of 2021 returned to 2019 levels;

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

This later start date for the Fall semester has been retained in 2021 as the semester is scheduled to begin on September 7, 2021;

● GCU shifted its move-in date for its residential students in the Fall 2020 semester 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 2020 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.

Residential enrollment for the Fall 2020 semester 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.

There are currently no plans to have a late move-in date for the Fall 2021 semester and the number of students currently scheduled to live on campus is at capacity;

● The first week of the Spring 2021 semester was completed in an online modality for GCU’s traditional students to provide greater flexibility for students returning to campus after the holidays.

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

GCU anticipates a higher number of residential students will remain on campus during the Summer semester of 2021 than in 2020 and that ancillary businesses operated by GCU such as its hotel and merchandise shops will be open.

However, GCU anticipates that the revenue earned in dormitory and ancillary revenues will remain below pre-COVID levels and thus the service revenues earned by GCE will continue to be impacted.

● During the second quarter of 2020, GCU’s online enrollment growth accelerated significantly into the high single digits.

The increased level of online enrollment at that time resulted from a combination of factors including an acceleration of new students starting programs, a higher than expected number of students returning to the university that had taken a break from their program (“re-enters”) and a lower than expected number of students deciding to drop out of or take a break from their program.

We believe these trends were primarily caused by the shutdowns precipitated by the COVID-19 outbreak as greater numbers of working

adults decided to return to school to finish undergraduate degree programs that they had previously started or to start new graduate degree programs during this time.

These trends generally continued through the first quarter of 2021.

Beginning in the second quarter of 2021, online enrollment growth rates as compared to the prior year period began to slow as both new enrollments and re-enters were down year over year, the numbers of students dropping out of school or taking periodic breaks in their program returned to historical levels and students completing their programs increased significantly on a year over year basis.

We anticipate that some or all of these trends will continue through the rest of 2021 and thus the year over year online growth rate might continue to decline.

We believe that as the year over year comparables return to historical levels and schools, hospitals and businesses fully reopen, our online enrollment growth rate will begin to re-accelerate.

● Professional studies students have declined significantly since the onset of the COVID-19 outbreak.

Professional studies students at that time were converted to the online learning environment;

since then, most have completed their programs while no new cohorts have been started until very recently.

Now that the university has approved the recruitment of new professional studies cohorts, we anticipate that the number of these students will begin to grow.

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

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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 semester, which resulted in lower enrollments and revenues in the Summer 2020 semester than was planned.

The Spring, Summer and Fall 2020 and Spring 2021 semesters were completed without interruption and each university partner has started its Summer 2021 semester.

Some students who were scheduled to start their programs in the Summer 2020 semester delayed their start until the Fall 2020 semester, 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 changes are currently anticipated with our other university partners related to the Summer 2021 semester that would have an impact on GCE’s service revenue, operating profit and operating margins.

However, if one of our university partners closes an off-campus classroom and laboratory site prior to the end of the Summer 2021 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.

No changes are currently anticipated with our other university partners related to the Fall 2021 semester that would have a material impact on GCE’s service revenue, operating profit and operating margins.

However, if one of our university partners were to close an off-campus classroom and laboratory site prior to the end of the Fall 2021 semester, or take some other action that adversely impacted program enrollment, such an event would reduce the service revenues earned by GCE.

The COVID-19 outbreak also presents operational challenges to GCE as a large percentage 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 $1.2 million in the second quarter of 2021 with a comparable reduction in operating profit.

Critical Accounting Policies and Use of Estimates

Our critical accounting policies are disclosed in the 2020 Form 10-K for the fiscal year ended December 31, 2020.

During the three months ended March 31, 2021, there have been no significant changes in our critical accounting policies.

During the six months ended June 30, 2021, there were no significant changes in our critical accounting policies.

Results of Operations

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Three Months Ended

Six Months Ended

Costs and expenses

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General and administrative

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Service revenue .

Our service revenue for the three months ended March 31, 2021 was $236.9 million, an increase of $15.2 million, or 6.9%, as compared to service revenue of $221.7 million for the three months ended March 31, 2020.

The increase year over year in service revenue was primarily due to an increase in university partner enrollments between years of 7.2% partially offset by a decrease in revenue per student year over year.

Partner enrollments totaled 115,390 at March 31, 2021 as compared to 107,591 at March 31, 2020.

Enrollments at GCU grew to 111,055 at March 31, 2021, an increase of 7.2% over enrollments at March 31, 2020, while enrollments at our other university partners were 4,335, an increase of 8.4% over enrollments at March 31, 2020.

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 in 2021 and 2020 caused by COVID-19 (see - Impact of COVID-19 above).

In addition, we generated slightly more revenues in 2020 as compared to the same period in 2021 due to 2020 being a Leap Year and thus providing an extra day of revenue in 2020 as compared to 2021 and we did not renew a contract with a university partner with two sites in the first quarter of 2021.

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, as these agreements 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.

Additionally, we opened seven new off-campus classroom and laboratory sites in the second half of 2020 and one new site in the Spring of 2021.

The eight new off-campus classroom and laboratory sites opened in the past twelve months, partially offset by the non-renewal of the contract with a university partner with two sites in the first quarter of 2021 increased the total number of these sites to 29 as compared to 23 at March 31, 2020.

Our service revenue for the three months ended June 30, 2021 was $201.5 million, an increase of $15.7 million, or 8.5%, as compared to service revenue of $185.8 million for the three months ended June 30, 2020.

The increase year over year in service revenue was primarily due to year over year increases in university partner enrollments of 3.5% and in revenue per student.

Partner enrollments totaled 101,808 at June 30, 2021 as compared to 98,326 at June 30, 2020.

University partner enrollments at our off-campus classroom and laboratory sites were 4,210, an increase of 13.2% over enrollments at June 30, 2020, which includes 176 GCU students at June 30, 2021.

Enrollments at GCU grew to 97,774 at June 30, 2021, an increase of 3.3% over enrollments at June 30, 2020.

GCU enrollment declines between March 31 and June 30 of each year as ground enrollment at GCU at June 30 of each year only includes traditional-aged students taking Summer school classes, which is a small percentage of GCU’s traditional-aged student body.

The Spring semester for GCU’s traditional-aged student body ends near the end of April each year.

GCU also had a decline in the year over year growth rate of its online students between March 31, 2021 to June 30, 2021 (see – Impact of COVID-19 above).

The increase in revenue per student is primarily due to the service revenue impact of the increased room, board, fee and other ancillary revenues at GCU in the second quarter of 2021 as compared to the prior year period (see - Impact of COVID-19 above) and the growth in the enrollment for students at off-campus classroom and laboratory sites.

These increases were partially offset by a one-day shift in timing for the Spring campus semester resulting in one day moving into the first quarter of 2021 from the second quarter of 2021.

Service revenue per student for off-campus classroom and laboratory sites generates a significantly higher revenue per student than we earn under our agreement with GCU, as these agreements 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 and take more credits on average per semester.

The ten new off-campus classroom and laboratory sites opened in the past twelve months, partially offset by the non-renewal of the contract with a university partner with two sites in the first quarter of 2021 increased the total number of these sites to 31 as compared to 23 at June 30, 2020.

Technology and academic services .

Our technology and academic services expenses for the three months ended March 31, 2021 were $32.1 million, an increase of $5.8 million, or 22.0%, as compared to technology and academic services expenses of $26.3 million for the three months ended March 31, 2020.

Our technology and academic services expenses for the three months ended June 30, 2021 were $33.7 million, an increase of $6.5 million, or 24.0%, as compared to technology and academic services expenses of $27.2 million for the three months ended June 30, 2020.

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 technology and academic supply costs of $4.6 million, $1.4 million and $0.5 million, respectively.

These increases were primarily due to increased headcount to support our 27 university partners, and their increased enrollment growth, tenure-based salary adjustments, an increase in benefit costs 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 1.6% to 13.5% for the three months ended March 31, 2021, from 11.9% for the three months ended March 31, 2020 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.

GCE has 29 off-campus classroom and laboratory sites open as of March 31, 2021 as compared to the 23 sites that were open as of March 31, 2020.

Additionally, in the first quarter of 2021 we are incurring costs for five more locations that we anticipate will open in the last nine months of 2021.

Our technology and academic services expenses as a percentage of net revenue increased 2.1% to 16.7% for the three months ended June 30, 2021, from 14.6% for the three months ended June 30, 2020.

This increase was primarily due to partnership agreements with university partners that have off-campus classroom and laboratory sites requiring a higher level of technology and academic services than our agreement with GCU partially offset by the increased Spring and Summer 2021 semester ancillary revenues at GCU.

GCE has 31 off-campus classroom and laboratory sites open as of June 30, 2021 as compared to the

23 sites that were open as of June 30, 2020.

Additionally, in the second quarter of 2021 we incurred costs for a number of locations that we anticipate will open in the next 15 months.

Counseling services and support .

Our counseling services and support expenses for the three months ended March 31, 2021 were $61.2 million, an increase of $1.0 million, or 1.7%, as compared to counseling services and support expenses of $60.2 million for the three months ended March 31, 2020.

Our counseling services and support expenses for the three months ended June 30, 2021 were $60.9 million, an increase of $3.3 million, or 5.8%, as compared to counseling services and support expenses of $57.6 million for the three months ended June 30, 2020.

This increase was primarily attributable to increases in employee compensation and related expenses including share-based compensation and increases in other counseling services and support expenses of $1.8 million and $1.7 million, respectively, partially offset by a slight decrease in occupancy and depreciation expenses of $0.2 million.

The increases in employee compensation and related expenses were primarily due to increased headcount to support our university partners, and their increased enrollment growth, tenure-based salary adjustments, an increase in benefit costs and the increased number of off-campus classroom and laboratory sites open year over year.

The increase in other counseling services and support expenses is primarily the result of increased travel costs to service our 27 university partners as compared to the COVID-19 impacted second quarter of 2020, during which all non-essential travel ceased.

Occupancy and depreciation costs declined slightly as a large percentage of our workforce continues to work remotely.

Our counseling services and support expenses as a percentage of net revenue decreased 0.8% to 30.2% for the three months ended June 30, 2021, from 31.0% for the three months ended June 30, 2020 primarily due to our ability to leverage our counseling services and support expense across an increasing revenue base and the increased Spring and Summer 2021 semester ancillary revenues at GCU.

Marketing and communication .

Our marketing and communication expenses for the three months ended June 30, 2021 were $45.4 million, an increase of $4.3 million, or 10.6%, as compared to marketing and communication expenses of $41.1 million for the three months ended June 30, 2020.

This increase was primarily attributable to the increased cost to market our university partners’ programs and to the marketing of new university partners and new locations which resulted in increased advertising of $3.9 million, increased other communications expenses of $0.3 million and increased employee compensation, including share-based compensation, and related expenses of $0.1 million.

Our marketing and communication expenses as a percentage of net revenue increased by 0.5% to 22.6% for the three months ended June 30, 2021, from 22.1% for the three months ended June 30, 2020, primarily due to the increase in the number of new off-campus classroom and laboratory sites opened since June 30, 2020 and sites planned to open in the next 15 months, partially offset by our ability to leverage our marketing and communication expenses across an increasing revenue base and the increased Spring and Summer 2021 semester ancillary revenues at GCU.

General and administrative .

Our general and administrative expenses for the three months ended June 30, 2021 were $9.1 million, a decrease of $0.4 million, or 4.4%, as compared to general and administrative expenses of $9.5 million for the three months ended June 30, 2020.

This decrease was primarily attributable to a decrease in employee compensation, including share-based compensation, and related expenses of $0.4 million and a decrease in other general and administrative expenses of $0.3 million, partially offset by an in increase in professional fees of $0.3 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 decrease in other general and administrative expenses is primarily related to reduced travel costs.

Our general and administrative expenses as a percentage of net revenue decreased by 0.6% to 4.5% for the three months ended June 30, 2021, from 5.1% for the three months ended June 30, 2020 due to the cost savings realized by consolidating certain back office functions, reduced travel costs, our ability to leverage our other general and administrative expenses across an increasing revenue base and the increased Spring and Summer 2021 semester ancillary revenues at GCU.

Amortization of intangible assets .

Amortization of intangible assets for the three months ended June 30, 2021 and 2020 were $2.1 million for both periods.

As a result of the acquisition of our wholly owned subsidiary, Orbis Education, 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 June 30, 2021 was $14.8 million, an increase of $0.1 million, as compared to $14.7 million for the three months ended June 30, 2020.

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

Interest expense .

Interest expense was $0.8 million for the three months ended June 30, 2021, a decrease of $0.3 million, as compared to interest expense of $1.1 million for the three months ended June 30, 2020.

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 average interest rate reduction of approximately 42 basis points from the second quarter of 2020 to the second quarter of 2021.

Investment interest and other .

Investment interest and other for the three months ended June 30, 2021 was $0.2 million, a decrease of $0.2 million, as compared to $0.4 million in the three months ended June 30, 2020.

This decrease was primarily attributable to a decline in interest income on excess cash due to lower interest rates.

Income tax expense .

Income tax expense for the three months ended June 30, 2021 was $15.0 million, a decrease of $0.3 million, or 2.0%, as compared to income tax expense of $15.3 million for the three months ended June 30, 2020.

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

The lower effective tax rate was primarily due to favorable adjustments as a result of the completion of several state audits.

Our effective tax rate was 23.3% during the second quarter of 2021 compared to 24.6% during the second quarter of 2020.

Our net income for the three months ended June 30, 2021 was $49.5 million, an increase of $2.5 million, or 5.2%, as compared to $47.0 million for the three months ended June 30, 2020, due to the factors discussed above.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Service revenue .

Our service revenue for the six months ended June 30, 2021 was $438.4 million, an increase of $31.0 million, or 7.6%, as compared to service revenue of $407.4 million for the six months ended June 30, 2020.

The increase year over year in service revenue was primarily due to year over year increases in university partner enrollments and in revenue per student.

Partner enrollments totaled 101,808 at June 30, 2021 as compared to 98,326 at June 30, 2020.

University partner enrollments at our off-campus classroom and laboratory sites were 4,210, an increase of 13.2% over enrollments at June 30, 2020, which includes 176 GCU students at June 30, 2021.

Enrollments at GCU grew to 97,774 at June 30, 2021, an increase of 3.3% over enrollments at June 30, 2020.

The Spring semester for GCU’s traditional-aged student body ends near the end of April each year.

GCU also had a decline in the year over year growth rate of its online students between March 31, 2021 to June 30, 2021 (see – Impact of COVID-19 above).

The increase in revenue per student is primarily due to the service revenue impact of the increased room, board, fee and other ancillary revenues at GCU in the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 (see - Impact of COVID-19 above) and the growth in the enrollment for students at off-campus classroom and laboratory sites.

In addition, we generated slightly more revenues in 2020 as compared to the same period in 2021 due to 2020 being a Leap Year and thus providing an extra day of revenue in 2020 as compared to 2021.

Technology and academic services .

Our technology and academic services expenses for the six months ended June 30, 2021 were $65.7 million, an increase of $12.3 million, or 23.0%, as compared to technology and academic services expenses of $53.4 million for the six months ended June 30, 2020.

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 technology and academic supply costs of $8.9 million, $2.8 million and $0.6 million, respectively.

off-campus classroom and laboratory sites year over year.

Our technology and academic services expenses as a percentage of net revenue increased 1.9% to 15.0% for the six months ended June 30, 2021, from 13.1% for the six months ended June 30, 2020.

This increase was primarily due to partnership agreements with university partners that have off-campus classroom and laboratory sites requiring a higher level of technology and academic services than our agreement with GCU partially offset by increased Spring and Summer semester ancillary revenues at GCU.

GCE has 31 off-campus classroom and laboratory sites open as of June 30, 2021 as compared to the 23 sites that were open as of June 30, 2020.

Additionally, in the second quarter of 2021 we incurred costs for a number of locations that we anticipate will open in the next 15 months.

Counseling services and support .

Our counseling services and support expenses for the six months ended June 30, 2021 were $122.2 million, an increase of $4.4 million, or 3.7%, as compared to counseling services and support expenses of $117.8 million for the six months ended June 30, 2020.

This increase was primarily attributable to increases in employee compensation and related expenses including share-based compensation of $4.5 million, partially offset by a decrease in other counseling services and support expenses of $0.1 million.

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The decrease in other counseling services and support expenses is primarily the result of decreased travel costs to service our 27 university partners.

All non-essential travel ceased when the COVID-19 national emergency was announced in mid-March 2020 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 1.4% to 25.8% for the three months ended March 31, 2021, from 27.2% for the three months ended March 31, 2020 primarily due to the reduced travel and other costs and our ability to leverage our other counseling services and support expense across an increasing revenue base partially offset by the revenue impacts caused by COVID-19 in 2020 as we incur limited operating expenses to deliver those services.

All non-essential travel ceased when the COVID-19 national emergency was announced in mid-March 2020.

Travel costs remained low through the rest of 2020 and the first quarter of 2021 but returned to historical levels in the second quarter of 2021.

Our counseling services and support expenses as a percentage of net revenue decreased 1.0% to 27.9% for the six months ended June 30, 2021, from 28.9% for the six months ended June 30, 2020 primarily due to our ability to leverage our counseling services and support expense across an increasing revenue base and the increased Spring and Summer 2021 semester ancillary revenues at GCU.

Marketing and communication .

Our marketing and communication expenses for the three months ended March 31, 2021 were $47.7 million, an increase of $5.0 million, or 11.8%, as compared to marketing and communication expenses of $42.7 million for the three months ended March 31, 2020.

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 $4.7 million, increased employee compensation and related expenses including share-based compensation of $0.1 million and increased other communications expenses of $0.1 million.

Our marketing and communication expenses as a percentage of net revenue increased by 0.8% to 20.1% for the three months ended March 31, 2021, from 19.3% for the three months ended March 31, 2020, primarily due to the increase in the number of new off-campus classroom and laboratory sites opened in the second half of 2020 and planned for opening in the 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.

Our marketing and communication expenses for the six months ended June 30, 2021 were $93.2 million, an increase of $9.4 million, or 11.2%, as compared to marketing and communication expenses of $83.8 million for the six months ended June 30, 2020.

This increase was primarily attributable to the increased cost to market our university partners’ programs and to the marketing of new university partners and new locations which resulted in increased advertising of $8.6 million, increased employee compensation, including share-based compensation, and related expenses of $0.3 million and increased other communications expenses of $0.5 million.

Our marketing and communication expenses as a percentage of net revenue increased by 0.7% to 21.3% for the six months ended June 30, 2021, from 20.6% for the six months ended June 30, 2020, primarily due to the increase in the number of new off-campus classroom and laboratory sites opened since June 30, 2020 and sites planned for opening in the next 15 months partially offset by increased Spring and Summer 2021 semester ancillary revenues at GCU.

General and administrative .

Our general and administrative expenses for both the three months ended March 31, 2021 and 2020 were $9.6 million as a $0.6 million increase in legal, audit and other professional fees was offset by a decrease in employee compensation and related expenses including share-based compensation of $0.3 million and a decrease in other general and administrative expenses of $0.3 million.

Our general and administrative expenses for the six months ended June 30, 2021 were $18.7 million, a decrease of $0.4 million, or 2.1%, as compared to general and administrative expenses of $19.1 million for the six months ended June 30, 2020.

This decrease was primarily attributable to a decrease in employee compensation, including share-based compensation, and related expenses and a decrease in other general and administrative expenses of $0.6 million and $0.6 million, respectively, partially offset by an increase in professional fees of $0.8 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 decrease in other general and administrative expenses is primarily related to reduced travel costs.

Our general and administrative expenses as a percentage of net revenue decreased by 0.3% to 4.0% for the three months ended March 31, 2021, from 4.3% for the three months ended March 31, 2020 due to the cost savings realized by consolidating certain back office functions, reduced travel costs 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.

Our general and administrative expenses as a percentage of net revenue decreased by 0.4% to 4.3% for the six months ended June 30, 2021, from 4.7% for the six months ended June 30, 2020 due to the cost savings realized by consolidating certain back office functions, reduced travel costs, our ability to leverage our other general and administrative expenses across an increasing revenue base and the increased Spring and Summer 2021 semester ancillary revenues at GCU.

Amortization of intangible assets .

Amortization of intangible assets for the three months ended March 31, 2021 and 2020 were $2.1 million for both periods.

Amortization of intangible assets for the six months ended June 30, 2021 and 2020 were $4.2 million for both periods.

Interest income on Secured Note .

Interest income on the secured note from GCU in the initial principal amount of $870.1 million (the “Secured Note”) for the three months ended March 31, 2021 was $14.5 million, a decrease of $0.2 million, or 1.1%, as compared to $14.7 million for the three months ended March 31, 2020.

Interest income on the Secured Note for the six months ended June 30, 2021 was $29.3 million, a decrease of $0.1 million, as compared to $29.4 million for the six months ended June 30, 2020.

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

The decrease over the prior year was primarily due to 2020 being a Leap Year with one additional day of interest.

The decrease from the prior year was primarily due to 2020 being a Leap Year with one additional day of interest.

Interest expense .

Interest expense was $0.8 million for the three months ended March 31, 2021, a decrease of $0.7 million, as compared to interest expense of $1.5 million for the three months ended March 31, 2020.

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 average interest rate reduction of approximately 155 basis points from the first quarter of 2020 to the first quarter of 2021 partially offset by 2020 being a Leap Year with one additional day of interest.

Interest expense was $1.6 million for the six months ended June 30, 2021, a decrease of $1.0 million, as compared to interest expense of $2.6 million for the six months ended June 30, 2020.

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 average interest rate reduction of approximately 99 basis points from the first half of 2020 to the first half of 2021 partially offset by 2020 being a Leap Year with one additional day of interest.

Investment interest and other .

Investment interest and other for the three months ended March 31, 2021 was $0.1 million, a decrease of $0.1 million, as compared to $0.2 million in the three months ended March 31, 2020.

Investment interest and other for the six months ended June 30, 2021 was $0.4 million, a decrease of $0.2 million, as compared to $0.6 million in the six months ended June 30, 2020.

This decrease was primarily attributable to a decline in interest income on excess cash due to lower interest rates.

Income tax expense .

Income tax expense for the three months ended March 31, 2021 was $20.0 million, a decrease of $2.8 million, or 12.3%, as compared to income tax expense of $22.8 million for the three months ended March 31, 2020.

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

Our effective tax rate was 20.4% during the first quarter of 2021 compared to 24.2% during the first quarter of 2020.

In the first quarter of 2021, the effective tax rate was impacted by an increase in excess tax benefits, which increased to $4.4 million in the first quarter of 2021 as compared to $0.6 million in the same period in 2020 due to a higher stock price and higher stock option exercises in the first quarter of 2021.

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.

Income tax expense for the six months ended June 30, 2021 was $35.0 million, a decrease of $3.1 million, or 8.2%, as compared to income tax expense of $38.1 million for the six months ended June 30, 2020.

This decrease was the result of a decrease in our effective tax rate between periods.

Our effective tax rate was 21.5% during the six months ended June 30, 2021 compared to 24.4% during the six months ended June 30, 2020.

In the first half of 2021, the effective tax rate was impacted by an increase in excess tax benefits, which increased to $4.4 million in the six months ended June 30, 2021 as compared to $0.6 million in the same period in 2020 due to a higher stock price and higher stock option exercises in the first half of 2021.

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

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

Our net income for the three months ended March 31, 2021 was $78.1 million, an increase of $6.7 million, or 9.4%, as compared to $71.4 million for the three months ended March 31, 2020, due to the factors discussed above.

Also, th e lower effective tax rate was impacted due to favorable adjustments as a result of the completion of several state audits.

Our net income for the six months ended June 30, 2021 was $127.6 million, an increase of $9.2 million, or 7.8%, as compared to $118.4 million for the six months ended June 30, 2020, due to the factors discussed above.

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

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Liquidity and Capital Resources

Our unrestricted cash and cash equivalents and investments were $262.3 million at March 31, 2021.

Our credit facility had an available line of credit of $150.0 million as of March 31, 2021.

Our unrestricted cash and cash equivalents and investments were $113.9 million at June 30, 2021.

Our credit facility had an available line of credit of $115.0 million as of June 30, 2021.

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.

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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 March 31, 2021, the Company had loaned an additional $99,815 to GCU, net of repayments.

GCU has been funding its capital expenditures using its own funds except that, in both June 2021 and 2020 GCU requested additional loan amounts that approximated its previous capital expenditures during those fiscal years.

In both instances GCU repaid the amounts borrowed in the following month.

As of June 30, 2021, the Company had loaned an additional $289,815 to GCU, net of repayments, including $190.0 million in June 2021.

The $190.0 million borrowed in June 2021 was repaid in July 2021.

GCU has engaged a firm to assist it in refinancing the Secured Note.

If GCU is successful in refinancing all or part of the Secured Note it would eliminate or reduce the interest income earned by us.

It is currently our intention that the proceeds received on a refinancing would be used to repurchase our common stock, paydown our existing debt, or for other general corporate purposes.

We can provide no assurance that GCU will be successful in refinancing the Secured Note.

GCU generally pays for the service fees and its interest due on the Secured Note for the month in arrears.

However, GCU paid its June 2021 estimated service fee and interest due on the Secured Note at the end of June 2021, thereby reducing the Secured Note, net and interest receivable on the Secured Note on our consolidated balance sheet as of June 30, 2021.

GCU also paid the June 2020 estimated service fee and interest due on the Secured Note receivable at the end of June 2020 so the impact on cash flows for the change in accounts receivable and interest receivable from university partners during the six months ended June 30, 2021 in comparison to the six months ended June 30, 2020 was not material.

We believe that GCU’s cash flows from operations are currently sufficient to fund all of its capital expenditures without additional loans from us although it is possible that GCU will continue to borrow from us for short term cash flow needs.

Share Repurchase Program

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

In January 2021 and July 2021, our Board of Directors increased the authorization under its existing stock repurchase program by $100.0 million and $970.0 million, respectively, reflecting an aggregate authorization for share repurchases since the initiation of the program of $1,470.0 million.

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

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Under the ASR agreement, the Company received initial delivery of approximately 275,889 shares of common stock, representing approximately 80% of the number of shares of common stock initially underlying the ASR agreement based on the closing price of the common stock of $101.49, on March 9, 2021.

The total number of shares that the Company will repurchase under the ASR program will be based on the volume-weighted average price of the common stock during the term of the ASR agreement, less a discount, and subject to potential adjustments pursuant to the terms and conditions of the ASR agreement.

The total number of shares that the Company repurchased under the ASR program was based on the volume-weighted average price of the common stock during the term of the ASR agreement, less a discount, and was

subject to potential adjustments pursuant to the terms and conditions of the ASR agreement.

The final settlement of the share repurchases under the ASR agreement was completed on May 4, 2021 with additional delivery of 45,914 shares of common stock.

The ASR agreement resulted in a total of 321,803 shares repurchased at an average cost of $108.76.

During the three months ended March 31, 2021, 567,255 shares of common stock were repurchased by the Company, which includes the shares delivered on March 10, 2021 under the ASR agreement.

At March 31, 2021, there remains $191.9 million available under our share repurchase authorization .

On May 14, 2021, the Company entered into an ASR agreement with Morgan Stanley to repurchase up to $50.0 million of its outstanding shares of common stock as part of the Company’s share repurchase program.

Under the ASR agreement, the Company received initial delivery on May 17, 2021 of approximately 418,279 shares of common stock, representing approximately 80% of the number of shares of common stock initially underlying the ASR agreement based on the closing price of the common stock of $95.63, on May 14, 2021.

The final settlement of the share repurchases under the ASR agreement will be completed by September 9, 2021.

We repurchased 981,431 shares of common stock in the three months ended June 30, 2021, including the shares delivered during the quarter as part of the two ASR transactions discussed above.

At June 30, 2021, there remains $96.6 million available under our share repurchase authorization (which authorization was increased to $1,066.6 million in July 2021) .

Operating Activities .

Net cash provided by operating activities for the three months ended March 31, 2021 was $89.8 million as compared to $85.7 million for the three months ended March 31, 2020.

The increase in cash generated from operating activities between the three months ended March 31, 2020 and the three months ended March 31, 2021 was primarily due to an increase in net income between periods partially offset by changes in other working capital balances.

Net cash provided by operating activities for the six months ended June 30, 2021 was $210.3 million as compared to $221.1 million for the six months ended June 30, 2020.

The decrease in cash generated from operating activities between the six months ended June 30, 2020 and the six months ended June 30, 2021 was primarily due to changes between years in the working capital balances, primarily income taxes.

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

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

Our income taxes payable balance increased $32.2 million between December 31, 2019 and June 30, 2020 as compared to a decrease of $5.4 million between December 31, 2020 and June 30, 2021 primarily due to the Treasury Department extending the due date in 2020 of certain estimated tax payments due to COVID-19 from April 15, 2020 to July 15, 2020.

This was partially offset by an increase in net income between periods.

Investing Activities .

Net cash used in investing activities was $34.8 million and $1.9 million for the three months ended March 31, 2021 and 2020, respectively.

The net cash used in investing activities in the three months ended March 31, 2021 consisted of capital expenditures of $8.9 million and purchases of investments, net of proceeds from the sale of investments of $25.8 million.

During the three months ended March 31, 2020, we paid $6.1 million for capital expenditures and received proceeds from investments of $4.3 million.

During the three-month period for 2021 and 2020, 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.

Net cash used in investing activities was $240.1 million and $80.6 million for the six months ended June 30, 2021 and 2020, respectively.

The net cash used in investing activities in the six months ended June 30, 2021 consisted of capital expenditures of $15.8 million and purchases of investments, net of proceeds from the sale of investments of $34.1 million.

Funding to GCU during the first six months of 2021 totaled $190.0 million, which was repaid in July 2021.

During the six months ended June 30, 2020, we paid $12.2 million for capital expenditures and received proceeds from investments of $6.8 million.

Funding to GCU during the first six months of 2020 totaled $75.0 million, which was repaid in July 2020.

During the six-month period for 2021 and 2020, 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 or those that will be opened during the next 15 months.

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, one new site in the Spring of 2021 and currently plan to open five additional sites in the last nine months of 2021.

We have opened ten off-campus classroom and laboratory sites since June 30, 2020.

We plan to open a number of additional sites in the next 15 months.

Financing Activities .

Net cash used in financing activities was $74.9 million and $73.9 million for the three months ended March 31, 2021 and 2020, respectively.

During the three months ended March 31, 2021, $6.0 million was used to purchase common shares withheld in lieu of income taxes resulting from the vesting of restricted share awards, $56.3 million was used to purchase treasury stock in accordance with the Company’s share repurchase program, and $7.0 million was paid to Morgan Stanley under our ASR agreement for shares that will be settled no later than May 7, 2021.

Net cash used in financing activities was $146.6 million and $90.5 million for the six months ended June 30, 2021 and 2020, respectively.

During the six months ended June 30, 2021, $6.0 million was used to purchase common shares withheld in lieu of income taxes resulting from the vesting of restricted share awards, $151.7 million was used to purchase treasury stock in accordance with the Company’s share repurchase program, and $10.0 million was paid to Morgan Stanley under our ASR agreement for shares that will be settled no later than September 9, 2021.

Principal payments on notes payable and capital leases totaled $16.6 million, partially offset by

proceeds from the exercise of stock options of $2.7 million and borrowings on our line of credit of $35.0 million.

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

Principal payments on notes payable and capital leases totaled $16.6 million, partially offset by proceeds from the exercise of stock options of $0.1 million.

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

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

Off-Balance Sheet Arrangements

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What changed 10-Q

Item 2. Management’s Discussion and Analysis