What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-03 compared with 2021-08-05 · 121 added, 123 removed, 201 unchanged (55% of the section changed)

46 unchanged sentences

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 June 30, 2021, GCE provides education services to 27 university partners across the United States.

As of September 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.

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

This contagious outbreak, which has continued to spread, and the related adverse public health developments that have occurred at various times since March 2020, 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.

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

9 unchanged sentences

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:

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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● 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;

This later start date for the Fall semester was retained in 2021 as the semester began 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.

2 unchanged sentences

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.

4 unchanged sentences

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.

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.

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

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

1 unchanged sentence

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 Fall 2021 semester that would have a material impact on GCE’s service revenue, operating profit and operating margins.

Beginning with the Summer 2021 semester and continuing into the Fall 2021 semester, we have experienced a decline in revenue per student from students in these programs caused primarily by some students delaying their scheduled clinical courses due to vaccine mandates at hospital partners.

No other 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.

4 unchanged sentences

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

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

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

Results of Operations

2 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Costs and expenses

3 unchanged sentences

General and administrative

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

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

Service revenue .

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.

Our service revenue for the three months ended September 30, 2021 was $206.8 million, an increase of $8.4 million, or 4.2%, as compared to service revenue of $198.4 million for the three months ended September 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 118,832 at September 30, 2021 as compared to 117,772 at September 30, 2020.

University partner enrollments at our off-campus classroom and laboratory sites were 5,652, an increase of 12.1% over enrollments at September 30, 2020, which includes 286 GCU students at September 30, 2021.

Enrollments at GCU grew to 113,466 at September 30, 2021, an increase of 0.6% over enrollments at September 30, 2020.

Enrollments for GCU ground traditional students were 23,628 at September 30, 2021 up from 22,363 at September 30, 2020 primarily due to a 9.5% increase in traditional ground students between years.

GCU’s ground traditional students residing on campus in GCU’s residence halls increased from 11,441 in the Fall of 2020 to 15,570 in the Fall of 2021, an increase of 36.1%, representing approximately 65.9% of GCU’s ground traditional students.

GCU had a decline in its working adult students (online and professional studies) between September 30, 2020 and September 30, 2021 (see – Impact of COVID-19 above).

The increase in revenue per student between years is primarily due to the service revenue impact of the increased room, board and other ancillary revenues at GCU in the third 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.

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.

The ten new off-campus classroom and laboratory sites opened in the past 15 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.

Technology and academic services .

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.

Our technology and academic services expenses for the three months ended September 30, 2021 were $35.6 million, an increase of $4.8 million, or 15.7%, as compared to technology and academic services expenses of $30.8 million for the three months ended September 30, 2020.

This increase was primarily due to increases in employee compensation and related expenses including share-based compensation and in occupancy and depreciation including lease expenses of $4.6 million and $0.4 million, respectively, partially offset by a slight decrease in technology and academic supply costs of $0.2 million.

These increases were primarily due to increased headcount to support our 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 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.

Our technology and academic services expenses as a percentage of net revenue increased 1.7% to 17.2% for the three months ended September 30, 2021, from 15.5% for the three months ended September 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 Summer and Fall 2021 semester ancillary revenues at GCU.

GCE has 31 off-campus classroom and laboratory sites open as of

September 30, 2021.

Additionally, in the third quarter of 2021 we incurred costs for a number of locations that we anticipate will open in the next 12 months.

Counseling services and support .

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.

Our counseling services and support expenses for the three months ended September 30, 2021 were $62.2 million, an increase of $4.0 million, or 6.9%, as compared to counseling services and support expenses of $58.2 million for the three months ended September 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 $2.7 million and $1.4 million, respectively, partially offset by a slight decrease in occupancy and depreciation expenses of $0.1 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.

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 third 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.

Our counseling services and support expenses as a percentage of net revenue increased 0.8% to 30.1% for the three months ended September 30, 2021, from 29.3% for the three months ended September 30, 2020 primarily due to an increase in benefit costs and the return to historical levels for travel costs, partially offset by our ability to leverage our counseling services and support expense across an increasing revenue base primarily due to the increased Summer and Fall 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.

Our marketing and communication expenses for the three months ended September 30, 2021 were $47.1 million, an increase of $4.9 million, or 11.5%, as compared to marketing and communication expenses of $42.2 million for the three months ended September 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 $4.3 million, increased other communications expenses of $0.3 million, increased employee compensation, including share-based compensation, and related expenses of $0.2 million and increased occupancy and depreciation costs of $0.1 million.

Our marketing and communication expenses as a percentage of net revenue increased by 1.5% to 22.8% for the three months ended September 30, 2021, from 21.3% for the three months ended September 30, 2020, primarily due to the increase in the number of new off-campus classroom and laboratory sites opened in the past 15 months and sites planned to open in the next 12 months.

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.

Our general and administrative expenses for the three months ended September 30, 2021 were $14.4 million, an increase of $0.4 million, or 3.0%, as compared to general and administrative expenses of $14.0 million for the three months ended September 30, 2020.

This increase was primarily attributable to an increase in professional fees of $1.0 million and an increase in occupancy and depreciation expense of $0.1 million, partially offset by decreases in other general and administrative expenses of $0.4 million and in employee compensation, including share-based compensation, and related expenses of $0.2 million.

The increase in professional fees is primarily due to increased legal and audit fees between years.

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.

Our general and administrative expenses as a percentage of net revenue decreased by 0.1% to 7.0% for the three months ended September 30, 2021, from 7.1% for the three months ended September 30, 2020 due to the cost savings realized by consolidating certain back office functions and reduced travel costs, our ability to leverage our other general and administrative expenses across an increasing revenue base primarily due to the increased Summer and Fall 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.

Amortization of intangible assets for the three months ended September 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.

Interest income on the Secured Note from GCU in the initial principal amount of $870.1 million (the “Secured Note”) for the three months ended September 30, 2021 was $15.0 million, an increase of

$0.1 million, as compared to $14.9 million for the three months ended September 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.

Interest expense was $0.7 million for the three months ended September 30, 2021, a decrease of $0.2 million, as compared to interest expense of $0.9 million for the three months ended September 30, 2020.

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.

Investment interest and other for the three months ended September 30, 2021 and 2020 was $0.2 million for both periods.

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

Income tax expense for the three months ended September 30, 2021 was $12.2 million, a decrease of $0.9 million, or 7.4%, as compared to income tax expense of $13.1 million for the three months ended September 30, 2020.

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

Our effective tax rate was 20.3% during the third quarter of 2021 compared to 20.2% during the third quarter of 2020.

Our net income for the three months ended September 30, 2021 was $47.7 million, a decrease of $4.3 million, or 8.4%, as compared to $52.0 million for the three months ended September 30, 2020, due to the factors discussed above.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 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.

Our service revenue for the nine months ended September 30, 2021 was $645.2 million, an increase of $39.4 million, or 6.5%, as compared to service revenue of $605.8 million for the nine months ended September 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.

Partner enrollments totaled 118,832 at September 30, 2021 as compared to 117,772 at September 30, 2020.

Enrollments at GCU grew to 113,466 at September 30, 2021, an increase of 0.6% over enrollments at September 30, 2020.

Enrollments for GCU ground traditional students were 23,628 at September 30, 2021 up from 22,363 at September 30, 2020 primarily due to a 9.5% increase in traditional ground students between years.

GCU had a decline in its working adult students (online and professional studies) between September 30, 2020 to September 30, 2021 (see – Impact of COVID-19 above).

The increase in revenue per student between years is primarily due to the service revenue impact of the increased room, board and other ancillary revenues at GCU in the nine months ended September 30, 2021 as compared to the nine months ended September 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.

Our technology and academic services expenses for the nine months ended September 30, 2021 were $101.3 million, an increase of $17.1 million, or 20.3%, as compared to technology and academic services expenses of $84.2 million for the nine months ended September 30, 2020.

$0.5 million, respectively.

Our technology and academic services expenses as a percentage of net revenue increased 1.8% to 15.7% for the nine months ended September 30, 2021, from 13.9% for the nine months ended September 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, Summer and Fall semester ancillary revenues at GCU.

GCE has 31 off-campus classroom and laboratory sites open as of September 30, 2021.

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

Our counseling services and support expenses for the nine months ended September 30, 2021 were $184.4 million, an increase of $8.4 million, or 4.7%, as compared to counseling services and support expenses of $176.0 million for the nine months ended September 30, 2020.

This increase was primarily attributable to increases in employee compensation and related expenses including share-based compensation and increase in other counseling services and support expenses of $7.1 million and $1.3 million, respectively.

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

The increase in other counseling services and support expenses is primarily the result of increased 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.

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.

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

Our counseling services and support expenses as a percentage of net revenue decreased 0.5% to 28.6% for the nine months ended September 30, 2021, from 29.1% for the nine months ended September 30, 2020 primarily due to our ability to leverage our counseling services and support expense across an increasing revenue base primarily due to the increased Spring, Summer and Fall 2021 semester ancillary revenues at GCU.

Marketing and communication .

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.

Our marketing and communication expenses for the nine months ended September 30, 2021 were $140.3 million, an increase of $14.3 million, or 11.3%, as compared to marketing and communication expenses of $126.0 million for the nine months ended September 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 $12.9 million, increased employee compensation, including share-based compensation, and related expenses of $0.7 million and increased other communications expenses of $0.7 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.

Our marketing and communication expenses as a percentage of net revenue increased by 0.9% to 21.7% for the nine months ended September 30, 2021, from 20.8% for the nine months ended September 30, 2020, primarily due to the increase in the number of new off-campus classroom and laboratory sites opened in the past 15 months and sites planned for opening in the next twelve months.

General and administrative .

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.

Our general and administrative expenses for the nine months ended September 30, 2021 and 2020 were $33.1 million for both periods.

The decreases in employee compensation, including share-based compensation, and related expenses and in other general and administrative expenses of $0.9 million and $0.9 million, respectively, were offset by an increase in professional fees of $1.8 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 0.4% 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.

The increase in professional fees is primarily due to increased legal and audit fees between years.

Our general and administrative expenses as a percentage of net revenue decreased by 0.4% to 5.1% for the nine months ended September 30, 2021, from 5.5% for the nine months ended September 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 primarily due to the increased Spring, Summer and Fall 2021 semester ancillary revenues at GCU.

Amortization of intangible assets .

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

Amortization of intangible assets for the nine months ended September 30, 2021 and 2020 were $6.3 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 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.

Interest income on the Secured Note for the nine months ended September 30, 2021 was $44.4 million, an increase of $0.1 million, as compared to $44.3 million for the nine months ended September 30, 2020.

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

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 $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.

Interest expense was $2.3 million for the nine months ended September 30, 2021, a decrease of $1.2 million, as compared to interest expense of $3.5 million for the nine months ended September 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 68 basis points from the first nine months of 2020 to the first nine months 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 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.

Investment interest and other for the nine months ended September 30, 2021 was $0.6 million, a decrease of $0.2 million, as compared to $0.8 million in the nine months ended September 30, 2020.

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

Income tax expense .

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.

Income tax expense for the nine months ended September 30, 2021 was $47.2 million, a decrease of $4.1 million, or 8.0%, as compared to income tax expense of $51.3 million for the nine months ended September 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.

Our effective tax rate was 21.2% during the nine months ended September 30, 2021 compared to 23.1% during the nine months ended September 30, 2020.

In the nine months ended September 30, 2021, the effective tax rate was impacted by an increase in excess tax benefits, which increased to $4.4 million in the nine months ended September 30, 2021 as compared to $0.7 million in the same period in 2020 due to a higher stock price and higher stock option exercises in the first nine months 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.

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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 income for the nine months ended September 30, 2021 was $175.2 million, an increase of $4.8 million, or 2.8%, as compared to $170.4 million for the nine months ended September 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 $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.

Our unrestricted cash and cash equivalents and investments were $61.0 million at September 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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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.

As of September 30, 2021, the Company had loaned an additional $99,815 to GCU, net of repayments.

On October 28, 2021, the Company received formal notice from GCU of GCU’s entry into a refinancing transaction (the “Refinancing”) the proceeds of which will be used to repay $500.0 million of the outstanding balance of the Secured Note on October 29, 2021.

In connection with the Refinancing and related partial repayment of the Secured Note, the Company entered into a Modification of Credit Agreement with GCU (the “Modification”).

The Modification provides that, in exchange for the partial repayment, (i) the Company will release its first priority lien on GCU’s assets, (ii) GCU will grant a first priority lien to a financial institution as master trustee under a master trust indenture (the “Master Trust Indenture”), and (iii) the Company will receive an obligation from the master trust evidencing the remaining balance of the Secured Note due to the Company (the “Trust Obligation”).

The Trust Obligation continues to bear interest at an annual rate of 6.0%, has a maturity date of June 30, 2025, and is secured on an equal and proportional basis with all other obligations issued under the Master Trust Indenture by all of the assets of GCU.

Termination of GCE Credit Agreement

The Company is a party to that certain Amended and Restated Credit Agreement, dated as of January 22, 2019, among the Company, Orbis Education Services, LLC, a wholly owned subsidiary of the Company, as guarantor, Bank of America, N.A.

as administrative agent, swing line lender and letter of credit issuers, and the other lenders names therein (as amended, the “GCE Credit Agreement”).

Upon its receipt of the proceeds from the Refinancing in partial payment of the Secured Note, the Company repaid all amounts due under the outstanding term loan and revolving credit facilities of, and terminated, the GCE Credit Agreement and plans to use the balance of such proceeds for general corporate purposes, including repurchases of shares under the Company’s share repurchase program.

Share Repurchase Program

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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.

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.

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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 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) .

The final settlement of the share repurchases under the ASR agreement was completed on August 13, 2021 with additional delivery of 139,270 shares of common stock.

The ASR agreement resulted in a total of 557,549 shares repurchased at an average cost of $89.68.

We repurchased 2,324,316 shares of common stock in the three months ended September 30, 2021, including the shares delivered during the quarter as part of the ASR transactions discussed above.

At September 30, 2021, there remains $864.1 million available under our share repurchase authorization .

Operating Activities .

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.

Net cash provided by operating activities for the nine months ended September 30, 2021 was $208.9 million as compared to $180.1 million for the nine months ended September 30, 2020.

The increase in cash generated from operating activities between the nine months ended September 30, 2020 and the nine months ended September 30, 2021 was primarily due to changes between years in the working capital balances, primarily accounts payable and accounts receivable.

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 $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.

Net cash used in investing activities was $11.3 million and $13.7 million for the nine months ended September 30, 2021 and 2020, respectively.

The net cash used in investing activities in the nine months ended September 30, 2021 consisted of capital expenditures of $21.4 million and proceeds from investments, net of purchases of investments of $10.5 million.

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

During the nine months ended September 30, 2020, we paid $22.2 million for capital expenditures and received proceeds from investments of $8.7 million.

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

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

We have opened ten off-campus classroom and laboratory sites in the past 15 months.

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

Financing Activities .

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.

Net cash used in financing activities was $382.4 million and $122.0 million for the nine months ended September 30, 2021 and 2020, respectively.

During the nine months ended September 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, $354.2 million was used to purchase treasury stock in accordance with the Company’s share repurchase program.

Principal payments on notes payable and capital leases totaled $24.9 million, partially offset by proceeds from the exercise of stock options of $2.7 million.

During the nine months ended September 30, 2020, $5.0 million was used to purchase common shares withheld in lieu of income taxes resulting from the vesting of restricted share awards and $92.3 million was used to purchase treasury stock in accordance with the Company’s share repurchase program.

Principal payments on notes payable and capital leases totaled $24.9 million, partially offset by proceeds from the exercise of stock options of $0.2 million.

Off-Balance Sheet Arrangements

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What changed 10-Q

Item 2. Management’s Discussion and Analysis