Grand Canyon Education, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes that appear elsewhere in this report. Forward-Looking Statements This Quarterly Report on Form 10-Q, including Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations , contains certain “forward-looking statements” within the meaning of Section 27A of Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include, without limitation: statements regarding proposed new programs; 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; and statements of management’s goals and objectives and other similar expressions concerning matters that are not historical facts. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and similar expressions, the negative of these expressions, as well as statements in future tense, identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions of management. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. 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 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; ● the occurrence of any event, change or other circumstance that could give rise to the termination of any of the key university partner agreements; ● our ability to properly manage risks and challenges associated with strategic initiatives, including potential acquisitions or divestitures of, or investments in, new businesses, acquisitions of new properties and new university partners, and expansion of services provided to our existing university partners; ● our failure to comply with the extensive regulatory framework applicable to us either directly as a third-party service provider or indirectly through our university partners, including Title IV of the Higher Education Act and the regulations thereunder, state laws and regulatory requirements, and accrediting commission requirements; ● the ability of our university partners’ students to obtain federal Title IV funds, state financial aid, and private financing; 22 Table of Contents ● potential damage to our reputation or other adverse effects as a result of negative publicity in the media, in the industry or in connection with governmental reports or investigations or otherwise, affecting us or other companies in the education services sector; ● risks associated with changes in applicable federal and state laws and regulations and accrediting commission standards, including pending rulemaking by the Department of Education applicable to us directly or indirectly through our university partners; ● competition from other education service companies in our geographic region and market sector, including competition for students, qualified executives and other personnel; ● our expected tax payments and tax rate; ● our ability to hire and train new, and develop and train existing, employees; ● the pace of growth of our university partners’ enrollment and its effect on the pace of our own growth; ● fluctuations in our revenues due to seasonality; ● our ability to, on behalf of our university partners, convert prospective students to enrolled students and to retain active students to graduation; ● our success in updating and expanding the content of existing programs and developing new programs in a cost-effective manner or on a timely basis for our university partners; ● risks associated with the competitive environment for marketing the programs of our university partners; ● failure on our part to keep up with advances in technology that could enhance the experience for our university partners’ students; ● the extent to which obligations under our credit agreement, including the need to comply with restrictive and financial covenants and to pay principal and interest payments, limits our ability to conduct our operations or seek new business opportunities; ● our ability to manage future growth effectively; ● the impact of any natural disasters or public health emergencies; and ● general adverse economic conditions or other developments that affect the job prospects of our university partners’ students. Additional factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those described in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K (the “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. Forward-looking statements speak only as of the date the statements are made and we assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. 23 Table of Contents Explanatory Note Grand Canyon Education, Inc. (together with its subsidiaries, the “Company” or “GCE”) is a publicly traded education services company dedicated to serving colleges and universities. GCE has developed significant technological solutions, infrastructure and operational processes to provide services to these institutions on a large scale. GCE’s most significant university partner is Grand Canyon University (“GCU”), a comprehensive regionally accredited university that offers graduate and undergraduate degree programs, emphases and certificates across nine colleges both online and on ground at its campus in Phoenix, Arizona, and at two off-campus classroom and laboratory sites. In January 2019, GCE began providing education services to numerous university partners across the United States, through our wholly owned subsidiary, Orbis Education, which we acquired on January 22, 2019. 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 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. 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 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. SIGNIFICANT DEVELOPMENTS Impact of COVID-19 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 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. GCE has a long-term master services agreement with GCU (the “Master Services Agreement”) pursuant to which GCE provides education services to GCU in return for 60% of GCU’s tuition and fee revenues, which includes fee revenues from room, board, and other ancillary businesses including a student-run golf course and hotel. GCU has four types of students: traditional ground university students, who attend class on its campus in Phoenix, Arizona and of which approximately 70% have historically lived on campus in university owned residence halls; professional studies students, who are working adult students who attend class one night a week on the Phoenix campus; online students who attend class fully online; and students who are studying in hybrid programs in which the ground component takes place at off-campus classroom and laboratory sites. ​ The COVID-19 outbreak, as well as measures taken to contain its spread, has impacted GCU’s students and its business in a number of ways. Beginning in March 2020, GCU’s programs for its professional studies students and its traditional ground university students were immediately converted to an online learning environment and residential students were strongly encouraged to move off campus. Summer 2020 semester classes were moved to an online environment as well and most students were given the choice of attending the Fall 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 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, 24 Table of Contents 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; ​ ● Ancillary businesses operated by GCU such as its hotel and merchandise shops were closed in late March 2020. 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 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 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 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. 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 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; ​ ● 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. Face-to-face instruction for the semester commenced on January 11, 2021 and ended April 1, 2021 for approximately 80% of classes, followed by two weeks of online instruction. Approximately 3,500 traditional ground students elected to complete the Spring 2021 semester entirely in the online modality. 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; ​ ● 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 25 Table of Contents 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. In addition, due to the limited operating expenses that we incur to deliver those services, there has been or will be a direct reduction in our operating profit and operating margin. ​ GCE also has long-term services agreements with numerous other university partners across the United States. The majority of these other university partners’ students are studying in the Accelerated Bachelor of Science in Nursing program which is offered in a 12-16 month format in three or four academic semesters. The Spring, Summer and Fall 2020 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. 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. 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. ​ 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. ​ 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 nine months ended September 30, 2021, there were no significant changes in our critical accounting policies. 26 Table of Contents Results of Operations The following table sets forth certain income statement data as a percentage of net revenue for each of the periods indicated. Amortization of intangible assets has been excluded from the table below: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ Nine Months Ended ​ ​ ​ ​ September 30, ​ ​ September 30, ​ ​ ​ 2021 2020 2021 2020 Costs and expenses Technology and academic services 17.2 % 15.5 % 15.7 % 13.9 % Counseling services and support 30.1 29.3 28.6 29.1 Marketing and communication 22.8 21.3 21.7 20.8 General and administrative 7.0 7.1 5.1 5.5 ​ ​ Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020 Service revenue . 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 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 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 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 27 Table of Contents 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 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 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 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 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 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 0.1% 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 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 September 30, 2021 was $15.0 million, an increase of 28 Table of Contents $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 $0.7 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. 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 a slight decline in the average interest rate between periods. Investment interest and other . 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 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. ​ Net income . 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 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 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 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. 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 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. 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 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. 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 $13.4 million, $3.2 million and 29 Table of Contents $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 1.8% 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 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 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. 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 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 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 0.9% 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 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. 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 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 30 Table of Contents 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 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. Interest expense . 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 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 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 21.2% 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. Our restricted stock vests in March each year so the favorable benefit will primarily impact the first quarter each year. Also, th e lower effective tax rate was impacted due to favorable adjustments as a result of the completion of several state audits. ​ Net income . 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. Seasonality Our net revenue and operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in our university partners’ enrollment. Our partners’ enrollment varies as a result of new enrollments, graduations, and student attrition. Revenues in the summer months (May through August) are lower primarily due to the majority of GCU’s traditional ground university students not attending courses during the summer months, which affects our results for our second and third fiscal quarters. Since a significant amount of our costs are fixed, the lower revenue resulting from the decreased summer enrollment has historically contributed to lower operating margins during those periods. Partially offsetting this summer effect has been the sequential quarterly increase in enrollments that has occurred as a result of the traditional fall school start. This increase in enrollments also has occurred in the first quarter, corresponding to calendar year matriculation. Thus, we experience higher net revenue in the fourth quarter due to its overlap with the semester encompassing the traditional fall school start and in the first quarter due to its overlap with the first semester of the calendar year. A portion of our expenses do not vary proportionately with these fluctuations in service revenue, resulting in higher operating income in the first and fourth quarters relative to other quarters. We expect quarterly fluctuation in operating results to continue as a result of these seasonal patterns. 31 Table of Contents Liquidity and Capital Resources Liquidity . 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. Arrangements with GCU In conjunction with the Asset Purchase Agreement with GCU, we received a Secured Note as consideration for the transferred assets (the “Transferred Assets”). The Secured Note contains customary commercial credit terms, including affirmative and negative covenants applicable to GCU, and provides that the Secured Note bears interest at an annual rate of 6.0%, has a maturity date of June 30, 2025, and is secured by all of the assets of GCU. The Secured Note provides for GCU to make interest only payments during the term, with all principal and accrued and unpaid interest due at maturity, and also provides that we may loan additional amounts to GCU to fund approved capital expenditures. 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 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 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. Repurchases occur at the Company’s discretion and the Company may modify, suspend or discontinue the repurchase authorization at any time. 32 Table of Contents Under our share repurchase authorization, we may purchase shares in the open market or in privately negotiated transactions, pursuant to the applicable SEC rules. The amount and timing of future share repurchases, if any, will be made as market and business conditions warrant. On March 10, 2021, the Company entered into an accelerated share repurchase (“ASR”) agreement with Morgan Stanley & Co. LLC (“Morgan Stanley”) to repurchase up to $35.0 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 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 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. 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 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 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 . ​ Cash Flows Operating Activities . 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. Investing Activities . 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 in the past 15 months. We plan to open a number of additional sites in the next 15 months. 33 Table of Contents Financing Activities . 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 We do not have any off-balance sheet arrangements that have had or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.