What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-10-27 compared with 2022-08-04 · 119 added, 115 removed, 183 unchanged (56% of the section changed)

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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.

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In addition, we have provided certain services to a university partner to assist them in expanding their online graduate programs.

As of June 30, 2022, GCE provides education services to 27 university partners across the United States.

As of September 30, 2022, GCE provides education services to 27 university partners across the United States.

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

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A full description of those impacts is described in our 2021 Form 10-K.

Below is an explanation of those impacts from the COVID-19 pandemic, that had an effect on GCU’s tuition and non-tuition revenue during 2021 and the first six months of 2022 and, consequently, the service revenues we earned under the Master Services Agreement:

Below is an explanation of those impacts from the COVID-19 pandemic, that had an effect on GCU’s tuition and non-tuition revenue during 2021 and the first nine months of 2022 and, consequently, the service revenues we earned under the Master Services Agreement:

● Room, board and certain fee income was negatively impacted in the Spring semester of 2021 for GCU’s traditional students as the first week of the Spring 2021 semester was completed in an online modality to provide greater flexibility for students returning to campus after the holidays.

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GCU’s residence halls returned to historical levels in the Spring semester of 2022 and the entire semester was conducted face-to-face.

Thus, GCU experienced a significant year over year increase in these revenues in the first half of 2022 and thus the service revenues earned by GCE;

Thus, GCU experienced a significant year over year increase in these revenues, primarily in the first four months of 2022 as compared to 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.

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The decline in new enrollments as compared to the prior year beginning in the second quarter of 2021 was also the result of recruitment challenges caused by the reduced access to schools, hospitals, and businesses where our potential students work.

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;

In the third quarter of 2022, we have seen an online new student increase over the prior year.

As the year over year comparables returned to historical levels in the third quarter of 2022 and schools, hospitals and businesses are generally reopened, our online enrollment growth rate has begun to re-accelerate;

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

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Beginning with the Summer 2021 semester we 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 and we started to see a reduction in our off-site classroom and laboratory student enrollment growth rate due primarily to delays in the opening of scheduled new sites and requests by some of our university or hospital partners or their state regulatory boards to reduce cohort sizes due to concerns over potential clinical faculty availability caused by nursing and other healthcare employee shortages.

This is especially true with one of our university partner’s Occupational Therapy Assistants (“OTA”) program in which enrollment declined 34.0% between June 30, 2021 and 2022 as the university partner stopped admitting new students for most of 2021 due to clinical placement backlog.

This is especially true with one of our university partner’s Occupational Therapy Assistants (“OTA”) program in which enrollment declined 22.7% between September 30, 2021 and 2022 as the university partner stopped admitting new students for most of 2021 due to clinical placement backlog.

None of our ABSN partners have stopped admitting new students but some locations that were scheduled to open in 2021 and 2022 have been pushed back and some existing partners have reduced incoming cohort sizes due to the concern that there are not enough nurses to serve as clinical faculty.

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Beginning at the time of the COVID-19 outbreak a large percentage of our workforce began to work 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.

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.

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Our critical accounting policies are disclosed in the 2021 Form 10-K for the fiscal year ended December 31, 2021.

During the six months ended June 30, 2022, there were no significant changes in our critical accounting policies.

During the nine months ended September 30, 2022, there were no significant changes in our critical accounting policies.

Results of Operations

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Costs and expenses

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General and administrative

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Service revenue .

Our service revenue for the three months ended June 30, 2022 was $199.8 million, a decrease of $1.7 million, or 0.9%, as compared to service revenue of $201.5 million for the three months ended June 30, 2021.

The decrease year over year in service revenue was primarily due to a decrease in online enrollments at GCU of 7.5% (see - Impact of COVID-19 above) and to a lesser extent, students in a university partner’s OTA program of 34% (see - Impact of COVID-19 above) partially offset by increases in GCU traditional campus enrollments, university partners enrollments in ABSN programs and revenue per student year over year.

Additionally, GCU’s traditional campus Spring semester moved forward one day and Summer semester moved back six days compared to the second quarter of 2021, which reduced service revenues earned in the second quarter by $1.3 million.

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 second quarter of 2022 as compared to the prior year period (see - Impact of COVID-19 above) although the impact of this growth is not as significant in the 2 nd and 3 rd quarters of each year as it is in the 1 st and 4 th quarters as the majority of GCU’s traditional ground university students do not attend courses during the summer months, and the increase in students at off-campus classroom and laboratory sites.

Service revenue per student for ABSN students at 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 take more credits on average per semester.

Partner enrollments totaled 96,029 at June 30, 2022 as compared to 101,808 at June 30, 2021.

University partner enrollments at our off-campus classroom and laboratory sites were 4,120, a decrease of 2.1% over enrollments at June 30, 2021, which includes 324 GCU students at June 30, 2022.

This growth rate has slowed over the past year primarily due to the 34.0% decline in OTA students.

Year over year ABSN students grew 1.2% at June 30, 2022.

As is discussed above in Impact of COVID-19, none of our ABSN partners have stopped admitting new students due to clinical faculty challenges that began during the pandemic, however some locations that were scheduled to open in 2021 and 2022 have been pushed back and some existing partners have reduced incoming cohort sizes which has slowed the growth.

Our service revenue for the three months ended September 30, 2022 was $208.7 million, an increase of $1.9 million, or 0.9%, as compared to service revenue of $206.8 million for the three months ended September 30, 2021.

The increase year over year in service revenue was primarily due to an increase in GCU traditional campus enrollments of 8.0% and increases in revenue per student year over year, partially offset by a decrease in online enrollments at GCU of 4.7% (see - Impact of COVID-19 above) and to a lesser extent, students in a university partner’s OTA program of 22.7% (see - Impact of COVID-19 above).

Additionally, GCU’s traditional campus Fall semester moved forward one day compared to the third quarter of 2021, which increased service revenues earned in the third quarter by $1.5 million.

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 2022 as compared to the prior year period although the impact of this growth is not as significant in the 3 rd quarter of each year as it is in the 1 st and 4 th quarters as the Fall semester does not begin until the first week in September.

In addition, service revenue per student for ABSN students at 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 take more credits on average per semester.

Partner enrollments totaled 116,202 at September 30, 2022 as compared to 118,832 at September 30, 2021.

University partner enrollments at our off-campus classroom and laboratory sites were 5,695, an increase of 0.8% over enrollments at September 30, 2021, which includes 421 GCU students at September 30, 2022.

This growth rate has slowed over the past year primarily due to the 22.7% decline in OTA students as the university partner stopped admitting new students for most of 2021 due to clinical placement backlog.

Year over year ABSN students increased 2.7% at September 30, 2022.

None of our ABSN partners have stopped admitting new students due to the clinical faculty challenges that began during the pandemic, however some locations that were scheduled to open in 2021 and 2022 have been pushed back and some existing partners have reduced incoming cohort sizes which has slowed the

In addition, in a joint decision between us and one of our university partners, two ABSN off-campus classroom and laboratory sites were closed at the beginning of this year to allow the university partner to focus its resources closer to its home location.

Excluding the prior year enrollments from locations that have been closed in the past twelve months, ABSN students

grew by 6.6% year over year.

We did open three new off-campus classroom and laboratory sites in the first half of 2022 increasing the total number of these sites to 32 at June 30, 2022 and we anticipate opening four more this Fall and six to eight more in 2023 which should re-accelerate the ABSN student enrollment growth.

Enrollments at GCU declined to 92,233 at June 30, 2022, a decrease of 5.7% over enrollments at June 30, 2021 primarily due to the decrease in GCU online enrollments between years.

Enrollments for GCU ground students were 7,309 at June 30, 2022 up from 6,202 at June 30, 2021 primarily due to a 24.0% increase in traditional ground students taking summer school courses between years.

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.

Excluding the prior year enrollments from locations that have been closed in the past twelve months, ABSN students grew by 7.5% year over year.

We did open six new off-campus classroom and laboratory sites in the nine months ended September 30, 2022 increasing the total number of these sites to 35 at September 30, 2022 and we anticipate opening six to eight more in 2023 which should re-accelerate the ABSN student enrollment growth.

Enrollments at GCU declined to 110,928 at September 30, 2022, a decrease of 2.2% over enrollments at September 30, 2021 primarily due to the decrease in GCU online enrollments between years.

Enrollments for GCU ground students were 25,350 at September 30, 2022 up from 23,628 at September 30, 2021 primarily due to a 8.0% increase in traditional ground students between years.

Technology and academic services .

Our technology and academic services expenses for the three months ended June 30, 2022 were $38.2 million, an increase of $4.5 million, or 13.4%, as compared to technology and academic services expenses of $33.7 million for the three months ended June 30, 2021.

This increase was primarily due to increases in employee compensation and related expenses, including share-based compensation and benefit expenses and in other technology and academic costs of $4.2 million and $0.3 million, respectively.

Our technology and academic services expenses for the three months ended September 30, 2022 were $37.6 million, an increase of $2.0 million, or 5.8%, as compared to technology and academic services expenses of $35.6 million for the three months ended September 30, 2021.

This increase was primarily due to increases in employee compensation and related expenses, including share-based compensation and benefit expenses, in occupancy and depreciation and in other technology and academic costs of $1.2 million, $0.4 million and $0.4 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 revenue increased 2.4% to 19.1% for the three months ended June 30, 2022, from 16.7% for the three months ended June 30, 2021.

Our technology and academic services expenses as a percentage of revenue increased 0.8% to 18.0% for the three months ended September 30, 2022, from 17.2% for the three months ended September 30, 2021.

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Counseling services and support .

Our counseling services and support expenses for the three months ended June 30, 2022 were $66.0 million, an increase of $5.1 million, or 8.4%, as compared to counseling services and support expenses of $60.9 million for the three months ended June 30, 2021.

This increase was primarily attributable to increases in other counseling services and support expenses, employee compensation and related expenses including share-based compensation and benefit expenses, and occupancy and depreciation expenses of $2.4 million, $2.4 million, and $0.3 million, respectively.

The increase in other counseling services and support expenses is primarily the result of increased travel costs for our 27 university partners as compared to the COVID-19 impacted second quarter of 2021, during which significantly lower travel costs were incurred.

Our counseling services and support expenses for the three months ended September 30, 2022 were $67.2 million, an increase of $5.0 million, or 8.1%, as compared to counseling services and support expenses of $62.2 million for the three months ended September 30, 2021.

This increase was primarily attributable to increases in employee compensation and related expenses including share-based compensation and benefit expenses, in other counseling services and support expenses and in occupancy and depreciation of $3.5 million, $1.4 million, and $0.1 million, respectively.

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

Our counseling services and support expenses as a percentage of revenue increased 2.9% to 33.1% for the three months ended June 30, 2022, from 30.2% for the three months ended June 30, 2021 primarily due to the significant increase year over year in travel and benefit costs and the increased headcount.

The increase in other counseling services and support expenses is primarily the result of increased travel costs for our 27 university partners as compared to the third quarter of 2021, during which significantly lower travel costs were incurred.

Our counseling services and support expenses as a percentage of revenue increased 2.1% to 32.2% for the three months ended September 30, 2022, from 30.1% for the three months ended September 30, 2021 primarily due to the significant increase year over year in travel and benefit costs and the increased headcount.

We anticipate that counseling services and support expense as a percentage of revenue will continue to be higher in 2022 than in 2021 as travel expenses return to pre-COVID-19 levels and we grow our employee base and their compensation to meet our university partners’ growth expectations and retain our employees.

Marketing and communication .

Our marketing and communication expenses for the three months ended June 30, 2022 were $49.7 million, an increase of $4.3 million, or 9.4%, as compared to marketing and communication expenses of $45.4 million for the three months ended June 30, 2021.

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 $3.4 million and increased employee compensation, including share-based compensation and benefit expenses of $0.9 million.

Our marketing and communication expenses as a percentage of revenue increased by 2.3% to 24.9% for the three months ended June 30, 2022, from 22.6% for the three months ended June 30, 2021, primarily due to the increase in the number of new university partners and their growth expectations and increased off-campus classroom and laboratory sites opened and sites planned to open in the next 12 months.

Our marketing and communication expenses for the three months ended September 30, 2022 were $50.7 million, an increase of $3.6 million, or 7.5%, as compared to marketing and communication expenses of $47.1 million for the three months ended September 30, 2021.

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 $3.0 million and increased employee compensation, including share-based compensation and benefit expenses of $0.8 million, partially offset by a decrease in other marketing and communication expenses of $0.2 million.

Our marketing and communication expenses as a percentage of revenue increased by 1.5% to 24.3% for the three months ended September 30, 2022, from 22.8% for the three months ended September 30, 2021, primarily due to the increase in the number of new university partners and their growth expectations and increased off-campus classroom and laboratory sites opened 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, 2022 were $9.9 million, an increase of $0.8 million, or 8.5%, as compared to general and administrative expenses of $9.1 million for the three months ended June 30, 2021.

This increase was primarily attributable to an increase in other general and administrative expenses, professional fees, and employee compensation, including share-based compensation and benefit expenses of $0.4 million, $0.2 million and $0.2 million, respectively.

Our increase in other general and administrative expenses is primarily related to an increase in travel costs and charitable contributions between years.

The increased professional fees is primarily increased legal and audit fees between years.

Our general and administrative expenses for the three months ended September 30, 2022 were $15.6 million, an increase of $1.1 million, or 7.8%, as compared to general and administrative expenses of $14.5 million for the three months ended September 30, 2021.

This increase was primarily attributable to an increase in other general and administrative expenses, in employee compensation, including share-based compensation and benefit expenses and in professional fees of $0.6 million, $0.5 million and $0.1 million, respectively, partially offset by a decrease in occupancy and depreciation of $0.1 million.

Our increase in other general and administrative expenses is primarily related to increases in travel costs and other charitable contributions between years.

The increase in employee compensation and related expenses is primarily related to tenure adjustments and higher benefit costs between years.

Our general and administrative expenses as a percentage of revenue increased by 0.4% to 4.9% for the three months ended June 30, 2022, from 4.5% for the three months ended June 30, 2021.

The increased professional fees is primarily increased legal and audit fees between years.

Our general and administrative expenses as a percentage of revenue increased by 0.5% to 7.5% for the three months ended September 30, 2022, from 7.0% for the three months ended September 30, 2021 primarily due to the increase in other expenses.

Amortization of intangible assets .

Amortization of intangible assets for the three months ended June 30, 2022 and 2021 were $2.1 million for both periods.

Amortization of intangible assets for the three months ended September 30, 2022 and 2021 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 for the three months ended June 30, 2021 was $14.8 million.

Interest income on the Secured Note for the three months ended September 30, 2021 was $15.0 million.

GCE recognized interest income on the Secured Note including borrowings made for capital expenditures, at an interest rate of 6%.

GCU repaid all amounts owed on the Secured Note in the fourth quarter of 2021.

As the Secured Note receivable was paid off in 2021 there was no interest income earned on the Secured Note in the second quarter of 2022 and there will be none in future periods.

As the Secured Note receivable was paid off in 2021 there was no interest income earned on the Secured Note in the third quarter of 2022 and there will be none in future periods.

Interest expense .

Interest expense was $0.8 million for the three months ended June 30, 2021.

Interest expense was $0.7 million for the three months ended September 30, 2021.

The credit facility was repaid and terminated in early November 2021.

Investment interest and other .

Investment interest and other for the three months ended June 30, 2022 was $0.3 million, as compared to investment interest and other for the three months ended June 30, 2021 was $0.2 million.

Investment interest and other for the three months ended September 30, 2022 was $0.7 million, as compared to investment interest and other for the three months ended September 30, 2021 of $0.2 million.

Interest rates have increased in 2022 resulting in increased investment interest income.

Income tax expense .

Income tax expense for the three months ended June 30, 2022 was $8.6 million, a decrease of $6.4 million, or 42.7%, as compared to income tax expense of $15.0 million for the three months ended June 30, 2021.

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

Our effective tax rate was 25.2% during the second quarter of 2022 compared to 23.3% during the second quarter of 2021.

In the second quarter of 2022, the effective tax rate was unfavorably impacted by an increase in the state income tax rate.

Our net income for the three months ended June 30, 2022 was $25.6 million, a decrease of $23.9 million, or 48.3%, as compared to $49.5 million for the three months ended June 30, 2021, due to the factors discussed above.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Income tax expense for the three months ended September 30, 2022 was $6.2 million, a decrease of $6.0 million, or 48.6%, as compared to income tax expense of $12.2 million for the three months ended September 30, 2021.

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

Our effective tax rate was 17.2% during the third quarter of 2022 compared to 20.3% during the third quarter of 2021.

In the third quarter of 2022 and 2021, the effective tax rate was favorably impacted by the contributions in lieu of state income taxes of $5.0 million in July 2022 and 2021.

The impact of the contributions in the third quarter of 2022 had a greater impact on the effective tax rate than it did in the third quarter of 2021 due to lower income before taxes.

Our net income for the three months ended September 30, 2022 was $30.0 million, a decrease of $17.7 million, or 37.0%, as compared to $47.7 million for the three months ended September 30, 2021, due to the factors discussed above.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Service revenue .

Our service revenue for the six months ended June 30, 2022 was $443.9 million, an increase of $5.5 million, or 1.2%, as compared to service revenue of $438.4 million for the six months ended June 30, 2021.

The increase year over year in service revenue was primarily due to increases in GCU traditional campus enrollments, university partners enrollments in ABSN programs and revenue per student year over year partially offset by a decrease in online enrollments at GCU of 7.5% (see - Impact of COVID-19 above) and to a lesser extent, students in a university partner’s OTA program of 34% (see - Impact of COVID-19 above).

Additionally, GCU’s traditional campus Summer semester moved back six days compared to the six months ended June 30, 2021, which reduced service revenues earned in the six months ended June 30, 2022 by $0.5 million.

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 first half of 2022 as compared to the prior year period (see - Impact of COVID-19 above) and the increase in students at off-campus classroom and laboratory sites.

and the majority of their students take more credits on average per semester.

Partner enrollments totaled 96,029 at June 30, 2022 as compared to 101,808 at June 30, 2021.

University partner enrollments at our off-campus classroom and laboratory sites were 4,120, a decrease of 2.1% over enrollments at June 30, 2021, which includes 324 GCU students at June 30, 2022.

This growth rate has slowed over the past year primarily due to the 34.0% decline in OTA students.

Year over year ABSN students grew 1.2% at June 30, 2022.

Our service revenue for the nine months ended September 30, 2022 was $652.6 million, an increase of $7.4 million, or 1.1%, as compared to service revenue of $645.2 million for the nine months ended September 30, 2021.

The increase year over year in service revenue was primarily due to increases in GCU traditional campus enrollments and revenue per student year over year partially offset by a decrease in online enrollments at GCU of 4.7% (see - Impact of COVID-19 above) and to a lesser extent, students in a university partner’s OTA program of 22.7% (see - Impact of COVID-19 above).

Additionally, GCU’s traditional campus Fall semester moved up one day compared to the nine months ended September 30, 2021, which increased service revenues earned in the nine months ended September 30, 2022 by $1.5 million.

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 first nine months of

2022 as compared to the prior year period (see - Impact of COVID-19 above) and the increase in revenue per student at off-campus classroom and laboratory sites.

Partner enrollments totaled 116,202 at September 30, 2022 as compared to 118,832 at September 30, 2021.

Year over year ABSN students increased 2.7% at September 30, 2022.

Excluding the prior year enrollments from locations that have been closed in the past twelve months, ABSN students grew by 7.5% year over year.

We did open three new off-campus classroom and laboratory sites in the first half of 2022 increasing the total number of these sites to 32 at June 30, 2022 and anticipate opening four more this Fall and six to eight more in 2023 which should re-accelerate the ABSN student enrollment growth.

Enrollments at GCU declined to 92,233 at June 30, 2022, a decrease of 5.7% over enrollments at June 30, 2021 primarily due to the decrease in GCU online enrollments between years.

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

Enrollments at GCU declined to 110,928 at September 30, 2022, a decrease of 2.2% over enrollments at September 30, 2021 primarily due to the decrease in GCU online enrollments between years.

Enrollments for GCU ground students were 25,350 at September 30, 2022 up from 23,628 at September 30, 2021 primarily due to a 8.0% increase in traditional ground students between years.

Technology and academic services .

Our technology and academic services expenses for the six months ended June 30, 2022 were $74.5 million, an increase of $8.8 million, or 13.3%, as compared to technology and academic services expenses of $65.7 million for the six months ended June 30, 2021.

Our technology and academic services expenses for the nine months ended September 30, 2022 were $112.1 million, an increase of $10.8 million, or 10.7%, as compared to technology and academic services expenses of $101.3 million for the nine months ended September 30, 2021.

This increase was primarily due to increases in employee compensation and related expenses, including share-based compensation and benefit expenses, in other technology and academic costs and in occupancy and depreciation including lease expenses of $8.3 million, $2.0 million and $0.6 million, respectively.

Our technology and academic services expenses as a percentage of revenue increased 1.8% to 16.8% for the six months ended June 30, 2022, from 15.0% for the six months ended June 30, 2021.

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 2022 semester ground traditional campus revenues at GCU.

Our technology and academic services expenses as a percentage of revenue increased 1.5% to 17.2% for the nine months ended September 30, 2022, from 15.7% for the nine months ended September 30, 2021.

We anticipate that technology and academic services expenses as a percentage of revenue will continue to increase in the future as we open more off-campus classroom and laboratory sites.

Counseling services and support .

Our counseling services and support expenses for the six months ended June 30, 2022 were $133.5 million, an increase of $11.3 million, or 9.3%, as compared to counseling services and support expenses of $122.2 million for the six months ended June 30, 2021.

This increase was primarily attributable to increases in other counseling services and support expenses, employee compensation and related expenses including share-based compensation and benefit expenses, and occupancy and depreciation expenses of $7.1 million, $3.7 million and $0.5 million, respectively.

The increase in other counseling services and support expenses is primarily the result of increased travel costs for our 27 university partners as compared to the COVID-19 impacted first half of 2021, during which significantly lower travel costs were incurred.

Our counseling services and support expenses for the nine months ended September 30, 2022 were $200.8 million, an increase of $16.4 million, or 8.9%, as compared to counseling services and support expenses of $184.4 million for the nine months ended September 30, 2021.

This increase was primarily attributable to increases in other counseling services and support expenses, in employee compensation and related expenses including share-based compensation and benefit expenses, and occupancy and depreciation expenses of $8.5 million, $7.3 million and $0.6 million, respectively.

The increase in other counseling services and support expenses is primarily the result of increased travel costs for our 27 university partners as compared to the COVID-19 impacted nine months ended September 30, 2021, during which significantly lower travel costs were incurred.

The increases in employee compensation and related expenses were primarily due to increased headcount to support our university partners, and their planned 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.

Our counseling services and support expenses as a percentage of revenue increased 2.2% to 30.1% for the six months ended June 30, 2022, from 27.9% for the six months ended June 30, 2021 primarily due to significant increase year over year in travel and benefit costs and the increased headcount, partially offset by our ability to leverage our counseling services and support expense across an increasing revenue base primarily due to the increased Spring and Summer 2022 semester ground traditional campus revenues at GCU.

Our counseling services and support expenses as a percentage of revenue increased 2.2% to 30.8% for the nine months ended September 30, 2022, from 28.6% for the nine months ended September 30, 2021 primarily due to significant increase year over year in travel and benefit costs and the increased headcount, partially offset by the increased ground traditional campus revenues at GCU.

We anticipate that counseling services and support expense as a percentage of revenue will continue to be higher

in 2022 than in 2021 as travel expenses return to pre-COVID-19 levels and we grow our employee base and their compensation to meet our university partners’ growth expectations and retain our employees.

Marketing and communication .

Our marketing and communication expenses for the six months ended June 30, 2022 were $100.6 million, an increase of $7.4 million, or 8.0%, as compared to marketing and communication expenses of $93.2 million for the six months ended June 30, 2021.

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, employee compensation, including share-based compensation and benefit expenses, and other communications expenses of $5.7 million, $1.6 million and $0.1 million, respectively.

Our marketing and communication expenses as a percentage of revenue increased by 1.4% to 22.7% for the six months ended June 30, 2022, from 21.3% for the six months ended June 30, 2021, primarily due to the increase in the number of new university partners and their growth expectations and increased off-campus classroom and laboratory sites opened and sites planned to open in the next 12 months.

Our marketing and communication expenses for the nine months ended September 30, 2022 were $151.2 million, an increase of $10.9 million, or 7.8%, as compared to marketing and communication expenses of $140.3 million for the nine months ended September 30, 2021.

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 and in employee compensation, including share-based compensation and benefit expenses of $8.7 million and $2.3 million, respectively, partially offset by a decrease in other communication expenses of $0.1 million.

Our marketing and communication expenses as a percentage of revenue increased by 1.5% to 23.2% for the nine months ended September 30, 2022, from 21.7% for the nine months ended September 30, 2021, primarily due to the increase in the number of new university partners and their growth expectations and increased off-campus classroom and laboratory sites opened and sites planned to open in the next 12 months.

General and administrative .

Our general and administrative expenses for the six months ended June 30, 2022 were $19.7 million, an increase of $1.0 million, or 5.8%, as compared to general and administrative expenses of $18.7 million for the six months ended June 30, 2021.

This increase was primarily attributable to an increase in professional fees, other general and administrative expenses, and employee compensation, including share-based compensation, and related benefit expenses of $0.5 million, $0.4 million, and $0.1 million, respectively.

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

Our general and administrative expenses for the nine months ended September 30, 2022 were $35.3 million, an increase of $2.2 million, or 6.7%, as compared to general and administrative expenses of $33.1 million for the nine months ended September 30, 2021.

This increase was primarily attributable to an increase in other general and administrative expenses, in employee compensation, including share-based compensation, and related benefit expenses, and in professional fees of $1.1 million, $0.6 million, and $0.6 million, respectively, partially offset by a decrease in occupancy and depreciation of $0.1 million.

Our increase in other general and administrative expenses is primarily related to an increase in travel costs and charitable contributions between years.

The increase in employee compensation and related expenses is primarily related to higher benefit costs and tenure adjustments.

Our general and administrative expenses as a percentage of revenue increased by 0.1% to 4.4% for the six months ended June 30, 2022, from 4.3% for the six months ended June 30, 2021.

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 revenue increased by 0.3% to 5.4% for the nine months ended September 30, 2022, from 5.1% for the nine months ended September 30, 2021primarily due to the increase in other expenses.

Amortization of intangible assets .

Amortization of intangible assets for the six months ended June 30, 2022 and 2021 were $4.2 million for both periods.

Amortization of intangible assets for the nine months ended September 30, 2022 and 2021 were $6.3 million for both periods.

Interest income on Secured Note .

Interest income on the Secured Note for the six months ended June 30, 2021 was $29.3 million.

Interest income on the Secured Note for the nine months ended September 30, 2021 was $44.4 million.

GCE recognized interest income on the Secured Note including borrowings made for capital expenditures, at an interest rate of 6%.

GCU repaid all amounts owed on the Secured Note in the fourth quarter of 2021.

As the Secured Note receivable was paid off in 2021 there was no interest income earned on the Secured Note in the six months ended June 30, 2022 and there will be none in future periods.

As the Secured Note receivable was paid off in 2021 there was no interest income earned on the Secured Note in the nine months ended September 30, 2022, and there will be none in future periods.

Interest expense .

Interest expense was $1.6 million for the six months ended June 30, 2021.

Interest expense was $2.3 million for the nine months ended September 30, 2021.

The credit facility was repaid and terminated in early November 2021.

Investment interest and other .

Investment interest and other for the six months ended June 30, 2022 was $0.5 million, as compared to investment interest and other for the six months ended June 30, 2021 was $0.4 million.

Investment interest and other for the nine months ended September 30, 2022 was $1.3 million, as compared to investment interest and other for the nine months ended September 30, 2021 of $0.6 million.

Interest rates have increased during the nine months ended September 30, 2022 resulting in increased investment interest income.

Income tax expense .

Income tax expense for the six months ended June 30, 2022 was $28.2 million, a decrease of $6.8 million, or 19.4%, as compared to income tax expense of $35.0 million for the six months ended June 30, 2021.

Income tax expense for the nine months ended September 30, 2022 was $34.5 million, a decrease of $12.7 million, or 27.0%, as compared to income tax expense of $47.2 million for the nine months ended September 30, 2021.

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

Our effective tax rate was 25.2% during the six months ended June 30, 2022 compared to 21.5% during the six months ended June 30, 2021.

In the first half of 2021, the effective tax rate was significantly impacted by excess tax benefits of $4.4 million as a result of exercises of the remaining stock options held by employees prior to their expiration.

Excess tax benefits totaled only $0.1 million in the first half of 2022.

In the first half of 2022, the effective tax rate was also unfavorably impacted by an increase in the state income tax rate.

Our net income for the six months ended June 30, 2022 was $83.6 million, a decrease of $44.0 million, or 34.4%, as compared to $127.6 million for the six months ended June 30, 2021, due to the factors discussed above.

Our effective tax rate was 23.3% during the nine months ended September 30, 2022 compared to 21.2% during the nine months ended September 30, 2021.

In the nine months ended September 30, 2021, the effective tax rate was significantly impacted by excess tax benefits of $4.4 million as a result of exercises of the remaining stock options held by employees prior to their expiration.

Excess tax benefits totaled only $0.1 million in the nine months ended September 30, 2022.

The effective tax rate was favorably impacted by the contributions in lieu of

state income taxes of $5.0 million in July 2022 and 2021.

The impact of the contribution in 2022 had a greater impact on the effective tax rate than it did in 2021 due to lower income before taxes.

Our net income for the nine months ended September 30, 2022 was $113.6 million, a decrease of $61.6 million, or 35.1%, as compared to $175.2 million for the nine months ended September 30, 2021, 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

As of June 30,

As of September 30,

As of December 31,

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Cash, cash equivalents and investments

Our liquidity position, as measured by cash and cash equivalents and investments decreased by $397.7 million between December 31, 2021 and June 30, 2022, which was largely attributable to share repurchases during the six months ended June 30, 2022 of $528.0 million, partially offset by cash provided by operating activities of $146.1 million.

Our unrestricted cash and cash equivalents and investments were $203.3 million at June 30, 2022 and $600.9 million at December 31, 2021.

Our liquidity position, as measured by cash and cash equivalents and investments decreased by $492.7 million between December 31, 2021 and September 30, 2022, which was largely attributable to share repurchases in accordance with our share repurchase program and capital expenditures during the nine months ended September 30, 2022 of $571.6 million and $26.3 million, respectively, partially offset by cash provided by operating activities of $110.5 million.

Our unrestricted cash and cash equivalents and investments were $108.3 million at September 30, 2022 and $600.9 million at December 31, 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, will provide adequate funds for ongoing operations, planned capital expenditures, and working capital requirements for at least the next 24 months.

Cash Flows from Operating Activities

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands)

Net cash provided by operating activities

The decrease in cash generated from operating activities between the six months ended June 30, 2022 and the six months ended June 30, 2021 was primarily due to a decrease in net income and changes in working capital balances, primarily accounts payable and income tax receivable.

The decrease in cash generated from operating activities between the nine months ended September 30, 2022 and the nine months ended September 30, 2021 was primarily due to a decrease in net income and changes in working capital balances, primarily accounts payable and accrued liabilities.

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

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Cash Flows from Investing Activities

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands)

Net cash used in investing activities

Investing activities consumed $79.6 million of cash in the six months ended June 30, 2022 compared to $240.1 million in the six months ended June 30, 2021.

In the first six months of 2022 cash used in investing activities consisted of the purchase of available-for-sale securities, net of proceeds from the sale of investments of $64.4 million with the excess cash flows generated from the recent repayment of the Secured Note by GCU in the fourth quarter of 2021.

In 2021 purchases of investments, net of proceeds from the sale of investments totaled $34.1 million.

In the first six months of 2022 and 2021 cash used in investing activities also included the purchases of capital expenditures totaling $15.1 million and $15.8 million, respectively.

Investing activities consumed $95.3 million of cash in the nine months ended September 30, 2022 compared to $11.3 million in the nine months ended September 30, 2021.

In the first nine months of 2022 cash used in investing activities consisted of the purchase of available-for-sale securities, net of proceeds from the sale of investments of $68.7 million with the excess cash flows generated from the recent repayment of the Secured Note by GCU in the fourth quarter of 2021.

In 2021 proceeds from investments, net of purchases of investments totaled $10.5 million.

In the first nine months of 2022 and 2021 cash used in investing activities also included the purchases of capital expenditures totaling $26.3 million and $21.4 million, respectively.

Capital expenditures for both periods primarily consisted of leasehold improvements and equipment for new off-campus classroom and laboratory sites, as well as purchases of computer equipment, internal use software projects and furniture and equipment to support our increasing employee headcount.

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The Company intends to continue to spend approximately $30.0 million to $35.0 million per year for capital expenditures.

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

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

Cash Flows from Financing Activities

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands)

Net cash used in financing activities

Financing activities consumed $528.0 million of cash in the six months ended June 30, 2022 compared to $146.6 million in the six months ended June 30, 2021.

During the six months ended June 30, 2022 and 2021, $523.4 million and $151.7 million, respectively was used to purchase treasury stock in accordance with GCE’s share repurchase program, and in 2021 $10.0 million was paid to Morgan Stanley under our accelerated share repurchase (“ASR”) agreement for shares that would be settled no later than September 9, 2021.

Financing activities consumed $576.2 million of cash in the nine months ended September 30, 2022 compared to $382.4 million in the nine months ended September 30, 2021.

During the nine months ended September 30, 2022 and 2021, $571.6 million and $354.2 million, respectively was used to purchase treasury stock in accordance with GCE’s share repurchase program.

In 2022 and 2021, $4.6 million and $6.0 million, respectively, of cash was utilized to purchase common shares withheld in lieu of income taxes resulting from the vesting of restricted share awards.

The Company intends to continue using a significant portion of its cash flows from operations to repurchase its shares.

In 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.

A significant amount of the share repurchases in 2021 and 2022 were from the proceeds received on the repayment of the Secured Note.

The Company intends to continue using a significant portion of its cash flows from operations to repurchase its shares but share repurchases in future years will be less than in 2021 and 2022.

In 2021, 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.

Share Repurchase Program

Our Board of Directors has authorized under its existing stock repurchase program, an aggregate authorization for share repurchases since the initiation of the program of $1,645.0 million.

On October 26, 2022, our Board of Directors increased the authorized under its existing stock repurchase program by $200.0 million, reflecting an aggregate authorization for share repurchases since the initiation of the program of $1,845.0 million.

The current expiration date on the repurchase authorization by our Board of Directors is December 31, 2023.

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

We repurchased 5,894,337 shares of common stock in the six months ended June 30, 2022.

At June 30, 2022, there remains $72.0 million available under our share repurchase authorization .

We repurchased 6,475,758 shares of common stock in the nine months ended September 30, 2022.

At September 30, 2022, there remains $23.9 million available under our share repurchase authorization (which authorization was increased to $223.9 million in October 2022) .

Off-Balance Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis