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Item 7. Management’s Discussion and Analysis

2023-02-16 compared with 2022-02-16 · 76 added, 154 removed, 182 unchanged (56% of the section changed)

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

GCE’s most significant university partner is GCU, a comprehensive regionally accredited university that offers graduate and undergraduate degree programs, emphases and certificates across nine colleges both online, 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.

See Note 3 - Acquisition to consolidated financial statements for a full description of the Acquisition.

Since the Acquisition, GCE, together with Orbis Education, has continued to add additional university partners.

In the healthcare field, we work 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.

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

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

As of December 31, 2022, GCE provides education services to 27 university partners across the United States.

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We do disclose significant information for GCU, such as enrollments, due to its size in comparison to our other university partners.

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, however, did serve to reduce GCU’s non-tuition revenue during 2020 and reduced 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.

Some of these ancillary businesses have fully reopened while others still have not, which has reduced GCU’s revenues and thus the service revenues earned by GCE.

Until these businesses return to full capacity, it will continue to reduce GCU’s revenues and thus the service revenues earned by GCE;

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

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

● GCU’s doctoral students are required to attend two residencies on the university’s campus and at its hotel in Phoenix, Arizona as part of their dissertation.

On an annual basis approximately 3,000 learners attend the week-long 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 beginning in the second quarter of 2021 returned to 2019 levels;

however, the residencies were held at an off-site location during the Fall semester;

● 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 11,441 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 number of residential students for the Fall semester of 2021 was 15,570, an increase of 36.1% over Fall semester of 2020;

● 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 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.

These trends continued through the rest of 2021 and thus the year over year online growth rate continued to decline.

The decline in new enrollments as compared to the prior year beginning in the second quarter of 2021 and continuing through the end of 2021 were 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;

● 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 provides services to numerous university partners across the United States, including GCU at off-campus classroom and laboratory sites.

The majority of these university partners’ students are studying in the Accelerated Bachelor of Science in Nursing (“ABSN”) program which is offered in a 12-16-month format in three or four academic semesters.

The Spring, Summer and Fall 2020 and Spring, Summer and Fall 2021 semesters were completed without interruption and each university partner has started its Spring 2022 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 and we are starting 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 our university partner’s Occupational Therapy Assistants (“OTA”) program in which enrollment declined 45.7% between December 31, 2020 and 2021 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.

No other changes are currently anticipated with our other university partners related to the Spring 2022 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 Spring 2022 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 Estimates

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Revenue recognition .

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

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

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

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

However, since the performance obligation represents a series of distinct services, GCE recognizes the variable consideration that becomes

known and billable because these fees relate to the distinct service period in which the fees are earned.

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

GCE meets the criteria in ASC 606 Revenue from Contracts with Customers and exercises the practical expedient to not disclose the aggregate amount of the transaction price allocated to the single performance obligation that is unsatisfied as of the end of the reporting period.

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There are no refunds or return rights under the Services Agreements.

Business Combinations, Intangible Assets, and Goodwill .

We apply the purchase accounting standards for “Business Combinations,” to acquisitions.

The purchase price of an acquisition is allocated to individual tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date.

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

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

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

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

The acquired goodwill was allocated to the entity level reporting unit.

The determination of the fair value and useful lives of the intangible assets acquired involves certain judgements and estimates.

These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.

Income taxes .

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Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the SEC for the fiscal year ended December 31, 2021 incorporated herein by reference.

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 and the loss on transaction have been excluded from the table below:

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

Amortization of intangible assets have been excluded from the table below:

Year Ended December 31,

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Our service revenue for the year ended December 31, 2022 was $911.3 million, an increase of $14.7 million, or 1.6%, as compared to service revenue of $896.6 million for the year ended December 31, 2021.

The increase year over year in service revenue was primarily due to an increase in revenue per student year over year, partially offset by a slight decrease in university partner enrollments between years of 3.0%.

The increase in revenue per student is primarily due to the service revenue impact of the higher room, board, fee and ancillary revenues at GCU in 2021 as compared to the same period in 2020 as a result of an increase in GCU residential student enrollment between periods due to the growth in traditional campus enrollment and the revenue impact of some residential students staying home and taking all of their courses online in 2020 (see - Impact of COVID-19 above).

In addition, our services agreements with our other university partners generally generate a higher revenue per student than our agreement with GCU.

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

In addition, we continue to open new off-campus classroom and laboratory sites increasing the total number of these sites to 31 as of December 31, 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 1.6% and to a lesser extent, students in a university partner’s Occupational Therapy Assistants (“OTA”) program in which enrollment declined 11.3% between December 31, 2022 and 2021.

The increase in revenue per student between years is primarily due to the service revenue impact of the increased ground campus enrollments which generates higher revenue per student due to the room, board and other ancillary revenues earned by GCU and the higher revenue per student at off-campus classroom and laboratory sites .

S ervice revenue per student for Accelerated Bachelor of Science in Nursing (“ABSN”) program 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 112,955 at December 31, 2022 as compared to 112,554 at December 31, 2021.

University partner enrollments at our off-campus classroom and laboratory sites were 4,684, an increase of 5.9% over enrollments at December 31, 2020, which includes 269 GCU students at December 31, 2021.

This growth rate has slowed over the past year primarily due to a 45.7% decline in OTA students.

Year over year ABSN student growth has slowed to 13.8% at December 31, 2021 (see – Impact of COVID-19 above).

Enrollments at GCU declined to 108,139 at December 31, 2021, a decrease of 3.1% over enrollments at December 31, 2020.

Enrollments for GCU ground traditional students were 23,629 at December 31, 2021 up from 22,185 at December 31, 2020 primarily due to a 9.9% 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 December 31, 2020 to December 31, 2021 (see – Impact of COVID-19 above).

Last, 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.

University partner enrollments at our off-campus classroom and laboratory sites were 4,636, a decrease of 1.0% over enrollments at December 31, 2021, which includes 320 and 269 GCU students at December 31, 2022 and 2021, respectively.

This growth rate has slowed over the past year primarily due to the 11.3% 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 decreased 0.3% at December 31, 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 growth.

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 3.6% year over year.

We did open six new off-campus classroom and laboratory sites in the year ended December 31, 2022 increasing the total number of these sites to 35 at December 31, 2022 and we anticipate opening six to eight more in 2023 which should re-accelerate the ABSN student enrollment growth.

Enrollments at GCU increased to 108,639 at December 31, 2022, a slight increase of 0.5% over enrollments at December 31, 2021 primarily due to the increase in ground traditional and ABSN off-campus enrollments partially offset by the decrease in GCU online enrollments between years.

The decline in GCU online enrollments between years is primarily due to recruitment challenges caused by reduced access to schools, hospitals, and businesses where our potential students work due to COVID-19.

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

As the year-over-year comparables returned to historical levels, and schools, hospitals, and businesses are generally reopened, our online enrollment growth rate has begun to re-accelerate.

Enrollments for GCU ground students were 25,522 at December 31, 2022 up from 23,629 at December 31, 2021 primarily due to a 8.6% increase in traditional ground students between years.

Technology and academic services .

Our technology and academic services expenses for the year ended December 31, 2022 were $150.5 million, an increase of $18.4 million, or 13.9%, as compared to technology and academic services expenses of $132.1 million for the year ended December 31, 2021.

This increase was primarily due to increases in employee compensation and related expenses including share-based compensation, in occupancy and depreciation including lease expenses, and in other technology and academic supply costs of $17.0 million, $3.3 million and $0.8 million, respectively.

These increases were partially offset by the $5.0 million reversal of the credit loss reserve as a result of the repayment by GCU for the Secured Note and capital expenditure loans in the fourth quarter of 2021.

The increases, in turn, 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 open between years.

Our technology and academic services expenses as a percentage of net revenue increased 1.0% to 14.7% for the year ended December 31, 2021, from 13.7% for the year ended December 31, 2020 primarily due to our services agreements with university partners that provide for off-campus classroom and laboratory sites, which necessitate a higher level of technology and academic services than does our agreement with GCU, partially offset by the service revenue impact of the higher room, board, fee and ancillary

revenues at GCU in 2021 as compared to the same period in 2020 (see - Impact of COVID-19 above).

Excluding the $5.0 million reversal of the credit loss reserve in the fourth quarter of 2021 as a result of the repayment by GCU for the Secured Note and capital expenditure loans, there was an increase of $13.4 million or 9.8%, year over year.

This increase was

primarily due to increases in employee compensation and related expenses including share-based compensation, in other technology and academic supply costs, and in occupancy and depreciation including lease expenses of $9.2 million, $2.6 million and $1.6 million, respectively.

The 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 open between years.

Our technology and academic services expenses as a percentage of service revenue, excluding the reversal of the $5.0 million credit loss in 2021 increased 1.3% to 16.5% for the year ended December 31, 2022, from 15.2% for the year ended December 31, 2021 primarily due to our services agreements with university partners that provide for off-campus classroom and laboratory sites, which necessitate a higher level of technology and academic services than does our agreement with GCU.

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-site classroom and laboratory sites.

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The increases in employee compensation and related expenses were primarily due to increased headcount to support our 27 university partners, and their increased enrollment growth, tenure-based salary adjustments, and an increase in benefit costs.

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 2020, during which all non-essential travel ceased in mid-March and only a small amount of travel occurred for the remainder of 2020.

Occupancy and depreciation costs increased slightly due to the increased number of off-campus classroom and laboratory sites open year over year, partially offset by a large percentage of our workforce continuing to work remotely.

Our counseling services and support expenses as a percentage of net revenue stayed flat at 27.8% for the years ended December 31, 2021 and 2020 primarily due to our ability to leverage our other counseling services and support expenses across an increasing revenue base, increases in service revenue from the higher room, board and ancillary revenues at GCU in 2021 (see – Impact of COVID-19 above), partially offset by increased travel costs.

We anticipate that counseling services and support expense as a percentage of revenue will increase in 2022 as we grow our employee base and their compensation to meet our university partners’ growth expectations and retain our employees.

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 2021, during which significantly lower travel costs were incurred.

Occupancy and depreciation costs increased slightly due to the increased number of off-campus classroom and laboratory sites open year over year.

Our counseling services and support expenses as a percentage of service revenue increased 2.2% to 30.0% for the year ended December 31, 2022, from 27.8% for the year ended December 31, 2021 primarily due to increased travel costs and the increase in our employee base and their compensation to meet our university partners’ growth expectations and retain our employees increasing at a faster rate than revenue growth.

We anticipate that counseling services and support expenses as a percentage of revenue will continue to increase on a year over year basis in the first half of 2023 as a result of the investments made primarily in the second half of 2022, but are hopeful that the growth rate will be more in line with our revenue growth in the second half of 2023.

Marketing and communication .

Our marketing and communication expenses for the year ended December 31, 2022 were $196.1 million, an increase of $13.2 million, or 7.2%, as compared to marketing and communication expenses of $182.9 million for the year ended December 31, 2021.

This increase was primarily attributable to the increased cost to market our university partners’ programs and due to the marketing of new university partners and new off-campus classroom and laboratory sites which resulted in increased advertising of $16.4 million, increased employee compensation expenses and related expenses including share-based compensation of $1.2 million and increased other marketing supplies of $1.0 million.

Our marketing and communication expenses as a percentage of net revenue increased by 0.9% to 20.4% for the year ended December 31, 2021, from 19.5% for the year ended December 31, 2020, primarily due to the increase in the number of new university partners and their growth expectations and increased off-campus classroom and laboratory sites open between years, partially offset by increases in service revenue from the higher room, board and ancillary revenues at GCU in 2021 (see – Impact of COVID-19 above).

This increase was primarily attributable to the increased cost to market our university partners’ programs and due to the marketing of new university partners and new off-campus classroom and laboratory sites which resulted in increased advertising of $10.6 million and increased employee compensation expenses and related expenses including share-based compensation of $2.9 million, partially offset by a decrease in other marketing supplies of $0.4 million.

Our marketing and communication expenses as a percentage of service revenue increased by 1.1% to 21.5% for the year ended December 31, 2022, from 20.4% for the year ended December 31, 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 open between years.

Although we will continue to invest heavily in this area, we are hopeful that the growth rate will be more in line with our revenue growth in 2023.

General and administrative .

Our general and administrative expenses for the year ended December 31, 2021 were $41.8 million, a decrease of $1.6 million, or 3.5%, as compared to general and administrative expenses of $43.4 million for the year ended December 31, 2020.

This decrease was primarily due to decreases in other general and administrative expenses of $2.0 million, decreases in employee compensation and related expenses including share-based compensation of $1.8 million and a slight decrease in occupancy and depreciation of $0.1 million, partially offset by an increase in professional fees of $2.3 million.

The decrease in other general and administrative expenses is primarily due to continued decreases in travel costs over the prior year.

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.

The increase in professional fees is primarily related to increased legal, audit and insurance costs.

Our decrease in occupancy and depreciation are primarily related to a significant portion of our workforce continuing to work remotely in 2021.

Our general and administrative expenses as a percentage of net revenue decreased by 0.4% to 4.7% for the year ended December 31, 2021, from 5.1% for the year ended December 31, 2020 due to the lower other general and administrative expenses, lower employee compensation costs, increases in service revenue from the higher room, board and ancillary revenue at GCU in 2021 (see – Impact of COVID-19 above), partially offset by increased professional fees.

Our general and administrative expenses for the year ended December 31, 2022 were $45.5 million, an increase of $3.7 million, or 8.8%, as compared to general and administrative expenses of $41.8 million for the year ended December 31, 2021.

This increase was primarily due to increases in other general and administrative expenses of $2.0 million and increases in employee compensation and related expenses including share-based compensation of $1.7 million.

The increase in other general and administrative expenses is primarily due to continued increases in travel costs and increases in charitable contributions over the prior year.

The increase in employee compensation and related expenses is increased headcount to support our 27 university partners, and their increased enrollment growth, tenure-based salary adjustments, and an increase in benefit costs.

Our general and administrative expenses as a percentage of service revenue increased by 0.3% to 5.0% for the year ended December 31, 2022, from 4.7% for the year ended December 31, 2021 due to the other general and administrative expense and

employee compensation costs growing at a faster rate than our revenue growth.

Although we will continue to invest heavily in this area, we are hopeful that the growth rate will be more in line with our revenue growth in 2023.

Amortization of intangible assets .

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Interest income on Secured Note .

Interest income on the Secured Note for the year ended December 31, 2021 was $52.1 million, a decrease of $7.1 million, or 12.0%, as compared to $59.2 million for the year ended December 31, 2020.

Interest income on the Secured Note for the year ended December 31, 2022 was nil as compared to $52.1 million for the year ended December 31, 2021.

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

The decrease over the prior year was primarily due to GCU repaying $500.0 million of the outstanding balance of the Secured Note receivable on October 29, 2021 and the remaining balance of the Secured Note receivable of $469.9 million on December 9, 2021.

The decrease over the prior year was due to GCU repaying $500.0 million of the outstanding balance of the Secured Note receivable on October 29, 2021 and the remaining balance of the Secured Note receivable of $469.9 million on December 9, 2021.

As the Secured Note receivable is paid off we do not anticipate any interest income to be earned in the future.

Interest expense .

Interest expense was $3.6 million for the year ended December 31, 2021, a decrease of $0.8 million, as compared to interest expense of $4.4 million for the year ended December 31, 2020.

Interest expense was $3.6 million for the year ended December 31, 2021 as compared to interest expense of nil for the year ended December 31, 2022.

The decrease in interest expense is primarily due to the repayment and termination of the credit facility in early November 2021, partially offset by the write-off of the remaining deferred loan costs of $1.0 million in 2021 at the time of the termination of the credit facility.

Investment interest and other .

Investment interest and other for the year ended December 31, 2021 was $0.6 million, a decrease of $0.3 million, as compared to $0.9 million for the year ended December 31, 2020.

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

Investment interest and other for the year ended December 31, 2022 was $2.6 million, an increase of $2.0 million, as compared to $0.6 million for the year ended December 31, 2021.

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

Income tax expense .

Income tax expense for the year ended December 31, 2022 was $55.4 million, a decrease of $15.5 million, or 21.9%, as compared to income tax expense of $70.9 million for the year ended December 31, 2021.

This decrease is the result of a decrease in our effective tax rate and a slight decline in taxable income between years.

This decrease is the result of a decline in taxable income between years, partially offset by a slight increase in our effective tax rate between years.

Our effective tax rate was 23.1% during the year ended December 31, 2022 as compared to 21.4% during the year ended December 31, 2021.

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

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

We anticipate our excess tax benefits in future years will be more similar to 2020 than 2021 as all stock options issued in prior years have been exercised.

Our net income for the year months ended December 31, 2021 was $260.3 million, an increase of $3.01 million, or 1.2% as compared to $257.2 million for the year ended December 31, 2020, due to the factors discussed above.

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

In 2021 the remaining stock options that had been granted ten years prior were exercised by certain of our executives prior to their expiration generating the large excess tax benefit.

As there are no stock options remaining, we anticipate our excess tax benefit or expense will be similar to what it was in 2022 going forward.

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

Our net income for the year ended December 31, 2022 was $184.7 million, a decrease of $75.6 million, or 29.1% as compared to $260.3 million for the year ended December 31, 2021, due to the factors discussed above.

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

Service revenues in the summer months (May through August) are lower primarily due to the majority of GCU’s traditional ground students not attending courses during the summer months, which affects our results for our second and third fiscal quarters.

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.

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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.

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 net revenue, resulting in higher operating income in the first and fourth quarters relative to other quarters.

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Cash, cash equivalents and investments

Notes payable

Unused revolving line of credit

Our liquidity position, as measured by cash and cash equivalents plus borrowing availability increased by $86.6 million during fiscal 2021, which was largely attributable to the Secured Note receivable payoff of $1.0 billion by GCU and net cash provided by operating activities of $313.1 million.

These large inflows were partially offset by the principal payments and the payoff of our credit facility as well as the termination of our unused revolving line of credit of $107.8 million and $150.0 million, respectively, and share repurchases during fiscal year 2021 of $803.8 million.

Our liquidity position, as measured by cash and cash equivalents and investments decreased by $419.2 million between December 31, 2021 and December 31, 2022, which was largely attributable to share repurchases in accordance with our share repurchase program and capital expenditures during the year ended December 31, 2022 of $604.2 million and $35.2 million, respectively, partially offset by cash provided by operating activities of $220.8 million.

Our unrestricted cash and cash equivalents and investments were $181.7 million and $600.9 million at December 31, 2022 and 2021, respectively.

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.

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Net cash provided by operating activities

The slight increase in cash generated from operating activities between the years ended December 31, 2020 and 2021 was primarily due to an increase in net income and changes in other working capital balances.

The decrease in cash generated from operating activities between the years ended December 31, 2021 and 2022 was primarily due to a decrease in net income and changes in other working capital balances.

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

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(In thousands)

Net cash provided by (used in) investing activities

Investing activities provided $951.0 million of cash in fiscal 2021 primarily due to the repayment of the Secured Note receivable by GCU for $969.9 million.

Net cash (used in) provided by investing activities

Investing activities consumed $97.1 million of cash in fiscal 2022.

Funding to GCU for fiscal 2020 net of repayments totaled nil.

Investing activities provided $951.0 million of cash in fiscal 2021 primarily due to the repayment of the Secured Note receivable by GCU for $969.9 million.

In 2022 and 2021 cash used in investing activities was primarily related to capital expenditures of $35.2 million and $28.9 million, respectively.

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

Proceeds from investments, net of purchases of short-term investments was $10.5 million in fiscal 2021.

Proceeds from investments was $10.6 million in fiscal 2020.

In 2021, the Company elected to utilize its excess cash balances from both operating cash flows and the payoff of the Secured Note to repurchase its shares.

Purchases from investments, net of proceeds, were $61.5 million.

Proceeds from investments, net of purchases of short-term investments, were $10.5 million in fiscal 2021.

In 2022 and 2021, the Company elected to utilize its excess cash balances from both operating cash flows and the payoff of the Secured Note to repurchase its shares.

Cash Flows from Financing Activities

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Financing activities consumed $604.2 million of cash in fiscal 2022 compared to $908.9 in fiscal 2021.

During 2021 and 2020, principal and revolver payments were $107.8 million and $33.1 million, respectively.

2020 payments represented quarterly term loan repayments and 2021 payments represented quarterly term loan repayments through the third quarter with the remaining balance of the credit facility paid and the credit facility terminated in October 2021, when the Secured Note receivable began to be repaid by GCU.

Proceeds received from option exercises totaled $2.7 million in fiscal 2021 and $0.9 million in fiscal 2020.

During 2021 principal and revolver payments were $107.8 million.

2021 payments represented quarterly term loan repayments through the third quarter with the remaining balance of the credit facility paid and the credit facility terminated in October 2021, when the Secured Note receivable began to be repaid by GCU.

Proceeds received from option exercises totaled $2.7 million in fiscal 2021.

During fiscal 2022 and 2021, $599.6 million and $797.8 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 portion of its cash flows from operations and the remaining proceeds from the repayment of the Secured Note receivable to repurchase its shares.

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

Share Repurchase Program

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

(ii) loss on transaction;

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

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

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

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contributions in lieu of state income taxes (a)

reversal of credit loss reserve (b)

share-based compensation (c)

estimated litigation and regulatory reserves (d)

loss on fixed asset disposal (b)

reversal of credit loss reserve (c)

share-based compensation (d)

litigation and regulatory reserves (e)

Adjusted EBITDA

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

(b) Represents the reversal of the credit loss reserve on the Secured Note receivable due to repayment in full by GCU in the fourth quarter of 2021.

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

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

(b) Represent loss on fixed asset disposals.

(c) Represents the reversal of the credit loss reserve on the Secured Note receivable due to repayment in full by GCU in the fourth quarter of 2021.

(d) Reflects share-based compensation expense related to GCE employees.

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

Recent Accounting Pronouncements

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

What changed 10-K

Item 7. Management’s Discussion and Analysis