Strategic Education, Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Strategic Education, Inc. Report of Independent Registered Public Accounting Firm (PCAOB ID: 238 ) 68 Consolidated Balance Sheets as of December 31, 20 20 and 202 1 70 Consolidated Statements of Income for each of the three years in the period ended December 31, 202 1 71 Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 202 1 71 Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 202 1 72 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 202 1 73 Notes to Consolidated Financial Statements 74 All other schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. 67 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Strategic Education, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Strategic Education, Inc. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of income, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 68 Table of Contents Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Strayer University Graduation Fund Liability – Undergraduate Degree Programs As described in Note 4 to the consolidated financial statements, the Company’s Strayer University Graduation Fund liability was $52 million as of December 31, 2021, of which $48.6 million related to students enrolled in undergraduate degree programs. Strayer University offers the Graduation Fund, a program which allows undergraduate and graduate students to earn tuition credits that are redeemable in the final year of a student’s course of study if he or she successfully remains in the program. The Company defers the value of the related performance obligation associated with the credits estimated to be redeemed in the future. Management’s estimate of the benefits that will be redeemed in the future, or the estimated redemption rate, is based on its historical experience of student persistence toward completion of a course of study within this program and similar programs. The principal considerations for our determination that performing procedures relating to the Strayer University Graduation Fund liability for undergraduate degree programs is a critical audit matter are (i) the significant judgment by management in estimating the liability and (ii) the high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s estimate of the liability and the estimated redemption rate assumption. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the estimation of the Graduation Fund liability for undergraduate degree programs including controls over the estimated redemption rate assumption. These procedures also included, among others, testing management’s process for estimating the Graduation Fund liability for undergraduate degree programs, including (i) evaluating the appropriateness of the methodology; (ii) testing the completeness, accuracy and relevance of the underlying data used in management’s estimate; and (iii) evaluating the reasonableness of the estimated redemption rate assumption for the undergraduate degree programs. Evaluating management’s estimated redemption rate assumption involved evaluating whether the assumption was reasonable considering (i) historical estimated redemption rates and (ii) whether the assumption was consistent with evidence obtained in other areas of the audit. /s/ PricewaterhouseCoopers LLP Washington, DC February 28, 2022 We have served as the Company’s auditor since 1993. 69 Table of Contents STRATEGIC EDUCATION, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) December 31, 2020 December 31, 2021 ASSETS Current assets: Cash and cash equivalents $ 187,509 $ 268,918 Marketable securities 7,557 6,501 Tuition receivable, net 50,169 51,277 Income taxes receivable 1,429 313 Other current assets 39,458 40,777 Total current assets 286,122 367,786 Property and equipment, net 158,854 150,589 Right-of-use lease assets 120,687 149,587 Marketable securities, non-current 30,270 23,377 Intangible assets, net 326,420 276,380 Goodwill 1,318,526 1,285,864 Other assets 54,928 52,297 Total assets $ 2,295,807 $ 2,305,880 LIABILITIES & STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $ 104,742 $ 95,518 Contract liabilities 60,501 73,232 Lease liabilities 34,809 27,005 Total current liabilities 200,052 195,755 Long-term debt 141,823 141,630 Deferred income tax liabilities 53,407 44,595 Lease liabilities, non-current 106,151 162,821 Other long-term liabilities 46,055 47,089 Total liabilities 547,488 591,890 Commitments and contingencies Stockholders’ equity: Common stock, par value $ 0.01 ; 32,000,000 shares authorized; 24,418,939 and 24,592,098 shares issued and outstanding at December 31, 2020 and 2021, respectively 244 246 Additional paid-in capital 1,519,549 1,529,969 Accumulated other comprehensive income 48,880 9,203 Retained earnings 179,646 174,572 Total stockholders’ equity 1,748,319 1,713,990 Total liabilities and stockholders’ equity $ 2,295,807 $ 2,305,880 The accompanying notes are an integral part of these consolidated financial statements. 70 Table of Contents STRATEGIC EDUCATION, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) For the Year Ended December 31, 2019 2020 2021 Revenues $ 997,137 $ 1,027,653 $ 1,131,686 Costs and expenses: Instructional and support costs 530,604 532,661 608,261 General and administration 272,411 295,231 361,345 Amortization of intangible assets 61,667 64,225 51,495 Merger and integration costs 21,923 13,770 11,201 Restructuring costs — 12,382 25,472 Total costs and expenses 886,605 918,269 1,057,774 Income from operations 110,532 109,384 73,912 Other income 13,192 4,573 2,687 Income before income taxes 123,724 113,957 76,599 Provision for income taxes 42,586 27,689 21,512 Net income $ 81,138 $ 86,268 $ 55,087 Earnings per share: Basic $ 3.73 $ 3.81 $ 2.30 Diluted $ 3.67 $ 3.77 $ 2.28 Weighted average shares outstanding: Basic 21,725 22,633 23,955 Diluted 22,097 22,860 24,122 STRATEGIC EDUCATION, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) For the Year Ended December 31, 2019 2020 2021 Net income $ 81,138 $ 86,268 $ 55,087 Other comprehensive income: Foreign currency translation adjustments — 48,068 ( 39,392 ) Unrealized gains (losses) on marketable securities, net of tax 201 579 ( 285 ) Comprehensive income $ 81,339 $ 134,915 $ 15,410 The accompanying notes are an integral part of these consolidated financial statements. 71 Table of Contents STRATEGIC EDUCATION, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except share data) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income Total Shares Par Value Balance at December 31, 2018 21,743,498 $ 217 $ 1,306,653 $ 118,322 $ 32 $ 1,425,224 Stock-based compensation — — 12,033 83 — 12,116 Exercise of stock options, net 103,364 2 ( 1,775 ) — — ( 1,773 ) Issuance of restricted stock, net 117,947 1 ( 7,473 ) — — ( 7,472 ) Common stock dividends ($ 2.10 per share) — — — ( 46,724 ) — ( 46,724 ) Unrealized gains on marketable securities, net of tax — — — — 201 201 Net income — — — 81,138 — 81,138 Balance at December 31, 2019 21,964,809 $ 220 $ 1,309,438 $ 152,819 $ 233 $ 1,462,710 Impact of adoption of new accounting standard — — — ( 3,311 ) — ( 3,311 ) Issuance of common stock in public offering 2,185,000 22 220,226 — — 220,248 Stock-based compensation — — 14,593 17 — 14,610 Exercise of stock options, net 20,522 — 1,244 — — 1,244 Issuance of restricted stock, net 250,377 2 ( 25,847 ) — — ( 25,845 ) Repurchase of common stock ( 1,769 ) — ( 105 ) ( 142 ) — ( 247 ) Common stock dividends ($ 2.40 per share) — — — ( 56,005 ) — ( 56,005 ) Foreign currency translation adjustment — — — — 48,068 48,068 Unrealized gains on marketable securities, net of tax — — — — 579 579 Net income — — — 86,268 — 86,268 Balance at December 31, 2020 24,418,939 $ 244 $ 1,519,549 $ 179,646 $ 48,880 $ 1,748,319 Stock-based compensation — — 18,094 55 — 18,149 Exercise of stock options, net 1,632 — 113 — — 113 Issuance of restricted stock, net 248,496 3 ( 2,997 ) — — ( 2,994 ) Repurchase of common stock ( 76,969 ) ( 1 ) ( 4,790 ) ( 1,114 ) — ( 5,905 ) Common stock dividends ($ 2.40 per share) — — — ( 59,102 ) — ( 59,102 ) Foreign currency translation adjustment — — — — ( 39,392 ) ( 39,392 ) Unrealized losses on marketable securities, net of tax — — — — ( 285 ) ( 285 ) Net income — — — 55,087 — 55,087 Balance at December 31, 2021 24,592,098 $ 246 $ 1,529,969 $ 174,572 $ 9,203 $ 1,713,990 The accompanying notes are an integral part of these consolidated financial statements. 72 Table of Contents STRATEGIC EDUCATION, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) 2019 2020 2021 Cash flows from operating activities: Net income $ 81,138 $ 86,268 $ 55,087 Adjustments to reconcile net income to net cash provided by operating activities: Loss on sale of marketable securities — — 781 Gain on sale of property and equipment — — ( 2,656 ) Amortization of deferred financing costs 333 466 552 Amortization of investment discount/premium 296 146 70 Depreciation and amortization 104,861 109,154 103,416 Deferred income taxes ( 8,037 ) ( 13,431 ) ( 7,710 ) Stock-based compensation 12,160 14,610 18,149 Impairment of right-of-use lease assets 6,046 848 18,876 Changes in assets and liabilities: Tuition receivable, net 1,770 19,659 ( 196 ) Other assets ( 2,129 ) ( 32,326 ) ( 6,964 ) Accounts payable and accrued expenses 245 ( 22,685 ) ( 6,700 ) Income taxes payable and income taxes receivable 1,198 ( 4,020 ) 1,196 Contract liabilities 7,716 ( 10,095 ) 13,995 Other liabilities ( 3,451 ) ( 5,689 ) ( 7,369 ) Net cash provided by operating activities 202,146 142,905 180,527 Cash flows from investing activities: Cash paid for acquisition, net of cash acquired — ( 628,759 ) — Purchases of property and equipment ( 38,689 ) ( 46,812 ) ( 49,433 ) Purchases of marketable securities ( 40,481 ) ( 1,863 ) — Proceeds from marketable securities 43,762 36,192 9,300 Proceeds from sale of property and equipment — — 8,331 Other investments ( 2,658 ) ( 950 ) ( 1,292 ) Net cash used in investing activities ( 38,066 ) ( 642,192 ) ( 33,094 ) Cash flows from financing activities: Net proceeds from issuance of common stock — 220,248 — Proceeds from long-term debt — 145,630 — Common dividends paid ( 46,625 ) ( 55,956 ) ( 59,045 ) Net payments for stock awards ( 9,195 ) ( 24,741 ) ( 2,938 ) Payments on long-term debt — ( 3,807 ) — Payment of deferred financing costs — ( 1,940 ) — Repurchase of common stock — ( 247 ) ( 5,905 ) Net cash provided by (used in) financing activities ( 55,820 ) 279,187 ( 67,888 ) Effect of exchange rate changes on cash, cash equivalents, and restricted cash — 1,623 ( 2,353 ) Net increase (decrease) in cash, cash equivalents, and restricted cash 108,260 ( 218,477 ) 77,192 Cash, cash equivalents, and restricted cash — beginning of period 312,237 420,497 202,020 Cash, cash equivalents, and restricted cash — end of period $ 420,497 $ 202,020 $ 279,212 Noncash transactions: Non-cash additions to property and equipment $ 5,562 $ 4,079 $ 9,308 The accompanying notes are an integral part of these consolidated financial statements. 73 Table of Contents 1. Nature of Operations Strategic Education, Inc. (“Strategic Education” or the “Company”), a Maryland corporation, is an education services company that provides access to high-quality education through campus-based and online post-secondary education offerings, as well as through programs to develop job-ready skills for high-demand markets. Strategic Education’s portfolio of companies is dedicated to closing the skills gap by placing adults on the most direct path between learning and employment. As discussed in Note 2 and Note 3, the Company completed its acquisition of Torrens University and associated assets in Australia and New Zealand (“ANZ”) on November 3, 2020. As discussed in Note 20, beginning in the first quarter of 2021 the Company changed the way management reports financial information relied on by the Chief Operating Decision Maker (“CODM”) to evaluate performance and allocate the resources of the Company. The Company's revised organizational structure includes the following three operating and reportable segments: (1) U.S. Higher Education, which is primarily comprised of the Company's previous Strayer University and Capella University segments and is focused on providing flexible and affordable certificate and degree programs to working adults; (2) Education Technology Services, a new segment that is primarily focused on developing and maintaining relationships with employers to build employee education benefits programs; and (3) Australia/New Zealand, which provides certificate and degree programs in Australia and New Zealand. During the first three quarters of 2021, the Education Technology Services segment was called the Alternative Learning segment. The Australia/New Zealand segment was not changed as a result of the Company's reorganization. Prior period segment disclosures have been restated to conform to the current period presentation. 2. Significant Accounting Policies Financial Statement Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in the consolidated financial statements. On November 3, 2020, the Company completed its acquisition of ANZ, whereby the Company was deemed the acquirer in the business combination for accounting purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, the financial results of the Company as of and for any periods ended prior to November 3, 2020 do not include the financial results of ANZ and therefore are not directly comparable. Below is a description of the nature of the costs included in the Company’s operating expense categories. Instructional and support costs (“I&SC”) generally contain items of expense directly attributable to activities that support students. This expense category includes salaries and benefits of faculty and academic administrators, as well as admissions and administrative personnel who support and serve student interests. Instructional and support costs also include course development costs and costs associated with delivering course content, including educational supplies, facilities, and all other physical plant and occupancy costs, with the exception of costs attributable to the corporate offices. Bad debt expense incurred on delinquent student account balances is also included in instructional and support costs. General and administration (“G&A”) expenses include salaries and benefits of management and employees engaged in finance, human resources, legal, regulatory compliance, marketing and other corporate functions. Also included are the costs of advertising and production of marketing materials. General and administration expense also includes the facilities occupancy and other related costs attributable to such functions. Amortization of intangible assets consists of amortization and depreciation expense related to intangible assets and software assets acquired through the Company's merger with Capella Education Company (“CEC”) and the Company's acquisition of ANZ. Merger and integration costs include integration expenses associated with the Company's merger with CEC, and transaction and integration expenses associated with the Company's acquisition of ANZ. Restructuring costs include severance and other personnel-related expenses from voluntary and involuntary employee terminations, as well as early lease termination costs and impairments of right-of-use lease assets and fixed assets associated with vacating leased space in connection with the Company's restructuring plan. See Note 5 for additional information. 74 Table of Contents Foreign Currency Translation and Transaction Gains and Losses The United States Dollar (“USD”) is the functional currency of the Company and its subsidiaries operating in the United States. The financial statements of its foreign subsidiaries are maintained in their functional currencies. The functional currency of each of the foreign subsidiaries is the currency of the economic environment in which the subsidiary primarily does business. Financial statements of foreign subsidiaries are translated into USD using the exchange rates applicable to the dates of the financial statements. Assets and liabilities are translated into USD using the period-end spot foreign exchange rates. Income and expenses are translated at the weighted-average exchange rates in effect during the period. Equity accounts are translated at historical exchange rates. The effects of these translation adjustments are reported as a component of accumulated other comprehensive income within shareholders’ equity. For any transaction that is in a currency different from the entity’s functional currency, the Company records a net gain or loss based on the difference between the exchange rate at the transaction date and the exchange rate at the transaction settlement date (or rate at period end, if unsettled) in the consolidated statements of income. Cash and Cash Equivalents Cash and cash equivalents consist of cash maintained in mostly FDIC-insured bank accounts and cash invested in bank overnight deposits and money market mutual funds. The Company places its cash and temporary cash investments with various financial institutions. The Company considers all highly liquid instruments purchased with a maturity of three months or less at the date of purchase to be cash equivalents. Concentration of Credit Risk Most cash and cash equivalent balances are in excess of the FDIC insurance limit. The Company has not experienced any losses on its cash and cash equivalents. Restricted Cash In the United States, a significant portion of the Company’s revenues are funded by various federal and state government programs. The Company generally does not receive funds from these programs prior to the start of the corresponding academic term. The Company may be required to return certain funds for students who withdraw from a U.S. Higher Education institution during the academic term. The Company had approximately $ 0.1 million and $ 0.7 million of these unpaid obligations as of December 31, 2020 and 2021, respectively. In Australia and New Zealand, advance tuition payments from international students are required to be restricted until a student commences his or her course. In addition, a portion of tuition prepayments from students enrolled in a vocational education and training program are held in trust by a third party law firm to adhere to tuition protection requirements. As of December 31, 2020 and 2021, the Company had approximately $ 13.9 million and $ 9.1 million, respectively, of restricted cash related to these requirements in Australia and New Zealand. These balances are recorded as restricted cash and included in other current assets in the consolidated balance sheets. As part of commencing operations in Pennsylvania in 2003, the Company is required to maintain a “minimum protective endowment” of at least $ 0.5 million in an interest-bearing account as long as the Company operates its campuses in the state. The Company holds these funds in an interest-bearing account which is included in other assets. The following table illustrates the reconciliation of cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows as of December 31, 2020 and 2021 (in thousands): As of December 31, 2020 2021 Cash and cash equivalents $ 187,509 $ 268,918 Restricted cash included in other current assets 14,011 9,794 Restricted cash included in other assets 500 500 Total cash, cash equivalents, and restricted cash shown in the statement of cash flows $ 202,020 $ 279,212 Marketable Securities Management determines the appropriate designation of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date. All of the Company’s marketable securities are designated as available-for-sale and consist of tax-exempt municipal securities and corporate debt securities. 75 Table of Contents Available-for-sale marketable securities are carried at fair value as determined by quoted market prices or other inputs either directly or indirectly observable in the marketplace for identical or similar assets, with unrealized gains and losses, net of tax, recognized as a component of accumulated other comprehensive income within shareholders’ equity. Management reviews the fair value of the portfolio at least quarterly, and evaluates individual securities with fair value below amortized cost at the balance sheet date for impairment. In order to determine whether there is an impairment, management evaluates whether the Company intends to sell the impaired security and whether it is more likely than not that the Company will be required to sell the security before recovering its amortized cost basis. If management intends to sell an impaired debt security, or it is more likely than not the Company will be required to sell the security prior to recovering its amortized cost basis, an impairment is deemed to have occurred. The amount of an impairment related to a credit loss, or securities that management intends to sell before recovery, is recognized in earnings. The amount of an impairment on debt securities related to other factors is recorded consistent with changes in the fair value of all other available-for-sale securities as a component of accumulated other comprehensive income within shareholders’ equity. The cost of securities sold is based on the specific identification method. Amortization of premiums, accretion of discounts, interest, dividend income and realized gains and losses are included in other income. The contractual maturity date of available-for-sale securities is based on the days remaining to the effective maturity. The Company classifies marketable securities as either current or non-current assets based on management’s intent with regard to usage of those funds, which is dependent upon the security's maturity date and liquidity considerations based on current market conditions. If management intends to hold the securities for longer than one year as of the balance sheet date, they are classified as non-current. Tuition Receivable and Allowance for Credit Losses The Company adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”) on January 1, 2020, which revised the accounting requirements related to the measurement of credit losses and requires organizations to measure all expected credit losses for financial assets based on historical experience, current conditions, and reasonable and supportable forecasts about collectability. The Company records tuition receivable and contract liabilities for its students upon the start of the academic term or program. Tuition receivables are not collateralized; however, credit risk is minimized as a result of the diverse nature of the Company's student bases and through the participation of the majority of the students in federally funded financial aid programs. An allowance for credit losses is established based upon historical collection rates by age of receivable and adjusted for reasonable expectations of future collection performance, net of estimated recoveries. These collection rates incorporate historical performance based on a student’s current enrollment status, likelihood of future enrollment, degree mix trends and changes in the overall economic environment. In the event that current collection trends differ from historical trends, an adjustment is made to the allowance for credit losses and bad debt expense. The Company’s tuition receivable and allowance for credit losses were as follows as of December 31, 2020 and 2021 (in thousands): December 31, 2020 December 31, 2021 Tuition receivable $ 99,942 $ 100,060 Allowance for credit losses ( 49,773 ) ( 48,783 ) Tuition receivable, net $ 50,169 $ 51,277 Approximately $ 3.6 million and $ 2.5 million of tuition receivable are included in other assets as of December 31, 2020 and 2021, respectively, because these amounts are expected to be collected after 12 months. The following table illustrates changes in the Company’s allowance for credit losses for each of the three years ended December 31, 2021 (in thousands): 2019 2020 2021 Allowance for credit losses, beginning of period $ 28,457 $ 30,931 $ 49,773 Impact of adopting ASC 326 — 4,571 — Additions charged to expense 49,072 49,130 43,040 Additions from merger 2,207 3,503 — Write-offs, net of recoveries ( 48,805 ) ( 38,362 ) ( 44,030 ) Allowance for credit losses, end of period $ 30,931 $ 49,773 $ 48,783 76 Table of Contents Property and Equipment Property and equipment are stated at cost, less accumulated depreciation and amortization. In accordance with the Property, Plant, and Equipment Topic, ASC 360, the carrying values of the Company’s assets are re-evaluated when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that an impairment loss has occurred based on expected undiscounted future cash flows, then a loss is recognized using a fair value-based model. During the year ended December 31, 2021, the Company recognized $ 2.7 million of impairment charges related to property and equipment, which is included in Restructuring costs on the consolidated statements of income. Depreciation and amortization of property and equipment is calculated using the straight-line method over the estimated useful lives ranging from three years to 40 years. Depreciation and amortization expense was $ 49.5 million, $ 51.8 million and $ 59.1 million for the years ended December 31, 2019, 2020, and 2021, respectively. Included in the 2019, 2020, and 2021 depreciation and amortization expense amount is $ 6.3 million, $ 6.9 million and $ 7.2 million of depreciation expense, respectively, related to computer software acquired in the Capella Education Company merger in 2018 and content acquired in the ANZ acquisition in 2020, which is included in Amortization of intangible assets on the consolidated statements of income. Repairs and maintenance costs are expensed as incurred. During the year ended December 31, 2021, the Company evaluated its leased and owned campus portfolio, which resulted in the decision to downsize or exit several of its underutilized campus locations, including two of its owned U.S. Higher Education campuses. In 2021, the Company sold the long-lived assets, consisting of land, buildings, and building improvements, related to the two owned campuses and recognized a $ 2.7 million gain on sale, which is included in Restructuring costs on the consolidated statements of income. Construction in progress includes costs of computer software developed for internal use, which is accounted for in accordance with the Internal-Use Software Topic, ASC 350-40. Computer software development costs that are incurred in the preliminary project stage are expensed as incurred. During the development stage, direct consulting costs, payroll, and payroll-related costs for employees that are directly associated with the project are capitalized and amortized over the estimated useful life of the software once placed into operation. Purchases of property and equipment and changes in accounts payable for each of the three years in the period ended December 31, 2021 in the consolidated statements of cash flows have been adjusted to exclude noncash purchases of property and equipment transactions during that period. Deferred Costs The Company defers certain commissions earned by third party international agents that are considered incremental and recoverable costs of obtaining a contract with customers of ANZ. These costs are amortized over the period of benefit which ranges from one to two years . In accordance with ASU 2018-15, which the Company adopted on January 1, 2020, the Company defers implementation costs incurred in cloud computing arrangements and amortizes these costs over the term of the arrangement. Leases The Company determines if an arrangement is a lease at inception. The Company analyzes each lease agreement to determine whether it should be classified as a finance lease or operating lease. Leases with an initial term longer than 12 months are included in right-of-use (“ROU”) lease assets, lease liabilities, and lease liabilities, non-current on the Company's consolidated balance sheets. The Company combines lease and non-lease components for all leases. ROU lease assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU lease assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the implicit interest rate for most of the Company's leases cannot be readily determined, the Company uses its incremental borrowing rate based on information available at the commencement date in determining the present value of lease payments. Lease expense for lease payments is recognized on a straight-line basis over the lease term for operating leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company subleases certain building space to third parties and sublease income is recognized on a straight-line basis over the lease term. See Note 8 for additional information. Fair Value The Fair Value Measurement Topic, ASC 820-10 (“ASC 820-10”), establishes a framework for measuring fair value, establishes a fair value hierarchy based upon the observability of inputs used to measure fair value, and expands disclosures 77 Table of Contents about fair value measurements. Assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level input that is significant to the fair value measurement. Under ASC 820-10, fair value of an investment is the price that would be received to sell an asset or to transfer a liability to an entity in an orderly transaction between market participants at the measurement date. The hierarchy gives the highest priority to assets and liabilities with readily available quoted prices in an active market and lowest priority to unobservable inputs, which require a higher degree of judgment when measuring fair value, as follows: • Level 1 assets or liabilities use quoted prices in active markets for identical assets or liabilities as of the measurement date; • Level 2 assets or liabilities use observable inputs, other than quoted market prices, that are either directly or indirectly observable in the marketplace for identical or similar assets and liabilities; and • Level 3 assets or liabilities use unobservable inputs that are supported by little or no market activity. The Company’s assets and liabilities that are subject to fair value measurement are categorized in one of the three levels above. Fair values are based on the inputs available at the measurement dates, and may rely on certain assumptions that may affect the valuation of fair value for certain assets or liabilities. Goodwill and Intangible Assets Goodwill represents the excess of the purchase price of an acquired business over the amount assigned to the assets acquired and liabilities assumed in a business combination. Indefinite-lived intangible assets, which include trade names, are recorded at fair value on their acquisition date. An indefinite life was assigned to the trade names because they have the continued ability to generate cash flows indefinitely. Goodwill and the indefinite-lived intangible assets are assessed at least annually for impairment on the first day of the fourth quarter, or more frequently if events occur or circumstances change between annual tests that would more likely than not reduce the fair value of the respective reporting unit or indefinite-lived intangible asset below its carrying amount. The Company identifies its reporting units by assessing whether the components of its operating segments constitute businesses for which discrete financial information is available and management regularly reviews the operating results of those components. The Company's goodwill impairment test includes an option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount based on the qualitative assessment, or that a qualitative assessment should not be performed for a reporting unit, the Company proceeds with performing a quantitative goodwill impairment test. In performing the quantitative goodwill impairment test, the Company compares the fair value of the reporting unit to the carrying value of its net assets. If the fair value of the reporting unit exceeds the carrying value of the net assets of the reporting unit, goodwill is not impaired and no further testing is required. If the carrying value of the net assets of the reporting unit exceeds the fair value of the reporting unit, an impairment loss is recognized to the extent the fair value of the reporting unit is less than the carrying value of the reporting unit's net assets. Finite-lived intangible assets that are acquired in business combinations are recorded at fair value on their acquisition dates and are amortized on a straight-line basis over the estimated useful life of the asset. Finite-lived intangible assets consist of student relationships. The Company reviews its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are not recoverable, a potential impairment loss is recognized to the extent the carrying amount of the assets exceeds the fair value of the assets. Authorized Stock The Company has authorized 32,000,000 shares of common stock, par value $ 0.01 , of which 24,418,939 and 24,592,098 shares were issued and outstanding as of December 31, 2020 and 2021, respectively. On August 10, 2020, the Company completed a public offering of 2,185,000 shares of its common stock for total cash proceeds of $ 220.2 million, net of underwriting discounts and offering costs of $ 9.2 million. The Company also has authorized 8,000,000 shares of preferred stock, none of which is issued or outstanding. Before any preferred stock may be issued in the future, the Board of Directors would need to establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, and the terms or conditions of the redemption of the preferred stock. The Board of Directors declared a quarterly cash dividend of $ 0.60 per common share for each quarter of 2021. The Company paid these quarterly cash dividends in each of March, June, September and December of 2021. 78 Table of Contents Advertising Costs The Company expenses advertising costs in the quarter incurred. Advertising costs were $ 149.8 million, $ 161.5 million and $ 165.1 million for the years ended December 31, 2019, 2020, and 2021, respectively, and are included within General and administration expense in our consolidated statements of income. Stock-Based Compensation As required by the Stock Compensation Topic, ASC 718, the Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors, including employee stock options, restricted stock, restricted stock units, performance stock units, and employee stock purchases related to the Company’s Employee Stock Purchase Plan, based on estimated fair values. The fair value of restricted stock awards granted is measured using the fair value of the Company's common stock on the date of grant or the most recent modification date, whichever is later. The Company records compensation expense for all share-based payment awards ratably over the vesting period. For awards with graded vesting, the Company measures fair value and records compensation expense separately for each vesting tranche. Stock-based compensation expense recognized in the consolidated statements of income for each of the three years in the period ended December 31, 2021 is based on awards ultimately expected to vest and, therefore, has been adjusted for estimated forfeitures. The Company estimates forfeitures at the time of grant and revises the estimate, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The forfeiture rate used is based on historical experience. The Company also assesses the likelihood that performance criteria associated with performance-based awards will be met. If it is determined that it is more likely than not that performance criteria will not be achieved, the Company revises its estimate of the number of shares it believes will ultimately vest. Refer to Note 15 for additional information. Net Income Per Share Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the periods. Diluted earnings per share reflects the potential dilution that could occur assuming conversion or exercise of all dilutive unexercised stock options, restricted stock, and restricted stock units. The dilutive effect of stock awards was determined using the treasury stock method. Under the treasury stock method, all of the following are assumed to be used to repurchase shares of the Company’s common stock: (1) the proceeds received from the exercise of stock options, and (2) the amount of compensation cost associated with the stock awards for future service not yet recognized by the Company. Stock options are not included in the computation of diluted earnings per share when the stock option exercise price of an individual grant exceeds the average market price for the period. Set forth below is a reconciliation of shares used to calculate basic and diluted earnings per share for each of the three years ended December 31, 2021 (in thousands): 2019 2020 2021 Weighted average shares outstanding used to compute basic earnings per share 21,725 22,633 23,955 Incremental shares issuable upon the assumed exercise of stock options 54 14 5 Unvested restricted stock and restricted stock units 318 213 162 Shares used to compute diluted earnings per share 22,097 22,860 24,122 Anti-dilutive shares excluded from the diluted earnings per share calculation 16 63 324 Comprehensive Income Comprehensive income includes net income and all changes in the Company’s equity during a period from non-owner sources, which for the Company consists of unrealized gains and losses on available-for-sale marketable securities, net of tax, and foreign currency translation adjustments. As of December 31, 2019, 2020, and 2021, the balance of accumulated other comprehensive income was $ 233,000 , net of tax of $ 90,000 , $ 48.9 million, net of tax of $ 0.3 million, and $ 9.2 million, net of tax of $ 0.2 million, respectively. During the year ended December 31, 2020, approximately $ 25,000 , net of tax of $ 10,000 , of unrealized gains on available-for-sale marketable securities was reclassified out of accumulated other comprehensive income to Other income on the consolidated statements of income. There were no reclassifications out of accumulated other comprehensive income to net income for the years ended December 31, 2019 and 2021. 79 Table of Contents Income Taxes The Company provides for deferred income taxes based on temporary differences between financial statement and income tax bases of assets and liabilities using enacted tax rates in effect in the year in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. The Income Taxes Topic, ASC 740, requires the company to determine whether uncertain tax positions should be recognized within the Company’s financial statements. The Company recognizes interest and penalties, if any, related to uncertain tax positions in income tax expense. Uncertain tax positions are recognized when a tax position, based solely on its technical merits, is determined more likely than not to be sustained upon examination. Upon determination, uncertain tax positions are measured to determine the amount of benefit that is greater than 50% likely to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. A tax position is derecognized if it no longer meets the more likely than not threshold of being sustained. The tax years since 2018 remain open for federal tax examination and the tax years since 2017 remain open to examination by state and local taxing jurisdictions in which the Company is subject. Other Investments The Company holds investments in certain limited partnerships that invest in innovative companies in the health care and education-related technology fields. The Company accounts for the investments in limited partnerships under the equity method. The Company's pro-rata share in the net income of the limited partnerships is included in Other income in our consolidated statements of income. The Company accounts for the investments made through its venture fund, SEI Ventures, at cost less impairment as these investments do not have readily determinable fair value. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the period reported. The most significant management estimates include allowances for credit losses, useful lives of property and equipment and intangible assets, incremental borrowing rates, potential sublease income and vacancy periods, accrued expenses, forfeiture rates and the likelihood of achieving performance criteria for stock-based awards, value of free courses earned by students that will be redeemed in the future, valuation of goodwill and intangible assets, and the provision for income taxes. During the years ended December 31, 2020 and 2021, management estimates also include potential impacts the COVID-19 pandemic will have on student enrollment, tuition pricing, and collections of tuition receivables in future periods. The duration and severity of the COVID-19 pandemic and its impact on the Company’s consolidated financial statements is subject to uncertainty. Actual results could differ from those estimates. Recently Issued Accounting Standards Not Yet Adopted ASUs recently issued by the FASB but not yet effective are not expected to have a material effect on the Company’s consolidated financial statements. 3. Business Combinations Acquisition of Torrens University and associated assets in Australia and New Zealand On November 3, 2020, the Company completed its acquisition of Torrens University and associated assets in Australia and New Zealand pursuant to the sale and purchase agreement dated July 29, 2020. The acquired operations include Torrens University Australia, Think Education, and Media Design School, which together provide diversified student curricula to approximately 19,000 students across five industry verticals, including business, hospitality, health, education, creative technology and design. Pursuant to the purchase agreement, the aggregate consideration paid was approximately $ 658.4 million in cash, which reflected the original agreed upon purchase price of $ 642.7 million, plus a $ 15.7 million adjustment reflecting $ 11.0 million of net cash at close, and $ 4.7 million related to higher net working capital. The Company applied the acquisition method of accounting to ANZ, whereby the excess of the acquisition date fair value of consideration transferred over the fair value of identifiable net assets was allocated to goodwill. Goodwill reflects workforce 80 Table of Contents and synergies expected from cost savings, operations, and revenue enhancements of the combined company that are expected to result from the acquisition. The goodwill recorded as part of the acquisition was allocated to the Australia/New Zealand reportable segment in the amount of $ 546.3 million, and is not deductible for tax purposes. The Company incurred $ 8.1 million of acquisition-related costs related to this acquisition. These costs were primarily attributable to legal, financial, and accounting support services incurred by the Company in connection with the acquisition, and are included in Merger and integration costs in the accompanying consolidated statements of income. During the year ended December 31, 2021, the Company finalized the fair value of assets acquired and liabilities assumed. In 2021, the Company recorded a measurement period adjustment that reduced Property and equipment, net by $ 0.3 million and increased goodwill by $ 0.3 million. This measurement period adjustment is reflected in the fair value of assets acquired and liabilities assumed in the table below. The fair value of assets acquired and liabilities assumed as well as a reconciliation to consideration transferred is presented in the table below (in thousands): Cash and cash equivalents $ 16,082 Tuition receivable 24,447 Other current assets 17,713 Property and equipment, net 41,508 Right-of-use lease assets 44,229 Intangible assets 103,161 Goodwill 546,315 Other assets 2,799 Total assets acquired 796,254 Accounts payable and accrued expenses ( 33,876 ) Income taxes payable ( 229 ) Contract liabilities ( 33,309 ) Lease liabilities ( 9,685 ) Deferred income taxes ( 18,712 ) Lease liabilities, non-current ( 34,544 ) Other long-term liabilities ( 7,520 ) Total liabilities assumed ( 137,875 ) Total consideration $ 658,379 The table below presents a summary of intangible assets acquired (in thousands) and the weighted average useful lives of these assets: Fair Value Weighted Average Useful Life in Years Trade names $ 68,774 Indefinite Student relationships 34,387 3 $ 103,161 The Company determined the fair value of assets acquired and liabilities assumed based on assumptions that reasonable market participants would use while employing the concept of highest and best use of the assets and liabilities. The Company utilized the following assumptions, some of which include significant unobservable inputs which would qualify the valuations as Level 3 measurements, and valuation methodologies to determine fair value: • Intangible assets ▪ Trade names - to determine the fair value of the trade names, the Company used the relief from royalty approach, which involved the use of estimates and assumptions with respect to the timing and amounts of future cash flows, revenue growth rates, royalty rate, and discount rate. Key assumptions used in the valuation included revenue growth rates ranging from 2.5 % to 6.3 % per year, a royalty rate of 2.5 % and a discount rate of 11 %. 81 Table of Contents ▪ Student relationships - to determine the fair value of the student relationships, the Company used the excess earnings method, which involved the use of estimates and assumptions with respect to the timing and amounts of future cash flows, earnings before interest and taxes margins, annual attrition rate, and discount rate. Key assumptions used in the valuation included an annual attrition rate of 60 % and a discount rate of 11 %. • Property and equipment - Included in property and equipment is course content of $ 10.0 million. To determine the fair value of course content, the Company used the relief from royalty approach, which involved the use of estimates and assumptions with respect to the timing and amounts of future cash flows, revenue growth rates, royalty rate, and discount rate. Key assumptions used in the valuation included revenue growth rates ranging from 5.6 % to 6.2 %, a royalty rate of 3 % and a discount rate of 11 %. The course content will be amortized over 3 years. All other property and equipment was valued at estimated cost. • Contract liabilities - The Company estimated the fair value of contract liabilities using the cost build-up method, which represents the cost to deliver the services plus a normal profit margin. Based on this method, fair value of contract liabilities were estimated to be 70 % of carrying value as of the acquisition date. • Other current and noncurrent assets and liabilities - The carrying value of all other assets and liabilities approximated fair value at the time of acquisition. The operations of ANZ were included in the consolidated financial statements as of the acquisition date. The revenue and net loss for ANZ reported within the consolidated statements of income for the year ended December 31, 2020 were $ 23.4 million and $ 10.5 million, respectively. Pro Forma Financial information The following unaudited pro forma information has been presented as if the ANZ acquisition occurred on January 1, 2019. The information is based on the historical results of operations of the acquired business, adjusted for: • The allocation of purchase price and related adjustments, including the adjustments to amortization expense related to the fair value of intangible assets acquired; • The exclusion of acquisition-related costs incurred during the years ended December 31, 2019 and 2020; • Associated tax-related impacts of adjustments; and • Changes to align accounting policies. The pro forma results do not necessarily represent what would have occurred if the acquisition had actually taken place on January 1, 2019, nor do they represent the results that may occur in the future. The pro forma adjustments are based on available information and upon assumptions the Company believes are reasonable to reflect the impact of this acquisition on the Company’s historical financial information on a supplemental pro forma basis. The following table presents the Company's pro forma combined revenues and net income (in thousands). Pro forma results for the year ended December 31, 2021 are not presented below because the results of ANZ are included in the Company's December 31, 2021 consolidated statement of income. Pro Forma Combined Year Ended December 31, 2019 Year Ended December 31, 2020 Revenue $ 1,188,269 $ 1,244,440 Net Income 69,446 105,431 4. Revenue Recognition The Company’s revenues primarily consist of tuition revenue arising from educational services provided in the form of classroom instruction and online courses. Tuition revenue is deferred and recognized ratably over the period of instruction, which varies depending on the course format and chosen program of study. Strayer University’s educational programs and Capella University’s GuidedPath classes typically are offered on a quarterly basis, and such periods coincide with the Company’s quarterly financial reporting periods, while Capella University’s FlexPath courses are delivered over a twelve-week subscription period. Torrens University offers the majority of its education programs on a trimester system having three primary academic terms, which all occur within the calendar year. 82 Table of Contents The following table presents the Company’s revenues from contracts with customers disaggregated by material revenue category for the years ended December 31, 2019, 2020, and 2021 (in thousands): 2019 2020 2021 U.S. Higher Education Segment Tuition, net of discounts, grants and scholarships $ 923,534 $ 928,476 $ 795,266 Other (1) 39,518 38,103 34,004 Total U.S. Higher Education Segment 963,052 966,579 829,270 Australia/New Zealand Segment Tuition, net of discounts, grants and scholarships — 22,431 245,791 Other (1) — 950 4,333 Total Australia/New Zealand Segment — 23,381 250,124 Education Technology Services Segment (2) 34,085 37,693 52,292 Consolidated revenue $ 997,137 $ 1,027,653 $ 1,131,686 ___________________________________________________________ (1) Other revenue is primarily comprised of academic fees, sales of course materials, placement fees and other non-tuition revenue streams. (2) Education Technology Services revenue is primarily derived from tuition revenue. Revenues are recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those goods and services. The Company applies the five-step revenue model under ASC 606 to determine when revenue is earned and recognized. Arrangements with students may have multiple performance obligations. For such arrangements, the Company allocates net tuition revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on the prices charged to customers and observable market prices. The standalone selling price of material rights to receive free classes or scholarships in the future is estimated based on class tuition prices or amounts of scholarships, and likelihood of redemption based on historical student attendance and completion behavior. At the start of each academic term or program, a contract liability is recorded for academic services to be provided, and a tuition receivable is recorded for the portion of the tuition not paid in advance. Any cash received prior to the start of an academic term or program is recorded as a contract liability. Some students may be eligible for scholarship awards, the estimated value of which will be realized in the future and is deducted from revenue when earned, based on historical student attendance and completion behavior. Contract liabilities are recorded as a current or long-term liability in the consolidated balance sheets based on when the performance obligations are expected to be satisfied and the related benefits are expected to be realized. Substantially all of the contract liability balance classified as short term at the beginning of the year was recognized into revenue during the year ended December 31, 2021. Course materials are available to enable students to access electronically all required materials for courses in which they enroll during the quarter. Revenue derived from course materials is recognized ratably over the duration of the course as the Company provides the student with continuous access to these materials during the term. For sales of certain other course materials, the Company is considered the agent in the transaction, and as such, the Company recognizes revenue net of amounts owed to the vendor at the time of sale. Revenues also include certain academic fees recognized within the quarter of instruction, and certificate revenue and licensing revenue, which are recognized as the services are provided. Contract Liabilities - Graduation Fund Strayer University offers the Graduation Fund, which allows undergraduate and graduate students to earn tuition credits that are redeemable in the final year of a student’s course of study if he or she successfully remains in the program. Students registering in credit-bearing courses in any undergraduate or graduate degree program receive one free course for every three courses that the student successfully completes. To be eligible, students must meet all of Strayer University’s admission requirements, and must be enrolled in a bachelor’s or master's degree program. The Company’s employees and their dependents are not eligible for the program. Students who have more than one consecutive term of non-attendance lose any Graduation Fund credits earned to date, but may earn and accumulate new credits if the student is reinstated or readmitted by Strayer University in the future. In response to the COVID-19 pandemic, Strayer University temporarily allowed students to miss three consecutive terms without losing their Graduation Fund credits. Revenue from students participating in the Graduation Fund is recorded in accordance with ASC 606. The Company defers the value of the related performance obligation associated with the credits estimated to be redeemed in the future based on the 83 Table of Contents underlying revenue transactions that result in progress by the student toward earning the benefit. The Company’s estimate of the benefits that will be redeemed in the future is based on its historical experience of student persistence toward completion of a course of study within this program and similar programs. Each quarter, the Company assesses its assumptions underlying these estimates, and to date, any adjustments to the estimates have not been material. The amount estimated to be redeemed in the next 12 months is $ 19.5 million and is included as a current contract liability in the consolidated balance sheets. The remainder is expected to be redeemed within two to four years . The table below presents activity in the Graduation Fund for the years ended December 31, 2020 and 2021 (in thousands): December 31, 2020 December 31, 2021 Balance at beginning of period $ 49,641 $ 53,314 Revenue deferred 26,462 21,067 Benefit redeemed ( 22,789 ) ( 22,357 ) Balance at end of period $ 53,314 $ 52,024 The portion of the Graduation Fund balance related to students enrolled in undergraduate degree programs was $ 52.6 million and $ 48.6 million as of December 31, 2020 and 2021, respectively. Unbilled Receivables – Student Tuition Academic materials may be shipped to certain new undergraduate students in advance of the term of enrollment. Under ASC 606, the materials represent a performance obligation to which the Company allocates revenue based on the fair value of the materials relative to the total fair value of all the performance obligations in the arrangement with the student. When control of the materials passes to the student in advance of the term of enrollment, an unbilled receivable and related revenue are recorded. Costs to Obtain a Contract Certain commissions earned by third party international agents are considered incremental and recoverable costs of obtaining a contract with customers of ANZ. These costs are deferred and then amortized over the period of benefit which ranges from one to two years . 5. Restructuring and Related Charges In 2018 and 2019, the Company incurred personnel-related restructuring charges due to cost reduction efforts and management changes. These changes related to the integration of Capella Education Company in order to establish an efficient ongoing cost structure for the Company. The severance and other employee separation costs incurred in connection with the integration of CEC are included in Merger and integration costs on the consolidated statements of income. In the third quarter of 2020, the Company began implementing a restructuring plan in an effort to reduce the ongoing operating costs of the Company to align with changes in enrollment following the COVID-19 pandemic. Under this plan, the Company incurred severance and other employee separation costs related to voluntary and involuntary employee terminations. In addition, the 2020 restructuring plan included an evaluation of the Company's owned and leased real estate portfolio, which resulted in the consolidation and sale of underutilized facilities. During the years ended December 31, 2020 and 2021, the Company recorded right-of-use lease asset charges of approximately $ 0.4 million and $ 18.9 million, respectively, related to facilities consolidated as a result of the restructuring plan. The Company also recorded fixed asset impairment charges of approximately $ 2.7 million during the year ended December 31, 2021. During the year ended December 31, 2021, the Company recorded a $ 2.7 million gain from the sale of property and equipment of owned campuses that were closed in connection with the 2020 restructuring plan. All severance and other employee separation charges, right-of-use lease asset and fixed asset impairment charges, and gains on the sale of property and equipment related to the 2020 restructuring plan are included in Restructuring costs on the consolidated statements of income. 84 Table of Contents The following details the changes in the Company’s severance and other employee separation costs restructuring liabilities for the years ended December 31, 2019, 2020, and 2021 (in thousands): CEC Integration Plan 2020 Restructuring Plan Total Balance at December 31, 2018 $ 14,347 $ — $ 14,347 Restructuring and other charges 3,920 — 3,920 Payments ( 9,984 ) — ( 9,984 ) Adjustments — — — Balance at December 31, 2019 8,283 — 8,283 Restructuring and other charges — 11,967 11,967 Payments ( 6,448 ) ( 10,680 ) ( 17,128 ) Adjustments — — — Balance at December 31, 2020 (1) 1,835 1,287 3,122 Restructuring and other charges — 4,618 4,618 Payments ( 1,835 ) ( 4,293 ) ( 6,128 ) Adjustments — — — Balance at December 31, 2021 (1) $ — $ 1,612 $ 1,612 ___________________________________________________________ (1) Restructuring liabilities are included in accounts payable and accrued expenses. 6. Marketable Securities The following is a summary of available-for-sale securities as of December 31, 2021 (in thousands): Amortized Cost Gross Unrealized Gain Gross Unrealized (Losses) Estimated Fair Value Tax-exempt municipal securities $ 18,546 $ 271 $ — $ 18,817 Corporate debt securities 10,898 163 — 11,061 Total $ 29,444 $ 434 $ — $ 29,878 The following is a summary of available-for-sale securities as of December 31, 2020 (in thousands): Amortized Cost Gross Unrealized Gain Gross Unrealized (Losses) Estimated Fair Value Tax-exempt municipal securities $ 19,924 $ 365 $ — $ 20,289 Corporate debt securities 17,086 452 — 17,538 Total $ 37,010 $ 817 $ — $ 37,827 The unrealized gains and losses on the Company’s investments in corporate debt and municipal securities as of December 31, 2020 and 2021 were caused by changes in market values primarily due to interest rate changes. As of December 31, 2021, there were no securities in an unrealized loss position for a period longer than twelve months. The Company has no allowance for credit losses related to its available-for-sale securities as all investments are in investment grade securities. The Company does not intend to sell these securities, and it is not more likely than not that the Company will be required to sell these securities prior to the recovery of their amortized cost basis, which may be at maturity. No impairment charges were recorded during the years ended December 31, 2019, 2020, and 2021. 85 Table of Contents The following table summarizes the maturities of the Company’s marketable securities as of December 31, 2020 and 2021 (in thousands): December 31, 2020 December 31, 2021 Due within one year $ 7,557 $ 6,501 Due after one year through five years 30,270 23,377 Total $ 37,827 $ 29,878 The following table summarizes the proceeds from the maturities and sales of available-for-sale securities for the years ended December 31, 2019, 2020, and 2021 (in thousands): December 31, 2019 December 31, 2020 December 31, 2021 Maturities of marketable securities $ 43,762 $ 34,728 $ 7,495 Sales of marketable securities — 1,464 1,805 Total $ 43,762 $ 36,192 $ 9,300 The Company recorded approximately $ 35,000 in gross realized gains and $ 0.8 million in gross realized losses in net income during the years ended December 31, 2020 and December 31, 2021, respectively. The Company did no t record any gross realized gains or losses in net income during the year ended and December 31, 2019. 7. Property and Equipment The composition of property and equipment as of December 31, 2020 and 2021 is as follows (in thousands): December 31, 2020 December 31, 2021 Estimated useful life (years) Land $ 7,138 $ 5,380 — Buildings and improvements 21,373 16,691 5 - 40 Furniture and office equipment 77,337 65,054 5 - 7 Computer hardware 15,684 20,175 3 - 7 Computer software 183,015 199,635 3 - 10 Leasehold improvements 65,719 71,633 3 - 15 Construction in progress 15,517 9,246 — 385,783 387,814 Accumulated depreciation and amortization ( 226,929 ) ( 237,225 ) $ 158,854 $ 150,589 Construction in progress includes costs associated with the construction and renovation of facilities and the development of information technology applications. 8. Leases The Company has long-term, non-cancelable operating leases for campuses and other administrative facilities. These leases generally range from 3 years to 15 years and may include renewal options to extend the lease term. In addition, the leases commonly include lease incentives in the form of rent abatements and tenant improvement allowances. The Company subleases certain portions of unused building space to third parties. 86 Table of Contents The components of lease costs were as follows for the years ended December 31, 2019, 2020, and 2021 (in thousands) 2019 2020 2021 Lease Cost: Operating lease cost (1) $ 35,335 $ 28,337 $ 53,957 Short-term lease cost 885 534 1,768 Sublease income ( 2,696 ) ( 2,240 ) ( 2,255 ) Total lease costs $ 33,524 $ 26,631 $ 53,470 ___________________________________________________________ (1) During the years ended December 31, 2019 , 2020 and 2021, operating lease cost includes $ 6.0 million, $ 0.8 million, and $ 18.9 million of right-of-use lease asset impairment charges, respectively, related to redundant leased space that was vacated during the year. The following table provides a summary of the Company's average lease term and discount rate as of December 31, 2020 and 2021: As of December 31, 2020 As of December 31, 2021 Weighted average remaining lease term (years) 5.6 7.8 Weighted average discount rate 4.37 % 4.01 % Supplemental information related to the Company's leases for the years ended December 31, 2019, 2020, and 2021 (in thousands): Year ended December 31, 2019 Year ended December 31, 2020 Year ended December 31, 2021 Cash paid for amounts included in the measurement of lease liabilities $ 32,883 $ 32,510 $ 43,021 Right-of-use assets obtained in exchange for operating lease liabilities $ 4,431 $ 12,763 $ 79,953 Maturities of lease liabilities (in thousands): Year Ending December 31, 2022 $ 34,086 2023 31,502 2024 29,059 2025 25,752 2026 23,048 Thereafter 80,322 Total lease payments 223,769 Less: interest ( 33,943 ) Present value of lease liabilities $ 189,826 87 Table of Contents 9. Fair Value Measurement Assets and liabilities measured at fair value on a recurring basis consist of the following as of December 31, 2021 (in thousands): Fair Value Measurements at Reporting Date Using December 31, 2021 Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets: Money market funds $ 4,134 $ 4,134 $ — $ — Marketable securities: Tax-exempt municipal securities 18,817 — 18,817 — Corporate debt securities 11,061 — 11,061 — Total assets at fair value on a recurring basis $ 34,012 $ 4,134 $ 29,878 $ — Liabilities: Deferred payments $ 658 $ — $ — $ 658 Assets and liabilities measured at fair value on a recurring basis consist of the following as of December 31, 2020 (in thousands): Fair Value Measurements at Reporting Date Using December 31, 2020 Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets: Money market funds $ 2,841 $ 2,841 $ — $ — Marketable securities: Tax-exempt municipal securities 20,289 — 20,289 — Corporate debt securities 17,538 — 17,538 — Total assets at fair value on a recurring basis $ 40,668 $ 2,841 $ 37,827 $ — Liabilities: Deferred payments $ 1,658 $ — $ — $ 1,658 The Company measures the above items on a recurring basis at fair value as follows: • Money market funds — Classified in Level 1 is excess cash the Company holds in both taxable and tax-exempt money market funds, which are included in cash and cash equivalents in the accompanying consolidated balance sheets. The Company records any net unrealized gains and losses for changes in fair value as a component of accumulated other comprehensive income in stockholders’ equity. The Company’s cash and cash equivalents held at December 31, 2020 and 2021, approximate fair value and are not disclosed in the above tables because of the short-term nature of the financial instruments. • Marketable securities – Classified in Level 2 and valued using readily available pricing sources for comparable instruments utilizing observable inputs from active markets. The Company does not hold securities in inactive markets. • Deferred payments — The Company acquired certain assets and entered into deferred payment arrangements with the sellers in transactions that occurred in 2011. The deferred payments are classified within Level 3 as there is no liquid market for similarly priced instruments and are valued using discounted cash flow models that encompass significant unobservable inputs. The assumptions used to prepare the discounted cash flows include estimates for interest rates, enrollment growth, retention rates, and pricing strategies. These assumptions are subject to change as the underlying data sources evolve and the programs mature. The short-term portion of deferred payments was $ 0.7 million as of December 31, 2021 and is included in accounts payable and accrued expense. 88 Table of Contents The Company did not change its valuation techniques associated with recurring fair value measurements from prior periods and did not transfer assets or liabilities between levels of the fair value hierarchy during the years ended December 31, 2020 or 2021. Changes in the fair value of the Company’s Level 3 liabilities during the years ended December 31, 2020 and 2021 are as follows (in thousands): December 31, 2020 December 31, 2021 Balance as of the beginning of period $ 3,257 $ 1,658 Amounts paid ( 1,628 ) ( 1,470 ) Other adjustments to fair value 29 470 Balance at end of period $ 1,658 $ 658 10. Goodwill and Intangible Assets Goodwill During the first quarter of 2021, the Company reallocated a portion of its goodwill to the Education Technology Services segment based on a relative fair value analysis performed using several probability weighted scenarios. The following table presents changes in the carrying value of goodwill by segment for the years ended December 31, 2020 and 2021 (in thousands): U.S. Higher Education Australia / New Zealand Education Technology Services Total Balance as of December 31, 2019 $ 732,075 $ — $ — $ 732,075 Additions (1) — 546,053 — 546,053 Impairments — — — — Currency translation adjustments — 40,398 — 40,398 Adjustments to prior acquisitions — — — — Balance as of December 31, 2020 732,075 586,451 — 1,318,526 Reporting unit reallocation (2) ( 100,000 ) — 100,000 — Additions — — — — Impairments — — — — Currency translation adjustments — ( 32,924 ) — ( 32,924 ) Adjustments to prior acquisitions (3) — 262 — 262 Balance as of December 31, 2021 $ 632,075 $ 553,789 $ 100,000 $ 1,285,864 ___________________________________________________ (1) Represents additions related to the acquisition of ANZ in 2020, as discussed in Note 3. (2) Represents the reallocation of goodwill as a result of the Company reorganizing its segments in 2021. (3) Represents a measurement period adjustment recorded in 2021, as discussed in Note 3. The Company assesses goodwill at least annually for impairment during the fourth quarter, or more frequently if events occur or circumstances change between annual tests that would more likely than not reduce the fair value of the respective reporting unit below its carrying amount. In 2021, the Company performed a qualitative impairment assessment of goodwill assigned to its reporting units using the first day of the fourth quarter of 2021 as the assessment date. The Company evaluated the likelihood of impairment by considering qualitative factors relevant to the reporting units, such as macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and any other factors that have a significant bearing on fair value. Based on the results of its qualitative impairment analysis, the Company determined that no impairment indicators existed for its reporting units as of the assessment date. There were no impairment charges related to goodwill recorded during the years ended December 31, 2019, 2020, and 2021. 89 Table of Contents Intangible Assets The following table represents the balance of the Company’s intangible assets as of December 31, 2020 and 2021 (in thousands): December 31, 2020 December 31, 2021 Gross Carrying Amount Accumulated Amortization Net Gross Carrying Amount Accumulated Amortization Net Subject to amortization Student relationships $ 202,861 $ ( 135,703 ) $ 67,158 $ 201,309 $ ( 180,007 ) $ 21,302 Not subject to amortization Trade names 259,262 — 259,262 255,078 — 255,078 Total $ 462,123 $ ( 135,703 ) $ 326,420 $ 456,387 $ ( 180,007 ) $ 276,380 The Company’s finite-lived intangible assets are comprised of student relationships, which are being amortized on a straight-line basis over a three-year useful life. Straight-line amortization expense for finite-lived intangible assets reflects the pattern in which the assets' economic benefits are consumed over their estimated useful lives. Amortization expense related to finite-lived intangible assets was $ 55.3 million, $ 57.3 million, and $ 44.3 million for the years ended December 31, 2019, 2020 and 2021, respectively. The following table presents future amortization expense for finite-lived intangible assets as of December 31, 2021 (in thousands): 2022 $ 11,619 2023 9,683 2024 — 2025 — 2026 — 2027 and thereafter — Total $ 21,302 Indefinite-lived intangible assets not subject to amortization consist of trade names. The Company assigned an indefinite useful life to its trade name intangible assets, as it is believed these assets have the ability to generate cash flows indefinitely. In addition, there are no legal, regulatory, contractual, economic, or other factors to limit the useful life of the trade name intangibles. The Company assesses indefinite-lived intangible assets at least annually for impairment during the fourth quarter, or more frequently if events occur or circumstances change between annual tests that would more likely than not reduce the fair value of the respective reporting unit below its carrying amount. In 2021, the Company performed a qualitative impairment assessment related to its indefinite-lived intangible assets using the first day of the fourth quarter of 2021 as the assessment date. The Company evaluated the likelihood of impairment by considering qualitative factors, such as macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and any other factors that have a significant bearing on fair value. Based on the results of its qualitative impairment analysis, the Company determined that no impairment indicators existed for the indefinite-lived intangible assets as of the assessment date. There were no impairment charges related to indefinite-lived intangible assets recorded during the years ended December 31, 2019, 2020, and 2021. 90 Table of Contents 11. Other Assets Other assets consist of the following as of December 31, 2020 and 2021 (in thousands): December 31, 2020 December 31, 2021 Prepaid expenses, net of current portion $ 22,418 $ 19,852 Equity method investments 15,795 15,582 Cloud computing arrangements 6,385 5,957 Other investments 2,527 3,576 Tuition receivable, non-current 3,585 2,466 Other 4,218 4,864 Other assets $ 54,928 $ 52,297 Prepaid Expenses Long-term prepaid expenses primarily relate to payments that have been made for future services to be provided after one year. In the fourth quarter of 2020, pursuant to the terms of the perpetual license agreement associated with JWMI, the Company made a final one-time cash payment of approximately $ 25.3 million for the right to continue to use the Jack Welch name and likeness. As of December 31, 2020 and 2021, $ 20.7 million and $ 19.2 million, respectively, of this payment is included in the prepaid expenses, net of current portion balance, as the payment is being amortized over an estimated useful life of 15 years. Equity Method Investments The Company holds investments in certain limited partnerships that invest in various innovative companies in the health care and education-related technology fields. The Company has commitments to invest up to an additional $ 2.9 million across these partnerships through 2031. The Company's investments range from 3 %- 5 % of any partnership’s interest and are accounted for under the equity method. The following table illustrates changes in the Company’s limited partnership investments for the years ended December 31, 2020 and 2021 (in thousands): 2020 2021 Limited partnership investments, beginning of period $ 15,795 $ 15,795 Capital contributions 550 892 Pro-rata share in the net income of limited partnerships 1,862 4,925 Distributions ( 2,412 ) ( 6,030 ) Limited partnership investments, end of period $ 15,795 $ 15,582 Cloud Computing Arrangements The Company defers implementation costs incurred in cloud computing arrangements and amortizes these costs over the term of the arrangement. Other Investments The Company's venture fund, SEI Ventures, makes investments in education tech start-ups focused on transformational technologies that improve student success. These investments are accounted for at cost less impairment as they do not have readily determinable fair value. Tuition Receivable Non-current tuition receivable represents tuition that the Company expects to collect, but not within the next 12 months. Other Other is comprised primarily of deferred financing costs associated with the Company's credit facility, deferred contract costs related to commissions paid by ANZ to third party international agents, and refundable security deposits associated with the Company's leased campus and office space. 91 Table of Contents 12. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consist of the following as of December 31, 2020 and 2021 (in thousands): December 31, 2020 December 31, 2021 Trade payables $ 64,049 $ 45,340 Accrued compensation and benefits 33,160 27,424 Accrued student obligations and other 7,533 22,754 Accounts payable and accrued liabilities $ 104,742 $ 95,518 13. Long-Term Debt On November 3, 2020, the Company entered into an amended credit facility ("Amended Credit Facility"), which provides for a senior secured revolving credit facility (the “Revolving Credit Facility”) in an aggregate principal amount of up to $ 350 million. The Amended Credit Facility provides the Company with an option, subject to obtaining additional loan commitments and satisfaction of certain conditions, to increase the commitments under the Revolving Credit Facility or establish one or more incremental term loans (each, an “Incremental Facility”) in the future in an aggregate amount of up to the sum of (x) the greater of (A) $ 300 million and (B) 100 % of the Company’s consolidated EBITDA (earnings before interest, taxes, depreciation, amortization, and noncash charges, such as stock-based compensation) calculated on a trailing four-quarter basis and on a pro forma basis, and (y) if such Incremental Facility is incurred in connection with a permitted acquisition or other permitted investment, any amounts so long as the Company's leverage ratio (calculated on a trailing four-quarter basis) on a pro forma basis will be no greater than 1.75 :1.00. In addition, the Amended Credit Facility provides for a subfacility for borrowings in certain foreign currencies in an amount equal to the U.S. dollar equivalent of $ 150 million. The maturity date of the Amended Credit Facility is November 3, 2025. The Company paid approximately $ 1.9 million in debt financing costs associated with the Amended Credit Facility, and these costs are being amortized on a straight-line basis over the five-year term of the Amended Credit Facility. Borrowings under the Revolving Credit Facility bear interest at a per annum rate equal to LIBOR or a base rate, plus a margin ranging from 1.50 % to 2.00 % depending on the Company’s leverage ratio. The Company also is subject to a quarterly unused commitment fee ranging from 0.20 % to 0.30 % per annum depending on the Company’s leverage ratio, times the daily unused amount under the Revolving Credit Facility. The Amended Credit Facility is guaranteed by all domestic subsidiaries, subject to certain exceptions, and secured by substantially all of the assets of the Company and its subsidiary guarantors. The Amended Credit Facility contains customary affirmative and negative covenants, representations, warranties, events of default, and remedies upon default, including acceleration and rights to foreclose on the collateral securing the Amended Credit Facility. In addition, the Amended Credit Facility requires that the Company satisfy certain financial maintenance covenants, including: • A leverage ratio of not greater than 2.00 to 1.00. Leverage ratio is defined as the ratio of total debt (net of unrestricted cash in an amount not to exceed $ 150 million) to trailing four-quarter EBITDA. • A coverage ratio of not less than 1.75 to 1.00. Coverage ratio is defined as the ratio of trailing four-quarter EBITDA and rent expense to trailing four-quarter interest and rent expense. • A U.S. Department of Education (“Department” or "Department of Education") Financial Responsibility Composite Score of not less than 1.0 for any fiscal year and not less than 1.5 for any two consecutive fiscal years. The Company was in compliance with all the covenants of the Amended Credit Facility as of December 31, 2021. As of December 31, 2020 and 2021, the Company had approximately $ 141.8 million and $ 141.6 million, respectively, outstanding under the Revolving Credit Facility. Approximately $ 3.8 million and $ 3.6 million was denominated in Australian dollars as of December 31, 2020 and 2021, respectively. During the years ended December 31, 2019, 2020 and 2021, the Company paid $ 0.5 million, $ 1.0 million and $ 2.7 million, respectively, of interest and unused commitment fees related to its Revolving Credit Facility. 92 Table of Contents 14. Other Long-Term Liabilities Other long-term liabilities consist of the following as of December 31, 2020 and 2021 (in thousands): December 31, 2020 December 31, 2021 Contract liabilities, net of current portion $ 34,866 $ 34,704 Asset retirement obligations 7,647 9,122 Deferred payments related to acquisitions 715 — Other 2,827 3,263 Other long-term liabilities $ 46,055 $ 47,089 Contract Liabilities As discussed in Note 4, in connection with its student tuition contracts, the Company has an obligation to provide free classes in the future should certain eligibility conditions be maintained (the Graduation Fund). Long-term contract liabilities represent the amount of revenue under these arrangements that the Company expects will be realized after one year. Asset Retirement Obligations Certain of the Company's lease agreements require the leased premises to be returned in a predetermined condition. Deferred Payments Related to Acquisitions In connection with previous acquisitions, the Company acquired certain assets and entered into deferred payment arrangements with the sellers. 15. Equity Awards On November 6, 2018, the Company’s shareholders approved the Strategic Education, Inc. 2018 Equity Compensation Plan (the “2018 Plan”), which replaced the Strayer Education, Inc. 2015 Equity Compensation Plan (the “2015 Plan”). The 2018 Plan provides for the granting of restricted stock, restricted stock units, stock options intended to qualify as incentive stock options, options that do not qualify as incentive stock options, and other forms of equity compensation and performance-based awards to employees, officers, and directors of the Company, or to a consultant or advisor to the Company, at the discretion of the Board of Directors. Vesting provisions are at the discretion of the Board of Directors. Options may be granted at option prices based at or above the fair market value of the shares at the date of grant. The maximum term of the awards granted under the 2018 Plan is ten years . The number of shares of common stock authorized for issuance under the 2018 Plan is 700,000 , plus the number of shares available for grant under the 2015 Plan at the time of stockholder approval of the 2018 Plan, plus the number of shares which may in the future become available under the 2015 Plan due to forfeitures of outstanding awards. As of December 31, 2021, 404,787 shares were available for issuance under the 2018 Plan. In connection with the merger with Capella Education Company on August 1, 2018, the Capella Education Company 2014 Equity Incentive Plan (the “2014 Capella Plan”) and the Capella Education Company 2005 Stock Incentive Plan (collectively, the “Capella Plans”) were assumed by the Company. Under the Capella Plans, shares of the Company's common stock may be issued upon the exercise or settlement of equity awards that were granted prior to the merger date or pursuant to awards granted after the closing of the merger to legacy Capella Education Company employees under the 2014 Capella Plan. As of December 31, 2021, 1,020,818 shares were available for issuance to legacy Capella Education Company employees under the 2014 Capella Plan. As of December 31, 2021, the Company has issued and outstanding awards under the 2018 Plan as well as the 2015 Plan, the Capella Education Company 2005 Stock Incentive Plan, and the Capella Education Company 2014 Equity Incentive Plan. Dividends paid on unvested restricted stock are reimbursed to the Company, and dividend equivalents accumulated on unvested restricted stock units are forfeited, if the recipient forfeits his or her shares as a result of termination of employment prior to vesting in the award, other than as a result of the recipient’s death, disability, or certain qualifying terminations in connection with a change in control of the Company, or unless waived by the Company. 93 Table of Contents Restricted Stock and Restricted Stock Units The table below sets forth the restricted stock and restricted stock units activity for each of the three years in the period ended December 31, 2021: Number of shares or units Weighted- average grant price Balance, December 31, 2018 737,950 $ 114.43 Grants 158,748 128.87 Vested shares ( 393,588 ) 141.75 Forfeitures ( 34,160 ) 79.02 Balance, December 31, 2019 468,950 98.98 Grants 150,107 140.39 Vested shares ( 116,724 ) 69.94 Forfeitures ( 7,364 ) 130.68 Balance, December 31, 2020 494,969 117.91 Grants 321,965 88.02 Vested shares ( 77,586 ) 92.38 Forfeitures ( 31,807 ) 121.80 Balance, December 31, 2021 707,541 $ 106.93 Stock Options The table below sets forth the stock option activity and other stock option information for each of the three years in the period ended December 31, 2021: Number of shares Weighted- average exercise price Weighted- average remaining contractual life (years) Aggregate intrinsic value (1) (in thousands) Balance, December 31, 2018 256,246 $ 66.80 7.0 $ 11,947 Grants — — Exercises ( 208,114 ) 67.61 Forfeitures/Expirations ( 2,036 ) 58.38 Balance, December 31, 2019 46,096 63.49 5.2 4,398 Grants — — Exercises ( 20,522 ) 60.62 Forfeitures/Expirations — — Balance, December 31, 2020 25,574 65.80 5.0 755 Grants — — Exercises ( 1,632 ) 69.44 Forfeitures/Expirations ( 266 ) 87.66 Balance, December 31, 2021 23,676 $ 65.30 4.0 $ 93 Exercisable, December 31, 2021 23,676 $ 65.30 4.0 $ 93 __________________________________________________________________________ (1) The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the respective trading day and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holder had all options been exercised on the respective trading day. The amount of intrinsic value will change based on the fair market value of the Company’s common stock. The Company paid $ 1.8 million, and received $ 1.2 million and $ 0.1 million of net cash proceeds related to stock options exercised during the years ended December 31, 2019, 2020, and 2021, respectively. The aggregate intrinsic value of the stock options exercised during the years ended December 31, 2019, 2020, and 2021 was $ 17.4 million, $ 2.0 million and $ 24 thousand, respectively. 94 Table of Contents Valuation and Expense Information under Stock Compensation Topic ASC 718 At December 31, 2021, total stock-based compensation cost which has not yet been recognized was $ 37.6 million for unvested restricted stock and restricted stock units. This cost is expected to be recognized over the next 2.0 years on a weighted-average basis. Approximately 443,000 shares of restricted stock awards are subject to performance conditions. The accrual for stock-based compensation for performance awards is based on the Company’s estimates that such performance criteria are probable of being achieved over the respective vesting periods. Such a determination involves judgment surrounding the Company’s ability to maintain regulatory compliance. If the performance targets are not reached during the respective vesting period, or it is determined it is more likely than not that the performance criteria will not be achieved, related compensation expense is adjusted. The following table reflects the amount of stock-based compensation expense recorded in each of the expense line items for the years ended December 31, 2019, 2020, and 2021 (in thousands): 2019 2020 2021 Instructional and support costs $ 3,823 $ 5,111 $ 5,317 General and administration 7,970 9,499 13,535 Merger and integration costs 367 — — Restructuring costs — — ( 703 ) Stock-based compensation expense included in operating expense 12,160 14,610 18,149 Tax benefit 3,126 3,771 4,809 Stock-based compensation expense, net of tax $ 9,034 $ 10,839 $ 13,340 During the years ended December 31, 2019, 2020, and 2021, the Company recognized windfall tax benefits related to share-based payment arrangements of approximately $ 4.0 million, $ 2.8 million, and $ 18,000 , respectively, which were adjustments to the provision for income taxes. 16. Other Employee Benefit Plans The Company sponsors the Strategic Education, Inc. 401(k) Plan, which covers all eligible employees of the Company. Effective January 1, 2022, participants may voluntarily contribute up to $ 20,500 of their base compensation annually. The Company makes discretionary contributions to participants of the Strategic Education, Inc. 401(k) Plan through a Company match of 100 % on the first 2 %, and 50 % on the next 2 %, of the employee contributions, for a maximum company match of 3 %. The Company’s contributions to these plans totaled $ 7.2 million, $ 7.6 million and $ 7.4 million for the years ended December 31, 2019, 2020, and 2021, respectively. Pursuant to local laws, ANZ is required to make contributions on behalf of its employees for post-retirement benefits. In addition, ANZ has recorded a liability for long service leave, an entitlement for which employees meeting certain requirements are eligible for extended paid leave. The Company incurred $ 1.5 million and $ 8.4 million in expense related to these arrangements for the benefit of ANZ employees for the years ended December 31, 2020 and 2021, respectively. In May 1998, the Company adopted the Strayer Education, Inc. Employee Stock Purchase Plan (“ESPP”). Under the ESPP, eligible employees may purchase shares of the Company’s common stock, subject to certain limitations, at 90 % of its market value at the date of purchase. Purchases are limited to 10 % of an employee’s eligible compensation. The aggregate number of shares of common stock that may be made available for purchase by participating employees under the ESPP is 2,500,000 shares. Shares purchased in the open market for employees for the years ended December 31, 2019, 2020, and 2021 were as follows: Shares purchased Average price per share 2019 4,918 $ 126.83 2020 7,274 $ 112.65 2021 13,065 $ 68.94 17. Stock Repurchase Plan In November 2003, the Company’s Board of Directors authorized the Company to repurchase up to an aggregate of $ 15 million in value of common stock in open market purchases from time to time at the discretion of the Company’s management depending on market conditions and other corporate considerations. The Company’s Board of Directors amended the program 95 Table of Contents on various dates, increasing the repurchase amount authorized and extending the expiration date. At December 31, 2021, $ 250 million of the Company’s share repurchase authorization was remaining for repurchases through December 31, 2022. All of the Company’s share repurchases were effected in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. This stock repurchase plan may be modified, suspended, or terminated at any time by the Company without notice. Repurchases of common stock are recorded as a reduction to additional paid-in capital in an amount equal to the price at which the repurchased shares were originally sold, with any excess cash paid to repurchase the shares being recorded as a reduction to retained earnings. Shares of common stock repurchased on the open market under the Company's repurchase program for the years ended December 31, 2019, 2020, and 2021 were as follows: Shares repurchased Average price paid per share 2019 — $ — 2020 1,769 $ 139.78 2021 76,969 $ 76.72 18. Commitments and Contingencies The Company's U.S. Higher Education institutions participate in various federal student financial assistance programs which are subject to audit by agencies, including the Department of Education, the Veterans Administration, and the Department of Defense. Management believes that the potential effects of audit adjustments, if any, for the periods currently under audit will not have a material adverse effect, individually or in the aggregate, on the Company’s consolidated financial position, results of operations, or cash flows. 19. Income Taxes The income tax provision for the years ended December 31, 2019, 2020 and 2021 is summarized below (in thousands): 2019 2020 2021 Current: Federal $ 37,878 $ 31,398 $ 20,754 State 11,584 9,786 5,736 Foreign — 125 2,761 Total current 49,462 41,309 29,251 Deferred: Federal ( 7,009 ) ( 8,537 ) ( 10,128 ) State 133 ( 538 ) ( 612 ) Foreign — ( 4,545 ) 3,001 Total deferred ( 6,876 ) ( 13,620 ) ( 7,739 ) Total provision for income taxes $ 42,586 $ 27,689 $ 21,512 The U.S. and foreign components of income (loss) before income taxes for the years ended December 31, 2019, 2020 and 2021 are summarized below (in thousands): 2019 2020 2021 United States $ 123,724 $ 128,822 $ 57,804 Foreign — ( 14,865 ) 18,795 Total income before income taxes $ 123,724 $ 113,957 $ 76,599 The Company is making an assertion that all earnings generated by its foreign subsidiaries are permanently reinvested in non-U.S. business or are distributable to the United States without material tax implications. As such, income taxes have not been accrued in the United States with respect to foreign subsidiary earnings. The Company intends to continue to reinvest the earnings outside of the United States for which there would be a material tax implication to distributing, such as withholding tax, for the foreseeable future and, as a result, have not recognized additional tax expense on these earnings. 96 Table of Contents The tax effects of the principal temporary differences that give rise to the Company’s net deferred tax liability are as follows as of December 31, 2020 and 2021 (in thousands): 2020 2021 Lease liabilities $ 28,017 $ 25,706 Allowance for credit losses 14,083 13,190 Contract liabilities 8,500 10,214 Stock-based compensation 6,318 7,758 Other 6,713 7,020 Other facility-related costs 582 1,916 Loss carryforward 7,307 619 Intangible assets ( 84,515 ) ( 74,016 ) Property and equipment ( 20,421 ) ( 21,320 ) Right-of-use lease assets ( 19,991 ) ( 15,052 ) Valuation allowance — ( 630 ) Net deferred tax liability $ ( 53,407 ) $ ( 44,595 ) The valuation allowance for deferred tax assets as of December 31, 2021 was $ 0.6 million and is primarily related to net operating loss carryforwards in states where the Company does not file a consolidated tax return. The Company concluded that it was more likely than not that the deferred tax asset for the net operating loss carryforwards would not be realized due to negative evidence outweighing the positive evidence regarding the realization of the deferred tax assets. The Company will continue to evaluate its ability to realize its net deferred tax assets on a quarterly basis. The Company had no valuation allowance for deferred tax assets as of December 31, 2020. As of December 31, 2021, Loss carryforward consists of net operating losses related to the states where the Company does not file a consolidated return. As of December 31, 2020 and 2021, the Company’s liabilities for unrecognized tax benefits are included in other long-term liabilities in the consolidated balance sheets. Interest and penalties, including those related to uncertain tax positions, are included in the provision for income taxes in the consolidated statements of income . The Company recognized $ 64,000 and $ 33,000 of expense related to interest and penalties in 2020 and 2021, respectively. The total amount of interest and penalties included in the consolidated balance sheets was $ 45,000 and $ 30,000 as of December 31, 2020 and 2021, respectively. The following table summarizes changes in unrecognized tax benefits, excluding interest and penalties, for the respective periods (in thousands): Year Ended December 31, 2020 2021 Beginning unrecognized tax benefits $ 1,165 $ 314 Additions for tax positions taken in the prior year 30 948 Reductions for tax positions taken in prior years ( 881 ) ( 219 ) Ending unrecognized tax benefits $ 314 $ 1,043 The Company does not anticipate significant changes to unrecognized tax benefits within the next 12 months. As of December 31, 2021, $ 1.0 million of the Company’s total unrecognized tax benefits would favorably affect the Company’s effective tax rate, if recognized. 97 Table of Contents A reconciliation between the Company’s statutory tax rate and the effective tax rate for the years ended December 31, 2019, 2020, and 2021 is as follows: 2019 2020 2021 Statutory federal rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal benefits 4.6 5.6 3.4 Impact of foreign operations — ( 1.2 ) 2.2 Termination of deferred compensation arrangements 9.2 — — Transaction costs — 0.6 — Excess tax benefit on share-based compensation ( 2.6 ) ( 2.0 ) — Other 2.2 0.3 1.5 Effective tax rate 34.4 % 24.3 % 28.1 % In February 2019, to align compensation and benefit plans after completion of the merger with CEC, the Compensation Committee of the Company’s Board of Directors took action to terminate all deferred compensation arrangements, including for employees already participating in such arrangements. These changes affect the tax deductibility of certain arrangements, which resulted in a discrete item recorded during the three months ended March 31, 2019, reducing the Company’s deferred tax assets by $ 11.5 million, and increasing the Company’s 2019 effective tax rate and future cash tax payments. Cash payments for income taxes were $ 48.8 million, $ 45.4 million, and $ 27.3 million in 2019, 2020, and 2021, respectively. 20. Segment and Geographic Information Strategic Education is an educational services company that provides access to high-quality education through campus-based and online post-secondary education offerings, as well as through programs to develop job-ready skills for high-demand markets. Strategic Education’s portfolio of companies is dedicated to closing the skills gap by placing adults on the most direct path between learning and employment. In the first quarter of 2021, the Company changed the way management reports financial information relied on by the Chief Operating Decision Maker (“CODM”) to evaluate performance and allocate the resources of the Company. The Company’s revised organizational structure includes three operating and reportable segments: U.S. Higher Education (“USHE”), which is primarily comprised of the Company's previous Strayer University and Capella University segments, Education Technology Services, and Australia/New Zealand. During the first three quarters of 2021, the Education Technology Services segment was called the Alternative Learning segment. Financial reporting under the new organizational structure began in the first quarter of 2021. Prior period segment disclosures have been recast to conform to the current period presentation. The USHE segment provides flexible and affordable certificate and degree programs to working adults primarily through Strayer University and Capella University, including the Jack Welch Management Institute MBA, which is a unit of Strayer University. USHE also operates non-degree web and mobile application development courses through Hackbright Academy and Devmountain, which are units of Strayer University. The Education Technology Services segment is primarily focused on developing and maintaining relationships with employers to build employee education benefits programs that provide employees with access to affordable and industry relevant training, certificate, and degree programs. The employer relationships developed by the Education Technology Services division are an important source of student enrollment for Strayer University and Capella University, and the majority of the revenue attributed to the Education Technology Services division is driven by the volume of enrollment derived from these employer relationships. Education Technology Services also supports employer partners through Workforce Edge, a platform which provides employers a full-service education benefits administration solution, and Sophia Learning, which enables lower cost education benefits programs through the use of low-cost online general education courses recommended by the American Council on Education for credit at other colleges and universities. The Australia/New Zealand segment is comprised of Torrens University, Think Education and Media Design School in Australia and New Zealand, which collectively offer certificate and degree programs in business, design, education, hospitality, healthcare, and technology through campuses in Australia, New Zealand, and online. Revenue and operating expenses are generally directly attributable to the segments. Inter-segment revenues are not presented separately, as these amounts are immaterial. The Company’s Chief Operating Decision Maker does not evaluate operating segments using asset information. 98 Table of Contents A summary of financial information by reportable segment (in thousands) for the years ended December 31, 2019, 2020, and 2021 is presented in the following table: 2019 2020 2021 Revenues U.S. Higher Education $ 963,052 $ 966,579 $ 829,270 Australia/New Zealand — 23,381 250,124 Education Technology Services 34,085 37,693 52,292 Consolidated revenues $ 997,137 $ 1,027,653 $ 1,131,686 Income (loss) from operations U.S. Higher Education $ 172,889 $ 193,393 $ 104,914 Australia/New Zealand — ( 13,275 ) 35,855 Education Technology Services 21,233 19,643 21,311 Amortization of intangible assets ( 61,667 ) ( 64,225 ) ( 51,495 ) Merger and integration costs ( 21,923 ) ( 13,770 ) ( 11,201 ) Restructuring costs — ( 12,382 ) ( 25,472 ) Consolidated income from operations $ 110,532 $ 109,384 $ 73,912 The following table presents a schedule of significant non-cash items included in segment income (loss) from operations by reportable segment (in thousands): 2019 2020 2021 Depreciation and amortization U.S. Higher Education $ 41,962 $ 41,822 $ 38,178 Australia/New Zealand — 1,930 10,640 Education Technology Services 831 828 1,067 Amortization of intangible assets 61,667 64,225 51,495 Merger and integration costs 401 — — Restructuring costs — 349 2,036 Consolidated depreciation and amortization $ 104,861 $ 109,154 $ 103,416 Stock-Based compensation U.S. Higher Education $ 11,445 $ 14,452 $ 16,926 Australia/New Zealand — 46 1,359 Education Technology Services 348 112 567 Merger and integration costs 367 — — Restructuring costs — — ( 703 ) Consolidated stock-based compensation $ 12,160 $ 14,610 $ 18,149 Geographic Information The Company's long-lived assets are comprised of Property and equipment, net and Right-of-use lease assets. The Company's long-lived assets by geographic area as of December 31, 2020 and 2021 were as follows (in thousands): December 31, 2020 December 31, 2021 United States $ 188,343 $ 156,389 International 91,198 143,787 21. Litigation The Company is involved in litigation and other legal proceedings arising out of the ordinary course of its business. Certain of these matters are discussed below. From time to time, certain matters may arise that are other than ordinary and routine. The outcome of such matters is uncertain, and the Company may incur costs in the future to defend, settle, or otherwise resolve them. The Company accrues for estimated costs related to existing lawsuits, claims and proceedings when it is probable that it 99 Table of Contents will incur these costs in the future and the costs are reasonably estimable. The Company currently believes that the ultimate outcome of such matters will not, individually or in the aggregate, have a material adverse effect on its consolidated financial position, results of operations or cash flows. However, depending on the amount and timing, an unfavorable resolution of some or all of these matters could materially affect future results of operations in a particular period. On April 20, 2021, Capella University received a letter from the Department of Education referencing the Wright matter (described below), and indicating that the Department will require a fact-finding process pursuant to the borrower defense to repayment regulations to determine the validity of more than 1,000 borrower defense applications that have been submitted regarding Capella. According to the Department, some of the applications allege similar claims as in the Wright matter concerning alleged misrepresentations of the length of time to complete doctoral programs. Capella has since received approximately 500 applications for borrower defense to repayment and is cooperating with the Department’s fact-finding process. At this time, the Company is unable to predict the outcome of the Department's fact-finding process or the resolution of the borrower defense applications. Wright, et al. v. Capella Education Co., et al. (now captioned Ornelas, et al. v. Capella, et al.) was filed several years ago in the United States District Court for the District of Minnesota. After the court granted Capella’s motion to dismiss in relation to all but one plaintiff, the plaintiff filed a motion for leave to file a second amended complaint on October 5, 2020, seeking to add six named plaintiffs as well as additional sub-classes and causes of action to the lawsuit. On September 22, 2021, the court affirmed a magistrate’s order granting plaintiffs’ motion to amend, and plaintiffs subsequently filed their second amended complaint. In January 2022, the parties reached an agreement in principle regarding the terms of a confidential settlement, and Capella anticipates the settlement agreement will become effective in Q1 2022, at which time the parties will file a joint Stipulation of Dismissal of the case. 22. Regulation United States Regulation American Rescue Plan Act of 2021 On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021. Similar to previous stimulus packages, this legislation provided additional funding for the Higher Education Emergency Relief Fund. A small portion of the $39.6 billion allocated for institutions of higher education has been made available for student emergency aid for students at for-profit institutions. Capella University disbursed $ 184,323 to students of the highest need in June 2021, and Strayer University disbursed $ 2,554,682 to students of the highest need in July 2021. The legislation also amends the “90/10 Rule” to include “all federal education assistance” in the “90” side of the ratio calculation. See “Item 1. Business – Regulation – U.S. Regulatory Environment – The 90/10 Rule” for a description of the 90/10 Rule. The legislation requires the Department to conduct a negotiated rulemaking process to modify related Department regulations, which the Department has announced its intent to convene beginning no earlier than January 2022. This rulemaking process may result in a definition of “federal education assistance” that will include tuition assistance programs offered by the U.S. Department of Defense and U.S. Department of Veterans Affairs, in addition to the Title IV programs already covered by the 90/10 Rule. Under the legislation, these revisions to the 90/10 Rule would apply to institutional fiscal years beginning on or after January 1, 2023. Further legislation has been introduced in both chambers of Congress that seeks to modify the 90/10 Rule further, including proposals to change the ratio requirement to 85/15 (federal to nonfederal revenue). We cannot predict whether Congress will pass any of these legislative proposals. Consolidated Appropriations Act, 2021 On December 27, 2020, former President Trump signed into law the Consolidated Appropriations Act of 2021. Among other things, this package funded the government through September 2021, provided additional COVID-related relief, and made a number of U.S. higher education changes. The legislation includes a number of tax provisions, including replacing the tuition deduction with an expanded Lifetime Learning Credit, which now shares the higher income limitations of the American Opportunity Tax Credit. The legislation also extends until January 1, 2026 expanded employer-provided educational assistance permitting employers to pay up to $5,250 toward an employee’s federal student loans as a tax-free benefit. The legislation also includes a number of higher education-related provisions, including: eliminating the “expected family contribution” from the Free Application for Federal Student Aid (“FAFSA”) and replacing it with a “Student Aid Index;” 100 Table of Contents expanding eligibility for Pell Grants; restoring Pell Grant eligibility for incarcerated students attending non-profit institutions; restoring quarters/semesters of Pell eligibility to students who have successfully asserted a borrower defense to repayment; repealing the limitation on lifetime subsidized loan eligibility (known as “Subsidized Usage Limit Applies,” or SULA); and significantly simplifying the FAFSA form. The Department is expected to provide, but has not yet provided, institutions with guidance on the higher education provisions included in the Consolidated Appropriations Act of 2021, which take effect on July 1, 2023. Additionally, the bill provides $22.7 billion for higher education institutions and students impacted by COVID-19, including $680.9 million (3 percent of the total) for student emergency aid for students at for-profit institutions. In January 2021, the Department released a table of institutional allocation of funds which indicated that Capella University was eligible for $ 328,602 and Strayer University was eligible for $ 5,831,606 , all of which was disbursed to students with the highest need, in the form of direct grants in spring 2021. Veterans Health Care and Benefits Improvement Act of 2020 On January 5, 2021, former President Trump signed into law the Veterans Health Care and Benefits Improvement Act of 2020, which expands student veterans’ protections. Among other things, the legislation requires a risk-based review of schools if an institution is operating under Heightened Cash Monitoring 2 or provisional approval status by the Department of Education, is subject to any punitive action by a federal or state entity, faces the loss or risk of loss of accreditation, or has converted from for-profit to non-profit status. The legislation also restores veterans benefits to students whose school closed, as long as the student transferred fewer than 12 credits from the closed school or program; protects students from debt collection by the Department of Veterans Affairs (“VA”) for overpaid tuition benefits; and establishes a number of institutional requirements, including: providing clear disclosures about cost, loan debt, graduation and job placement rates, and acceptance of transfer credit; ensuring institutions are accommodating short absences due to service; prohibiting same-day recruitment and registration; and prohibiting more than three unsolicited recruiting contacts during any 1-month period. The legislation will require guidance from the VA, and most provisions became effective August 1, 2021. Institutions were permitted to seek waivers for certain sections of the new law if they were not able to satisfy compliance requirements by August 1, 2021, but neither Strayer University nor Capella University sought a waiver. THRIVE Act On June 8, 2021, President Biden signed into law the Training in High-Demand Roles to Improve Veteran Employment Act (the “THRIVE Act”), which amended provisions of the Veterans Health Care and Benefits Improvement Act and the American Rescue Plan Act. The law requires the Department of Labor and VA to collaborate on a list of high-demand occupations for a rapid retraining assistance program. Additionally, the law requires the Government Accountability Office to report on the outcomes and effectiveness of retraining programs. The THRIVE Act amends the Veterans Health Care and Benefits Improvement Act by clarifying that programs pursued solely through distance education on a half-time basis or less are not eligible for the housing stipend that is generally available for retraining programs. As noted above, the Veterans Health Care and Benefits Improvement Act prohibits certain high-pressure recruiting tactics. The THRIVE Act requires the VA to take disciplinary action if a person with whom an institution has a recruiting or educational services agreement violates the VA’s incentive compensation bans. REMOTE Act On December 21, 2021, President Biden signed into law the Responsible Education Mitigating Options and Technical Extensions (“REMOTE”) Act, which amended provisions of the Veterans Health Care and Benefits Improvement Act, the American Rescue Plan Act, and the THRIVE Act. The law includes changes to help institutions satisfy the Veterans Health Care and Benefits Improvement Act’s requirements by using the College Financing Plan template, in addition to extending some COVID-related flexibilities previously granted amid the pandemic. The law also extends remote learning waivers, simplifies the Department of Veterans Affairs verification process for tuition reimbursement, and fixes a technical error to ensure US institutions of higher education can continue to recruit foreign students without losing GI bill funding for their students. CARES Act On March 27, 2020, Congress passed and former President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. Among other things, the $2.2 trillion bill established some flexibilities related to the processing of federal student financial aid, established a higher education emergency fund, and created relief for some federal student loan borrowers. Through the CARES Act, Congress provided institutions of higher education relief from conducting a return to Title IV (R2T4) calculation in cases where the student withdrew because of COVID-19, including removing the requirement that the institution return unearned funds to the Department of Education and providing loan cancellation for the 101 Table of Contents portion of the Direct Loan associated with a payment period that the student did not complete due to COVID-19. The CARES Act also allows institutions to exclude from satisfactory academic progress calculations any attempted credits that the student did not complete due to COVID-19, without requiring an appeal from the student. Additionally, under the legislation, institutions are permitted to transfer up to 100% of Federal Work Study funds into their Federal Supplemental Educational Opportunity Grant allocation and are granted a waiver of the 2019/2020 and 2020/2021 non-federal share institutional match. Institutions may continue to make Federal Work Study payments to student employees who are unable to meet their employment obligations due to COVID-19. The Department issued sub-regulatory guidance to institutions regarding implementation of the provisions included in the CARES Act. The CARES Act also suspended payments and interest accrual on federal student loans until September 30, 2020, in addition to suspending involuntary collections such as wage garnishment, tax refund reductions, and reductions of federal benefits like Social Security benefits during the same timeframe. On March 30, 2021, the Secretary of Education also extended student loan relief to all Federal Family Education Loans (“FFEL”) not previously covered. Through a series of administrative actions, student loan relief has been extended through May 1, 2022. Finally, the CARES Act allocated $14 billion to higher education through the creation of the Education Stabilization Fund. Fifty percent of the emergency funds received by institutions must go directly to students in the form of emergency financial aid grants to cover expenses related to the disruption of campus operations due to COVID-19. Students who were previously enrolled in exclusively online courses prior to March 13, 2020 are not eligible for these grants. Institutions may use remaining emergency funds not given to students for costs associated with significant changes to the delivery of instruction due to COVID-19, as long as such costs do not include payment to contractors for the provision of pre-enrollment recruitment activities, including marketing and advertising; endowments; or capital outlays associated with facilities related to athletics, sectarian instruction, or religious worship. Institutions received funds under the Education Stabilization Fund based on a formula that factors in their relative percentage of full-time, Federal Pell Grant-eligible students who were not exclusively enrolled in online education prior to the emergency period. On April 9, 2020, the Department published guidance and funding levels for the Education Stabilization Fund, indicating that Strayer University was eligible to receive $ 5,792,122 . Given that Strayer University is predominantly online, and very few students take only on-ground classes, Strayer declined to accept the funds allocated to it because most students would not have expenses related to the disruption of campus operations. Instead, Strayer University provided a $ 500 tuition grant for all students who had enrolled in on-ground classes for the Spring term, prior to the classes being converted to online. Because Capella University’s students are exclusively online, Capella was ineligible for Education Stabilization funding. Gainful Employment Under the Higher Education Act (“HEA”), a proprietary institution offering programs of study other than a baccalaureate degree in liberal arts (for which there is a limited statutory exception) must prepare students for gainful employment in a recognized occupation. The Department of Education published final regulations related to gainful employment that went into effect on July 1, 2015, with the additional disclosure requirements that became effective January 1, 2017 and July 1, 2019 (the “2015 Regulations”). On July 1, 2019, the Department of Education released final gainful employment regulations, which contained a full repeal of the 2015 Regulations and became effective on July 1, 2020. Both Strayer University and Capella University implemented the July 2019 regulations early, by means permitted by the Secretary, and accordingly were not required to report gainful employment data for the 2018-2019 award year. For the period between July 2019 and July 1, 2020, Strayer University and Capella University were not required to comply with gainful employment disclosure and template publication requirements and were not required to comply with the regulation’s certification requirements with respect to programmatic accreditation and program satisfaction of prerequisites for professional licensure/state certification. On December 8, 2021, the Department announced its intention to establish negotiated rulemaking committees to develop proposed regulations for gainful employment and other topics related to programs authorized under Title IV of the Higher Education Act of 1965, as amended, with negotiations scheduled to occur January-March 2022. Borrower Defenses to Repayment On September 23, 2019, the Department published final Borrower Defense to Repayment regulations (the “2019 BDTR Rule”), which governs borrower defense to repayment claims in connection with loans first disbursed on or after July 1, 2020, the date the 2019 BDTR Rule became effective. The 2019 BDTR Rule supplants the 2016 Borrower Defense to Repayment rule. 102 Table of Contents Under the 2019 BDTR Rule, an individual borrower can assert a defense to repayment and be eligible for relief if she or he establishes, by a preponderance of the evidence, that (1) the institution at which the borrower enrolled made a misrepresentation of material fact upon which the borrower reasonably relied in deciding to obtain a Direct Loan or a loan repaid by a Direct Consolidation Loan; (2) the misrepresentation directly and clearly related to the borrower’s enrollment or continuing enrollment at the institution or the institution’s provision of education services for which the loan was made; and (3) the borrower was financially harmed by the misrepresentation. The Department will grant forbearance on all loans related to a claim at the time the claim is made. The 2019 BDTR Rule defines “financial harm” as the amount of monetary loss that a borrower incurs as a consequence of a misrepresentation. The Department will determine financial harm based upon individual earnings and circumstances, which must include consideration of the individual borrower’s career experience subsequent to enrollment and may include, among other factors, evidence of program-level median or mean earnings. “Financial harm” does not include damages for non-monetary loss, and the act of taking out a Direct Loan, alone, does not constitute evidence of financial harm. Financial harm also cannot be predominantly due to intervening local, regional, national economic or labor market conditions, nor can it arise from the borrower’s voluntary change in occupation or decision to pursue less than full-time work or decision not to work. The 2019 BDTR Rule contains certain limitations and procedural protections. Among the most prominent of these restrictions, the regulation contains a three-year limitation period of claims, measured from the student’s separation from the institution, does not permit claims to be filed on behalf of groups, and requires that institutions receive access to any evidence in the Department’s possession to inform its response. The 2019 BDTR Rule permits the usage of pre-dispute arbitration agreements and class action waivers as conditions of enrollment, so long as the institution provides plain-language disclosures to students and the disclosures are placed on the institution’s website. The regulations also allow for a borrower to choose whether to apply for a closed school loan discharge or accept a teach-out opportunity. In addition, the closed school discharge window is expanded from 120 days to 180 days prior to the school’s closure, though the final rule does not allow for an automatic closed school loan discharge. Institutions are required to accept responsibility for the repayment of amounts discharged by the Secretary pursuant to the borrower defense to repayment, closed school discharge, false certification discharge, and unpaid refund discharge regulations. If the Secretary discharges a loan in whole or in part, the Department of Education may require the school to repay the amount of the discharged loan. On December 10, 2019, the Secretary of Education released a formula to calculate the amount of relief a borrower may receive for a successful BDTR application. This formula analyzed a borrower’s earnings as compared to median earnings of comparable programs to determine the amount of loans that would be discharged. Under this formula, even successful BDTR applicants may receive only a partial loan discharge. On March 11, 2020, the 116th Congress passed a joint resolution providing for Congressional disapproval of the 2019 BDTR Rule. Former President Trump vetoed the joint resolution on May 29, 2020, and the House subsequently failed to override the veto during a vote on June 26, 2020. On March 18, 2021, the Department revised its BDTR review process and repealed the previous administration’s partial relief formula. Under the new BDTR procedures, the Department will grant full loan relief to borrowers with approved BDTR applications. Additionally, the Department has eliminated certain evidentiary requirements for borrowers who have received a loan cancellation due to total or permanent disability. These borrowers will no longer be required to provide proof of insufficient income for the relief program for the three years after discharge of their loans. On August 10, 2021, the Department announced its intention to establish a negotiated rulemaking committee to develop proposed regulations for borrower defenses to repayment and other topics related to programs authorized under Title IV of the Higher Education Act of 1965, as amended, and solicited negotiator nominations. Negotiated rulemaking for the Affordability and Student Loans Committee began October 4, 2021 and concluded December 10, 2021. See “Current Negotiated Rulemaking” below. We cannot predict the outcome of the negotiated rulemaking process. Accrediting Agencies and State Authorization On November 1, 2019, the Department of Education published final rules amending regulations governing the recognition of accrediting agencies, certain student assistance provisions including state authorization rules, and institutional eligibility. Among other changes, the final rules revise the definition of “state authorization reciprocity agreement” such that member states may enforce their own general-purpose state laws and regulations, but may not impose additional requirements related to state authorization of distance education directed at all or a subgroup of educational institutions. The regulations also clarify that state authorization requirements related to distance education courses are based on the state where a student is “located,” as determined by the institution, and not the state of the student’s “residence.” In addition, the final rules remove certain disclosure requirements related to programs offered solely through distance education, and they replace those requirements with certain disclosure requirements applicable to all programs that lead to professional licensure or certification, regardless of the delivery modality of those programs. The Department’s new rules also refine the process for recognition and review of accrediting agencies, the criteria used by the Department to recognize accrediting agencies, and the Department’s requirements for 103 Table of Contents accrediting agencies in terms of their oversight of accredited institutions and programs. The final regulations became effective on July 1, 2020, excepting certain provisions which were eligible to be implemented early by institutions, and certain provisions relating to recognition of accrediting agencies effective January 1 and July 1, 2021. On July 29, 2020, the National Advisory Committee on Institutional Quality and Integrity (“NACIQI”) held a meeting to review compliance by the Higher Learning Commission (“HLC”) with Department of Education requirements for recognized accrediting agencies. HLC is the institutional accreditor for Capella University. On June 30, 2020, the Department released a staff report that outlined HLC’s alleged noncompliance with its own policies and the Department’s regulations with regard to a change of ownership approval process for the acquisition of the Art Institute of Colorado and the Illinois Institute of Art, by Dream Center Educational Holdings. The staff report noted noncompliance in the areas of due process, consistency in decision making, and proper appeals procedures. The staff report proposed a one-year prohibition on HLC accrediting new institutions and a required compliance report on HLC’s remedial actions. NACIQI voted 9-2 to reject the staff report’s proposed sanctions, but NACIQI’s recommendation was non-binding. On October 26, 2020, a Senior Department Official (“SDO”) found HLC non-compliant, in part. While the SDO required that HLC submit periodic reporting for twelve months, the SDO did not restrict HLC's scope of accreditation or ability to accredit new institutions. HLC did not appeal the Secretary's decision. Distance Education and Innovation On August 24, 2020, the Department of Education published final rules related to distance education and innovation to amend the sections of the institutional eligibility regulations issued under the HEA regarding establishing eligibility, maintaining eligibility, and losing eligibility. Among other changes, the final rules establish an updated definition of distance education; amend the existing definition of the credit hour; create a definition of academic engagement; and update eligibility and program design, for programs offered through the direct assessment of learning. The final rules also make operational changes to several financial aid awarding, disbursing and refunding rules, including how aid can be delivered to students enrolled in subscription period programs, such as Capella’s FlexPath offerings. The final rule became effective July 1, 2021. Title IX On May 6, 2020, the Department of Education published final rules related to implementation of Title IX of the Education Amendments of 1972 (“Title IX”), which prohibits discrimination on the basis of sex in education programs that receive funding from the federal government. The final rules define what constitutes sexual harassment for purposes of Title IX in the administrative enforcement context, describe what actions trigger an institution’s obligation to respond to incidents of alleged sexual harassment, and specify how an institution must respond to allegations of sexual harassment. Among other things, the new rules include a requirement for live hearings on Title IX sexual harassment claims, which includes direct and cross-examination of parties, university-provided advisors (in the event a student or party does not provide an advisor), rulings on questions of relevance by decision-makers, and the creation and maintenance of a record of the live hearing proceedings. The final rule became effective August 14, 2020. On March 8, 2021, President Biden signed an executive order that requires the Secretary of Education and the Attorney General to review the previous administration’s rulemakings and guidance documents related to Title IX. In June 2021, the Department of Education held virtual public hearings to gather information for providing enforcement of Title IX, as part of the Office for Civil Rights’ (“OCR”) comprehensive review of the regulation. After the public hearings, the Department of Education indicated that it plans to introduce proposed rule changes for Title IX in May 2022. On June 16, 2021, the OCR issued a notice of interpretation clarifying that the Department interprets Title IX and its enforcement authority under the regulation to include the prohibition of sex discrimination based on sexual orientation and gender identity. On July 20, 2021, the Department of Education released a Questions and Answers document outlining the OCR's interpretation of the Title IX regulations related to sexual harassment. On August 24, 2021, OCR, in alignment with recent federal court decisions, issued guidance indicating it would cease enforcement of Title IX’s current prohibition against consideration of statements made by individuals failing to submit to cross-examination. In December 2021, OCR indicated that proposed rule changes for Title IX can be expected in April 2022, one month ahead of the anticipated schedule. Current Negotiated Rulemaking On May 26, 2021, the Department announced its intention to establish negotiated rulemaking committees to prepare proposed regulations for programs authorized under Title IV of the Higher Education Act of 1965, as amended. As part of the notice, the Department suggested the following topics for regulation: change of ownership and change in control of institutions of higher education under 34 CFR § 600.31; certification procedures for participation in Title IV, HEA programs under 34 CFR § 668.13; standards of administrative capability under 34 CFR § 668.16; ability to benefit under 34 CFR § 668.156; borrower defense to repayment under 34 CFR §§ 682.410, 668.411, 685.206, and 685.222; discharges for borrowers with a total and permanent disability under 34 CFR §§ 674.61, 682.402, and 685.213; closed school discharges under 34 CFR §§ 685.214 and 104 Table of Contents 682.402; discharges for false certification of student eligibility under 34 CFR §§ 685.215(a)(1) and 682.402; loan repayment plans under 34 CFR §§ 682.209, 682.215, 685.208, and 685.209; the Public Service Loan Forgiveness program under 34 CFR § 685.219; mandatory pre-dispute arbitration and prohibition of class action lawsuits provisions in institutions’ enrollment agreements (formerly under 34 CFR § 685.300) and associated counseling about such arrangements under 34 CFR § 685.304; financial responsibility for participating institutions of higher education under 34 CFR subpart L, such as events that indicate heightened financial risk; gainful employment (formerly located in 34 CFR subpart Q); and Pell Grant eligibility for prison education programs under 34 CFR part 690. Additionally, the Department invited public input on how it could address, through regulations, gaps in postsecondary outcomes such as retention, completion, loan repayment, and student loan default by race, ethnicity, gender, and other key student characteristics. To support this work, the Department held a series of virtual public hearings in June 2021, as well as accepted written comments. At the virtual public hearings and via written comments, members of the public discussed proposed changes for all of the issues noted above, as well as comments addressing data transparency, including disclosures of outcomes for veteran students. The Department has indicated its intention to convene multiple committees, including the Affordability and Student Loans Committee. See “Affordability and Student Loans Committee” below. On October 4, 2021 the Department announced its intention to establish a negotiated rulemaking committee to prepare proposed regulations affecting institutional and programmatic eligibility, including the 90/10 rule. As part of the notice, the Department announced public hearings on October 26 and October 27. Meetings of this negotiated rulemaking committee are scheduled to occur January-March 2022. We cannot predict the outcome of the negotiated rulemaking process. Affordability and Student Loans Committee On August 10, 2021, the Department announced its intention to establish the Affordability and Student Loans committee, to prepare proposed regulations to address the following topics: borrower defense to repayment, closed school discharges, discharges for borrowers with a total and permanent disability, discharges for false certification of student eligibility, loan repayment plans, interest capitalization, mandatory pre-dispute arbitration and prohibition of class action lawsuits provisions in institutions’ enrollment agreements and associated counseling about such arrangements, Pell Grant eligibility or prison education programs, and the Public Service Loan Forgiveness program. The Department also announced the formation of a Prison Education Program Subcommittee. The Department selected negotiators in September 2021, with negotiations occurring October-December 2021. Issue papers provided by the Department indicate the Department is considering changes to borrower to defense to repayment regulations that include eliminating a limitations period on claims, making the group claims process the default process for loan relief, establishing the borrower defense application as a form of evidence, and redefining misrepresentation. See “Current Negotiated Rulemaking” above. We cannot predict the outcome of the negotiated rulemaking process. Institutional and Programmatic Eligibility Committee On December 8, 2021, the Department announced its intention to establish the Institutional and Programmatic Eligibility committee, to prepare proposed regulations to address the following topics: 90/10, ability to benefit, certification procedures for participating in Title IV programs, change of ownership and change in control of institutions of higher education, financial responsibility for participating institutions of higher education, gainful employment, and standards of administrative capability. Committee meetings began on January 18, 2022 and are to be completed in March 2022. Public Service Loan Forgiveness Program On October 6, 2021, the Department of Education announced new changes and initiatives related to the Public Service Loan Forgiveness (“PSLF”) program. This announcement aimed to make discharge of federal student loans easier for those that participate in the PSLF. One such way the Department of Education is streamlining the PSLF process is by implementing a time-limited waiver, which gives borrowers flexibility in counting prior payments towards PSLF, even if the previous payments were for different loan programs such as FFEL or if the payments were partial payments. Borrowers with Direct Loans will be able to seek this waiver until October 31, 2022. The Department of Education announced that the waiver will help over 550,000 borrowers progress towards loan relief under PSLF. Additionally, the Department of Education plans to automate aspects of the PSLF process for federal employees and military service members. The Department of Education plans to pair these changes to the program with increased support and communications to borrowers who may benefit from PSLF. Compliance Reviews Strayer University and Capella University are subject to announced and unannounced compliance reviews and audits by various external agencies, including the Department, its Office of Inspector General, state licensing agencies, guaranty agencies, and accrediting agencies. 105 Table of Contents In June 2019, the Department conducted an announced, on-site program review at Capella University, focused on Capella University’s FlexPath program. The review covered the 2017-2018 and 2018-2019 federal student financial aid years. The Department issued its preliminary report on November 13, 2020, and Capella University responded to the report. On February 9, 2021, Capella University received the Department’s Final Program Review Determination, which closed the Program Review without further action required on the part of Capella University. On March 17, 2021, the Department informed Strayer University that it planned to conduct an announced, remote program review. The review commenced on April 19, 2021 and covered the 2019-2020 and 2020-2021 federal student financial aid years. On September 21, 2021, Strayer University received the Department’s Final Program Review Determination, which closed the Program Review without further action required on the part of Strayer University. Program Participation Agreement Each institution participating in Title IV programs must enter into a Program Participation Agreement with the Department. Under the agreement, the institution agrees to follow the Department’s rules and regulations governing Title IV programs. On December 13, 2021, the Department and Strayer University executed a new Program Participation Agreement, approving Strayer University’s continued participation in Title IV programs with full certification through September 30, 2025. As a result of the August 1, 2018 merger, Capella University experienced a change of ownership, with the Company as its new owner. On January 18, 2019, consistent with standard procedure upon a Title IV institution’s change of ownership, the Department and Capella University executed a new Provisional Program Participation Agreement, approving Capella’s continued participation in Title IV programs with provisional certification through December 31, 2022. As is typical, the Provisional Program Participation Agreement subjects Capella University to certain requirements during the period of provisional certification, including that Capella must apply for and receive approval from the Department in connection with new locations or the addition of new Title IV-eligible educational programs. Capella will be required to apply for recertification by September 30, 2022. Federal Trade Commission On October 6, 2021 the Federal Trade Commission (“FTC”) announced that it is resurrecting Penalty Offense Authority under Section 5(m) of the FTC Act (the “Act”). Under the Act, the FTC may secure penalties against entities not a party to an original proceeding if the FTC can show that the entity had actual knowledge that the conduct in question was found to be unfair or deceptive. Entities that have actual knowledge of acts or practices the FTC has found to be unlawful and that subsequently engage in such unlawful acts or practices may be held liable for civil penalties up to $43,792 per violation. Also on October 6, 2021, in an effort to establish actual knowledge and create a pathway for penalties in the event of post-notice acts or practices, the FTC issued notice to the 70 largest for-profit schools based on enrollment and revenues. The notice included a list of acts and practices that the FTC has determined are unfair or deceptive, including but not limited to acts relating to misrepresentation of employment opportunities and other benefits, together with citation to various prior determinations from cases previously litigated by the FTC. Strayer and Capella University received the FTC’s notice on October 7, 2021. The FTC made clear that receipt of the notice itself does not reflect any assessment as to whether Capella or Strayer has engaged in deceptive or unfair conduct. Office of Enforcement On October 8, 2021, the Department of Education announced establishment of an Office of Enforcement within the Department's Office of Federal Student Aid, designed to strengthen oversight over and enforcement against postsecondary schools that participate in federal student loan, grant, and work-study programs. The Office of Enforcement restores an office first established by the Department in 2016. The Office of Enforcement will be comprised of four existing divisions: Administrative Actions and Appeals Services Group, Borrower Defense Group, Investigations Group, and Resolution and Referral Management Group. The Department intends the Office of Enforcement to coordinate with other state and federal partners, including the Department of Justice, Consumer Financial Protection Bureau, Federal Trade Commission, and state attorneys general. Australian Regulation The Company operates two post-secondary educational institutions in Australia, Torrens University Australia Limited (“Torrens”) and Think: Colleges Pty Ltd (“Think”). In Australia, a distinction is made between higher education and vocational education organizations. 106 Table of Contents Higher education providers consist of public and private universities, Australian branches of overseas universities and other higher education providers. Higher education qualifications consist of undergraduate awards (bachelor’s degrees, associate degrees and diplomas) and postgraduate awards (graduate certificates and diplomas, master’s degrees and doctoral degrees). The regulation of higher education providers is undertaken at a national level by the Tertiary Education Quality and Standards Agency (“TEQSA”). All organizations that offer higher education qualifications in or from Australia must be registered by TEQSA. Higher education providers that have not been granted self-accrediting status must also have their courses of study accredited by TEQSA. Registration as a higher education provider is for a fixed period of up to seven years. TEQSA regularly reviews the conduct and operation of accredited higher education providers. The vocational education and training (“VET”) sector consists of technical and further education institutes, agricultural colleges, adult and community education providers, community organizations, industry skill centers and private providers. VET qualifications include certificates, diplomas and advanced diplomas. The regulation of VET providers is undertaken at a national level by the Australian Skills Quality Authority (“ASQA”). Organizations providing VET courses in Australia must be registered by ASQA as a Registered Training Organisation (“RTO”). Courses offered by RTOs need to be accredited by ASQA. Registration as an RTO is for a fixed period of up to seven years. ASQA regularly reviews the conduct and operations of RTOs. Torrens is one of 43 universities in Australia. It is a for-profit entity and registered as a university by TEQSA. As a self-accrediting university, it is not required to have its courses of study accredited by TEQSA. Torrens is also registered by ASQA as an RTO and is thus entitled to offer vocational and training courses. Think is one of approximately 5,000 RTOs in Australia and in that capacity is regulated by ASQA. It is also registered as a higher education provider by TEQSA. Its higher education courses require, and have received, accreditation by TEQSA. Australia also maintains a Commonwealth Register of Institutions and Courses for Overseas Students (“CRICOS”) for Australian education providers that recruit, enroll and teach overseas students. Registration in CRICOS allows providers to offer courses to overseas students studying on Australian student visas. Both Torrens and Think are so registered. The Commonwealth government has established income-contingent loan schemes that assist eligible fee-paying students to pay all or part of their tuition fees (separate schemes exist for higher education and vocational courses). Under the schemes, the relevant fees are paid directly to the institutions. A corresponding obligation then exists from the participating student to the Commonwealth government. Neither Torrens nor Think have any responsibility in connection with the repayment of these loans by students and, generally, this assistance is not available to international students. Both Torrens and Think are registered for the purposes of these plans (a precondition to their students being eligible to receive such loans). New Zealand Regulation The Company operates a post-secondary educational institution in New Zealand, Media Design School Limited (“MDS”). MDS is a Private Training Establishment (“PTE”); a private organization offering education or training. It is a globally renowned and specialist provider of design and creative technology education with qualifications ranging from diplomas to postgraduate degrees. MDS also has access to New Zealand Government student finance where study loans are offered to students who are New Zealand citizens or ordinarily resident in New Zealand, subject to certain conditions. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.