lope_Current_Folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10‑Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended March 31, 2019

 

or

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from                              to                             

 

Commission File Number: 001‑34211

 

 

GRAND CANYON EDUCATION, INC.

(Exact name of registrant as specified in its charter)

 

 

DELAWARE

    

20‑3356009

(State or other jurisdiction of
Incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

2600 W. Camelback Road

Phoenix, Arizona 85017

(Address, including zip code, of principal executive offices)

 

(602) 247‑4400

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   ☒     No   ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   ☒    No   ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act. (Check one):

 

Large accelerated filer     ☒

    

Accelerated filer                      ☐

Non-accelerated filer       ☐

 

Smaller reporting company     ☐

 

 

Emerging growth company     ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act).   Yes  ☐    No  ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

LOPE

Nasdaq Global Select Market

 

The total number of shares of common stock outstanding as of May 3, 2019, was 48,248,212.

 

 

 

 


 

Table of Contents

GRAND CANYON EDUCATION, INC.

FORM 10‑Q

INDEX

 

 

 

Page

PART I – FINANCIAL INFORMATION 

3

 

 

Item 1 Financial Statements 

3

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 

24

Item 3 Quantitative and Qualitative Disclosures About Market Risk 

32

Item 4 Controls and Procedures 

32

 

 

PART II – OTHER INFORMATION 

33

 

 

Item 1 Legal Proceedings 

33

Item 1A Risk Factors 

33

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 

33

Item 3 Defaults Upon Senior Securities 

34

Item 4 Mine Safety Disclosures 

34

Item 5 Other Information 

34

Item 6 Exhibits 

34

SIGNATURES 

36

101.INS      XBRL Instance Document

 

101.SCH     XBRL Taxonomy Extension Schema

 

101.CAL     XBRL Taxonomy Extension Calculation Linkbase

 

101.LAB     XBRL Taxonomy Extension Label Linkbase

 

101.PRE     XBRL Taxonomy Extension Presentation Linkbase

 

101.DEF     XBRL Taxonomy Extension Definition Linkbase

 

 

 

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PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

GRAND CANYON EDUCATION, INC.

Consolidated Income Statements

(Unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

(In thousands, except per share data)

    

2019

    

2018

Service revenue

 

$

197,287

 

$

 —

University related revenue

 

 

 —

 

 

275,681

Net revenue

 

 

197,287

 

 

275,681

Costs and expenses:

 

 

  

 

 

  

Technology and academic services

 

 

19,039

 

 

10,697

Counseling services and support

 

 

53,093

 

 

50,747

Marketing and communication

 

 

35,461

 

 

28,527

General and administrative

 

 

11,489

 

 

7,419

Amortization of intangible assets

 

 

1,686

 

 

 —

University related expenses

 

 

 —

 

 

87,649

Loss on Transaction

 

 

4,088

 

 

550

Total costs and expenses

 

 

124,856

 

 

185,589

Operating income

 

 

72,431

 

 

90,092

Interest income on Secured Note

 

 

13,735

 

 

 —

Interest expense

 

 

(2,586)

 

 

(346)

Investment interest and other

 

 

1,119

 

 

981

Income before income taxes

 

 

84,699

 

 

90,727

Income tax expense

 

 

11,456

 

 

17,046

Net income

 

$

73,243

 

$

73,681

Earnings per share:

 

 

  

 

 

  

Basic income per share

 

$

1.54

 

$

1.55

Diluted income per share

 

$

1.52

 

$

1.52

Basic weighted average shares outstanding

 

 

47,699

 

 

47,432

Diluted weighted average shares outstanding

 

 

48,274

 

 

48,397

 

The accompanying notes are an integral part of these consolidated financial statements.

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GRAND CANYON EDUCATION, INC.

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

(In thousands)

    

2019

    

2018

Net income

 

$

73,243

 

$

73,681

Other comprehensive income, net of tax:

 

 

  

 

 

  

Unrealized gains on available-for-sale securities, net of taxes of $8 for March 31, 2018

 

 

 —

 

 

24

Unrealized gains (losses) on hedging derivatives, net of taxes of $35 and $57 for March 31, 2019 and 2018, respectively

 

 

(107)

 

 

174

Comprehensive income

 

$

73,136

 

$

73,879

 

The accompanying notes are an integral part of these consolidated financial statements.

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GRAND CANYON EDUCATION, INC.

Consolidated Balance Sheets

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

(In thousands, except par value)

 

2019

 

2018

 

 

(Unaudited)

 

 

 

ASSETS:

 

 

 

 

 

 

Current assets

 

 

 

 

 

  

Cash and cash equivalents

 

$

88,467

 

$

120,346

Restricted cash and cash equivalents

 

 

300

 

 

61,667

Investments

 

 

14,243

 

 

69,002

Accounts receivable, net

 

 

74,653

 

 

46,830

Interest receivable on Secured Note

 

 

4,785

 

 

4,650

Income tax receivable

 

 

3,423

 

 

 8

Other current assets

 

 

12,337

 

 

6,963

Total current assets

 

 

198,208

 

 

309,466

Property and equipment, net

 

 

116,239

 

 

111,039

Right-of-use assets

 

 

13,186

 

 

 —

Secured Note receivable

 

 

929,998

 

 

900,093

Amortizable intangible assets, net

 

 

208,594

 

 

 —

Goodwill

 

 

151,228

 

 

2,941

Other assets

 

 

2,020

 

 

478

Total assets

 

$

1,619,473

 

$

1,324,017

LIABILITIES AND STOCKHOLDERS’ EQUITY:

 

 

  

 

 

  

Current liabilities

 

 

  

 

 

  

Accounts payable

 

$

13,295

 

$

14,274

Accrued compensation and benefits

 

 

17,985

 

 

15,427

Accrued liabilities

 

 

15,543

 

 

8,907

Income taxes payable

 

 

23,500

 

 

5,442

Deferred revenue

 

 

5,168

 

 

 —

Current portion of lease liability

 

 

2,089

 

 

 —

Current portion of notes payable

 

 

48,422

 

 

36,468

Total current liabilities

 

 

126,002

 

 

80,518

Deferred income taxes, noncurrent

 

 

9,427

 

 

6,465

Lease liability, less current portion

 

 

11,177

 

 

 —

Notes payable, less current portion

 

 

199,994

 

 

23,437

Total liabilities

 

 

346,600

 

 

110,420

Commitments and contingencies

 

 

  

 

 

  

Stockholders’ equity

 

 

  

 

 

  

Preferred stock, $0.01 par value, 10,000 shares authorized; 0 shares issued and outstanding at March 31, 2019 and December 31, 2018

 

 

 —

 

 

 —

Common stock, $0.01 par value, 100,000 shares authorized; 52,922 and 52,690 shares issued and 48,246 and 48,201 shares outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

529

 

 

527

Treasury stock, at cost, 4,676 and 4,489 shares of common stock at March 31, 2019 and December 31, 2018, respectively

 

 

(143,579)

 

 

(125,452)

Additional paid-in capital

 

 

261,071

 

 

256,806

Accumulated other comprehensive loss

 

 

(560)

 

 

(453)

Retained earnings

 

 

1,155,412

 

 

1,082,169

Total stockholders’ equity

 

 

1,272,873

 

 

1,213,597

Total liabilities and stockholders’ equity

 

$

1,619,473

 

$

1,324,017

 

The accompanying notes are an integral part of these consolidated financial statements.

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GRAND CANYON EDUCATION, INC.

Consolidated Statement of Stockholders’ Equity

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

 

Common Stock

 

Treasury Stock

 

Paid-in

 

Comprehensive

 

Retained

 

 

 

 

  

Shares

  

Par Value

  

Shares

  

Cost

  

Capital

  

Loss

  

Earnings

  

Total

Balance at December 31, 2018

 

52,690

 

$

527

 

4,489

 

$

(125,452)

 

$

256,806

 

$

(453)

 

$

1,082,169

 

$

1,213,597

Comprehensive income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(107)

 

 

73,243

 

 

73,136

Common stock purchased for treasury

 

 —

 

 

 —

 

108

 

 

(10,000)

 

 

 —

 

 

 —

 

 

 —

 

 

(10,000)

Restricted shares forfeited

 

 

 

 

11

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Share-based compensation

 

149

 

 

 1

 

68

 

 

(8,127)

 

 

2,635

 

 

 —

 

 

 —

 

 

(5,491)

Exercise of stock options

 

83

 

 

 1

 

 —

 

 

 —

 

 

1,630

 

 

 —

 

 

 —

 

 

1,631

Balance at March 31, 2019

 

52,922

 

$

529

 

4,676

 

$

(143,579)

 

$

261,071

 

$

(560)

 

$

1,155,412

 

$

1,272,873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

 

Common Stock

 

Treasury Stock

 

Paid-in

 

Comprehensive

 

Retained

 

 

 

 

  

Shares

  

Par Value

  

Shares

  

Cost

  

Capital

  

Loss

  

Earnings

  

Total

Balance at December 31, 2017

 

52,277

 

 

523

 

4,152

 

 

(100,694)

 

 

232,670

 

 

(724)

 

 

854,176

 

 

985,951

Cumulative effect from the adoption of accounting pronouncements, net of taxes

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,174)

 

 

(1,174)

Comprehensive income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

198

 

 

73,681

 

 

73,879

Common stock purchased for treasury

 

 —

 

 

 —

 

 5

 

 

(508)

 

 

 —

 

 

 —

 

 

 —

 

 

(508)

Restricted shares forfeited

 

 

 

 

 3

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Share-based compensation

 

160

 

 

 2

 

119

 

 

(11,524)

 

 

3,467

 

 

 —

 

 

 —

 

 

(8,055)

Exercise of stock options

 

59

 

 

 —

 

 —

 

 

 —

 

 

919

 

 

 —

 

 

 —

 

 

919

Balance at March 31, 2018

 

52,496

 

$

525

 

4,279

 

$

(112,726)

 

$

237,056

 

$

(526)

 

$

926,683

 

$

1,051,012

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

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GRAND CANYON EDUCATION, INC.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

(In thousands)

    

2019

    

2018

Cash flows provided by operating activities:

 

 

  

 

 

  

Net income

 

$

73,243

 

$

73,681

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

  

 

 

  

Share-based compensation

 

 

2,636

 

 

3,469

Provision for bad debts

 

 

 —

 

 

4,997

Depreciation and amortization

 

 

4,414

 

 

13,947

Amortization of intangible assets

 

 

1,686

 

 

 —

Deferred income taxes

 

 

2,855

 

 

1,928

Loss on transaction, net of costs and asset impairment

 

 

4,088

 

 

 —

Other, including fixed asset impairments

 

 

(186)

 

 

539

Changes in assets and liabilities:

 

 

  

 

 

  

Accounts receivable from university partners

 

 

(24,722)

 

 

 —

Accounts receivable

 

 

 —

 

 

(3,558)

Prepaid expenses and other

 

 

(3,425)

 

 

(1,332)

Right-of-use assets and lease liabilities

 

 

80

 

 

 —

Accounts payable

 

 

(4,903)

 

 

563

Accrued liabilities

 

 

805

 

 

7,665

Income taxes receivable/payable

 

 

14,643

 

 

14,809

Deferred rent

 

 

 —

 

 

(36)

Deferred revenue

 

 

5,123

 

 

24,686

Student deposits

 

 

 —

 

 

(22,350)

Net cash provided by operating activities

 

 

76,337

 

 

119,008

Cash flows used in investing activities:

 

 

  

 

 

  

Capital expenditures

 

 

(4,586)

 

 

(35,347)

Additions of amortizable content

 

 

(157)

 

 

 —

Acquisition, net of cash acquired

 

 

(361,184)

 

 

 —

Funding to GCU for capital expenditures

 

 

(29,905)

 

 

 —

Purchases of investments

 

 

(1,772)

 

 

(17,122)

Proceeds from sale or maturity of investments

 

 

56,752

 

 

13,944

Net cash used in investing activities

 

 

(340,852)

 

 

(38,525)

Cash flows provided by (used in) financing activities:

 

 

  

 

 

  

Principal payments on notes payable

 

 

(59,850)

 

 

(1,716)

Debt issuance costs

 

 

(2,385)

 

 

 —

Proceeds from notes payable

 

 

243,750

 

 

 —

Net borrowings from revolving line of credit

 

 

6,250

 

 

 —

Repurchase of common shares including shares withheld in lieu of income taxes

 

 

(18,127)

 

 

(12,032)

Net proceeds from exercise of stock options

 

 

1,631

 

 

919

Net cash provided by (used in) financing activities

 

 

171,269

 

 

(12,829)

Net (decrease) increase in cash and cash equivalents and restricted cash

 

 

(93,246)

 

 

67,654

Cash and cash equivalents and restricted cash, beginning of period

 

 

182,013

 

 

248,008

Cash and cash equivalents and restricted cash, end of period

 

$

88,767

 

$

315,662

Supplemental disclosure of cash flow information

 

 

  

 

 

  

Cash paid for interest

 

$

1,667

 

$

321

Cash paid for income taxes

 

$

420

 

$

375

Supplemental disclosure of non-cash investing and financing activities

 

 

  

 

 

  

Purchases of property and equipment included in accounts payable

 

$

736

 

$

13,081

Reclassification of capitalized costs – adoption of ASC 606

 

$

 —

 

$

9,015

Reclassification of deferred revenue – adoption of ASC 606

 

$

 —

 

$

7,451

Lease adoption - gross up of right of use assets and lease liabilities

 

$

498

 

$

 —

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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1. Nature of Business

Grand Canyon Education, Inc. (together with its subsidiaries, the “Company” or “GCE”) is a publicly traded education services company. Prior to July 1, 2018, GCE owned and operated Grand Canyon University (the “University”), a comprehensive regionally accredited university that offers approximately 240 graduate and undergraduate degree programs, emphases and certificates across nine colleges both online and on ground at its campus in Phoenix, Arizona, at leased facilities and at facilities owned by third party employers of its students. On July 1, 2018, the Company sold the University to Grand Canyon University, an Arizona non-profit corporation formerly known as Gazelle University (“GCU”). As a result of this transaction (the “Transaction”), GCE became an educational services company focused on providing a full array of support services to institutions in the post-secondary education sector. GCE has developed significant technological solutions, infrastructure and operational processes to provide services to these institutions on a large scale.  See Note 2 to our consolidated financial statements for a full description of the Transaction.

On December 17, 2018, the Company entered into a definitive Agreement and Plan of Merger to acquire Orbis Education Services, LLC (“Orbis Education”). Orbis Education is an education services company that supports healthcare education programs for 17 university partners across the United States. The closing of the merger occurred on January 22, 2019 and, as a result of the merger, GCE acquired all of the outstanding equity interests of Orbis Education for $361,184, net of cash acquired (the “Acquisition”). The Company financed a portion of the purchase price through a credit facility provided by a consortium of banks led by our existing bank group.  See Note 3 to our consolidated financial statement for a full description of the Acquisition.

As a result of the Transaction and Acquisition, the Company no longer owns and operates an institution of higher education, but instead provides a bundle of services in support of its 18 university partners. 

2. The Transaction

Asset Purchase Agreement and Related Agreements

On July 1, 2018, the Company consummated an Asset Purchase Agreement (the “Asset Purchase Agreement”) with GCU.  In conjunction with the Asset Purchase Agreement, we received a secured note from GCU as consideration for the transferred assets (the “Transferred Assets”) in the initial principal amount of $870.1 million (the “Secured Note”). The Secured Note contains customary commercial credit terms, including affirmative and negative covenants applicable to GCU, and provides that the Secured Note bears interest at an annual rate of 6.0%, has a maturity date of June 30, 2025, and is secured by all of the assets of GCU. The Secured Note provides for GCU to make interest only payments during the term, with all principal and accrued and unpaid interest due at maturity and also provides that we may loan additional amounts to GCU to fund approved capital expenditures during the first three years of the term.  In connection with the closing of the Asset Purchase Agreement, the Company and GCU entered into a long-term master services agreement pursuant to which the Company provides identified technology and academic services, counseling services and support, marketing and communication services, and several back office services to GCU in return for 60% of GCU’s tuition and fee revenue.

The Company was a party to a credit agreement with Bank of America, N.A. as Administrative Agent, and other lenders, dated December 21, 2012 and amended as of January 15, 2016. Effective July 1, 2018, the Company and the lenders amended the credit agreement (the “Amendment”) to release the assets pledged as collateral in order to enable GCE to sell them to GCU and complete the Transaction.  In connection with the Amendment, GCE provided restricted cash collateral in the amount of $61,667 as of December 31, 2018. 

Disposed Assets, previously Assets and Liabilities Held for Sale

The Company received Board approval to consummate the Transaction on June 28, 2018, and completed the Transaction on July 1, 2018. As a result, the Company determined that it had met the accounting requirements to classify the assets and liabilities to be transferred in the Transaction as assets and liabilities held for sale as of June 30, 2018. The

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assets and liabilities held for sale were sold as part of the Transaction on July 1, 2018. Accordingly, the following balances were transferred to GCU as of July 1, 2018:

 

 

 

 

Restricted cash and cash equivalents

    

$

97,443

Accounts receivable, net of allowance for doubtful accounts of $6,093

 

 

9,780

Other assets

 

 

7,677

Property and equipment, net of accumulated depreciation of $166,066

 

 

870,097

Total assets held for sale, current

 

$

984,997

 

 

 

 

Accrued and other liabilities

 

$

5,025

Student deposits

 

 

88,010

Deferred revenue

 

 

46,325

Note payable

 

 

79

Total liabilities held for sale, current

 

$

139,439

 

The Company received the Secured Note for the Transferred Assets. The Company also transferred cash equal to $34,107 representing a working capital adjustment as part of the closing. Except for identified liabilities assumed by GCU, GCE retained responsibility for all liabilities of the business arising from pre-closing operations. For the three months ended March 31, 2018 the Company had transaction expenses of $550, included in Loss on Transaction.

3. Acquisition

On January 22, 2019, GCE acquired Orbis Education for $361,184 (inclusive of closing date adjustments and net of cash acquired).  Orbis Education is an education services company that supports healthcare education programs for 17 university partners across the United States.  Concurrent with the closing of the Acquisition, GCE entered into an amended and restated credit agreement and used $191,000 from the amended and restated credit agreement and $171,034 of operating cash flows on hand to complete the purchase.  See Note 11 of our consolidated financial statements for a description of the amended and restated credit agreement.  The fair value of the assets acquired, less the liabilities assumed exceeded the purchase price by $148,287 which was recorded as goodwill.  Transaction costs for the Acquisition for the year ended December 31, 2018 were $808 and for the three months ended March 31, 2019 were $4,088, which are included in the Loss on Transaction in our consolidated income statement.

The Acquisition was accounted for in accordance with the acquisition method of accounting.  Under this method the cost of the target is allocated to the identifiable assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The following table provides a tabular depiction of the Company’s

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allocation of the total purchase price to each of the assets acquired and liabilities assumed based on the Company’s fair value estimates.

 

 

 

 

Assets acquired

    

 

 

Cash, including $300 of pledged collateral

 

$

4,793

Accounts receivable, net of allowance of $0

 

$

3,236

Property and equipment

 

$

5,392

Right-of-use assets

 

$

13,069

Intangible assets

 

$

210,280

Other assets

 

$

2,793

Liabilities assumed

 

 

 

Accounts payable

 

$

4,308

Accrued and other liabilities

 

$

4,451

Lease liability

 

$

13,069

Deferred revenue

 

$

45

Total net asset or liability purchased and assumed

 

$

217,690

 

 

 

 

Purchase price

 

$

365,977

 

 

 

 

Excess of fair value of net assets acquired over consideration given (“goodwill”)

 

$

148,287

 

The estimated fair values of current assets and liabilities were based upon their historical costs on the date of acquisition due to their short-term nature.  The majority of property and equipment were also estimated based upon historical costs as they approximated fair value.  Identified intangible assets of $210,280, consist primarily of university partner relationships that were valued at $210,000.  The fair value of university partner relationships was determined using the multiple-period excess earnings method.

The amounts recorded related to the Acquisition is subject to adjustment as the Company has not yet completed the final allocation of the purchase price.  The Company has one year from the date of the Acquisition to complete the allocation of the purchase price.

The Company has consolidated the results of operations for Orbis Education since its Acquisition on January 22, 2019.  Consolidated net revenue and consolidated net income for the three months ended March 31, 2019 include $17,481 and $380, respectively, from Orbis Education.  The following table reports pro forma information as if the Acquisition of Orbis Education had been completed at the beginning of the earliest period presented:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2019

    

2018

Net revenue

 

 

 

 

 

 

As Reported

 

$

197,287

 

$

275,681

Pro forma

 

$

200,537

 

$

289,255

 

 

 

 

 

 

 

Net income

 

 

  

 

 

  

As Reported

 

$

73,243

 

$

73,681

Pro forma

 

$

61,998

 

$

58,699

 

The pro forma information above for the three months ended March 31, 2019 and 2018 includes acquisition related costs in both periods, amortization of intangible assets as a result of the Acquisition, additional interest expense on the debt issued to finance the Acquisition, depreciation expense based on the estimated fair value of the assets acquired, and warrant expense and related tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been consummated on January 1, 2019 and 2018.

 

 

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4. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions have been eliminated in consolidation.

Unaudited Interim Financial Information

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles and pursuant to the rules and regulations of the United States Securities and Exchange Commission and the instructions to Form 10‑Q and Article 10, consistent in all material respects with those applied in its financial statements included in its Annual Report on Form 10‑K for the fiscal year ended December 31, 2018. They do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. Such interim financial information is unaudited but reflects all adjustments that in the opinion of management are necessary for the fair presentation of the interim periods presented. Interim results are not necessarily indicative of results for a full year. These consolidated financial statements should be read in conjunction with the Company’s audited financial statements and footnotes included in its Annual Report on Form 10‑K for the fiscal year ended December 31, 2018 from which the December 31, 2018 balance sheet information was derived. For purposes hereof, the term “university related revenue” refer to the Company’s revenue from operations prior to the sale of the University to GCU, and the term “university related expenses” refers to the Company’s expenses related to the operation of the University prior to the sale of the University to GCU and that are now the responsibility of GCU.

Restricted Cash and Cash Equivalents

A significant portion of the Company’s university related revenue was received from students who participated in government financial aid and assistance programs. Prior to July 1, 2018, restricted cash and cash equivalents represented amounts received from the federal and state governments under various student aid grant and loan programs, such as Title IV. The Company received these funds subsequent to the completion of the authorization and disbursement process and held them for the benefit of the student. The Department of Education requires Title IV funds collected in advance of student billings to be restricted until the course begins. Prior to the Transaction, the Company recorded all of these amounts as a current asset in restricted cash and cash equivalents. The majority of these funds remained as restricted for an average of 60 to 90 days from the date of receipt. Restricted cash and cash equivalents at December 31, 2018 represents the cash collateral on the credit agreement, which was released as part of the amended and restated credit agreement on January 22, 2019.  Restricted cash and cash equivalents at March 31, 2019 represents cash pledged for leased office space.

Investments

The Company considers its investments in municipal bonds, mutual funds, municipal securities, certificates of deposit and commercial paper as available-for-sale securities or trading securities based on the Company’s intent for the respective security. Available-for-sale securities are carried at fair value, determined using Level 1 and Level 2 of the hierarchy of valuation inputs, with the use of quoted market prices and inputs other than quoted prices that are observable for the assets, with unrealized gains and losses, net of tax, reported as a separate component of other comprehensive income. Unrealized losses considered to be other-than-temporary are recognized currently in earnings. Amortization of premiums, accretion of discounts, interest and dividend income and realized gains and losses are included in interest and other income.  As of December 31, 2018, the Company transferred its investments from available-for-sale to trading, due to the Company's decision to liquidate all investments to fund a portion of the purchase price paid in the Acquisition.  Trading securities are carried at fair value and unrealized holding gains and losses are included in earnings.  See Note 3 of our consolidated financial statements for further discussion on the Acquisition.

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Derivatives and Hedging

Derivative financial instruments are recorded on the balance sheet as assets or liabilities and re-measured at fair value at each reporting date. For derivatives designated as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

Derivative financial instruments enable the Company to manage its exposure to interest rate risk. The Company does not engage in any derivative instrument trading activity. Credit risk associated with the Company’s derivative is limited to the risk that a derivative counterparty will not perform in accordance with the terms of the contract. Exposure to counterparty credit risk is considered low because these agreements have been entered into with institutions with Aa or higher credit ratings, and they are expected to perform fully under the terms of the agreements.

On February 27, 2013, the Company entered into an interest rate corridor to manage its 30 Day LIBOR interest exposure related to its variable rate debt. The fair value of the interest rate corridor instrument as of March 31, 2019 and December 31, 2018 was $423 and $600, respectively, which is included in other assets. The fair value of the derivative instrument was determined using a hypothetical derivative transaction and Level 2 of the hierarchy of valuation inputs. This derivative instrument was originally designated as a cash flow hedge of variable rate debt obligations. The adjustment of $142 and $231 for the three months ended March 31, 2019 and 2018, respectively, for the effective portion of the gains and losses on the derivatives is included as a component of other comprehensive income, net of taxes.

The interest rate corridor instrument reduces variable interest rate risk starting March 1, 2013 through December 20, 2019 with a notional amount of $58,333 as of March 31, 2019. The corridor instrument’s terms permit the Company to hedge its interest rate risk at several thresholds; the Company pays variable interest monthly based on the 30 Day LIBOR rates until that index reaches 1.5%. If 30 Day LIBOR is equal to 1.5% through 3.0%, the Company pays 1.5%. If 30 Day LIBOR exceeds 3.0%, the Company pays actual 30 Day LIBOR less 1.5%.

At March 31, 2019, the Company expects to reclassify gains or losses on derivative instruments from accumulated other comprehensive income (loss) into earnings during the next 12 months as the derivative instrument expires in December 2019.

Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, investments, accounts receivable, accounts payable and accrued compensation and benefits and accrued liabilities expenses approximate their fair value based on the liquidity or the short-term maturities of these instruments. The carrying value of notes receivable, non-current approximates fair value as the Secured Note resulted from the Transaction and was negotiated at fair market value. The carrying value of notes payable approximates fair value as it is based on variable rate index. Derivative financial instruments are carried at fair value, determined using Level 2 of the hierarchy of valuation inputs as defined in the FASB Accounting Standards Codification (“Codification”), with the use of inputs other than quoted prices that are observable for the asset or liability.

The fair value of investments, primarily municipal securities, was determined using Level 2 of the hierarchy of valuation inputs, with the use of inputs other than quoted prices that are observable for the assets. The unit of account used for valuation is the individual underlying security. The municipal securities are comprised of city and county bonds related to schools, water and sewer, utilities, transportation, healthcare and housing.

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Revenue Recognition

University related revenue – prior to July 1, 2018

On January 1, 2018, the Company adopted “Revenue from Contracts with Customers” using the modified retrospective method applied to all contracts. Prior to the Transaction on July 1, 2018, net revenues consisted primarily of tuition, net of scholarships, and fees derived from courses taught by the University online, on ground, and at facilities it leased or those of employers, as well as from related educational resources that the University provided to its students, such as access to online materials. Tuition revenue was recognized pro-rata over the applicable period of instruction. A contract was entered into with a student and covered a course or semester. Revenue recognition occurred once a student started attending a course. The Company also charged online students an upfront learning management fee, which was deferred and recognized over the initial course. The Company had no costs that were capitalized to obtain or to fulfill a contract with a customer. Ancillary revenues included housing and fee revenues that were recognized over the period the services were provided and also included revenues from sales and services such as food and beverage, merchandise, hotel, golf and arena events that were recognized as sales occurred or services were performed as these services were transferred at a point in time. For the three months ended March 31, 2018, the Company’s revenue was reduced by approximately $60,241, as a result of scholarships that the Company offered to students. Sales tax collected from students is excluded from net revenues. Collected but unremitted sales tax is included as an accrued liability in our consolidated balance sheet.

The following table presents our revenues disaggregated by the nature of transfer of services for the three months ended March 31, 2018:

 

 

 

 

Tuition revenues

    

$

278,713

Ancillary revenues (housing, meals, fees, golf, hotel, arena, other)

 

 

57,209

Total revenues

 

 

335,922

Scholarships

 

 

(60,241)

Net Revenues

 

$

275,681

 

The Company’s receivables represented unconditional rights to consideration from its contracts with students; accordingly, students were not billed until they started attending a course and the revenue recognition process had commenced. Once a student had been invoiced, payment was due immediately. Included in each invoice to the student were all educational related items including tuition, net of scholarships, housing, educational materials, fees, etc. The Company did not have any contract assets. The Company’s contract liabilities were reported as deferred revenue and student deposits in the consolidated balance sheets. Deferred revenue and student deposits in any period represented the excess of tuition, fees, and other student payments received as compared to amounts recognized as revenue on the consolidated income statement and were reflected as current liabilities in the accompanying consolidated balance sheets. The Company’s education programs had starting and ending dates that differ from its fiscal quarters. Therefore, at the end of each fiscal quarter, a portion of revenue from these programs was not yet earned. The majority of the University’s traditional ground students did not attend courses during the summer months (May through August), which affected our results for our second and third fiscal quarters.

The Company had identified a performance obligation associated with the provision of its educational instruction and other educational services, housing services, and other academic related services and used the output measure for recognition as the period of time over which the services were provided to our students. The Company had identified performance obligations related to its hotel, golf course, restaurants, sale of branded promotional items and other ancillary activities and recognized revenue at the point in time goods or services were provided to its customers. The Company maintained an institutional tuition refund policy, which provided for all or a portion of tuition to be refunded if a student withdrew during stated refund periods. Certain states in which students reside impose separate, mandatory refund policies, which overrode the Company’s policy to the extent in conflict. If a student withdrew at a time when only a portion, or none of the tuition was refundable, then in accordance with its revenue recognition policy, the Company continued to recognize the tuition that was not refunded pro-rata over the applicable period of instruction. The Company did not record revenue on amounts that may be refunded. However, for students that had taken out financial aid to pay their tuition and for which a return of such money to the Department of Education under Title IV

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was required as a result of his or her withdrawal, the Company reassessed collectability for these students each quarter for the estimated revenue that will be returned and recognized the revenue in future periods when payment was received. The Company had elected the short-term contract exemption with respect to its performance obligations under its contracts with students as all such contracts had original terms of less than one year.

Service revenue commenced July 1, 2018

Starting July 1, 2018, the Company generates all of its revenue through services agreements with its university partners (“Services Agreements”), pursuant to which the Company provides integrated technology and academic services, marketing and communication services, and back office services to its university partners in return for a percentage of tuition and fee revenue. Effective July 1, 2018, the Company adopted Revenue from Contracts with Customers” applied to our Services Agreements, as an education service provider.

The Company’s Services Agreements have initial terms ranging from 7-15 years, subject to renewal options, although certain agreements may give the university partners the right to terminate early if certain conditions are met.    The Company’s Services Agreements have a single performance obligation, as the promises to provide the identified services are not distinct within the context of these agreements. The single performance obligation is delivered as our partners receive and consume benefits, which occurs ratably over a series of distinct service periods (daily or semester). Service revenue is recognized over time using the output method of measuring progress towards complete satisfaction of the single performance obligation. The output method provides a faithful depiction of the performance toward complete satisfaction of the performance obligation and can be tied to the time elapsed which is consumed evenly over the service period and is a direct measurement of the value provided to our partners. The service fees received from our partners over the term of the agreement are variable in nature in that they are dependent upon the number of students attending the university partner’s program and revenues generated from those students during the service period. Due to the variable nature of the consideration over the life of the service arrangement, the Company considers forming an expectation of the variable consideration to be received over the service life of this one performance obligation. However, since the performance obligation represents a series of distinct services, the Company will recognize the variable consideration that becomes known and billable because these fees related to the distinct service period in which the fees are earned. The Company meets the criteria in the standard and will exercise the practical expedient and not disclose the aggregate amount of the transaction price allocated to the single performance obligation that is unsatisfied as of the end of the reporting period. The Company does not disclose the value of unsatisfied performance obligations because the directly allocable variable consideration is allocated entirely to a wholly unsatisfied promise to transfer a service that forms part of a single performance obligation. The service fees are calculated and settled per the terms of the Services Agreements and result in a settlement duration of less than one year for all partners. There are no refunds or return rights under the Services Agreements.

The Company’s receivables represent unconditional rights to consideration from our Services Agreements with our university partners. Accounts receivable, net is stated at net realizable value and contains billed and unbilled revenue.  The Company utilizes the allowance method to provide for doubtful accounts based on its evaluation of the collectability of the amounts due. There have been no amounts written off and no reserves established as of March 31, 2019 given historical collection experience.  The Company will continue to review and revise its allowance methodology based on its collection experience with its partners.

 

For our partners with unbilled revenue, revenue recognition occurs in advance of billings. Billings for some university clients do not occur until after the service period has commenced and final enrollment information is available. Our unbilled revenue of $1,556 as of March 31, 2019 represents contract assets included in accounts receivable in our consolidated balance sheets.  Deferred revenue represents the excess of amounts received as compared to amounts recognized in revenue on our consolidated statements of income as of the end of the reporting period, and such amounts are reflected as a current liability on our consolidated balance sheets. We generally receive payments for our services billed within 30 days of invoice. These payments are recorded as deferred revenue until the services are delivered and revenue is recognized. 

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Internally Developed Technology

The Company capitalizes certain costs related to internal-use software, primarily consisting of direct labor associated with creating technology. Software development projects generally include three stages: the preliminary project stage (all costs are expensed as incurred), the application development stage (certain costs are capitalized and certain costs are expensed as incurred) and the post-implementation or operation stage (all costs are expensed as incurred). Costs capitalized in the application development stage include costs of design, coding, integration, and testing of the software developed. Capitalization of costs requires judgment in determining when a project has reached the application development stage and the period over which we expect to benefit from the use of that software. Once the software is placed in service, these costs are amortized over the estimated useful life of the software, which is generally three years.  These assets are a component of our property and equipment, net in our consolidated balance sheet.

Capitalized Content Development    

The Company capitalizes certain costs to fulfill a contract related to the development and digital creation of content on a course-by-course basis for each university partner, many times in conjunction with faculty and subject matter experts. It is responsible for the conversion of instructional materials to an on-line format, including outlines, quizzes, lectures, and articles in accordance with the educational guidelines provided to us by our university partners, prior to the respective course commencing. We also capitalize the creation of learning objects which are digital assets such as online demonstrations, simulations, and case studies used to obtain learning objectives.

Costs that are capitalized include payroll and payroll-related costs for employees who are directly associated and spend time producing content and payments to faculty and subject matter experts involved in the process.  The Company starts capitalizing content costs when it begins to develop or to convert a particular course, resources have been assigned and a timeline has been set. The content asset is placed in service when all work is complete and the curriculum could be used for instruction. Capitalized content development assets are included in other assets in our consolidated balance sheets.  The Company has concluded that the most appropriate method to amortize the deferred content assets is on a straight-line basis over the estimated life of the course, which is generally four years which corresponds with course’s review and major revision cycle.  As of March 31, 2019, $1,222 of deferred content assets are included in other assets, long-term in the Company’s consolidated balance sheets and amortization is included in technical and academic services where the costs originated.

Amortizable Intangible Assets

The Company capitalizes purchased intangible assets, such as university partner relationships (customer relationships), and tradenames, and amortizes them on a straight-line basis over their estimated useful lives.

Business Combinations

The purchase price of an acquisition is allocated to the assets acquired, including intangible assets, and liabilities assumed, based on their respective fair values at the acquisition date.  Acquisition-related costs are expensed as incurred.  The excess of the cost of an acquired entity, net of the amounts assigned to the assets acquired and liabilities assumed, is recognized as goodwill.  The net assets and result of operations of an acquired entity are included on the Company's consolidated financial statements from the acquisition date.

Goodwill

Goodwill represents the excess of the cost over the fair market value of net assets acquired, including identified intangible assets.  Goodwill is tested annually or more frequently if circumstances indicate potential impairment.  The Financial Accounting Standards Board (“FASB”) has issued guidance that permits an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.  The Company reviews goodwill at least annually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value.

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Long-Lived Assets (other than goodwill)

The Company evaluates the recoverability of its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Technology and Academic Services

Technology and academic services consist primarily of costs related to ongoing maintenance of educational infrastructure, including online course delivery and management, student records, assessment, customer relations management and other internal administrative systems. This also includes costs to provide support for content development, support for faculty including training and development, technology support, rent and occupancy costs for university partners’ off-campus locations, and assistance with state compliance. This expense category includes salaries, benefits and share-based compensation, information technology costs, amortization of content development costs and other costs associated with these support services. This category also includes an allocation of depreciation, amortization, and occupancy costs attributable to the provision of certain services, primarily at the Company’s Phoenix, Arizona location.

Counseling Services and Support

Counseling services and support consist primarily of costs including team-based counseling and other support to prospective and current students as well as financial aid processing. This expense category includes salaries, benefits and share-based compensation, and other costs such as dues, fees and subscriptions and travel costs. This category also includes an allocation of depreciation, amortization, lease expense, and occupancy costs attributable to the provision of certain services, primarily at the Company’s Phoenix, Arizona location.

Marketing and Communication

Marketing and communication includes lead acquisition, digital communication strategies, brand identity advertising, media planning and strategy, video, data science and analysis, marketing to potential students and other promotional and communication services. This category was primarily from our historical captions of advertising and marketing and promotional. This expense category includes salaries, benefits and share-based compensation for marketing and communication personnel, brand advertising, marketing leads and other promotional and communication expenses. This category also includes an allocation of depreciation, amortization, lease expense, and occupancy costs attributable to the provision of certain services, primarily at the Company’s Phoenix, Arizona and Indianapolis, Indiana locations. Advertising costs are expensed as incurred.

General and Administrative

General and administrative expenses include salaries, benefits and share-based compensation of employees engaged in corporate management, finance, human resources, compliance, and other corporate functions. This category also includes an allocation of depreciation, amortization, lease expense, and occupancy costs attributable to the provision of these services, primarily at the Company’s Phoenix, Arizona and Indianapolis, Indiana locations.

University related expenses

University related expenses represent the costs that were transferred to GCU in the Transaction and that are no longer incurred by the Company.

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Commitments and Contingencies

The Company accrues for contingent obligations when it is probable that a liability has been incurred and the amount is reasonably estimable. When the Company becomes aware of a claim or potential claim, the likelihood of any loss exposure is assessed. If it is probable that a loss will result and the amount of the loss is estimable, the Company records a liability for the estimated loss. If the loss is not probable or the amount of the potential loss is not estimable, the Company will disclose the claim if the likelihood of a potential loss is reasonably possible and the amount of the potential loss could be material. Estimates that are particularly sensitive to future changes include tax, legal, and other regulatory matters, which are subject to change as events evolve, and as additional information becomes available during the administrative and litigation process. The Company expenses legal fees as incurred.

Concentration of Credit Risk

The Company believes the credit risk related to cash equivalents and investments is limited due to its adherence to an investment policy that requires investments to have a minimum BBB rating, depending on the type of security, by one major rating agency at the time of purchase. All of the Company’s cash equivalents and investments as of March 31, 2019 and December 31, 2018 consist of investments rated BBB or higher by at least one rating agency. Additionally, the Company utilizes more than one financial institution to conduct initial and ongoing credit analysis on its investment portfolio to monitor and lower the potential impact of market risk associated with its cash equivalents and investment portfolio. The Company is also subject to credit risk for its accounts receivable balance. The Company has not experienced any losses on receivables to date. To manage accounts receivable risk, the Company maintains an allowance for doubtful accounts, if needed. Our dependence on our largest university partner subjects us to the risk that declines in our customer’s operations would result in a sustained reduction in revenues for the Company.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Segment Information

The Company operates as a single educational services company using a core infrastructure that serves the curriculum and educational delivery needs of its 18 university partners. The Company’s Chief Executive Officer manages the Company’s operations as a whole and no expense or operating income information is generated or evaluated on any component level.

Accounting Pronouncements Adopted in 2019

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which introduced a lessee model that requires the majority of leases to be recognized on the balance sheet.  On January 1, 2019, the Company adopted the ASU using the modified retrospective transition approach and elected the transition option to recognize the adjustment in the period of adoption rather than in the earliest period presented.  Adoption of the new guidance resulted in an immaterial amount of right-of-use (“ROU”) assets and lease liabilities of $498.  Subsequent to adoption, the Company recognized ROU assets of $13,069 and lease liabilities of $13,069 acquired in the Acquisition. As part of the adoption process the Company made the following elections:

·

The Company elected the hindsight practical expedient, for all leases.

·

The Company elected the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs for all leases.

·

The Company elected to make the accounting policy election for short-term leases resulting in lease payments being recorded as an expense on a straight-line basis over the lease term.

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ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term.  The Company’s leases do not provide an implicit rate.  The Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.  Refer to Note 10 to our consolidated financial statements for further disclosures regarding the impact of adopting this standard.  

In August 2017, the FASB issued “Targeted Improvements to Accounting for Hedging Activities.”  This standard targets improvements in the hedge relationship documentation, testing and disclosures for derivatives.  This standard is effective for fiscal years and interim periods within those years, beginning after December 15, 2018.  Accordingly, the standard was adopted by us as of January 1, 2019.  The adoption of this guidance did not have a material impact on the Company’s financial condition, results of operations or statement of cash flows.  The Company elected a qualitative approach starting in 2019 to assess its hedge effectiveness and included updated disclosures as required by the standard.

Recent Accounting Pronouncements

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350); Simplifying the Test for Goodwill Impairment, which eliminated step two from the goodwill impairment test and requires an entity to recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value, up to the amount of goodwill allocated to that reporting unit.  The amendments in this standard are effective for fiscal years beginning after December 15, 2019, with early adoption permitted.  The Company expects that the adoption of this standard will impact its consolidated financial statements and related disclosures only to the extent that a future goodwill impairment test results in the recognition of an impairment charge.

The Company has determined that no other recent accounting pronouncements apply to its operations or could otherwise have a material impact on its consolidated financial statements.

5. Investments

At December 31, 2018, the Company transferred its investments from available-for-sale classification to trading, due to the Company’s decision to liquidate all investments to complete the Acquisition in the first quarter of 2019.  Prior to December 31, 2018, the Company considered all investments as available-for-sale.  At March 31, 2019 and December 31, 2018, the Company had $14,243 and $69,002, respectively, of investments.  These investments were held in money market accounts as of March 31, 2019 and held in municipal securities as of December 31, 2018.

6. Net Income Per Common Share

Basic earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflects the assumed conversion of all potentially dilutive securities, consisting of stock options and restricted stock awards, for which the estimated fair value exceeds the exercise price, less shares which could have been purchased with the related proceeds, unless anti-dilutive. For employee equity awards, repurchased shares are also included for any unearned compensation adjusted for tax. The table below reflects the calculation of the weighted average number of common shares outstanding, on an as if converted basis, used in computing basic and diluted earnings per common share.

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2019

    

2018

Denominator:

 

  

 

  

Basic weighted average shares outstanding

 

47,699

 

47,432

Effect of dilutive stock options and restricted stock

 

575

 

965

Diluted weighted average shares outstanding

 

48,274

 

48,397

 

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Diluted weighted average shares outstanding excludes the incremental effect of unvested restricted stock and shares that would be issued upon the assumed exercise of stock options in accordance with the treasury stock method. For both the three months ended March 31, 2019 and 2018, none of the Company’s stock options and restricted stock awards outstanding were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.

7. Allowance for Doubtful Accounts

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at

    

 

    

 

    

Balance at

 

 

Beginning of

 

Charged to

 

Deductions/

 

End of

 

 

Period

 

Expense

 

Transfers(1)

 

Period

Allowance for doubtful accounts receivable

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2019

 

$

 —

 

 —

 

 

$

Three months ended March 31, 2018

 

$

5,907

 

4,997

 

(3,722)

 

$

7,182


(1)

Deductions represent accounts written off, net of recoveries.

 

 

8. Property and Equipment

Property and equipment consist of the following:

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

2019

 

2018

Land

 

$

5,579

 

$

5,579

Land improvements

 

 

2,242

 

 

2,242

Buildings

 

 

51,398

 

 

51,409

Buildings and leasehold improvements

 

 

11,070

 

 

9,581

Computer equipment

 

 

88,131

 

 

85,316

Furniture, fixtures and equipment

 

 

8,066

 

 

4,955

Internally developed software

 

 

31,829

 

 

39,270

Construction in progress

 

 

2,118

 

 

2,376

 

 

 

200,433

 

 

200,728

Less accumulated depreciation and amortization

 

 

(84,194)

 

 

(89,689)

Property and equipment, net

 

$

116,239

 

$

111,039

 

 

9. Intangible Assets

Amortizable intangible assets consist of the following as of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

Estimated

 

Gross

 

 

 

 

Net

 

 

Average Useful

 

Carrying

 

Accumulated

 

Carrying

 

 

Life (in years)

 

Amount

 

Amortization

 

Amount

University partner relationships

  

25

  

$

210,000

  

 

(1,629)

  

$

208,371

Trade names

 

1

 

 

280

 

 

(57)

 

 

223

Total amortizable intangible assets, net

 

 

 

$

210,280

 

 

(1,686)

 

$

208,594

 

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Amortization expense for university partner relationships and trade names for the years ending December 31:

 

 

 

 

2019

 

$

6,767

2020

 

 

8,726

2021

 

 

8,726

2022

 

 

8,726

2023

 

 

8,425

Thereafter

 

 

168,380

 

 

$

209,750

 

 

10. Leases

The Company has operating leases for classroom site locations, office space, office equipment, and optical fiber communication lines.  These leases range from 3 months to 10 years.  At lease inception, we determined the lease term by assuming no exercises of renewal options, due to the Company’s constantly changing geographical needs for its university partners.  Leases with an initial term of 12 months or less are not recorded in the consolidated balance sheets and we recognize lease expense for these leases on a straight-line basis over the lease term.  The Company has operating lease costs of $865 and $423 for the three month period ended March 31, 2019 and 2018, respectively. The consolidated financial statements for years before January 1, 2019 are not presented on the same accounting basis with respect to leases. There was an immaterial amount of future lease obligations as of March 31,2018.  The majority of leases that existed for the three months ended March 31, 2018 were assigned to GCU in the Transaction that occurred on July 1, 2018.  

As of March 31, 2019, the Company had $2,193 of non-cancelable operating lease commitments, primarily for a classroom site location and a copier lease, that have not yet commenced.  These operating leases will commence in 2019 with lease terms ranging from 3 to 10 years.  The Company’s weighted-average remaining lease term relating to its operating leases is 6.26 years, with a weighted-average discount rate of 4.4%.  As of March 31, 2019, the Company had no financing leases. 

Future payment obligations with respect to the Company’s operating leases, which were existing at March 31, 2019, by year and in the aggregate, are as follows:

 

 

 

 

Year Ending December 31,

    

Amount

2019

 

$

2,382

2020

 

 

2,725

2021

 

 

2,581

2022

 

 

2,420

2023

 

 

1,703

Thereafter

 

 

3,909

Total lease payments

 

$

15,720

Less interest

 

 

2,454

Present value of lease liabilities

 

$

13,266

 

 

11. Notes Payable and Other Noncurrent Liabilities

On January 22, 2019, we entered into an amended and restated credit agreement dated January 22, 2019 and two related amendments dated January 31, 2019 and dated February 1, 2019, that together provide a credit facility of $325,000 comprised of a term loan facility of $243,750 and a revolving credit facility of $81,250, both with a five year maturity date.  The term facility is subject to quarterly amortization of principal, commencing with the fiscal quarter ended June 30, 2019, in equal installments of 5% of the principal amount of the term facility per quarter.  Both the term loan and revolver have monthly interest payments currently at 30 Day LIBOR plus an applicable margin of 2%.  The proceeds of the term loan, together with $6,250 drawn under the revolver and operating cash on hand were used to

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complete the Acquisition.  Concurrent with the amendment of the credit agreement and Acquisition, we repaid our existing term loan of $59,850 and our cash collateral of $61,667 was released.  The amended and restated credit agreement contains standard covenants that, among other things, restrict the Company’s ability to incur additional debt or make certain investments, and require the Company to achieve certain financial ratios and maintain certain financial conditions. As of March 31, 2019, the Company is in compliance with its debt covenants.   The Company concluded that the amended and restated credit agreement is considered a loan modification.  Accordingly, the Company allocated the costs paid to the bank consortium based on the borrowing dollars and has recorded an asset of $596 and a contra liability of $1,639, which are related to our revolver and term loan, respectively, that is being amortized to interest expense over the five year maturity date.  Additionally, the Company expensed $150 of third party costs in the first quarter related to this loan modification.

 

 

 

 

 

 

 

 

 

As of March 31,

 

As of December 31,

 

    

2019

    

2018

Notes Payable

 

 

  

 

 

  

Note payable, quarterly payment of $12,188 starting June 30, 2019; interest at 30 day LIBOR plus 2.00% (4.49% at March 31, 2019) through January 22, 2024

 

$

242,166

 

$

59,905

Revolving line of credit; interest at 30 day LIBOR plus 2.0% (4.49% at March 31, 2019)

 

 

6,250

 

 

 0

 

 

 

248,416

 

 

59,905

Less: Current portion

 

 

48,422

 

 

36,468

 

 

$

199,994

 

$

23,437

 

Payments due under the notes payable obligations are as follows as of March 31, 2019:

 

 

 

 

2019

    

$

36,317

2020

 

 

48,422

2021

 

 

48,422

2022

 

 

48,422

2023

 

 

48,422

Thereafter

 

 

18,411

Total

 

$

248,416

 

 

12. Commitments and Contingencies

Legal Matters

From time to time, the Company is a party to various lawsuits, claims, and other legal proceedings that arise in the ordinary course of business, some of which are covered by insurance. When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company records a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the nature of the specific claim if the likelihood of a potential loss is reasonably possible and the amount involved could be material. With respect to the majority of pending litigation matters, the Company’s ultimate legal and financial responsibility, if any, cannot be estimated with certainty and, in most cases, any potential losses related to those matters are not considered probable.

Upon resolution of any pending legal matters, the Company may incur charges in excess of presently established reserves. Management does not believe that any such charges would, individually or in the aggregate, have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

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Tax, Income Tax Related

 

During the first quarter of 2019, the Company reached an agreement with the Arizona Department of Revenue regarding previously filed refund claims related to income tax obligations for calendar year 2008 through calendar year 2013.  As a result of the agreement, the Company received a refund of $7,500, inclusive of both tax and interest.  Net of the federal tax benefit, the refund has a favorable tax impact of $5,925.  The Company has recorded the impact of this discrete tax item in its first quarter 2019 financials. 

 

Tax Reserves, Non-Income Tax Related

From time to time the Company has exposure to various non-income tax related matters that arise in the ordinary course of business. The Company reserve is not material for tax matters where its ultimate exposure is considered probable and the potential loss can be reasonably estimated.

 

 

13. Share-Based Compensation

Incentive Plan

Prior to June 2017, the Company made grants of restricted stock and stock options under its 2008 Equity Incentive Plan (the “2008 Plan”). In January 2017, the Board of Directors of the Company approved, and at the Company’s 2017 annual meeting of stockholders held on June 14, 2017, the Company’s stockholders adopted a 2017 Equity Incentive Plan (the “2017 Plan”) under which a maximum of 3,000 shares may be granted. As of March 31, 2019, 1,765 shares were available for grants under the 2017 Plan. All grants of equity incentives made after June 2017 have been made from the 2017 Plan.

Restricted Stock

During the three months ended March 31, 2019, the Company granted 149 shares of common stock with a service vesting condition to certain of its executives, officers, faculty and employees. The restricted shares have voting rights and vest in five annual installments of 20%, with this first installment vesting in March of the calendar year following the date of grant (the “first vesting date”) and on each of the four anniversaries of the first vesting date. Upon vesting, shares will be held in lieu of taxes equivalent to the minimum statutory tax withholding required to be paid when the restricted stock vests. During the three months ended March 31, 2019, the Company withheld 68 shares of common stock in lieu of taxes at a cost of $8,127 on the restricted stock vesting dates.  

A summary of the activity related to restricted stock granted under the Company’s Incentive Plan since December 31, 2018 is as follows:

 

 

 

 

 

 

 

    

 

    

Weighted Average

 

 

Total

 

Grant Date

 

 

Shares

 

Fair Value per Share

Outstanding as of December 31, 2018

 

460

 

$

63.28

Granted

 

149

 

$

93.07

Vested

 

(171)

 

$

55.26

Forfeited, canceled or expired

 

(11)

 

$

76.12

Outstanding as of March 31, 2019

 

427

 

$

76.57

 

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Stock Options

During the three months ended March 31, 2019, no options were granted. A summary of the activity since December 31, 2018 related to stock options granted under the Company’s Incentive Plan is as follows: