UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 | |
For the quarterly period ended |
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:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of | (I.R.S. Employer |
(Address, including zip code, of principal executive offices)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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.
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).
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.:
| 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
The total number of shares of common stock outstanding as of November 3, 2020, was
GRAND CANYON EDUCATION, INC.
FORM 10-Q
INDEX
2
PART I – FINANCIAL INFORMATION
Item 1.Financial Statements
GRAND CANYON EDUCATION, INC.
Consolidated Income Statements
(Unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
(In thousands, except per share data) |
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Service revenue | $ | | $ | | $ | | $ | | |||||
Costs and expenses: |
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Technology and academic services |
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Counseling services and support |
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Marketing and communication |
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General and administrative |
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Amortization of intangible assets | | | | | |||||||||
Loss on transaction |
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Total costs and expenses |
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Operating income |
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Interest income on Secured Note |
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Interest expense |
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Investment interest and other |
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Income before income taxes |
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Income tax expense |
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Net income | $ | | $ | | $ | | $ | | |||||
Earnings per share: |
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Basic income per share | $ | | $ | | $ | | $ | | |||||
Diluted income per share | $ | | $ | | $ | | $ | | |||||
Basic weighted average shares outstanding |
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Diluted weighted average shares outstanding |
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The accompanying notes are an integral part of these consolidated financial statements.
3
GRAND CANYON EDUCATION, INC.
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||
| September 30, | September 30, | |||||||||||
(In thousands) |
| 2020 |
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Net income | $ | | $ | | $ | | $ | | |||||
Other comprehensive income, net of tax: |
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Unrealized losses on hedging derivative, net of taxes of $ |
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Comprehensive income | $ | | $ | | $ | | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
4
GRAND CANYON EDUCATION, INC.
Consolidated Balance Sheets
| September 30, |
| December 31, | ||||
(In thousands, except par value) |
| 2020 | 2019 | ||||
(Unaudited) | |||||||
ASSETS: | |||||||
Current assets |
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Cash and cash equivalents | $ | | $ | | |||
Restricted cash and cash equivalents |
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Investments |
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Accounts receivable, net |
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Interest receivable on Secured Note |
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Income tax receivable |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Right-of-use assets | | | |||||
Secured Note receivable, net |
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Amortizable intangible assets, net | | | |||||
Goodwill |
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Other assets |
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Total assets | $ | | $ | | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY: |
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Current liabilities |
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Accounts payable | $ | | $ | | |||
Accrued compensation and benefits |
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Accrued liabilities |
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Income taxes payable |
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Deferred revenue |
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Current portion of lease liability | | | |||||
Current portion of notes payable |
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Total current liabilities |
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Deferred income taxes, noncurrent |
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Other long term liability | | | |||||
Lease liability, less current portion | | | |||||
Notes payable, less current portion |
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Total liabilities |
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Commitments and contingencies |
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Stockholders’ equity |
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Preferred stock, $ |
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Common stock, $ |
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Treasury stock, at cost, |
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Additional paid-in capital |
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Retained earnings |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity | $ | | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
5
GRAND CANYON EDUCATION, INC.
Consolidated Statement of Stockholders’ Equity
(In thousands)
(Unaudited)
Nine Months Ended September 30, 2020 | ||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||
Common Stock | Treasury Stock | Paid-in | Comprehensive | Retained | ||||||||||||||||||
| Shares |
| Par Value |
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| Cost |
| Capital |
| Loss |
| Earnings |
| Total | |||||||
Balance at December 31, 2019 | | $ | |
| | $ | ( | $ | | $ | — | $ | | $ | | |||||||
Cumulative effect from the adoption of accounting pronouncements, net of taxes of $ |
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Comprehensive income | — |
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Common stock purchased for treasury | — |
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Restricted shares forfeited | — |
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Share-based compensation | |
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Exercise of stock options | |
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Balance at September 30, 2020 | | $ | |
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Nine Months Ended September 30, 2019 | ||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||
Common Stock | Treasury Stock | Paid-in | Comprehensive | Retained | ||||||||||||||||||
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| Total | |||||||
Balance at December 31, 2018 | | |
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Comprehensive income | — |
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Common stock purchased for treasury | — |
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Restricted shares forfeited | — |
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Share-based compensation | |
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Exercise of stock options | |
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Balance at September 30, 2019 | | $ | |
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The accompanying notes are an integral part of these consolidated financial statements.
6
GRAND CANYON EDUCATION, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended | |||||||
| September 30, | ||||||
(In thousands) |
| 2020 |
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Cash flows provided by operating activities: |
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Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Share-based compensation |
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Depreciation and amortization |
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Amortization of intangible assets | | | |||||
Deferred income taxes |
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Loss on transaction |
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Other, including fixed asset impairments |
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Changes in assets and liabilities: |
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Accounts receivable and interest receivable from university partners |
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Other assets |
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Right-of-use assets and lease liabilities | | | |||||
Accounts payable |
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Accrued liabilities |
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Income taxes receivable/payable |
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Deferred revenue |
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Net cash provided by operating activities |
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Cash flows used in investing activities: |
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Capital expenditures |
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Additions of amortizable content |
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Acquisition, net of cash acquired | — | ( | |||||
Funding to GCU |
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Repayment by GCU | | | |||||
Purchases of investments |
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Proceeds from sale or maturity of investments |
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Net cash used in investing activities |
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Cash flows (used in) provided by financing activities: |
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Principal payments on notes payable |
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Debt issuance costs | — | ( | |||||
Proceeds from notes payable | — | | |||||
Net borrowings from revolving line of credit |
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Repurchase of common shares including shares withheld in lieu of income taxes |
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Net proceeds from exercise of stock options |
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Net cash (used in) provided by financing activities |
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Net increase (decrease) in cash and cash equivalents and restricted cash |
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Cash and cash equivalents and restricted cash, beginning of period |
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Cash and cash equivalents and restricted cash, end of period | $ | | $ | | |||
Supplemental disclosure of cash flow information |
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Cash paid for interest | $ | | $ | | |||
Cash paid for income taxes | $ | | $ | | |||
Supplemental disclosure of non-cash investing and financing activities |
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Purchases of property and equipment included in accounts payable | $ | | $ | | |||
Allowance for credit losses of $ | $ | | $ | — | |||
Lease adoption - recognition of right of use assets and lease liabilities | $ | — | $ | | |||
ROU Asset and Liability recognition | $ | | $ | — |
The accompanying notes are an integral part of these consolidated financial statements.
7
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
1. Nature of Business
Grand Canyon Education, Inc. (together with its subsidiaries, the “Company” or “GCE”) is a publicly traded education services company dedicated to serving colleges and universities. GCE has developed significant technological solutions, infrastructure and operational processes to provide services to these institutions on a large scale. GCE’s most significant university partner is Grand Canyon University (“GCU”), an Arizona non-profit corporation, a comprehensive regionally accredited university that offers graduate and undergraduate degree programs, emphases and certificates across
In January 2019, GCE began providing education services to numerous university partners across the United States, through our wholly owned subsidiary, Orbis Education, which we acquired, by merger on January 22, 2019 for $
As of September 30, 2020, GCE provides education services to
2. Acquisition
On January 22, 2019, GCE acquired Orbis Education for $
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
8
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
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 |
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Cash, including $ | $ | | |
Accounts receivable, net of allowance of $ | $ | | |
Property and equipment | $ | | |
Right-of-use assets | $ | | |
Intangible assets | $ | | |
Other assets | $ | | |
Liabilities assumed | |||
Accounts payable | $ | | |
Accrued and other liabilities | $ | | |
Lease liability | $ | | |
Deferred tax liability | $ | | |
Deferred revenue | $ | | |
Total net asset or liability purchased and assumed | $ | | |
Purchase price | $ | | |
Excess of fair value of net assets acquired over consideration given | $ | |
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 $
Subsequent to the closing of the Acquisition, the Company revised its allocation of the purchase price by $
3. 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, 2019. 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
9
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
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, 2019 from which the December 31, 2019 balance sheet information was derived.
Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents at December 31, 2019 represented cash pledged for leased office space, which was released during the nine months ended September 30, 2020.
Investments
The Company considers its investments in municipal bonds, mutual funds, municipal securities, corporate bonds, collateralized mortgage obligations, certificates of deposit and commercial paper as trading securities based on the Company’s intent for the respective security. Trading securities are carried at fair value and unrealized holding gains and losses are included in earnings.
Arrangements with GCU
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 $
Internally Developed Technology
The Company capitalizes certain costs related to internal-use software, primarily consisting of direct labor associated with creating the software. 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
10
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
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. The Company 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
Leases
The Company determines if an arrangement is a lease at inception and evaluates the lease agreement to determine whether the lease is a finance or operating lease. Right-of-use (“ROU”) assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at the commencement to determine the present value of lease payments over the lease term. At lease inception, the Company determines 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 are recognized as lease expense on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, and the non-lease components are accounted for separately and not included in our ROU assets and lease liabilities. Leases primarily consist of off-campus classroom and laboratory site locations and office space.
Business Combinations
The purchase price of an acquisition is allocated to the assets acquired, including tangible and intangible assets, and liabilities assumed, based on their respective fair values at the acquisition date. The excess of the fair value of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill. Transaction costs associated with business combinations are expensed as incurred and are recorded in the loss on transaction in the consolidated financial statements. The determination of the fair value and useful lives of the intangible assets acquired involves certain judgments and estimates. These judgements can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital. The net assets and result of operations of an acquired entity are included in the Company’s consolidated financial statements from the acquisition date.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price of an acquired business over the amount assigned to the tangible and intangible assets acquired and liabilities assumed. Goodwill is assessed at least annually for impairment during the fourth quarter, or more frequently if circumstances indicate potential impairment. Goodwill is allocated to
11
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
our reporting unit at the education services segment, which is the same as the entity as a whole (entity level reporting unit). The Company has concluded there is
Finite-lived intangible assets that are acquired in a business combination are recorded at fair value on their acquisition dates and are amortized on a straight-line basis over the estimated useful life of the intangible asset. Finite-lived intangible assets consist of university partner relationships and trade names. The Company reviews its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. There were no indicators that the carrying amount of the finite-lived intangible assets were impaired. 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 intangible assets are not recoverable, a potential impairment loss is recognized to the extent the carrying amounts of the assets exceeds the fair value of the assets.
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.
In 2013, the Company entered into an interest rate corridor to manage its 30-Day LIBOR interest exposure related to its variable rate debt. In December 2019 this cash flow hedge expired. The fair value of the interest rate corridor instrument as of September 30, 2019 was $
The interest rate corridor instrument reduced variable interest rate risk starting March 1, 2013 through December 20, 2019. The corridor instrument’s terms permitted the Company to hedge its interest rate risk at several thresholds; the Company paid variable interest monthly based on the 30-Day LIBOR rates until that index reached
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, investments, accounts receivable, accounts payable, 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 Secured Note receivable, non-current approximates fair value as the Secured Note resulted from the GCU Transaction and was negotiated at fair market value. The carrying
12
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
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 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, housing and corporate securities consisting of bank and financial institution bonds and securities.
Revenue Recognition
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.
The Company’s Services Agreements have initial terms ranging from
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
For our partners with unbilled revenue, revenue recognition occurs in advance of billings. Billings for some university partners do not occur until after the service period has commenced and final enrollment information is
13
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
available. Our unbilled revenue of $
Allowance for Credit Losses
The Company records our accounts receivable and Secured Note receivable at the net amount expected to be collected. Our accounts receivable are derived through education services provided to university partners. Our Secured Note receivable was derived through the sale of university related assets to our most significant university partner, GCU. The Company maintains an allowance for credit losses resulting from our university partners not making payments. The Company determines the adequacy of the allowance by periodically evaluating each university partners balance, considering their financial condition and credit history, and considering current and forecasted economic conditions. Since our transition to an education services company on July 1, 2018, and continued growth to
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, faculty training, development and other faculty support, 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 and Indianapolis, Indiana locations.
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 and Indianapolis, Indiana locations.
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
14
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
promotional and communication services. 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.
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 September 30, 2020 and December 31, 2019 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 since July 1, 2018, the date the Company transitioned to an educational service provider. To manage accounts receivable risk, the Company maintains an allowance for doubtful accounts, if needed. Our dependence on our most significant university partner, with
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 education services company using a core infrastructure that serves the curriculum and educational delivery needs of its university partners. The Company’s Chief Executive Officer manages
15
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
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 2020
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. Under this guidance, the Company is required to utilize an “expected credit loss model” on certain financial instruments, including receivables and the Secured note receivable. This model requires consideration of a broader range of reasonable and supportable information and requires the Company to estimate expected credit losses including a measure of the expected risk of credit loss even if that risk is remote over the lifetime of the asset. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Accordingly, the standard was adopted by the Company as of January 1, 2020 using a modified retrospective approach. Upon adoption, the Company recorded a reserve of $
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments in the ASU improve the Codification by eliminating inconsistencies and providing clarifications. Under this guidance, the Company made an election not to measure an allowance for credit losses on its accrued interest receivable amounts earned on the Secured Note receivable. The Company will write off any uncollectible accrued interest in a timely manner. The adoption of this guidance did not have a material impact on the Company’s financial condition, results of operations or statements of cash flows.
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. Accordingly, the standard was adopted by us as of January 1, 2020. The adoption of this guidance did not have a material impact on the Company’s financial condition, results of operations or statements of cash flows.
Recent Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for annual periods beginning after December 15, 2020 and interim periods within those annual periods, with early adoption permitted. An entity that elects early adoption must adopt all the amendments in the same period. Most amendments within this ASU are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company is currently evaluating the impact of the new standard on our consolidated financial statements and related disclosures.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effect of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying generally accepted accounting
16
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company plans to elect the optional expedient for its credit facility by prospectively adjusting the effective interest rate if the cessation of the London Interbank Offered Rate (LIBOR) occurs. The Company does not believe the adoption of the reference rate reform will have a material impact on the Company’s financial condition, results of operations or statements of cash flows.
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.
4. Investments
The Company classifies its investments as trading. At September 30, 2020 and December 31, 2019, the Company had $
5. 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 | Nine Months Ended | ||||||
September 30, | September 30, | ||||||
2020 |
| 2019 |
| 2020 |
| 2019 | |
Denominator: |
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Basic weighted average shares outstanding | |
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Effect of dilutive stock options and restricted stock | |
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Diluted weighted average shares outstanding | |
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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 the three month periods ended September 30, 2020 and 2019, approximately
6. Allowance for Credit Losses
Balance at |
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| Balance at | ||||||
Beginning of | Charged to | Deductions/ | End of | |||||||
Period (1) | Expense | Transfers (2) | Period | |||||||
Allowance for credit losses | ||||||||||
Nine months ended September 30, 2020 | $ | |
| — |
| — | $ | | ||
Nine months ended September 30, 2019 | $ | — |
| — |
| — | $ | — | ||
17
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(1) | Represents the cumulative effect of the adoption of ASU No. 2016-13 on the Secured Note receivable. |
(2) | Deductions represent accounts written off, net of recoveries. |
7. Property and Equipment
Property and equipment consist of the following:
| September 30, |
| December 31, | |||
2020 | 2019 | |||||
Land | $ | | $ | | ||
Land improvements |
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Buildings |
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Buildings and leasehold improvements |
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Computer equipment |
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Furniture, fixtures and equipment |
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Internally developed software |
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Construction in progress |
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| | |||
Less accumulated depreciation and amortization |
| ( |
| ( | ||
Property and equipment, net | $ | | $ | |
8. Intangible Assets
Amortizable intangible assets consist of the following as of:
September 30, 2020 | ||||||||||
Estimated | Gross | Net | ||||||||
Average Useful | Carrying | Accumulated | Carrying | |||||||
Life (in years) | Amount | Amortization | Amount | |||||||
University partner relationships |
| $ | |
| ( |
| $ | | ||
Trade names | | ( |
| — | ||||||
Total amortizable intangible assets, net | $ | | ( | $ | |
Amortization expense for university partner relationships and trade names for the years ending December 31:
Remainder of 2020 | $ | | |
2021 |
| | |
2022 | | ||
2023 | | ||
2024 | | ||
Thereafter |
| | |
$ | |
9. Leases
The Company has operating leases for classroom site locations, office space, office equipment, and optical fiber communication lines. These leases have terms that range from
18
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
Company had operating lease costs of $
As of September 30, 2020, the Company had a non-cancelable operating lease commitment in the amount of $
Future payment obligations with respect to the Company’s operating leases, which were existing at September 30, 2020, by year and in the aggregate, are as follows:
Year Ending December 31, |
| Amount | |
2020 | $ | | |
2021 | | ||
2022 | | ||
2023 | | ||
2024 | | ||
Thereafter | | ||
Total lease payments | $ | | |
Less interest | | ||
Present value of lease liabilities | $ | |
10. Notes Payable and Other Noncurrent Liabilities
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, respectively, that together provide a credit facility of $
The Company entered into a further amendment for the credit facility on October 31, 2019. This amendment increased the revolving commitment by $
19
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
benefits and payments under the Secured Note and the Master Services Agreement. As of September 30, 2020, the Company is in compliance with its debt covenants.
As of September 30, | As of December 31, | |||||
| 2020 |
| 2019 | |||
Notes Payable |
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| ||
Note payable, quarterly payment of $ | $ | | $ | | ||
Revolving line of credit; interest at 30-Day LIBOR plus | — | — | ||||
| |
| | |||
Less: Current portion |
| |
| | ||
$ | | $ | |
Payments due under the notes payable obligations are as follows as of September 30, 2020:
2020 |
| $ | |
2021 | | ||
2022 | | ||
2023 | | ||
2024 | | ||
Total | $ | |
11. 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.
20
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
COVID-19 Considerations
In March 2020, the World Health Organization declared COVID-19 a global pandemic. This contagious outbreak and the related adverse public health developments, including orders to shelter-in-place, travel restrictions and mandated non-essential business closures, have adversely affected our business, primarily through reduced room and board and other ancillary revenue at our most significant partner, GCU and as a result of certain other partner institutions’ students deferring the start of their program in the Summer semester. The pandemic could result in further reductions in education service revenue, operating income and margins in the fourth quarter of 2020. At this time there remains considerable uncertainty around the duration of the COVID-19 pandemic. If some of our university partners are not able to allow their students to return to their campus locations in the Spring of 2021 this will have a further impact on our service revenue, operating income and margins. These factors, or material changes in the fair value of the collateral underlying our Secured Note receivable and accounts receivable, could also materially impact the allowance for expected credit losses on our Secured Note receivable and our accounts receivable. However, the related financial impact and duration of the COVID-19 pandemic cannot be reasonably estimated at this time.
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 $
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.
12. 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
Restricted Stock
During the nine months ended September 30, 2020, the Company granted
21
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
members of the Company’s Board of Directors. The restricted shares granted to these directors have voting rights and vest on the earlier of (a) the one year anniversary of the date of grant or (b) immediately prior to the following year’s annual stockholders’ meeting. A summary of the activity related to restricted stock granted under the Company’s Incentive Plan since December 31, 2019 is as follows:
|
| Weighted Average | |||
Total | Grant Date | ||||
Shares | Fair Value per Share | ||||
Outstanding as of December 31, 2019 |
| | $ | | |
Granted |
| | $ | | |
Vested |
| ( | $ | | |
Forfeited, canceled or expired |
| ( | $ | | |
Outstanding as of September 30, 2020 |
| | $ | |
Stock Options
During the nine months ended September 30, 2020,