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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 September 30, 2023

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)

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

​ ​​ ​

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.:

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  

The total number of shares of common stock outstanding as of October 31, 2023, was 30,010,536.

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

22

Item 3 Quantitative and Qualitative Disclosures About Market Risk

30

Item 4 Controls and Procedures

30

PART II – OTHER INFORMATION

31

Item 1 Legal Proceedings

31

Item 1A Risk Factors

31

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

31

Item 3 Defaults Upon Senior Securities

32

Item 4 Mine Safety Disclosures

32

Item 5 Other Information

32

Item 6 Exhibits

32

SIGNATURES

34

2

Table of Contents

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)

 

2023

    

2022

    

2023

    

2022

Service revenue

$

221,913

$

208,720

$

682,615

$

652,606

Costs and expenses:

 

  

 

  

 

  

 

  

Technology and academic services

 

39,174

 

37,641

 

115,643

 

112,136

Counseling services and support

 

73,824

 

67,235

 

219,565

 

200,773

Marketing and communication

 

53,097

 

50,651

 

156,797

 

151,237

General and administrative

 

12,175

 

15,576

 

32,838

 

35,323

Amortization of intangible assets

 

2,105

 

2,105

 

6,315

 

6,315

Total costs and expenses

 

180,375

 

173,208

 

531,158

 

505,784

Operating income

 

41,538

 

35,512

 

151,457

 

146,822

Interest expense

 

(1)

 

 

(27)

 

(5)

Investment interest and other

 

2,739

 

745

 

7,482

 

1,294

Income before income taxes

 

44,276

 

36,257

 

158,912

 

148,111

Income tax expense

 

8,537

 

6,249

 

34,636

 

34,463

Net income

$

35,739

$

30,008

$

124,276

$

113,648

Earnings per share:

 

  

 

  

 

  

 

  

Basic income per share

$

1.20

$

0.96

$

4.12

$

3.48

Diluted income per share

$

1.19

$

0.96

$

4.10

$

3.47

Basic weighted average shares outstanding

 

29,776

 

31,302

 

30,138

 

32,623

Diluted weighted average shares outstanding

 

29,912

 

31,387

 

30,277

 

32,709

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

3

Table of Contents

GRAND CANYON EDUCATION, INC.

Consolidated Balance Sheets

September 30, 

    

December 31, 

(In thousands, except par value)

 

2023

2022

(Unaudited)

ASSETS:

Current assets

 

  

Cash and cash equivalents

$

56,871

$

120,409

Investments

 

97,553

 

61,295

Accounts receivable, net

 

104,475

 

77,413

Income tax receivable

 

3,770

 

2,788

Other current assets

 

12,069

 

11,368

Total current assets

 

274,738

 

273,273

Property and equipment, net

 

164,638

 

147,504

Right-of-use assets

90,393

72,719

Amortizable intangible assets, net

170,485

176,800

Goodwill

 

160,766

 

160,766

Other assets

 

2,136

 

1,687

Total assets

$

863,156

$

832,749

LIABILITIES AND STOCKHOLDERS’ EQUITY:

 

  

 

  

Current liabilities

 

  

 

  

Accounts payable

$

23,696

$

20,006

Accrued compensation and benefits

 

25,446

 

36,412

Accrued liabilities

 

33,527

 

22,473

Income taxes payable

 

91

 

12,167

Deferred revenue

 

6,237

 

Current portion of lease liability

 

10,518

 

8,648

Total current liabilities

 

99,515

 

99,706

Deferred income taxes, noncurrent

 

26,694

 

26,195

Other long-term liability

416

436

Lease liability, less current portion

 

86,001

 

68,793

Total liabilities

 

212,626

 

195,130

Commitments and contingencies

 

  

 

  

Stockholders’ equity

 

  

 

  

Preferred stock, $0.01 par value, 10,000 shares authorized; 0 shares issued and outstanding at September 30, 2023 and December 31, 2022

 

 

Common stock, $0.01 par value, 100,000 shares authorized; 53,970 and 53,830 shares issued and 30,092 and 31,058 shares outstanding at September 30, 2023 and December 31, 2022, respectively

 

540

 

538

Treasury stock, at cost, 23,878 and 22,772 shares of common stock at September 30, 2023 and December 31, 2022, respectively

 

(1,832,686)

 

(1,711,423)

Additional paid-in capital

 

319,266

 

309,310

Accumulated other comprehensive loss

 

(593)

 

(533)

Retained earnings

 

2,164,003

 

2,039,727

Total stockholders’ equity

 

650,530

 

637,619

Total liabilities and stockholders’ equity

$

863,156

$

832,749

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

4

Table of Contents

GRAND CANYON EDUCATION, INC.

Consolidated Statements of Comprehensive Income

(Unaudited)

Three Months Ended

Nine Months Ended

 

September 30, 

September 30, 

(In thousands)

2023

    

2022

    

2023

    

2022

Net income

$

35,739

$

30,008

$

124,276

$

113,648

Other comprehensive income, net of tax:

 

  

 

  

 

  

 

  

Unrealized gains (losses) on available-for-sale securities, net of taxes of $30 and $8 for the three months ended September 30, 2023 and 2022, respectively, and $19 and $131 for the nine months ended September 30, 2023 and 2022, respectively

 

97

 

(19)

 

(60)

 

(417)

Comprehensive income

$

35,836

$

29,989

$

124,216

$

113,231

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

5

Table of Contents

GRAND CANYON EDUCATION, INC.

Consolidated Statement of Stockholders’ Equity

(In thousands)

(Unaudited)

Nine Months Ended September 30, 2023

Accumulated

Additional

Other

Common Stock

Treasury Stock

Paid-in

Comprehensive

Retained

  

Shares

  

Par Value

  

Shares

  

Cost

  

Capital

  

Loss

  

Earnings

  

Total

Balance at December 31, 2022

53,830

$

538

22,772

$

(1,711,423)

$

309,310

$

(533)

$

2,039,727

$

637,619

Comprehensive income

119

59,564

59,683

Common stock purchased for treasury

310

(35,090)

(35,090)

Restricted shares forfeited

5

Share-based compensation

136

2

56

(6,331)

3,367

(2,962)

Balance at March 31, 2023

53,966

$

540

23,143

$

(1,752,844)

$

312,677

$

(414)

$

2,099,291

$

659,250

Comprehensive income

(276)

28,973

28,697

Common stock purchased for treasury

419

(45,775)

(45,775)

Restricted shares forfeited

10

Share-based compensation

4

3,253

3,253

Balance at June 30, 2023

53,970

$

540

23,572

$

(1,798,619)

$

315,930

$

(690)

$

2,128,264

$

645,425

Comprehensive income

97

35,739

35,836

Common stock purchased for treasury

306

(34,067)

(34,067)

Restricted shares forfeited

Share-based compensation

3,336

3,336

Balance at September 30, 2023

53,970

$

540

 

23,878

$

(1,832,686)

$

319,266

$

(593)

$

2,164,003

$

650,530

6

Table of Contents

GRAND CANYON EDUCATION, INC.

Consolidated Statement of Stockholders’ Equity

(In thousands)

(Unaudited)

Nine Months Ended September 30, 2022

Accumulated

Additional

Other

Common Stock

Treasury Stock

Paid-in

Comprehensive

Retained

  

Shares

  

Par Value

  

Shares

  

Cost

  

Capital

  

Loss

  

Earnings

  

Total

Balance at December 31, 2021

53,637

$

536

 

15,915

$

(1,107,211)

$

296,670

$

$

1,855,052

$

1,045,047

Comprehensive income

 

 

 

 

 

(323)

 

58,078

 

57,755

Common stock purchased for treasury

 

 

4,575

 

(394,930)

 

 

 

 

(394,930)

Restricted shares forfeited

 

 

6

 

 

 

 

 

Share-based compensation

189

 

2

 

52

 

(4,625)

 

3,188

 

 

 

(1,435)

Balance at March 31, 2022

53,826

$

538

20,548

$

(1,506,766)

$

299,858

$

(323)

$

1,913,130

$

706,437

Comprehensive income

(75)

25,562

25,487

Common stock purchased for treasury

1,319

(128,457)

(128,457)

Share-based compensation

4

3,171

3,171

Balance at June 30, 2022

53,830

$

538

21,867

$

(1,635,223)

$

303,029

$

(398)

$

1,938,692

$

606,638

Comprehensive income

(19)

30,008

29,989

Common stock purchased for treasury

582

(48,194)

(48,194)

Restricted shares forfeited

4

Share-based compensation

 

 

 

 

3,123

 

 

 

3,123

Balance at September 30, 2022

53,830

$

538

 

22,453

$

(1,683,417)

$

306,152

$

(417)

$

1,968,700

$

591,556

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

7

Table of Contents

GRAND CANYON EDUCATION, INC.

Consolidated Statements of Cash Flows

(Unaudited)

Nine Months Ended

 

September 30, 

(In thousands)

2023

    

2022

Cash flows provided by operating activities:

  

 

  

Net income

$

124,276

$

113,648

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

 

  

 

  

Share-based compensation

 

9,958

 

9,484

Depreciation and amortization

 

16,994

 

17,023

Amortization of intangible assets

6,315

6,315

Deferred income taxes

 

517

 

368

Other, including fixed asset impairments

 

(134)

 

1,013

Changes in assets and liabilities:

 

  

 

  

Accounts receivable from university partners

 

(27,062)

 

(31,107)

Other assets

 

(1,154)

 

(1,288)

Right-of-use assets and lease liabilities

1,404

700

Accounts payable

 

3,894

 

(5,768)

Accrued liabilities

 

(910)

 

2,162

Income taxes receivable/payable

 

(13,058)

 

(8,172)

Deferred revenue

 

6,237

 

6,092

Net cash provided by operating activities

 

127,277

 

110,470

Cash flows used in investing activities:

 

  

 

  

Capital expenditures

 

(34,186)

 

(26,301)

Additions of amortizable content

 

(809)

 

(294)

Purchases of investments

 

(73,462)

 

(132,096)

Proceeds from sale or maturity of investments

 

37,927

 

63,373

Net cash used in investing activities

 

(70,530)

 

(95,318)

Cash flows used in financing activities:

 

  

 

  

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

 

(120,285)

 

(576,206)

Net cash used in financing activities

 

(120,285)

 

(576,206)

Net decrease in cash and cash equivalents and restricted cash

 

(63,538)

 

(561,054)

Cash and cash equivalents and restricted cash, beginning of period

 

120,409

 

600,941

Cash and cash equivalents and restricted cash, end of period

$

56,871

$

39,887

Supplemental disclosure of cash flow information

 

  

 

  

Cash paid for interest

$

27

$

5

Cash paid for income taxes

$

47,654

$

41,118

Supplemental disclosure of non-cash investing and financing activities

 

  

 

  

Purchases of property and equipment included in accounts payable

$

927

$

1,827

ROU Asset and Liability recognition

$

17,674

$

17,434

Excise tax on treasury stock repurchases

$

978

$

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

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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 nine colleges both online, on ground at its campus in Phoenix, Arizona and at six off-campus classroom and laboratory sites.

In January 2019, GCE began providing education services to numerous university partners across the United States, through our wholly owned subsidiary, Orbis Education, which we acquired, by merger on January 22, 2019 (the “Acquisition”). Since the Acquisition, GCE, together with Orbis Education, has continued to add additional university partners. In the healthcare field, we work in partnership with a growing number of top universities and healthcare networks across the country, offering healthcare-related academic programs at off-campus classroom and laboratory sites located near healthcare providers and developing high-quality, career-ready graduates who enter the workforce ready to meet the demands of the healthcare industry. In addition, we have provided certain services to a university partner to assist them in expanding their online graduate programs. As of September 30, 2023, GCE provides education services to 25 university partners across the United States.

2. 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, 2022. 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, 2022 from which the December 31, 2022 balance sheet information was derived.

Investments

As of September 30, 2023 and December 31, 2022, the Company considered its investments in corporate bonds, agency bonds and commercial paper as available-for-sale securities based on the Company’s intent for the respective securities. 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 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.

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Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

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 in the initial principal amount of $870,097 (the “Secured Note”) which was repaid by GCU in the fourth quarter of 2021. In connection therewith, the Company and GCU entered into a long-term master services agreement (the “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. Except for identified liabilities assumed by GCU, GCE retained responsibility for all liabilities of the business arising from pre-closing operations.

Internally Developed Software

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 straight-line 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 sheets.

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 four years which corresponds with course’s review and major revision cycle. As of September 30, 2023 and December 31, 2022, $906 and $910, respectively, net of amortization, 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.

Long-Lived Assets

The Company evaluates the recoverability of its long-lived assets for impairment, other than goodwill, 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

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Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

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.

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. 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 Amortizable 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 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 one operating segment and one reporting unit for goodwill impairment consideration. The Financial Accounting Standards Board has issued guidance that permits an entity to first assess qualitative factors to determine whether it is necessary to perform the 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 amount.

Finite-lived intangible assets that are acquired in a business combination are recorded at fair value on their acquisition dates and are amortized using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or on a straight-line basis over the estimated useful life of the intangible asset if the pattern of economic benefit cannot be reliability determined. 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 as of September 30, 2023. 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,

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Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

a potential impairment loss is recognized to the extent the carrying amounts of the assets exceeds the fair value of the assets.

Share-Based Compensation

The Company measures and recognizes compensation expense for share-based payment awards made to employees and directors. The fair value of the Company’s restricted stock awards is based on the market price of its common stock on the date of grant. Stock-based compensation expense related to restricted stock grants is expensed over the vesting period using the straight-line method for Company employees and the Company’s board of directors. The Company recognizes forfeitures as they occur.

Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, 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 fair value of investments was determined using Level 1 and 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 basis for fair value measurements for each level is described below, with Level 1 having the highest priority.

-Level 1 – inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

-Level 2 – inputs are quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in non-active markets; and model-derived valuations whose inputs are observable or whose significant valuation drivers are observable.

-Level 3 – unobservable inputs that are not corroborated by market data.

Investments are comprised of corporate bonds, commercial paper and agency bonds.

Revenue Recognition

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 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

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Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

variable nature of the consideration over the life of the service arrangement, the Company considered forming an expectation of the variable consideration to be received over the service life of this one performance obligation. However, since the performance obligation represents a series of distinct services, the Company recognizes the variable consideration that becomes known and billable because these fees relate to the distinct service period in which the fees are earned. The Company meets the criteria in the standard and exercises the practical expedient to not disclose the aggregate amount of the transaction price allocated to the single performance obligation that is unsatisfied as of the end of the reporting period. 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 expected credit losses. There have been no amounts written off and no reserves established as of September 30, 2023. 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 partners do not occur until after the service period has commenced and final enrollment information is available. Our unbilled revenue of $7,778 and $5,560 as of September 30, 2023 and December 31, 2022, respectively, are 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.

Allowance for Credit Losses

The Company records its accounts receivable at the net amount expected to be collected. Our accounts receivable are derived through education services provided to university partners. 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. Bad debt expense is recorded as a technology and academic services expense in the consolidated income statements. The Company monitors the impact of other factors on expected credit losses.

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 classroom and laboratory sites, 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.

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Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

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 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 at least one major rating agency at the time of purchase. All of the Company’s cash equivalents and investments as of September 30, 2023 and December 31, 2022 consist of investments rated BBB or higher by at least one rating agency. Additionally, the Company utilizes at least 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. Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash balances, which are primarily invested in money market funds or on deposit at high credit quality financial institutions in the U.S. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At September 30, 2023 and December 31, 2022, the Company had $56,119 and $119,639, respectively, in excess of the FDIC insured limit. The Company is also subject to credit risk for its accounts receivable balance. Our dependence on our most significant university partner, with 87.0% and 84.9% of total service revenue for

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Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

the nine-month periods ended September 30, 2023 and 2022, respectively, subjects us to the risk that declines in our customer’s operations would result in a sustained reduction in service revenue 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 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 the Company’s operations as a whole and no expense or operating income information is generated or evaluated on any component level.

Recent Accounting Pronouncements

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.

3. Investments

As of September 30, 2023 and December 31, 2022, the Company had investments of $97,553 and $61,295, respectively, classified as available-for-sale securities.

As of September 30, 2023, the Company had available-for-sale investments comprised of the following:

    

As of September 30, 2023

    

Gross

    

Gross

    

Adjusted

Unrealized

Unrealized

Estimated

Cost

Gains

(Losses)

Fair Value

Corporate bonds

$

74,323

$

$

(742)

$

73,581

Commercial Paper

4,988

(1)

4,987

Agency bonds

19,020

(35)

18,985

Total investments

$

98,331

$

$

(778)

$

97,553

For the nine months ended September 30, 2023 and 2022, the net unrealized losses were $60 and $417, respectively, net of taxes. Available-for-sale debt securities are carried at fair value on the consolidated balance sheets. The Company estimates the lifetime expected credit losses for all available-for sale debt securities in an unrealized loss position. If our assessment indicates that an expected credit loss exists, we determine the portion of the unrealized loss attributable to credit deterioration and record a reserve for the expected credit loss in the allowance for credit losses in technology and academic services in our consolidated income statements. The Company has the ability and intent to hold these investments until recovery or maturity.

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Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

Available-for-sale securities maturing as of December 31:

2023

$

25,659

2024

39,002

2025

24,366

2026

5,844

2027

2,682

Total

$

97,553

4. 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 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, 

 

2023

    

2022

    

2023

    

2022

Denominator:

 

  

 

  

 

  

 

  

Basic weighted average shares outstanding

 

29,776

 

31,302

 

30,138

 

32,623

Effect of dilutive stock options and restricted stock

 

136

 

85

 

139

 

86

Diluted weighted average shares outstanding

 

29,912

 

31,387

 

30,277

 

32,709

Diluted weighted average shares outstanding excludes the incremental effect of unvested restricted stock in accordance with the treasury stock method. For the three-month periods ended September 30, 2023 and 2022, approximately 2 and 25, respectively, and for the nine-month periods ended September 30, 2023 and 2022, approximately 70 and 77, respectively, of the Company’s restricted stock awards outstanding were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive. These restricted stock awards could be dilutive in the future.

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Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

5. Property and Equipment

Property and equipment consist of the following:

 

September 30, 

    

December 31, 

2023

2022

Land

$

5,098

$

5,098

Land improvements

 

2,242

 

2,242

Buildings

 

51,399

 

51,399

Buildings and leasehold improvements

 

30,389

 

21,911

Computer equipment

 

133,391

 

119,316

Furniture, fixtures and equipment

 

25,361

 

21,323

Internally developed software

 

67,626

 

58,904

Construction in progress

 

13,238

 

16,336

 

328,744

 

296,529

Less accumulated depreciation and amortization

 

(164,106)

 

(149,025)

Property and equipment, net

$

164,638

$

147,504

6. Amortizable Intangible Assets

In January 2019, GCE completed the Acquisition. 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. Identified intangible assets of $210,280 consisted 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.

Amortizable intangible assets consist of the following as of:

September 30, 2023

Estimated

Gross

Net

Average Useful

Carrying

Accumulated

Carrying

Life (in years)

Amount

Amortization

Amount

University partner relationships

25

  

$

210,000

  

$

(39,515)

  

$

170,485

Trade names

1

280

(280)

 

Total amortizable intangible assets, net

$

210,280

$

(39,795)

$

170,485

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

2023

$

2,104

2024

 

8,419

2025

8,419

2026

8,419

2027

8,419

Thereafter

 

134,705

$

170,485

7. Leases

The Company has operating leases for off-campus classroom and laboratory sites, office space, office equipment, and optical fiber communication lines. These leases have remaining lease terms that range from eight

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Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

months to 10 years and eight months. At lease inception, we determine 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 had operating lease costs of $3,525 and $2,789 for the three-month periods ended September 30, 2023 and 2022, respectively, and $9,695 and $7,596 for the nine-month periods ended September 30, 2023 and 2022, respectively.

As of September 30, 2023, the Company had $24,077 of non-cancelable operating lease commitments for four off-campus classroom and laboratory sites and $192 for optical fiber communication lines that had not yet commenced. The Company’s weighted-average remaining lease term relating to its operating leases is 7.99 years, with a weighted-average discount rate of 3.78%. As of September 30, 2023, the Company had no financing leases.

Future payment obligations with respect to the Company’s operating leases, which were existing at September 30, 2023, by year and in the aggregate, are as follows:

Year Ending December 31,

    

Amount

2023

$

2,990

2024

14,102

2025

14,015

2026

13,992

2027

13,385

Thereafter

54,657

Total lease payments

$

113,141

Less interest

16,622

Present value of lease liabilities

$

96,519

8. 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.

Litigation

On May 12, 2020, a securities class action complaint was filed in the U.S. District Court for the District of Delaware by the City of Hialeah Employees’ Retirement System naming the Company, Brian E. Mueller and Daniel E. Bachus as defendants for allegedly making false and materially misleading statements regarding the circumstances surrounding the Company’s sale of Grand Canyon University (the “University”) to a non-profit entity on July 1, 2018 and the subsequent decision of the U.S. Department of Education to continue to treat the University as a for-profit

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Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

institution for education regulatory purposes (collectively, the “Conversion”). The complaint asserted a putative class period stemming from January 5, 2018, the date when the Company announced that it had applied to the University’s accreditor for approval of the Conversion, to January 27, 2020, the date prior to the publication of a short-seller report focused on the Conversion. A substantially similar complaint was filed in the same court by Grant Walsh on June 12, 2020 making similar allegations against the Company, Mr. Mueller and Mr. Bachus. Both complaints alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder and sought unspecified monetary relief, interest, and attorneys’ fees.

On August 13, 2020, the two cases were consolidated and the Fire and Police Association of Colorado, the Oakland County Employees’ Retirement System and the Oakland County Voluntary Employees’ Beneficiary Association Trust were appointed as lead plaintiffs. Thereafter, the plaintiffs filed a consolidated amended complaint on October 20, 2020 and the Company filed a motion to dismiss on December 21, 2020. On August 23, 2021, the Court granted the Company’s motion to dismiss in its entirety but permitted plaintiffs to file a further amended complaint to correct deficiencies in the initial complaint. The plaintiffs filed further amended complaints on September 28, 2021 and January 21, 2022, and the Company filed a further motion to dismiss on March 15, 2022. On March 28, 2023, the Company’s motion to dismiss was denied.

The Company believes that plaintiffs’ claims are without merit and it intends to defend itself in this legal proceeding vigorously. The outcome of this legal proceeding is uncertain at this point. At present, the Company cannot reasonably estimate a range of loss for this action based on the information available to the Company. Accordingly, the Company has not accrued any liability associated with this action.

Other Matters

In May 2022, we received a civil investigative demand (“CID”) from the Federal Trade Commission (“FTC”) related to the marketing services that we provide on behalf of GCU, and related activities. The CID requests the production of documents and answers to written questions. In January 2023, we received a further CID from the FTC requesting testimony on the same topic. We are cooperating with the FTC in connection with each of these CIDs.

9. Share-Based Compensation

Incentive Plan

The Company makes equity incentive grants pursuant to our 2017 Equity Incentive Plan (the “2017 Plan”) under which a maximum of 3,000 shares may be granted. As of September 30, 2023, 1,081 shares were available for grants under the 2017 Plan.

Restricted Stock

During the nine months ended September 30, 2023, the Company granted 136 shares of common stock with a service vesting condition to certain of its executives, officers and employees. The restricted shares have voting rights and vest in five annual installments of 20%, with the first installment vesting in March of the calendar year following the date of grant (the “first vesting date”) and subsequent installments vesting on each of the four anniversaries of the first vesting date. Upon vesting, shares will be withheld in lieu of taxes equivalent to the minimum statutory tax withholding required to be paid when the restricted stock vests. During the nine months ended September 30, 2023, the Company withheld 56 shares of common stock in lieu of taxes at a cost of $6,331 on the restricted stock vesting dates. In June 2023, following the annual stockholders meeting, the Company granted 4 shares of common stock to the non-employee 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 next annual stockholders meeting.

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Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

A summary of the activity related to restricted stock granted under the Company’s Incentive Plan since December 31, 2022 is as follows:

    

    

Weighted Average

Total

Grant Date

Shares

Fair Value per Share

Outstanding as of December 31, 2022

 

476

$

85.32

Granted

 

140

$

112.60

Vested

 

(147)

$

86.94

Forfeited, canceled or expired

 

(15)

$

85.90

Outstanding as of September 30, 2023

 

454

$

93.18

Share-based Compensation Expense

The table below outlines share-based compensation expense for the nine months ended September 30, 2023 and 2022 related to restricted stock granted:

 

2023

    

2022

Technology and academic services

$

1,814

$

1,812

Counseling services and support

 

5,155

 

4,720

Marketing and communication

 

143

 

114

General and administrative

 

2,846

 

2,838

Share-based compensation expense included in operating expenses

 

9,958

 

9,484

Tax effect of share-based compensation

 

(2,489)

 

(2,371)

Share-based compensation expense, net of tax

$

7,469

$

7,113

10. Treasury Stock

On October 25, 2023, the Board of Directors increased the authorization under its existing stock repurchase program by $200,000 reflecting an aggregate authorization for share repurchases since the initiation of our program of $2,045,000. The expiration date on the repurchase authorization is March 1, 2025. Repurchases occur at the Company’s discretion. Repurchases may be made in the open market or in privately negotiated transactions, pursuant to the applicable Securities and Exchange Commission rules. The amount and timing of future share repurchases, if any, will be made as market and business conditions warrant.

During the nine months ended September 30, 2023 the Company repurchased 1,035 shares of common stock, at an aggregate cost of $113,954. As of September 30, 2023, there remained $81,892 available under its current share repurchase authorization (which authorization was increased to $281,892 in October 2023). Shares repurchased in lieu of taxes are not included in the repurchase plan totals as they were approved in conjunction with the restricted share awards. Excise taxes of $978 are not included in the repurchase plan totals but are included in the total cost of net share repurchases in the consolidated statement of stockholders’ equity.

11. Related Party Transactions

Related party transactions include transactions between the Company and certain of its affiliates. The following transactions were in the normal course of operations and were measured at the exchange amount, which was the amount of consideration established and agreed to by the parties.

As of and for the nine months ended September 30, 2023 and 2022, related party transactions consisted of the following:

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Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

Affiliates

GCE Community Fund (“GCECF”) - GCECF was initially formed in 2014. GCECF makes grants for charitable, educational, literary, religious or scientific purposes within the meaning of Section 501(c ) (3) of the Internal Revenue Code (the “Code”), including for such purposes as the making of distributions to organizations that qualify as exempt organizations under Section 501 (c ) (3) of the Code. The Company’s Chief Executive Officer serves as the president of GCECF and GCECF’s board of directors is comprised entirely of Company executives. The Company is not the primary beneficiary of GCECF, and accordingly, the Company does not consolidate GCECF’s activities with its financial results. The Company made voluntary charitable contributions of $700 and $200 for each of the nine months ended September 30, 2023 and 2022, respectively, of which no amounts were owed as of September 30, 2023 and 2022.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes that appear elsewhere in this report.

Forward-Looking Statements