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)
| ||
(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 October 31, 2023, 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) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Service revenue | $ | | $ | | $ | | $ | | ||||
Costs and expenses: |
|
|
|
|
|
|
|
| ||||
Technology and academic services |
| |
| |
| |
| | ||||
Counseling services and support |
| |
| |
| |
| | ||||
Marketing and communication |
| |
| |
| |
| | ||||
General and administrative |
| |
| |
| |
| | ||||
Amortization of intangible assets |
| |
| |
| |
| | ||||
Total costs and expenses |
| |
| |
| |
| | ||||
Operating income |
| |
| |
| |
| | ||||
Interest expense |
| ( |
| — |
| ( |
| ( | ||||
Investment interest and other |
| |
| |
| |
| | ||||
Income before income taxes |
| |
| |
| |
| | ||||
Income tax expense |
| |
| |
| |
| | ||||
Net income | $ | | $ | | $ | | $ | | ||||
Earnings per share: |
|
|
|
|
|
|
|
| ||||
Basic income per share | $ | | $ | | $ | | $ | | ||||
Diluted income per share | $ | | $ | | $ | | $ | | ||||
Basic weighted average shares outstanding |
| |
| |
| |
| | ||||
Diluted weighted average shares outstanding |
| |
| |
| |
| |
The accompanying notes are an integral part of these consolidated financial statements.
3
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 | $ | | $ | | ||
Investments |
| |
| | ||
Accounts receivable, net |
| |
| | ||
Income tax receivable |
| |
| | ||
Other current assets |
| |
| | ||
Total current assets |
| |
| | ||
Property and equipment, net |
| |
| | ||
Right-of-use assets | | | ||||
Amortizable intangible assets, net | | | ||||
Goodwill |
| |
| | ||
Other assets |
| |
| | ||
Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY: |
|
|
|
| ||
Current liabilities |
|
|
|
| ||
Accounts payable | $ | | $ | | ||
Accrued compensation and benefits |
| |
| | ||
Accrued liabilities |
| |
| | ||
Income taxes payable |
| |
| | ||
Deferred revenue |
| |
| — | ||
Current portion of lease liability |
| |
| | ||
Total current liabilities |
| |
| | ||
Deferred income taxes, noncurrent |
| |
| | ||
Other long-term liability | | | ||||
Lease liability, less current portion |
| |
| | ||
Total liabilities |
| |
| | ||
Commitments and contingencies |
|
|
|
| ||
Stockholders’ equity |
|
|
|
| ||
Preferred stock, $ |
| — |
| — | ||
Common stock, $ |
| |
| | ||
Treasury stock, at cost, |
| ( |
| ( | ||
Additional paid-in capital |
| |
| | ||
Accumulated other comprehensive loss |
| ( |
| ( | ||
Retained earnings |
| |
| | ||
Total stockholders’ equity |
| |
| | ||
Total liabilities and stockholders’ equity | $ | | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
4
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 | $ | | $ | | $ | | $ | | ||||
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
| ||||
Unrealized gains (losses) on available-for-sale securities, net of taxes of $ |
| |
| ( |
| ( |
| ( | ||||
Comprehensive income | $ | | $ | | $ | | $ | |
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, 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 | | $ | | | $ | ( | $ | | $ | ( | $ | | $ | | ||||||||
Comprehensive income | — | — | — | — | — | | | | ||||||||||||||
Common stock purchased for treasury | — | — | | ( | — | — | — | ( | ||||||||||||||
Restricted shares forfeited | — | — | | — | — | — | — | — | ||||||||||||||
Share-based compensation | | | | ( | | — | — | ( | ||||||||||||||
Balance at March 31, 2023 | | $ | | | $ | ( | $ | | $ | ( | $ | | $ | | ||||||||
Comprehensive income | — | — | — | — | — | ( | | | ||||||||||||||
Common stock purchased for treasury | — | — | | ( | — | — | — | ( | ||||||||||||||
Restricted shares forfeited | — | — | | — | — | — | — | — | ||||||||||||||
Share-based compensation | | — | — | — | | — | — | | ||||||||||||||
Balance at June 30, 2023 | | $ | | | $ | ( | $ | | $ | ( | $ | | $ | | ||||||||
Comprehensive income | — | — | — | — | — | | | | ||||||||||||||
Common stock purchased for treasury | — | — | | ( | — | — | — | ( | ||||||||||||||
Restricted shares forfeited | — | — | — | — | — | — | — | — | ||||||||||||||
Share-based compensation | — | — | — | — | | — | — | | ||||||||||||||
Balance at September 30, 2023 | | $ | |
| | $ | ( | $ | | $ | ( | $ | | $ | |
6
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 | | $ | |
| | $ | ( | $ | | $ | — | $ | | $ | | |||||||
Comprehensive income | — |
| — |
| — |
| — |
| — |
| ( |
| |
| | |||||||
Common stock purchased for treasury | — |
| — |
| |
| ( |
| — |
| — |
| — |
| ( | |||||||
Restricted shares forfeited | — |
| — |
| |
| — |
| — |
| — |
| — |
| — | |||||||
Share-based compensation | |
| |
| |
| ( |
| |
| — |
| — |
| ( | |||||||
Balance at March 31, 2022 | | $ | | | $ | ( | $ | | $ | ( | $ | | $ | | ||||||||
Comprehensive income | — | — | — | — | — | ( | | | ||||||||||||||
Common stock purchased for treasury | — | — | | ( | — | — | — | ( | ||||||||||||||
Share-based compensation | | — | — | — | | — | — | | ||||||||||||||
Balance at June 30, 2022 | | $ | | | $ | ( | $ | | $ | ( | $ | | $ | | ||||||||
Comprehensive income | — | — | — | — | — | ( | | | ||||||||||||||
Common stock purchased for treasury | — | — | | ( | — | — | — | ( | ||||||||||||||
Restricted shares forfeited | — | — | | — | — | — | — | — | ||||||||||||||
Share-based compensation | — |
| — |
| — |
| — |
| |
| — |
| — |
| | |||||||
Balance at September 30, 2022 | | $ | |
| | $ | ( | $ | | $ | ( | $ | | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
7
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 | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
| ||
Share-based compensation |
| |
| | ||
Depreciation and amortization |
| |
| | ||
Amortization of intangible assets | | | ||||
Deferred income taxes |
| |
| | ||
Other, including fixed asset impairments |
| ( |
| | ||
Changes in assets and liabilities: |
|
|
|
| ||
Accounts receivable from university partners |
| ( |
| ( | ||
Other assets |
| ( |
| ( | ||
Right-of-use assets and lease liabilities | | | ||||
Accounts payable |
| |
| ( | ||
Accrued liabilities |
| ( |
| | ||
Income taxes receivable/payable |
| ( |
| ( | ||
Deferred revenue |
| |
| | ||
Net cash provided by operating activities |
| |
| | ||
Cash flows used in investing activities: |
|
|
|
| ||
Capital expenditures |
| ( |
| ( | ||
Additions of amortizable content |
| ( |
| ( | ||
Purchases of investments |
| ( |
| ( | ||
Proceeds from sale or maturity of investments |
| |
| | ||
Net cash used in investing activities |
| ( |
| ( | ||
Cash flows used in financing activities: |
|
|
|
| ||
Repurchase of common shares and shares withheld in lieu of income taxes |
| ( |
| ( | ||
Net cash used in financing activities |
| ( |
| ( | ||
Net decrease in cash and cash equivalents and restricted cash |
| ( |
| ( | ||
Cash and cash equivalents and restricted cash, beginning of period |
| |
| | ||
Cash and cash equivalents and restricted cash, end of period | $ | | $ | | ||
Supplemental disclosure of cash flow information |
|
|
|
| ||
Cash paid for interest | $ | | $ | | ||
Cash paid for income taxes | $ | | $ | | ||
Supplemental disclosure of non-cash investing and financing activities |
|
|
|
| ||
Purchases of property and equipment included in accounts payable | $ | | $ | | ||
ROU Asset and Liability recognition | $ | | $ | | ||
Excise tax on treasury stock repurchases | $ | | $ | — |
The accompanying notes are an integral part of these consolidated financial statements.
8
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 (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
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.
9
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 $
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
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
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
10
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
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,
11
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
12
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
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 $
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.
13
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 $
14
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 $
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 | $ | | $ | — | $ | ( | $ | | ||||
Commercial Paper | | — | ( | | ||||||||
Agency bonds | | — | ( | | ||||||||
Total investments | $ | | $ | — | $ | ( | $ | |
For the nine months ended September 30, 2023 and 2022, the net unrealized losses were $
15
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 | $ | | |
2024 | | ||
2025 | | ||
2026 | | ||
2027 | | ||
Total | $ | |
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 |
| |
| |
| |
| |
Effect of dilutive stock options and restricted stock |
| |
| |
| |
| |
Diluted weighted average shares outstanding |
| |
| |
| |
| |
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
16
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 | $ | | $ | | ||
Land improvements |
| |
| | ||
Buildings |
| |
| | ||
Buildings and leasehold improvements |
| |
| | ||
Computer equipment |
| |
| | ||
Furniture, fixtures and equipment |
| |
| | ||
Internally developed software |
| |
| | ||
Construction in progress |
| |
| | ||
| |
| | |||
Less accumulated depreciation and amortization |
| ( |
| ( | ||
Property and equipment, net | $ | | $ | |
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 $
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 |
| $ | |
| $ | ( |
| $ | | |
Trade names | | ( |
| — | ||||||
Total amortizable intangible assets, net | $ | | $ | ( | $ | |
Amortization expense for university partner relationships and trade names for the years ending December 31:
2023 | $ | | |
2024 |
| | |
2025 | | ||
2026 | | ||
2027 | | ||
Thereafter |
| | |
$ | |
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
17
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
As of September 30, 2023, the Company had $
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 | $ | | |
2024 | | ||
2025 | | ||
2026 | | ||
2027 | | ||
Thereafter | | ||
Total lease payments | $ | | |
Less interest | | ||
Present value of lease liabilities | $ | |
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
18
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
Restricted Stock
During the nine months ended September 30, 2023, the Company granted
19
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 |
| | $ | | |
Granted |
| | $ | | |
Vested |
| ( | $ | | |
Forfeited, canceled or expired |
| ( | $ | | |
Outstanding as of September 30, 2023 |
| | $ | |
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 | $ | | $ | | ||
Counseling services and support |
| |
| | ||
Marketing and communication |
| |
| | ||
General and administrative |
| |
| | ||
Share-based compensation expense included in operating expenses |
| |
| | ||
Tax effect of share-based compensation |
| ( |
| ( | ||
Share-based compensation expense, net of tax | $ | | $ | |
10. Treasury Stock
On October 25, 2023, the Board of Directors increased the authorization under its existing stock repurchase program by $
During the nine months ended September 30, 2023 the Company repurchased
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:
20
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 $
21
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