Docoh
Loading...

LOPE Grand Canyon Education

Filed: 5 May 21, 4:09pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2021

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 May 3, 2021, was 46,344,811.

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

GRAND CANYON EDUCATION, INC.

Consolidated Income Statements

(Unaudited)

Three Months Ended

March 31, 

(In thousands, except per share data)

 

2021

    

2020

    

Service revenue

$

236,934

$

221,655

Costs and expenses:

 

  

 

  

Technology and academic services

 

32,051

 

26,277

Counseling services and support

 

61,239

 

60,219

Marketing and communication

 

47,731

 

42,693

General and administrative

 

9,582

 

9,565

Amortization of intangible assets

 

2,105

 

2,105

Total costs and expenses

 

152,708

 

140,859

Operating income

 

84,226

 

80,796

Interest income on Secured Note

 

14,549

 

14,710

Interest expense

 

(799)

 

(1,546)

Investment interest and other

 

121

 

216

Income before income taxes

 

98,097

 

94,176

Income tax expense

 

19,985

 

22,791

Net income

$

78,112

$

71,385

Earnings per share:

 

  

 

  

Basic income per share

$

1.70

$

1.50

Diluted income per share

$

1.69

$

1.49

Basic weighted average shares outstanding

 

46,084

 

47,455

Diluted weighted average shares outstanding

 

46,300

 

47,764

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

3

GRAND CANYON EDUCATION, INC.

Consolidated Balance Sheets

March 31, 

    

December 31, 

(In thousands, except par value)

 

2021

2020

(Unaudited)

ASSETS:

Current assets

 

  

Cash and cash equivalents

$

225,829

$

245,769

Investments

 

36,443

 

10,840

Accounts receivable, net

 

91,790

 

62,189

Interest receivable on Secured Note

 

5,011

 

5,011

Income tax receivable

 

763

 

1,294

Other current assets

 

14,484

 

8,639

Total current assets

 

374,320

 

333,742

Property and equipment, net

 

131,929

 

128,657

Right-of-use assets

59,434

61,020

Secured Note receivable, net

 

964,912

 

964,912

Amortizable intangible assets, net

191,533

193,638

Goodwill

 

160,766

 

160,766

Other assets

 

2,133

 

1,844

Total assets

$

1,885,027

$

1,844,579

LIABILITIES AND STOCKHOLDERS’ EQUITY:

 

  

 

  

Current liabilities

 

  

 

  

Accounts payable

$

17,224

$

16,583

Accrued compensation and benefits

 

37,307

 

34,248

Accrued liabilities

 

29,495

 

21,945

Income taxes payable

 

21,180

 

5,405

Deferred revenue

 

6,936

 

Current portion of lease liability

7,525

7,393

Current portion of notes payable

 

33,144

 

33,144

Total current liabilities

 

152,811

 

118,718

Deferred income taxes, noncurrent

 

22,029

 

20,288

Other long term liability

107

3

Lease liability, less current portion

55,058

56,611

Notes payable, less current portion

 

66,344

 

74,630

Total liabilities

 

296,349

 

270,250

Commitments and contingencies

 

  

 

  

Stockholders’ equity

 

  

 

  

Preferred stock, $0.01 par value, 10,000 shares authorized; 0 shares issued and outstanding at March 31, 2021 and December 31, 2020

 

 

Common stock, $0.01 par value, 100,000 shares authorized; 53,633 and 53,277 shares issued and 46,382 and 46,649 shares outstanding at March 31, 2021 and December 31, 2020, respectively

 

536

 

533

Treasury stock, at cost, 7,251 and 6,628 shares of common stock at March 31, 2021 and December 31, 2020, respectively

 

(365,721)

 

(303,379)

Additional paid-in capital

 

281,163

 

282,467

Accumulated other comprehensive loss

 

(120)

 

Retained earnings

 

1,672,820

 

1,594,708

Total stockholders’ equity

 

1,588,678

 

1,574,329

Total liabilities and stockholders’ equity

$

1,885,027

$

1,844,579

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

4

GRAND CANYON EDUCATION, INC.

Consolidated Statement of Other Comprehensive Income

(Unaudited)

Three Months Ended

 

March 31, 

(In thousands)

2021

    

2020

    

Net income

$

78,112

$

71,385

Other comprehensive income, net of tax:

 

  

 

  

Unrealized losses on available-for-sale securities, net of taxes of $35 for the three months ended March 31, 2021

 

(120)

 

Comprehensive income

$

77,992

$

71,385

5

GRAND CANYON EDUCATION, INC.

Consolidated Statement of Stockholders’ Equity

(In thousands)

(Unaudited)

Three Months Ended March 31, 2021

Accumulated

Additional

Other

Common Stock

Treasury Stock

Paid-in

Comprehensive

Retained

  

Shares

  

Par Value

  

Shares

  

Cost

  

Capital

  

Loss

  

Earnings

  

Total

Balance at December 31, 2020

 

53,277

$

533

 

6,628

$

(303,379)

$

282,467

$

1,594,708

$

1,574,329

Comprehensive income

 

 

 

 

 

(120)

 

78,112

 

77,992

Common stock purchased for treasury

 

 

567

 

(56,348)

 

(7,000)

 

 

 

(63,348)

Restricted shares forfeited

 

 

 

 

 

 

 

Share-based compensation

180

 

1

 

56

 

(5,994)

 

3,018

 

 

 

(2,975)

Exercise of stock options

176

 

2

 

 

 

2,678

 

 

 

2,680

Balance at March 31, 2021

53,633

$

536

 

7,251

$

(365,721)

$

281,163

$

(120)

$

1,672,820

$

1,588,678

Three Months Ended March 31, 2020

Accumulated

Additional

Other

Common Stock

Treasury Stock

Paid-in

Comprehensive

Retained

  

Shares

  

Par Value

  

Shares

  

Cost

  

Capital

  

Loss

  

Earnings

  

Total

Balance at December 31, 2019

53,054

$

531

 

4,949

$

(169,365)

$

270,923

$

1,341,344

$

1,443,433

Cumulative effect from the adoption of accounting pronouncements, net of taxes of $1,168

 

 

 

 

 

 

(3,832)

 

(3,832)

Comprehensive income

 

 

 

 

 

 

71,385

 

71,385

Common stock purchased for treasury

 

 

787

 

(60,737)

 

 

 

 

(60,737)

Restricted shares forfeited

 

 

10

 

 

 

 

 

Share-based compensation

164

 

1

 

62

 

(4,969)

 

2,655

 

 

 

(2,313)

Exercise of stock options

3

 

 

 

 

72

 

 

 

72

Balance at March 31, 2020

53,221

$

532

 

5,808

$

(235,071)

$

273,650

$

$

1,408,897

$

1,448,008

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

6

GRAND CANYON EDUCATION, INC.

Consolidated Statements of Cash Flows

(Unaudited)

Three Months Ended

 

March 31, 

(In thousands)

2021

    

2020

Cash flows provided by operating activities:

  

 

  

Net income

$

78,112

$

71,385

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

 

  

 

  

Share-based compensation

 

3,019

 

2,656

Depreciation and amortization

 

5,426

 

4,989

Amortization of intangible assets

2,105

2,105

Deferred income taxes

 

1,776

 

1,688

Other, including fixed asset impairments

 

65

 

289

Changes in assets and liabilities:

 

  

 

  

Accounts receivable and interest receivable from university partners

 

(29,601)

 

(28,451)

Other assets

 

(6,166)

 

(6,742)

Right-of-use assets and lease liabilities

165

544

Accounts payable

 

971

 

3,957

Accrued liabilities

 

10,714

 

5,972

Income taxes receivable/payable

 

16,305

 

19,174

Deferred revenue

 

6,936

 

8,153

Net cash provided by operating activities

 

89,827

 

85,719

Cash flows used in investing activities:

 

  

 

  

Capital expenditures

 

(8,911)

 

(6,085)

Additions of amortizable content

 

(90)

 

(56)

Purchases of investments

 

(31,337)

 

Proceeds from sale or maturity of investments

 

5,519

 

4,263

Net cash used in investing activities

 

(34,819)

 

(1,878)

Cash flows used in financing activities:

 

  

 

  

Principal payments on notes payable

 

(8,286)

 

(8,286)

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

 

(69,342)

 

(65,706)

Net proceeds from exercise of stock options

 

2,680

 

72

Net cash used in financing activities

 

(74,948)

 

(73,920)

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

 

(19,940)

 

9,921

Cash and cash equivalents and restricted cash, beginning of period

 

245,769

 

122,572

Cash and cash equivalents and restricted cash, end of period

$

225,829

$

132,493

Supplemental disclosure of cash flow information

 

  

 

  

Cash paid for interest

$

895

$

1,546

Cash paid for income taxes

$

230

$

250

Supplemental disclosure of non-cash investing and financing activities

 

  

 

  

Purchases of property and equipment included in accounts payable

$

876

$

899

Allowance for credit losses of $5,000, net of taxes of $1,168 from adoption of ASU 2016-13

$

$

3,832

ROU Asset and Liability recognition

$

1,586

$

6,775

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

7

Table of Contents

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 9 colleges both online, on ground at its campus in Phoenix, Arizona and at 2 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 for $361,184, net of cash acquired (the “Acquisition”). In the healthcare field, GCE, together with Orbis Education, works 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.

As of March 31, 2021, GCE provides education services to 26 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, 2020. 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, 2020 from which the December 31, 2020 balance sheet information was derived.

Investments

At March 31, 2021 and December 31, 2020, the Company considers its investments in corporate bonds, commercial paper, municipal securities, asset backed securities, municipal bonds, and collateralized mortgage obligations either as trading securities or available-for-sale securities based on the Company’s intent for the respective security. Trading securities are carried at fair value determined using Level 1 and Level 2 of the hierarchy of valuation inputs, with the use of quoted market prices and inputs other than quoted prices that are observable for the assets. Available-for-sale securities are carried at fair value, determined using Level 2 of the hierarchy of valuation inputs, with the use of inputs other than quoted prices that are observable for the assets, with unrealized gains and losses, net of tax,

8

Table of Contents

Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

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.

Arrangements with GCU

On July 1, 2018, the Company consummated an Asset Purchase Agreement (the “Asset Purchase Agreement”) with GCU. In conjunction with the Asset Purchase Agreement, we received a secured note from GCU as consideration for the transferred assets (the “Transferred Assets”) in the initial principal amount of $870,097 (the “Secured Note”). The Secured Note contains customary commercial credit terms, including affirmative and negative covenants applicable to GCU, and provides that the Secured Note bears interest at an annual rate of 6.0%, has a maturity date of June 30, 2025, and is secured by all of the assets of GCU. The Secured Note provides for GCU to make interest only payments during the term, with all principal and accrued and unpaid interest due at maturity and also provides that we may loan additional amounts to GCU to fund approved capital expenditures during the first three years of the term. As of March 31, 2021, the Company had loaned $99,815 to GCU, net of repayments. In connection with the closing of the Asset Purchase Agreement, the Company and GCU entered into a long-term master services agreement pursuant to which the Company provides identified technology and academic services, counseling services and support, marketing and communication services, and several back-office services to GCU in return for 60% of GCU’s tuition and fee revenue. 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

9

Table of Contents

Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

corresponds with course’s review and major revision cycle. As of March 31, 2021 and December 31, 2020, $1,166 and $1,198, 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.

Leases

The Company determines if an arrangement is a lease at inception and evaluates the lease agreement to determine whether the lease is a finance or operating lease. Right-of-use (“ROU”) assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at the commencement to determine the present value of lease payments over the lease term. At lease inception, the Company determines the lease term by assuming no exercises of renewal options, due to the Company’s constantly changing geographical needs for its university partners. Leases with an initial term of 12 months or less are not recorded in the consolidated balance sheets and are recognized as lease expense on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, and the non-lease components are accounted for separately and not included in our ROU assets and lease liabilities. Leases primarily consist of off-campus classroom and laboratory site locations and office space.

Business Combinations

The purchase price of an acquisition is allocated to the assets acquired, including tangible and intangible assets, and liabilities assumed, based on their respective fair values at the acquisition date. The excess of the fair value of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill. Transaction costs associated with business combinations are expensed as incurred and are recorded in the loss on transaction in the consolidated financial statements. The determination of the fair value and useful lives of the intangible assets acquired involves certain judgments and estimates. These judgements can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital. The net assets and result of operations of an acquired entity are included in the Company’s consolidated financial statements from the acquisition date.

Goodwill and 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 1 operating segment and 1 reporting unit for goodwill impairment consideration. The Financial Accounting Standards Board (“FASB”) has issued guidance that permits an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The Company reviews goodwill at least annually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.

Finite-lived intangible assets that are acquired in a business combination are recorded at fair value on their acquisition dates and are amortized on a straight-line basis over the estimated useful life of the intangible asset. Finite-lived intangible assets consist of university partner relationships and trade names. The Company reviews its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. There were no indicators that the carrying amount of the finite-lived intangible assets were impaired. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the assets. If such intangible assets are not

10

Table of Contents

Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

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

Acquisition

On January 22, 2019, GCE acquired Orbis Education for $361,184 (inclusive of closing date adjustments and net of cash acquired). The Acquisition was accounted for in accordance with the acquisition method of accounting. Under this method the cost of the target is allocated to the identifiable assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The estimated fair values of current assets and liabilities were based upon their historical costs on the date of acquisition due to their short-term nature. The majority of property and equipment were also estimated based upon historical costs as they approximated fair value. Identified intangible assets of $210,280 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. The fair value of the assets acquired, less the liabilities assumed, exceeded the purchase price by $157,825 which was recorded as goodwill.

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. As of March 31, 2021 and December 31, 2020 the fair value of the Company’s Secured Note was $1,045,591 and $1,049,458, respectively. As of March 31, 2021 and December 31, 2020 the carrying value of Secured Note receivable for both periods was $964,912. The carrying value of notes payable approximates fair value as it is based on variable rate index.

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.

Investments are comprised of corporate bonds, commercial paper, municipal securities, asset backed securities, municipal bonds, and collateralized mortgage obligations.

11

Table of Contents

Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

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 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 amortized cost, net of any allowance for credit losses and contains billed and unbilled revenue. The Company evaluates the need for an allowance for credit losses using relevant available information about expected credit losses, including information about historical credit losses, past events, current conditions, and other factors which may affect the collectability of receivables. There have been 0 amounts written off and 0 allowance for credit losses established as of March 31, 2021 given historical collection experience. The Company will continue to review and revise its allowance methodology based on its collection experience with its partners.

For our partners with unbilled revenue, revenue recognition occurs in advance of billings. Billings for some university partners do not occur until after the service period has commenced and final enrollment information is available. Our unbilled revenue of $10,132 and $294 as of March 31, 2021 and December 31, 2020, 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.

12

Table of Contents

Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

Allowance for Credit Losses

The Company records its accounts receivable and Secured Note receivable at the net amount expected to be collected. Our accounts receivable are derived through education services provided to university partners. Our Secured Note receivable was derived through the sale of university related assets to our most significant university partner, GCU. The Company maintains an allowance for credit losses resulting from our university partners not making payments. The Company determines the adequacy of the allowance by periodically evaluating each university partners balance, considering their financial condition and credit history, and considering current and forecasted economic conditions. Since our transition to an education services company on July 1, 2018, and continued growth to 26 university partners, the Company has 0 credit losses with any of our university partners. In the first quarter of 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments using a modified retrospective approach. This model requires consideration of a broader range of reasonable and supportable information and requires the Company to estimate expected credit losses including a measure of the expected risk of credit loss even if that risk is remote over the lifetime of the asset. Upon adoption, the Company recorded a reserve of $5,000 on its long-term Secured Note receivable. The cumulative effect for the Company upon adoption of this new standard was $3,832, net of taxes of $1,168. Bad debt expense is recorded as a technology and academic services expense in the consolidated income statements. The Company will continue to actively monitor the impact of the COVID-19 pandemic 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 locations, and assistance with state compliance. This expense category includes salaries, benefits and share-based compensation, information technology costs, amortization of content development costs and other costs associated with these support services. This category also includes an allocation of depreciation, amortization, and occupancy costs attributable to the provision of certain services, primarily at the Company’s Phoenix, Arizona and Indianapolis, Indiana locations.

Counseling Services and Support

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

Marketing and Communication

Marketing and communication includes lead acquisition, digital communication strategies, brand identity advertising, media planning and strategy, video, data science and analysis, marketing to potential students and other 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.

13

Table of Contents

Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

General and Administrative

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

Commitments and Contingencies

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

Concentration of Credit Risk

The Company believes the credit risk related to cash equivalents and investments is limited due to its adherence to an investment policy that requires investments to have a minimum BBB rating, depending on the type of security, by one major rating agency at the time of purchase. All of the Company’s cash equivalents and investments as of March 31, 2021 and December 31, 2020 consist of investments rated BBB or higher by at least one rating agency. Additionally, the Company utilizes more than one financial institution to conduct initial and ongoing credit analysis on its investment portfolio to monitor and lower the potential impact of market risk associated with its cash equivalents and investment portfolio. The Company is also subject to credit risk for its accounts receivable balance and its Secured Note. The Company has not experienced any losses on receivables since July 1, 2018, the date the Company transitioned to an educational service provider. To manage accounts receivable risk, the Company maintains an allowance for doubtful accounts, if needed. The Company monitors the credit risk exposure of the counterparty of the Secured Note to determine whether an adjustment to allowance for credit loss is necessary. A significant deterioration in the financial viability of our counterparty and corresponding decline in the fair value of the collateralized assets could impact the collectability risk of the Secured Note. Our dependence on our most significant university partner, which is also the counterparty to the Secured Note, with 87.4% and 87.9% of total service revenue for the three-month periods ended March 31, 2021 and 2020, respectively, subjects us to the risk that declines in our customer’s operations would result in a sustained reduction in service revenue and interest income on the Secured Note 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.

14

Table of Contents

Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

Accounting Pronouncements Adopted in 2021

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for annual periods beginning after December 15, 2020 and interim periods within those annual periods, with early adoption permitted. Accordingly, the standard was adopted by the Company as of January 1, 2021. Most amendments within this ASU are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The adoption of this guidance did not have a material impact on the Company’s financial condition, results of operations or statements of cash flows.

Recent Accounting Pronouncements

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effect of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company plans to elect the optional expedient for its credit facility by prospectively adjusting the effective interest rate if the cessation of the London Interbank Offered Rate (LIBOR) occurs. The Company does not believe the adoption of the reference rate reform will have a material impact on the Company’s financial condition, results of operations or statements of cash flows.

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

3. Investments

At March 31, 2021 and December 31, 2020, the Company had investments of $8,015 and $10,840, respectively, classified as trading. The trading investments are held in municipal and corporate securities as of March 31, 2021 and December 31, 2020 and are due in one year or less as of March 31, 2021. The cash flows of municipal securities are backed by the issuing municipality’s credit-worthiness.

At March 31, 2021, the Company had available-for-sale investments of $28,428, comprised of the following:

As of March 31, 2021

    

    

Gross

    

Gross

    

Estimated

Adjusted

Unrealized

Unrealized

Fair

Cost

Gains

(Losses)

Value

Corporate bonds

$

19,228

$

9

$

(158)

$

19,079

Commercial paper

5,991

(3)

5,988

Municipal securities

1,433

(1)

1,432

Asset backed securities

1,931

(2)

1,929

Total investments

$

28,583

$

9

$

(164)

$

28,428

For the three months ended March 31, 2021, the net unrealized gains or (losses) were $120, net of taxes. Available-for-sale debt securities are carried at fair value on the consolidated balance sheets. The Company estimates

15

Table of Contents

Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

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. As of March 31, 2021, there were no credit losses for our available-for-sale debt securities.

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

2021 (Remainder of year)

9,153

2022

2,302

2023

4,041

2024

3,338

2025

1,019

Thereafter

8,575

Total

28,428

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 stock options and restricted stock awards, for which the estimated fair value exceeds the exercise price, less shares which could have been purchased with the related proceeds, unless anti-dilutive. For employee equity awards, repurchased shares are also included for any unearned compensation adjusted for tax. The table below reflects the calculation of the weighted average number of common shares outstanding, on an as if converted basis, used in computing basic and diluted earnings per common share.

Three Months Ended

March 31, 

    

 

2021

    

2020

    

Denominator:

 

 

  

 

  

 

Basic weighted average shares outstanding

 

 

46,084

 

47,455

 

Effect of dilutive stock options and restricted stock

 

 

216

 

309

 

Diluted weighted average shares outstanding

 

 

46,300

 

47,764

 

Diluted weighted average shares outstanding excludes the incremental effect of unvested restricted stock and shares that would be issued upon the assumed exercise of stock options in accordance with the treasury stock method. For the three month periods ended March 31, 2021 and 2020, approximately 1 and 284, 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.

5. Allowance for Credit Losses

Balance at

    

    

    

Balance at

Beginning of

Charged to

Deductions/

End of

Period (1)

Expense

Transfers (2)

Period

Allowance for credit losses

Three months ended March 31, 2021

$

5,000

 

 

$

5,000

Three months ended March 31, 2020

$

5,000

 

 

$

5,000

16

Table of Contents

Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(1)Amount represents the cumulative effect of the adoption of ASU No. 2016-13 on the Secured Note.
(2)Deductions represent accounts written off, net of recoveries.

6. Property and Equipment

Property and equipment consist of the following:

 

March 31, 

    

December 31, 

2021

2020

Land

$

5,579

$

5,579

Land improvements

 

2,242

 

2,242

Buildings

 

51,399

 

51,399

Buildings and leasehold improvements

 

16,670

 

14,352

Computer equipment

 

102,891

 

100,575

Furniture, fixtures and equipment

 

15,912

 

15,439

Internally developed software

 

47,222

 

46,981

Construction in progress

 

8,267

 

5,043

 

250,182

 

241,610

Less accumulated depreciation and amortization

 

(118,253)

 

(112,953)

Property and equipment, net

$

131,929

$

128,657

7. Amortizable Intangible Assets

Amortizable intangible assets consist of the following as of:

March 31, 2021

Estimated

Gross

Net

Average Useful

Carrying

Accumulated

Carrying

Life (in years)

Amount

Amortization

Amount

University partner relationships

25

  

$

210,000

  

(18,467)

  

$

191,533

Trade names

1

280

(280)

 

Total amortizable intangible assets, net

$

210,280

(18,747)

$

191,533

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

Remainder of 2021

$

6,314

2022

 

8,419

2023

8,419

2024

8,419

2025

8,419

Thereafter

 

151,543

$

191,533

8. Leases

The Company has operating leases for classroom site locations, office space, office equipment, and optical fiber communication lines. These leases have terms that range from 10 months to 10 years. 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

17

Table of Contents

Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

Company had operating lease costs of $2,435 and $1,441 for the three-month periods ended March 31, 2021 and 2020, respectively.

As of March 31, 2021, the Company had 0 non-cancelable operating lease commitments that had not yet commenced. The Company’s weighted-average remaining lease term relating to its operating leases is 8.36 years, with a weighted-average discount rate of 3.21%. As of March 31, 2021, the Company had 0 financing leases.

Future payment obligations with respect to the Company’s operating leases, which were existing at March 31, 2021, by year and in the aggregate, are as follows:

Year Ending December 31,

    

Amount

Remainder of 2021

$

7,092

2022

8,992

2023

8,469

2024

7,967

2025

7,645

Thereafter

31,106

Total lease payments

$

71,271

Less interest

8,688

Present value of lease liabilities

$

62,583

9. Notes Payable and Other Noncurrent Liabilities

We entered into an amended and restated credit agreement dated January 22, 2019 and two related amendments dated January 31, 2019 and dated February 1, 2019, respectively, that together provide a credit facility of $325,000 comprised of a term loan facility of $243,750 and a revolving credit facility of $81,250, both with a five-year maturity date. The Company concluded that the amended and restated credit agreement is considered a loan modification. Accordingly, the Company allocated the costs paid to the bank consortium based on the borrowing dollars and recorded an asset of $596 and a contra liability of $1,639, which are related to our revolver and term loan, respectively, that is being amortized to interest expense over the five-year maturity date.

The Company entered into a further amendment for the credit facility on October 31, 2019. This amendment increased the revolving commitment by $68,750 to $150,000, while reducing the term loan by the same $68,750 to $150,625. The Company concluded that this amendment is considered a loan modification. The amended and restated credit agreement contains standard covenants that, among other things, restrict the Company’s ability to incur additional debt or make certain investments, and require the Company to achieve certain financial ratios and maintain certain financial conditions. The Company’s obligations under the credit facility are secured by its assets, including all rights,

18

Table of Contents

Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

benefits and payments under the Secured Note and the Master Services Agreement. As of March 31, 2021, the Company is in compliance with its debt covenants.

As of March 31, 

As of December 31, 

    

2021

    

2020

Notes Payable

 

  

 

  

Note payable, quarterly payment of $8,368 starting December 31, 2019; interest at 30-Day LIBOR plus 2.00% (2.12% at March 31, 2021) through January 22, 2024

$

99,488

$

107,774

Revolving line of credit; interest at 30-Day LIBOR plus 2.0% (2.12% at March 31, 2021)

 

99,488

 

107,774

Less: Current portion

 

33,144

 

33,144

$

66,344

$

74,630

Payments due under the notes payable obligations are as follows as of December 31:

Remainder of 2021

    

$

24,858

2022

33,144

2023

33,145

2024

8,341

2025

Total

$

99,488

10. 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.

Tax Reserves, Non-Income Tax Related

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

19

Table of Contents

Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

11. 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 March 31, 2021, 1,418 shares were available for grants under the 2017 Plan.

Restricted Stock

During the three months ended March 31, 2021, the Company granted 180 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 4 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 three months ended March 31, 2021, the Company withheld 56 shares of common stock in lieu of taxes at a cost of $5,994 on the restricted stock vesting dates. A summary of the activity related to restricted stock granted under the Company’s Incentive Plan since December 31, 2020 is as follows:

    

    

Weighted Average

Total

Grant Date

Shares

Fair Value per Share

Outstanding as of December 31, 2020

 

419

$

83.43

Granted

 

180

$

85.97

Vested

 

(141)

$

74.41

Forfeited, canceled or expired

 

$

Outstanding as of March 31, 2021

 

458

$

87.20

Stock Options

During the three months ended March 31, 2021, 0 options were granted. A summary of the activity since December 31, 2020 related to stock options granted under the Company’s Incentive Plan is as follows:

Summary of Stock Options Outstanding

    

    

Weighted

    

Weighted

    

Average

Average

Exercise

Remaining

Aggregate

Total

Price per

Contractual

Intrinsic

Shares

Share

Term (Years)

Value ($)

Outstanding as of December 31, 2020

 

176

$

15.34

Granted

 

$

 

  

 

  

Exercised

 

(176)

$

15.34

 

  

 

  

Forfeited, canceled or expired

 

$

 

  

 

  

Outstanding as of March 31, 2021

 

$

 

$

Exercisable as of March 31, 2021

 

$

 

$

20

Table of Contents

Grand Canyon Education, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

Share-based Compensation Expense

The table below outlines share-based compensation expense for the three months ended March 31, 2021 and 2020 related to restricted stock granted:

    

 

2021

    

2020

Technology and academic services

$

606

$

518

Counseling services and support

 

1,488

 

1,330

Marketing and communication

 

30

 

25

General and administrative

 

895

 

783

Share-based compensation expense included in operating expenses

 

3,019

 

2,656

Tax effect of share-based compensation

 

(755)

 

(664)

Share-based compensation expense, net of tax

$

2,264

$

1,992

12. Treasury Stock

In January 2021, the Board of Directors increased the authorization under its existing stock repurchase program by $100,000 reflecting an aggregate authorization for share repurchases since the initiation of our program of $500,000. The expiration date on the repurchase authorization is December 31, 2021. 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.

On March 10, 2021, the Company entered into an accelerated share repurchase (“ASR”) agreement with Morgan Stanley & Co. LLC (“Morgan Stanley”) to repurchase up to $35,000 of its outstanding shares of common stock as part of the Company’s share repurchase program. Under the ASR agreement, the Company received initial delivery of approximately 276 shares of common stock, representing approximately 80% of the number of shares of common stock initially underlying the ASR agreement based on the closing price of the common stock of $101.49, on March 9, 2021. The total number of shares that the Company will repurchase under the ASR program will be based on the volume-weighted average price of the common stock during the term of the ASR agreement, less a discount, and subject to potential adjustments pursuant to the terms and conditions of the ASR agreement. The final settlement of the share repurchases under the ASR agreement was completed on May 4, 2021 with additional delivery of 46 shares of common stock. The ASR agreement resulted in a total of 322 shares repurchased at an average cost of $108.76.

During the three months ended March 31, 2021 the Company repurchased 567 shares of common stock, which includes shares received under the ASR on March 10, 2021, at an aggregate cost of $56,348. At March 31, 2021, there remained $191,924 available under its current share repurchase authorization. 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.

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

This Quarterly Report on Form 10-Q, including Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains certain “forward-looking statements” within the meaning of Section 27A of Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include, without limitation: statements regarding proposed new programs; statements as to whether regulatory developments or other matters may or may not have a material adverse effect on our financial position, results of operations, or liquidity; statements concerning projections, predictions, expectations, estimates, or forecasts as to our business, financial and operational results, and future economic performance; and statements of management’s goals and objectives and other similar expressions concerning matters that are not historical facts. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and similar expressions, the negative of these expressions, as well as statements in future tense, identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions of management.

Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Currently, one of the most significant factors that could cause actual outcomes to differ materially from our forward-looking statements is the continuing potential adverse effects of the COVID-19 pandemic, and federal, state and/or local regulatory guidelines and private business actions to control it, on the global economy and the financial markets, the higher education industry in which we operate, our university partners, and, ultimately, on our financial condition, operating results and cash flows. The extent to which the COVID-19 pandemic will continue to impact us and our university partners will depend on future developments, including the scope, severity and duration of the pandemic, and the resulting economic impacts and potential changes in behavior, among others, all of which are highly uncertain and cannot be predicted with confidence. Important factors that could cause such differences, and which may be further heightened by the COVID-19 pandemic, include, but are not limited to:

the harm to our business, results of operations, and financial condition, and harm to our university partners resulting from epidemics, pandemics, including the COVID-19 outbreak, or public health crises;
the occurrence of any event, change or other circumstance that could give rise to the termination of any of the key university partner agreements;
our ability to properly manage risks and challenges associated with strategic initiatives, including potential acquisitions or divestitures of, or investments in, new businesses, acquisitions of new properties and new university partners, and expansion of services provided to our existing university partners;
our failure to comply with the extensive regulatory framework applicable to us either directly as a third-party service provider or indirectly through our university partners, including Title IV of the Higher Education Act and the regulations thereunder, state laws and regulatory requirements, and accrediting commission requirements;
the ability of our university partners’ students to obtain federal Title IV funds, state financial aid, and private financing;

22

potential damage to our reputation or other adverse effects as a result of negative publicity in the media, in the industry or in connection with governmental reports or investigations or otherwise, affecting us or other companies in the education services sector;
risks associated with changes in applicable federal and state laws and regulations and accrediting commission standards, including pending rulemaking by the Department of Education applicable to us directly or indirectly through our university partners;
competition from other education service companies in our geographic region and market sector, including competition for students, qualified executives and other personnel;
our expected tax payments and tax rate;
our ability to hire and train new, and develop and train existing, employees;
the pace of growth of our university partners’ enrollment and its effect on the pace of our own growth;
fluctuations in our revenues due to seasonality;
our ability to, on behalf of our university partners, convert prospective students to enrolled students and to retain active students to graduation;
our success in updating and expanding the content of existing programs and developing new programs in a cost-effective manner or on a timely basis for our university partners;
risks associated with the competitive environment for marketing the programs of our university partners;
failure on our part to keep up with advances in technology that could enhance the experience for our university partners’ students;
the extent to which obligations under our credit agreement, including the need to comply with restrictive and financial covenants and to pay principal and interest payments, limits our ability to conduct our operations or seek new business opportunities;
our ability to manage future growth effectively;
the impact of any natural disasters or public health emergencies; and
general adverse economic conditions or other developments that affect the job prospects of our university partners’ students.

Additional factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those described in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K (the “2020 Form 10-K”) for the fiscal year ended December 31, 2020, as updated in our subsequent reports filed with the Securities and Exchange Commission (“SEC”), including any updates found in Part II, Item 1A of this Quarterly Report on Form 10-Q or our other reports on Form 10-Q. You should not put undue reliance on any forward-looking statements. Forward-looking statements speak only as of the date the statements are made and we assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

23

Explanatory Note

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”), a comprehensive regionally accredited university that offers graduate and undergraduate degree programs, emphases and certificates across nine colleges both online and on ground at its campus in Phoenix, Arizona, and at two 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 on January 22, 2019. In the healthcare field, GCE, together with Orbis Education, works 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. As of March 31, 2021, GCE provides education services to 26 university partners across the United States.

We plan to continue to add additional university partners and will roll out additional programs with both our existing partners and with new partners. We may engage with both new and existing university partners to offer healthcare programs, online only or hybrid programs, or, as is the case for our most significant partner, GCU, both healthcare and other programs. Therefore, we will refer to all university partners as “GCE partners” or “our partners” and will no longer differentiate between partners of GCE and partners of Orbis Education; we will, however, continue to disclose significant information for GCU, such as enrollments, due to its size in comparison to our other university partners.

SIGNIFICANT DEVELOPMENTS

Impact of COVID-19

In March 2020, the World Health Organization declared the COVID-19 outbreak to be a global pandemic. This contagious outbreak, which has continued to spread, and the related adverse public health developments, including orders to shelter-in-place, travel restrictions and mandated non-essential business closures, have adversely affected workforces, organizations, customers, economies and financial markets globally, leading to an economic downturn and increased market volatility. It has also disrupted the normal operations of many businesses, including ours, and that of our university partners.

 

GCE has a long-term master services agreement with GCU (the “Master Services Agreement”) pursuant to which GCE provides education services to GCU in return for 60% of GCU’s tuition and fee revenues, which includes fee revenues from room, board, and other ancillary businesses including a student-run golf course and hotel. GCU has four types of students: traditional ground university students, who attend class on its campus in Phoenix, Arizona and of which approximately 70% have historically lived on campus in university owned residence halls; professional studies students, who are working adult students who attend class one night a week on the Phoenix campus; online students who attend class fully online; and students who are studying in hybrid programs in which the ground component takes place at off-campus classroom and laboratory sites.

The COVID-19 outbreak, as well as measures taken to contain its spread, has impacted GCU’s students and its business in a number of ways. Beginning in March 2020, GCU’s programs for its professional studies students and its traditional ground university students were immediately converted to an online learning environment and residential students were strongly encouraged to move off campus. Summer 2020 semester classes were moved to an online environment as well and most students were given the choice of attending the Fall semester in person or completely online. Given GCE’s historical experience delivering online education services and the fact that all of GCU’s students and faculty use the university’s online learning management system for at least some of the coursework, the transition has been seamless and thus, the university has not incurred a significant decrease in tuition revenue or significant increase in costs associated with this transition. The following impacts from the COVID-19 pandemic, however, did

24

serve to reduce GCU’s non-tuition revenue during 2020 and the Spring semester of 2021 and, consequently, the service revenues we earned under the Master Services Agreement:

Traditional ground university students who elected to move off campus near the end of the Spring 2020 semester received partial refunds for dormitory and meal payments, which reduced GCU’s revenue and thus the service revenues earned by GCE in the last nine days of March 2020 and the month of April 2020;

Ancillary businesses operated by GCU such as its hotel and merchandise shops were closed in late March 2020. Most of these businesses re-opened with scaled back operations in mid-September 2020, which reduced and will continue to reduce GCU’s revenues and thus the service revenues earned by GCE until these businesses are fully reopened;

Limited residential students remained on campus during the Summer 2020 semester, which reduced GCU’s dormitory and ancillary revenues and thus the service revenues earned by GCE;

GCU’s doctoral students are required to attend two residencies on the university’s campus and at its hotel in Phoenix, Arizona as part of their dissertation. On an annual basis approximately 3,000 learners attend the week-long residency, most of whom have historically attended in the Summer. Most of the residencies which were scheduled for the last week of March 2020 through the end of July 2020 were cancelled. The doctoral residencies scheduled for August 2020 through December 2020 were held at another location with lower than normal attendance. In the first quarter of 2021, doctoral residencies returned to the university’s campus and its hotel, although at lower than normal attendance. This has reduced and will continue to reduce GCU’s revenues including at its hotel, and thus reduced service revenues earned by GCE until residencies return to normal attendance;

GCU shifted its start date for the Fall semester for its traditional ground students from August 24, 2020 to September 8, 2020, which had the effect of moving tuition revenue for all GCU traditional students and certain ancillary revenue for residential students, from the third quarter of 2020 to the fourth quarter of 2020;

GCU shifted its move-in date for its residential students to the week of September 21, 2020, which reduced housing revenue and certain ancillary revenue for residential students by three weeks. In addition, approximately 4,900 of GCU’s traditional campus students elected to attend the Fall semester entirely in the online modality. Residential enrollment for the Fall of 2020 was approximately 11,500 whereas residential bed capacity is approximately 14,500. This reduction in residential students caused a reduction in GCU’s revenue and thus the service revenues earned by GCE; and

The first week of the Spring 2021 semester was completed in an online modality for GCU’s traditional students to provide greater flexibility for students returning to campus after the holidays. Face-to-face instruction for the semester commenced on January 11, 2021 and ended April 1, 2021 for approximately 80% of classes, followed by two weeks of online instruction. Approximately 3,500 traditional ground students elected to complete the Spring semester entirely in the online modality. These changes had the effect of reducing GCU’s dormitory and ancillary revenues in the Spring of 2021 and thus the service revenues earned by GCE.

GCU anticipates a higher number of residential students will remain on campus during the Summer semester of 2021 than in 2020 and that ancillary businesses operated by GCU such as its hotel and merchandise shops will be open. However, GCU anticipates that the revenue earned in dormitory and ancillary revenues will remain below pre-COVID levels and thus the service revenues earned by GCE will continue to be impacted.

The changes described above at GCU have impacted or will impact GCE’s service revenue under the Master Services Agreement. In addition, due to the limited operating expenses that we incur to deliver those services, there has been or will be a direct reduction in our operating profit and operating margin.

25

GCE also has long-term services agreements with numerous other university partners across the United States. The majority of these other university partners’ students are studying in the Accelerated Bachelor of Science in Nursing program which is offered in a 12-16 month format in three or four academic semesters. The Spring, Summer and Fall 2020 semesters were completed without interruption and each university partner has started its Spring 2021 semester. Some students who were scheduled to start their program in the Summer 2020 semester delayed their start until the Fall 2020 semester, which resulted in lower enrollments and revenues in the Summer 2020 semester than was planned. In a number of locations, the demand to start in the Fall 2020 semester was greater than initially planned but a number of our university or healthcare partners chose not to increase the Fall 2020 cohort size to compensate for the Summer 2020 start shortfall due to concerns about clinical availability. The Fall 2020 enrollment was only slightly lower than our original expectations as the Summer 2020 new start shortfall was offset by higher retention rates and slightly higher than expected Fall 2020 new starts.

No changes are currently anticipated with our other university partners related to the Summer 2021 semester that would have an impact on GCE’s service revenue, operating profit and operating margins. However, if one of our university partners closes an off-campus classroom and laboratory site prior to the end of the Summer 2021 semester, such an event would reduce the service revenues earned by GCE.

The COVID-19 outbreak also presents operational challenges to GCE as approximately 90% of our workforce is currently working remotely and is expected to continue doing so for the foreseeable future. This degree of remote working could increase risks in the areas of internal control, cyber security and the use of remote technology, and thereby result in interruptions or disruptions in normal operational processes.

It is not possible for us to completely predict the duration or magnitude of the adverse results of the COVID-19 pandemic and its effects on our business, results of operations or financial condition at this time, but such effects may be material in future quarters.

We estimate that the reduction in service revenue attributable to reduced tuition, fees and ancillary revenues of our university partners resulting from COVID-19 will be $1.2 million in the second quarter of 2021 with a comparable reduction in operating profit.

Critical Accounting Policies and Use of Estimates

Our critical accounting policies are disclosed in the 2020 Form 10-K for the fiscal year ended December 31, 2020. During the three months ended March 31, 2021, there have been no significant changes in our critical accounting policies.

Results of Operations

The following table sets forth certain income statement data as a percentage of net revenue for each of the periods indicated. Amortization of intangible assets has been excluded from the table below:

Three Months Ended

March 31, 

    

2021

    

2020

    

    

Costs and expenses

 

  

 

  

 

 

Technology and academic services

 

13.5

%  

11.9

%  

 

Counseling services and support

 

25.8

 

27.2

 

 

Marketing and communication

 

20.1

 

19.3

 

 

General and administrative

 

4.0

 

4.3

 

 

26

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Service revenue. Our service revenue for the three months ended March 31, 2021 was $236.9 million, an increase of $15.2 million, or 6.9%, as compared to service revenue of $221.7 million for the three months ended March 31, 2020. The increase year over year in service revenue was primarily due to an increase in university partner enrollments between years of 7.2% partially offset by a decrease in revenue per student year over year. Partner enrollments totaled 115,390 at March 31, 2021 as compared to 107,591 at March 31, 2020. Enrollments at GCU grew to 111,055 at March 31, 2021, an increase of 7.2% over enrollments at March 31, 2020, while enrollments at our other university partners were 4,335, an increase of 8.4% over enrollments at March 31, 2020. The decrease in revenue per student is primarily due to the service revenue impact of the lower room, board, fee and ancillary revenues at GCU in 2021 and 2020 caused by COVID-19 (see - Impact of COVID-19 above). In addition, we generated slightly more revenues in 2020 as compared to the same period in 2021 due to 2020 being a Leap Year and thus providing an extra day of revenue in 2020 as compared to 2021 and we did not renew a contract with a university partner with two sites in the first quarter of 2021. This was partially offset by the fact that our services agreements with our other university partners generally generate a higher revenue per student than our agreement with GCU, as these agreements generally provide us with a higher revenue share percentage, the partners have higher tuition rates than GCU and the majority of their students are studying in the Accelerated Bachelor of Science in Nursing program so these students take more credits on average per semester. Additionally, we opened seven new off-campus classroom and laboratory sites in the second half of 2020 and one new site in the Spring of 2021. The eight new off-campus classroom and laboratory sites opened in the past twelve months, partially offset by the non-renewal of the contract with a university partner with two sites in the first quarter of 2021 increased the total number of these sites to 29 as compared to 23 at March 31, 2020.

Technology and academic services. Our technology and academic services expenses for the three months ended March 31, 2021 were $32.1 million, an increase of $5.8 million, or 22.0%, as compared to technology and academic services expenses of $26.3 million for the three months ended March 31, 2020. This increase was primarily due to increases in employee compensation and related expenses including share-based compensation, in occupancy and depreciation including lease expenses, and in technology and academic supply costs of $4.3 million, $1.4 million and $0.1 million, respectively. These increases were primarily due to increased headcount to support our 26 university partners, and their increased enrollment growth, tenure-based salary adjustments, an increase in benefit costs and the increased number of off-campus classroom and laboratory sites year over year. Our technology and academic services expenses as a percentage of net revenue increased 1.6% to 13.5% for the three months ended March 31, 2021, from 11.9% for the three months ended March 31, 2020 primarily due to the partnership agreements that have off-campus classroom and laboratory sites requiring a higher level of technology and academic services than our agreement with GCU and due to the revenue impacts caused by COVID-19 as we incur limited operating expenses to deliver those services. GCE has 29 off-campus classroom and laboratory sites open as of March 31, 2021 as compared to the 23 sites that were open as of March 31, 2020. Additionally, in the first quarter of 2021 we are incurring costs for five more locations that we anticipate will open in the last nine months of 2021.

Counseling services and support. Our counseling services and support expenses for the three months ended March 31, 2021 were $61.2 million, an increase of $1.0 million, or 1.7%, as compared to counseling services and support expenses of $60.2 million for the three months ended March 31, 2020. This increase was primarily attributable to increases in employee compensation and related expenses including share-based compensation of $2.8 million, partially offset by a decrease in other counseling services and support expenses of $1.8 million. The increases in employee compensation and related expenses were primarily due to increased headcount to support our university partners, and their increased enrollment growth, tenure-based salary adjustments, an increase in benefit costs and the increased number of off-campus classroom and laboratory sites open year over year. The decrease in other counseling services and support expenses is primarily the result of decreased travel costs to service our 26 university partners. All non-essential travel ceased when the COVID-19 national emergency was announced in mid-March 2020 and only a small amount of travel has occurred subsequent to that date. Our counseling services and support expenses as a percentage of net revenue decreased 1.4% to 25.8% for the three months ended March 31, 2021, from 27.2% for the three months ended March 31, 2020 primarily due to the reduced travel and other costs and our ability to leverage our other counseling services and support expense across an increasing revenue base partially offset by the revenue impacts caused by COVID-19 in 2020 as we incur limited operating expenses to deliver those services.

27

Marketing and communication. Our marketing and communication expenses for the three months ended March 31, 2021 were $47.7 million, an increase of $5.0 million, or 11.8%, as compared to marketing and communication expenses of $42.7 million for the three months ended March 31, 2020. This increase was primarily attributable to the increased cost to market our university partners’ programs and due to the marketing of new university partners and new locations which resulted in increased advertising of $4.7 million, increased employee compensation and related expenses including share-based compensation of $0.1 million and increased other communications expenses of $0.1 million. Our marketing and communication expenses as a percentage of net revenue increased by 0.8% to 20.1% for the three months ended March 31, 2021, from 19.3% for the three months ended March 31, 2020, primarily due to the increase in the number of new off-campus classroom and laboratory sites opened in the second half of 2020 and planned for opening in the first half of 2021 as compared to those opened in the same period in the prior year and due to the revenue impacts caused by COVID-19 as we incur limited operating expenses to deliver those services.

General and administrative. Our general and administrative expenses for both the three months ended March 31, 2021 and 2020 were $9.6 million as a $0.6 million increase in legal, audit and other professional fees was offset by a decrease in employee compensation and related expenses including share-based compensation of $0.3 million and a decrease in other general and administrative expenses of $0.3 million. The decrease in employee compensation and related expenses is primarily related to lower headcount at our office in Indiana as we have transitioned a number of back office functions to Arizona. Our decrease in other general and administrative expenses is primarily related to reduced travel costs. Our general and administrative expenses as a percentage of net revenue decreased by 0.3% to 4.0% for the three months ended March 31, 2021, from 4.3% for the three months ended March 31, 2020 due to the cost savings realized by consolidating certain back office functions, reduced travel costs and our ability to leverage our other general and administrative expenses across an increasing revenue base partially offset by the revenue impacts caused by COVID-19 as we incur limited operating expenses to deliver those services.

Amortization of intangible assets. Amortization of intangible assets for the three months ended March 31, 2021 and 2020 were $2.1 million for both periods. As a result of the acquisition of our wholly owned subsidiary, Orbis Education, certain identifiable intangible assets were created (primarily customer relationships) that will be amortized over their expected lives.

Interest income on Secured Note. Interest income on the secured note from GCU in the initial principal amount of $870.1 million (the “Secured Note”) for the three months ended March 31, 2021 was $14.5 million, a decrease of $0.2 million, or 1.1%, as compared to $14.7 million for the three months ended March 31, 2020. The Secured Note bears interest at 6% annually, and GCU makes monthly interest payments. The decrease over the prior year was primarily due to 2020 being a Leap Year with one additional day of interest.

Interest expense. Interest expense was $0.8 million for the three months ended March 31, 2021, a decrease of $0.7 million, as compared to interest expense of $1.5 million for the three months ended March 31, 2020. The decrease in interest expense was primarily due to a decline in the average credit facility outstanding balance between periods due to paydowns of the credit facility during the past twelve months and an average interest rate reduction of approximately 155 basis points from the first quarter of 2020 to the first quarter of 2021 partially offset by 2020 being a Leap Year with one additional day of interest.

Investment interest and other. Investment interest and other for the three months ended March 31, 2021 was $0.1 million, a decrease of $0.1 million, as compared to $0.2 million in the three months ended March 31, 2020. This decrease was primarily attributable to a decline in interest income on excess cash due to lower interest rates.

Income tax expense. Income tax expense for the three months ended March 31, 2021 was $20.0 million, a decrease of $2.8 million, or 12.3%, as compared to income tax expense of $22.8 million for the three months ended March 31, 2020. This decrease was the result of a decrease in our effective tax rate between periods partially offset by higher taxable income. Our effective tax rate was 20.4% during the first quarter of 2021 compared to 24.2% during the first quarter of 2020. In the first quarter of 2021, the effective tax rate was impacted by an increase in excess tax benefits, which increased to $4.4 million in the first quarter of 2021 as compared to $0.6 million in the same period in 2020 due to a higher stock price and higher stock option exercises in the first quarter of 2021. The inclusion of excess tax benefits and deficiencies as a component of our income tax expense will increase volatility within our provision for

28

income taxes as the amount of excess tax benefits or deficiencies from share-based compensation awards are dependent on our stock price at the date the restricted awards vest, our stock price on the date an option is exercised, and the quantity of options exercised. Our restricted stock vests in March each year so the favorable benefit will primarily impact the first quarter each year.

Net income. Our net income for the three months ended March 31, 2021 was $78.1 million, an increase of $6.7 million, or 9.4%, as compared to $71.4 million for the three months ended March 31, 2020, due to the factors discussed above.

Seasonality

Our net revenue and operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in our university partners’ enrollment. Our partners’ enrollment varies as a result of new enrollments, graduations, and student attrition. Revenues in the summer months (May through August) are lower primarily due to the majority of GCU’s traditional ground university students not attending courses during the summer months, which affects our results for our second and third fiscal quarters. Since a significant amount of our costs are fixed, the lower revenue resulting from the decreased summer enrollment has historically contributed to lower operating margins during those periods. Partially offsetting this summer effect has been the sequential quarterly increase in enrollments that has occurred as a result of the traditional fall school start. This increase in enrollments also has occurred in the first quarter, corresponding to calendar year matriculation. Thus, we experience higher net revenue in the fourth quarter due to its overlap with the semester encompassing the traditional fall school start and in the first quarter due to its overlap with the first semester of the calendar year. A portion of our expenses do not vary proportionately with these fluctuations in service revenue, resulting in higher operating income in the first and fourth quarters relative to other quarters. We expect quarterly fluctuation in operating results to continue as a result of these seasonal patterns.

Liquidity and Capital Resources

Liquidity. Our unrestricted cash and cash equivalents and investments were $262.3 million at March 31, 2021. Our credit facility had an available line of credit of $150.0 million as of March 31, 2021.

Based on our current level of operations and anticipated growth, we believe that our cash flow from operations and other sources of liquidity, including cash and cash equivalents and our revolving line of credit, will provide adequate funds for ongoing operations, planned capital expenditures, and working capital requirements for at least the next 24 months.

Arrangements with GCU

In conjunction with the Asset Purchase Agreement with GCU, we received a Secured Note as consideration for the transferred assets (the “Transferred Assets”). The Secured Note contains customary commercial credit terms, including affirmative and negative covenants applicable to GCU, and provides that the Secured Note bears interest at an annual rate of 6.0%, has a maturity date of June 30, 2025, and is secured by all of the assets of GCU. The Secured Note provides for GCU to make interest only payments during the term, with all principal and accrued and unpaid interest due at maturity, and also provides that we may loan additional amounts to GCU to fund approved capital expenditures during the first three years of the term. As of March 31, 2021, the Company had loaned an additional $99,815 to GCU, net of repayments. We believe that GCU’s cash flows from operations are currently sufficient to fund all of its capital expenditures without additional loans from us although it is possible that GCU will continue to borrow from us for short term cash flow needs.

Share Repurchase Program

In January 2021, our Board of Directors increased the authorization under its existing stock repurchase program by $100.0 million reflecting an aggregate authorization for share repurchases since the initiation of the program of $500.0 million. The current expiration date on the repurchase authorization by our Board of Directors is December 31,

29

2021. Repurchases occur at the Company’s discretion and the Company may modify, suspend or discontinue the repurchase authorization at any time.

Under our share repurchase authorization, we may purchase shares in the open market or in privately negotiated transactions, pursuant to the applicable SEC rules. The amount and timing of future share repurchases, if any, will be made as market and business conditions warrant.

On March 10, 2021, the Company entered into an accelerated share repurchase (“ASR”) agreement with Morgan Stanley & Co. LLC (“Morgan Stanley”) to repurchase up to $35.0 million of its outstanding shares of common stock as part of the Company’s share repurchase program. Under the ASR agreement, the Company received initial delivery of approximately 275,889 shares of common stock, representing approximately 80% of the number of shares of common stock initially underlying the ASR agreement based on the closing price of the common stock of $101.49, on March 9, 2021. The total number of shares that the Company will repurchase under the ASR program will be based on the volume-weighted average price of the common stock during the term of the ASR agreement, less a discount, and subject to potential adjustments pursuant to the terms and conditions of the ASR agreement. The final settlement of the share repurchases under the ASR agreement was completed on May 4, 2021 with additional delivery of 45,914 shares of common stock. The ASR agreement resulted in a total of 321,803 shares repurchased at an average cost of $108.76.

During the three months ended March 31, 2021, 567,255 shares of common stock were repurchased by the Company, which includes the shares delivered on March 10, 2021 under the ASR agreement. At March 31, 2021, there remains $191.9 million available under our share repurchase authorization.

Cash Flows

Operating Activities. Net cash provided by operating activities for the three months ended March 31, 2021 was $89.8 million as compared to $85.7 million for the three months ended March 31, 2020. The increase in cash generated from operating activities between the three months ended March 31, 2020 and the three months ended March 31, 2021 was primarily due to an increase in net income between periods partially offset by changes in other working capital balances. We define working capital as the assets and liabilities, other than cash, generated through the Company’s primary operating activities. Changes in these balances are included in the changes in assets and liabilities presented in the consolidated statement of cash flows.

Investing Activities. Net cash used in investing activities was $34.8 million and $1.9 million for the three months ended March 31, 2021 and 2020, respectively. The net cash used in investing activities in the three months ended March 31, 2021 consisted of capital expenditures of $8.9 million and purchases of investments, net of proceeds from the sale of investments of $25.8 million. During the three months ended March 31, 2020, we paid $6.1 million for capital expenditures and received proceeds from investments of $4.3 million. During the three-month period for 2021 and 2020, capital expenditures primarily consisted of leasehold improvements and equipment for new university partner locations, as well as purchases of computer equipment, other internal use software projects and furniture and equipment to support our increasing employee headcount. The increase in capital expenditures between periods is primarily due to the increase in the number of sites opened. We invest approximately $1.5 million in leasehold improvements and equipment for each off-campus classroom and laboratory site. We opened seven new sites in the second half of 2020, one new site in the Spring of 2021 and currently plan to open five additional sites in the last nine months of 2021.

Financing Activities. Net cash used in financing activities was $74.9 million and $73.9 million for the three months ended March 31, 2021 and 2020, respectively. During the three months ended March 31, 2021, $6.0 million was used to purchase common shares withheld in lieu of income taxes resulting from the vesting of restricted share awards, $56.3 million was used to purchase treasury stock in accordance with the Company’s share repurchase program, and $7.0 million was paid to Morgan Stanley under our ASR agreement for shares that will be settled no later than May 7, 2021. Principal payments on notes payable and capital leases totaled $8.3 million, partially offset by proceeds from the exercise of stock options of $2.7 million. During the three months ended March 31, 2020, $5.0 million was used to purchase common shares withheld in lieu of income taxes resulting from the vesting of restricted share awards and $60.7 million was used to purchase treasury stock in accordance with the Company’s share repurchase program. Principal

30

payments on notes payable and capital leases totaled $8.3 million, partially offset by proceeds from the exercise of stock options of $0.1 million.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have had or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

Impact of inflation. We believe that inflation has not had a material impact on our results of operations for the three months ended March 31, 2021 or 2020. There can be no assurance that future inflation will not have an adverse impact on our operating results and financial condition.

Market risk. As of March 31, 2021, we have no derivative financial instruments or derivative commodity instruments. We invest cash in excess of current operating requirements in money market instruments and commercial paper at multiple financial institutions.

Interest rate risk. We manage interest rate risk by investing excess funds in cash equivalents, BBB or higher rated corporate bonds, commercial paper, municipal securities, asset backed securities, municipal bonds, and collateralized mortgage obligations bearing variable interest rates, which are tied to various market indices or individual bond coupon rates. Our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities before their maturity date that have declined in market value due to changes in interest rates. At March 31, 2021, a 10% increase or decrease in interest rates would not have a material impact on our future earnings, fair values, or cash flows. For information regarding our variable rate debt, see “Market risk” above.

Item 4.   Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective, as of March 31, 2021, in ensuring that material information relating to us required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in reports it files or submits under the Exchange Act is accumulated and communicated to management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting.

Based on an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (who is our principal executive officer) and our Chief Financial Officer (who is our principal financial officer), there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

31

PART II – OTHER INFORMATION

Item 1.   Legal Proceedings

None.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

In January 2021, our Board of Directors increased the authorization under its existing stock repurchase program by $100.0 million reflecting an aggregate authorization for share repurchases since the initiation of the program of $500.0 million. The current expiration date on the repurchase authorization by our Board of Directors is December 31, 2021. Repurchases occur at the Company’s discretion and the Company may modify, suspend or discontinue the repurchase authorization at any time. 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.

On March 10, 2021, the Company entered into an accelerated share repurchase (“ASR”) agreement with Morgan Stanley & Co. LLC (“Morgan Stanley”) to repurchase up to $35.0 million of its outstanding shares of common stock as part of the Company’s share repurchase program. Under the ASR agreement, the Company received initial delivery of approximately 275,889 shares of common stock, representing approximately 80% of the number of shares of common stock initially underlying the ASR agreement based on the closing price of the common stock of $101.49, on March 9, 2021. The total number of shares that the Company will repurchase under the ASR program will be based on the volume-weighted average price of the common stock during the term of the ASR agreement, less a discount, and subject to potential adjustments pursuant to the terms and conditions of the ASR agreement. The final settlement of the share repurchases under the ASR agreement was completed on May 4, 2021 with additional delivery of 45,914 shares of common stock. The ASR agreement resulted in a total of 321,803 shares repurchased at an average cost of $108.76.

During the three months ended March 31, 2021, 567,255 shares of common stock were repurchased by the Company, which includes the shares delivered from the ASR agreement on March 10, 2021. At March 31, 2021, there remains $191.9 million available under our share repurchase authorization.

32

The following table sets forth our share repurchases of common stock and our share repurchases in lieu of taxes, which are not included in the repurchase plan totals as they were approved in conjunction with the restricted share awards, during each period in the first quarter of fiscal 2021:

    

    

    

Total Number of

   

Maximum Dollar

Shares Purchased as

Value of Shares

Average

Part of Publicly

That May Yet Be

Total Number of

Price Paid

Announced

Purchased Under

Period

Shares Purchased

Per Share

Program

the Program

Share Repurchases

 

  

 

  

 

  

 

  

January 1, 2021 – January 31, 2021

 

112,121

$

88.05

 

112,121

$

238,400,000

February 1, 2021 – February 28, 2021

 

73,832

$

101.10

 

73,832

$

230,900,000

March 1, 2021 – March 31, 2021

 

381,302

$

102.31

 

381,302

$

191,900,000

Total

 

567,255

$

99.33

 

567,255

$

191,900,000

Tax Withholdings

 

  

 

  

 

  

 

  

January 1, 2021 – January 31, 2021

 

$

 

$

February 1, 2021 – February 28, 2021

 

$

 

$

March 1, 2021 – March 31, 2021

 

56,162

$

106.72

 

$

Total

 

56,162

$

106.72

 

$

Item 3.   Defaults Upon Senior Securities

None.

Item 4.   Mine Safety Disclosures

None.

Item 5.   Other Information

None.

Item 6.   Exhibits

(a)   Exhibits

Number

    

Description

    

Method of Filing

3.1

Amended and Restated Certificate of Incorporation.

Incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed with the SEC on February 20, 2019.

3.2

Third Amended and Restated Bylaws.

Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 29, 2014.

4.1

Specimen of Stock Certificate.

Incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 filed with the SEC on September 29, 2008.

31.1

Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Filed herewith.

33

31.2

Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Filed herewith.

32.1

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ††

Filed herewith.

32.2

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ††

Filed herewith.

101

The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in Inline XBRL: (i) Consolidated Income Statements, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements tagged as blocks of text and including detailed tags.

Filed herewith.

104

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in Inline XBRL (included as Exhibit 101).

Filed herewith.

††   This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Exchange Act, and is not to be incorporated by reference into any filings of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

34

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    

GRAND CANYON EDUCATION, INC.

Date: May 5, 2021

By:

/s/ Daniel E. Bachus

Daniel E. Bachus

Chief Financial Officer

(Principal Financial Officer)

35