| Summary of Significant Accounting Policies | 3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Intercompany
transactions have been eliminated in consolidation.
Unaudited Interim Financial Information
The accompanying unaudited interim consolidated financial
statements of the Company have been prepared in accordance with
U.S. generally accepted accounting principles and pursuant to the
rules and regulations of the United States Securities and Exchange
Commission and the instructions to
Form 10-Q 10-K 10-K
Restricted Cash and Cash Equivalents
A significant portion of the Company’s university related
revenue was received from students who participated in government
financial aid and assistance programs. Prior to July 1, 2018,
restricted cash and cash equivalents represented amounts received
from the federal and state governments under various student aid
grant and loan programs, such as Title IV. The Company received
these funds subsequent to the completion of the authorization and
disbursement process and held them for the benefit of the student.
The Department of Education requires Title IV funds collected in
advance of student billings to be restricted until the course
begins. Prior to the Transaction, the Company recorded all of these
amounts as a current asset in restricted cash and cash equivalents.
The majority of these funds remained as restricted for an average
of 60 to 90 days from the date of receipt. Restricted cash and cash
equivalents at September 30, 2018 represents the cash
collateral on the credit agreement.
Investments
The Company considers its investments in municipal bonds, mutual
funds, municipal securities, certificates of deposit and commercial
paper as available-for-sale Available-for-sale
Derivatives and Hedging
Derivative financial instruments are recorded on the balance sheet
as assets or liabilities and re-measured
Derivative financial instruments enable the Company to manage its
exposure to interest rate risk. The Company does not engage in any
derivative instrument trading activity. Credit risk associated with
the Company’s derivative is limited to the risk that a
derivative counterparty will not perform in accordance with the
terms of the contract. Exposure to counterparty credit risk is
considered low because these agreements have been entered into with
institutions with Aa or higher credit ratings, and they are
expected to perform fully under the terms of the agreements.
On February 27, 2013, the Company entered into an interest
rate corridor to manage its 30 Day LIBOR interest exposure related
to its variable rate debt. The fair value of the interest rate
corridor instrument as of September 30, 2018 and
December 31, 2017 was $801 and $509, respectively, which is
included in other assets. The fair value of the derivative
instrument was determined using a hypothetical derivative
transaction and Level 2 of the hierarchy of valuation inputs.
This derivative instrument was originally designated as a cash flow
hedge of variable rate debt obligations. The adjustment of $330 and
$169 for the nine months ended September 30, 2018 and 2017,
respectively, for the effective portion of the gains and losses on
the derivatives is included as a component of other comprehensive
income, net of taxes.
The interest rate corridor instrument reduces variable interest
rate risk starting March 1, 2013 through December 20,
2019 with a notional amount of $61,667 as of September 30,
2018. The corridor instrument’s terms permit the Company to
hedge its interest rate risk at several thresholds; the Company
pays variable interest monthly based on the 30 Day LIBOR rates
until that index reaches 1.5%. If 30 Day LIBOR is equal to 1.5%
through 3.0%, the Company pays 1.5%. If 30 Day LIBOR exceeds 3.0%,
the Company pays actual 30 Day LIBOR less 1.5%.
As of September 30, 2018, no derivative ineffectiveness was
identified. Any ineffectiveness in the Company’s derivative
instrument designated as a hedge is reported in interest expense in
the income statement. At September 30, 2018, the Company
expects to reclassify gains or losses on derivative instruments
from accumulated other comprehensive income (loss) into earnings
during the next 12 months as the derivative instrument expires in
December 2019.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, investments,
accounts receivable, accounts payable and accrued compensation and
benefits and accrued liabilities expenses approximate their fair
value based on the liquidity or the short-term maturities of these
instruments. The carrying value of notes
receivable, non-current
The fair value of investments, primarily municipal securities, was
determined using Level 2 of the hierarchy of valuation inputs,
with the use of inputs other than quoted prices that are observable
for the assets. The unit of account used for valuation is the
individual underlying security. The municipal securities are
comprised of city and county bonds related to schools, water and
sewer, utilities, transportation, healthcare and housing.
Revenue Recognition
University related revenue – prior to July 1,
2018
On January 1, 2018, the Company adopted “Revenue from
Contracts with Customers” using the modified retrospective
method applied to all contracts. Prior to the Transaction on
July 1, 2018, net revenues consisted primarily of tuition, net
of scholarships, and fees derived from courses taught by the
University online, on ground, and at facilities it leased or those
of employers, as well as from related educational resources that
the University provided to its students, such as access to online
materials. Tuition revenue was
recognized pro-rata
The following table presents our revenues disaggregated by the
nature of transfer of services for the six months ended
June 30, 2018:
Tuition revenues $ 522,430
Ancillary revenues (housing, meals, fees, golf, hotel, arena,
other) 91,245
Total revenues 613,675
Scholarships (101,176 )
Net Revenues $ 512,499
The Company’s receivables represented unconditional rights to
consideration from its contracts with students; accordingly,
students were not billed until they started attending a course and
the revenue recognition process had commenced. Once a student had
been invoiced, payment was due immediately. Included in each
invoice to the student were all educational related items including
tuition, net of scholarships, housing, educational materials, fees,
etc. The Company did not have any contract assets. The
Company’s contract liabilities were reported as deferred
revenue and student deposits in the consolidated balance sheets.
Deferred revenue and student deposits in any period represented the
excess of tuition, fees, and other student payments received as
compared to amounts recognized as revenue on the consolidated
income statement and were reflected as current liabilities in the
accompanying consolidated balance sheets. The Company’s
education programs had starting and ending dates that differ from
its fiscal quarters. Therefore, at the end of each fiscal quarter,
a portion of revenue from these programs was not yet earned. The
majority of the University’s traditional ground students did
not attend courses during the summer months (May through August),
which affected our results for our second and third fiscal
quarters.
The Company had identified a performance obligation associated with
the provision of its educational instruction and other educational
services, housing services, and other academic related services and
used the output measure for recognition as the period of time over
which the services were provided to our students. The Company had
identified performance obligations related to its hotel, golf
course, restaurants, sale of branded promotional items and other
ancillary activities and recognized revenue at the point in time
goods or services were provided to its customers. The Company
maintained an institutional tuition refund policy, which provided
for all or a portion of tuition to be refunded if a student
withdrew during stated refund periods. Certain states in which
students reside impose separate, mandatory refund policies, which
overrode the Company’s policy to the extent in conflict. If a
student withdrew at a time when only a portion, or none of the
tuition was refundable, then in accordance with its revenue
recognition policy, the Company continued to recognize the tuition
that was not refunded pro-rata
Service revenue commenced July 1, 2018
Starting July 1, 2018, the Company generates all of its
revenue through the Master Services Agreement, pursuant to which
the Company provides identified technology and academic services,
counseling services and support, marketing and communication
services, and several back office services to GCU in return for 60%
of GCU’s tuition and fee revenue. Effective July 1,
2018, the Company adopted “ Revenue from Contracts with
Customers
The Company’s contract with GCU has an initial 15 year term,
subject to renewal options, although GCU has the right to terminate
the Master Services Agreement early after the later of seven
(7) years or the payment in full of the Secured Note. Refer to
Note 2 for further discussion on the fees associated with early
termination or non-renewal
The Company’s receivables represent unconditional rights to
consideration from our contract with GCU. Accounts receivable, net
is stated at net realizable value, and the Company utilizes the
allowance method to provide for doubtful accounts based on its
evaluation of the collectability of the amounts due. There are no
unbilled revenue amounts included in our accounts receivable. There
have been no amounts written off and no reserves established as of
September 30, 2018. The Company receives service revenue
payments monthly. The Company will continue to review and revise
its allowance methodology based on historical collection
experience.
The Company does not have any contract assets or contract
liabilities as the Company calculates the service fee and bills its
client on the last day of each month. The Company has no costs that
are capitalized to obtain or to fulfill a contract with a
customer.
Prepaid Royalty
In connection with its February 2004 acquisition of the assets of
Grand Canyon University from a non-profit
Internally Developed Technology
The Company capitalizes certain costs related
to internal-use
Long-Lived Assets (other than goodwill)
The Company evaluates the recoverability of its long-lived assets
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted
future net cash flows expected to be generated by the assets. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets.
Financial Statement Presentation
On July 1, 2018 the Company consummated the Transaction, which
impacted the nature of its business. See Note 2 to our consolidated
financial statements for a full description of the Transaction. GCE
now provides services to GCU, its client, that include technology
and academic services, counseling services and support, marketing
and communication services, and several back office services such
as accounting, reporting, tax, human resources, and procurement
services. The Company made changes in its presentation of operating
expenses and reclassified prior periods to conform to the current
presentation. The Company determined that these changes would
provide more meaningful information as this new presentation
provides transparency for costs that will be incurred as a service
provider and costs that will not reoccur in the future as they are
related to university expenses that were transferred to GCU in the
Transaction.
Technical and Academic Services
Technical and academic services (previously primarily a component
of instructional costs and 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 curriculum and new program development, support for faculty
training and development, technical support and assistance with
state compliance. This expense category includes salaries, benefits
and share-based compensation, information technology costs,
curriculum and new program development costs (which are expensed as
incurred) and other costs associated with these support services.
This category also includes an allocation of depreciation,
amortization, rent, and occupancy costs attributable to the
provision of these services, primarily at the Company’s
Phoenix, Arizona location.
Counseling Services and Support
Counseling services and support (previously primarily components of
instructional costs and services and admissions advisory related
expenses) 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,
rent, and occupancy costs attributable to the provision of these
services, primarily at the Company’s Phoenix, Arizona
location.
Marketing and Communication
Marketing and communication includes lead acquisition, digital
communication strategies, brand identity advertising, media
planning and strategy, video, data science and analysis, marketing
to potential students and other promotional and communication
services. This category was primarily from our historical captions
of advertising and marketing and promotional. This expense category
includes salaries, benefits and share-based compensation for
marketing and communication personnel, brand advertising, marketing
leads and other promotional and communication expenses. This
category also includes an allocation of depreciation, amortization,
rent, and occupancy costs attributable to the provision of these
services, primarily at the Company’s Phoenix, Arizona
location. Advertising costs are expensed as incurred.
General and Administrative
General and administrative expenses include salaries, benefits and
share-based compensation of employees engaged in corporate
management, finance, human resources, compliance, and other
corporate functions. This category also includes an allocation of
depreciation, amortization, rent, and occupancy costs attributable
to the provision of these services, primarily at the
Company’s Phoenix, Arizona location.
University related expenses
University related expenses (previously primarily instructional
costs and services) represent the costs that were transferred to
GCU in the Transaction and that are no longer incurred by the
Company.
We have reclassified our operating expenses for prior periods to
conform to the above disaggregation and revisions to our
presentation. There were no changes to total operating expenses or
operating income as a result of these reclassifications. The
following table presents our operating expenses as previously
reported and as reclassified on our Consolidated Income Statement
for each of the quarters in 2017 and the first two quarters of
2018.
2017
First Quarter As Reported First Quarter As Reclassified Second Quarter As Reported Second Quarter As Reclassified
Costs and expenses:
Technology and academic services
— 10,381
— 10,220
Counseling services and support
— 46,312
— 45,970
Marketing and communication
— 27,309
— 27,426
General and administrative 9,941 7,033 10,058 5,806
University related expenses
— 80,543
— 73,791
Instructional costs and services 102,574
— 95,030
—
Admissions advisory and related 31,972
— 31,085
—
Advertising 24,631
— 24,776
—
Marketing and promotional 2,460
— 2,264
—
Total costs and expenses 171,578 171,578 163,213 163,213
2017
Third Quarter As Reported Third Quarter As Reclassified Fourth Quarter As Reported Fourth Quarter As Reclassified
Costs and expenses:
Technology and academic services
— 10,494
— 10,739
Counseling services and support
— 46,100
— 50,213
Marketing and communication
— 28,130
— 26,227
General and administrative 12,915 8,343 10,845 5,975
University related expenses
— 83,450
— 86,356
Loss on transaction
—
—
— 562
Instructional costs and services 104,303
— 108,933
—
Admissions advisory and related 31,426
— 34,061
—
Advertising 25,523
— 23,678
—
Marketing and promotional 2,350
— 2,555
—
Total costs and expenses 176,517 176,517 180,072 180,072
2018
First Quarter As Reported First Quarter As Reclassified Second Quarter As Reported Second Quarter As Reclassified
Costs and expenses:
Technology and academic services
— 10,697
— 10,678
Counseling services and support
— 50,747
— 50,838
Marketing and communication
— 28,527
— 30,095
General and administrative 11,309 7,419 11,969 5,762
University related expenses
— 87,649
— 79,517
Loss on transaction
— 550
— 1,440
Instructional costs and services 111,027
— 102,237
—
Admissions advisory and related 34,854
— 34,254
—
Advertising 25,715
— 27,602
—
Marketing and promotional 2,684
— 2,268
—
Total costs and expenses 185,589 185,589 178,330 178,330
Commitments and Contingencies
The Company accrues for contingent obligations when it is probable
that a liability has been incurred and the amount is reasonably
estimable. When the Company becomes aware of a claim or potential
claim, the likelihood of any loss exposure is assessed. If it is
probable that a loss will result and the amount of the loss is
estimable, the Company records a liability for the estimated loss.
If the loss is not probable or the amount of the potential loss is
not estimable, the Company will disclose the claim if the
likelihood of a potential loss is reasonably possible and the
amount of the potential loss could be material. Estimates that are
particularly sensitive to future changes include tax, legal, and
other regulatory matters, which are subject to change as events
evolve, and as additional information becomes available during the
administrative and litigation process. The Company expenses legal
fees as incurred.
Concentration of Credit Risk
The Company believes the credit risk related to cash equivalents
and investments is limited due to its adherence to an investment
policy that requires investments to have a minimum BBB rating,
depending on the type of security, by one major rating agency at
the time of purchase. All of the Company’s cash equivalents
and investments as of September 30, 2018 and December 31,
2017 consist of investments rated BBB or higher by at least one
rating agency. Additionally, the Company utilizes more than one
financial institution to conduct initial and ongoing credit
analysis on its investment portfolio to monitor and lower the
potential impact of market risk associated with its cash
equivalents and investment portfolio. The Company is also subject
to credit risk for its accounts receivable balance. The Company has
not experienced any losses on receivables to date. To manage
accounts receivable risk, the Company maintains an allowance for
doubtful accounts, if needed. Our dependence on one customer
subjects us to the risk that declines in our customer’s
operations would result in a sustained reduction in revenues for
the Company.
Use of Estimates
The preparation of consolidated financial statements in conformity
with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts in the consolidated financial statements and
accompanying notes. Actual results could differ from those
estimates.
Segment Information
The Company operates as a single educational services company using
a core infrastructure that serves the curriculum and educational
delivery needs of its client, GCU. The Company’s Chief
Executive Officer manages the Company’s operations as a whole
and no expense or operating income information is generated or
evaluated on any component level.
Accounting Pronouncements Adopted in 2018
In May 2014, the FASB issued “ Revenue from Contracts with
Customers
In January 2016, the FASB issued “ Financial Instruments
– Overall: Recognition and Measurement of Financial Assets
and Financial Liabilities
In May 2017, the FASB issued “ Compensation – Stock
Compensation – Scope of Modification Accounting
In February 2018, the FASB issued “ Income
Statement – Reporting Comprehensive
Income.”
Recent Accounting Pronouncements
In February 2016, the FASB issued “ Leases right-of-use
In August 2017, the FASB issued “ Targeted Improvements to
Accounting for Hedging Activities
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. |
