Be bold
and fearless.
2017 Annual Report
“ We didn’t
let the
skeptic win.”
The Power of Snow.
1:26 P.M., APRIL 2, 2008. On that date and time 2U’s
certificate of incorporation was filed in Delaware. A
decade later, what began as a crazy idea to so many, has
grown into one of the world’s most important education
technology companies.
I’m blessed to be in a beautiful marriage that has brought
me love, joy and two incredible sons. That marriage
started 26 years ago when I, as a young college student
from South Florida, met Gabrielle Smith. I hadn’t seen
snow, nor much of the world.
The first snow I saw while
a freshman at the
George Washington
University (GWU)
blew my mind.
But so did
everything else.
GWU, and Gabbi,
opened my eyes,
broadened my
horizons and created
a path of social mobility
for me as a human being that is real.
I met the best friends of my life. I worked hard. I became
a better person. And I learned. A lot.
Fast forward to 2008, without question the founding of
2U is one of the more important moments of my life. After
a couple of decades learning some hard lessons in two
education startups, a small team of incredible people
poured themselves fully into this venture. We didn’t let
the skeptic win. We believed that online education could
be great. And we got it right. We are defining the next
generation of higher education. We are building a great
business with an extremely defensible model.
One of our guiding principles at 2U is to cherish the
opportunity. What an opportunity we have...
2017 WAS AN IMPORTANT YEAR. We launched 10
new domestic graduate programs (DGPs), which began
our multi-year step-up in annual launch cadence. We
expanded our MPV footprint, increasing our multiple
program verticals from 6 to 11. And arguably most
important to our long-term future, we protected a
competitive flank and simultaneously improved our
product offering with our first acquisition. Today, now
with short courses in our business, our international reach
and scale came into clearer focus in 2017. 2U now has
8 offices across 3 continents and a global portfolio of
33 university partners offering over 50 graduate
programs and over 80 short courses.
SHORT COURSES
80+
Offices in8
Continents3
50+ Graduate
33UNIVERSITY
Programs
PARTNERS
On top of that, personally I graduated from the
2U-powered MBA@UNC program and am a proud
Tar Heel.
2018 WILL BE BOLD AND FEARLESS FOR 2U. We will
build on our lead by investing in all of the bricks, clicks
and mortar of our model. Our product suite, branded as
2U OS, will evolve with the addition of several critical new
technologies. Our physical footprint will grow through
clinical relationships, immersions, and our worldwide
partnership with WeWork. We will continue to innovate
the service suite, with improvements in career services
and placement. We will enter challenging new verticals
like Physician Assistant and Physical Therapy. We will
broaden our reach with our first international graduate
program, with more to follow. We will continue integrating
our business across the Atlantic to provide a better
overall solution to our partners and will begin calling that
business 2U Cape Town. We are even starting to plant
some seeds on the undergrad opportunity.
THE LETTER TO STOCKHOLDERS
THE LETTER TO STOCKHOLDERS
But what really gets me up in the morning isn’t the
business we are creating. It’s a reflection of the
18-year-old in me landing at GWU.
Our institutions change
students’ lives. And we
power that experience.
Cory Broussard
got his MBA from UNC on an oil rig in the
middle of the Gulf of Mexico.
Jabari Evans
founded an arts non-profit on the South Side of
Chicago while completing his MSW from USC.
Emily Ham
attended live classes for International
Relations at American University while she
traveled across 15 countries.
The story of 2U is the story of institutional will driving
access. It’s the story of powering social mobility for
people all over the world—now nearly 100,000
students strong.
We are delivering for our clients with a simple proposition:
When students win, universities win, and then we win.
The clear alignment of interests among students, university
partners, and 2U is ultimately what makes our purpose-
driven business model so compelling and powerful. By
coming together around one shared goal—delivering great
student outcomes—not only are we improving lives, we are
transforming the future of higher education for the better.
Ten years later, I still feel energized and ready for the next
decade. It’s snowing in Florida. And it feels great.
Ready to play? We are. Join us.
Chip
P.S. #NoBackRow
Our Partners
For a decade, 2U has been a trusted brand steward and the partner of choice to the world’s top
universities in navigating the complexities of bringing the best of themselves into the digital age.
Inception through April 26, 2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(cid:2) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FORM 10-K
For the fiscal year ended December 31, 2017
or
(cid:3) 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: 001-36376
25FEB201610120468
2U, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
7900 Harkins Road, Lanham, MD
(Address of principal executive offices)
26-2335939
(I.R.S. Employer Identification No.)
20706
(Zip Code)
(301) 892-4350
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Name of exchange on which registered:
Common Stock, $0.001 par value per share
The Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:2) No (cid:3)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:3) No (cid:2)
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 (cid:2) No (cid:3)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted 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 and post such files). Yes (cid:2) No (cid:3)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this form 10-K. (cid:3)
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 the 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 (cid:2)
Accelerated filer (cid:3)
Non-accelerated filer (cid:3)
(Do not check if a
smaller reporting company)
Smaller reporting company (cid:3)
Emerging growth company (cid:3)
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. (cid:3)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:3) No (cid:2)
The aggregate market value of the 47,301,042 shares held by non-affiliates as of June 30, 2017 (computed based on the closing price on
such date as reported on The Nasdaq Global Select Market) was $2,219,364,891.
As of February 21, 2018, there were 52,715,791 shares of the registrant’s common stock, par value $0.001 per share, outstanding.
Portions of the Company’s definitive proxy statement, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934,
for its 2018 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
2U, Inc.
FORM 10-K
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . .
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 15.
Item 16.
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INDEX TO CONSOLIDATED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) . . .
Consolidated Financial Statements:
Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31,
2017, 2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017,
PAGE
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43
44
44
44
46
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47
47
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53
55
56
75
78
79
2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
80
81
82
110
1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 and which are subject to substantial risks and
uncertainties. In some cases, you can identify forward-looking statements by the words ‘‘may,’’ ‘‘might,’’
‘‘will,’’ ‘‘could,’’ ‘‘would,’’ ‘‘should,’’ ‘‘expect,’’ ‘‘intend,’’ ‘‘plan,’’ ‘‘objective,’’ ‘‘anticipate,’’ ‘‘believe,’’
‘‘estimate,’’ ‘‘predict,’’ ‘‘project,’’ ‘‘potential,’’ ‘‘continue’’ and ‘‘ongoing,’’ or the negative of these terms,
or other comparable terminology intended to identify statements about the future. These statements
involve known and unknown risks, uncertainties and other factors that may cause our actual results,
levels of activity, performance or achievements to be materially different from the information
expressed or implied by these forward-looking statements. Although we believe that we have a
reasonable basis for each forward-looking statement contained in this Annual Report on Form 10-K, we
caution you that these statements are based on a combination of facts and factors currently known by
us and our expectations of the future, about which we cannot be certain. Factors which may cause
actual results to differ materially from current expectations include, but are not limited to:
• trends in the higher education market and the market for online education, and expectations for
growth in those markets;
• the acceptance, adoption and growth of online learning by colleges and universities, faculty,
students, employers, accreditors and state and federal licensing bodies;
• our ability to comply with evolving regulations and legal obligations related to data privacy, data
protection and information security;
• our expectations about the potential benefits of our cloud-based software-as-a-service, or SaaS,
technology and technology-enabled services to university clients and students;
• our dependence on third parties to provide certain technological services or components used in
our platform;
• our ability to meet the anticipated launch dates of our graduate programs and short courses;
• our expectations about the predictability, visibility and recurring nature of our business model;
• our ability to acquire new university clients and expand our graduate programs and short courses
with existing university clients;
• our ability to successfully integrate the operations of Get Educated International Proprietary
Limited, or GetSmarter, achieve the expected benefits of the acquisition and manage, expand
and grow the combined company;
• our ability to execute our growth strategy in the international, undergraduate and non-degree
alternative markets;
• our ability to continue to acquire prospective students for our graduate programs and short
courses;
• our ability to affect or increase student retention in our graduate programs;
• our expectations regarding the scalability of our cloud-based platform;
• our expectations regarding future expenses in relation to future revenue;
• potential changes in regulations applicable to us or our university clients; and
• our expectations regarding the amount of time our cash balances and other available financial
resources will be sufficient to fund our operations.
2
You should refer to the risks described in Part I, Item 1A. ‘‘Risk Factors’’ in this Annual Report
on Form 10-K for a discussion of important factors that may cause our actual results to differ
materially from those expressed or implied by our forward-looking statements. As a result of these
factors, we cannot assure you that the forward-looking statements in this Annual Report on Form 10-K
will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the
inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements,
you should not regard these statements as a representation or warranty by us or any other person that
we will achieve our objectives and plans in any specified timeframe, or at all. We undertake no
obligation to publicly update any forward-looking statements, whether as a result of new information,
future events or otherwise, except as required by law.
You should read this Annual Report on Form 10-K completely and with the understanding that
our actual future results may be materially different from what we expect. We qualify all of our
forward-looking statements by these cautionary statements.
SPECIAL NOTE REGARDING EXHIBITS
In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please
remember they are included to provide you with information regarding their terms and are not
intended to provide any other factual or disclosure information about the Company or the other parties
to the agreements. The agreements contain representations and warranties by each of the parties to the
applicable agreement. These representations and warranties have been made solely for the benefit of
the other parties to the applicable agreement and:
• should not in all instances be treated as categorical statements of fact, but rather as a way of
allocating the risk to one of the parties if those statements provide to be inaccurate;
• have been qualified by disclosures that were made to the other party in connection with the
negotiation of the applicable agreement, which disclosures are not necessarily reflected in the
agreement;
• may apply standards of materiality in a way that is different from what may be viewed as
material to you or other investors; and
• were made only as of the date of the applicable agreement or such other date or dates as may
be specified in the agreement and are subject to more recent developments.
Accordingly, these representations and warranties may not describe the actual state of affairs as of
the date they were made of at any other time. Additional information about the Company may be
found elsewhere in this Annual Report on Form 10-K and the Company’s other public filings, which
are available without charge through the SEC’s website at http://www.sec.gov.
The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary
statements, it is responsible for considering whether additional specific disclosures of material
information regarding material contractual provisions are required to make the statements in this
report not misleading.
Item 1. Business
Our Mission
PART I
Our mission is to improve lives by eliminating the back row in higher education.
3
Overview
We are a leading education technology company that well-recognized nonprofit colleges and
universities trust to bring them into the digital age. Our comprehensive platform of tightly integrated
technology and services provides the digital infrastructure universities need to attract, enroll, educate
and support students at scale. With our platform, students can pursue their education anytime,
anywhere, without quitting their jobs or moving; and university clients can improve educational
outcomes, skills attainment and career prospects for a greater number of students.
Over the past decade, we have developed new and innovative tools within our platform to enhance
the effectiveness of instructional methods and improve student outcomes and the student experience.
During that time, we have also refined our program selection algorithm and improved our data-driven
digital marketing capabilities across our ecosystem of offerings to generate increased student
enrollments in a cost effective manner. As a result, demand for our comprehensive platform of
integrated technology and services has increased significantly. Since 2008, we have expanded our
university client base from one to 24 across our entire portfolio of offerings, increased the number of
2U-powered graduate programs from one to 37, and enrolled over 33,000 graduate students.
Our core strategy is to launch graduate programs and short courses with new and existing
university clients and to increase student enrollments across our portfolio. We are also committed to
continuously improving our platform to deliver high-quality university and student experiences and
outcomes at scale.
Business Segments
Beginning in July 2017, with the closing of our acquisition of GetSmarter, we began offering
premium online short courses to students not seeking a full graduate degree. As a result of the
GetSmarter acquisition, we have two reportable segments: the Graduate Program Segment and the
Short Course Segment.
In both our Graduate Program Segment and our Short Course Segment, we provide
well-recognized nonprofit colleges and universities with the comprehensive infrastructure they need to
attract, enroll, educate and support students in their 2U-enabled graduate program or short course. In
our Graduate Program Segment, we target students seeking a full graduate degree of the same quality
they would receive on-campus. In our Short Course Segment, we target working professionals seeking
career advancement through skills attainment.
The reportable segments represent businesses for which separate financial information is utilized
by the chief operating decision maker for the purpose of allocating resources and evaluating
performance. Our Graduate Program Segment derives revenue primarily from a contractually specified
percentage of the amounts our university clients receive from their students in the 2U-enabled graduate
program for tuition and fees, less credit card fees and other specified charges we have agreed to
exclude in certain of our university client contracts. The Short Course Segment derives revenue directly
from students for the tuition and fees paid to enroll in and progress through our short courses. A
contractually specified percentage of the tuition and fees received from students is shared with the
university client. For additional information regarding our segments, see Note 13 Segment and
Geographic Information in the accompanying notes to our consolidated financial statements included in
Part II, Item 8, ‘‘Financial Statements and Supplementary Data’’ of this Annual Report on Form 10-K.
Our Platform
Our platform consists of front-end and back-end cloud-based SaaS technology and technology-
enabled services. These two components are tightly integrated and each is optimized with data analysis
and machine learning techniques.
4
Front-End Technology and Services
We provide the following front-end technology and services to students enrolled in our offerings
and to faculty members and university administrators supporting our offerings:
• Online Learning Platform. Our online learning platform is a secure and accessible learning and
teaching platform, where our university clients can reliably deliver their high-quality educational
content to students in a live, intimate and engaging setting, all accessible through proprietary
web and mobile applications. Our online learning platform allows our university clients to
provide a personalized learning environment for faculty and students as well as a robust online
educational community. Students can also download their asynchronous coursework for
convenient offline consumption.
On January 19, 2018, we entered into an agreement to purchase a perpetual source code license
for the Learn.co platform from Flatiron School, Inc., a wholly owned subsidiary of WeWork
Companies, Inc. Once integrated into our online learning platform, we expect that Learn.co will
enhance the learning experience of students and instruction capabilities of faculty across our
entire portfolio of offerings.
• Student and Faculty Support. We augment each student’s academic experience by providing
ongoing personalized non-academic support. We also provide a dedicated team to support and
train university administration and faculty on how to use our platform to facilitate outstanding
live instruction.
• Accessibility. For students with disabilities, we are able to facilitate accessibility across our
platform. This includes providing screen-reading technology, captioning, subtitling and voice-over
descriptions for asynchronous content, and sign language interpretation and real time captioning
for live classes.
• Admissions Application Advising. Leveraging our customer relationship management deployments
and other technology, our graduate program-dedicated teams work with prospective students as
they consider and apply to a program. Once a student has submitted a completed admissions
application package, it is routed to and reviewed by the university admissions office, which
renders the final admission decision.
• In-Program Student Field Placements. Leveraging our nationwide network of clinics, hospitals,
schools and other sites, our field placement team is dedicated to securing in-program field
placement opportunities for students enrolled in our university clients’ graduate programs that
have a field placement component. Leveraging a geo-location database, we work closely with
faculty to identify and approve sites that meet curriculum requirements.
• Immersion Support. Many of our university clients’ graduate programs require students to attend
immersions and intensive residencies where students travel to a university client’s physical
campus and other locations, where they can engage in collaborative learning experiences with
their classmates and professors in person, and develop invaluable personal and professional
relationships. We provide the resources and technology to support our university clients in
facilitating these experiences.
• Faculty Recruiting. Using our platform, our university clients can identify and employ highly
qualified teaching faculty without geographic constraint. We effectively act as a search firm by
attracting, cultivating and vetting a pool of faculty candidates for our university clients.
5
Back-End Technology and Services
We provide the following back-end technology and services to launch and operate our offerings:
• Graduate Program Launch and Operations Applications. We use an application we call Central
Park to unify our suite of applications and better automate the standup of technology
infrastructure for new graduate programs. We also use an application we call Uber-Conf to
translate graduate program-specific code into a common language to simplify program-specific
complexity. These applications simplify the effort to launch new graduate programs and enable
non-technology oriented employees to support the data analytics and operational needs across
our business.
• University Systems Integration Applications. We use an application we call Port Authority to
integrate our technology with our university clients’ information technology systems. This
application automates the student enrollment process, which allows us to more efficiently and
quickly enroll students, thereby increasing our student-to-support staff ratios, while reducing the
potential for human error.
• Content Management System. Our content management system enables us and our university
clients to author, review and deploy the asynchronous content for our offerings. The content
management system includes a set of project management and collaboration tools that allow our
university clients’ faculty to seamlessly integrate their work with that of our course production
and content development staff.
• Admissions Application Processing Portal. Our proprietary admissions application system, known
as the Online Application and Recommendation System, or OARS, automates the graduate
program admissions application process. OARS is integrated with the primary marketing site for
each graduate program and directly using data analysis and machine learning techniques, funnels
prospective students into each university client’s existing admissions application process and
provides automated workflow for that process.
• Customer Relationship Management. We have developed customer relationship management
deployments configured for each university client’s specific graduate program. Each deployment
serves as the data hub for scheduling, student acquisition, student application, faculty admissions
review, enrollment and student support. Our university clients and our employees review,
maintain and track this information to ensure proper coordination.
• Content Development. Leveraging our content management system, our content development
staff works closely with our university clients’ faculty in a collaborative process to produce
high-quality, engaging online coursework and content.
• Student Acquisition. Leveraging data analytics and machine learning techniques, we develop
targeted, offering-specific digital marketing campaigns that can reach and engage interested and
qualified prospective students in a cost-effective manner. Our marketing teams also develop
creative assets, such as websites related to the graduate program and short course fields of study,
and execute search engine optimization and paid search campaigns aimed at acquiring students
cost-effectively.
• State Authorization Services. Many of our offerings must comply with state authorization
requirements in each state where students reside. We work with most of our university clients to
identify and satisfy a complex array of state authorization requirements.
6
Our Approach
Our approach in providing our platform to our university clients is as follows:
• Tightly Integrated Technology and Services with a Focus on Quality. We believe that our platform
offers extensive features, high configurability, an intuitive user interface and the ability to
support synchronous and asynchronous learning at scale. Our front-end and back-end technology
and services are tightly integrated, and together they provide a broad set of capabilities that
would otherwise require universities to purchase multiple, disparate point solutions, and hire
significant human resources and expertise.
• Data-Driven Methodology.
• Proprietary Algorithm. We have developed a proprietary program-selection algorithm to
optimize our process for identifying new graduate programs that have a high likelihood of
success. Following our acquisition of GetSmarter, we have deployed this algorithm to inform
our short course selection process as well. Our algorithm draws on a wide variety of data,
including the operating history of our existing offerings, and is based on key market
variables, such as the existing market size of an offering, potential student demographics
and university characteristics.
• Marketing. We believe that our continuously expanding selection of educational offerings
increases our marketing leverage, allowing us to acquire additional students for the same
cost and increase enrollments across our entire portfolio of offerings. In addition, we use
data analytics and machine learning techniques to focus our marketing efforts on finding
prospective students for the right offerings at times when conversion is more likely.
• Alignment with University Clients. We serve as brand stewards for our university clients and our
relationships are characterized by close, ongoing collaboration with faculty and administrators, as
well as a deep integration between their academic missions and our platform. Our revenue-share
model also aligns our interests with those of our university clients. This revenue model,
combined with long contractual terms, enables us to make the investment in technology,
integration, content production, marketing, student and faculty support and other services
necessary to launch and scale successful offerings, without significant financial risk to our
university clients.
• Driving High Quality Student Outcomes. We are committed to delivering the technology and
services required to support each student throughout the life of each offering, thereby improving
the likelihood of students’ achieving their desired educational outcomes, skills attainment and
career opportunities.
Our Growth Strategy
We intend to continue our industry leadership as a provider of a digital education platform that
enables well-recognized nonprofit colleges and universities to deliver education online. Our approach to
growth is disciplined and focused on long-term success. The principal elements of our strategy are to:
• Add Graduate Programs, Short Courses, University Clients and Students. We intend to add graduate
programs and short courses with new and existing university clients, and increase student
enrollments across our entire portfolio of offerings.
• Add New Categories of Offerings. We believe that there is significant international demand for our
platform as colleges and universities worldwide seek to extend their brands by accessing the
growing global market for higher education. We also believe that there may be significant
opportunities in the future to offer high-quality digital education experiences to undergraduate
students and expand our non-degree offerings. As we evaluate these growth strategies, we
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periodically consider acquisitions or investment opportunities in complementary businesses, joint
ventures, services and technologies and intellectual property rights in an effort to add product
offerings, extend our technological leadership or expand the markets in which we operate. We
expect to continue to evaluate, and may enter into, acquisitions and investments in the future as
opportunities are presented.
Clients
Graduate Program Segment
In our Graduate Program Segment, we have grown our university client and program base
significantly since our inception from one client with one program in one academic discipline in 2008 to
24 clients with 51 programs in 23 degree verticals today, 37 of which have launched and have students
enrolled. A full listing of all 51 announced programs, including the programs we plan to launch in 2018,
can be found at investor.2u.com.
Our long-term university client contracts, which typically have 10 to 15 year initial terms, do not
include termination rights for convenience. Most contracts impose liquidated damages for a university
client’s non-renewal, unless the university client otherwise terminates due to our uncured breach.
Our contracts also set forth the parties’ respective rights to offer competitive programs. For
example, some contracts permit us to offer competitive programs with other schools whose potential
students are not academically qualified or otherwise interested in the program we offer with our client.
Other contracts prohibit us from offering competitive programs with a specific list of schools, whether a
certain number as listed on U.S. News & World Report’s ‘‘best’’ schools list or a specifically
enumerated list of schools negotiated with our university client. In addition, any limitation on our
ability to offer competitive programs becomes inapplicable if a university client either refuses to scale
the program to accommodate all students qualifying for admission into the program, or raises the
program admissions standards above those at the time of contract execution. In addition, our contracts
generally prohibit our university clients from offering any online competitive program. Most of our
more recent contracts either do not restrict our ability to offer competitive programs or provide for
only limited restrictions.
For the years ended December 31, 2017 and 2016, 27% and 34%, respectively, of our consolidated
revenue was derived from our programs with University of Southern California, or USC, including our
two longest running programs, launched in 2009 and 2010. We expect that these programs will continue
to account for a large portion of our revenue until our other university client graduate programs
become more mature and achieve significantly higher enrollment levels.
Our programs with Simmons College accounted for 17% and 18% of our consolidated revenue for
the years ended December 31, 2017 and 2016, respectively. Our programs with the University of North
Carolina accounted for 10% and 11% of our revenue for the years ended December 31, 2017 and 2016,
respectively.
Short Course Segment
In our Short Course Segment, we currently have ten university clients we are collaborating with to
offer more than 80 courses. Our university client contracts in our Short Course Segment are typically
shorter in length and less restrictive than our client contracts in our Graduate Program Segment.
In our Short Course Segment, revenue is derived from individual students, rather than directly
from university clients. For the year ended December 31, 2017, revenue associated with our three
largest university clients in this segment accounted for approximately 82% of the segment’s revenue,
which was less than 10% of our consolidated revenue on a combined basis. Of the 12 courses we have
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launched in 2017, six are with these three university clients. We expect these university clients will
continue to account for a large portion of our revenue in the Short Course Segment.
Competition
The overall market for technology solutions that enable higher education providers to deliver
education online is highly fragmented, rapidly evolving and subject to changing technology, shifting
needs of students and educators and frequent introductions of new delivery methods. Several
competitors provide platforms that compete with some of the capabilities of our platform. Two such
competitors, are Pearson Online Learning Services and Wiley Education Services, owned by Pearson
and John Wiley & Sons, respectively, both of which are large education and publishing companies. In
addition, traditional massive open online course providers have evolved from providing massive open
online courses to providing short course certificates, nano degrees and similar non-degree alternatives.
Many of these companies provide components of the technology and services we provide and these
companies may choose to pursue some of the institutions we target. Moreover, nonprofit colleges and
universities may elect to continue using or develop their own online learning solutions in-house.
We expect that the competitive landscape will expand as the market for online education offerings
at nonprofit institutions matures. We believe the principal competitive factors in our market include the
following:
• brand awareness and reputation;
• ability of online graduate programs and short courses to deliver desired student outcomes;
• robustness and evolution of technology solutions;
• breadth and depth of service offering;
• ability to make significant investments in launching and operating graduate programs;
• expertise in marketing, student acquisition and student retention;
• quality of student and faculty experience;
• ease of deployment and use of technology solutions;
• level of customization, configurability, integration, security, scalability and reliability of
technology solutions; and
• quality of university client base and track record of performance.
We believe we compete favorably on the basis of these factors. Our ability to remain competitive
will depend, to a great extent, upon our ability to consistently deliver our high-quality platform, meet
university client needs for content development, acquire, support and retain students and deliver
desired student, faculty and university outcomes.
Seasonality
We experience seasonality in our marketing and sales expenses in both our Graduate Program
Segment and our Short Course Segment. We typically reduce our paid search and other marketing and
sales efforts during late November and December because these efforts are less productive during the
holiday season. We generally do not experience pronounced seasonality in our revenue, although
revenue can fluctuate significantly from quarter to quarter due to variations driven by the academic
schedules of our graduate programs and short courses.
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Intellectual Property
We protect our intellectual property by relying on a combination of copyrights, trademarks, trade
secrets and contractual agreements. For example, we rely on trademark protection in the United States
and various foreign jurisdictions to protect our rights to various marks, including 2U, NO BACK ROW,
GETSMARTER and other distinctive logos associated with our brand.
We ensure that we own intellectual property created for us by signing agreements with employees,
independent contractors, consultants, companies, and any other third party that creates intellectual
property for us that assign any intellectual property rights to us.
We have also established business procedures designed to maintain the confidentiality of our
proprietary information, including the use of confidentiality agreements with employees, independent
contractors, consultants and companies with which we conduct business.
We also purchase or license technology that we incorporate into our technology or services. While
it may be necessary in the future to seek or renew licenses relating to various aspects of our technology
and services, we believe, based upon past experience and industry practice, such licenses generally could
be obtained on commercially reasonable terms.
We continue to evaluate developing and expanding our intellectual property rights in patents,
trademarks and copyrights, as available through registration in the United States and internationally.
For important additional information related to our intellectual property position, please review
the information set forth in ‘‘Risk Factors—Risks Related to Intellectual Property.’’
Education Laws and Regulations
The higher education industry is heavily regulated. Institutions of higher education that award
degrees and certificates to signify the successful completion of an academic program are subject to
regulation from three primary entities: the U.S. Department of Education, or DOE, accrediting
agencies and state licensing authorities. Each of these entities promulgates and enforces its own laws,
regulations and standards, which we refer to collectively as education laws.
We contract with postsecondary institutions that are subject to education laws. In addition, we
ourselves are required to comply with certain education laws as a result of our role as a service
provider to institutions of higher education, either directly or indirectly through our contractual
arrangements with university clients. Our failure, or that of our university clients, to comply with
education laws could adversely impact our operations. As a result, we work closely with our university
clients to maintain compliance with education laws.
Federal Laws and Regulations
Under the Higher Education Act of 1965, as amended, or the HEA, institutions offering
postsecondary education must comply with certain laws and related regulations promulgated by the
DOE in order to participate in the Title IV federal student financial assistance programs. Many of our
university clients participate in the Title IV programs.
The HEA and the regulations promulgated thereunder are frequently revised, repealed or
expanded. Congress historically has reauthorized and amended the HEA in regular intervals,
approximately every five to seven years. The re-authorization process is currently under way.
The re-authorization of the HEA could alter the regulatory landscape of the higher education
industry, and thereby impact the manner in which we conduct business and serve our university clients.
In addition, the DOE is independently conducting an ongoing series of rulemakings intended to assure
the integrity of the Title IV programs. The DOE also frequently issues formal and informal guidance
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instructing institutions of higher education and other covered entities how to comply with various
federal laws and regulations. DOE guidance is subject to frequent change and may impact our business
model.
Although we are not considered an institution of higher education and we do not directly
participate in Title IV programs, we are required to comply with certain regulations promulgated by
the DOE as a result of our role as a service provider to institutions that do participate in Title IV
programs. These include, for example, regulations governing student privacy under Family Educational
Rights and Privacy Act, or FERPA. The most material obligations stem from new rules and revisions to
existing regulations promulgated by the DOE in 2010 as part of the so-called ‘‘program integrity’’ rules.
While the program integrity rules were targeted at for-profit institutions of higher education, most
apply equally to traditional colleges and universities such as our university clients, and they apply in
particular to institutions contracting with outside vendors to provide services, particularly in connection
with distance education. These rules include principally the incentive compensation rule, the
misrepresentation rule, the written arrangements rules and state authorization requirements. The more
significant program integrity rules applicable to us or our university clients are discussed in further
detail below.
Incentive Compensation Rule
The HEA provides that any institution that participates in the Title IV federal student financial
assistance programs must agree with the DOE that the institution will not provide any commission,
bonus or other incentive payment to any person or entity engaged in any student recruiting or
admission activities.
As part of the program integrity rules, the DOE issued revised regulations regarding incentive
compensation effective July 1, 2011. Under the revised regulations, each higher education institution
agrees that it will not ‘‘provide any commission, bonus, or other incentive payment based in any part,
directly or indirectly, upon success in securing enrollments or the award of financial aid, to any person
or entity who is engaged in any student recruitment or admission activity, or in making decisions
regarding the award of title IV, HEA program funds.’’ Pursuant to this rule, we are prohibited from
offering our covered employees, which are those involved with or responsible for recruiting or
admissions activities, any bonus or incentive-based compensation based on the successful recruitment,
admission or enrollment of students into a postsecondary institution.
In addition, the revised rule initially raised a question as to whether our company itself, as an
entity, is prohibited from entering into tuition revenue-sharing arrangements with university clients. On
March 17, 2011, the DOE issued official agency guidance, known as a ‘‘Dear Colleague Letter,’’ or the
DCL, providing guidance on this point. The DCL states that ‘‘[t]he Department generally views
payment based on the amount of tuition generated as an indirect payment of incentive compensation
based on success in recruitment and therefore a prohibited basis upon which to measure the value of
the services provided’’ and that ‘‘[t]his is true regardless of the manner in which the entity compensates
its employees.’’ But the DCL also provides an important exception to the ban on tuition revenue-
sharing arrangements between institutions and third parties. According to the DCL, the DOE does not
consider payment based on the amount of tuition generated by an institution to violate the incentive
compensation ban if the payment compensates an ‘‘unaffiliated third party’’ that provides a set of
‘‘bundled services’’ that includes recruitment services, such as those we provide. Example 2-B in the
DCL is described as a ‘‘possible business model’’ developed ‘‘with the statutory mandate in mind.’’
Example 2-B describes the following as a possible business model:
‘‘A third party that is not affiliated with the institution it serves and is not affiliated with any other
institution that provides educational services, provides bundled services to the institution including
marketing, enrollment application assistance, recruitment services, course support for online
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delivery of courses, the provision of technology, placement services for internships, and student
career counseling. The institution may pay the entity an amount based on tuition generated for the
institution by the entity’s activities for all the bundled services that are offered and provided
collectively, as long as the entity does not make prohibited compensation payments to its
employees, and the institution does not pay the entity separately for student recruitment services
provided by the entity.’’
The DCL guidance indicates that an arrangement that complies with Example 2-B will be deemed
to be in compliance with the incentive compensation provisions of the HEA and the DOE’s
regulations. Our business model and contractual arrangements with our university clients closely follow
Example 2-B in the DCL. In addition, we assure that none of our ‘‘covered employees’’ is paid any
bonus or other incentive compensation in violation of the rule.
Because the bundled services rule was promulgated in the form of agency guidance issued by the
DOE in the form of a DCL and is not codified by statute or regulation, the rule could be altered or
removed without prior notice, public comment period or other administrative procedural requirements
that accompany formal agency rulemaking. Similarly, a court could invalidate the rule in an action
involving our company or our university clients, or in action that does not involve us at all. The
revision, removal or invalidation of the bundled services rule by Congress, the DOE or a court could
require us to change our business model.
Misrepresentation Rule
The HEA prohibits an institution that participates in the Title IV programs from engaging in any
‘‘substantial misrepresentation’’ regarding three broad subject areas: (1) the nature of the school’s
education programs, (2) the school’s financial charges and (3) the employability of the school’s
graduates. In 2010, as part of the program integrity rules, the DOE revised its regulations in order to
significantly expand the scope of the misrepresentation rule. Although some of the DOE’s most
expansive amendments to the misrepresentation rule were overturned by the courts in 2012, most of
the 2010 amendments survived and remain in effect.
Under the new rule, ‘‘misrepresentation’’ is defined as any false, erroneous or misleading
statement, written, visual or oral. This includes even statements that ‘‘have the likelihood or tendency
to deceive.’’ Therefore, a statement need not be intentionally deceitful to qualify as a
misrepresentation. ‘‘Substantial misrepresentation’’ is defined loosely as a misrepresentation on which
the person to whom it was made could reasonably be expected to rely, or has reasonably relied, to that
person’s detriment.
The new regulation also expands the scope of the rule to cover statements made by any
representative of an institution, including agents, employees and subcontractors, and statements made
directly or indirectly to any third party, including state agencies, government officials or the public, and
not just to students or prospective students.
Violations of the misrepresentation rule are subject to various sanctions by the DOE and violations
may be used as a basis for legal action by third parties. Similar rules apply under state laws or are
incorporated in institutional accreditation standards and the Federal Trade Commission, or FTC,
applies similar rules prohibiting any unfair or deceptive marketing practices to the education sector. As
a result, we and our employees and subcontractors, as agents of our university clients, must use a high
degree of care to comply with such rules and are prohibited by contract from making any false,
erroneous or misleading statements about our university clients. To avoid an issue under the
misrepresentation rule and similar rules, we assure that all marketing materials are approved in
advance by our university clients before they are used by our employees and we carefully monitor our
subcontractors.
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Accreditation Rules and Standards
Accrediting agencies primarily examine the academic quality of the instructional programs of an
educational institution, and a grant of accreditation is typically viewed as confirmation that an
institution or an institution’s programs meet generally accepted academic standards. Accrediting
agencies also review the administrative and financial operations of the institutions they accredit to
ensure that each institution has the resources to perform its educational mission. The DOE also relies
on accrediting agencies to determine whether institutions’ educational programs qualify the institutions
to participate in Title IV programs.
In addition to institutional accreditation, colleges and universities may require specialized
programmatic accreditation for particular educational programs. Many states and professional
associations require professional programs to be accredited, and require individuals to have graduated
from accredited programs in order to sit for professional license exams. Programmatic accreditation,
while not a sufficient basis for institutional Title IV Program certification by the DOE, assists graduates
to practice or otherwise secure appropriate employment in their chosen field. Common fields of study
subject to programmatic accreditation include teaching and nursing.
Although we are not an accredited institution and are not required to maintain accreditation,
accrediting agencies are responsible for reviewing an accredited institution’s third-party contracts with
service providers like us and may require an institution to obtain approval from or to notify the
accreditor in connection with such arrangements. One purpose of the notification and approval
requirements is to verify that the accredited institution remains responsible for providing academic
instruction leading to a credential and provides oversight of other activities undertaken by third parties
like us that are within the scope of its accreditation. We work closely with our university clients to
assure that the standards of their respective accreditors are met and are not adversely impacted by us.
Accrediting agencies are also responsible for assuring that any ‘‘written arrangements’’ to outsource
academic instruction meet accrediting standards and related regulations of the DOE. Our operations
are generally not subject to such ‘‘written arrangements’’ rules because academic instruction is provided
by our university client institutions and not by us.
State Laws and Regulations
Each state has at least one licensing agency responsible for the oversight of educational institutions
operating within its jurisdiction. Continued approval by such agencies is necessary for an institution to
operate and grant degrees, diplomas or certificates in those states. Moreover, under the HEA, approval
by such agencies is necessary to maintain eligibility to participate in Title IV programs. State attorneys
general are also active in enforcing education laws, and the level of regulatory oversight varies
substantially from state to state.
We and our university clients may be subject to regulation in each state in which we or they own
facilities, provide distance education or recruit students. State laws establish standards for, among other
things, student instruction, qualifications of faculty, location and nature of facilities, recruiting practices
and financial policies. The need to comply with applicable state laws and regulations may limit or delay
our ability to market or expand our offerings. In addition, the interpretation of state authorization
regulations is subject to substantial discretion by the state agency responsible for enforcing the
regulations.
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As part of the program integrity rules, the DOE required, among other things, that an institution
offering distance learning or online programs secure the approval of those states which require such
approval and provide evidence of such approval to the DOE upon request. This regulation dramatically
increased the importance of state authorization because failure to obtain it could result in an obligation
to return federal funds received by an institution. The U.S. Court of Appeals for the District of
Columbia struck down the regulations requiring proof of state approval for online education programs
in 2012 on procedural grounds; however, the DOE promulgated similar replacement regulations in
December 2016, with an effective date of July 1, 2018. In addition, even if these rules do not go into
effect, it is the policy of DOE to require proof of all necessary state approvals when an institution
seeks to renew its authorization to participate in the Title IV programs.
Most states participate in the State Authorization Reciprocity Agreement, or SARA, governing the
licensing of online offerings. All SARA-member institutions may provide online offerings in SARA
states without obtaining separate state authorization (this includes externships, recruiting, local
advertising, and faculty presence). SARA-member institutions must still obtain a separate authorization
in order to open a physical location in another state and are also required to obtain any additional
approvals that may be required for offerings leading to professional licensure in a state (e.g., nursing,
teaching, or counseling). Most of our university clients are SARA members and the DOE has indicated
it will accept participation in a reciprocity agreement as evidence of state approval.
We monitor state law developments closely and work closely with our university clients to assist
them with obtaining any required approvals.
Other Laws
Our activities on behalf of institutions are also subject to other federal and state laws. These
regulations include, but are not limited to, consumer marketing and unfair trade practices laws and
regulations, including those promulgated and enforced by the FTC, as well as federal and state data
protection and privacy requirements.
Employees
As of December 31, 2017, we had 1,808 full-time employees and 114 part-time employees. None of
our employees are represented by a labor union or covered by a collective bargaining agreement. We
consider our relations with our employees to be good.
Other Information
We were incorporated as a Delaware corporation in April 2008 and completed our initial public
offering in April 2014. Our principal executive offices are located at 7900 Harkins Road, Lanham,
MD 20706, and our telephone number is (301) 892-4350.
You can obtain copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and other filings with the U.S. Securities and Exchange Commission, or
the SEC, and all amendments to these filings, free of charge from our website at investor.2u.com as
soon as reasonably practicable following our filing of any of these reports with the SEC. You can also
obtain copies free of charge by contacting our Investor Relations department at our office address
listed above. The public may read and copy any materials filed by us with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC at www.sec.gov. The contents of
these websites are not incorporated into this filing. Further, our references to the URLs for these
websites are intended to be inactive textual references only.
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Item 1A. Risk Factors
In addition to the other information set forth in this Annual Report on Form 10-K, you should
carefully consider the factors discussed in the ‘‘Special Note Regarding Forward-Looking Statements’’
in this Annual Report on Form 10-K.
Risks Related to Our Business Model, Our Operations and Our Growth Strategy
We have a limited operating history, which makes it difficult to predict our future financial and operating
results, and we may not achieve our expected financial and operating results in the future.
We were incorporated in 2008 and launched our first graduate program in 2009. In July 2017, we
acquired GetSmarter and extended our offerings to include premium online short courses offered in
collaboration with universities. As a result of our limited operating history, our ability to forecast our
future operating results, including revenue, cash flows and profitability, is limited and subject to a
number of uncertainties. We have encountered and will encounter risks and uncertainties frequently
experienced by growing companies in the technology industry. If our assumptions regarding these risks
and uncertainties are incorrect or change due to factors impacting our targeted markets, or if we do
not manage these risks successfully, our operating and financial results may differ materially from our
expectations and our business may suffer.
We have incurred significant net losses since inception, and we expect our operating expenses to increase
significantly in the foreseeable future, which may make it more difficult for us to achieve and maintain
profitability.
We incurred net losses of $29.4 million, $20.7 million and $26.7 million during the years ended
December 31, 2017, 2016 and 2015, respectively. We will need to generate and sustain increased
revenue levels in future periods to become profitable, and, even if we do, we may not be able to
maintain or increase our level of profitability. We anticipate that our operating expenses will increase
substantially in the foreseeable future as we undertake increased technology and production efforts to
support a growing number of graduate programs and increase our marketing and sales efforts to drive
the acquisition of potential students. In addition, as a public company, we will continue to incur
significant accounting, legal and other expenses that we did not incur as a private company. These
expenditures will make it harder for us to achieve and maintain profitability. Our efforts to grow our
business may be more costly than we expect, and we may not be able to increase our revenue enough
to offset our higher operating expenses. If we are forced to reduce our expenses, our growth strategy
could be compromised. We may incur significant losses in the future for a number of reasons, including
unforeseen expenses, difficulties, complications, delays and other unknown events. As a result, we may
be unable to achieve and maintain profitability, and the value of our company and our common stock
could decline significantly.
Our business depends heavily on the adoption by colleges and universities of online delivery of their
educational offerings. If we fail to attract new university clients, or if new leadership at existing university
clients does not have an interest in continuing or expanding online delivery of their educational offerings, our
revenue growth and profitability may suffer.
The success of our business depends in large part on our ability to enter into agreements with
additional nonprofit colleges and universities to offer their graduate programs and courses online. In
particular, to engage new university clients, we need to convince potential university clients, many of
which have been educating students in generally the same types of on-campus programs for hundreds
of years, to invest significant time and resources to adjust the manner in which they teach students. The
delivery of online education at leading nonprofit colleges and universities is nascent, and many
administrators and faculty members have expressed concern regarding the perceived loss of control
15
over the education process that might result from offering content online, as well as skepticism
regarding the ability of colleges and universities to provide high-quality education online that maintains
the standards they set for their on-campus programs. It may be difficult to overcome this resistance,
and online programs of the kind we develop with our university clients may not achieve significant
market acceptance. In addition, our university clients have regular turnover in their leadership
positions, and there is no guarantee that any new leader will have an interest in continuing or
expanding online delivery of the university’s educational offerings. If new leaders at our university
clients do not embrace online delivery of educational offerings, we may not be able add additional
offerings with the university client and the university client may attempt to terminate or may not renew
their relationship with us.
Our financial performance depends heavily on our ability to acquire qualified potential students for our
offerings, and our ability to do so may be affected by circumstances beyond our control.
Building awareness of our offerings is critical to our ability to acquire prospective students for our
university clients’ programs and courses and generate revenue. A substantial portion of our expenses is
attributable to marketing and sales efforts dedicated to attracting potential students to our offerings.
Because we generate revenue based on a portion of the tuition and fees that students pay, it is critical
to our success that we identify qualified prospective students for our offerings in a cost-effective
manner, and that enrolled students remain active in our offerings until graduation or completion.
The following factors, many of which are largely outside of our control, may prevent us from
successfully driving and maintaining student enrollment in our offerings in a cost-effective manner or at
all:
• Negative perceptions about online learning programs. As a non-traditional form of education
delivery, prospective students will subject our offerings to increased scrutiny. Online offerings
that we or our competitors provide may not be successful or operate efficiently, and new
entrants to the field of online learning also may not perform well. Such underperformance could
create the perception that online offerings in general are not an effective way to educate
students, whether or not our offerings achieve satisfactory performance, which could make it
difficult for us to successfully attract prospective students. Students may be reluctant to enroll in
online programs and courses for fear that the learning experience may be substandard, that
employers may be averse to hiring students who received their education online, or that
organizations granting professional licenses or certifications may be reluctant to grant them
based on degrees earned through online education.
• Ineffective marketing efforts. We invest substantial resources in developing and implementing
data-driven marketing strategies that focus on identifying the right potential student at the right
time. These marketing efforts make substantial use of search engine optimization, paid search
and custom website development and deployment and we rely on a small number of internet
search engines and marketing partners. If our execution of this strategy proves to be inefficient
or unsuccessful in generating a sufficient quantity of qualified prospective students, or if the
costs associated with the execution of this strategy increase, our revenue could be adversely
affected.
• Damage to university client reputation. Because we market a specific graduate program or course
to potential students, the reputations of our university clients are critical to our ability to enroll
students. Many factors affecting our university clients’ reputations are beyond our control and
can change over time, including their academic performance and ranking among nonprofit
educational institutions.
• Lack of interest in an offering. We may encounter difficulties attracting qualified students for
graduate programs or courses that are not highly desired or that are relatively new within their
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fields. Macroeconomic conditions beyond our control may diminish interest in employment in a
field, and that could contribute to lack of interest in offerings in the disciplines related to that
field.
• Our lack of control over admissions decisions for our university clients’ graduate programs. Even if
we are able to identify prospective students for a graduate program, there is no guarantee that
students will be admitted to that program. In the Graduate Program Segment, the university
clients retain complete discretion over admissions decisions, and any changes to admissions
standards, or inconsistent application of admissions standards, could affect student enrollment
and our ability to generate revenue.
• Inability of students to secure funding. Like traditional college and university students, many of
the students in our university clients’ graduate programs rely heavily on the availability of third-
party financing to pay for the costs of their educations, including tuition. This tuition assistance
may include federal or private student loans, scholarships and grants, or benefits or
reimbursement provided by the students’ employers. Any developments that reduce the
availability of financial aid for higher education generally, or for our university clients’ graduate
programs in particular, could impair students’ abilities to meet their financial obligations, which
in turn could result in reduced enrollment and harm our ability to generate revenue.
• General economic conditions. Student enrollment in our offerings may be affected by changes in
global economic conditions. An improvement in economic conditions and, in particular, an
improvement in the economic conditions in the U.S. and the U.S. unemployment rate, may
reduce demand among potential students for educational services, as they may find adequate
employment without additional education. Conversely, a worsening of economic and employment
conditions may reduce the willingness of employers to sponsor educational opportunities for
their employees or discourage existing or potential students from pursuing additional education
due to a perception that there are insufficient job opportunities, increased economic uncertainty
or other factors, any of which could adversely impact our ability to attract qualified students to
our offerings. If one or more of these factors reduces student demand for our offerings,
enrollment could be negatively affected, our costs associated with student acquisition and
retention could increase, or both, any of which could materially compromise our ability to grow
our revenue or achieve profitability. These developments could also harm our reputation and
make it more difficult for us to engage new and existing university clients for new offerings,
which would negatively impact our ability to expand our business.
Disruption to or failures of our platform could reduce university client and student satisfaction with our
offerings and could harm our reputation.
The performance and reliability of our platform is critical to our operations, reputation and ability
to attract new university clients, as well as our student acquisition and retention efforts. Our university
clients rely on this technology to offer their programs and courses online, and students access this
technology on a frequent basis as an important part of their educational experience. Because our
platform is complex and incorporates a variety of hardware and proprietary and third party software,
our platform may have errors or defects that could result in unanticipated downtime for our university
clients and students. Web and mobile based applications frequently contain undetected errors when first
introduced or when new versions or enhancements are released, and we have from time to time found
errors and defects in our technology and new errors and defects may be detected in the future. In
addition, we have experienced and may in the future experience temporary system interruptions to our
platform for a variety of reasons including network failures, power failures, problems with third party
firmware updates, as well as an overwhelming numbers of users trying to access our platform. Any
errors, defects, disruptions or other performance problems with our platform could damage our or our
university clients’ reputations, decrease student satisfaction and retention and impact our ability to
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attract new students and university clients. If any of these problems occur, our university clients could
attempt to terminate their agreements with us, or make indemnification or other claims against us. In
addition, sustained or recurring disruptions in our platform could adversely affect our and our
university clients’ compliance with applicable regulations and accrediting body standards.
We rely upon Amazon Web Services to host certain aspects of our platform and any disruption of or
interference with our use of Amazon Web Services could impair our ability to deliver our platform to
university clients and students, resulting in university client and student dissatisfaction, damage to our
reputation, and harm to our business.
Amazon Web Services, or AWS, provides a distributed computing infrastructure platform for
business operations, or what is commonly referred to as a cloud computing service. We have designed
our technology and technology-enabled services to use data processing, storage capabilities and other
services provided by AWS. Currently, our online learning platform and certain of our front-end and
back-end technology and services are run on AWS. Given this, along with the fact that we cannot easily
switch our AWS operations to another cloud provider, any disruption of, or interference with our use
of, AWS would impact our operations and our business would be adversely impacted. AWS provides us
with computing and storage capacity pursuant to an agreement that continues until terminated by
either party. AWS may terminate the agreement without cause by providing 30 days’ prior written
notice, and may terminate the agreement for cause with 30 days’ prior written notice, including any
material default or breach of the agreement by us that we do not cure within the 30-day period.
Additionally, AWS has the right to terminate the agreement immediately with notice to us in certain
scenarios such as if AWS believes providing the services could create a substantial economic or
technical burden or material security risk for AWS, or in order to comply with the law or requests of
governmental entities. If any of our arrangements with AWS is terminated, we could experience
interruptions in our software as well as delays and additional expenses in arranging new facilities and
services.
We utilize third-party data center hosting facilities operated by AWS. Our operations depend, in
part, on AWS’s abilities to protect these facilities against damage or interruption from natural disasters,
power or telecommunications failures, criminal acts and similar events. The occurrence of spikes in
usage volume, a natural disaster, an act of terrorism, vandalism or sabotage, a decision to close a
facility without adequate notice, or other unanticipated problems at a facility could result in lengthy
interruptions in the availability of our platform, which would result in harm to our business. Also, in
the event of damage or interruption, our insurance policies may not adequately compensate us for any
losses that we may incur. These factors in turn could further reduce our revenue, subject us to liability
or cause our university clients to fail to renew or terminate their contracts, any of which could harm
our business.
Our student acquisition efforts depend in large part upon the availability of advertising space through a
variety of media.
We depend upon the availability of advertising space through a variety of media, including third
party applications on platforms such as Facebook and LinkedIn, to direct traffic to our offerings and
acquire new students for our offerings. The availability of advertising space varies, and a shortage of
advertising space in any particular media or on any particular platform, or the elimination of a
particular medium on which we advertise, could limit our ability to direct traffic to our offerings and
acquire new students on a cost-effective basis, any of which could have a material adverse effect on our
business, results of operations and financial condition.
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The market for our offerings may be limited based on the types of nonprofit colleges and universities we
target.
Our target market of selective nonprofit colleges and universities is necessarily limited. Some of
the contracts we enter into with our university clients contain limitations on our ability to contract with
other institutions to provide the same offering. In addition, in order to maintain good relations with
our university clients we may decide not to approach certain institutions that they regard as their direct
competitors to offer similar programs or courses, even if we are allowed to do so under our contracts.
We have agreed to incur, and we may incur in the future, costs to terminate some or all of the exclusivity
obligations in certain of our university client contracts.
Certain of our contracts with our university clients limit our ability to enable competitive offerings
with other schools. In our Graduate Program Segment, we have determined that enabling some of
these contractually prohibited competitive programs may be part of our business strategy. To eliminate
some or all of the exclusivity obligations in certain university clients’ contracts with us, we have agreed
with certain university clients in our Graduate Program Segment to do some or all of the following:
make fixed and contingent cash payments over time, reduce our revenue share over time, and/or make
minimum investments in marketing under certain conditions.
We may determine in the future that enabling additional contractually prohibited competitive
programs or courses is desirable, and we may therefore agree with additional university clients to incur
costs similar to those above to reduce or eliminate the exclusivity obligations contained in their
contracts with us.
If the competitive programs or courses we ultimately enable fail to reach scale or cannot be scaled
at a reasonable cost, or if we need to incur contingent costs in connection with offering competitive
programs or courses, our ability to grow our business and achieve profitability would be impaired.
Attracting new university clients for the launch of new offerings is complex and time-consuming. If we pursue
unsuccessful opportunities, we may forego more profitable opportunities and our operating results and growth
would be harmed.
The process of identifying new offerings at selective nonprofit colleges and universities, and then
negotiating contracts with potential university clients, is complex and time-consuming. Because of the
initial reluctance on the part of some nonprofit colleges and universities to embrace a new method of
delivering their education services and the complicated approval process within universities, our sales
process to attract and engage a new university client can be lengthy. Depending on the particular
college or university and the particular offering, we may face resistance from university administrators
or faculty members during the process.
The sales cycle for a new university client often spans one year or longer. In addition, our sales
cycle can vary substantially because of a number of factors, including the university client’s approval
processes or disagreements over the terms of our offerings. We spend substantial time and management
resources on these sales efforts without any assurance that our efforts will result in the launch of a new
program or course. If we invest substantial resources pursuing unsuccessful opportunities, we may
forego other more profitable university client relationships, which would harm our operating results and
growth.
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To launch a new graduate program, we must incur significant expense in technology and content development,
as well as marketing and sales, to identify and attract prospective students, and it may be several years, if
ever, before we generate revenue from a new program sufficient to recover our costs.
To launch a new graduate program, we must integrate components of our platform with the
various student information and other operating systems our university clients use to manage functions
within their institutions. In addition, our content development staff must work closely with that
university client’s faculty members to produce engaging online coursework and content, and we must
commence student acquisition activities. This process of launching a new graduate program is
time-consuming and costly and, under our agreements with our university clients, we are primarily
responsible for the significant costs of this effort, even before we generate any revenue. Additionally,
during the life of our university client agreements, we are responsible for the costs associated with
continued marketing, maintaining our platform and providing non-academic and other support for
students enrolled in the graduate program. We invest significant resources in these new graduate
programs from the beginning of our relationship with a university client, and there is no guarantee that
we will ever recoup these costs.
Because our university client agreements provide that we receive a fixed percentage of the tuition
that the university clients receive from the students enrolled in their graduate programs, we only begin
to recover these costs once students are enrolled and our university clients begin billing students for
tuition and fees. The time that it takes for us to recover our investment in a new graduate program
depends on a variety of factors, primarily the level of our student acquisition costs and the rate of
growth in student enrollment in the program. We estimate that, on average, it takes approximately four
to five years after engagement with a university client to fully recover our investment in that university
client’s new graduate program. Because of the lengthy period required to recoup our investment in a
new graduate program, unexpected developments beyond our control could occur that result in the
university client ceasing or significantly curtailing a graduate program before we are able to fully
recoup our investment. As a result, we may ultimately be unable to recover the full investment that we
make in a new graduate program or achieve our expected level of profitability for the graduate
program.
If new offerings do not scale efficiently and in the time frames we expect, our reputation and our revenue will
suffer.
Our continued growth and profitability depends on our and our university clients’ ability to
successfully scale newly launched offerings. As we continue aggressively growing our business, we plan
to continue to hire new employees at a rapid pace, particularly in our marketing and sales team and
our technology and content development teams. If we cannot adequately train these new employees, we
may not be successful in acquiring potential students for our offerings, which would adversely impact
our ability to generate revenue, and our university clients and the students in their programs and
courses could lose confidence in the knowledge and capability of our employees. If we cannot quickly
and efficiently scale our technology to handle growing student enrollment and new offerings, our
university clients’ and their students’ experiences may suffer, which could damage our reputation among
colleges and universities and their faculty and students.
In addition, in our Graduate Program Segment, if our university clients cannot quickly develop the
infrastructure and hire sufficient faculty and administrators to handle growing student enrollments, our
university clients’ and their students’ experiences with our platform may suffer, which could damage our
reputation among colleges and universities and their faculty and students.
Our ability to effectively manage any significant growth of new offerings and increasing student
enrollment will depend on a number of factors, including our ability to:
• satisfy existing students in, and attract and enroll new students for, our offerings;
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• assist our university clients in recruiting qualified faculty to support their expanding enrollments;
• assist our university clients in developing and producing an increased volume of course content;
• successfully introduce new features and enhancements and maintain a high level of functionality
in our platform; and
• deliver high-quality support to our university clients and their faculty and students.
Establishing new offerings or expanding existing offerings will require us to make investments in
management and key staff, increase capital expenditures, incur additional marketing expenses and
reallocate other resources. If student enrollment in our offerings does not increase, if we are unable to
launch new offerings in a cost-effective manner or if we are otherwise unable to manage new offerings
effectively, our ability to grow our business and achieve profitability would be impaired, and the quality
of our platform and the satisfaction of our university clients and their students could suffer.
Our financial performance depends heavily on student retention within our offerings, and factors influencing
student retention may be out of our control.
Once a student is enrolled in a program or course, we and our university client must retain the
student over the life of the program or course to generate ongoing revenue. Our strategy involves
offering high-quality support to students enrolled in these programs and courses to support their
retention. If we do not help students quickly resolve any educational, technological or logistical issues
they encounter, otherwise provide effective ongoing support to students or deliver the type of
high-quality, engaging educational content that students expect, students may withdraw from the
program or course, which would negatively impact our revenue.
In addition, student retention could be compromised by the following factors, many of which are
largely outside of our control:
• Reduced support from our university clients. Because revenue from a particular offering is directly
attributable to the level of student enrollment in the offering, our ability to grow our revenue
from a university client relationship depends on the growth of enrollment in that program. Our
university clients could limit enrollment in their offerings, cease providing the offerings
altogether or significantly curtail or inhibit our ability to promote their offerings, any of which
would negatively impact our revenue.
• Lack of support from faculty members in our university clients’ graduate programs. It takes a
significant time commitment and dedication from our university clients’ faculty members to work
with us to develop course content for their graduate programs and courses designed for an
online learning environment. Our university clients’ faculty may be unfamiliar with the
development and production process, may not understand the time commitment involved to
develop the course content, or may otherwise be resistant to changing the ways in which they
present the same content in an on-campus class. Our ability to maintain high student retention
will depend in part on our ability to convince our university clients’ faculty of the value in the
time and effort they will spend developing the course content. Lack of support from faculty
could cause the quality of our graduate programs to decline, which could contribute to
decreased student satisfaction and retention in our Graduate Program Segment.
• Student dissatisfaction. Enrolled students may drop out of our offerings based on their individual
perceptions of the value they are getting from the offering. For example, we may face retention
challenges as a result of students’ dissatisfaction with the quality of course content and
presentation, dissatisfaction with our university clients’ faculty, changing views of the value of
our offerings and perceptions of employment prospects following completion of the program or
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course. Factors outside our control related to student satisfaction with, and overall perception of,
a program or course may contribute to decreased student retention rates for that program.
• Personal factors. Factors impacting a student’s willingness and ability to stay enrolled in a
program or course include personal factors, such as ability to continue to pay tuition, ability to
meet the rigorous demands of the offering, and lack of time to continue classes, all of which are
generally beyond our control.
Any of these factors could significantly reduce the revenue that we generate from our offerings,
which would negatively impact our return on investment for the particular offering, and could
compromise our ability to grow our business and achieve profitability.
Of the graduate programs we operate, only a small number contribute a significant portion of our revenue,
and loss or material underperformance of any one of these programs could have a disproportionate effect on
our business.
In our Graduate Program Segment, we currently have, and for the foreseeable future expect to
continue to have, a small number of graduate programs that contribute a meaningful portion of our
revenue and generate positive earnings and cash flow. Therefore, if any of these programs were to
materially underperform for any reason or if the university client for these programs terminate or do
not renew their relationship with us, it would hurt our future financial performance.
A significant portion of our revenue is currently attributable to graduate programs with the University of
Southern California. The loss of, or a decline in enrollment in, these programs could significantly reduce our
revenue.
We expect that our programs with USC will continue to account for a large portion of our revenue
until our other university client programs become more mature and achieve significantly higher
enrollment levels. Any decline in USC’s reputation, any increase in USC’s tuition, or any changes in
USC’s policies could adversely affect the number of students that enroll in these programs. Further, the
faculty or administrators could become resistant to offering their online programs through our
platform, making it more difficult for us to attract and retain students. USC is not required to expand
student enrollment in these online programs and, upon the expiration of their contracts, they are not
required to continue using us as the provider of these or other online programs. If certain of these
programs were to materially underperform for any reason or to terminate or not renew their
relationships with us, it would significantly reduce our revenue.
A significant portion of our revenue in the Short Course Segment is attributable to courses with three
university clients. The loss of any of these clients, or a decline in enrollment in certain of these courses, could
significantly reduce our revenue in this segment.
We expect that our courses with our three largest university clients in the Short Course Segment
will continue to account for a large portion of our revenue in this segment. Any decline in these
university clients’ reputations, increase in fees adversely affecting the number of students that enroll in
these courses, or these university clients becoming resistant to offering online courses through our
platform, would make it more difficult for us to attract students. These university clients are not
required to continue using us as their provider for online short courses. If any of these university
clients elected to end certain courses or to terminate or not renew their relationships with us, it would
significantly reduce our revenue in this segment.
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The loss, or material underperformance, of any one of our graduate programs could harm our reputation,
which could in turn affect our profitability.
We rely on our reputation for delivering high-quality online graduate programs and
recommendations from existing university clients to attract potential new university clients. Therefore,
the loss of any single graduate program, or the failure of any university client to renew its agreement
with us upon expiration, could harm our reputation and impair our ability to pursue our growth
strategy and ultimately to become profitable.
If our security measures or those of our third party service providers are breached or fail and result in
unauthorized disclosure of data, we could lose university clients, fail to attract new university clients and be
exposed to protracted and costly litigation.
Our platform and computer systems store and transmit proprietary and confidential university,
student and company information, which may include personal information of students, prospective
students, faculty and employees, that is subject to stringent legal and regulatory obligations. As a
technology company, we face an increasing number of threats to our platform and computer systems
including unauthorized activity and access, system viruses, worms, malicious code, denial of service
attacks, and organized cyberattacks, any of which could breach our security and disrupt our platform
and our university clients’ programs. The techniques used by computer hackers and cyber criminals to
obtain unauthorized access to data or to sabotage computer systems change frequently and generally
are not detected until after an incident has occurred. Our efforts to maintain the security and integrity
of our platform, and the cybersecurity measures taken by our third party service providers may be
unable to anticipate, detect or prevent all attempts to compromise our systems. If our security measures
are breached or fail as a result of third-party action, employee error, malfeasance or otherwise, we
could be subject to liability or our business could be interrupted, potentially over an extended period of
time. Any or all of these issues could harm our reputation, adversely affect our ability to attract new
university clients and students, cause existing university clients to scale back their offerings or elect not
to renew their agreements, cause prospective students not to enroll or students to not stay enrolled in
our offerings, or subject us to third-party lawsuits, regulatory fines or other action or liability. Further,
any reputational damage resulting from breach of our security measures could create distrust of our
company by prospective university clients or students. In addition, our insurance coverage may not be
adequate to cover losses associated with such events, and in any case, such insurance may not cover all
of the types of costs, expenses and losses we could incur to respond to and remediate a security breach.
As a result, we may be required to expend significant additional resources to protect against the threat
of these disruptions and security breaches or to alleviate problems caused by such disruptions or
breaches.
Many governments have enacted laws that require companies and institutions to notify individuals
of data breach incidents, usually in writing. Under the terms of our contracts with our university clients,
we would be responsible for the costs of investigating and disclosing data breaches to the university
clients’ students. In addition to costs associated with investigating and fully disclosing a data breach, we
could be subject to substantial monetary fines or private claims by affected parties and our reputation
would likely be harmed.
We have grown rapidly and expect to continue to invest in our growth for the foreseeable future. If we fail to
manage this growth effectively, the success of our business model will be compromised.
We have experienced rapid growth in a relatively short period of time, which has placed, and will
continue to place, a significant strain on our administrative and operational infrastructure, facilities and
other resources. Our ability to manage our operations and growth will require us to continue to expand
our marketing and sales personnel, technology team, finance and administration teams, as well as our
facilities and infrastructure. We will also be required to refine our operational, financial and
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management controls and reporting systems and procedures. If we fail to manage this expansion of our
business efficiently, our costs and expenses may increase more than we plan and we may not
successfully expand our university client base, enhance our platform, develop new offerings with new
and existing university clients, attract a sufficient number of qualified students in a cost-effective
manner, satisfy the requirements of our existing university clients, respond to competitive challenges or
otherwise execute our business plan. Accordingly, our historical revenue growth rate may not continue
in the future.
Our ability to manage any significant growth of our business effectively will depend on a number
of factors, including our ability to:
• effectively recruit, integrate, train and motivate a large number of new employees, including our
marketing and technology teams, while retaining existing employees;
• maintain the beneficial aspects of our corporate culture and effectively execute our business
plan;
• continue to improve our operational, financial and management controls;
• protect and further develop our strategic assets, including our intellectual property rights; and
• make sound business decisions in light of the scrutiny associated with operating as a public
company.
These activities will require significant capital expenditures and allocation of valuable management
and employee resources, and our growth will continue to place significant demands on our management
and our operational and financial infrastructure.
We may not be able to effectively manage any future growth in an efficient, cost-effective or timely
manner, or at all. In particular, any failure to implement systems enhancements and improvements
successfully will likely negatively impact our ability to manage our expected growth, ensure
uninterrupted operation of key business systems and comply with the rules and regulations that are
applicable to public reporting companies. Moreover, if we do not manage the growth of our business
and operations effectively, the quality of our platform could suffer, which could negatively affect our
reputation, results of operations and overall business.
We may expand by acquiring or investing in other companies or technologies, which may divert our
management’s attention, result in dilution to our shareholders and consume resources that are necessary to
sustain our business.
We have in the past and may in the future acquire complementary products, services, technologies
or businesses. Negotiating these transactions can be time-consuming, difficult and expensive, and our
ability to complete these transactions may often be subject to conditions or approvals that are beyond
our control. In addition, we have limited experience in acquiring other companies or technologies. We
may not be able to identify desirable additional acquisition targets, may incorrectly estimate the value
of an acquisition target or may not be successful in entering into an agreement with any particular
target. Consequently, these transactions, even if undertaken and announced, may not close.
An acquisition, investment, or new business relationship may result in unforeseen operating
difficulties and expenditures. It is also possible that the integration process could result in material
challenges, including, without limitation:
• the diversion of management’s attention from ongoing business concerns and performance as a
result of the devotion of management’s attention to acquisition or integration activities;
• managing a larger combined company;
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• maintaining employee morale and retaining key management and other employees;
• the possibility of faulty assumptions underlying expectations regarding the integration process;
• retaining existing business and operational relationships and attracting new business and
operational relationships;
• consolidating corporate and administrative infrastructures and eliminating duplicative operations
and inconsistencies in standards, controls, procedures and policies;
• coordinating geographically separate organizations;
• unanticipated issues in integrating information technology, communications and other systems;
• undetected errors or unauthorized use of a third party’s code in the products of the acquired
companies or in technology acquired;
• entry into highly competitive markets in which we have no or limited direct prior experience and
where competitors have stronger market positions; and
• exposure to unknown liabilities, including claims and disputes by third parties against the
companies we acquire.
Many of these factors will be outside of the combined company’s control and any one of them
could result in delays, increased costs, decreased revenues and diversion of management’s time and
energy, which could materially affect our financial position, results of operations and cash flows.
If we experience difficulties with the integration process following an acquisition, the anticipated
benefits of the acquisition may not be realized fully or at all, or may take longer to realize than
expected. Moreover, the anticipated benefits of any acquisition, investment, or business relationship
may not be realized.
In addition, in connection with an acquisition, investment or new business relationship we may:
• issue additional equity securities that would dilute current shareholders;
• use cash that we may need in the future to operate our business;
• incur debt on terms unfavorable to us or that we are unable to repay or that may place
burdensome restrictions on our operations;
• incur large charges or substantial liabilities; or
• become subject to adverse tax consequences.
Any of these outcomes could harm our business and operating results.
We face competition from established and emerging companies, which could divert university clients or
students to our competitors, result in pricing pressure and significantly reduce our revenue.
We expect existing competitors and new entrants to the online learning market to revise and
improve their business models constantly in response to challenges from competing businesses,
including ours. If these or other market participants introduce new or improved delivery of online
education and technology-enabled services that we cannot match or exceed in a timely or cost-effective
manner, our ability to grow our revenue and achieve profitability could be compromised.
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Some of our competitors and potential competitors have significantly greater resources than we do.
Increased competition may result in pricing pressure for us in terms of the percentage of tuition and
fees we are able to negotiate to receive. The competitive landscape may also result in longer and more
complex sales cycles with a prospective university client or a decrease in our market share among
selective nonprofit colleges and universities seeking to offer online graduate programs or short courses,
any of which could negatively affect our revenue and future operating results and our ability to grow
our business.
A number of competitive factors could cause us to lose potential university client and student
opportunities or force us to offer our platform on less favorable economic terms, including:
• competitors may develop service offerings that our potential university clients or students find to
be more compelling than ours;
• competitors may adopt more aggressive pricing policies and offer more attractive sales terms,
adapt more quickly to new technologies and changes in university client and student
requirements, and devote greater resources to the acquisition of qualified students than we can;
• current and potential competitors may establish cooperative relationships among themselves or
with third parties to enhance their products and expand their markets, and our industry is likely
to see an increasing number of new entrants and increased consolidation. Accordingly, new
competitors or alliances among competitors may emerge and rapidly acquire significant market
share; and
• colleges and universities may choose to continue using or to develop their own online learning
solutions in-house, rather than pay for our platform.
We may not be able to compete successfully against current and future competitors. In addition,
competition may intensify as our competitors raise additional capital and as established companies in
other market segments or geographic markets expand into our market segments or geographic markets.
If we cannot compete successfully against our competitors, our ability to grow our business and achieve
profitability could be impaired.
If for-profit postsecondary institutions, which offer online education alternatives different from ours, perform
poorly, it could tarnish the reputation of online education as a whole, which could impair our ability to grow
our business.
For-profit postsecondary institutions, many of which provide course offerings predominantly online,
are under intense regulatory and other scrutiny, which has led to media attention that has sometimes
portrayed that sector in an unflattering light. Some for-profit online school operators have been subject
to governmental investigations alleging the misuse of public funds, financial irregularities, and failure to
achieve positive outcomes for students, including the inability to obtain employment in their fields.
These allegations have attracted significant adverse media coverage and have prompted legislative
hearings and regulatory responses. These investigations have focused on specific companies and
individuals, and even entire industries in the case of recruiting practices by for-profit higher education
companies. Even though we do not market our platform to these institutions, this negative media
attention may nevertheless add to skepticism about online higher education generally, including our
platform.
The precise impact of these negative public perceptions on our current and future business is
difficult to discern. If these few situations, or any additional misconduct, cause all online learning
programs to be viewed by the public or policymakers unfavorably, we may find it difficult to enter into
or renew contracts with selective colleges and universities or attract additional students for our
offerings. In addition, this perception could serve as the impetus for more restrictive legislation, which
could limit our future business opportunities. Moreover, allegations of abuse of federal financial aid
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funds and other statutory violations against for-profit higher education companies could negatively
impact our opportunity to succeed due to increased regulation and decreased demand. Any of these
factors could negatively impact our ability to increase our university client base and grow our offerings,
which would make it difficult to continue to grow our business.
If we are unable to successfully implement our new global enterprise resource planning system, it could disrupt
our business or have a material adverse effect on our results of operations, cash flows and financial condition.
We are in the process of implementing of a new global enterprise resource planning, or ERP,
system. The ERP system is designed to accurately maintain our books and records and provide
information on our operations to management. Our ERP system implementation will continue to
require significant investment of human and financial resources. There are inherent risks associated
with upgrading or changing systems, including inaccurate data or reporting. The process of upgrading
and standardizing our ERP system is complex, time-consuming and expensive. We may experience data
loss, disruptions, delays or negative business impacts from the upgrades. Any operational disruptions
during the course of this process and any delays or deficiencies in the design and implementation of
the new ERP system or in the performance of our legacy systems could materially and adversely affect
our ability to operate our businesses. Additionally, changes in scope, timeline or cost of implementing
the ERP system could have a material adverse effect on our results of operations, cash flows and
financial condition.
If we do not retain our senior management team and key employees, we may not be able to sustain our
growth or achieve our business objectives.
Our future success is substantially dependent on the continued service of our senior management
team. Because of our small number of university clients and the significant nature of each new
university client relationship, our senior management team is heavily involved in the university client
identification and sales process, and their expertise is critical in navigating the complex approval
processes of large nonprofit colleges and universities. We do not maintain key-person insurance on any
of our employees, including our senior management team. The loss of the services of any individual on
our senior management team, or failure to find a suitable successor, could make it more difficult to
successfully operate our business and achieve our business goals.
Our future success also depends heavily on the retention of our marketing and sales, technology
and content development and support teams to continue to attract and retain qualified students in our
university clients’ programs and courses, thereby generating revenue for us. In particular, our highly-
skilled technology and content development employees provide the technical expertise underlying our
bundled technology-enabled services that support our university clients’ programs and courses and the
students enrolled in these offerings. Competition for these employees is intense. As a result, we may be
unable to attract or retain these key personnel that are critical to our success, resulting in harm to our
relationships with university clients, loss of expertise or know-how and unanticipated recruitment and
training costs.
In addition, as a result of business acquisitions, including the GetSmarter acquisition, current and
prospective employees of 2U and any acquired company may experience uncertainty about their future
roles following the acquisition. If our employees or the employees of any acquired company depart
because of issues relating to uncertainty or perceived difficulties of integration, our ability to realize the
anticipated benefits of an acquisition could be adversely impacted.
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Our international operations expose us to fluctuations in currency exchange rates that could negatively impact
our financial results and cash flows.
After the GetSmarter acquisition, we conduct a more substantial portion of our business outside
the U.S. and we accordingly make certain business and resource decisions considering assumptions
about foreign currency. As a result, we face exposure to adverse movements in foreign currency
exchange rates, in particular with respect to the volatility of the South African rand, or ZAR. While
our reporting currency is in U.S. dollars, a portion of our consolidated revenues and expenses are
denominated in ZAR, certain of our assets are denominated in ZAR and we have a significant
employee base in South Africa. A decrease in the value of the U.S. dollar in relation to the ZAR could
increase our cost of doing business in South Africa. Alternatively, if the ZAR depreciates against the
U.S. dollar, the value of our ZAR revenues, earnings and assets as expressed in our U.S. dollar
financial statements will decline. We have not entered into any hedging transactions in an effort to
reduce our exposure to foreign exchange risk. Our exposure to adverse movements in foreign currency
exchange rates, including the ZAR, could have a material adverse impact on our financial results and
cash flows.
The fluctuations of currencies in which we conduct business can both increase and decrease our
overall revenue and expenses for any given fiscal period. Such volatility, even when it increases our
revenues or decreases our expenses, impacts our ability to accurately predict our future results and
earnings.
We have incurred substantial transaction and integration expenses related to the acquisition of GetSmarter
and expect to incur additional integration expenses that could negatively impact our financial results and cash
flows.
We have incurred, and expect to continue to incur, a number of non-recurring costs associated
with the GetSmarter acquisition and combining the operations of the two companies. For example, we
expect to incur costs related to formulating and implementing integration plans, including facilities and
systems consolidation costs and employment-related costs. We continue to assess the magnitude of
these costs, and additional unanticipated costs may be incurred in the integration of the two companies’
businesses. Any expected efficiencies to offset these costs may not be achieved in the near term, or at
all.
We may need additional capital in the future to pursue our business objectives. Additional capital may not be
available on favorable terms, or at all, which could compromise our ability to grow our business.
We may need to raise additional funds to respond to business challenges or opportunities,
accelerate our growth, develop new offerings or enhance our platform. If we seek to raise additional
capital, it may not be available on favorable terms or may not be available at all. In addition, if we
have borrowings outstanding under our credit facility, we may be restricted from using the net proceeds
of financing transactions for our operating objectives. Lack of sufficient capital resources could
significantly limit our ability to manage our business and to take advantage of business and strategic
opportunities. Any additional capital raised through the sale of equity or debt securities with an equity
component would dilute our stock ownership. If adequate additional funds are not available if and
when needed, we may be required to delay, reduce the scope of, or eliminate material parts of our
business strategy.
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We maintain offices outside of the United States, have international residents that apply to and enroll in our
offerings and plan to expand our international business, which exposes us to risks inherent in international
operations.
We have a branch office in Hong Kong for marketing and student support. In addition, we
currently employ approximately 332 people in South Africa and 2 people in the United Kingdom as a
result of the acquisition of GetSmarter, which significantly increased our international operations,
including the number of international applicants and students in our offerings. One element of our
growth strategy is to continue expanding our international operations and to establish a worldwide
client base. Our current international operations and future initiatives will involve a variety of risks that
could constrain our operations and compromise our growth prospects, including:
• the need to localize and adapt online offerings for specific countries, including translation into
foreign languages and ensuring that these offerings enable our university clients to comply with
local education laws and regulations;
• the burden of complying with a wide variety of laws, including those relating to labor and
employment matters, data protection and privacy;
• difficulties in staffing and managing foreign operations, including different pricing environments,
longer sales cycles, longer accounts receivable payment cycles and collections issues;
• lack of familiarity with and unexpected changes in foreign regulatory requirements;
• challenges inherent in efficiently managing an increased number of employees over large
geographic distances, including the need to implement appropriate systems, policies, benefits and
compliance programs;
• new and different sources of competition, and practices which may favor local competitors;
• weaker protection for intellectual property and other legal rights than in the United States and
practical difficulties in enforcing intellectual property and other rights outside of the United
States;
• compliance challenges related to the complexity of multiple, conflicting and changing
governmental laws and regulations, including employment, tax, privacy and data protection, and
anti-bribery laws and regulations such as the U.S. Foreign Corrupt Practices Act and the U.K.
Bribery Act;
• increased financial accounting and reporting burdens and complexities;
• restrictions on the transfer of funds;
• adverse tax consequences, including the potential for required withholding taxes for our overseas
employees;
• terrorist attacks, acts of violence or war and adverse environmental conditions;
• unstable regional and economic political conditions; and
• fluctuations in currency exchange rates or restrictions on foreign currency.
Our expansion efforts may not be successful. Our experience with attracting university clients and
students in the U.S. may not be relevant to our ability to attract clients and students in other markets.
If we invest substantial time and resources to expand our international operations and are unable to
attract university clients and students successfully and in a timely manner, our business and operating
results will be harmed.
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Our operations in South Africa expose us to risks that could have an adverse effect on our business.
We expect to continue adding personnel in South Africa. We may incur costs complying with labor
laws, rules and regulations in South Africa, including laws that regulate work time, provide for
mandatory compensation in the event of termination of employment for operational reasons, and
impose monetary penalties for non-compliance with administrative and reporting requirements in
respect of affirmative action policies. Our reliance on a workforce in South Africa also exposes us to
disruptions in the business, political, and economic environment in that region, as well as natural
disasters and other environmental conditions. Maintenance of a stable political environment is
important to our operations in South Africa, and terrorist attacks and acts of violence or war may
directly affect our physical facilities and workforce or contribute to general instability. Our operations
in South Africa require us to comply with complex local laws and regulatory requirements and expose
us to foreign currency exchange rate risk. The economy of South Africa in the past has been, and in
the future may continue to be, characterized by rates of inflation and interest rates that are
substantially higher than those prevailing in the United States, which could increase our South-African
based costs and decrease our operating margins. Our operations in South Africa may also subject us to
trade restrictions, exchange control limitations, reduced or inadequate protection for intellectual
property rights, security breaches, and other factors that may adversely affect our business. Negative
developments in any of these areas could increase our costs of operations or otherwise harm our
business.
We might not be able to utilize a portion of our net operating loss carryforwards, which could adversely affect
our profitability.
As of December 31, 2017, we had federal net operating loss carryforwards due to prior period
losses, which, if not utilized, will begin to expire in 2029. Our gross state net operating loss
carryforwards are equal to or less than the federal net operating loss carryforwards and expire over
various periods based on individual state tax laws. These net operating loss carryforwards could expire
unused and be unavailable to offset future income tax liabilities, which could adversely affect our
profitability. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, if a
corporation undergoes an ‘‘ownership change,’’ which is generally defined as a greater than 50%
change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its
pre-change net operating loss carryforwards and other pre-change tax attributes to offset its
post-change income may be limited. Similar rules may apply under state tax laws. During the three-year
period ended December 31, 2016, we determined that such an ownership change occurred. Absent a
subsequent ownership change, however, all of our historical net operating losses should be available.
Therefore, the occurrence of the ownership change during the three-year period ended December 31,
2016 is not expected to limit our ability to carry forward historical net operating losses before
expiration. We may experience ownership changes in the future as a result of subsequent shifts in our
stock ownership. If a future ownership change occurs and limits our ability to use our historical net
operating loss carryforwards, it would harm our future financial statement results by increasing our
future tax obligations. We also have net operating loss carryforwards in South Africa and the United
Kingdom, and there is no guarantee that entities in these countries will generate enough taxable
income to fully utilize them.
We engage some individuals classified as independent contractors, not employees, and if federal or state law
mandates that they be classified as employees, our business would be adversely impacted.
We engage independent contractors and are subject to the Internal Revenue Service regulations
and applicable state law guidelines regarding independent contractor classification. These regulations
and guidelines are subject to judicial and agency interpretation, and it could be determined that the
independent contractor classification is inapplicable. Further, if legal standards for classification of
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independent contractors change, it may be necessary to modify our compensation structure for these
personnel, including by paying additional compensation or reimbursing expenses. In addition, if our
independent contractors are determined to have been misclassified as independent contractors, we
would incur additional exposure under federal and state law, workers’ compensation, unemployment
benefits, labor, employment and tort laws, including for prior periods, as well as potential liability for
employee benefits and tax withholdings. Any of these outcomes could result in substantial costs to us,
could significantly impair our financial condition and our ability to conduct our business as we choose,
and could damage our reputation and our ability to attract and retain other personnel.
We rely on third-party software to provide certain components of our platform, which may be difficult to
obtain or which could cause errors or failures of our platform.
We rely on software licensed from third parties to offer certain components of our technology and
services. In addition, we may need to obtain future licenses from third-parties to use intellectual
property necessary for the continued use of our technology and services, which might not be available
to us on acceptable terms, or at all. Any loss of the right to use a component of our technology or
services could result in errors or failures of our platform until equivalent technology is either developed
by us, or, if available, is identified, obtained and integrated, which could harm our business. Any errors
or defects in third-party software could result in errors or a failure of our platform, which could harm
our business.
Risks Related to Regulation of Our Business and That of Our University Clients
Our business model relies on university client institutions complying with federal and state laws and
regulations.
Higher education is heavily regulated. All of our university clients in the United States and certain
university clients outside of the United States participate in Title IV federal student financial assistance
programs under the HEA of 1965, as amended, or HEA, and are subject to extensive regulation by the
DOE, as well as various state agencies, licensing boards and accrediting commissions. To participate in
the Title IV programs, an institution must receive and maintain authorization by the appropriate state
education agencies, be accredited by an accrediting commission recognized by the DOE, and be
certified by the DOE as an eligible institution. If a university client participating in Title IV was found
to be in non-compliance with any of these laws, regulations, standards or policies, the university client
could lose some or all access to Title IV program funds, lose the ability to offer certain programs or
lose their ability to operate in certain states, any of which could cause our revenue from that university
client’s program to decline.
The regulations, standards and policies applicable to our university clients change frequently and
are often subject to interpretation. Changes in, or new interpretations of, applicable laws, regulations or
standards could compromise our university clients’ accreditation, authorization to operate in various
states, permissible activities or use of federal funds under Title IV programs. We cannot predict with
certainty how the requirements applied by our university clients’ regulators will be interpreted, or
whether our university clients will be able to comply with these requirements in the future.
Our activities are subject to federal and state laws and regulations and other requirements.
Although we are not an institution of higher education, we are required to comply with certain
education laws and regulations as a result of our role as a service provider to higher education
institutions, either directly or indirectly through our contractual arrangements with university clients.
Failure to comply with these laws and regulations could result in breach of contract and indemnification
claims and could cause damage to our reputation and impair our ability to grow our business and
achieve profitability.
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Activities of the U.S. Congress could result in adverse legislation or regulatory action.
The process of re-authorization of the HEA began in 2014 and is ongoing. Congressional hearings
began in 2013 and will continue to be scheduled by the U.S. Senate Committee on Health, Education,
Labor and Pensions, the U.S. House of Representatives Committee on Education and the Workforce
and other Congressional committees regarding various aspects of the education industry, including
accreditation matters, student debt, student recruiting, cost of tuition, distance learning, competency-
based learning, student success and outcomes and other matters.
The increased scrutiny and results-based accountability initiatives in the education sector, as well as
ongoing policy differences in Congress regarding spending levels, could lead to significant changes in
connection with the reauthorization of the HEA or otherwise. These changes may place additional
regulatory burdens on postsecondary schools generally, and specific initiatives may be targeted at or
have an impact upon companies like us that serve higher education. The adoption of any laws or
regulations that limit our ability to provide our bundled services to our university clients could
compromise our ability to drive revenue through their programs or make our platform less attractive to
them. Congress could also enact laws or regulations that require us to modify our practices in ways that
could increase our costs.
In addition, regulatory activities and initiatives of the DOE may have similar consequences for our
business even in the absence of Congressional action.
Our business model, which depends on our ability to receive a share of tuition revenue as payment from our
university clients, has been validated by a DOE ‘‘dear colleague’’ letter, but such validation is not codified by
statute or regulation and may be subject to change.
Each institution that participates in Title IV programs agrees it will not ‘‘provide any commission,
bonus, or other incentive payment based in any part, directly or indirectly, upon success in securing
enrollments or the award of financial aid, to any person or entity who is engaged in any student
recruitment or admission activity, or in making decisions regarding the award of Title IV, HEA
program funds.’’ All of our university clients participate in Title IV Programs.
Although this rule, referred to as the incentive compensation rule, generally prohibits entities or
individuals from receiving incentive-based compensation payments for the successful recruitment,
admission or enrollment of students, the DOE provided guidance in 2011 permitting tuition revenue-
sharing arrangements known as the ‘‘bundled services rule.’’ Our current business model relies heavily
on the bundled services rule to enter into tuition revenue-sharing agreements with our university
clients.
Because the bundled services rule was promulgated in the form of agency guidance issued by the
DOE in the form of a ‘‘dear colleague’’ letter, or DCL, and is not codified by statute or regulation,
there is risk that the rule could be altered or removed without prior notice, public comment period or
other administrative procedural requirements that accompany formal agency rulemaking. Although the
DCL represents the current policy of the DOE, the bundled services rule could be reviewed, altered or
vacated in the future. In addition, the legal weight the DCL would carry in litigation over the propriety
of any specific compensation arrangements under the HEA or the incentive compensation rule is
uncertain. We can offer no assurances as to how the DCL would be interpreted by a court. The
revision, removal or invalidation of the bundled services rule by Congress, the DOE or a court, whether
in an action involving our company or our university clients, or in action that does not involve us, could
require us to change our business model and renegotiate the terms of our university client contracts
and could compromise our ability to generate revenue.
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If we or our subcontractors or agents violate the incentive compensation rule, we could be liable to our
university clients for substantial fines, sanctions or other liabilities.
Even though the DCL clarifies that tuition revenue-sharing arrangements with our university
clients are permissible, we are still subject to other provisions of the incentive compensation rule that
prohibit us from offering to our employees who are involved with or responsible for recruiting or
admissions activities any bonus or incentive-based compensation based on the successful identification,
admission or enrollment of students into any institution. If we or our subcontractors or agents violate
the incentive compensation rule, we could be liable to our university clients for substantial fines,
sanctions or other liabilities, including liabilities related to ‘‘whistleblower’’ claims under the federal
False Claims Act. Any such claims, even if without merit, could require us to incur significant costs to
defend the claim, distract management’s attention and damage our reputation.
If we or our subcontractors or agents violate the misrepresentation rule, or similar federal and state regulatory
requirements, we could face fines, sanctions and other liabilities.
We are required to comply with other regulations promulgated by the DOE that affect our student
acquisition activities, including the misrepresentation rule. The misrepresentation rule is broad in scope
and applies to statements our employees, subcontractors or agents may make about the nature of a
university client’s program, a university client’s financial charges or the employability of a university
client’s program graduates. A violation of this rule, FTC rules or other federal or state regulations
applicable to our marketing activities by an employee, subcontractor or agent performing services for
university clients could hurt our reputation, result in the termination of university client contracts,
require us to pay fines or other monetary penalties or require us to pay the costs associated with
indemnifying a university client from private claims or government investigations.
If our university clients participating in Title IV programs fail to maintain their state authorizations, or we or
our university clients participating in Title IV programs violate other state laws and regulations, students in
their offerings could be adversely affected and we could lose our ability to operate in that state and provide
services to these university clients.
Our university clients participating in Title IV programs must be authorized in certain states to
offer online educational offerings, engage in recruiting and operate externships, internships, clinical
training or other forms of field experience, depending on state law. The loss of or failure to obtain
state authorization would, among other things, limit the ability of a university client participating in
Title IV programs to enroll students in that state, render the university client and its students ineligible
to participate in Title IV programs in that state, diminish the attractiveness of the university client’s
offering and ultimately compromise our ability to generate revenue and become profitable.
In addition, if we or any of our university clients participating in Title IV programs fail to comply
with any state agency’s rules, regulations or standards beyond authorizations, the state agency or state
attorney general could limit the ability of the university client to offer educational offerings in that state
or limit our ability to perform our contractual obligations to our university client in that state.
If our U.S.-based university clients fail to maintain institutional or programmatic accreditation for their
offerings, our revenue could be materially affected.
The loss or suspension of a U.S.-based university client’s accreditation or other adverse action by
the university client’s institutional or programmatic accreditor would render the institution or its
offerings ineligible to participate in Title IV programs, could prevent the university client from offering
certain educational offerings and, for degree-granting programs, could make it impossible for the
graduates of the university client’s program to practice the profession for which they trained. If any of
these results occurs, it could hurt our ability to generate revenue from that offering.
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Our future growth could be impaired if our university clients fail to obtain timely approval from applicable
regulatory agencies to offer new programs, make substantive changes to existing programs or expand their
programs into or within certain states.
Our U.S.-based university clients are required to obtain the appropriate approvals from the DOE
and applicable state and accrediting regulatory agencies for new programs or locations, which may be
conditioned, delayed or denied in a manner that could impair our strategic plans and future growth.
Education regulatory agencies are generally experiencing significant increases in the volume of requests
for approvals as a result of new distance learning programs and adjustments to the significant volume
of new regulations over the last several years. Regulatory capacity constraints have resulted in delays to
various approvals our U.S.-based university clients are requesting, and such delays could in turn delay
the timing of our ability to generate revenue from our university clients’ programs.
If more state agencies require specialized approval of our university clients’ offerings, our operating costs
could rise significantly, approval times could lag or we could be prohibited from operating in certain states.
In addition to state licensing agencies, our U.S.-based university clients may be required to obtain
approval from professional licensing boards in certain states to offer specialized programs in specific
fields of study. Currently, relatively few states require institutions to obtain professional board approval
for their online educational offerings. However, more states could pass laws requiring our U.S.-based
university clients’ offerings, such as graduate programs in teaching or nursing, to obtain approval from
state professional boards. If a significant number of states pass additional laws requiring schools to
obtain professional board approval, the cost of obtaining all necessary state approvals could
dramatically increase, which could make our platform less attractive to U.S.-based university clients,
and these university clients could be barred from operating in some states entirely.
Evolving regulations and legal obligations related to data privacy, data protection and information security
and our actual or perceived failure to comply with such obligations, could have an adverse effect on our
business.
The legislative and regulatory framework for privacy and security issues worldwide is rapidly
evolving and is likely to remain uncertain for the foreseeable future. In providing our platform to
university clients and in operating our business, we collect and process regulated personal information
from students, faculty, prospective students and employees, such as names, identification numbers and
birth dates. Our handling of this personal information is subject to a variety of laws and regulations,
which have been adopted by federal, state and foreign governments to regulate the collection,
distribution, use and storage of personal information of individuals. Any failure or perceived failure by
us to comply with these privacy laws and regulations or any security incident that results in the
unauthorized release or transfer of this personal information in our possession, could result in
government enforcement actions, litigation, fines and penalties or adverse publicity, all of which could
have an adverse effect on our reputation and business.
Various federal, state and foreign legislative, regulatory or other governmental bodies may enact
new or additional laws or regulations, or issue rulings that invalidate prior laws or regulations
concerning privacy, data storage and data protection that could materially adversely impact our
business. For example, in April 2016, the European Parliament and the Council of the European Union
formally adopted a comprehensive general data protection regulation (GDPR), which will take effect in
May 2018. The GDPR introduces new data protection requirements in the EU and substantial fines for
breaches. We are also subject to evolving EU laws on data transfer, as we may transfer personal data
from the European Economic Area to other jurisdictions. There is currently litigation challenging
various EU mechanisms for adequate data transfers and it is uncertain whether various mechanisms,
such as the ‘‘Privacy Shield’’ or ‘‘model contractual clauses’’ will be invalidated by the European courts.
Complying with these and other changing requirements could cause us to incur substantial costs, or
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require us to change our business practices, any of which could materially adversely affect our business
and operating results.
We are required to comply with The Family Educational Rights and Privacy Act, or FERPA, and failure to do
so could harm our reputation and negatively affect our business.
FERPA generally prohibits an institution of higher education participating in Title IV programs
from disclosing personally identifiable information from a student’s education records without the
student’s consent. Our university clients and their students disclose to us certain information that
originates from or comprises a student education record under FERPA. As an entity that provides
services to institutions participating in Title IV programs, we are indirectly subject to FERPA, and we
may not transfer or otherwise disclose any personally identifiable information from a student record to
another party other than in a manner permitted under the statute. If we violate FERPA, it could result
in a material breach of contract with one or more of our university clients and could harm our
reputation. Further, in the event that we disclose student information in violation of FERPA, the DOE
could require a university client to suspend our access to their student information for at least five
years.
In our Short Course Segment, we are subject to risks and compliance rules and regulations related to the
third party credit card payment processing platform integrated within our websites or otherwise used by our
business.
Students typically use a credit or debit card to pay application and enrollment fees and to make
tuition payments for our short courses. We are subject to payment card association operating rules,
certification requirements and rules governing electronic funds transfers, which could change or be
reinterpreted to make it difficult or impossible for us to comply. We believe that we and the payment
processing service providers we use are compliant in all material respects with the Payment Card
Industry Data Security Standard. However, there is no guarantee that such compliance will be
maintained or that compliance will prevent illegal or improper use of our systems that are integrated
with our payment processing providers. If we or any of the third party payment processors we use fails
to be in compliance with applicable credit card rules and regulations, we may be required to migrate to
an alternate payment processor which could result in transaction downtime during the migration and/or
a loss of students and have a material adverse effect on our business, financial condition and results of
operations.
Risks Related to Intellectual Property
We operate in an industry with extensive intellectual property litigation. Claims of infringement against us
may hurt our business.
Our success depends, in part, upon our ability to avoid infringing intellectual property rights owned
by others and being able to resolve claims of intellectual property infringement without major financial
expenditures or adverse consequences. The technology and software fields generally are characterized
by extensive intellectual property litigation and many companies that own, or claim to own, intellectual
property have aggressively asserted their rights. From time to time, we may be subject to legal
proceedings and claims relating to the intellectual property rights of others, and we expect that third
parties will assert intellectual property claims against us, particularly as we expand the complexity and
scope of our business. In addition, our university client agreements require us to indemnify our
university clients against claims that our platform infringe the intellectual property rights of third
parties.
Future litigation may be necessary to defend ourselves or our university clients from intellectual
property infringement claims or to establish our proprietary rights. Some of our competitors have
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substantially greater resources than we do and would be able to sustain the costs of complex
intellectual property litigation to a greater degree and for longer periods of time than we could. In
addition, patent holding companies that focus solely on extracting royalties and settlements by enforcing
patent rights may target us. Regardless of whether claims that we are infringing patents or other
intellectual property rights have any merit, these claims are time-consuming and costly to evaluate and
defend and could:
• hurt our reputation;
• adversely affect our relationships with our current or future university clients;
• cause delays or stoppages in providing our platform;
• divert management’s attention and resources;
• require technology changes to our software that could cause us to incur substantial cost;
• subject us to significant liabilities; and
• require us to cease some or all of our activities.
In addition to liability for monetary damages against us, which may include attorneys’ fees, treble
damages in the event of a finding of willful infringement, or, in some circumstances, damages against
our university clients, we may be prohibited from developing, commercializing or continuing to provide
some or all of our bundled technology-enabled platform unless we obtain licenses from, and pay
royalties to, the holders of the patents or other intellectual property rights, which may not be available
on commercially favorable terms, or at all.
We may incur liability, or our reputation may be harmed, as a result of the activities of our university clients
and students or the content in our online learning environments.
We may be subject to potential liability for the activities of our university clients or students in
connection with the data they post or store in our online learning platform. For example, university
personnel or students, or our employees or independent contractors, may post to our online learning
platform various articles or other third-party content for use in class discussions or within asynchronous
lessons.
Various U.S. federal statutes may apply to us with respect to these activities. The Copyright Act of
1976 provides recourse to copyright owners who believe that their rights under U.S. copyright law have
been infringed on the internet. Those rights can be limited by operation of the Digital Millennium
Copyright Act of 1998, or DMCA, such that we may not be liable for infringing content posted by
university clients or students, provided that we follow the procedures for handling copyright
infringement claims set forth in the DMCA.
Although statutes and case law in the U.S. have generally shielded us from liability for these
activities to date, court rulings in pending or future litigation may narrow the scope of protection
afforded us under these laws. In addition, laws governing these activities are unsettled in many
international jurisdictions. As a result, we could incur liability to third parties for the unauthorized
duplication, distribution or other use of third party content. Any such claims could subject us to costly
litigation and impose a significant strain on our financial resources and management personnel
regardless of whether the claims have merit. Our various liability insurance coverages may not cover
potential claims of this type adequately or at all, and we may be required to alter or cease our uses of
such material, which may include changing or removing content from courses or altering the
functionality of our online learning platform, or to pay monetary damages.
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Additionally, university personnel or students, or our employees or independent contractors could
use our online learning platform to store or process regulated personal information without our
knowledge. In the event that our systems experience a data security incident, or an individual or entity
accesses information without, or in excess of, proper authorization, we could be subject to data security
incident notification laws, as described elsewhere, which may require prompt remediation and
notification to individuals. If we are unaware of the data and information stored on our systems, we
may be unable to appropriately comply with all legal obligations, and we may be exposed to
governmental enforcement or prosecution actions, private litigation, fines and penalties or adverse
publicity and these incidents could harm our reputation and business.
Our failure to protect our intellectual property rights could diminish the value of our platform, weaken our
competitive position and reduce our revenue.
We regard the protection of our intellectual property, which includes trade secrets, copyrights,
trademarks and domain names, as critical to our success. We protect our proprietary information from
unauthorized use and disclosure by entering into confidentiality agreements with any party who may
come in contact with such information. We also seek to ensure that we own intellectual property
created for us by signing agreements with employees, independent contractors, consultants, companies
and any other third party who may create intellectual property for us that assign their copyright and
patent rights to us. However, these arrangements and the other steps we have taken to protect our
intellectual property may not prevent the misappropriation of our proprietary information or deter
independent development of similar technologies by others.
We pursue the registration of our domain names, trademarks and service marks in the United
States and in jurisdictions outside the United States. However, third parties may knowingly or
unknowingly infringe on our trademark or service mark rights, third parties may challenge our
trademark or service mark rights, and pending or future trademark or service mark applications may
not be approved. In addition, effective trademark protection may not be available in every country in
which we operate or intend to operate. In any or all cases, we may be required to expend significant
time and expense to prevent infringement or enforce our rights.
Monitoring unauthorized use of our intellectual property is difficult and costly. Our efforts to
protect our proprietary rights may not be adequate to prevent misappropriation of our intellectual
property. Further, we may not be able to detect unauthorized use of, or take appropriate steps to
enforce, our intellectual property rights. Our competitors may also independently develop similar
technology. In addition, the laws of many countries may not protect our proprietary rights to as great
an extent as do the laws of the United States. Further, the laws in the United States and elsewhere
change rapidly, and any future changes could adversely affect us and our intellectual property rights.
Our failure to meaningfully protect our intellectual property could result in competitors offering
services that incorporate our most technologically advanced features, which could seriously reduce
demand for our platform. In addition, we may in the future need to initiate litigation such as
infringement or administrative proceedings, to protect our intellectual property rights. Litigation,
whether we are a plaintiff or a defendant, can be expensive, time-consuming and may divert the efforts
of our technical staff and managerial personnel, whether or not such litigation results in a
determination that is unfavorable to us. In addition, litigation is inherently uncertain, and thus we may
not be able to stop our competitors from infringing upon our intellectual property rights.
The use of ‘‘open source’’ software in our platform could negatively affect our ability to offer our platform and
subject us to possible litigation.
A substantial portion of our platform incorporates so-called ‘‘open source’’ software, and we may
incorporate additional open source software in the future. Open source software is generally freely
accessible, usable and modifiable. Certain open source licenses may, in certain circumstances, require
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us to offer our platform that incorporate the open source software for no cost, that we make available
source code for modifications or derivative works we create based upon, incorporating or using the
open source software and that we license such modifications or derivative works under the terms of the
particular open source license. Our efforts to monitor the use of open source software in our platform
to ensure that no open source software is used in such a way as to require us to disclose our source
code when we do not wish to do so, may be unable to prevent such use from occurring. In addition, if
a third party software provider has incorporated certain types of open source software into software we
license from such third party without our knowledge, we could, under certain circumstances, be
required to comply with the foregoing conditions. If an author or other third party that distributes open
source software we use were to allege that we had not complied with the conditions of one or more of
these licenses, we could be required to incur significant legal expenses defending against such
allegations and could be subject to significant damages, including being enjoined from offering the
component of our platform that contained the open source software and being required to comply with
the foregoing conditions, which could disrupt our ability to offer certain components of our platform.
We could also be subject to suits by parties claiming ownership of what we believe to be open
source software. The terms of many open source licenses to which we are subject have not been
interpreted by U.S. or foreign courts. Accordingly, there is a risk that those licenses could be construed
in a manner that imposes unanticipated conditions or restrictions on our ability offer our platform.
Litigation could be costly for us to defend, have a negative effect on our operating results and financial
condition and require us to devote additional research and development resources to change our
products.
If internet search engines’ methodologies are modified, our search engine optimization capability in connection
with our student recruiting efforts could be harmed.
Our search engine optimization capability in connection with our student acquisition efforts
substantially depends on various internet search engines, such as Google, to direct a significant amount
of traffic to websites related to our offerings. Our ability to influence the number of visitors directed to
these websites through search engines is not entirely within our control. For example, search engines
frequently revise their algorithms in an attempt to optimize their search result listings. In 2011, Google
announced an algorithm change that affected nearly 12% of their U.S. query results. Future changes
that may be made by Google or any other search engines could impact our ability to effectively utilize
search engine optimization as part of our student acquisition strategies in the long-term. Changes in the
methodologies used by search engines to display results could cause the websites related to our
offerings to receive less favorable placements, which could reduce the number of prospective students
who click to visit these websites from search engines. Any reduction in the number of prospective
students directed to our websites could negatively affect our ability to generate prospective students,
and ultimately revenue, through our student acquisition activities.
Individuals that appear in content hosted on our online learning platform may claim violation of their rights.
Faculty and students that appear in video segments hosted on our online learning platform may
claim that proper assignments, licenses, consents and releases were not obtained for use of their
likenesses, images or other contributed content. Our contracts typically require that our university
clients ensure that proper assignments, licenses, consents and releases are obtained for their course
material, but we cannot know with certainty that they have obtained all necessary rights. Moreover, the
laws governing rights of publicity and privacy, and the laws governing faculty ownership of course
content, are imprecise and adjudicated on a case-by-case basis, such that the enforcement of
agreements to transfer the necessary rights is unclear. As a result, we could incur liability to third
parties for the unauthorized duplication, display, distribution or other use of this material. Any such
claims could subject us to costly litigation and impose a significant strain on our financial resources and
38
management personnel regardless of whether the claims have merit. Our various liability insurance
coverages may not cover potential claims of this type adequately or at all, and we may be required to
alter or cease our use of such material, which may include changing or removing content from courses,
or to pay monetary damages. Moreover, claims by faculty and students could damage our reputation,
regardless of whether such claims have merit.
Risks Related to Ownership of Our Common Stock and Our Status as a Public Company
Our quarterly operating results have fluctuated in the past and may do so in the future, which could cause
our stock price to decline.
Our quarterly operating results have historically fluctuated due to seasonality and changes in our
business, and our future operating results may vary significantly from quarter to quarter due to a
variety of factors, many of which are beyond our control. You should not rely on period-to-period
comparisons of our operating results as an indication of our future performance. Factors that may
cause fluctuations in our quarterly operating results include, but are not limited to, the following:
• the timing of our costs incurred in connection with the launch of new graduate programs and
the delay in receiving revenue from these new programs, which delay may last for several years;
• seasonal variation driven by the semester schedules for our university clients’ graduate programs,
which may vary from year to year;
• changes in the student enrollment and retention levels in our university clients’ offerings;
• changes in our key metrics or the methods used to calculate our key metrics;
• changes in tuition rates;
• the timing and amount of our marketing and sales expenses;
• costs necessary to improve and maintain our platform;
• fluctuations in foreign currency exchange rates;
• costs related to any acquisition and integration of business and technology;
• our ability to effectively integrate businesses and technologies that we acquire;
• changes in the prospects of the economy generally, which could alter current or prospective
university clients’ or students’ spending priorities, or could increase the time it takes us to launch
new offerings.
Our operating results may fall below the expectations of market analysts and investors in some
future periods, which could cause the market price of our common stock to decline substantially.
The trading price of the shares of our common stock may be volatile, and purchasers of our common stock
could incur substantial losses.
Our stock price may be volatile. The stock market in general and the market for technology
companies in particular have experienced extreme volatility that has often been unrelated to the
operating performance of particular companies. As a result of this volatility, investors may not be able
to sell their common stock at or above the price paid for the shares. The market price for our common
stock may be influenced by many factors, including:
• actual or anticipated variations in our operating results;
• changes in financial estimates by us or by any securities analysts who might cover our stock;
• conditions or trends in our industry, the stock market or the economy;
39
• stock market price and volume fluctuations of comparable companies and, in particular, those
that operate in the software and information technology industries;
• announcements by us or our competitors of new product or service offerings, significant
acquisitions, strategic partnerships or divestitures;
• announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against
us;
• capital commitments;
• investors’ general perception of our company and our business;
• recruitment or departure of key personnel; and
• sales of our common stock, including sales by our directors and officers or specific stockholders.
In addition, in the past, stockholders have initiated class action lawsuits against technology
companies following periods of volatility in the market prices of these companies’ stock. Such litigation,
if instituted against us, could cause us to incur substantial costs and divert management’s attention and
resources from our business.
If equity research analysts do not continue to publish research or reports, or publish unfavorable research or
reports, about us, our business or our market, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that
equity research analysts publish about us and our business. Equity research analysts may elect not to
initiate or to continue to provide research coverage of our common stock, and such lack of research
coverage may adversely affect the market price of our common stock. Even if we do have equity
research analyst coverage, we will not have any control over the analysts or the content and opinions
included in their reports. The price of our stock could decline if one or more equity research analysts
downgrade our stock or issue other unfavorable commentary or research. If one or more equity
research analysts ceases coverage of our company or fails to publish reports on us regularly, demand
for our stock could decrease, which in turn could cause our stock price or trading volume to decline.
Provisions in our corporate charter documents and under Delaware law may prevent or frustrate attempts by
our stockholders to change our management and hinder efforts to acquire a controlling interest in us, and the
market price of our common stock may be lower as a result.
Provisions in our amended and restated certificate of incorporation and amended and restated
bylaws may make it difficult for a third party to acquire, or attempt to acquire, control of our company,
even if a change in control is considered favorable by you and other stockholders. For example, our
board of directors has the authority to issue up to 5,000,000 shares of preferred stock. The board of
directors can fix the price, rights, preferences, privileges, and restrictions of the preferred stock without
any further vote or action by our stockholders. An issuance of shares of preferred stock may result in
the loss of voting control to other stockholders, which could delay or prevent a change in control
transaction. As a result, the market price of our common stock and the voting and other rights of our
stockholders may be adversely affected.
Our charter documents also contain other provisions that could have an anti-takeover effect,
including:
• only one of our three classes of directors will be elected each year;
• stockholders are not entitled to remove directors other than by a 662⁄3% vote and only for cause;
• stockholders are not permitted to take actions by written consent;
40
• stockholders are not permitted to call a special meeting of stockholders; and
• stockholders are required to give us advance notice of their intention to nominate directors or
submit proposals for consideration at stockholder meetings.
In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which regulates corporate acquisitions by prohibiting Delaware corporations from
engaging in specified business combinations with particular stockholders of those companies. These
provisions could discourage potential acquisition proposals and could delay or prevent a change in
control transaction. They could also have the effect of discouraging others from making tender offers
for our common stock, including transactions that may be in your best interests. These provisions may
also prevent changes in our management or limit the price that investors are willing to pay for our
stock.
Concentration of ownership of our common stock among our existing executive officers, directors and large
stockholders may prevent smaller stockholders from influencing significant corporate decisions.
Our executive officers, directors and current beneficial owners of 5% or more of our common
stock and their respective affiliates, in the aggregate, beneficially own a substantial percentage of our
outstanding common stock. These persons, acting together, are able to significantly influence all
matters requiring stockholder approval, including the election and removal of directors, any merger,
consolidation, sale of all or substantially all of our assets, or other significant corporate transactions.
The interests of this group of stockholders may not coincide with our interests or the interests of other
stockholders.
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial
statements on a timely basis could be impaired.
We are subject to the reporting requirements of the Securities Exchange Act of 1934, the
Sarbanes-Oxley Act and the rules and regulations of The Nasdaq Global Select Market. The Sarbanes-
Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures
and internal control over financial reporting. We are required to perform system and process evaluation
and testing of our internal control over financial reporting to allow management to report on the
effectiveness of our internal control over financial reporting in our Form 10-K filing for that year, as
required by Section 404 of the Sarbanes-Oxley Act. This may require us to incur substantial additional
professional fees and internal costs to further expand our accounting and finance functions and expend
significant management efforts.
We may in the future discover material weaknesses in our system of internal financial and
accounting controls and procedures that could result in a material misstatement of our financial
statements. In addition, our internal control over financial reporting will not prevent or detect all errors
and all fraud. A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that
misstatements due to errors or fraud will not occur or that all control issues and instances of fraud will
be detected.
If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a
timely manner, or if we are unable to maintain proper and effective internal controls, we may not be
able to produce timely and accurate financial statements. If that were to happen, the market price of
our stock could decline and we could be subject to sanctions or investigations by the stock exchange on
which our common stock is listed, the Securities and Exchange Commission, or SEC, or other
regulatory authorities.
41
Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future,
capital appreciation, if any, will be your sole source of gains and you may never receive a return on your
investment.
You should not rely on an investment in our common stock to provide dividend income. We have
not declared or paid cash dividends on our common stock to date. We currently intend to retain our
future earnings, if any, to fund the development and growth of our business. In addition, the terms of
our existing credit facility preclude, and the terms of any future debt agreements is likely to similarly
preclude, us from paying dividends. As a result, capital appreciation, if any, of our common stock will
be your sole source of gain for the foreseeable future. Investors seeking cash dividends should not
purchase our common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our headquarters are located in Lanham, Maryland, where we occupy approximately 200,000
square feet under a lease that expires in 2028.
In February 2017, we signed a lease for new office space in Brooklyn, New York, which we began
to occupy in December 2017. The lease covers three floors totaling approximately 80,000 square feet
and will expire approximately 12 years after the lease commencement date.
In May 2016, we signed a lease for new office space in Denver, Colorado, which we began to
occupy in October 2016. The lease covers two floors totaling approximately 50,000 square feet and will
expire approximately eight years after the lease commencement date.
Including our headquarters and the Brooklyn and Denver leases, we lease an aggregate of
approximately 436,000 square feet of space, primarily for our Graduate Program Segment, in Maryland,
New York, California, Colorado, North Carolina, Virginia and Hong Kong.
We lease an aggregate of approximately 42,000 square feet of space, primarily for our Short
Course Segment, in South Africa and the United Kingdom.
We believe that our current facilities are suitable and adequate to meet our ongoing needs and
that, if we require additional space, we will be able to obtain additional facilities on commercially
reasonable terms.
Item 3. Legal Proceedings
We are not presently involved in any legal proceeding or other contingency that, if determined
adversely to it, would individually or in the aggregate have a material adverse effect on its business,
operating results, financial condition or cash flows. Accordingly, we do not believe that there is a
reasonable possibility that a material loss exceeding amounts already recognized may have been
incurred as of the date of the balance sheets presented herein.
Item 4. Mine Safety Disclosures
None.
42
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Our common stock has been listed on The Nasdaq Global Select Market since March 28, 2014,
under the symbol ‘‘TWOU.’’ Prior to our initial public offering, there was no public market for our
common stock.
The following table set forth for the indicated periods the high and low sales prices of our
common stock as reported on The Nasdaq Global Select Market.
2017
2016
High
Low
High
Low
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . .
$40.38
48.40
56.12
69.27
$29.23
39.38
44.69
55.23
$27.50
29.87
38.91
38.49
$14.94
21.76
28.78
29.34
As of February 21, 2018, there were 36 registered stockholders of record for our common stock.
The actual number of stockholders is greater than this number of record holders and includes
stockholders who are beneficial owners but whose shares are held in street name by brokers and other
nominees. This number of holders of record also does not include stockholders whose shares may be
held in trust by other entities.
Stock Performance Graph
The graph set forth below compares the cumulative total stockholder return on an initial
investment of $100 in our common stock between March 28, 2014 (the date of our initial public
offering) and December 31, 2017, with the comparative cumulative total return of such amount over
the same period on (i) The Nasdaq Composite Index, (ii) the S&P North American Technology
Software Index and (iii) the Russell 3000 Index. We have not paid any cash dividends and, therefore,
the cumulative total return calculation for us is based solely upon our stock price appreciation or
depreciation and does not include any reinvestment of cash dividends. The graph assumes our closing
sales price on March 28, 2014 of $13.98 per share as the initial value of our common stock. The
comparisons shown in the graph below are based upon historical data, and are not necessarily
indicative of, nor intended to forecast, the potential future stock performance of our common stock.
43
Comparison of Cumulative Total Return
Through December 31, 2017
Assumes Initial Investment of $100
$500
$450
$400
$350
$300
$250
$200
$150
$100
$50
$-
3/28/2014
12/31/2014
12/31/2015
12/31/2016
12/31/2017
2U, Inc.
NASDAQ Composite Index
Russell 3000 Index
S&P North American Technology Software Index
26FEB201816034239
The information presented above in the stock performance graph shall not be deemed to be
‘‘soliciting material’’ or to be ‘‘filed’’ with the SEC or subject to Regulation 14A or 14C, except to the
extent that we subsequently specifically request that such information be treated as soliciting material
or specifically incorporate it by reference into a filing under the Securities Act of 1933, as amended, or
a filing under the Securities Exchange Act of 1934, as amended.
Dividend Policy
We have never declared or paid any dividends on our common stock. We anticipate that we will
retain all of our future earnings, if any, for use in the operation and expansion of our business and do
not anticipate paying cash dividends in the foreseeable future. Additionally, our ability to pay dividends
on our common stock is limited by restrictions under the terms of the agreements governing our credit
facility, and the terms of any future loan agreement into which we may enter or any additional debt
securities we may issue are likely to contain similar restrictions on the payment of dividends.
Item 6. Selected Financial Data
See the information for the years 2013 through 2017 contained in the table titled ‘‘Selected
Financial Data,’’ which is included in this Annual Report on Form 10-K and listed in the Index to
Consolidated Financial Information on page 55 hereof (with only the information for such years to be
deemed filed as part of this Annual Report on Form 10-K).
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
See the information contained under the heading ‘‘Management’s Discussion and Analysis of
Results of Operations and Financial Condition,’’ which is included in this Annual Report on Form 10-K
and listed in the Index to Consolidated Financial Information on page 55 hereof.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss to future earnings, values or future cash flows that may result from
changes in the price of a financial instrument. The value of a financial instrument may change as a
44
result of changes in interest rates, exchange rates, commodity prices, equity prices and other market
changes. Our exposure to market risk related to changes in foreign currency exchange rates is deemed
moderate as further described below. In addition, we do not use derivative financial instruments for
speculative, hedging or trading purposes, although in the future we may enter into exchange rate
hedging arrangements to manage the risks described in the succeeding paragraphs.
Interest Rate Risk
We are subject to interest rate risk in connection with potential borrowings available under our
bank line of credit which was procured in December 2013 and amended in January 2017. Borrowings
under the revolving line of credit bear interest at variable rates. Increases in LIBOR or our lender’s
prime rate would increase the amount of interest payable on any borrowings outstanding under this line
of credit. On January 21, 2014, we borrowed $5.0 million under this line of credit and repaid this
borrowing in full on February 18, 2014. There have been no subsequent borrowings under this line of
credit, and therefore, no amounts were outstanding as of December 31, 2017.
Foreign Currency Exchange Risk
Prior to July 1, 2017, we did not have significant foreign currency exchange risk. Beginning in the
third quarter of 2017, with the acquisition of GetSmarter, we now transact business in foreign
currencies and are exposed to risks resulting from fluctuations in foreign currency exchange rates. Our
primary exposures are related to non-U.S. dollar denominated revenue and operating expenses in South
Africa and the United Kingdom. Accounts relating to foreign operations are translated into U.S. dollars
using prevailing exchange rates at the relevant period end. As a result, we would experience increased
revenue and operating expenses in our non-U.S. operations if there were a decline in the value of the
U.S. dollar relative to these foreign currencies. Conversely, we would experience decreased revenue and
operating expenses in our non-U.S. operations if there were an increase in the value of the U.S. dollar
relative to these foreign currencies. Translation adjustments are included as a separate component of
stockholders’ equity.
For the years ended December 31, 2017 and 2016, our foreign currency translation adjustment was
a gain of $5.3 million and zero, respectively. For the years ended December 31, 2017 and 2016, we
recognized a foreign currency exchange loss of $0.9 million and zero, respectively, included in our
consolidated statements of operations and comprehensive loss. Foreign exchange volatility from the
date of acquisition of GetSmarter to December 31, 2017 was 10% and 5% for the South African rand
and UK pound, respectively. A 10% fluctuation of foreign currency exchange rates would have had an
immaterial effect on our results of operations and cash flows for all periods presented.
The fluctuations of currencies in which we conduct business can both increase and decrease our
overall revenue and expenses for any given fiscal period. Such volatility, even when it increases our
revenues or decreases our expenses, impacts our ability to accurately predict our future results and
earnings.
Inflation
We do not believe that inflation currently has had a material effect on our business, financial
condition or results of operations, though we continue to monitor costs we incur in higher inflationary
economies. Additionally, we continue to monitor all inflation-driven costs, regardless of where they are
incurred. If our costs were to become subject to significant inflationary pressures, the price increases
implemented by our university clients and our own pricing strategies might not fully offset the higher
costs, which could harm our business, financial condition and results of operations.
45
Item 8. Financial Statements and Supplementary Data
See our consolidated financial statements at December 31, 2017, and for the periods then ended,
together with the report of KPMG LLP thereon and the information contained in Note 16 in said
consolidated financial statements titled ‘‘Quarterly Financial Information (Unaudited),’’ which are
included in this Annual Report on Form 10-K and listed in the Index to Consolidated Financial
Information on page 55 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered
by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective.
Management’s Annual Report On Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. With the participation of our Chief Executive Officer and Chief
Financial Officer, management conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2017 based on the Internal Control—Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
this evaluation, management concluded that our internal control over financial reporting was effective
as of December 31, 2017.
We acquired Get Educated International Proprietary Limited (‘‘GetSmarter’’) on July 1, 2017,
which represented 1.3% of our total assets and 5.7% of our total revenue as of December 31, 2017. As
the GetSmarter acquisition was completed during the second quarter of 2017, the scope of our
evaluation of the effectiveness of our internal control over financial reporting does not include
GetSmarter.
Our independent registered public accounting firm, KPMG LLP, has issued an audit report on the
effectiveness of our internal control over financial reporting, which appears in Item 8 of this report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended
December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Item 9B. Other Information
Not applicable.
46
PART III
We will file a definitive Proxy Statement for our 2018 Annual Meeting of Stockholders or our 2018
Proxy Statement with the SEC, pursuant to Regulation 14A, not later than 120 days after the end of
our fiscal year. Accordingly, certain information required by Part III has been omitted under General
Instruction G(3) to Form 10-K. Only those sections of the 2018 Proxy Statement that specifically
address the items set forth herein are incorporated by reference.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 is hereby incorporated by reference to the sections of our
2018 Proxy Statement under the captions ‘‘Board of Directors and Committees,’’ ‘‘Election of
Directors,’’ ‘‘Management,’’ ‘‘Section 16(a) Beneficial Ownership Reporting Compliance’’ and ‘‘Code of
Business Conduct and Ethics for Employees, Executive Officers and Directors.’’
Item 11. Executive Compensation
The information required by Item 11 is hereby incorporated by reference to the sections of our
2018 Proxy Statement under the captions ‘‘Executive Compensation,’’ ‘‘Director Compensation’’ and
‘‘Compensation Committee Interlocks and Insider Participation.’’
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by Item 12 is hereby incorporated by reference to the sections of our
2018 Proxy Statement under the captions ‘‘Security Ownership of Certain Beneficial Owners and
Management’’ and ‘‘Securities Authorized for Issuance under Equity Compensation Plans.’’
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 is hereby incorporated by reference to the sections of our
2018 Proxy Statement under the captions ‘‘Transactions with Related Parties’’ and ‘‘Director
Independence.’’
Item 14. Principal Accounting Fees and Services
The information required by Item 14 is hereby incorporated by reference to the section of our
2018 Proxy Statement under the caption ‘‘Independent Registered Public Accounting Firm Fees.’’
Item 15. Exhibits, Financial Statement Schedules
(a) Exhibits
PART IV
See the Exhibit Index immediately following the Part IV of this Annual Report on Form 10-K.
(b) Financial Statements
See the Index to Consolidated Financial Information on page 55 hereof.
Item 16. Form 10-K Summary
None.
47
Exhibit Index
Form
10-Q
File No.
Exhibit
Number
Filing Date
Filed
Herewith
001-36376
2.1
May 4, 2017
8-K
001-36376
2.2
July 3, 2017
Exhibit
Number
2.1
Description
Share Sale Agreement, by
and among a wholly owned
subsidiary of the Registrant,
K2017143886 South Africa
Proprietary Limited, Get
Educated International
Proprietary Limited (‘‘Get
Educated’’), the shareholders
of Get Educated, and Samuel
Edward Paddock, as the
Seller’s Representative.
2.2 Addendum to the Share Sale
Agreement, by and among a
wholly owned subsidiary of
the Registrant, K2017143886
South Africa Proprietary
Limited, Get Educated
International Proprietary
Limited (‘‘Get Educated’’),
the shareholders of Get
Educated, and Samuel
Edward Paddock, as the
Seller’s Representative.
3.1 Amended and Restated
8-K
001-36376
3.1
April 4, 2014
Certificate of Incorporation
of the Registrant.
3.2 Amended and Restated
8-K
001-36376
3.2
April 4, 2014
S-1/A 333-194079
4.2
March 17, 2014
S-1
333-194079
10.1
February 21, 2014
Bylaws of the Registrant.
4.1
Specimen stock certificate
evidencing shares of Common
Stock.
10.1*
Services Agreement, by and
between the Registrant and
University of Southern
California, on behalf of the
USC Rossier School of
Education, dated as of
October 29, 2008, as
amended to date.
48
Exhibit
Number
Description
Form
File No.
Exhibit
Number
Filing Date
Filed
Herewith
S-1
333-194079
10.2
February 21, 2014
S-1/A 333-194079
10.2.1
March 17, 2014
10.2* Master Services Agreement,
by and between the
Registrant and University of
Southern California, on
behalf of School of Social
Work, dated as of April 12,
2010, as amended.
10.2.1*
Second Addendum to the
Master Services Agreement,
by and between the
Registrant and University of
Southern California, on
behalf of the School of Social
Work, dated as of March 14,
2014.
10.2.2* Amendment to Master
10-K
001-36376
10.2.2
March 10, 2016
Services Agreement, by and
between the Registrant and
University of Southern
California, on behalf of
School of Social Work, dated
as of November 5, 2015.
10.3 Amended and Restated
S-1
333-194079
10.6
February 21, 2014
Investor Rights Agreement,
dated as of March 27, 2012,
by and among the Registrant
and certain of its
stockholders.
10.4† Fourth Amended and
S-1
333-194079
10.7
February 21, 2014
Restated 2008 Stock Incentive
Plan, as amended to date.
10.5† Form of Incentive Stock
S-1
333-194079
10.8
February 21, 2014
Option Agreement under
2008 Stock Incentive Plan.
10.6† Form of Non-Qualified Stock
S-1
333-194079
10.9
February 21, 2014
Option Agreement under
2008 Stock Incentive Plan.
10.7†
2014 Equity Incentive Plan.
10.8† Form of Stock Option
Agreement under 2014 Equity
Incentive Plan.
S-1
S-1
333-194079
10.11
February 21, 2014
333-194079
10.12
February 21, 2014
10.9† Form of Restricted Stock
S-1
333-194079
10.13
February 21, 2014
Unit Award Agreement under
2014 Equity Incentive Plan.
49
Exhibit
Number
10.10†
Description
Summary of Non-Employee
Director Compensation.
Form
10-Q
File No.
Exhibit
Number
Filing Date
Filed
Herewith
001-36376
10.1
May 12, 2014
10.11† Confidential Information,
S-1/A 333-194079
10.14
March 17, 2014
Invention Assignment, Work
for Hire, Noncompete and
No Solicit/No Hire
Agreement, dated as of
February 28, 2009, by and
between the Registrant and
Christopher J. Paucek.
10.12† Form of Indemnification
S-1
333-194079
10.15
February 21, 2014
Agreement with directors and
executive officers.
10.14* Amended and Restated
S-1
333-194079
10.4
February 21, 2014
Revolving Credit Agreement,
by and among the Registrant,
Comerica Bank as
Administrative Agent and as
a Lender, Issuing Lender and
Swing Line Lender and
Square 1 Bank as a Lender,
dated as of December 31,
2013.
10.16 Office Lease, by and between
Lanham Office 2015 LLC and
2U Harkins Road LLC, dated
as of December 23, 2015.
10.17 Agreement of Lease, by and
between 55 Prospect
Owner LLC and 2U
NYC, LLC, dated as of
February 13, 2017.
10.18 Office Lease, by and between
SRI Ten DCC LCC and 2U,
Inc., dated May 11, 2016.
21.1
Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP,
independent registered public
accounting firm.
10-K
001-36376
10.16
February 24, 2017
10-K
001-36376
10.17
February 24, 2017
X
X
X
50
Exhibit
Number
Description
Form
File No.
Exhibit
Number
Filing Date
31.1 Certification of Chief
Executive Officer of 2U, Inc.
pursuant to Exchange Act
Rule 13a-14(a)/15d-14(a), as
adopted pursuant to
Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification of Chief
Financial Officer of 2U, Inc.
pursuant to Exchange Act
Rule 13a-14(a)/15d-14(a), as
adopted pursuant to
Section 302 of the Sarbanes-
Oxley Act of 2002.
32.1 Certification of Chief
Executive Officer of 2U, Inc.
in accordance with 18 U.S.C.
Section 1350, as adopted
pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief
Financial Officer of 2U, Inc.
in accordance with 18 U.S.C.
Section 1350, as adopted
pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002.
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension
Schema Document.
101.CAL XBRL Taxonomy Extension
Calculation Linkbase
Document.
101.DEF XBRL Taxonomy Extension
Definition Linkbase
Document.
101.LAB XBRL Taxonomy Extension
Label Linkbase Document.
51
Filed
Herewith
X
X
X
X
X
X
X
X
X
Exhibit
Number
Description
Form
File No.
Exhibit
Number
Filing Date
101.PRE XBRL Taxonomy Extension
Presentation Linkbase
Document.
Filed
Herewith
X
*
Portions of this exhibit, indicated by asterisks, have been omitted pursuant to a request for
confidential treatment and have been separately filed with the Securities and Exchange
Commission.
†
Indicates management contract or compensatory plan.
52
Pursuant to the requirements of Section 13 or 15(d) 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:
SIGNATURES
2U, Inc.
February 27, 2018
By: /s/ CHRISTOPHER J. PAUCEK
Name: Christopher J. Paucek
Title: Chief Executive Officer and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Christopher J. Paucek, Catherine A. Graham and Matthew J. Norden, or each
of them, as his true and lawful attorneys-in-fact and agents, each with the full power of substitution, for
him and in his name, place or stead, in any and all capacities, to sign any amendments to this report
and to file the same, with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that either of said
attorneys-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this Annual Report on Form 10-K has
been signed by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature
Title
Date
/s/ CHRISTOPHER J. PAUCEK
Christopher J. Paucek
Chief Executive Officer and Director
(Principal Executive Officer)
February 27, 2018
/s/ CATHERINE A. GRAHAM
Catherine A. Graham
Chief Financial Officer (Principal
Financial Officer)
February 27, 2018
/s/ ANDREA PAPACONSTANTOPOULOS
Andrea Papaconstantopoulos
Chief Accounting Officer (Principal
Accounting Officer)
February 27, 2018
/s/ PAUL A. MAEDER
Paul A. Maeder
/s/ MARK J. CHERNIS
Mark J. Chernis
Director and Chairman of the Board
February 27, 2018
Director
February 27, 2018
53
Signature
Title
Date
/s/ TIMOTHY M. HALEY
Timothy M. Haley
/s/ JOHN M. LARSON
John M. Larson
/s/ CORETHA M. RUSHING
Coretha M. Rushing
/s/ ROBERT M. STAVIS
Robert M. Stavis
/s/ SALLIE L. KRAWCHECK
Sallie L. Krawcheck
/s/ EARL LEWIS
Earl Lewis
/s/ EDWARD S. MACIAS
Edward S. Macias
/s/ VALERIE J. JARRETT
Valerie J. Jarrett
Director
February 27, 2018
Director
February 27, 2018
Director
February 27, 2018
Director
February 27, 2018
Director
February 27, 2018
Director
February 27, 2018
Director
February 27, 2018
Director
February 27, 2018
54
2U, Inc.
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Financial Statements:
Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations and Comprehensive Loss for the years ended
December 31, 2017, 2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Changes in Stockholders’ Equity for the years ended
December 31, 2017, 2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and
PAGE
56
75
78
79
80
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
81
82
110
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of
operations in conjunction with our consolidated financial statements and the related notes and other
financial information included elsewhere in this Annual Report on Form 10-K. Some of the information
contained in this discussion and analysis or set forth elsewhere in this report, including information with
respect to our plans and strategy for our business, includes forward-looking statements that involve risks and
uncertainties. You should review Item 1A. ‘‘Risk Factors’’ and ‘‘Special Note Regarding Forward-Looking
Statements’’ in this report for a discussion of important factors that could cause actual results to differ
materially from the results described in or implied by the forward-looking statements contained in the
following discussion and analysis.
Overview
We are a leading education technology company that well-recognized nonprofit colleges and
universities trust to bring them into the digital age. Our comprehensive platform of tightly integrated
technology and services provides the digital infrastructure universities need to attract, enroll, educate
and support students at scale. With our platform, students can pursue their education anytime,
anywhere, without quitting their jobs or moving; and university clients can improve educational
outcomes, skills attainment and career prospects for a greater number of students.
As a result of our July 2017 acquisition of GetSmarter we have two reportable segments: the
Graduate Program Segment and the Short Course Segment.
• Our Graduate Program Segment provides services to well-recognized nonprofit colleges and
universities primarily in the United States to enable the online delivery of graduate programs.
We target students seeking a full graduate degree of the same quality they would receive
on-campus.
• Our Short Course Segment provides premium online short courses to working professionals in
more than 150 countries. We target working professionals seeking career advancement through
skills attainment.
Our core strategy is to launch graduate programs and short courses with new and existing
university clients and to increase student enrollments across our portfolio of offerings. We are also
committed to continuously improving our platform to deliver high-quality university and student
experiences and outcomes at scale.
Our Business Model and Components of Operating Results
The key elements of our business model and components of our operating results are described
below.
Revenue
Graduate Program Segment
Our Graduate Program Segment derives revenue primarily from a contractually specified
percentage of the amounts our university clients receive from their students in the 2U-enabled graduate
program for tuition and fees, less credit card fees and other specified charges we have agreed to
exclude in certain of our university client contracts. Most of our contracts with university clients within
this segment have 10 to 15 year initial terms.
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Short Course Segment
Our Short Course Segment derives revenue directly from students for the tuition and fees paid to
enroll in and progress through our short courses. A contractually specified percentage of the gross
proceeds from students is shared with the university clients, in the form of a royalty recognized within
our consolidated statements of operations and comprehensive loss as curriculum and teaching costs.
Our university client contracts within this segment are typically shorter and less restrictive than our
contracts within our Graduate Program Segment.
The primary driver of our revenue growth across our segments is the increase in the number of
student enrollments in our graduate programs and short courses. This in turn is influenced primarily by
three factors:
• our ability to increase the number of graduate programs and short courses offered, either by
adding new university clients or by adding graduate programs and short courses with current
university clients;
• our ability to acquire prospective students for graduate programs and short courses; and
• our ability to retain the students who enroll in graduate programs and short courses.
In the near term, we expect the significant drivers of our consolidated financial results to continue
to be our university client relationships with the University of Southern California, Simmons College
and the University of North Carolina, within our Graduate Program Segment. For the years ended
December 31, 2017, 2016 and 2015, 27%, 34% and 43%, respectively, of our consolidated revenue was
derived from our graduate programs with USC, including our two longest running programs, which
were launched in 2009 and 2010. Our programs with Simmons College accounted for 17%, 18% and
16% of our consolidated revenue for the years ended December 31, 2017, 2016 and 2015, respectively.
Our programs with the University of North Carolina accounted for 10%, 11% and 12% of our
consolidated revenue for the years ended December 31, 2017, 2016 and 2015, respectively.
For the year ended December 31, 2017, revenue associated with our three largest university clients
in our Short Course Segment accounted for approximately 82% of the segment’s revenue, which was
less than 10% of our consolidated revenue on a combined basis.
Marketing and Sales Costs
Our most significant cost in each fiscal period relates primarily to student acquisition activities
across each of our segments. This includes the cost of online advertising and student generation, as well
as cash and non-cash compensation and benefit costs (including stock-based compensation) for our
graduate program and short course marketing, search engine optimization, marketing analytics and
admissions application counseling personnel.
We have primary responsibility for identifying qualified students for our graduate programs and
short courses, generating potential student interest and driving applications to the educational offerings.
The number of students who enroll in our graduate programs and short courses in any given period is
significantly dependent on the amount we have spent on these student acquisition activities in prior
periods.
Graduate Program Segment
We typically identify prospective students for our graduate programs between three months and
two or more years before they ultimately enroll. For the students currently enrolled in our graduate
programs and those who have graduated, the average time from our initial contact with that student to
enrollment was approximately seven months. For the students who have graduated from these graduate
programs, the average time from initial enrollment to graduation was 26 months. Based on the student
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retention rates and patterns we have observed in our graduate programs, we estimate that, for our
current graduate programs, the average time from a graduate program student’s initial enrollment to
graduation will be approximately two years.
Although most of our university clients’ graduate programs span multiple academic terms and,
therefore, generate continued revenue beyond the term in which initial enrollments occur, we expect
that we will need to continue to incur significant marketing and sales expense for existing graduate
programs going forward to generate a continuous pipeline of new enrollments. For new graduate
programs, we begin incurring marketing and sales costs as early as nine months prior to the classes
beginning.
Accordingly, our marketing and sales expense in any period is an investment we make to generate
revenue in future periods. Likewise, revenue generated in any period is largely attributable to the
investment made in student acquisition activities in earlier periods. Because marketing and sales
expense in any period is almost entirely unrelated to revenue generated in that period, we do not
believe it is meaningful to directly compare the two. We believe that the total revenue we will receive
over time related to students who enroll in our graduate programs as a result of current period
marketing and sales expense, will be significantly greater as a multiple of that current period expense
than is implied by the multiple of current period revenue to current period marketing and sales
expense as expressed in our financial statements. Further, we believe that our marketing and sales
expense in future periods will generally decline as a percentage of the revenue reported in those same
periods as our revenue base from returning students in existing programs increases.
We continually manage our marketing and sales expense to ensure that across our portfolio of
offerings, our cost to acquire students for these offerings is appropriate for our business model. We use
a ratio of attrition adjusted lifetime revenue of a student, or LTR, to the total cost to acquire that
student, or TCA, as the measure of our marketing efficiency and to determine how much we are
willing to spend to acquire an additional student for any offering. The calculations included in this ratio
include certain assumptions. For any period, we know what we spent on program sales and marketing
and therefore, can accurately calculate the ratio’s denominator. However, given the time lag between
when we incur our marketing and sales expense and when we receive revenue related to students
enrolled based on that expense, we have to incorporate forecasts of student enrollments and retention
into our calculation of the ratio’s numerator, which is our estimate of future revenue related to that
period’s expense. We use the significant amount of data we have on the effectiveness of various
marketing channels, student attrition and other factors to inform our forecasts and are continually
testing the assumptions underlying these forecasts against actual results to give us confidence that our
forecasts are reasonable. The LTR to TCA ratio may vary across offerings depending on the nature of
the offering, where that offering is in its lifecycle and whether we enable the same or similar offerings
at other universities.
Short Course Segment
We typically begin incurring marketing and sales costs approximately three months prior to each
short course presentation, and our short courses run between six and 16 weeks. As our short courses
often have a course length that straddles two fiscal quarters based on the timing of the course start, the
marketing and sales expense in any period is a combination of investments we make to generate
revenue in the current and subsequent periods. Likewise, revenue generated in any period is
attributable to investments made in student acquisition activities in the prior and current periods.
As the majority of our short course student enrollments are attributable to discrete marketing
efforts for each short course presentation, we expect that we will need to continue to incur significant
marketing and sales expense for each new and recurring short course presentation going forward to
generate a continuous pipeline of new enrollments.
58
Other Operating Costs
Our other operating costs consist of the following:
Curriculum and teaching. Curriculum and teaching costs are associated with our Short Course
Segment and primarily relate to royalties due to our university clients based on the revenue associated
with short course offerings. It also includes costs to compensate short course tutors.
Servicing and support. Servicing and support costs consist primarily of cash and non-cash
compensation and benefit costs (including stock-based compensation). It also includes software
licensing, telecommunications, technical support and other costs related to providing access to and
support for our platform for our university clients and students. In addition, servicing and support
includes costs to facilitate in-program field placements, student immersions and other student
enrichment experiences, as well as costs to assist our university clients with their state compliance
requirements.
Technology and content development. Technology and content development costs consist primarily
of cash and non-cash compensation and benefit costs (including stock-based compensation) and
outsourced services costs related to the ongoing improvement and maintenance of our platform, and
the developed content for our graduate programs and short courses. It also includes the associated
amortization expense related to capitalized technology and content development, as well as hosting and
other costs associated with maintaining our platform in a cloud environment. Additionally, it includes
the costs to support our internal infrastructure, including our cloud-based server usage.
General and administrative. General and administrative costs consist primarily of cash and
non-cash compensation and benefit costs (including stock-based compensation) for employees in our
executive, administrative, finance and accounting, legal, communications and human resources
functions. It also includes external legal, accounting and other professional fees, telecommunications
charges and other corporate costs such as insurance and travel that are not related to another function.
Non-cash stock-based compensation expense is a component of compensation cost within each of
the five cost categories described above. Under our current framework for granting equity awards
under our 2014 Equity Incentive Plan, the majority of our equity awards are made on or around
April 1 of each year and typically have four-year vesting periods.
To support our anticipated growth, we expect to continue to hire new employees (which will
increase both our cash and non-cash compensation and benefit costs, including stock-based
compensation), increase our promotion and student acquisition efforts, expand our technology
infrastructure and increase our other support capabilities. As a result, we expect our costs to increase
in absolute dollars, but to decrease as a percentage of revenue over time as we achieve economies of
scale through the expansion of our business.
Period-to-Period Fluctuations
Our revenue, cash position, accounts receivable, deferred revenue, and sales and marketing
expense can fluctuate significantly from quarter to quarter due to variations driven by the academic
schedules of our graduate programs and short courses.
Our graduate programs generally start classes for new and returning students an average of four
times per year and our short courses have multiple course starts per year. Graduate program courses
and short course presentations are not necessarily evenly spaced throughout the year, do not necessarily
correspond to the traditional academic calendar and may vary from year to year. As a result, the
number of courses our graduate programs and short courses have in session, and therefore the number
of students enrolled, will vary from quarter to quarter, leading to variability in our revenue.
59
Our graduate programs and short courses often have academic terms that straddle two fiscal
quarters. Our graduate program university clients generally pay us when they have billed tuition and
specified fees to their students, which is typically early in the academic term, and once the drop/add
period has passed. We recognize the related revenue ratably over the course of the academic term,
beginning on the first day of classes through the last. Our short course students typically pay either in
full upon registration of the short course or in full before the end of the short course based on a
payment plan. Because we generally receive payments from our graduate program university clients and
short course students prior to our ability to recognize the majority of those amounts as revenue, we
record deferred revenue at each balance sheet date equal to the excess of the amounts we have billed
or received from our graduate program university clients and short course students over the amounts
we have recognized as revenue as of that date. For these reasons, our cash flows typically vary
considerably from quarter to quarter and our cash position, accounts receivable and deferred revenue
typically fluctuate between quarterly balance sheet dates.
Our expense levels across both segments also fluctuate from quarter to quarter, driven primarily by
our marketing and sales activity. We typically reduce our paid search and other marketing and sales
efforts during late November and December because these efforts are less productive during the
holiday season. This generally results in lower total marketing and sales expense during the fourth
quarter. In addition, because we begin spending on marketing and sales, and, to a lesser extent, services
and support as much as nine months prior to the start of classes for a new graduate program and as
much as three months prior to the start of a new short course, these costs as a percentage of revenue
fluctuate, sometimes significantly, depending on the timing of new graduate programs and short courses
launches.
Results of Operations
Full-Year 2017 Highlights
• Revenue was $286.8 million, an increase of 39.3% from $205.9 million for the year ended
December 31, 2016.
• Net loss was $(29.4) million, or $(0.60) per share, compared to $(20.7) million, or $(0.44) per
share for the year ended December 31, 2016.
• Adjusted EBITDA was $11.4 million, compared to $4.5 million for the year ended December 31,
2016.
• Our Graduate Program Segment launched ten new graduate programs.
• We acquired GetSmarter in July 2017 for a net cash purchase price of $98.7 million and an
earn-out payment of up to $20.0 million in cash, subject to the achievement of certain financial
milestones.
• We completed a public offering of common stock in September 2017 in which we sold 4,047,500
shares and received net proceeds of $189.5 million.
Revenue
Revenue for the year ended December 31, 2017 was $286.8 million, an increase of 39.3%, from
$205.9 million for the same period of 2016. Graduate Program Segment revenue was $270.5 million for
the year ended December 31, 2017, an increase of 31.4%, from $205.9 million for the same period of
2016, primarily due to a 27.9% increase in full course equivalent enrollments. We also reported
incremental revenue of $16.3 million for the year ended December 31, 2017 related to our Short
Course Segment, which was created as a result of our acquisition of GetSmarter in July of 2017.
60
Revenue for the year ended December 31, 2016 was $205.9 million, an increase of 37.1%, from
$150.2 million for the same period of 2015, primarily due to a 35.6% increase in full course equivalent
enrollments.
Costs
Curriculum and Teaching
Curriculum and teaching costs for the year ended December 31, 2017 were $6.6 million, and we
did not incur any such costs in 2016 or 2015.
Servicing and Support
Servicing and support costs for the year ended December 31, 2017 were $50.8 million, an increase
of 23.9%, from $41.0 million for the same period of 2016. This was primarily due to a 18.4% increase
in cash and non-cash compensation and benefit costs within our Graduate Program Segment, as we
increased our headcount by 21% in this area to serve a growing number of students and faculty in new
and existing graduate programs. Additionally, 3.4% of the increase related to rent, other facilities costs
and travel costs within our Graduate Program Segment. The increase also included 1.8% of additional
servicing and support costs associated with our Short Course Segment. The remainder of the increase
related to other net costs to service and support our Graduate Program Segment.
Servicing and support costs for the year ended December 31, 2016 were $41.0 million, an increase
of 27.9%, from $32.0 million for the same period of 2015. This was primarily due to a 19.9% increase
in cash and non-cash compensation and benefit costs within our Graduate Program Segment, as we
increased our headcount by 26% in this area to serve a growing number of students and faculty in new
and existing graduate programs. Additionally, 3.4% of the increase related to rent, other facilities costs
and travel costs within our Graduate Program Segment. The remainder of the increase related to other
net costs to service and support our Graduate Program Segment.
Technology and Content Development
Technology and content development costs for the year ended December 31, 2017 were
$45.9 million, an increase of 38.0%, from $33.3 million for the same period of 2016. This was due in
part to a 12.4% increase in cash and non-cash compensation and benefit costs (net of amounts
capitalized for technology and content development) within our Graduate Program Segment, as we
increased our headcount by 30% in this area to support the scaling of existing and launch of new
graduate programs. Additionally, 15.4% of the increase related to higher amortization expense
associated with capitalized technology and content development, as well as higher hosting and licensing
costs, within our Graduate Program Segment due to the larger number of courses that have been
developed and the continued maintenance of our platform in a cloud environment. The increase also
included 8.3% of additional technology and content development costs associated with our Short
Course Segment. The remainder of the increase related to other net costs to support and maintain our
internal software applications in our Graduate Program Segment.
Technology and content development costs for the year ended December 31, 2016 were
$33.3 million, an increase of 22.3%, from $27.2 million for the same period of 2015. This was due in
part to a 5.8% increase in cash and non-cash compensation and benefit costs (net of amounts
capitalized for technology and content development) within our Graduate Program Segment, as we
increased our headcount by 31% in this area to support the scaling of existing programs and launch of
new graduate programs. Additionally, 13.9% of the increase related to higher amortization expense
associated with capitalized technology and content development, as well as higher hosting and licensing
costs within our Graduate Program Segment due to the larger number of courses that have been
61
developed for our university client programs and the continued maintenance of our platform in a cloud
environment.
Marketing and Sales
Marketing and sales costs for the year ended December 31, 2017 were $150.9 million, an increase
of 41.6%, from $106.6 million for the same period of 2016. This was primarily due to an 18.4%
increase in direct internet marketing costs to acquire students for our Graduate Program Segment.
Additionally, 9.5% of the increase related to cash and non-cash compensation and benefit costs, as we
increased our headcount by 26% in this area within our Graduate Program Segment to acquire
students for, and drive revenue growth in, existing and new graduate programs. The increase also
included 8.4% of additional marketing and sales costs associated with our Short Course Segment. The
remainder of the increase related to other net costs to support growth within our Graduate Program
Segment.
Marketing and sales costs for the year ended December 31, 2016 were $106.6 million, an increase
of 28.6%, from $82.9 million for the same period of 2015. This was primarily due to a 15.7% increase
in direct internet marketing costs to acquire students for our Graduate Program Segment. Additionally,
10.0% of the increase related to cash and non-cash compensation and benefit costs, as we increased
our headcount by 21% within our Graduate Program Segment to acquire students for, and drive
revenue growth in, existing and new graduate programs. The remainder of the increase related to other
net costs to support growth within our Graduate Program Segment.
General and Administrative
General and administrative costs for the year ended December 31, 2017 were $62.7 million, an
increase of 36.2%, from $46.0 million for the same period of 2016. This was primarily due to a 16.3%
increase in cash and non-cash compensation and benefit costs within our Graduate Program Segment,
as we increased our headcount by 18% in this area to support our growing business. Additionally, a
4.4% increase related to higher consulting and other professional services within our Graduate Program
Segment primarily driven by additional recurring and nonrecurring costs associated with the acquisition
of GetSmarter and partially offset by reductions in year-over-year costs after the integration of our
enterprise resource planning system which was completed in the second quarter of 2017, and a 2.6%
increase related to rent, other facilities costs and travel costs within our Graduate Program Segment.
The increase also included 7.1% of additional general and administrative costs associated with our
Short Course Segment. The remainder of the increase related to other net costs to support growth
within our Graduate Program Segment.
General and administrative costs for the year ended December 31, 2016 were $46.0 million, an
increase of 34.9%, from $34.1 million for the same period of 2015. This was primarily due to a 23.0%
increase in cash and non-cash compensation and benefit costs within our Graduate Program Segment,
as we increased our headcount by 35% in this area to support our growing business. Additionally,
11.2% of the increase related to higher consulting and other professional services, primarily related to
non-recurring costs associated with the integration of our enterprise resource planning system. The
remainder of the increase related to other net cost increases to support growth within our Graduate
Program Segment.
Net Interest Income (Expense)
Interest income is derived from interest received on our cash and cash equivalents. Interest
expense consists primarily of the amortization of deferred financing costs associated with our line of
credit. Net interest income (expense) reflects the aggregation of interest income and interest expense.
For the year ended December 31, 2017, we earned net interest income of $284,000, a decrease of
62
18.4%, from $348,000 for the same period of 2016. Our net interest income for the year ended
December 31, 2016 represented an increase of 190.3%, from net interest expense of $385,000 for the
same period of 2015.
Other Non-Operating Income (Expense), Net
Other non-operating income (expense), net primarily consists of foreign currency gains and losses.
For the year ended December 31, 2017, we incurred other non-operating expense, net, of $866,000
primarily due to foreign currency rate fluctuations associated with the acquisition and operations of our
Short Course Segment, compared to no activity in the same period of 2016. Our other non-operating
expense, net for the year ended December 31, 2015 included a $250,000 write-down on an investment
that did not recur in 2016.
Income Tax Benefit
Income tax benefit consists of U.S. federal, state and foreign income taxes. To date, we have not
been required to pay U.S. federal income taxes because of our current and accumulated net operating
losses. For the year ended December 31, 2017, we recognized a tax benefit of $1.3 million. The tax
benefit primarily relates to the GetSmarter acquisition and losses generated from the acquired
operations. We expect to continue to recognize a tax benefit in the future for the Short Course
Segment to the extent that the segment continues to generate taxable losses and deferred tax liabilities
that are in excess of deferred tax assets. We incurred immaterial state and foreign income tax liabilities
for the years ended December 31, 2016 and 2015.
On December 22, 2017, the Tax Act and Jobs Act of 2017 (the ‘‘Tax Act’’) was enacted into law
and the new legislation contains certain key tax provisions that affected us. The Tax Act affects us by
(i) reducing the U.S. tax rate to 21% effective January 1, 2018, (ii) impacting the values of our deferred
assets and liabilities, (iii) changing our ability to utilize future net operating losses and (iv) requiring a
one-time tax on any of our unrepatriated foreign earnings and profits (‘‘E&P’’) in 2017.
Pursuant to U.S. GAAP, changes in tax rates and tax laws are accounted for in the period of
enactment, and the resulting effects are included as components of the income tax provision related to
continuing operations within the same period. Therefore, the following changes in the tax laws have
been accounted for in 2017. Our deferred tax assets and liabilities and offsetting valuation allowance
have been remeasured at the new enacted tax rate as of December 31, 2017. The amount of U.S. net
operating losses that we have available and our ability to utilize them to reduce future taxable income
is not impacted by the Tax Act. However, the Tax Act may impact the amount and ability to utilize net
operating losses generated by us in the future. Additionally, we believe that any undistributed amounts
of foreign earnings and profits potentially included in taxable income would be offset by net operating
losses; therefore, no transition tax is due from us in 2017.
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Consolidated Statements of Operations as a Percentage of Revenue
The following table sets forth selected consolidated statements of operations data as a percentage
of revenue for each of the periods indicated.
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs and expenses
Year Ended December 31,
2017
2016
2015
100.0% 100.0% 100.0%
Curriculum and teaching . . . . . . . . . . . . . . . . . . . . . . . .
Servicing and support . . . . . . . . . . . . . . . . . . . . . . . . . .
Technology and content development
. . . . . . . . . . . . . .
Marketing and sales . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . .
2.3
17.7
16.0
52.6
21.9
—
19.9
16.2
51.8
22.4
—
21.4
18.1
55.2
22.7
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . .
110.5
110.3
117.4
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . . . .
Total other income (expense) . . . . . . . . . . . . . . . . . . .
(10.5)
(10.3)
(17.4)
0.1
0.0
(0.3)
(0.2)
0.2
0.0
0.0
0.2
0.1
(0.4)
(0.1)
(0.4)
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(10.7)
0.4
(10.1)
—
(17.8)
—
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(10.3)% (10.1)% (17.8)%
Key Business and Financial Performance Metrics
We use a number of key metrics to evaluate our business, measure our performance, identify
trends affecting our business, formulate financial projections and make strategic decisions. In addition
to adjusted EBITDA, which we discuss below and revenue and the components of loss from operations
in the section above entitled ‘‘—Our Business Model and Components of Operating Results’’, we
utilize full course equivalent enrollments as a key metric to evaluate the success of our growth strategy.
Full Course Equivalent Enrollments in Our University Clients’ Offerings
We measure full course equivalent enrollments for each of the courses offered during a particular
period by taking the number of students enrolled in that course and multiplying it by the percentage of
the course completed during that period. We use this metric to account for the fact that many courses
we enable straddle two or more fiscal quarters. For example, if a course had 25 enrolled students and
40% of the course was completed during a particular period, we would count the course as having 10
full course equivalent enrollments for that period. Any individual student may be enrolled in more than
one course during a period.
Average revenue per full course equivalent enrollment represents our weighted-average revenue
per course across the mix of courses being offered during a period within each of our operating
segments. This number is derived by dividing the total revenue for a period for each of our operating
segments by the number of full course equivalent enrollments within the applicable segment during that
same period. This amount may vary from period to period depending on the academic calendars of our
university clients, the relative growth rates of graduate programs and short courses, as applicable, with
varying tuition levels, the launch of new graduate programs or short courses with higher or lower than
average net tuition costs and annual tuition increases instituted by our university clients.
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The following table sets forth the full course equivalent enrollments and average revenue per full
course equivalent enrollment in our Graduate Program Segment for the periods presented.
Graduate program full course equivalent enrollments . . . .
Graduate program average revenue per full course
Year Ended December 31,
2017
2016
2015
98,904
77,344
57,019
equivalent enrollment . . . . . . . . . . . . . . . . . . . . . . . . .
$2,734
$2,662
$2,634
Of the increase in full course equivalent enrollments for the years ended December 31, 2017 and
2016, 959 or 4.4% and 476 or 2.3%, respectively, were attributable to graduate programs launched
during the preceding 12 months.
The following table sets forth the full course equivalent enrollments and average revenue per full
course equivalent enrollment in our Short Course Segment for the periods presented.
Short courses full course equivalent enrollments . . . . . . . . . . .
Short courses average revenue per full course equivalent
Year Ended
December 31,
2017*
2016
2015
10,830 — —
enrollment** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,507
$— $—
* We acquired GetSmarter on July 1, 2017 and their results of operations are included in
our financial results from the date of acquisition. As such, the full course equivalent
enrollment measures of our short courses are measured only for the six months ended
December 31, 2017.
** The calculation of short course average revenue per full course equivalent enrollment
includes $0.7 million of revenue that was excluded from the results of operations in the
third quarter of 2017, due to an adjustment recorded as part of the valuation of
GetSmarter.
Adjusted EBITDA
Adjusted EBITDA represents our earnings before net interest income (expense), taxes,
depreciation and amortization, foreign currency gains or losses, acquisition-related gains or losses and
stock-based compensation expense. Adjusted EBITDA is a key measure used by our management and
board of directors to understand and evaluate our core operating performance and trends, to prepare
and approve our annual budget and to develop short- and long-term operational plans. In particular,
the exclusion of certain expenses in calculating adjusted EBITDA can provide a useful measure for
period-to-period comparisons of our core business. Accordingly, we believe that adjusted EBITDA
provides useful information to investors and others in understanding and evaluating our operating
results in the same manner as our management and board of directors.
Adjusted EBITDA is not a measure calculated in accordance with U.S. GAAP, and should not be
considered as an alternative to any measure of financial performance calculated and presented in
accordance with U.S. GAAP. In addition, adjusted EBITDA may not be comparable to similarly titled
measures of other companies because other companies may not calculate adjusted EBITDA in the
same manner as we do. We prepare adjusted EBITDA to eliminate the impact of stock-based
compensation expense, which we do not consider indicative of our core operating performance.
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Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it
in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some
of these limitations are:
• although depreciation and amortization are non-cash charges, the assets being depreciated and
amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash
capital expenditure requirements for such replacements or for new capital expenditure
requirements;
• adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital
needs;
• adjusted EBITDA does not reflect acquisition related gains or losses such as, but not limited to,
post-acquisition changes in the value of contingent consideration reflected in operations;
• adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation;
• adjusted EBITDA does not reflect interest or tax payments that may represent a reduction in
cash available to us; and
• other companies, including companies in our industry, may calculate adjusted EBITDA
differently, which reduces its usefulness as a comparative measure.
Because of these and other limitations, you should consider adjusted EBITDA alongside other
U.S. GAAP-based financial performance measures, including various cash flow metrics, net income
(loss) and our other U.S. GAAP results. The following table presents a reconciliation of net loss to
adjusted EBITDA for each of the periods indicated:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments:
Interest income . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency loss . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expense . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . .
Year Ended December 31,
2017
2016
2015
(in thousands)
$(29,423) $(20,684) $(26,733)
(371)
87
866
19,624
(1,297)
21,930
(383)
35
—
9,750
—
15,823
(167)
552
—
7,220
—
12,499
Total adjustments . . . . . . . . . . . . . . . . . . . . . .
40,839
25,225
20,104
Adjusted EBITDA (loss) . . . . . . . . . . . . . . . . . . . .
$ 11,416
$ 4,541
$ (6,629)
Financial Condition: Capital Resources and Liquidity
Acquisitions
During 2017, we acquired all of the outstanding equity interest in GetSmarter for a net purchase
price of $98.7 million in cash and an earn-out payment of up to $20.0 million in cash, subject to the
achievement of certain financial milestones. The acquired assets and liabilities of GetSmarter have been
recorded at their estimated fair values at the date of acquisition.
Capital Expenditures
During the year ended December 31, 2017, we had capital asset additions of $62.3 million, which
were comprised of $29.6 million of leasehold improvements, $23.9 million in capitalized technology and
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content development and $8.9 million of other property and equipment. The $62.3 million increase
consisted of $51.1 million in cash capital expenditures and $11.2 million of non-cash capital
expenditures, primarily related to landlord funded leasehold improvements. In 2018, we expect new
capital asset additions of approximately $55 to $59 million, of which approximately $2 to $3 million will
be funded by landlord leasehold improvement allowances.
Sources of Liquidity
Public Offerings of Common Stock
On September 11, 2017, we sold 4,047,500 shares of our common stock to the public, including
547,500 shares sold pursuant to the underwriters’ over-allotment option, resulting in net proceeds of
$189.5 million, which we intend to use for general corporate purposes, including expenditures for
graduate program and short course marketing, technology and content development, in connection with
new graduate program and short course launches and growing existing graduate programs and short
courses.
On September 30, 2015, we sold 3,625,000 shares of our common stock to the public, including
525,000 shares sold pursuant to the underwriters’ over-allotment option, resulting in net proceeds of
$117.1 million, which was used for general corporate purposes, including expenditures for marketing,
sales, technology and content development in connection with new program launches and growing
existing programs.
Lines of Credit
We currently have a $25.0 million revolving line of credit with Comerica Bank, or Comerica, which
had no amounts outstanding as of December 31, 2017 and 2016. During 2017, we amended our line of
credit agreement multiple times to extend the maturity date as well as to receive Comerica’s consent to
our acquisition of GetSmarter and our formation of certain subsidiaries in connection therewith. The
most recent amendment was completed in the first quarter of 2018, to extend the maturity date of the
credit agreement through March 31, 2018.
Under this revolving line of credit, we have the option of borrowing funds subject to (i) a base
rate, which is equal to 1.5% plus the greater of Comerica’s prime rate, the federal funds rate plus 1%
or the 30-day LIBOR plus 1%, or (ii) LIBOR plus 2.5%. For amounts borrowed under the base rate,
we may make interest-only payments quarterly, and may prepay such amounts with no penalty. For
amounts borrowed under LIBOR, we may make interest-only payments in periods of one, two and
three months and will be subject to a prepayment penalty if we repay such borrowed amounts before
the end of the interest period.
Borrowings under the line of credit are collateralized by substantially all of our assets. The
availability of borrowings under this credit line is subject to our compliance with reporting and financial
covenants, including, among other things, that we achieve specified minimum three-month trailing
revenue levels during the term of the agreement and specified minimum six-month trailing profitability
levels for some of our graduate programs, measured quarterly. In addition, we are required to maintain
a minimum adjusted quick ratio, which measures our short-term liquidity, of at least 1.10 to 1.00. As of
December 31, 2017 and 2016, our adjusted quick ratios were 5.44 and 5.43, respectively.
The covenants under the line of credit also place limitations on our ability to incur additional
indebtedness or to prepay permitted indebtedness, grant liens on or security interests in our assets,
carry out mergers and acquisitions, dispose of assets, declare, make or pay dividends, make capital
expenditures in excess of specified amounts, make investments, loans or advances, enter into
transactions with our affiliates, amend or modify the terms of our material contracts, or change our
fiscal year. If we are not in compliance with the covenants under the line of credit, after any
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opportunity to cure such non-compliance, or we otherwise experience an event of default under the line
of credit. We are currently in compliance with all such covenants.
Certain of our operating lease agreements entered into require security deposits in the form of
cash or an unconditional, irrevocable letter of credit. As of December 31, 2017, we have entered into
standby letters of credit totaling $11.5 million, as security deposits for the applicable leased facilities.
Additionally, in June 2017, we entered into standby letters of credit totaling $3.5 million in connection
with two government grants. These letters of credit reduced the aggregate amount we may borrow
under our revolving line of credit to $10.0 million.
Our Short Course Segment had $1.9 million of revolving debt facilities that matured on
December 31, 2017. These facilities were subsequently extended with a borrowing base of $1.3 million
and will mature on March 31, 2018. As of December 31, 2017, no amounts were outstanding under
these facilities and the interest rate was 10.25%.
Government Grants
In June 2017, we entered into two conditional loan agreements with Prince George’s County,
Maryland and the State of Maryland, respectively, for an aggregate amount of $3.5 million, each
bearing an interest rate of 3% per annum. These agreements are conditional loan obligations that may
be forgiven provided that we attain certain conditions related to employment levels at our Lanham,
Maryland headquarters.
Working Capital
Our cash at December 31, 2017 was held for working capital purposes. Our working capital as of
December 31, 2017 and 2016 was $190.1 million and $143.6 million, respectively. We do not enter into
investments for trading or speculative purposes. We invest any cash in excess of our immediate
requirements in investments designed to preserve the principal balance and provide liquidity.
Accordingly, our cash is invested primarily in demand deposit accounts that are currently providing only
a minimal return.
Cash Flows
The following table summarizes our cash flows for the periods presented:
Year Ended December 31,
2017
2016
2015
(in thousands)
Cash provided by (used in):
Operating activities . . . . . . . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . . . . . . . .
Effects of exchange rate changes on cash . . . . . .
$
8,106
(149,374)
196,752
(844)
$ 5,210
(24,518)
4,309
—
$ (9,267)
(15,945)
122,012
—
Net changes in cash and cash equivalents . . . . . .
$ 54,640
$(14,999) $ 96,800
Operating Activities
Cash provided by operating activities for the year ended December 31, 2017 was $8.1 million, an
increase of 55.6% from net cash provided by operating activities of $5.2 million for the same period of
2016. This was primarily due to increases of $3.2 million and $15.5 million in net loss and up-front and
marketing rights payments to universities, respectively, which were partially offset by decreases of
$11.6 million and $8.3 million in non-cash expenses and changes in working capital, respectively. In
addition, there was an increase of $1.7 million in operating activities associated with the GetSmarter
acquisition.
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Cash provided by operating activities for the year ended December 31, 2016 was $5.2 million, an
increase of 156.2% from net cash used in operating activities of $9.3 million for the same period of
2015. This was primarily related to increases of $5.9 million and $5.3 million in up-front and marketing
rights payments to universities and changes in working capital and non-cash expenses, respectively,
which were partially offset by a decrease of $6.0 million in net loss.
Investing Activities
Cash used in investing activities for the year ended December 31, 2017 was $149.4 million, an
increase of $124.9 million from $24.5 million for the same period of 2016. This was primarily due to
$97.1 million in net cash paid to acquire GetSmarter, a $19.7 million increase due to purchases of
property and equipment for our new office locations and a $7.1 million increase in additions to
amortizable intangible assets to support a greater number of launched graduate programs and short
courses.
Cash used in investing activities for the year ended December 31, 2016 was $24.5 million, an
increase of 53.8% from $15.9 million for the same period of 2015. This was primarily due to a
$6.4 million increase due to purchases of property and equipment related to leasehold improvement
expenditures for our new office operating leases and a $4.4 million increase in costs related to
internal-use software and content developed to support a greater number of launched graduate
programs.
Financing Activities
Cash provided by financing activities for the year ended December 31, 2017 was $196.8 million, an
increase of $192.4 million from $4.3 million for the same period of 2016. This was primarily due to
$189.5 million in proceeds received from our public offering of common stock and $2.0 million in net
proceeds from borrowings.
Cash provided by financing activities for the year ended December 31, 2016 was $4.3 million, a
decrease of $117.7 million from $122.0 million for the same period of 2015. This was primarily due to
$117.1 million in net proceeds from our public offering of common stock in 2015.
Contractual Obligations and Commitments
The following table summarizes our obligations under deferred government grant obligations,
non-cancelable operating leases, commitments to certain of our university clients in exchange for
contract extensions and various marketing and other rights and purchase obligations at December 31,
2017. Future events could cause actual payments to differ from these amounts.
Contractual Obligations
Deferred government grant obligations . . . . . . .
Operating lease obligations . . . . . . . . . . . . . . .
Future minimum payments to university clients .
Purchase obligations . . . . . . . . . . . . . . . . . . . .
Payment due by period
Less than
1 year
1 - 3 years
3 - 5 years
(in thousands)
More than
5 years
Total
$ — $ — $ — $ 3,500
82,187
4,400
—
27,404
1,250
376
23,411
1,500
10,114
9,308
5,975
5,137
$
3,500
142,310
13,125
15,627
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20,420
$35,025
$29,030
$90,087
$174,562
Other purchase orders made in the ordinary course of business are excluded from the table above.
Any amounts for which we are liable under purchase orders are reflected in our consolidated balance
sheets as accounts payable and accrued liabilities.
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We have entered into a specific program agreement under which we would be obligated to make
future minimum program payments to a university client in the event that certain program metrics,
partially associated with a program not yet launched, are not achieved. Due to the dependency of this
calculation on a future program launch, the amount of any associated contingent payments cannot be
reasonably estimated at this time. As we cannot reasonably estimate the amount of the contingent
payments, we have excluded such payments from the table above.
See Note 6 in the ‘‘Notes to Consolidated Financial Statements’’ included in Part II, Item 8 and
‘‘Legal Proceedings’’ contained in Part I, Item 3 of this Annual Report on Form 10-K for additional
information regarding contingencies.
Other
We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of
Regulation S-K, such as the use of unconsolidated subsidiaries, structured finance, special purpose
entities or variable interest entities.
Critical Accounting Policies and Significant Judgments and Estimates
This management’s discussion and analysis of financial condition and results of operations is based
on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP.
The preparation of these consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue
and expenses during the reported period. In accordance with U.S. GAAP, we base our estimates on
historical experience and on various other assumptions we believe to be reasonable under the
circumstances. Actual results may differ from these estimates if conditions differ from our assumptions.
While our significant accounting policies are more fully described in Note 2 in the ‘‘Notes to
Consolidated Financial Statements’’ included in Part II, Item 8 of this Annual Report on Form 10-K,
we believe the following accounting policies are critical to the process of making significant judgments
and estimates in preparation of our consolidated financial statements.
Revenue Recognition, Accounts Receivable and Allowance for Doubtful Accounts
We recognize revenue when all of the following conditions are met: (i) persuasive evidence of an
arrangement exists, (ii) rendering of services is complete, (iii) fees are fixed or determinable and
(iv) collection of fees is reasonably assured. Revenue for both of our segments is recognized ratably
over the service period, which we define as the first through the last day of the graduate program
course or short course. We establish a refund allowance, if necessary, for our share of tuition and fees
ultimately uncollected either by our university clients within the Graduate Program Segment or by us
within the Short Course Segment. Payments to university clients that are not for distinct goods or
services are recognized as a reduction of revenue over the contractual term or the period to which they
relate.
The Graduate Program Segment derives revenue primarily from a contractually specified
percentage of the amounts our university clients receive from their students in the 2U-enabled graduate
program for tuition and fees, less credit card fees and other specified charges we have agreed to
exclude in certain of our university client contracts. Most of our contracts with university clients within
this segment have 10 to 15 year initial terms.
The Short Course Segment derives revenue directly from students for the tuition and fees paid to
enroll in and progress through our short courses. A contractually specified percentage of the gross
proceeds from students is shared with the university clients, in the form of a royalty recognized within
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our consolidated statements of operations and comprehensive loss as curriculum and teaching costs, for
providing the content and certifying the course. Our university client contracts within this segment are
typically shorter and less restrictive than our contracts within our Graduate Program Segment.
We generally receive payments for revenue from our graduate program university clients early in
each academic term and from our short course students, either in full upon registration of the course
or in full before the end of the course based on a payment plan, prior to completion of the service
period. We record these payments as deferred revenue until the services are delivered or until our
obligations are otherwise met, at which time we recognize the revenue. Deferred revenue as of a
particular balance sheet date represents the excess of amounts billed or received as compared to
amounts recognized in revenue in the consolidated statements of operations and comprehensive loss as
of the end of the reporting period, and such amounts are reflected as a current liability on our
consolidated balance sheets.
We generate substantially all of our revenue from multiple-deliverable contractual arrangements,
and provide a combination of access to our platform that supports the complete lifecycle of a graduate
program or short course, including attracting students, advising prospective students through the
admissions application process, providing technical, success coaching and other support, facilitating
accessibility to individuals with disabilities and facilitating in-program field placements, when required.
We have determined that no individual deliverable has standalone value upon delivery and, therefore,
the multiple deliverables within our arrangements do not qualify for treatment as separate units of
accounting. Accordingly, we consider all deliverables to be a single unit of accounting and we recognize
revenue from the entire arrangement over the term of the service period.
Our accounts receivable are stated at net realizable value. We utilize the allowance method to
provide for doubtful accounts based on management’s evaluation of the collectability of the amounts
due. Our estimates are based on historical collection experience and a review of the current status of
accounts receivable. We review and revise our estimates periodically and, historically, actual write-offs
for uncollectible accounts have not significantly differed from our estimates.
Goodwill
Goodwill is the excess of purchase price over the fair value of identified net assets of the business
acquired. Our goodwill balance was established in connection with our acquisition of GetSmarter in
2017. We will review goodwill at least annually, as of October 1, for possible impairment, beginning in
2018. Between annual tests, goodwill is reviewed for possible impairment if an event occurs or
circumstances change that would more likely than not reduce the fair value of the reporting unit below
its carrying value. We will test our goodwill at the reporting unit level, which is an operating segment
or one level below an operating segment. We initially will assess qualitative factors to determine if it is
necessary to perform the two-step goodwill impairment review. We will review our goodwill for
impairment using the two-step process if we decide to bypass the qualitative assessment or determine
that it is more likely than not that the fair value of a reporting unit is less than its carrying value based
on our qualitative assessment. Upon the completion of the two-step process, we may be required to
recognize an impairment based on the difference between the carrying value and the fair value of the
goodwill recorded.
Internally-Developed Intangible Assets
Capitalized Technology
We capitalize 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/
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operation stage (all costs are expensed as incurred). Costs capitalized in the application development
stage include costs of designing the application, coding, integrating our and the university’s networks
and systems, and the testing of the software. 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
on the straight-line method over the estimated useful life of the software, which is generally three
years.
Capitalized Content Development
We develop content on a course-by-course basis in conjunction with the faculty for each university
client program. The university clients and their faculty generally provide course outlines in the form of
the curriculum, any required textbooks, case studies and other reading materials, as well as
presentations that are typically used in the on-campus setting. We are then responsible for, and incur
all of the expenses related to, the conversion of the materials provided by each university client into a
format suitable for delivery through our online learning platform.
The content development costs that qualify for capitalization are third-party direct costs, such as
videography, editing and other services associated with creating digital content. Additionally, we
capitalize internal payroll and payroll-related costs incurred to create and produce videos and other
digital content utilized in the university clients’ programs for delivery via our online learning platform.
Capitalization ends when content has been fully developed by both us and the university client, at
which time amortization of the capitalized content development costs begin. The capitalized costs are
recorded on a course-by-course basis and included in capitalized content costs on the consolidated
balance sheets. These costs are amortized using the straight-line method over the estimated useful life
of the respective capitalized content program, which is generally five years. The estimated useful life
corresponds with the planned curriculum refresh rate. This refresh rate is consistent with expected
curriculum refresh rates as cited by program faculty members for similar on-campus programs. It is
reasonably possible that developed content could be refreshed before the estimated useful lives are
complete or be expensed immediately in the event that the development of a course is discontinued
prior to launch.
Evaluation of Long-Lived Assets
We review long-lived assets, which consist of property and equipment, capitalized technology costs,
capitalized content development costs and acquired finite-lived intangible assets, for impairment
whenever events or changes in circumstances indicate the carrying value of an asset may not be
recoverable. Recoverability of a long-lived asset is measured by a comparison of the carrying value of
an asset or asset group to the future undiscounted net cash flows expected to be generated by that
asset or asset group. If such assets are not recoverable, the impairment to be recognized is measured by
the amount by which the carrying value of an asset exceeds the estimated fair value (discounted cash
flow) of the asset or asset group. In order to assess the recoverability of the capitalized technology and
content development costs, the costs are grouped by degree vertical, which is the lowest level of
independent cash flows. Our impairment analysis is based upon cumulative results and forecasted
performance. The actual results could vary from our forecasts, especially in relation to recently
launched programs.
Stock-Based Compensation
We have issued three types of stock-based awards under our stock plans: stock options, restricted
stock units and stock awards. Stock option awards granted to employees, directors and independent
contractors are measured at fair value at each grant date. We rely on the Black-Scholes option pricing
model for estimating the fair value of stock options granted, and expected volatility is based on the
72
historical volatilities of our common stock. For awards subject to service-based vesting conditions, we
recognize compensation expense on a straight-line basis over the requisite service period of the award.
Prior to January 1, 2017, we adjusted stock-based compensation expense for estimated forfeitures.
Beginning on January 1, 2017, we account for forfeitures (and the impact on stock-based compensation
expense) as they occur, as described in the ‘‘Recent Accounting Pronouncements’’ section in Note 2 in
the ‘‘Notes to Consolidated Financial Statements’’ included in Part II, Item 8 of this Annual Report on
Form 10-K. Stock options subject to service-based vesting generally vest at various times from the date
of the grant, with most stock options vesting in tranches, generally over a period of four years.
Restricted stock units subject to service-based vesting generally vest 25% on each anniversary of the
grant date over four years.
For the years ended December 31, 2017, 2016 and 2015, we recorded stock-based compensation
expense of $21.9 million, $15.8 million and $12.5 million, respectively. Information about the
assumptions used in the calculation of stock-based compensation expense is set forth in Note 11 in the
‘‘Notes to Consolidated Financial Statements’’ included in Part II, Item 8 of this Annual Report on
Form 10-K.
As of December 31, 2017, unrecognized stock-based compensation expense related to unvested
options totaled $15.6 million and will be recognized over a weighted-average period of approximately
2.4 years.
As of December 31, 2017, unrecognized stock-based compensation expense related to unvested
restricted stock units was $31.5 million and will be recognized over a weighted-average period of
approximately 2.1 years.
Income Tax (Expense) Benefit
Income taxes are accounted for under the asset and liability method, which requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences of events that
are included in the financial statements. Under this method, the deferred tax assets and liabilities are
determined based on the differences between the financial statement and tax bases of the assets and
liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
The effect of a change in tax rates on the deferred tax assets and liabilities is recognized in earnings in
the period when the new rate is enacted. Deferred tax assets are subject to periodic recoverability
assessments. Valuation allowances are established, when necessary, to reduce deferred tax assets to the
amount that more likely than not will be realized. We consider all positive and negative evidence
relating to the realization of the deferred tax assets in assessing the need for a valuation allowance. We
currently maintain a full valuation allowance against our deferred tax assets in the U.S and certain
entities in the foreign jurisdictions.
We record a liability for unrecognized tax benefits resulting from uncertain tax positions taken or
expected to be taken in a tax return. We account for uncertainty in income taxes using a two-step
approach for evaluating tax positions. Step one, recognition, occurs when we conclude that a tax
position, based solely on its technical merits, is more likely than not to be sustained upon examination.
Step two, measurement, determines the amount of benefit that is more likely than not to be realized
upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.
De-recognition of a tax position that was previously recognized would occur if we subsequently
determine that a tax position no longer meets the more likely than not threshold of being sustained.
We recognize interest and penalties, if any, related to unrecognized tax benefits as income tax expense
in our consolidated statements of operations.
On December 22, 2017, the Tax Act was enacted into law and the new legislation contains certain
key tax provisions that affected us. The Tax Act affects us by (i) reducing the U.S. tax rate to 21%
effective January 1, 2018, (ii) impacting the values of our deferred assets and liabilities, (iii) changing
73
our ability to utilize future net operating losses and (iv) requiring a one-time tax on any of our
unrepatriated foreign earnings and profits (‘‘E&P’’) in 2017.
Pursuant to U.S. GAAP, changes in tax rates and tax laws are accounted for in the period of
enactment, and the resulting effects are included as components of the income tax provision related to
continuing operations within the same period. Therefore, the following changes in the tax laws have
been accounted for in 2017. Our deferred tax assets and liabilities and offsetting valuation allowance
have been remeasured at the new enacted tax rate as of December 31, 2017. The amount of U.S. net
operating losses that we have available and our ability to utilize them to reduce future taxable income
is not impacted by the Tax Act. However, the Tax Act may impact the amount and ability to utilize net
operating losses generated by us in the future. Additionally, we believe that any undistributed amounts
of foreign earnings and profits potentially included in taxable income would be offset by net operating
losses; therefore, no transition tax is due from us in 2017.
We are required to recognize the effect of the tax law changes in the period of enactment, such as
re-measuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of
deferred tax assets and liabilities. In December 2017, the SEC issued Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act (‘‘SAB 118’’), which allows entities to
record provisional amounts during a measurement period not to extend beyond one year of the
enactment date. We consider the E&P and other items to be provisional and expect to complete our
analysis within the measurement period in accordance with SAB 118, although we do not expect there
to be any adjustment to the income tax benefit (expense) on our consolidated statements of operations
and comprehensive loss during the re-measurement period.
Recent Accounting Pronouncements
Refer to Note 2 in the ‘‘Notes to Consolidated Financial Statements’’ included in Part II, Item 8 of
this Annual Report on Form 10-K for a discussion of FASB’s recent accounting pronouncements and
their effect on us.
74
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
2U, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of 2U, Inc. and subsidiaries (the
Company) as of December 31, 2017 and 2016, the related consolidated statements of operations and
comprehensive loss, changes in stockholders’ equity, and cash flows for each of the years in the
three-year period ended December 31, 2017, and the related notes (collectively, the consolidated
financial statements). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of
its operations and its cash flows for each of the years in the three-year period ended December 31,
2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as
of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated February 27, 2018 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud. Our audits
included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable
basis for our opinion.
We have served as the Company’s auditor since 2013.
/s/ KPMG LLP
McLean, Virginia
February 27, 2018
75
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
2U, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited 2U, Inc. and subsidiaries’ (the Company) internal control over financial reporting
as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of
December 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive
loss, changes in stockholders’ equity, and cash flows for each of the years in the three-year period
ended December 31, 2017, and related notes (collectively, the consolidated financial statements), and
our report dated February 27, 2018 expressed an unqualified opinion on those consolidated financial
statements.
The Company acquired Get Educated International Proprietary Limited (GetSmarter) during 2017,
and management excluded from its assessment of the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2017, GetSmarter’s internal control over financial reporting
associated with 1.3% of total assets and 5.7% of total revenues included in the consolidated financial
statements of the Company as of and for the year ended December 31, 2017. Our audit of internal
control over financial reporting of the Company also excluded an evaluation of the internal control
over financial reporting of GetSmarter.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Annual Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit of internal control
over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
76
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
McLean, Virginia
February 27, 2018
77
2U, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
December 31,
2017
December 31,
2016
Assets
Current assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 223,370
14,174
10,509
$ 168,730
7,860
8,108
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortizable intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets, non-current . . . . . . . . . . . . . . . . . . . . .
248,053
49,055
71,988
90,761
22,205
184,698
15,596
—
34,131
9,895
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 482,062
$ 244,320
Liabilities and stockholders’ equity
Current liabilities
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation and related benefits . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 22,629
19,017
7,024
9,330
$ 14,724
16,491
3,137
6,717
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current lease-related liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred government grant obligations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58,000
22,573
3,500
10,087
70
94,230
41,069
7,620
—
—
394
49,083
Commitments and contingencies (Note 6)
Stockholders’ equity
Preferred stock, $0.001 par value, 5,000,000 shares authorized, none
issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Common stock, $0.001 par value, 200,000,000 shares authorized,
52,505,856 shares issued and outstanding as of December 31, 2017;
47,151,635 shares issued and outstanding as of December 31, 2016 . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . .
53
588,289
(205,836)
5,326
47
371,455
(176,265)
—
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
387,832
195,237
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 482,062
$ 244,320
See accompanying notes to consolidated financial statements.
78
2U, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share amounts)
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs and expenses
Curriculum and teaching . . . . . . . . . . . . . . . . . . . . . . . . .
Servicing and support
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Technology and content development . . . . . . . . . . . . . . . .
Marketing and sales
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . .
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . .
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . .
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss per share, basic and diluted . . . . . . . . . . . . . . . . . .
Weighted-average shares of common stock outstanding, basic
and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss
Foreign currency translation adjustments, net of tax of $0
Year Ended December 31,
2017
2016
2015
$
286,752
$
205,864
$
150,194
6,609
50,767
45,926
150,923
62,665
316,890
(30,138)
371
(87)
(866)
(30,720)
1,297
—
40,982
33,283
106,610
46,021
226,896
(21,032)
383
(35)
—
(20,684)
—
—
32,047
27,211
82,911
34,123
176,292
(26,098)
167
(552)
(250)
(26,733)
—
$
$
(29,423) $
(20,684) $
(26,733)
(0.60) $
(0.44) $
(0.63)
49,062,611
46,609,751
42,420,356
for all periods presented . . . . . . . . . . . . . . . . . . . . . . . .
5,326
—
—
Comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(24,097) $
(20,684) $
(26,733)
See accompanying notes to consolidated financial statements.
79
2U, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except share amounts)
Common Stock
Shares
Amount
40,735,069
1,141,731
$41
1
Additional
Paid-In
Capital
$216,818
5,335
Accumulated
Deficit
$(128,848)
—
Accumulated
Other
Comprehensive
Loss
$ —
—
Total
Stockholders’
Equity
$ 88,011
5,336
Balance, December 31, 2014 . . . .
Exercise of stock options . . . . .
Issuance of common stock in
connection with settlement of
restricted stock units, net of
withholdings . . . . . . . . . . . .
Issuance of common stock, net
of issuance costs . . . . . . . . .
Issuance of common stock
248,088
3,625,000
award . . . . . . . . . . . . . . . .
26,567
Stock-based compensation
expense . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . .
—
—
Balance, December 31, 2015 . . . .
45,776,455
Exercise of stock options . . . . .
Issuance of common stock in
connection with settlement of
restricted stock units, net of
withholdings . . . . . . . . . . . .
Issuance of common stock
1,011,153
351,319
award . . . . . . . . . . . . . . . .
12,708
Stock-based compensation
expense . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . .
—
—
Balance, December 31, 2016 . . . .
47,151,635
Cumulative-effect of accounting
change (Note 2) . . . . . . . . .
Balance, December 31, 2016,
adjusted . . . . . . . . . . . . . . . .
Exercise of stock options . . . . .
Issuance of common stock in
connection with settlement of
restricted stock units, net of
withholdings . . . . . . . . . . . .
Issuance of common stock, net
of issuance costs . . . . . . . . .
Stock-based compensation
expense . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . .
Foreign currency translation
adjustment . . . . . . . . . . . . .
—
47,151,635
846,821
459,900
4,047,500
—
—
—
—
4
—
—
—
46
1
—
—
—
—
47
—
47
1
1
4
—
—
—
(436)
117,108
750
11,749
—
—
—
—
—
(26,733)
351,324
(155,581)
4,858
(382)
(168)
—
—
—
15,823
—
—
(20,684)
371,455
(176,265)
148
(148)
371,603
6,614
(176,413)
—
(1,310)
189,452
21,930
—
—
—
—
(29,423)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(436)
117,112
750
11,749
(26,733)
195,789
4,859
(382)
(168)
15,823
(20,684)
195,237
—
195,237
6,615
(1,309)
189,456
21,930
(29,423)
5,326
$5,326
5,326
$387,832
Balance, December 31, 2017 . . . .
52,505,856
$53
$588,289
$(205,836)
See accompanying notes to consolidated financial statements.
80
2U, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . .
Charge related to execution of new lease agreement . . . . . . . . . . .
Changes in operating assets and liabilities:
Increase in accounts receivable, net . . . . . . . . . . . . . . . . . . . . .
Decrease (increase) in prepaid expenses and other assets . . . . . .
Increase (decrease) in accounts payable and accrued expenses . .
Increase in accrued compensation and related benefits . . . . . . .
Increase in deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in payments to university clients . . . . . . . . .
. . . . . . . . . . . . . . . .
Increase (decrease) in other liabilities, net
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2017
2016
2015
$ (29,423) $ (20,684) $ (26,733)
19,624
21,930
—
(5,634)
1,549
3,504
2,504
1,661
(13,239)
4,763
867
9,750
15,823
—
(6,885)
(1,090)
(2,459)
3,086
528
2,234
4,907
—
5,210
7,220
12,499
884
(625)
(4,876)
2,366
4,317
703
(3,664)
(1,608)
250
(9,267)
Net cash provided by (used in) operating activities . . . . . . . . . .
8,106
Cash flows from investing activities
Purchase of a business, net of cash acquired . . . . . . . . . . . . . . . . .
Purchases of property and equipment
. . . . . . . . . . . . . . . . . . . . .
Additions of amortizable intangible assets . . . . . . . . . . . . . . . . . .
Advances made to university clients . . . . . . . . . . . . . . . . . . . . . . .
Advances repaid by university clients . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(97,102)
(27,316)
(23,823)
(1,950)
817
—
—
(7,648)
(16,728)
—
—
(142)
—
(1,256)
(12,358)
—
—
(2,331)
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . .
(149,374)
(24,518)
(15,945)
Cash flows from financing activities
Proceeds from issuance of common stock, net of offering costs . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . .
Proceeds from debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax withholding payments associated with settlement of restricted
stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . .
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . .
189,463
6,615
3,500
(1,517)
(1,309)
—
196,752
(844)
54,640
168,730
— 117,112
5,336
—
—
4,859
—
—
(378)
(172)
4,309
—
(14,999)
183,729
(436)
—
122,012
—
96,800
86,929
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . .
$ 223,370
$168,730
$183,729
See accompanying notes to consolidated financial statements.
81
2U, Inc.
Notes to Consolidated Financial Statements
1. Organization
2U, Inc. (the ‘‘Company’’) is a leading education technology company that well-recognized
nonprofit colleges and universities trust to bring them into the digital age. The Company’s
comprehensive platform provides the digital infrastructure universities need to attract, enroll, educate
and support students at scale, while delivering high-quality outcomes. With the Company’s platform,
students can pursue their education anytime, anywhere, without quitting their jobs or moving; and
university clients can improve educational outcomes, skills attainment and career prospects for a
greater number of students.
On July 1, 2017, the Company completed its acquisition of all of the outstanding equity interests of
Get Educated International Proprietary Limited (‘‘GetSmarter’’), a leader in collaborating with
universities to offer premium online short courses to working professionals. The acquisition will enable
the Company to expand its total addressable market by offering short course certificates to students not
seeking a full graduate degree and to provide a better product-market fit for international audiences.
As a result of the acquisition of GetSmarter, the Company now manages its operations in two
operating segments: the Graduate Program Segment and the Short Course Segment. See Note 3 for
further information on the GetSmarter acquisition and Note 13 for further information on the
Company’s segments.
2. Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries and have been prepared in accordance with United States generally accepted
accounting principles (‘‘U.S. GAAP’’) and include the assets, liabilities, results of operations and cash
flows of the Company. All significant intercompany accounts and transactions have been eliminated in
consolidation.
Reclassifications
The Company has reclassified capitalized technology and content development, as well as other
amortizable intangible assets, into amortizable intangible assets, net on the consolidated balance sheets
and consolidated statements of cash flows. In addition, certain other prior period amounts in the
consolidated balance sheets and consolidated statements of cash flows have been reclassified to
conform to the current period’s presentation. These reclassifications had no impact on total assets, total
liabilities, cash flows from operating activities or cash flows from investing activities previously reported
for any periods presented.
Use of Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires
management to make certain estimates and assumptions that affect the amounts reported herein. The
Company bases its estimates and assumptions on historical experience and on various other factors that
it believes to be reasonable under the circumstances. Due to the inherent uncertainty involved in
making estimates, actual results reported in future periods may be affected by changes in those
estimates. The Company evaluates its estimates and assumptions on an ongoing basis.
82
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
2. Significant Accounting Policies (Continued)
Business Combinations
The purchase price of an acquisition is allocated to the assets acquired, including intangible assets,
and liabilities assumed, based on their respective fair values at the acquisition date. Acquisition-related
costs are expensed as incurred. The excess of the cost of an acquired entity of the net of the amounts
assigned to the assets acquired and liabilities assumed is recognized as goodwill. The net assets and
results of operations of an acquired entity are included in the Company’s consolidated financial
statements from the acquisition date.
Concentration of Credit Risk
Financial instruments that subject the Company to significant concentrations of credit risk consist
primarily of cash and cash equivalents and accounts receivable. All of the Company’s cash is held at
financial institutions that management believes to be of high credit quality. The Company’s bank
accounts exceed federally insured limits at times. The Company has not experienced any losses on cash
to date. To manage accounts receivable risk, the Company maintains an allowance for doubtful
accounts, if needed.
Cash and Cash Equivalents
Cash and cash equivalents consist of bank checking accounts, money market accounts, investments
in certificates of deposit that mature in less than three months and highly liquid marketable securities
with maturities at the time of purchase of three months or less.
Fair Value Measurements
The carrying amounts of certain assets and liabilities, including cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses and other current liabilities, approximate their
respective fair values due to their short-term nature.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date, based on the
Company’s principal or, in the absence of a principal, most advantageous, market for the specific asset
or liability.
U.S. GAAP provides for a three-tier fair value hierarchy to classify and disclose all assets and
liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair
value on a non-recurring basis, in periods subsequent to their initial measurement. The fair value
hierarchy requires the Company to use observable inputs when available, and to minimize the use of
unobservable inputs when determining fair value. The three tiers are defined as follows:
• Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or
liabilities in active markets;
• Level 2—Observable inputs, other than quoted prices in active markets, that are observable
either directly or indirectly in the marketplace for identical or similar assets and liabilities; and
• Level 3—Unobservable inputs that are supported by little or no market data, which require the
Company to develop its own assumptions about the assumptions market participants would use
in pricing the asset or liability based on the best information available in the circumstances.
83
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
2. Significant Accounting Policies (Continued)
Advances to University Clients
The Company is contractually obligated to pay advances to certain of its university clients in order
to fund start-up expenses of the program on behalf of the university client. Advances to university
clients are stated at realizable value. Advances are repaid to the Company on terms as required in the
respective agreements. The Company recognizes imputed interest income on these advance payments
when there is a significant amount of imputed interest.
Long-Lived Assets
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization.
Expenditures for major additions, construction and improvements are capitalized. Depreciation and
amortization is expensed using the straight-line method over the estimated useful lives of the related
assets, which range from three to five years for computer hardware and five to seven years for furniture
and office equipment. Leasehold improvements are depreciated on a straight-line basis over the lesser
of the remaining term of the leased facility or the estimated useful life of the improvement, which
generally ranges from four to approximately 11 years. Useful lives of significant assets are periodically
reviewed and adjusted prospectively to reflect the Company’s current estimates of the respective assets’
expected utility. Repair and maintenance costs are expensed as incurred.
Amortizable Intangible Assets
Acquired Intangible Assets. The Company capitalizes purchased intangible assets such as software,
websites and domains and amortizes them on a straight-line basis over their estimated useful life.
Historically, the Company has assessed the useful lives of these acquired intangible assets to be
between three and ten years.
Capitalized Technology. The Company capitalizes certain costs related to internal-use software,
primarily consisting of direct labor associated with creating the software. Software development projects
generally include three stages: the preliminary project stage (all costs are expensed as incurred), the
application development stage (certain costs are capitalized and certain costs are expensed as incurred)
and the post-implementation/operation stage (all costs are expensed as incurred). Costs capitalized in
the application development stage include costs of designing the application, coding, integrating the
Company’s and the university’s networks and systems, and the testing of the software. Capitalization of
costs requires judgment in determining when a project has reached the application development stage
and the period over which the Company expects to benefit from the use of that software. Once the
software is placed in service, these costs are amortized on the straight-line method over the estimated
useful life of the software, which is generally three years.
Capitalized Content Development. The Company develops content on a course-by-course basis in
conjunction with the faculty for each university client program. The university clients and their faculty
generally provide course outlines in the form of the curriculum, required textbooks, case studies and
other reading materials, as well as presentations that are typically used in the on-campus setting. The
Company is then responsible for, and incurs all of the expenses related to, the conversion of the
materials provided by each university client into a format suitable for delivery through our online
learning platform.
84
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
2. Significant Accounting Policies (Continued)
The content development costs that qualify for capitalization are third-party direct costs, such as
videography, editing and other services associated with creating digital content. Additionally, the
Company capitalizes internal payroll and payroll-related costs incurred to create and produce videos
and other digital content utilized in the university clients’ programs for delivery via Online Campus.
Capitalization ends when content has been fully developed by both the Company and the university
client, at which time amortization of the capitalized content development costs begin. The capitalized
costs are recorded on a course-by-course basis and included in capitalized content costs on the
consolidated balance sheets. These costs are amortized using the straight-line method over the
estimated useful life of the respective capitalized content program, which is generally five years. The
estimated useful life corresponds with the planned curriculum refresh rate. This refresh rate is
consistent with expected curriculum refresh rates as cited by program faculty members for similar
on-campus programs. It is reasonably possible that developed content could be refreshed before the
estimated useful lives are complete or be expensed immediately in the event that the development of a
course is discontinued prior to launch.
Evaluation of Long-Lived Assets
The Company reviews long-lived assets, which consist of property and equipment, capitalized
technology costs, capitalized content development costs and acquired finite-lived intangible assets, for
impairment whenever events or changes in circumstances indicate the carrying value of an asset may
not be recoverable. Recoverability of a long-lived asset is measured by a comparison of the carrying
value of an asset or asset group to the future undiscounted net cash flows expected to be generated by
that asset or asset group. If such assets are not recoverable, the impairment to be recognized is
measured by the amount by which the carrying value of an asset exceeds the estimated fair value
(discounted cash flow) of the asset or asset group. In order to assess the recoverability of the
capitalized technology and content development costs, the costs are grouped by degree vertical, which is
the lowest level of independent cash flows. The Company’s impairment analysis is based upon
cumulative results and forecasted performance. The actual results could vary from the Company’s
forecasts, especially in relation to recently launched programs.
Non-Cash Long-Lived Asset Additions
During the year ended December 31, 2017, the Company had capital asset additions of
$62.3 million in property and equipment and capitalized technology and content development, of which
$11.2 million consisted of non-cash capital expenditures, primarily related to landlord funded leasehold
improvements.
During the year ended December 31, 2016, the Company had capital asset additions of
$30.8 million in property and equipment and capitalized technology and content development, of which
$6.4 million consisted of non-cash capital expenditures, primarily related to landlord funded leasehold
improvements.
Goodwill
Goodwill is the excess of purchase price over the fair value of identified net assets of the business
acquired. The Company’s goodwill balance was established in connection with the acquisition of
GetSmarter in 2017. The Company will review goodwill at least annually, as of October 1, for possible
85
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
2. Significant Accounting Policies (Continued)
impairment, beginning in 2018. Between annual tests, goodwill is reviewed for possible impairment if an
event occurs or circumstances change that would more likely than not reduce the fair value of the
reporting unit below its carrying value. The Company will test goodwill at the reporting unit level,
which is an operating segment or one level below an operating segment. The Company initially will
assess qualitative factors to determine if it is necessary to perform the two-step goodwill impairment
review. The Company will review goodwill for impairment using the two-step process if it decides to
bypass the qualitative assessment or determines that it is more likely than not that the fair value of a
reporting unit is less than its carrying value based on a qualitative assessment. Upon the completion of
the two-step process, the Company may be required to recognize an impairment based on the
difference between the carrying value and the fair value of the goodwill recorded.
Government Grants
Government grants awarded to the Company in the form of forgivable loans are recorded as
deferred government grant obligations within long-term liabilities on the consolidated balance sheets
until all contingencies are resolved and the grant is determined to be realized.
Income Taxes
Income taxes are accounted for under the asset and liability method, which requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences of events that
are included in the financial statements. Under this method, the deferred tax assets and liabilities are
determined based on the differences between the financial statement and tax bases of the assets and
liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
The effect of a change in tax rates on the deferred tax assets and liabilities is recognized in earnings in
the period when the new rate is enacted. Deferred tax assets are subject to periodic recoverability
assessments. Valuation allowances are established, when necessary, to reduce deferred tax assets to the
amount that more likely than not will be realized. The Company considers all positive and negative
evidence relating to the realization of the deferred tax assets in assessing the need for a valuation
allowance. The Company currently maintains a full valuation allowance against deferred tax assets in
the U.S and certain entities in the foreign jurisdictions.
The Company records a liability for unrecognized tax benefits resulting from uncertain tax
positions taken or expected to be taken in a tax return. The Company accounts for uncertainty in
income taxes using a two-step approach for evaluating tax positions. Step one, recognition, occurs when
the Company concludes that a tax position, based solely on its technical merits, is more likely than not
to be sustained upon examination. Step two, measurement, determines the amount of benefit that is
more likely than not to be realized upon ultimate settlement with a taxing authority that has full
knowledge of all relevant information. De-recognition of a tax position that was previously recognized
would occur if the Company subsequently determines that a tax position no longer meets the more
likely than not threshold of being sustained. The Company recognizes interest and penalties, if any,
related to unrecognized tax benefits as income tax expense in the consolidated statements of operations
and comprehensive loss.
86
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
2. Significant Accounting Policies (Continued)
Revenue Recognition, Accounts Receivable and Allowance for Doubtful Accounts
The Company recognizes revenue when all of the following conditions are met: (i) persuasive
evidence of an arrangement exists, (ii) rendering of services is complete, (iii) fees are fixed or
determinable and (iv) collection of fees is reasonably assured. Revenue for both of our segments is
recognized ratably over the service period, which the Company defines as the first through the last day
of the graduate program class or short course. The Company establishes a refund allowance, if
necessary, for its share of tuition and fees ultimately uncollected either by its university clients within
the Graduate Program Segment or by the Company within the Short Course Segment. Payments to
university clients that are not for distinct goods or services are recognized as a reduction of revenue
over the contractual term or the period to which they relate.
The Graduate Program Segment derives revenue primarily from a contractually specified
percentage of the amounts the Company’s university clients receive from their students in the 2U-
enabled graduate program for tuition and fees, less credit card fees and other specified charges that the
Company has agreed to exclude in certain of our university client contracts. Most of our contracts with
university clients within this segment have 10 to 15 year initial terms.
The Short Course Segment derives revenue directly from students for the tuition and fees paid to
enroll in and progress through our short courses. A contractually specified percentage of the gross
proceeds from students is shared with the university clients, in the form of a royalty recognized within
the Company’s consolidated statements of operations and comprehensive loss as curriculum and
teaching costs, for providing the content and certifying the course. Our university client contracts within
this segment are typically shorter and less restrictive than our contracts within our Graduate Program
Segment.
The Company generally receives payments for revenue from graduate program university clients
early in each academic term and from short course students, either in full upon registration of the
course or in full before the end of the course based on a payment plan, prior to completion of the
service period. The Company records these payments as deferred revenue until the services are
delivered or until the obligations are otherwise met, at which time revenue is recognized. Deferred
revenue as of a particular balance sheet date represents the excess of amounts billed or received as
compared to amounts recognized in revenue in the consolidated statements of operations and
comprehensive loss as of the end of the reporting period, and such amounts are reflected as a current
liability on the Company’s consolidated balance sheets.
The Company generates substantially all of its revenue from multiple-deliverable contractual
arrangements, and provide a combination of access to the platform of technology and technology-
enabled services that support the complete lifecycle of a graduate program or short course, including
attracting students, advising prospective students through the admissions application process, providing
technical, success coaching and other support, facilitating accessibility to individuals with disabilities and
in some cases, facilitating in-program field placements. The Company has determined that no individual
deliverable has standalone value upon delivery and, therefore, the multiple deliverables within its
arrangements do not qualify for treatment as separate units of accounting. Accordingly, the Company
considers all deliverables to be a single unit of accounting and recognizes revenue from the entire
arrangement over the term of the service period.
87
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
2. Significant Accounting Policies (Continued)
The Company’s accounts receivable are stated at net realizable value. The Company utilizes the
allowance method to provide for doubtful accounts based on management’s evaluation of the
collectability of the amounts due. The estimate is based on historical collection experience and a review
of the current status of accounts receivable. Historically, actual write-offs for uncollectible accounts
have not significantly differed from estimates. As of December 31, 2017 and 2016, the allowance for
doubtful accounts was $0.3 million and zero, respectively, and relates to amounts from the Short
Course Segment.
Marketing and Sales Costs
The majority of the marketing and sales costs incurred by the Company are directly related to
acquiring students for its university clients’ programs, with lesser amounts related to the Company’s
own marketing and advertising efforts. For the years ended December 31, 2017, 2016 and 2015, costs
related to the Company’s own marketing and advertising efforts were not material. All such costs are
expensed as incurred and reported in marketing and sales expense in the Company’s consolidated
statements of operations and comprehensive loss.
As of December 31, 2017 and 2016, the Company had $11.7 million and $5.6 million, respectively,
of accrued marketing costs included in accounts payable and accrued expenses on the consolidated
balance sheets.
Leases
The Company leases all of its office facilities and enters into various other lease agreements in
conducting its business. At the inception of each lease, the Company evaluates the lease agreement to
determine whether the lease is an operating or capital lease. Additionally, many of the Company’s lease
agreements contain renewal options, tenant improvement allowances, rent holiday and/or rent
escalation clauses. The Company defers tenant improvement allowances and amortizes such balances as
a reduction of rent expense over the term of the lease. When rent holidays or rent escalations are
included in a lease agreement, the Company records a deferred rent asset or liability in the
consolidated financial statements, and records these items in rent expense evenly over the term of the
lease.
The Company is also required to make additional payments under operating lease terms for taxes,
insurance and other operating expenses incurred during the operating lease period; such items are
expensed as incurred. Rental deposits are included as other assets in the consolidated financial
statements for lease agreements the require payments in advance or deposits held for security that are
refundable, less any damages, at the end of the respective lease.
Stock-Based Compensation
The Company accounts for stock-based compensation awards based on the fair value of the award
as of the grant date. For awards subject to service-based vesting conditions, the Company recognizes
stock-based compensation expense on a straight-line basis over the awards’ requisite service period.
Effective April 1, 2017, expected volatility is based on the historical volatilities of the Company’s
common stock. Prior to January 1, 2017, the Company adjusted stock-based compensation expense for
estimated forfeitures of stock-based awards. As described in the ‘‘Recent Accounting Pronouncements’’
section of this Note, beginning on January 1, 2017, the Company accounts for forfeitures (and the
88
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
2. Significant Accounting Policies (Continued)
impact on stock-based compensation expense) as they occur. For awards subject to both performance
and service-based vesting conditions, the Company recognizes stock-based compensation expense using
an accelerated recognition method when it is probable that the performance condition will be achieved.
Foreign Currency Translation
For the portion of the Company’s non-U.S. business where the local currency is the functional
currency, operating results are translated into U.S. dollars using the average rate of exchange for the
period, and assets and liabilities are converted at the closing rates on the period end date. Gains and
losses on translation of these accounts are accumulated and reported as a separate component of
stockholder’s equity and comprehensive loss.
For any transaction that is in a currency different from the entity’s functional currency, the
Company records a gain or loss based on the difference between the exchange rate at the transaction
date and the exchange rate at the transaction settlement date (or rate at period end, if unsettled) as
other income (expense), net in the consolidated statements of operations and comprehensive loss.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards
Update (‘‘ASU’’) No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment, which eliminates step two from the goodwill impairment test and requires an
entity to recognize an impairment charge for the amount by which the carrying amount of a reporting
unit exceeds its fair value, up to the amount of goodwill allocated to that reporting unit. The
amendments in this ASU are effective for fiscal years beginning after December 15, 2019, with early
adoption permitted. The Company is evaluating the impact that this standard will have on its
consolidated financial position or related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying
the Definition of a Business, which revises the definition of a business and provides new guidance in
evaluating when a set of transferred assets and activities is a business. The amendments in this ASU
are effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The
Company early adopted this ASU in the third quarter of 2017, in connection with the acquisition of
GetSmarter.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230):
Restricted Cash, a consensus of the FASB Emerging Issues Task Force. The ASU requires companies to
explain the changes in the combined total of restricted and unrestricted cash balances in the statement
of cash flows. The amendments in this ASU are effective for fiscal years beginning after December 15,
2017, with early adoption permitted. Adoption of the ASU is retrospective to each prior period
presented. The Company early adopted this ASU in the second quarter of 2017. Adoption of this
standard did not have a material impact on the presentation of prior periods.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments. The ASU addresses eight specific cash flow
issues with the objective of reducing the existing diversity in practice surrounding how certain
transactions are classified in the statement of cash flows. The amendments in this ASU are effective for
annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the
effect that this standard will have on its consolidated statements of cash flows and related disclosures.
89
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
2. Significant Accounting Policies (Continued)
In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU simplifies various
aspects related to the accounting and presentation of share-based payments. The guidance also allows
employers to withhold shares to satisfy minimum statutory withholding requirements up to the
employees’ maximum individual tax rate without causing the award to be classified as a liability.
Additionally, the guidance stipulates that cash paid by an employer to a taxing authority when directly
withholding shares for tax withholding purposes should be classified as a financing activity on the
statement of cash flows, and allows companies to elect an accounting policy to either estimate the
share-based award forfeitures (and expense) or account for forfeitures (and expense) as they occur. The
amendments in this ASU are effective for fiscal years beginning after December 15, 2016. The
Company adopted this ASU on January 1, 2017. In connection with the adoption of this standard, the
Company elected to no longer apply an estimated forfeiture rate and will instead account for
forfeitures as they occur. Accordingly, the Company applied the modified retrospective adoption
approach, which resulted in a $0.1 million cumulative-effect reduction to retained earnings with an
offset to additional paid-in-capital.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU introduces a
model for lessees requiring most leases to be reported on the balance sheet. Lessor accounting remains
substantially similar to current U.S. GAAP. The amendments in this ASU are effective for fiscal years
beginning after December 15, 2018. The Company is currently evaluating the effect that this ASU will
have on its consolidated financial position and related disclosures, and believes that this standard may
materially increase its other non-current assets and non-current liabilities on the consolidated balance
sheets in order to record right-of-use assets and related liabilities for its existing operating leases.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going
Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going
Concern. The ASU requires that an entity’s management evaluate whether there are conditions or
events that raise substantial doubt about the entity’s ability to continue as a going concern within one
year after the date that the financial statements are issued. The amendments in this ASU are effective
for annual reporting periods ending after December 15, 2016. The Company adopted this ASU on
January 1, 2017. Adoption of this standard did not have a material impact on the Company’s financial
reporting process.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers
(Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be
entitled for the transfer of promised goods or services to customers. The ASU will replace most
existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the FASB
deferred the mandatory effective date of this ASU by one year from January 1, 2017 to January 1,
2018. Early application is permitted, but not prior to the original effective date of January 1, 2017.
Subsequently, the FASB has issued the following standards related to ASU No. 2014-09:
ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent
Considerations; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying
Performance Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts with Customers
(Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU No. 2016-20, Technical
Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The Company must
adopt ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20 with ASU
No. 2014-09 (collectively, the ‘‘new revenue standard’’). The new revenue standard may be applied
90
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
2. Significant Accounting Policies (Continued)
retrospectively to each prior period presented or retrospectively with the cumulative effect recognized
as of the date of adoption. The Company has finalized its assessment of the new standard, and will
adopt the new revenue standard effective January 1, 2018 using the modified retrospective method. As
part of its assessment, the Company completed reviews of its contracts and evaluated its costs,
particularly costs of obtaining contracts with its university clients and costs associated with content
development. Certain of these contract and content costs will be capitalized under the new standard.
However, the Company has concluded that, upon adoption, the new revenue standard will not have a
material impact on the amount and timing of either its revenue or costs.
3. Business Combination
On July 1, 2017, the Company, through a wholly owned subsidiary (‘‘2U South Africa’’), completed
its acquisition of all of the outstanding equity interests of GetSmarter pursuant to a Share Sale
Agreement, dated as of May 1, 2017 (the ‘‘Share Sale Agreement’’), as amended by an addendum,
dated as of June 29, 2017, for a net purchase price of $98.7 million in cash. In addition, 2U South
Africa agreed to pay a potential earn-out payment of up to $20.0 million, subject to the achievement of
certain financial milestones in calendar years 2017 and 2018. Under the terms of the Share Sale
Agreement, the Company has issued restricted stock units for shares of its common stock, par value
$0.001 per share, to certain employees and officers of GetSmarter. These awards are subject to the
2014 2U, Inc. Equity Incentive Plan and will vest over either a two- or four-year period. As a result of
the transaction, GetSmarter became an indirect wholly owned subsidiary of the Company. The net
assets and results of operations of GetSmarter are included in the Company’s consolidated financial
statements and in the newly established Short Course Segment as of July 1, 2017.
The Company has completed its valuation of the assets acquired and liabilities assumed of
GetSmarter. The following table summarizes the estimated fair values of the assets acquired and
liabilities assumed as of the date of the acquisition:
Estimated Average
Useful Life (in years)
Purchase Price
Allocation
Cash and cash equivalents . . . . . . . . . . . . . . . . . .
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . .
Amortizable intangible assets:
Capitalized technology . . . . . . . . . . . . . . . . . . .
Capitalized content development . . . . . . . . . . . .
University client relationships . . . . . . . . . . . . . .
Trade names and domain names . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . .
Non-current liabilities . . . . . . . . . . . . . . . . . . . . .
3
4
9
10
(in thousands)
$ 1,584
3,676
479
2,800
5,000
28,000
8,900
68,172
(9,031)
(10,894)
$ 98,686
As of December 31, 2017, the completion of the purchase price allocation resulted primarily in a
decrease of approximately $2 million in goodwill and an offsetting decrease in other current liabilities
91
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
3. Business Combination (Continued)
related to contingent consideration. While the overall value of acquired intangible assets did not
materially change, their individual values were reallocated between the asset categories.
The goodwill balance is primarily attributed to the assembled workforce, expanded market
opportunities and cost and other operating synergies anticipated upon the integration of the operations
of 2U and GetSmarter. The goodwill resulting from the acquisition is not expected to be tax deductible.
The unaudited pro forma combined financial information below is presented for illustrative
purposes and does not purport to represent what the results of operations would actually have been if
the business combination occurred as of the dates indicated or what the results would be for any future
periods. The following table presents the Company’s unaudited pro forma combined revenue and pro
forma combined net loss, for the years ended December 31, 2017 and 2016 as if the acquisition of
GetSmarter had occurred on January 1, 2016:
Year Ended
December 31,
2017
2016
(in thousands)
Pro forma revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma net loss
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma net loss per share, basic and diluted . . . . . . . . . . . .
4. Property and Equipment, Net
Property and equipment, net consisted of the following as of:
$294,446
(37,267)
$
(0.76) $
$223,532
(27,959)
(0.60)
Computer hardware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . .
December 31,
2017
December 31,
2016
(in thousands)
$ 8,519
5,354
42,086
194
56,153
(7,098)
$ 3,935
2,204
6,689
6,864
19,692
(4,096)
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$49,055
$15,596
Depreciation expense of property and equipment was $5.5 million, $1.7 million and $1.1 million for
the years ended December 31, 2017, 2016 and 2015, respectively.
5. Goodwill and Amortizable Intangible Assets
As a result of the acquisition of GetSmarter, the Company recorded goodwill of $68.2 million
within its Short Course Segment as of July 1, 2017. As of December 31, 2017, goodwill was
$72.0 million. The difference between the date of acquisition and year end was $3.8 million, due to
changes in foreign currency.
92
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
5. Goodwill and Amortizable Intangible Assets (Continued)
Amortizable intangible assets consisted of the following as of:
Estimated
Gross
Net
Gross
Net
December 31, 2017
December 31, 2016
Average Useful Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount
Life (in years)
Amortization Amount
Amount
Capitalized technology . . . . .
Capitalized content
development . . . . . . . . . . .
University client relationships
Trade names and domain
3
4
9
$ 27,108
$ (9,486) $17,622 $17,100
$ (7,822) $ 9,278
(in thousands)
55,872
29,443
(21,417)
(1,636)
34,455
27,807
37,956
—
(15,367)
—
22,589
—
names . . . . . . . . . . . . . . .
10
12,119
(1,242)
10,877
2,761
(497)
2,264
Total amortizable intangible
assets, net
. . . . . . . . . . . .
$124,542
$(33,781) $90,761 $57,817
$(23,686) $34,131
Included in the amounts presented above are $15.6 million and $8.7 million of in process
capitalized technology and content development as of December 31, 2017 and December 31, 2016,
respectively.
The Company recorded amortization expense related to amortizable intangible assets of
$14.0 million, $8.0 million and $6.1 million for the years ended December 31, 2017, 2016 and 2015,
respectively.
As of December 31, 2017, the estimated future amortization expense for amortizable intangible
assets placed in service is as follows (in thousands):
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17,571
15,595
12,102
8,216
5,404
16,296
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$75,184
On January 19, 2018, the Company entered into an agreement to purchase a perpetual source
code license and services of $14.5 million for the Learn.co platform from Flatiron School, Inc., a wholly
owned subsidiary of WeWork Companies, Inc.
6. Commitments and Contingencies
Legal Contingencies
From time to time, the Company may become involved in legal proceedings or other contingencies
in the ordinary course of its business. The Company is not presently involved in any legal proceeding or
other contingency that, if determined adversely to it, would individually or in the aggregate have a
material adverse effect on its business, operating results, financial condition or cash flows. Accordingly,
93
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
6. Commitments and Contingencies (Continued)
the Company does not believe that there is a reasonable possibility that a material loss exceeding
amounts already recognized may have been incurred as of the date of the balance sheets presented
herein.
Marketing and Sales Commitments
Certain of the agreements entered into between the Company and its university clients require the
Company to commit to meet certain staffing and spending investment thresholds related to marketing
and sales activities. In addition, certain of the agreements require the Company to invest up to agreed
upon levels in marketing the programs to achieve specified program performance. The Company
believes it is currently in compliance with all such commitments.
Future Minimum Payments to University Clients
The Company is contractually obligated to make payments to certain of its university clients in
exchange for contract extensions and various marketing and other rights. Currently, the future
minimum payments to the Company’s university clients in exchange for contract extensions and various
marketing and other rights were as follows (in thousands):
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,975
875
625
625
625
4,400
Total future minimum payments to university clients . . . . . . . . . . . . . . . . .
$13,125
Contingent Payments to University Clients
The Company has entered into specific program agreements under which it would be obligated to
make future minimum program payments to a university client in the event that certain program
metrics, partially associated with programs not yet launched, are not achieved. Due to the dependency
of these calculations on future program launches, the amounts of any associated contingent payments
cannot be reasonably estimated at this time. As the Company cannot reasonably estimate the amounts
of the contingent payments, the Company has excluded such payments from the table above.
7. Operating Leases
In February 2017, the Company signed a lease for new office space in Brooklyn, New York, and
began occupying the space in December 2017. The lease covers three floors totaling approximately
80,000 square feet, requires total future minimum lease payments of approximately $52.5 million and
will expire approximately 12 years after the July 1, 2017 lease commencement date. Related to this
lease, the Company could be eligible for certain state and local incentives that are dependent on
construction build, employment levels, the Company’s taxable income and other factors. The Company
is in the process of applying for such eligibility, but is not currently able to assess the potential benefit
these incentives may yield over the lease term.
94
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
7. Operating Leases (Continued)
The Company leases office facilities under non-cancelable operating leases in Maryland, New York,
California, Colorado, North Carolina, Virginia, Hong Kong, South Africa and the United Kingdom.
The Company also leases office equipment under non-cancelable leases. As of December 31, 2017, the
future minimum lease payments were as follows (in thousands):
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,308
11,862
11,549
13,685
13,719
82,187
Total future minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . .
$142,310
The future minimum lease payments due under non-cancelable operating lease arrangements
contain fixed rent increases over the term of the lease. Rent expense on these operating leases is
recognized over the term of the lease on a straight-line basis. The excess of rent expense over actual
lease payments is reported in non-current liabilities in the accompanying consolidated balance sheets.
The deferred rent liability related to these leases totaled $6.5 million and $2.5 million as of
December 31, 2017 and 2016, respectively. The Company does not have any subleases as of
December 31, 2017.
Total rent expense from non-cancelable operating lease agreements (net of sublease income of
zero, $0.3 million and $0.3 million) was $8.5 million, $5.8 million and $3.5 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
8. Debt
Lines of Credit
On December 31, 2013, the Company entered into a credit agreement with Comerica for a
revolving line of credit with an aggregate commitment not to exceed $37.0 million. On December 31,
2015, the Company amended this credit agreement to reduce the aggregate amount it may borrow to
$25.0 million. In June 2017, the Company and Comerica amended this credit agreement pursuant to
which, among other things, Comerica consented to the Company’s acquisition of GetSmarter and the
Company’s formation of certain subsidiaries in connection therewith. On January 31, 2018, the
Company amended this credit agreement to extend the maturity date through March 31, 2018. No
amounts were outstanding under this credit agreement as of December 31, 2017 or 2016. The Company
intends to extend this agreement under comparable terms, prior to expiration.
Under this revolving line of credit, the Company has the option of borrowing funds subject to (i) a
base rate, which is equal to 1.5% plus the greater of Comerica’s prime rate, the federal funds rate plus
1% or the 30-day LIBOR plus 1%, or (ii) LIBOR plus 2.5%. For amounts borrowed under the base
rate, the Company may make interest-only payments quarterly, and may prepay such amounts with no
penalty. For amounts borrowed under LIBOR, the Company makes interest-only payments in periods
of one, two and three months and will be subject to a prepayment penalty if such borrowed amounts
are repaid before the end of the interest period.
95
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
8. Debt (Continued)
Borrowings under the line of credit are collateralized by substantially all of the Company’s assets.
The availability of borrowings under this credit line is subject to compliance with reporting and
financial covenants, including, among other things, that the Company achieves specified minimum
three-month trailing revenue levels during the term of the agreement and specified minimum six-month
trailing profitability levels for some university client programs, measured quarterly. In addition, the
Company is required to maintain a minimum adjusted quick ratio, which measures short-term liquidity,
of at least 1.10 to 1.00. As of December 31, 2017 and 2016, the Company’s adjusted quick ratio was
5.44 and 5.43, respectively.
The covenants under the line of credit also place limitations on the Company’s ability to incur
additional indebtedness or to prepay permitted indebtedness, grant liens on or security interests in its
assets, carry out mergers and acquisitions, dispose of assets, declare, make or pay dividends, make
capital expenditures in excess of specified amounts, make investments, loans or advances, enter into
transactions with affiliates, amend or modify the terms of material contracts, or change its fiscal year. If
the Company is not in compliance with the covenants under the line of credit, after any opportunity to
cure such non-compliance, or it otherwise experiences an event of default under the line of credit. The
Company is currently in compliance with all such covenants.
Certain of the Company’s operating lease agreements entered into prior to December 31, 2017
require security deposits in the form of cash or an unconditional, irrevocable letter of credit. As of
December 31, 2017, the Company has entered into standby letters of credit totaling $11.5 million as
security deposits for the applicable leased facilities. Additionally, in June 2017, the Company entered
into standby letters of credit totaling $3.5 million in connection with two government grants, as
described later in this Note. These letters of credit reduced the aggregate amount the Company may
borrow under its revolving line of credit to $10.0 million.
The Company’s Short Course Segment had $1.9 million of revolving debt facilities that matured on
December 31, 2017. These facilities were subsequently extended with a borrowing base of $1.3 million
and will mature on March 31, 2018. As of December 31, 2017, there were no amounts outstanding
under these facilities and the interest rate was 10.25%.
Government Grants
On June 22, 2017, the Company executed a conditional loan agreement and received financing
from Prince George’s County, Maryland that provides for a grant in the form of a forgivable loan of
$1.5 million. The financing was secured by a letter of credit pursuant to the Company’s line of credit
with Comerica. The conditional loan obligation is recorded as deferred government grant obligations on
the consolidated balance sheets. The proceeds from this loan are to be used in connection with the
relocation of 2U’s headquarters, leasehold improvements thereto and other purposes. The loan has a
maturity date of June 22, 2027, and bears interest at a rate of 3% per annum. If 2U does not employ
at least 650 employees at its Lanham headquarters at any time during the term of the loan period or
otherwise defaults on the loan, the entire principal balance, plus accrued interest, will become due and
payable. If 2U does not employ at least 1,300 employees at its Lanham headquarters by January 1,
2020, the Company will be required to repay a prorated portion of the loan ($2,252 per employee, for
every employee below 1,300), plus interest. During the year ended December 31, 2017, the Company
did not incur a material amount of interest expense on this forgivable loan.
96
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
8. Debt (Continued)
On June 27, 2017, 2U Harkins Road LLC (a wholly owned subsidiary of the Company) executed a
loan agreement and received financing from the Department of Commerce (a principal department of
the State of Maryland) that provides for a grant in the form of a forgivable loan of $2.0 million. The
financing was secured by a letter of credit pursuant to the Company’s line of credit with Comerica. The
conditional loan obligation is recorded as ‘‘Deferred government grant obligations’’ on the consolidated
balance sheets. The proceeds from this loan are to be used in connection with the relocation of 2U’s
headquarters, leasehold improvements thereto and other purposes. The loan has a maturity date of
December 31, 2026, and bears interest at a rate of 3% per annum. If 2U does not employ at least 650
employees at its Lanham headquarters at any time during the term of the loan period or otherwise
defaults on the loan, the entire principal balance, plus accrued interest, will become due and payable. If
2U does not employ at least 1,600 employees at its Lanham headquarters by December 31, 2020, and
at each December 31 thereafter through 2026, the Company will be required to repay a prorated
portion of the loan ($2,105 per employee, for every employee below 1,600), plus interest. During the
year ended December 31, 2017, the Company did not incur a material amount of interest expense on
this forgivable loan.
9. Income Taxes
The following table presents the components of loss before income taxes:
Year Ended December 31,
2017
2016
2015
(in thousands)
Loss before income taxes:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(25,002) $(20,684) $(26,733)
—
(5,718)
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(30,720) $(20,684) $(26,733)
For the year ended December 31, 2017, the Company had a tax benefit of $1.3 million, which is
solely related to a deferred tax benefit. For the years ended December 31, 2016 and 2015, the
Company did not have a current or deferred tax provision or benefit.
97
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
9. Income Taxes (Continued)
A reconciliation between the Company’s statutory federal income tax rate and the effective tax
rate is presented below:
U.S. statutory federal income tax rate . . . . . . . . . . . . . . . . .
Increase (decrease) resulting from:
Year ended December 31,
2017
2016
2015
35.0% 35.0% 35.0%
U.S. state income taxes, net of federal benefits . . . . . . . . .
Foreign tax rate differential
. . . . . . . . . . . . . . . . . . . . . . .
Non-deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . .
Change in tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9.9
5.5
(1.4) —
(1.5)
(1.8)
(2.9)
40.9
(36.6)
29.8
(108.0) —
0.5
(0.2)
7.7
—
(1.0)
(1.0)
(39.1)
—
(1.6)
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.2% 0.0% 0.0%
The significant components of the Company’s deferred tax assets and liabilities are as follows:
As of December 31,
2017
2016
(in thousands)
Deferred tax assets:
Accrued expenses and other . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation and related benefits . . . . . . . . . . . . .
Rebate reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign net operating loss carryforwards . . . . . . . . . . . . . . .
U.S net operating loss carryforwards . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,395
3,524
20
6,924
6,874
191
1,704
69,425
(71,101)
$ 2,757
4,317
126
1,028
7,127
—
—
61,995
(62,297)
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 19,956
$ 15,053
Deferred tax liabilities:
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized content development costs . . . . . . . . . . . . . . . . .
Capitalized software development costs . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(355) $ (1,524)
(9,368)
(3,848)
(313)
—
(8,600)
(4,356)
(4,720)
(12,012)
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
$(30,043) $(15,053)
Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(10,087) $
—
98
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
9. Income Taxes (Continued)
Deferred tax valuation allowances and changes in deferred tax valuation allowances are as follows:
Balance at
Beginning of
Period
Additions
Charged to
Expense
Deductions
Balance at End
of Period
(in thousands)
Income tax valuation allowance:
Year ended December 31, 2017 . . . . . . . . . . . . . .
Year ended December 31, 2016 . . . . . . . . . . . . . .
Year ended December 31, 2015 . . . . . . . . . . . . . .
$62,297
54,739
44,309
$17,967
7,558
10,430
$(9,163)
—
—
$71,101
62,297
54,739
At December 31, 2017, the Company had a U.S. net operating loss (‘‘NOL’’) carryforward of
approximately $253.2 million, which expires between 2029 and 2037. The gross amount of the state
NOL carryforwards is equal to or less than the federal NOL carryforwards and expires over various
periods based on individual state tax laws. The Company also had an NOL carryforward of $6.7 million
in its foreign jurisdictions which do not expire. A full valuation allowance has been established to offset
its net deferred tax assets in the U.S. and certain foreign jurisdictions as the Company has not
generated taxable income since inception and does not have sufficient deferred tax liabilities to recover
the deferred tax assets in these jurisdictions. The total increase in the valuation allowance was
$8.8 million for the year ended December 31, 2017. The utilization of the NOL carryforwards to reduce
future income taxes will depend on the Company’s ability to generate sufficient taxable income prior to
the expiration of the NOL carryforwards. Under the provisions of Internal Revenue Code Section 382,
certain substantial changes in the Company’s ownership may result in a limitation on the amount of
U.S. net operating loss carryforwards that could be utilized annually to offset future taxable income and
taxes payable. The Company does not expect such limitation, if any, to impact the use of the net
operating losses prior to their expiration.
As of December 31, 2017 and 2016, the Company has not recognized any amounts for uncertain
tax positions.
The Company has analyzed its filing positions in all significant federal, state and foreign
jurisdictions where it is required to file income tax returns, as well as open tax years in these
jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local tax
examinations by tax authorities for the years prior to 2014, though the NOL carryforwards can be
adjusted upon audit and could impact taxes owed in open tax years. No income tax returns are
currently under examination by the taxing authorities.
On December 22, 2017, the Tax Act and Jobs Act of 2017 (the ‘‘Tax Act’’) was enacted into law
and the new legislation contains certain key tax provisions that affected the Company. The Tax Act
affects the Company by (i) reducing the U.S. tax rate to 21% effective January 1, 2018, (ii) impacting
the values of the Company’s deferred assets and liabilities, (iii) changing the Company’s ability to
utilize future net operating losses and (iv) requiring a one-time tax on any of the Company’s
unrepatriated foreign earnings and profits (‘‘E&P’’) in 2017.
Pursuant to U.S. GAAP, changes in tax rates and tax laws are accounted for in the period of
enactment, and the resulting effects are included as components of the income tax provision related to
continuing operations within the same period. Therefore, the following changes in the tax laws have
been accounted for in 2017. The Company’s deferred tax assets and liabilities and offsetting valuation
99
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
9. Income Taxes (Continued)
allowance have been remeasured at the new enacted tax rate as of December 31, 2017. The amount of
U.S. net operating losses that the Company has available and the Company’s ability to utilize them to
reduce future taxable income is not impacted by the Tax Act. However, the Tax Act may impact the
amount and ability to utilize net operating losses generated by the Company in the future. Additionally,
the Company believes that any undistributed amounts of foreign earnings and profits potentially
included in taxable income would be offset by net operating losses; therefore, no transition tax is due
by the Company in 2017.
The Company is required to recognize the effect of the tax law changes in the period of
enactment, such as re-measuring its U.S. deferred tax assets and liabilities as well as reassessing the net
realizability of deferred tax assets and liabilities. In December 2017, the SEC issued Staff Accounting
Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (‘‘SAB 118’’), which
allows entities to record provisional amounts during a measurement period not to extend beyond one
year of the enactment date. The Company considers the E&P and other items to be provisional and
expects to complete its analysis within the measurement period in accordance with SAB 118, although
it does not expect there to be any adjustment to the income tax benefit (expense) on the Company’s
consolidated statements of operations and comprehensive loss during the re-measurement period.
10. Stockholders’ Equity
On September 30, 2015, the Company sold 3,625,000 shares of its common stock to the public,
including 525,000 shares sold pursuant to the underwriters’ over-allotment option. The Company
received net proceeds of $117.1 million, which the Company intends to use for general corporate
purposes, including expenditures for marketing, sales, technology and content development in
connection with new program launches and growing existing programs.
On September 11, 2017, the Company sold 4,047,500 shares of its common stock to the public,
including 547,500 shares sold pursuant to the underwriters’ over-allotment option. The Company
received net proceeds of $189.5 million, which the Company intends to use for general corporate
purposes, including expenditures for graduate program and short course marketing, technology and
content development, in connection with new graduate program and short course launches and growing
existing graduate programs and short courses.
As of December 31, 2017, the Company was authorized to issue 205,000,000 total shares of capital
stock, consisting of 200,000,000 shares of common stock and 5,000,000 shares of preferred stock. At
December 31, 2017, the Company had reserved a total of 11,388,192 of its authorized shares of
common stock for future issuance as follows:
Outstanding stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Possible future issuance under 2014 Equity Incentive Plan . . . . . . . . . . .
Outstanding restricted stock units
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available for future issuance under employee stock purchase plan . . . . .
4,559,176
4,415,593
1,413,423
1,000,000
Total shares of common stock reserved for future issuance . . . . . . . . . .
11,388,192
100
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
11. Stock-Based Compensation
The Company provides equity-based compensation awards to employees, independent contractors
and directors as an effective means for attracting, retaining and motivating such individuals. The
Company maintains two share-based compensation plans: the 2014 Equity Incentive Plan (the ‘‘2014
Plan’’) and the 2008 Stock Incentive Plan (the ‘‘2008 Plan’’). Upon the effective date of the 2014 Plan
in January 2014, the Company ceased using the 2008 Plan to grant new equity awards, and began using
the 2014 Plan for grants of new equity awards.
2014 Plan
In February 2014, the Company’s stockholders approved the 2014 Plan. The 2014 Plan provides for
the grant of incentive stock options to the Company’s employees and its parent and subsidiary
corporations’ employees, and for the grant of nonstatutory stock options, restricted stock awards,
restricted stock unit awards, stock appreciation rights, performance stock awards and other forms of
stock compensation to the Company’s employees, consultants and directors. The 2014 Plan also
provides for the grant of performance-based cash awards to the Company’s employees, consultants and
directors.
A total of 2,800,000 shares of the Company’s common stock were initially reserved for issuance
pursuant to the 2014 Plan. In addition, the shares reserved for issuance under the 2014 Plan include
(a) those shares reserved but unissued under the 2008 Plan, and (b) shares returned to the 2008 Plan
as the result of expiration or termination of awards (provided that the maximum number of shares that
may be added to the 2014 Plan pursuant to (a) and (b) is 5,943,348 shares). The number of shares of
the Company’s common stock that may be issued under the 2014 Plan will automatically increase on
January 1st of each year, for a period of ten years, from January 1, 2015 continuing through January 1,
2024, by 5% of the total number of shares of the Company’s common stock outstanding on
December 31st of the preceding calendar year, or a lesser number of shares as may be determined by
the Company’s board of directors. The shares available for issuance increased by 2,625,292 and
2,357,579 on January 1, 2018 and 2017, respectively, pursuant to the automatic share reserve increase
provision under the 2014 Plan.
In addition, shares subject to outstanding stock awards granted under the 2008 Plan and 2014 Plan
that (i) expire or terminate for any reason prior to exercise or settlement; (ii) are forfeited because of
the failure to meet a contingency or condition required to vest such shares or otherwise return to the
Company; or (iii) are reacquired, withheld (or not issued) to satisfy a tax withholding obligation in
connection with an award or to satisfy the purchase price or exercise price of a stock award, return to
the 2014 Plan’s share reserve and become available for future grant under the 2014 Plan, up to the
maximum number of shares of 5,943,348.
As of December 31, 2017, the Company had 4,415,593 shares reserved for issuance under the 2014
Plan. Further, as of December 31, 2017, under the 2014 Plan, options to purchase 2,412,307 shares of
the Company’s common stock were outstanding at a weighted-average exercise price of $24.77 per
share and 1,413,423 restricted stock units were outstanding.
The compensation committee of the Company’s board of directors, acting under authority
delegated from the board of directors, granted on January 1, 2018, option awards to employees to
purchase an aggregate of 8,731 shares of common stock at an exercise price of $64.51, restricted stock
unit awards for an aggregate of 7,609 shares of common stock and performance stock awards for an
aggregate of 56,575 shares of common stock, in each case under the 2014 Plan.
101
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
11. Stock-Based Compensation (Continued)
2008 Plan
In October 2008, the Company’s stockholders approved the Company’s 2008 Plan. The 2008 Plan
was most recently amended on May 8, 2013. The 2008 Plan provided for the grant of incentive stock
options to the Company’s employees and the employees of the Company’s subsidiaries, and for the
grant of nonstatutory stock options, restricted stock awards and deferred stock awards to the
Company’s employees, directors and consultants. Upon the effective date of the 2014 Plan, the
Company ceased using the 2008 Plan to grant new equity awards, and began using the 2014 Plan for
grants of new equity awards. Accordingly, as of January 30, 2014, no shares were available for future
grant under the 2008 Plan. However, the 2008 Plan will continue to govern the terms and conditions of
outstanding awards granted thereunder.
As of December 31, 2017, options to purchase 2,146,864 shares of the Company’s common stock
were outstanding under the 2008 Plan at a weighted-average exercise price of $4.22 per share.
Stock-Based Compensation Expense
Stock-based compensation expense related to stock-based awards is included in the following line
items in the accompanying consolidated statements of operations and comprehensive loss:
Year Ended December 31,
2017
2016
2015
(in thousands)
Curriculum and teaching . . . . . . . . . . . . . . . . . . . . . .
Servicing and support
. . . . . . . . . . . . . . . . . . . . . . . .
Technology and content development . . . . . . . . . . . . .
Marketing and sales . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . .
$
3
4,036
3,306
1,742
12,843
$ — $ —
2,270
1,548
1,057
7,624
3,245
2,392
1,317
8,869
Total stock-based compensation expense . . . . . . . . .
$21,930
$15,823
$12,499
Prior to January 1, 2017, the Company adjusted stock-based compensation expense for estimated
forfeitures of stock-based awards. As described in the ‘‘Recent Accounting Pronouncements’’ section of
Note 2, beginning on January 1, 2017, the Company accounts for forfeitures (and the impact on stock-
based compensation expense) as they occur.
Stock Options
The terms of stock option grants, including the exercise price per share and vesting periods, are
determined by the Company’s board of directors or the compensation committee thereof. Stock options
are granted at exercise prices of not less than the estimated fair market value of the Company’s
common stock at the date of grant. Stock options are generally subject to service-based vesting
conditions and vest at various times from the date of the grant, with most options vesting in tranches,
generally over a period of four years. Stock options granted under the 2014 Plan and the 2008 Plan are
subject to service-based vesting conditions, and generally expire ten years from the grant date.
The Company values stock options using the Black-Scholes-Merton option pricing model, which
requires the input of subjective assumptions, including the risk-free interest rate, expected life of the
102
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
11. Stock-Based Compensation (Continued)
option, expected stock price volatility and dividend yield. The risk-free interest rate assumption is based
upon observed interest rates for constant maturity U.S. Treasury securities consistent with the expected
term of the Company’s employee stock options. The expected life represents the period of time the
stock options are expected to be outstanding and is based on the ‘‘simplified method.’’ Under the
‘‘simplified method,’’ the expected life of an option is presumed to be the mid-point between the
vesting date and the end of the contractual term. The Company used the ‘‘simplified method’’ due to
the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise
estimate the expected life of the stock options. Expected volatility is based on the historical volatility of
the Company’s common stock over the estimated expected life of the stock options. The Company
assumed no dividend yield because dividends are not expected to be paid in the near future, which is
consistent with the Company’s history of not paying dividends.
The following table summarizes the assumptions used for estimating the fair value of the stock
options granted for the periods presented.
Year Ended December 31,
2017
2016
2015
Risk-free interest rate . . . . . . . . . . . . .
Expected term (years) . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . .
2.0% - 2.1% 1.1% - 1.9% 1.5% - 1.9%
5.56 - 6.08
5.43 - 6.50
6.00 - 6.08
50%
50%
46% - 49%
0%
0%
0%
The following is a summary of the stock option activity for the year ended December 31, 2017:
Weighted-Average
Exercise Price per
Share
Weighted-Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic
Value
(in thousands)
Outstanding balance at December 31, 2016
Granted . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Options
4,882,237
605,640
(846,821)
(65,853)
(16,027)
Outstanding balance at December 31, 2017
4,559,176
Exercisable at December 31, 2017 . . . . . . .
3,357,682
$10.74
40.90
7.81
23.63
13.26
15.10
8.96
Vested and expected to vest at
December 31, 2017 . . . . . . . . . . . . . . . .
4,559,176
15.10
6.30
8.95
3.97
5.88
4.92
5.88
$ 95,081
225,283
186,529
225,283
The weighted-average grant date fair value of the Company’s stock options granted during the
years ended December 31, 2017, 2016 and 2015 was $19.65, $11.41 and $12.54 per share, respectively.
The total unrecognized compensation cost related to the unvested options as of December 31,
2017 was $15.6 million and will be recognized over a weighted-average period of approximately
2.4 years.
The aggregate intrinsic value of the options exercised during the years ended December 31, 2017,
2016 and 2015 was $24.9 million, $24.9 million and $25.8 million, respectively.
103
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
11. Stock-Based Compensation (Continued)
Restricted Stock Units
Throughout 2017 and 2016, the Company granted restricted stock units under the 2014 Plan to the
Company’s directors and certain of the Company’s employees. The terms of the restricted stock unit
grants under the 2014 Plan, including the vesting periods, are determined by the Company’s board of
directors or the compensation committee thereof. Restricted stock units are generally subject to service-
based vesting conditions and vest at various times from the date of the grant, with most restricted stock
units vesting in equal annual tranches, generally over a period of four years.
The following is a summary of restricted stock unit activity:
Number of
Restricted Stock
Units
Weighted-Average
Grant Date Fair
Value per Share
Outstanding balance at December 31, 2016 . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,412,934
620,259
(494,504)
(125,266)
Outstanding balance at December 31, 2017 . . . . . . .
1,413,423
$20.60
41.74
18.98
26.16
29.95
The total compensation cost related to the nonvested restricted stock units not yet recognized as of
December 31, 2017 was $31.5 million and will be recognized over a weighted-average period of
approximately 2.1 years.
Employee Stock Purchase Plan
On June 5, 2017, the Company’s stockholders voted upon and approved the Company’s 2017
Employee Stock Purchase Plan (the ‘‘ESPP’’). The ESPP provides for (i) multiple offering periods each
year and (ii) that the purchase price for shares of the Company’s common stock purchased under the
ESPP will not be less than 85% of the fair market value of the Company’s common stock on the
purchase date. Notwithstanding the foregoing, the Compensation Committee of the Company’s Board
of Directors may exercise its discretion, subject to certain conditions, to make changes to certain
aspects of the ESPP including, but not limited to, the length of the offering periods and that the
purchase price will be 85% of the lesser of the fair market value of 2U’s common stock on the
purchase date or the fair market value of 2U’s common stock on the first day of the offering period.
The first offering period begins on January 1, 2018, and will end on June 30, 2018. Eligible employees
will be able to select a rate of payroll deduction between 1% and 15% of their salary or wage
compensation received from the Company as in effect at the start of the offering period, subject to a
maximum payroll deduction per calendar year of $25,000. The ESPP is intended to qualify as an
employee stock purchase plan under Section 423 of the Internal Revenue Code. A maximum of
1,000,000 shares of 2U’s common stock may be issued under the ESPP, subject to adjustments for
certain capital transactions.
12. Net Loss per Share
Diluted net loss per share is the same as basic net loss per share for all periods presented because
the effects of potentially dilutive items were anti-dilutive, given the Company’s net loss. The following
104
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
12. Net Loss per Share (Continued)
securities have been excluded from the calculation of weighted-average shares of common stock
outstanding because the effect is anti-dilutive for the years ended December 31, 2017, 2016 and 2015:
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units . . . . . . . . . . . . . . . . . . . . .
4,559,176
1,413,423
4,882,237
1,412,934
5,298,510
1,220,008
Basic and diluted net loss per share is calculated as follows:
Year Ended December 31,
2017
2016
2015
Year Ended December 31,
2017
2016
2015
Numerator (in thousands):
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(29,423) $
(20,684) $
(26,733)
Denominator:
Weighted-average shares of common stock outstanding,
basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49,062,611
46,609,751
42,420,356
Net loss per share, basic and diluted . . . . . . . . . . . . . . . . . .
$
(0.60) $
(0.44) $
(0.63)
13. Segment and Geographic Information
As a result of the acquisition of GetSmarter on July 1, 2017, the Company’s operations consist of
two operating segments and two reportable segments: the Graduate Program Segment and the Short
Course Segment. The Company’s Graduate Program Segment provides services to well-recognized
nonprofit colleges and universities primarily in the United States to enable the online delivery of
graduate programs. The Company’s Short Course Segment provides premium online short courses to
working professionals. The reportable segments represent businesses for which separate financial
information is utilized by the chief operating decision maker for the purpose of allocating resources
and evaluating performance.
During the year ended December 31, 2017, four university clients in the Graduate Program
Segment each accounted for 10% or more of the Company’s consolidated revenue, as follows:
$77.6 million, $48.2 million, $30.1 million and $28.3 million, which equals 27%, 17%, 11% and 10% of
the Company’s consolidated revenue, respectively. During the year ended December 31, 2016, three
university clients in the Graduate Program Segment each accounted for 10% or more of the Company’s
consolidated revenue, as follows: $71.0 million, $36.7 million and $22.1 million, which equals 35%, 18%
and 11% of the Company’s consolidated revenue, respectively.
As of December 31, 2017, two university clients in the Graduate Program Segment each accounted
for 10% or more of the Company’s consolidated accounts receivable balance, as follows: $9.4 million
and $2.0 million, which equals 67% and 14% of the Company’s consolidated accounts receivable,
respectively. As of December 31, 2016, two university clients in the Graduate Program Segment each
accounted for 10% or more of the Company’s consolidated accounts receivable balance, as follows:
$5.8 million and $1.4 million, which equals 74% and 17% of the Company’s consolidated accounts
receivable, respectively.
105
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
13. Segment and Geographic Information (Continued)
For the Company’s Short Course Segment, revenue and accounts receivable are derived from
individual students, rather than directly from university clients. For the year ended December 31, 2017,
revenue associated with the Company’s three largest university clients in this segment accounted for
approximately 82% of the segment’s revenue, which was less than 10% of the Company’s consolidated
revenue on a combined basis. As of December 31, 2017, none of the student accounts receivable
balances within this segment accounted for more than 10% of the Company’s consolidated accounts
receivable.
Segment Performance
The following table summarizes financial information regarding each reportable segment’s results
of operations for the periods presented:
Year Ended December 31,
2017
2016
2015
(dollars in thousands)
Revenue*
Graduate program segment . . . . . . . . . . . . . . . . . .
Short course segment . . . . . . . . . . . . . . . . . . . . . .
$270,432
16,320
$205,864
—
$150,194
—
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . .
$286,752
$205,864
$150,194
Segment profitability**
Graduate program segment . . . . . . . . . . . . . . . . . .
Short course segment . . . . . . . . . . . . . . . . . . . . . .
$ 13,022
(1,606)
Total segment profitability . . . . . . . . . . . . . . . . .
$ 11,416
$
$
4,541
—
$ (6,629)
—
4,541
$ (6,629)
Segment profitability margin***
Graduate program segment . . . . . . . . . . . . . . . . . .
Short course segment . . . . . . . . . . . . . . . . . . . . . .
Total segment profitability margin . . . . . . . . . . .
5%
(1)%
4%
2%
—
2%
(4)%
—
(4)%
*
The Company did not have any material intersegment revenues for any periods presented.
** The Company evaluates segment profitability as net income or net loss, as applicable,
before net interest income (expense), taxes, depreciation and amortization, foreign
currency gains or losses, acquisition-related gains or losses and stock-based compensation
expense. Some or all of these items may not be applicable in any given reporting period.
*** The Company defines segment profitability margin as segment profitability as a
percentage of segment revenue
106
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
13. Segment and Geographic Information (Continued)
The following table reconciles net loss to total segment profitability:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments:
Interest income . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency loss . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expense . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
Income tax benefit
Stock-based compensation expense . . . . . . . . . . .
Year Ended December 31,
2017
2016
2015
(in thousands)
$ (29,423) $ (20,684) $ (26,733)
(371)
87
866
19,624
(1,297)
21,930
(383)
35
—
9,750
—
15,823
(167)
552
—
7,220
—
12,499
Total adjustments . . . . . . . . . . . . . . . . . . . . . .
40,839
25,225
20,104
Total segment profitability . . . . . . . . . . . . . . . . . . .
$ 11,416
$
4,541
$ (6,629)
The Company’s total assets by segment are as follows:
Total assets
Graduate program segment . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Short course segment
$359,597
122,465
$244,320
—
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$482,062
$244,320
December 31,
2017
December 31,
2016
(in thousands)
Geographical Information
The Company’s non-U.S. revenue for the year ended December 31, 2017, determined based upon
the university client’s functional currency, was $10.0 million, entirely from the Short Course Segment’s
operations outside of the U.S. The Company did not have non-U.S. revenue for the years ended
December 31, 2016 and 2015. The Company’s long-lived assets in non-U.S. countries as of
December 31, 2017 totaled approximately $0.7 million. The Company did not have non-U.S. long-lived
assets as of December 31, 2016.
14. Retirement Plan
The Company has established a 401(k) plan for eligible employees to contribute up to 100% of
their compensation, limited by the IRS-imposed maximum contribution amount. The Company matches
33% of each employee’s contribution up to 6% of the employee’s salary deferral. For the years ended
December 31, 2017, 2016 and 2015, the Company made employer contributions of $1.3 million,
$1.1 million and $0.8 million, respectively.
107
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
15. Related Party Transactions
During the years ended December 31, 2016 and 2015, the Company subleased office space to an
entity that was, upon execution of the sublease in 2011, a greater than 5% stockholder. The lease
required the subtenant to reimburse the Company for the allocated cost of the office space subleased.
The Company had no transactions with this related party during the year ended December 31, 2017,
other than the repayment of a $0.1 million security deposit in connection with the expiration of the
sublease in December 2016. For the years ended December 31, 2016 and 2015, the Company recorded
$0.3 million and $0.3 million, respectively, as rental income from this related entity.
The Company utilized the marketing and event planning services of a company that is partially
owned by one of the Company’s former executives. The Company had no transactions with this related
party during the year ended December 31, 2017. The Company recorded $1.4 million and $1.7 million
for the expenses incurred related to the services provided by this related party for the years ended
December 31, 2016 and 2015, respectively. No material amounts were due to the related party or
recorded in accounts payable on the consolidated balance sheets as of December 31, 2017 and 2016.
16. Quarterly Financial Information (Unaudited)
The following tables set forth certain unaudited quarterly financial data for 2017 and 2016. This
unaudited information has been prepared on the same basis as the audited information included
elsewhere in this Annual Report and includes all adjustments necessary to present fairly the
information set forth therein. The operating results are not necessarily indicative of results for any
future period.
Three Months Ended
March 31,
2017
June 30,
2017
September 30,
2017
December 31,
2017
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs and expenses
Curriculum and teaching . . . . . . . . . . . . . . .
Servicing and support . . . . . . . . . . . . . . . . .
Technology and content development . . . . . .
Marketing and sales . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . .
Total costs and expenses . . . . . . . . . . . . .
Income (loss) from operations . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . .
Income tax benefit (expense) . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) per share, basic . . . . . . . . .
Net income (loss) per share, diluted . . . . . . . .
Weighted-average shares used in computing
$
$
$
$
(in thousands, except share and per share amounts)
64,829
64,995
70,250
$
$
$
86,678
—
10,925
9,205
34,670
13,664
68,464
(3,635)
196
—
—
(3,439)
—
(3,439) $
—
13,458
11,140
37,242
13,930
75,770
(10,775)
53
(1)
(1,031)
(11,754)
—
(11,754) $
1,792
12,939
12,735
41,311
17,227
86,004
(15,754)
18
(36)
59
(15,713)
974
(14,739) $
(0.07) $
(0.25) $
(0.30) $
(0.07) $
(0.25) $
(0.30) $
4,817
13,445
12,846
37,700
17,844
86,652
26
104
(50)
106
186
323
509
0.01
0.01
net income (loss) per share, basic . . . . . . . .
47,237,341
47,668,397
48,961,914
52,330,067
Weighted-average shares used in computing
net income (loss) per share, diluted . . . . . . .
47,237,341
47,668,397
48,961,914
56,593,108
108
Notes to Consolidated Financial Statements (Continued)
2U, Inc.
16. Quarterly Financial Information (Unaudited) (Continued)
Three Months Ended
March 31,
2016
June 30,
2016
September 30,
2016
December 31,
2016
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs and expenses
$
Servicing and support . . . . . . . . . . . . . . . . .
Technology and content development . . . . . .
Marketing and sales . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . .
Total costs and expenses . . . . . . . . . . . . .
Loss from operations . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . .
Loss before income taxes . . . . . . . . . . . . . . . .
Income tax benefit (expense) . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss per share, basic and diluted . . . . . . .
$
$
Weighted-average shares used in computing
(in thousands, except share and per share amounts)
47,444
51,960
49,110
$
$
$
57,350
9,512
7,275
23,656
10,447
50,890
(3,446)
92
(26)
(3,380)
—
10,260
8,842
27,483
10,944
57,529
(8,419)
91
(9)
(8,337)
—
10,351
8,670
28,165
11,569
58,755
(6,795)
37
—
(6,758)
—
(3,380) $
(8,337) $
(6,758) $
10,859
8,496
27,306
13,061
59,722
(2,372)
163
—
(2,209)
—
(2,209)
(0.07) $
(0.18) $
(0.14) $
(0.05)
net loss per share, basic and diluted . . . . . .
45,953,082
46,494,464
46,903,628
47,075,167
109
2U, Inc.
Selected Financial Data
The following selected consolidated financial data for the years ended December 31, 2017, 2016,
2015, 2014 and 2013, and the selected consolidated balance sheet data as of December 31, 2017, 2016,
2015, 2014 and 2013 are derived from our audited consolidated financial statements. Our historical
results are not necessarily indicative of the results to be expected in the future. The selected
consolidated financial data should be read together with Item 7 ‘‘Management’s Discussion and
Analysis of Financial Condition and Results of Operations’’ and in conjunction with the consolidated
financial statements, related notes, and other financial information included elsewhere in this Annual
Report on Form 10-K.
Consolidated Statement of Operations
Data:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . $
Costs and expenses
Curriculum and teaching . . . . . . . . . .
Servicing and support . . . . . . . . . . . . .
Technology and content development .
Marketing and sales . . . . . . . . . . . . . .
General and administrative . . . . . . . . .
Total costs and expenses . . . . . . . . .
Loss from operations . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . .
. . . . . . .
Other income (expense), net
Loss before income taxes . . . . . . . . . . . .
Income tax benefit
. . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock accretion . . . . . . . . . . . .
Net loss attributable to common
Year Ended December 31,
2017
2016
2015
2014
2013
(in thousands, except share and per share amounts)
286,544 $
205,864 $
150,194 $
110,239 $
83,127
6,609
50,767
45,926
150,923
62,457
316,682
(30,138)
371
(87)
(866)
(30,720)
1,297
(29,423)
—
—
40,982
33,283
106,610
46,021
226,896
(21,032)
383
(35)
—
(20,684)
—
(20,684)
—
—
32,047
27,211
82,911
34,123
—
26,858
22,621
65,218
23,420
—
22,718
19,472
54,103
14,840
176,292
138,117
111,133
(26,098)
167
(552)
(250)
(26,733)
—
(26,733)
—
(27,878)
92
(1,213)
—
(28,999)
—
(28,999)
(89)
(28,006)
26
27
—
(27,953)
—
(27,953)
(347)
stockholders . . . . . . . . . . . . . . . . . . . $
(29,423) $
(20,684) $
(26,733) $
(29,088) $ (28,300)
Net loss per share attributable to
common stockholders, basic and
diluted . . . . . . . . . . . . . . . . . . . . . . . $
Weighted-average common shares
outstanding used in computing net
loss per share attributable to common
stockholders, basic and diluted . . . . . .
Other Financial Data:
Adjusted EBITDA (loss)(1) . . . . . . . . . . $
(0.60) $
(0.44) $
(0.63) $
(0.91) $
(3.81)
49,062,611
46,609,751
42,420,356
32,075,107
7,432,055
11,416 $
4,541 $
(6,629) $
(14,779) $ (21,245)
(1) Adjusted EBITDA is a financial measure not in accordance with generally accepted accounting
principles, or GAAP. For more information about adjusted EBITDA and a reconciliation of net
110
loss, the most directly comparable financial measure calculated and presented in accordance with
GAAP, to adjusted EBITDA, see the section below titled ‘‘Adjusted EBITDA.’’
2017
2016
2015
2014
2013
As of December 31,
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents . . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . .
Total assets
. . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . .
Total redeemable convertible preferred stock . .
. . . . . . . . . . . . . . . .
Additional paid-in capital
Total stockholders’ equity (deficit) . . . . . . . . . .
$223,370
14,174
482,062
94,230
—
588,289
387,832
$168,730
7,860
244,320
49,083
—
371,455
195,237
$183,729
975
231,041
35,252
—
351,324
195,789
$ 86,929
350
113,039
25,028
—
216,818
88,011
$ 7,012
1,835
28,652
22,629
98,047
7,817
(92,024)
Adjusted EBITDA
To provide investors with additional information regarding our financial results, we have provided
within this Annual Report on Form 10-K adjusted EBITDA, a non-GAAP financial measure. We have
provided a reconciliation below of net loss, the most directly comparable GAAP financial measure, to
adjusted EBITDA.
We have included adjusted EBITDA in this Annual Report on Form 10-K because it is a key
measure used by our management and board of directors to understand and evaluate our core
operating performance and trends, to prepare and approve our annual budget and to develop short-and
long-term operational plans. In particular, the exclusion of certain expenses in calculating adjusted
EBITDA can provide a useful measure for period-to-period comparisons of our core business.
Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in
understanding and evaluating our operating results in the same manner as our management and board
of directors.
Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it
in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some
of these limitations are:
• although depreciation and amortization are non-cash charges, the assets being depreciated and
amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash
capital expenditure requirements for such replacements or for new capital expenditure
requirements;
• adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital
needs;
• adjusted EBITDA does not reflect acquisition related gains or losses such as, but not limited to,
post-acquisition changes in the value of contingent consideration reflected in operations;
• adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation;
• adjusted EBITDA does not reflect interest or tax payments that may represent a reduction in
cash available to us; and
• other companies, including companies in our industry, may calculate adjusted EBITDA
differently, which reduces its usefulness as a comparative measure.
111
Because of these and other limitations, you should consider adjusted EBITDA alongside other
U.S. GAAP-based financial performance measures, including various cash flow metrics, net income
(loss) and our other GAAP results. The following table presents a reconciliation of net loss to adjusted
EBITDA for each of the periods indicated:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments:
Interest income . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . .
Foreign currency loss . . . . . . . . . . . . . . . . . .
Depreciation and amortization expense . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . .
Year Ended December 31,
2017
2016
2015
2014
2013
(in thousands)
$(29,423) $(20,684) $(26,733) $(28,999) $(27,953)
(371)
87
866
19,624
(1,297)
21,930
(383)
35
—
9,750
—
15,823
(167)
552
—
7,220
—
12,499
(92)
1,213
—
5,572
—
7,527
(26)
(27)
—
4,335
—
2,426
6,708
Total adjustments . . . . . . . . . . . . . . . . . . .
40,839
25,225
20,104
14,220
Adjusted EBITDA (loss) . . . . . . . . . . . . . . . . .
$ 11,416
$ 4,541
$ (6,629) $(14,779) $(21,245)
112
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CORPORATE INFORMATION
Board of Directors
Christopher J. Paucek
Chief Executive Officer and Co-Founder
Paul A. Maeder
Board Chair
Compensation Committee Member
General Partner of Highland Capital Partners
Mark J. Chernis
SVP of Strategic Partnerships and Investments
at Pearson, PLC
Timothy M. Haley
Nominating and Governance Committee Chair
Managing Director of Redpoint Ventures
John M. Larson
Compensation Committee Chair
Executive Chairman of Triumph Higher Education
Group Inc. and President of Triumph Group, Inc.
Earl Lewis
Audit Committee Member
Fellow of the American Academy of Arts and Sciences
and Professor of History and African American Studies
at the University of Michigan
Edward S. Macias
Nominating and Governance Committee Member
Provost Emeritus and Barbara and David Thomas
Distinguished Professor in Arts & Sciences at
Washington University in St. Louis
Coretha M. Rushing
Compensation Committee Member
Corporate Vice President and Chief Human Resources
Officer at Equifax, Inc.
Valerie B. Jarrett
Nominating and Governance Committee Member
Former Senior Advisor to President Obama
Robert M. Stavis
Audit Committee Chair
Partner at Bessemer Venture Partners
Gregory K. Peters
Audit Committee Member
Chief Product Officer at Netflix
Sallie L. Krawcheck
Nominating and Governance Committee Member
CEO and Co-Founder of Ellevest and Owner and
Chair of Ellevate Network
Shareholder Information
Copies of the Company’s Form 10-K filed with the
Securities and Exchange Commission for the year
ended December 31, 2017; committee charters; Code
of Business Conduct and Ethics; and other documents
may be obtained free of charge on investor.2u.com
or by contacting:
2U, Inc.
Investor Relations
7900 Harkins Road
Lanham, MD 20706
301-892-4350
Annual Meeting
The annual meeting of stockholders
will be held on June 26, 2018, at 2:00 pm ET at
2U Headquarters
7900 Harkins Road
Lanham, MD 20706
7900 Harkins Road
Lanham, MD 20706
investor.2u.com