UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-K
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
$4,102,056,578. classmates and professors in person, and develop invaluable personal and professional relationships. We provide the Our programs with Simmons Our programs with Syracuse University accounted for 10% and 11% of our consolidated revenue for the years ended December 31, 2018 and 2017, respectively. platform, meet university client needs for content development, ” addition, the DOE is independently conducting an ongoing series of Certain of the program integrity rules are under review by the current administration as part of its policy to deregulate and spur innovation in higher education, but revisions to the rules are not expected to become final until 2020. marketing, enrollment application assistance, recruitment services, course support for online 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 ” Accreditation Rules and Standards us; however, the “written arrangements” rules may apply to online programs in the Short Course Segment to the extent such courses are outsourced by university clients. The “written arrangements” rule is under review by the current administration. Any changes are not expected to be final until 2020. 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 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. . Life is short, so treasure every moment. 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 or on the SEC’s website at www.sec.gov as soon as reasonably Our business depends heavily on the adoption by colleges and universities of online delivery of their 
Delaware(State or other jurisdiction ofincorporation or organization)26-2335939(I.R.S. EmployerIdentification No.)7900 Harkins Road, Lanham, MD(Address of principal executive offices)20706(Zip Code)(301) 892-4350Registrant'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 NASDAQThe Nasdaq Global Select Market12 (g)12(g) of the Act:Noneýx No oýxýx No oand posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationsRegulation 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 ýx No oregistrant'sregistrant’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. ýoor a smaller reporting company, or an emerging growth company. See the definitions of "large“large accelerated filer," "accelerated filer"” “accelerated filer,” “smaller reporting company” and "smaller reporting company"“emerging growth company” in Rule 12b-2 of the Exchange Act.ýx (Do not check if asmaller reporting company) ýx42,046,21849,091,151 shares held by non-affiliates as of June 30, 20162018 (computed based on the closing price on such date as reported on the NASDAQThe Nasdaq Global Select Market) was $1,236,579,271.17, 2017,20, 2019, there were 47,229,87758,141,860 shares of the registrant'sregistrant’s common stock, par value $0.001 per share, outstanding.Company'sCompany’s definitive proxy statement, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, for its 20172019 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.PAGE "may," "might," "will," "could," "would," "should," "expect," "intend," "plan," "objective," "anticipate," "believe," "estimate," "predict," "project," "potential," "continue"“may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue” and "ongoing,"“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. Forward-looking statementsFactors which may cause actual results to differ materially from current expectations include, statements about:••••new client programs;••••clients' programs;•clients'graduate programs;•growth strategy;•SaaS technology;•expectedexpectations regarding future expenses in relation to future periods and their relationship to revenue;•• that we expect our cash balances and other available financial resources towill be sufficient to fund our operations."Risk Factors"“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,time frame, 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.PAGE PART IItem 1.Business3Item 1A.Risk Factors18Item 1B.Unresolved Staff Comments40Item 2.Properties41Item 3.Legal Proceedings41Item 4.Mine Safety Disclosures41 PART IIItem 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities42Item 6.Selected Financial Data43Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations44Item 7A.Quantitative and Qualitative Disclosures About Market Risk44Item 8.Financial Statements and Supplementary Data45Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure45Item 9A.Controls and Procedures45Item 9B.Other Information45 PART IIIItem 10.Directors, Executive Officers and Corporate Governance46Item 11.Executive Compensation46Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters46Item 13.Certain Relationships and Related Transactions, and Director Independence46Item 14.Principal Accounting Fees and Services46 PART IVItem 15.Exhibits, Financial Statement Schedules47 SIGNATURES48 INDEX TO CONSOLIDATED FINANCIAL INFORMATION50 Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited)51 Management's Report on Internal Control Over Financial Reporting (Unaudited)70 Consolidated Financial Statements: Reports of Independent Registered Public Accounting Firm71 Consolidated Balance Sheets as of December 31, 2016 and 201573 Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 201474 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 2016, 2015 and 201475 Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 201476 Notes to Consolidated Financial Statements77 Selected Financial Data (Unaudited)102 2U partners with great colleges and universitiesbuild what we believe isimprove lives by eliminating the world's best onlineback row in higher education. Our platform provides a comprehensive fusion of technology, services and data architecture to transform our clients, historically campus-based universities of the highest quality and rigor, into digital versions of themselves. Why should a student need to pick up their life, quit their job and move to attend a graduate program at a great university? With 2U's solutions, they don't have to anymore.leading providerglobal leader in education technology. For more than a decade, we have been improving lives by powering world-class digital education. As a trusted partner and brand steward of great universities, we build, deliver, and support online graduate programs and certificates for working adults. Our industry-leading short courses, offered by GetSmarter, are designed to equip life-long learners with in-demand career skills. software-as-a-service, or SaaS technology and technology-enabled services that enable leading nonprofit colleges and universities to deliver their degree programs at scale to students anywhere. Our SaaS technology consists of an innovative online learning environment, where our clients deliver their high-quality educational content to students in a live, intimate and engaging setting. We also provide a comprehensive suite of integrated applications, including a content management system and a customer relationship management system, that serve as the back-end infrastructure of the programs we enable. This technology is fused with technology-enabled services, including student acquisition services, content development services, student and faculty support, clinical placement services, and admissions applications advising services. This suite of technologyThese two components are tightly integrated with technology-enabled services,and optimized with data analysis and machine learning techniques, providestechniques. 2UOS delivers technology with a comprehensive sethuman touch and is the keystone of capabilities that would otherwise requireour commitment to provide our university clients the purchase of multiple, disparate point solutions, and allows our clients' programs to expand and operate at scale, providing the comprehensive infrastructure colleges and universitiestools they need to attract, enroll, educate,lead the digital transformation in education.students.significant domain expertiseresources and operating capacitytechnology to support our university clients requirein facilitating these experiences. Through our strategic partnership with WeWork, we also provide students in 2U-enabled graduate programs and faculty for both graduate programs and short courses access to scaleWeWork spaces around the world so they have a place to take classes, prepare course materials, study, and collaborate with student groups.successfullyour offerings:◦ ◦ ◦ ◦ ◦ environment. Utilizingcoursework and content.analysisanalytics 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 technology-enabled services we provide are designed to improve enrollmentgraduate program and retentionshort course fields of study, and execute search engine optimization and paid search campaigns aimed at acquiring students cost-effectively.clients'offerings must comply with state authorization requirements in each state where students as well as to provide those studentsreside. We work with a complete, high-quality educational experience. We have primary responsibility for identifying qualified students formost of our clients' programs, generating potential student interest in the programs and driving applications to the programs. We deploy sophisticated digital program marketing and student acquisition capabilities, and we work closely with ouruniversity clients to help them create highly engaging multimedia instructional content for delivery through our innovative learning environment, Online Campus. We also provide the services that support the complete lifecycleidentify and satisfy a complex array of a higher education program, including advising prospective students through the admissions application process,state authorization requirements.technical, success coaching and other support, facilitating accessibility to individuals with disabilities, facilitating in-program field placements, conducting faculty recruiting, immersion support, and obtaining state regulatory approvals. Through our experience launching and operating programs with leading nonprofit colleges and universities, we have developed a proprietary program-selection algorithm, which enables us to systematically identify degrees at colleges and universities that we believe have the highest probability of success—for us, our clients, and their students. The algorithm not only enables us to deploy capital with greater confidence, but it also provides our clients with greater assurance of, and visibility into, program success. We believe that by delivering high-quality degree programs online using our solutions, our clients can improve educational outcomes and career opportunities for a larger number of students and, by doing so, broaden the global reach of their brands while maintaining their academic rigor and admissions standards. By deploying our solutions, clients give their students, who receive the samedegree or credit as their on-campus counterparts and generally pay equivalent tuition, the option of pursuing their educations without potentially incurring the burden of moving, leaving existing employment or giving up family and community support networks. This can substantially reduce the total cost of obtaining a degree and lower a student's total debt burden. It can also allow students for whom relocating is not an option to obtain a higher quality education than they might be able to access in their local communities. Our compensation from our clients consists primarily of a specified share of the tuition and fees paid2UOS to our university clients by students in the programs we enable, which we believe aligns our interests with those of our clients. This revenue model, combined with long contractual terms typically between 10 and 15 years, enables us to make the investment in technology, integration, content production, program marketing, student and faculty support and other services necessary to create large, successful programs. In addition, a significant percentage of our annual revenue is related to students returning to our clients' programs after their first semester. In the twelve months ended December 31, 2016, 62% of our revenue was related to students who had enrolled and completed their first semester prior to the start of the year. We believe this high percentage of revenue attributable to returning students contributes to the predictability and recurring nature of our business. We have achieved significant growth in a relatively short period of time. For the years ended December 31, 2016, 2015 and 2014, our revenue was $205.9 million, $150.2 million and $110.2 million, respectively. For the years ended December 31, 2016, 2015 and 2014, our net losses were $20.7 million, $26.7 million and $29.0 million, respectively, and our Adjusted EBITDA, a non-GAAP measure, was $4.5 million, a loss of $6.6 million and a loss of $14.8 million, respectively. For a reconciliation of Adjusted EBITDA to net loss, see "Selected Financial Data—Adjusted EBITDA." From our inception through December 31, 2016, more than 24,000 unique individuals have enrolled as students in our clients' programs, and 83% of students who have entered these programs have either graduated or remain enrolled. By the time the last of these individuals graduate or leave our clients' programs, we estimate that they will have generated more than $1.5 billion in total program tuition and fees for our clients.Our Approach Our approach to providing our solutions to leading nonprofit colleges and universities is as follows:•Data-Driven Approach to Program Selection. Through our experience launching and operating programs with leading nonprofit colleges and universities, we have developed a proprietary program-selection algorithm to drive the process for identifying new programs and clients. Our algorithm draws on a wide variety of data including the operating history of our existing programs, and is based on key market variables, including the existing market size of a degree, potential student demographics and client characteristics. We believe our approach to identifying potential programs enables us to systematically identify degrees at colleges and universities in specific geographic regions that we believe have the highest probability of success. Not only does it enable us to deploy capital with greater confidence, it also provides our clients with greater assurance of, and visibility into, program success.•Long-Term Relationships. Our client relationships are characterized by close, ongoing collaboration with faculty and administration, as well as a deep integration between our clients' academic missions and operations and our solutions. Our compensation from our clients consists primarily of a specified share of the tuition and fees paid to our clients by students in the programs we enable, which we believe aligns our interests with those of our clients. This revenue model, combined with long contractual terms, enables us to make the investment in technology, integration, content production, program marketing, student and faculty support and other services necessary to create large, successful programs.•BundledTightly Integrated Technology and Services with a Focus on Quality. We believe that our solutions offerplatform offers extensive features, high configurability, an intuitive user interface and the ability to support synchronous and asynchronous learning at scale.technology-enabledalgorithm 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. 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. with our SaaS technology and together they provide a broad set of capabilities that would otherwise require theuniversities to purchase of multiple, disparate point solutions, and the employment ofhire significant human resources and expertise.•Driving High Quality Student Outcomes.Efficient Marketing We are committed to delivering the technology and services required to ensure that every student and faculty member is fully supported throughout the life of each program. This model is designed to enable our clients to deliver academic programs that align with their brands and produce positive student outcomes, not only in educational achievement but also in terms of the following key measures of success.•Net Promoter Score. We regularly conduct Net Promoter Score® surveys with the students in each of our client programs. Net Promoter Score is a commonly used measure of customer loyalty and satisfaction. We believe that the favorable scores typically received demonstrate that we deliver our solutions in an effective and user-friendly manner.•Retention. Our model is designed to support student satisfaction with, and retention in, our clients' programs. Through December 31, 2016, 83% of students who have ever entered our clients' programs have either graduated or remain enrolled.•First Attempt Board Pass Rates. In client programs that lead to licensure, we track and measure first attempt board pass rates to ensure that students in our client programs are achieving their desired goals. In 2015, the first attempt board pass rate in Georgetown University's family nurse practitioner program was 97%.•Attractive Financial Model with Significant Predictability and Visibility. We believe our financial model delivers significant operating leverage and visibility. Given the long-term nature of our contracts and the insight we receive from our program selection algorithm, we are able to benefit from increasing enrollments in clients' programs as those programs mature, leading to both revenue growth and expanding operating margins. In addition, we believe the significant portion of our revenue that is typically attributable to returning students contributes to the predictability and recurring nature of our business.•Data-Driven Approach to Marketing. We believe that our shared marketing funnelbroad selection of prospective students acrosseducational offerings increases our client programs in the same or similar degree verticals delivers marketing leverage, that allowsallowing us to more efficiently acquire additional students for the same cost. The revenue generated by those additional students allows us to deploy additional marketing spend for programs in that degree vertical to acquire even more students for those programs.and increase enrollments across our entire portfolio of offerings. In addition, we use data analytics and machine learning techniques to ensure thatfocus our marketing efforts are focused on finding prospective students for the right programsofferings at times when conversion is more likely. In addition, we have optimized our process for identifying new graduate programs and short courses that have a high likelihood of success. 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.cloud-based SaaS technology and technology-enabled servicesa digital education platform that enable leadingenables 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:•in New Graduate Degree Verticals.Short Courses, University Clients and Students. Add graduate-levelWe intend to add graduate programs and short courses with new and currentexisting university clients, in new degree verticals within our core market of selective colleges and universities.•Add Programs in Current Graduate Degree Verticals. Add graduate-level programs with new and current clients in degree verticals in which we have existing programs. We believe this approach, which we refer to as our Multiple Program Vertical strategy, will enable us to leverage our program marketing investments across multiple client programs within specific academic disciplines, expanding the number of students who can access high-quality educations and significantly decreasing student acquisition costs within those disciplines.•Increase Enrollment at Existing Clients' Programs. Increaseincrease student enrollments within the existing programs we enable forin our clients. We will seek to accomplish this by acquiring an increasing numbercurrent portfolio of students for our clients' existing degree programs and by diversifying and innovating our degree offerings within a program.offerings.•Grow International, Undergraduate and Non-Degree Presence.Add New Categories of Offerings. We believe that there is significant international demand for our solutionsplatform 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 additional high-quality digital education experiences to undergraduate students and students seekingexpand our non-degree alternatives, such as certificates.offerings across the career-curriculum continuum. As we evaluate these growth strategies, we periodically consider and are currently considering, acquisitions or investment opportunities in complementary businesses, joint ventures, services and technologies and intellectual property rights in an effort to expand ouradd product offerings, outside of our core business, 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.Our Solutions Our solutions consist ofcloud-based SaaS technology fused with technology-enabled services, whichGraduate Program Segment, we optimize with data analysis and machine learning techniques. This suite of technology and services allows our clients' programs to expand and operate at scale, and provides the comprehensive infrastructure colleges and universities need to attract, enroll, educate, support and graduate their students.Proprietary, Cloud-Based SaaS TechnologyOnline Campus Our innovative online learning environment, Online Campus, enables our clients to offer high-quality educational content together with instructor-led classes in a live, intimate and engaging setting, averaging 12 students per session, all accessible through proprietary web-based and mobile applications. Online Campus allows our clients to provide a personalized learning environment for faculty and students as well as a robust online educational community. Online Campus powers the following:•Virtual, Live Classes and Groups. Online Campus enables a variety of live, small-group class sessions that are accessed online. Through Online Campus, instructors can simultaneously lead video group discussions, customize the virtual classroom to their individual styles and display a variety of documents, images, charts, notes and videos. Additionally, Online Campus is available for students to collaborate in planned or ad hoc study or work groups, regardless of day or time.•Delivery of High-Quality, Engaging Content. Through Online Campus, we and our clients collaboratively create, publish and deliver video and other asynchronous content, interactive course lectures, individual and group assignments and assessments. We have developed technology solutions to augment our content delivery capabilities, including our Bi-Directional Learning Tool, a technology we initially created to facilitate the Socratic method of teaching law.This technology enhances interaction between a faculty member and students, both individually and as a group, by blending asynchronous content and real-time student responses in the online environment.Integrated Back-End Applications Our integrated back-end applications launch, operate and support our clients' programs, and seamlessly communicate between their existing university information technology systems and our information technology systems. In addition, these applications provide clients with real-time data and deep analytical insight related to student performance and engagement, student satisfaction, and enrollment. Our back-end applications include the following:•New Program Launch and Operations. We use an application we call Central Park, which unifies our suite of applications and better automates the standup of technology infrastructure for new client programs, so that we can launch new client programs more quickly and efficiently. In addition, Central Park has a graphic interface that allows non-technology oriented employees to create a program website, initiate online applications for students and build Online Campus for a program. We also use an application we call Uber-Conf, which translates program-specific code to simplify program-specific complexity. We believe that this application simplifies not only the effort we are required to expend in launching new programs, but also enables non-technology oriented employees to support the data analytics and operational needs across our business.•University Systems Integration. We use an application we call Port Authority, which integrates our technology with our 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 clients to author, review and deploy the asynchronous content for their online programs through Online Campus. The content management system includes a set of project management and collaboration tools that allow our 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 online admissions application process for prospective students of our clients' programs. OARS is integrated with the primary marketing site for each program, directly funneling prospective students into each client's existing admissions application process and providing automated workflow for that process. Additionally, our system automates faculty review and student notification to improve the efficiency of these processes.•Customer Relationship Management. We have developed customer relationship management deployments configured for each client's specific program characteristics. Each deployment serves as the data hub for scheduling, student acquisition, student application, faculty admissions review, enrollment and student support for each program. Our clients and our staff, as appropriate, can review, maintain and track this information to ensure that functions driven both by the client and by us are properly coordinated.Technology-Enabled Services We offer a comprehensive suite of technology-enabled services, many of which are optimized with data analytics and machine learning techniques, that support the complete lifecycle of a higher education program. These services include the following:•Content Development. Leveraging our content management system, our content development staff works closely with our clients' faculty in a collaborative process to produce high-quality, engaging online coursework and content. We produce scripted and casual videos in studio and on location, transform static content into interactive materials and ultimately assemble customized online course materials for delivery through our Online Campus. While our clients retain control of and responsibility for the curricula, we work closely with them to present the content in a highly engaging manner.•Student Acquisition. Leveraging data analytics and machine learning techniques, we provide dedicated program marketing services to drive applications for each client program. Our marketing teams develop creative assets, such as websites related to the fields of study of our clients' programs, and execute campaigns aimed at acquiring students cost-effectively. Our search engine optimization team supports our prospective student generation efforts across all of our clients' programs. Our campaigns are focused on finding the right prospective student at the right time in his or her search.•Admissions Application Advising: Leveraging our customer relationship management deployments and other technology, our program-dedicated teams work with prospective students as they consider and apply to a client program. Once a student has submitted a completed admissions application package through the OARS portal, it is routed to and reviewed by the university admissions office, which renders the final admission decision.•Student and Faculty Support: We augment each student's academic experience by assigning a dedicated advisor to provide ongoing individualized non-academic support. We also provide a dedicated support team that supports and trains university administration and faculty on how to use our solutions to facilitate outstanding live instruction.•In-Program Student Field Placements: Our field placement team is dedicated to securing in-program field placement opportunities for students enrolled in our clients' programs. Leveraging a geo-location database, we work closely with faculty to identify and approve sites that meet curriculum requirements. Through December 31, 2016, our placement team has facilitated nearly 32,000 individual in-program field placements in approximately 25,000 organizations around the world.•Accessibility: For students with disabilities, we are able to facilitate accessibility across our solutions. These include providing screen-reading technology, captioning, subtitling and voice-over descriptions for asynchronous content, and sign language interpretation and real time captioning for live classes.•State Authorization Services. Each online program we enable for a client must comply with state authorization requirements in each state where the students enrolled in the program reside. We work with most of our clients to identify and satisfy state authorization requirements.•Immersion Support. Many of our client programs require students to attend immersions and intensive residencies where students travel to a client's physical campus and other locations, where they can engage in collaborative learning experiences with their classmates and professors, and develop invaluable personal and professional relationships. We provide the resources and technology to support our clients in facilitating these experiences.•Faculty Recruiting. With our solutions our clients can identify and employ highly qualified teaching faculty without geographic constraint. We effectively act as a search firm for our clients, attracting, cultivating and vetting a pool of faculty candidates for our clients. Our clients make all faculty hiring decisions, but we support them in creating a broader pool of potential faculty than they could on their own.Benefits of Using Our Solutions Using our solutions, our clients can:•Extend Institutional Mission and Reach. Extend their brands and fulfill their missions by delivering high-quality education programs online to students anywhere in the world while maintaining their academic rigor and admissions standards. Our clients are able to reach students who otherwise may not have been able to enroll in their programs, thereby furthering their marketplace recognition and extending their institutional presence beyond geographic limitations.•Increase Revenue. Increase their overall enrollments significantly, thereby growing their tuition revenue. Students who enroll in the programs we enable generally pay the same tuition as on-campus students.•Increase Scalability. Extend beyond their physical boundaries and capacity constraints to scale programs without the investment typically required to acquire, educate and service incremental on-campus students. Our clients can focus on providing high quality, rigorous education at scale without needing to address the increased operational complexity related to delivering online education to students anywhere in the world.•Deliver a Differentiated, Engaging Learning Environment. Leverage advanced software technology to enable highly interactive learning experiences through Online Campus. Instructors are able to lead live, intimate discussions in seminar-style classes with an average of 12 students per session. Students are able to access Online Campus using proprietary web-based and mobile applications and engage with rich, multimedia-based educational content. We believe that this dynamic, interactive learning environment is more engaging and impactful than traditional educational environments or other approaches to online education, encouraging students to remain in our clients' programs through graduation.•Utilize Ongoing Data and Analytical Insight. Track the engagement and learning outcomes of their online students to a significantly greater degree than for their on-campus students. Through our analytics and reporting functions, clients can follow key data related to asynchronous student participation, class attendance, homework submission and overall engagement, and can provide timely intervention or support services as appropriate. This helps clients improve learning outcomes for their students.•Increase Speed to Market. Implement and scale an online degree program faster than they could on their own. We work closely with our clients' faculty to develop engaging asynchronous multimedia course content, and apply our sophisticated digital marketing expertise to attract potential students for our clients' programs. Our clients do not need to spend time installing servers, networking equipment or other infrastructure to ensure a scalable, reliable program offering.Technology Our cloud-based SaaS technology is designed to deliver an exceptional end-user experience in a secure environment. To increase the speed at which we develop and enhance our solutions, we useopen-source technology and custom development of our own instructional design tools and learning components. Our technology stack resides completely in the cloud, with a high level of security and horizontal scalability. We work with Amazon Web Services, our cloud hosting provider, to ensure high levels of redundancy and general preparedness. We have the ability to manage hundreds of server instances in Amazon Web Services and elsewhere through our automated deployment technologies. Our application programming interface, or API, is at the core of all of our SaaS technology providing a standardized way to provision, manage, engage and deliver content to students, faculty and administrators. The API supports advanced analytics that allow us to search and analyze student usage data to evaluate course content, inform continuous technology development and improve user experiences. The API manages authentication and access for our entire technology stack and is designed to manage and interface with new technologies as they are introduced. Our development process follows best practices in web security, including formal design reviews by operations security consultants, threat modeling and risk assessments. All deployed software undergoes recurring penetration testing performed by certified industry experts. Our security risk assessment reviews begin during the design phase and continue through ongoing operations. All of the applications and application components within our SaaS technology are designed from the ground up to produce significant, readable and interpretable data to centralized systems in the form of monitors and logs that allow us to proactively identify and mitigate potential capacity, performance and security issues. We design our SaaS technology to industry security standards as well as requirements set out in current applicable regulations and standards.New Program Pipeline We dedicate the bulk of our program marketing and sales efforts to acquiring students for our clients' programs, and have developed highly sophisticated internet-based program marketing and student acquisition capabilities. However, we do maintain a small sales team targeted at new client or program acquisition. Our new clients and programs are largely generated through a direct approach to selected colleges and universities and we use a proprietary program selection algorithm to develop our pipeline of target programs based on a combination of degree vertical, college or university and geographic region. This data-centric model uses internally generated, publicly available and purchased data on degree vertical size, selectivity, student demographics, competition and other factors to identify opportunities we believe will have the best prospects of long-term success.Clients Our clients are leading nonprofit colleges and universities who primarily use our solution to offer full graduate degree programs online. 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 1727 clients with 3867 programs today.in 24 academic disciplines today, 49 of which have launched and have students enrolled. A full listing of all 3867 announced programs, including the programs we plan to launch in 2019, can be found at investor.2u.com. Through our uncompromising focus on quality and deep understanding of the higher education environment, we believe we have become not only a valued provider of the technology and services our clients use to implement and manage their critical online education operations, but also a trusted steward of their brands. We currently have announcedwith 17 universities and collegeswhich typically have 10 to operate a totalof 38 programs. At the end of 2016, we had launched 24 programs in 17 different degree verticals. In 2017, we plan to launch the following ten programs:University/SchoolProgram NameExpected Program Launch DateThe George Washington University—Milken Institute School of Public HealthHealthInformatics@GWJanuary 2017Syracuse University—Maxwell School of Citizenship and Public AffairsExecutiveMPA@SyracuseJuly 2017University of Southern California—Jimmy Iovine and Andre Young Academy for Arts, Technology and the Business of InnovationDesign@USCAugust 2017Vanderbilt University—Peabody College of Education and Human DevelopmentPeabody OnlineSeptember 2017Pepperdine University—School of LawLaw@PepperdineSeptember 2017New York University—Steinhardt School of Culture, Education, and Human DevelopmentOT@NYUSeptember 2017New York University—Steinhardt School of Culture, Education, and Human DevelopmentCounseling for Mental Health and WellnessSeptember 2017Syracuse UniversityDataScience@SyracuseOctober 2017University of Dayton—School of Business AdministrationMBA@DaytonOctober 2017Pepperdine University—Graduate School of Education and PsychologyPsychology@PepperdineOctober 2017 Our long-term client contracts15 year initial terms, generally do not include termination rights for convenience. Most contracts impose liquidated damages for a client'suniversity client’s non-renewal, unless the university client otherwise terminates due to our uncured breach. Each of our clients owns all of the academic content that we help them develop, although we are generally not obligated to develop content that will be functional anywhere but within Online Campus.parties'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, whetherexpressed either by reference to a certain number as listedranking on U.S. News & World Report's "best"Report’s “best” schools list or as 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. Our2010, are with the University of Southern California, or USC. For the years ended December 31, 2016 and 2015, 34% and 43%, respectively, of our revenue was derived from these two programs.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. We have a contract with the USC Rossier School of Education, or Rossier, to enable various education programs, including a Master of Arts in Teaching program, or MAT program, a Doctor ofEducation program and a Master of Education in School Counseling program. We also have contracts with the USC Suzanne Dworak-Peck School of Social Work to enable both a Master of Social Work (MSW) program and a Master of Nursing program. We amended our contract with Rossier in April 2016 and our contract with the School of Social Work for the MSW program in November 2015. Under the terms of each amended contract, the initial terms expire on June 30, 2030, we are entitled to a specified percentage of the net program proceeds, which is reduced over time, and we agreed to provide fixed and contingent cash payments over time. Both contracts provide for automatic renewal for successive three-year terms unless either party gives one-year notice of non-renewal, and liquidated damages if Rossier or the School of Social Work, as the case may be, fails to renew its respective contract after any term.CollegeUniversity accounted for 18%13% and 16%17% of our consolidated revenue for the years ended December 31, 20162018 and 2015,2017, respectively. Our programs with the University of North Carolina accounted for 11%less than 10% and 12%10% of our consolidated revenue for the years ended December 31, 20162018 and 2015,2017, respectively.methods of delivering education online.delivery methods. Several competitors provide solutionsplatforms that compete with some of the capabilities of our solutions.platform. Two such competitors EmbanetCompassare Pearson Online Learning Services and Deltak, were acquired in 2012Wiley Education Services, owned by Pearson and John Wiley & Sons, respectively, both of which are large education and publishing companies. There areIn addition, traditional massive open online course providers have evolved from providing massive open online courses to providing degrees, short course certificates, nano degrees and similar non-degree alternatives and we also several privateface competition from companies including HotChalkproviding corporate training programs and Everspring Partners, providing some or allonline courses taught outside the university environment (e.g., by experts in various fields). 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. In addition,Moreover, nonprofit colleges and universities may elect to continue using or develop their own online learning solutions in-house.programseducation offerings at nonprofit institutions matures. We believe the principal competitive factors in our market include the following:•••offering;••investmake significant investments in launching and operating graduate programs;• program marketing, student acquisition and student retention;•userstudent and faculty experience;•••technology solutions,and acquire, support and retain students who achieve high-qualityand deliver desired student, faculty and university outcomes. patent applications 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 also have two patent applications pending in the United States, which are directed to computer-implemented processes that facilitate asynchronous student responses to teacher questions. Portions"Risk“Risk Factors—Risks Related to Intellectual Property."AllMost of our university clients participate in the Title IV programs.five to seven years. The re-authorization process is currently under way.rulemakings intended to assure the integrity of the Title IV programs.rulemakings. The DOE also frequently issues formal and informal guidance 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."program integrity"“program integrity” rules."provide“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."Dear“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"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“unaffiliated third party"party” that provides a set of "bundled services"“bundled services” that includes recruitment services, such as those we provide. Example 2-B in the DCL is described as a "possible“possible business model"model” developed "with“with the statutory mandate in mind."” Example 2-B describes the following as a possible business model:"entity'sentity’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."DOE'sDOE’s regulations. Our business model and contractual arrangements with client institutionsour university clients closely follow Example 2-B in the DCL. In addition, we assure that none of our "covered employees"“covered employees” is paid any bonus or other incentive compensation in violation of the rule."substantial misrepresentation"“substantial misrepresentation” regarding three broad subject areas: (1) the nature of the school'sschool’s education programs, (2) the school'sschool’s financial charges and (3) the employability of the school'sschool’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'sDOE’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.new rule, "misrepresentation"“misrepresentation” is defined as any false, erroneous or misleading statement, written, visual or oral. This includes even statements that "have“have the likelihood or tendency to deceive."” Therefore, a statement need not be intentionally deceitful to qualify as a misrepresentation. "Substantial 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'sperson’s detriment.newcurrent regulation also expands the scope of the original 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.(FTC)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.institution'sinstitution’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 programsinstitutions qualify the institutions to participate in Title IV programs.institution'sinstitution’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."written arrangements"“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"“written arrangements” rules because academic instruction is provided by our university client institutions and not by us.programs or offer new degree programs ofexpand our clients. State regulatory requirements for online education are inconsistent between states, change frequently and, in some instances, are outmoded.offerings. In addition, the interpretation of state authorization regulations is subject to substantial discretion by the state agency responsible for enforcing the regulations. Some states have enacted legislation or issued regulations that specifically address online educational programs, some of which may affect our operations.However,The current administration delayed the effective date of the regulations until 2020 and is considering repealing them outright or making further changes to them, which are expected to be effective in 2020. Repeal of the federal rules would not eliminate the obligation to comply with state law with respect to online programs, but it iswould reduce the policy of DOE to require proof of all necessary state approvals when an institution seeks to renew its authorization topotential liabilities associated with non-compliance.Title IV programs. 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.EmployeesCherish each opportunity2016,2018, we had 1,1192,583 full-time employees and 9086 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.Facilitiesheadquartersprincipal executive offices are located inat 7900 Harkins Road, Lanham, Maryland where we occupy approximately 153,000 square feet under a lease that expires in 2028. We also currently lease approximately 94,000 square feet in Landover, Maryland, in connection withMD 20706, and our former corporate headquarters, which expires in July, 2018. In February 2017, we signed a lease for new office space in Brooklyn, New York, which we expect to occupy in 2018 after we vacate our current offices in New York City. The lease covers three floors totaling approximately 80,000 square feet and will expire approximately eleven years and nine months after the lease commencement date. We expect that the new space will allow us to accommodate our growth in the local area. We also currently lease an aggregate of approximately 114,000 square feet of space in New York, California, Colorado, North Carolina, Virginia and Hong Kong. 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.Legal Proceedings From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any material legal proceedings, nor are we a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows.Available InformationYou 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 the Company 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, the Company'sour references to the URLs for these websites are intended to be inactive textual references only."Special“Special Note Regarding Forward-Looking Statements"Statements” in this Annual Report on Form 10-K.clientgraduate 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.$20.7$38.3 million, $26.7$29.4 million and $29.0$20.7 million during the years ended December 31, 2016, 20152018, 2017 and 2014,2016, 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 client programsofferings and increase our program marketing and sales efforts to drive the acquisition of potential students in these programs.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 can provide no assurance as to whether or when we will achieve profitability. If we are not ablemay be unable to achieve and maintain profitability, and the value of our company and our common stock could decline significantly.programs.educational offerings. If we fail to attract new colleges and universities asuniversity 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.
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 to add additional offerings with the university client and the university client may attempt to terminate or may not renew their relationship with us.
offerings until graduation or completion.
•
•- and university leadership positions.
their academic performance, and ranking among nonprofit educational institutions offering a particular degree program.
We primarily market our integrated solution toof selective nonprofit colleges and universities a market that 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 offerprovide the same degree program, and maintainingor a similar offering. In addition, in order to maintain good relations with our university clients may mean that we may be less likelydecide not to approach certain institutions that theyour university clients regard as their direct competitors to offer similar programs or courses, even if we are allowed to do so under our contracts. Moreover, because of the long-term nature of our client contracts, and because of the relationships of trust we strive to build with our current clients, we generally will not be able or willing to terminate our existing client relationships to pursue a competitive program with another college or university, even if it may prove to be more profitable to us. Instead, we may continue with a program that does not generate expected levels of revenue to us, or one from which we may not be able to fully recover the program marketing and sales expenses we incur in attracting students to enroll in the program, if, for example, the client limits enrollment in the program. As a result, the nature of our contracts and our relationships with our clients could restrict the overall revenue potential of our business.
Our clients may disagree with our decision to offer competitive programs under the contracts we have with them.
Our contracts with our clients include terms addressing the parties' respective rights to offer competitive programs. For example, some of our 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 that client. Some of our other contracts prohibit us from offering competitive programs with specific schools. In addition, any contract limitations on our ability to offer competitive programs are inapplicable if our 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 described in the contract at the time it was executed. If we elect to offer competitive programs in reliance on these contractual provisions, our clients may disagree with our interpretation of those provisions or with our interpretation of the facts surrounding our decision to offer a competitive program. Any disagreement with our clients over our decision to offer competitive programs could result in claims for breach of contract and equitable relief, and could cause damage to our reputation and impair our ability to grow our business and achieve profitability.
Attracting new university clients for the launch of new programsofferings is complex and time-consuming. If we pursue unsuccessful client opportunities, we may foregoforgo more profitable opportunities and our operating results and growth would be harmed.
technology and content development teams. If we cannot adequately train these new employees, we may not be successful in acquiring potential students for our clients' programs,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 client programs,offerings, our clients'university clients’ and their students'students’ experiences may suffer, which could damage our reputation among colleges and universities and their faculty and students.
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offerings altogether or significantly curtail or inhibit our ability to promote their programs,offerings, any of which would negatively impact our revenue.
Any
We
Of the programs we operate, only a small number contribute a significant portion of our revenue and generate positive earnings and cash flow. As a result, the material underperformance of any one of these programs could have a disproportionate effect on our business.
Our two longest running programs, launched in 2009 and 2010, are with the University of Southern California, or USC. For the years ended December 31, 2016 and 2015, 34% and 43%, respectively, of our revenue was derived from these two programs.
provider of theirthese or other online programs. If eithercertain of these programs were to materially underperform for any reason or if any of these university clients terminated or did not renew their relationships with us, it would significantly reduce our revenue.
revenue in this segment.
Maintaining security of our SaaS technology is of critical importance for our clients because it stores
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
programmarketing 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.There are no guarantees that we willWe 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 oursolutionsplatform 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 ourmanagement'smanagement’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.We also may enter into relationships with other businesses to expand our ability to provide our solutions in the United States and in international markets.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.In particular, we may encounter difficulties assimilatingIt 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;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 thebusinesses, technologies,productspersonnel, or operations of acquired companies, particularly if the key personnelof the acquiredcompany choosecompanies or in technology acquired;breaches to our cybersecurity measures if there are cybersecurity issues we are notto work for us,aware of at theacquired company's technology is not compatible with ours, ortime of the acquisition;entry into highly competitive markets in which we havedifficulty retainingno or limited direct prior experience and where competitors have stronger market positions; andexposure to unknown liabilities, including claims and disputes by third parties against thecustomerscompanies we acquire.Many of these factors will be outside of the combined company’s control and anyacquired business due to changesone of them could result inmanagement or otherwise. Additionally,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 wemay encounterexperience difficultiesintegrating the acquired companies with our standardized accounting systems as necessary to provide us with the accounting controls needed to comply with our continued financial reporting requirements as a public company. Acquisitions may also disrupt our business, divert our resources, and require significant management attention that would otherwise be available for the development of our business. Any problems or delays associatedwith the integration process following an acquisition, the anticipated benefits of the acquisition may not be realized fully orthe failureat all, or may take longer tocomplete the integrations on a timely basis could adversely affect our ability to report financial information, including the filing of our quarterly or annual reports with the SEC on a timely and accurate basis.realize than expected. Moreover, the anticipated benefits of any acquisition, investment, or business relationship may not berealizedrealized.In addition, in connection with an acquisition, investment orwe may be exposed to unknown liabilities, including litigation against the companies we may acquire. For one or more of those transactions,new business relationship we may:•
issue additional equity securities that would diluteourcurrent 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.Our primary competitors include EmbanetCompass and Deltak, which were acquired in 2012 by Pearson and John Wiley & Sons, respectively, both of which are large education and publishing companies. There are also several private companies, including HotChalk and Everspring, providing some or all of the services we provide, and these companies may choose to pursue some of the institutions we target. In addition, colleges and universities may choose to continue using or to develop their own online learning solutions in-house, rather than pay for our solutions.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 toreceive from a client.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 onlinedegreegraduate programs or short courses, any of which could negatively affect our revenue and future operating results and our ability to grow our business.Particularly in our Short Course Segment, which has a lower barrier to entry, we are facing increasing competition from traditional massive open online course providers, which have evolved from providing massive open online courses to providing short course certificates, nano degrees and similar non-degree alternatives, as well as from companies that provide corporate training programs and online courses taught outside the university environment (e.g., by experts in various fields).A number of competitive factors could cause us to lose potential university client and student opportunities or force us to offer oursolutionsplatform on less favorable economic terms,including•- 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;and•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 marketshare.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,areremain under intense regulatory and other scrutiny, which has led to media attention that hassometimesportrayed 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, exaggerated promises to students, 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, andevenentire industries in the case of marketing and recruiting practices by for-profit higher education companies. Even though we do not market oursolutionsplatform to these institutions, this negative media attention may nevertheless add to skepticism about online higher education generally, including oursolutions.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 clients' programs. In addition, this perception could serve as the impetus for more restrictive legislation, which could limit our future business opportunities. Moreover, allegationsplatform. Allegations of abuse of federal financial aid 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 ourclients' programs,offerings, which would make it difficult to continue to grow our business.Our internal information technology systems are critical to our business. System integration and implementation issues could disrupt our operations, which could have a material adverse impact on our business or result in significant deficiencies or material weaknesses in our internal controls.We rely on the efficient and uninterrupted operation of complex information technology systems, including systems for billing, human resources, enterprise resource planning, and customer relationship management. As our business has grown in size and complexity, the growth has placed, and will continue to place, significant demands on our internal information technology systems. To effectively manage this growth, we must commit significant financial resources and personnel to maintain and enhance existing systems and develop or acquire new systems to keep pace with continuing changes in our business and information processing technology as well as evolving industry, regulatory, and accounting standards. If the information we rely upon to run our businesses is determined to be inaccurate or unreliable, or if we fail to properly maintain or enhance our internal information technology systems, we could have operational disruptions, significant deficiencies, or material weaknesses in our internal controls, incur increased operating and administrative expenses, lose our ability to produce timely and accurate financial reports, or suffer other adverse consequences.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 ourprogrammarketing and sales, technology and content development and support teams to continue to attract and retain qualified students in ourclients'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 ourclients'university clients’ programs and courses and the students enrolled in theseprograms.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, current and prospective employees of 2U and any acquired company may experience uncertainty about their future roles following the acquisition. Ifcertain awards underourstock plans are deemedemployees or the employees of any acquired company depart because of issues relating tohave not expired in accordance with their terms, weuncertainty or perceived difficulties of integration, our ability to realize the anticipated benefits of an acquisition could beliableadversely impacted.Our international operations expose us tocertain award holders forfluctuations in currency exchange rates that could negatively impact our financial results and cash flows.After the GetSmarter acquisition, we conduct a more substantialamounts.
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.Eachportion of our2008 Stock Incentive Planbusiness outside the U.S. and2014 Equity Incentive Plan provide that vested stock option awards issued under those plans expire uponwe 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 theoccurrencevolatility 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, certainevents. For example, each plan provides, among other things, that stock options expireof our assets are denominated in ZAR andare no longer exercisable uponAlternatively, if theearlierZAR 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 tooccur of 90 days afterreduce our exposure to foreign exchange risk. Our exposure to adverse movements in foreign currency exchange rates, including the ZAR, could have aseparation of service, or, dependingmaterial adverse impact on our financial results and cash flows.In addition, local political events, financial instability and other factors can lead to economic uncertainty and currency exchange rate fluctuations. For example, thespecific circumstancesannouncement of thegrantee, 5 or 10 years afterReferendum of thegrant date. Award recipients under these plans have failed and may failU.K.’s Membership of the EU (referred to as “Brexit”), advising for the exit of the U.K. from the EU resulted in significant volatility in the global stock markets and exchange rate fluctuations.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 toexercise their stock options withintheprescribed time frame or may otherwise failacquisition of GetSmarter and expect tocomplyincur 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 withtermsthe GetSmarter acquisition andconditionscombining the operations of the two companies. For example, we expect to incur costs related to formulating and implementing integration plans,orincluding facilities and systems consolidation costs and employment-related costs. We continue to assess thecorresponding award agreements resultingmagnitude of these costs, and additional unanticipated costs may be incurred in theexpirationintegration ofthose option awards. Award recipients with expired option awards have disagreed andthe two companies’ businesses. Any expected efficiencies to offset these costs maydisagreenot be achieved in thefuture with ournear term, orour Compensation Committee's interpretation of the provisions in the plans or the award agreements. Any disagreement between us and holders of expired option awards regarding the expiration of those awards under the terms of the plan or award agreements could result in claims for breach of contract and other claims that could subject us to costly litigation that could require management time and involvement, regardless of whether such claims have merit.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 believe that our existing cash balances and the available borrowing capacity under our revolving line of credit, will be sufficient to meet our minimum anticipated cash requirements for at least the next twelve months.We mayhowever,need to raise additional funds to respond to business challenges or opportunities, accelerate our growth, develop newprogramsofferings or enhance oursolutions.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.Our employees locatedWe maintain offices outside of the United States,and thehave international residentsapplyingthat apply to andenrollingenroll in ourclients' programs exposeofferings and plan to expand our international business, which exposes us tointernational risks.Operatingrisks inherent in internationalmarkets requires significant resources and management attention and subjects us to regulatory, economic and political risks that are different from those in the United States.operations.We have a branch office in Hong Kong forprogrammarketing and student support.BecauseIn addition, wehave employeescurrently employ approximately 555 people inHong Kong, we are subject to Hong Kong's compensationSouth Africa andbenefits regulations, which differ from compensation and benefits regulations6 people in the UnitedStates. Further, acquiringKingdom as a result of the acquisition of GetSmarter, which significantly increased our international operations, including the number of international applicants andenrollments forstudents in ourclients requires us to comply with international data privacy regulations of the countries from which our clients' programs draw applicants and enrollments. Failure to comply with international regulations or to adequately adapt to international markets could harm our ability to successfully operate our business and pursue our business goals.Future programs or other offerings with colleges and universities outside the United States could expose us to risks inherent in international operations.offerings. One element of our growth strategy is to
expandcontinue expanding our international operations and to establish a worldwide client base.We cannot assure you that our expansion efforts intoOur current internationalmarketsoperations and future initiatives willbe successful. Our experience with attracting clients in the United States may not be relevant to our ability to attract clients in other emerging markets. In addition, we would faceinvolve a variety of risksin doing business internationallythat could constrain our operations and compromise our growth prospects, including:•
the need to localize and adapt onlinedegree programs or otherofferings for specific countries, including translation into foreign languages and ensuring that theseprogramsofferings enable our university clients to comply with local education laws and regulations;•- complying with a wide variety of laws, including those relating to labor and employment matters, education, data
privacy laws that may require data to be handled in a specific manner; •- protection and privacy;difficulties in staffing and managing foreign operations, including
employment laws and regulations;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, education, 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 liabilities for indirect taxes or 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 foreigncurrency.currency, and the resulting effect on our revenue and expenses.
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.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 31,2016,2018, 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“ownership change,"” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, thecorporation'scorporation’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.We have completed an analysis ofDuring thestock ownership changes throughthree-year period ended December 31, 2016,andwe determined thata greater than 50%such an ownership changeof one or more of its 5-percent shareholdersoccurred. Absent a subsequent ownership change, however, all of our historical net operating lossessubject to the ownership changeshould be available. Therefore,despitethefact that anoccurrence of the ownership changeoccurred, such changeduring the three-year period ended December 31, 2016 is not expected to limit our ability toutilize carryforwardcarry forward historical net operating losses before expiration.In addition, weWe 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 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'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 ClientsOur 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 theHigher Education ActHEA of 1965, as amended, or HEA, and are subject to extensive regulation by theU.S. Department of Education, orDOE, 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. Ifany of our clients were to bea 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 thatclient'suniversity client’s program to decline.The regulations, standards and policiesofapplicable to ourclients' regulatorsuniversity clients change frequently and are often subject to interpretation. Changes in, or new interpretations of, applicable laws, regulations or standards could compromise ourclients'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 ourclients'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.Activities of the U.S. Congress or Department of Education could result in adverse legislation or regulatory action.The process of re-authorization of the HEA began in 2014 and is ongoing. Congressional hearingswere held in 2013-2016 andwill 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 new or 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 ourability to drive revenue through their programs or make oursolutionsplatform 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"“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“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 oftitleTitle 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“bundled services rule."” Our current business model relies heavily on the bundled services rule to enter into tuition revenue-sharing agreements withclient colleges and universities.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"“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.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 theincentive compensation rule, we could be liable to our university clients for substantial fines, sanctions or other liabilities, including liabilities related to
"whistleblower"“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, distractmanagement'smanagement’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 aclient'suniversity client’s program, aclient'suniversity client’s financial charges or the employability of aclient'suniversity 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 fail to maintain their state authorizations, or we or our university clients violate other state laws and regulations, students in theirprogramsofferings could be adversely affected and we could lose our ability to operate in that state and provide services toourthese university clients.Our university clients must be authorized in certain states to offer onlineprograms,educational offerings, engage in recruiting and operate externships, internships, clinical training or other forms of field experience, depending on state law. The loss of orfailure to obtain state authorization would, among other things, limit the ability of aclient's abilityuniversity client 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 theclient's programuniversity client’s offering and ultimately compromise our ability to generate revenue and become profitable.In addition, if we or any of our university clients fail to comply with any stateagency'sagency’s rules, regulations or standards beyond authorizations, the state agency or state attorney general could limit the ability of the university client to offerprogramseducational offerings in that state or limit our ability to perform our contractual obligations to our university client in that state.If our university clients fail to maintain institutional or programmatic accreditation for theirprograms,offerings, our revenue could be materially affected.The loss or suspension of aclient'suniversity client’s accreditation or other adverse action by theclient'suniversity client’s institutional or programmatic accreditor would render the institution or itsprogramofferings ineligible to participate in Title IV programs, could prevent the university client from offering certain educational offerings and, for certain degree-granting programs,andcould make it impossible for the graduates of theclient'suniversity client’s program topracticeobtain employment in the profession for which they trained. If any of these results occurs, it could hurt our ability to generate revenue from thatprogram.offering.
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 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 regulationsover the last several years.Regulatorycapacityconstraints have resulted in delays to various approvals ourclient institutionsuniversity clients are requesting, and such delays could in turn delay the timing of our ability to generate revenue from ourclients'university clients’ programs.If more state agencies require specialized approval of ourclients' programs,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 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 theirprofessional programs when offered online.online educational offerings. However, more states could pass laws requiringprofessional programs offered byourclients,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 oursolutionsplatform less attractive to university clients, andourthese university clients could be barred from operating in some states entirely.IfEvolving 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 thepersonally identifiable informationforeseeable future. In providing our platform to university clients and in operating our business, we collectfrom students is unlawfully acquired, accessed or obtained, we could be required to pay substantial finesandbear the cost of investigating the data breach and providing notice to individuals whose personally identifiable information was unlawfully accessed.In providing services to our clients, we collect personally identifiableprocess regulated personal information from students,andfaculty, prospective students and employees. 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. 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 took effect in May 2018. The GDPR introduces new requirements for the protection of personal data of individuals in the EU and substantial fines for non-compliance. As another example, the European ePrivacy Directive (Directive 2002/58/EC, as amended by Directive 2009/136/EC), which obliges EU member states to introduce certain national laws regulating privacy in the electronic communications sector, will soon be replaced by the ePrivacy Regulation. As the text of the ePrivacy Regulation is still under development and in draft form, and as further guidance is issued and interpretations of both the ePrivacy Regulation and the GDPR develop, it is difficult to assess the impact of either on our business or operations, but it may require us to modify our data practices and policies (e.g., in relation to management of cookies and direct marketing messages sent throughdifferent media) and we could incur substantial costs as a result. 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 asnames, social security numbers and birth dates. Intheevent that“Privacy Shield” or “model contractual clauses” will be invalidated by thepersonally identifiable information is unlawfully accessed or acquired,European courts.Similarly, in themajority ofU.S., various states have either passed or proposed privacy laws thatrequire institutionswill go into effect in the next few years. For example, California passed the California Consumer Privacy Act (CCPA) in 2018 (set toinvestigatego into effect in 2020), andimmediately discloseMassachusetts recently proposed MA Bill SD 341, “An Act relative to consumer data privacy.” There are similar bills pending in a number of other states, as well. CCPA and MA Bill SD 341 each represent a trend toward stronger privacy protections and greater data transparency in thedata breach to students, usually in writing. UnderU.S.. Currently, federal law legislates privacy on an industry by industry basis. Without an overarching federal law driving privacy compliance, thetermsrisk is high ofour contracts with our clients, we would be responsible for the costsa patchwork ofinvestigating and disclosing these data breachesprivacy legislation formed by individual state laws, similar to theclients' students. In additionstates’ approach to breach notification obligations. This could not only increase costsassociatedfor compliance but also raise the risk of enforcement by individual state Attorneys General.Complying withinvestigatingthese andfully disclosing a data breach in such instances, weother changing requirements couldbe subjectcause us to incur substantialmonetary finescosts, orprivate claims by affected partiesrequire us to change our business practices, any of which could materially adversely affect our business andour reputation would likely be harmed.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 astudent'sstudent’s education records without thestudent'sstudent’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 PropertyWe 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. In addition, we face potential copyright and trademark infringement from the content we produce in connection with our marketing activities, including in websites related to our offerings. From time to time, we may be subject to legalproceedings 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
solutions infringeplatform infringes 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 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 enforcingpatent 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 oursolutions;•- platform;
divertmanagement'smanagement’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 includeattorneys'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-enabledsolutionsplatform 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 theunauthorized duplication, distributionactivities of our university clients orother use of materials posted online.In some instances,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 toOnline Campusour 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 governingthe fair use ofthesethird-party materialsactivities areimprecise and adjudicated on a case-by-case basis, which makes it challenging to adopt and implement appropriately balanced institutional policies governing these practices.unsettled in many international jurisdictions. As a result, we could incur liability to third parties for the unauthorized duplication, distribution or other use ofthis material.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 ofOnline Campus,our online learning platform, or to pay monetary damages.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 oursolutions,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,and patent applications,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, independentcontractors, consultants, companies and any other third party who may create intellectual property for us and that
assignassigns 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.Wehave also begun seeking patent protection for our processes, including two patent applications pending in the United States. These pending applications are directed to computer-implemented processes that facilitate asynchronous student responses to teacher questions. We cannot predict whether these pending patent applications will result in issued patents that will effectively protect our intellectual property. Even if a patent issues, the patent may be circumvented or its validity may be challenged in proceedings before the U.S. Patent and Trademark Office. In addition, we cannot assure you that every significant feature of our products and services will be protected by any patent or patent application.We alsopursue 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 oursolutions.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.OurThe use of"open source"“open source” software in our platform could negatively affect our ability to offer oursolutionsplatform and subject us to possible litigation.A substantial portion of ourcloud-based SaaS technologyplatform incorporates so-called"open source"“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 us to offer oursolutionsplatform thatincorporateincorporates 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 that 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 theofferingcomponent of oursolutionsplatform that contained the open source software and being required to comply with the foregoing conditions, which could disrupt our ability to offerthe affected solutions.certain components of our platform.We could alsobe 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 to 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 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 onOnline Campusour online learning platform may claim violation of their rights.Faculty and students that appear in video segments hosted onOnline Campusour 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 clientsare contractually required toensure 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 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 CompanyOur 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 ourclients'university clients’ graduate programs, which may vary from year to year;•changes in the student enrollment and retention levels in ourclients' programs from one term to the next;•- university clients’ offerings;
changes in our key metrics or the methods used to calculate our key metrics;•changes inour clients'tuition rates;•the timing and amount of ourprogrammarketing and sales expenses;•costs necessary to improve and maintain ourSaaSplatform;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 prospectiveclients'university clients’ orstudents'students’ spending priorities, or could increase the time it takes us to launch newclient programs.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;•variations between our actual operating results and the expectations of securities analysts, investors and the financial community;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;•the level of demand for our stock, including the amount of short interest in our stock;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'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 thesecompanies'companies’ stock. Such litigation, if instituted against us, could cause us to incur substantial costs and divertmanagement'smanagement’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.In addition, if our operating results fail to meet the forecasts of analysts, our stock price would likely 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 ofdirectors 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 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;•stockholders are not permitted to call a special meeting of stockholders;allowing the board of directors to adopt, amend or repeal our bylaws; 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 theNASDAQNasdaq 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 errorsand all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control
system'ssystem’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.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.We incur increased costs and demands upon management as a result of being a public company.As a public company listed in the United States, we incur significant additional legal, accounting and other costs. These additional costs could negatively affect our financial results. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations implemented by the SEC and the NASDAQ Global Select Market, may increase legal and financial compliance costs and make some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management's time and attention from revenue-generating activities to compliance activities. If, notwithstanding our efforts to comply with new laws, regulations and standards, we fail to comply, regulatory authorities may initiate legal proceedings against us and our business may be harmed.Failure to comply with these rules might also make it more difficult for us to obtain some types of insurance, including director and officer liability insurance, and we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors or as members of senior management.Item 1B. Unresolved Staff CommentsNone.Item 2. PropertiesOur headquarters are located in Lanham, Maryland, where we occupy approximately153,000225,000 square feet under a lease that expires in 2028. We alsocurrently leaseoccupy approximately94,00053,000 square feetin Landover, Maryland, in connection with our former corporate headquarters, which expires in July, 2018.In February 2017, we signed a lease for newof office space in Brooklyn, New Yorkwhich we expect to occupy in 2018 after we vacate our current offices in New York City. The lease covers three floors totalingand approximately80,000100,000 square feet of office space in Denver, Colorado.Including our headquarters andwill expire approximately eleven yearsthe Brooklyn andnine months after the lease commencement date. We expect that the new space will allow us to accommodate our growth in the local area.We also currentlyDenver properties, we lease an aggregate of approximately114,000421,000 square feet of space, primarily for our Graduate Program Segment, in Maryland, New York, California, Colorado, North Carolina, Virginia and Hong Kong.We also lease an aggregate of approximately 62,000 square feet of space, primarily for our Short Course Segment, in South Africa and the United Kingdom.We intend to add new facilities or expand existing facilities as we add employees and believe thatour 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 ProceedingsThe Company isWe 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,the Company doeswe 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 DisclosuresNone.PART IIItem 5. Market forRegistrant'sRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesOur common stock has been listed on theNASDAQNasdaq 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.“TWOU.”2016 First
QuarterSecond
QuarterThird
QuarterFourth
QuarterHigh
$ 27.50 $ 29.87 $ 38.91 $ 38.49 Low
14.94 21.76 28.78 29.34 2015 First
Quarter*Second
QuarterThird
QuarterFourth
QuarterHigh
$ 25.77 $ 33.01 $ 39.69 $ 35.72 Low
16.69 24.20 29.18 18.81 *Beginning on March 28, 2014
As of February
17, 2017,20, 2019, there were4637 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 GraphThe 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 31,2016,2018, with the comparative cumulative total return of such amount over the same period on (i) theNASDAQNasdaq 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.
Comparison of Cumulative Total ReturnThrough December 31,2016
2018Assumes Initial Investment of $100
The information presented above in the stock performance graph shall not be deemed to be"soliciting material"“soliciting material” or to be"filed"“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 PolicyWe have never declared or paid any dividends on our common stock. We anticipate that we will retain allItem 6. Selected Financial DataSee the informationThe following selected consolidated statements of operations data for the years2012 throughended December 31, 2018, 2017 and 2016,containedand the selected consolidated balance sheets data as of December 31, 2018 and 2017 are derived from our audited consolidated financial statements in “Financial Statements and Supplementary Data” included in Part II, Item 8 of this Annual Report on Form 10-K. The selected consolidated statements of operations data for thetable titled "Selected Financial Data," which isyears ended December 31, 2015 and 2014, and the selected consolidated balance sheets data as of December 31, 2016, 2015 and 2014 are derived from our audited consolidated financial statements, except as otherwise noted, that are not included in this Annual Report on Form10-K and listed10-K. Our historical results are not necessarily indicative of the results to be expected in theIndex to Consolidatedfuture. The selected consolidated financial data should be read together with Item 7 “Management’s Discussion and Analysis of FinancialInformation on page 50 hereof (with onlyCondition and Results of Operations” and in conjunction with the consolidated financial statements, related notes, and other financial informationfor such years to be deemed filed as part ofincluded elsewhere in this Annual Report on Form10-K).10-K.Year Ended December 31, 2018 2017 2016 2015 2014 (in thousands, except share and per share amounts) Consolidated Statements of Operations Data: Revenue $ 411,769 $ 286,752 $ 205,864 $ 150,194 $ 110,239 Costs and expenses Curriculum and teaching 23,290 6,609 — — — Servicing and support 67,203 50,767 40,982 32,047 26,858 Technology and content development 63,812 45,926 33,283 27,211 22,621 Marketing and sales 221,015 150,923 106,610 82,911 65,218 General and administrative 82,989 62,665 46,021 34,123 23,420 Total costs and expenses 458,309 316,890 226,896 176,292 138,117 Loss from operations (46,540 ) (30,138 ) (21,032 ) (26,098 ) (27,878 ) Interest income 5,173 371 383 167 92 Interest expense (108 ) (87 ) (35 ) (552 ) (1,213 ) Other expense, net (1,722 ) (866 ) — (250 ) — Loss before income taxes (43,197 ) (30,720 ) (20,684 ) (26,733 ) (28,999 ) Income tax benefit 4,867 1,297 — — — Net loss (38,330 ) (29,423 ) (20,684 ) (26,733 ) (28,999 ) Preferred stock accretion — — — — (89 ) Net loss attributable to common stockholders $ (38,330 ) $ (29,423 ) $ (20,684 ) $ (26,733 ) $ (29,088 ) Net loss per share attributable to common stockholders, basic and diluted $ (0.69 ) $ (0.60 ) $ (0.44 ) $ (0.63 ) $ (0.91 ) Weighted-average common shares outstanding used in computing net loss per share attributable to common stockholders, basic and diluted 55,833,492 49,062,611 46,609,751 42,420,356 32,075,107 Other Financial Data: Adjusted EBITDA (loss)* $ 17,655 $ 11,416 $ 4,541 $ (6,629 ) $ (14,779 ) * Adjusted EBITDA is a financial measure not in accordance with United States generally accepted accounting principles, or U.S. GAAP. For more information about adjusted EBITDA and a reconciliation of net loss, the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, to adjusted EBITDA, see the section below titled “Adjusted EBITDA.” As of December 31, 2018 2017 2016 2015 2014 (in thousands) Consolidated Balance Sheets Data: Cash and cash equivalents $ 449,772 $ 223,370 $ 168,730 $ 183,729 $ 86,929 Working capital* 453,200 190,053 143,629 160,310 66,220 Goodwill and amortizable intangible assets, net 198,457 162,749 34,131 25,024 16,813 Total assets 807,354 482,062 244,320 231,041 113,039 Total liabilities 102,345 94,230 49,083 35,252 25,028 Additional paid-in capital 957,631 588,289 371,455 351,324 216,818 Total stockholders’ equity 705,009 387,832 195,237 195,789 88,011 * We define working capital as current assets minus current liabilities. Adjusted EBITDATo provide investors with additional information regarding our financial results, we have provided within this Annual Report on Form 10-K adjusted EBITDA, a non-U.S. GAAP financial measure. We have provided a reconciliation below of net loss, the most directly comparable U.S. 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 expense 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 the impact of changes in foreign currency exchange rates;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; andother 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:Year Ended December 31, 2018 2017 2016 2015 2014 (in thousands) Net loss $ (38,330 ) $ (29,423 ) $ (20,684 ) $ (26,733 ) $ (28,999 ) Adjustments: Interest income (5,173 ) (371 ) (383 ) (167 ) (92 ) Interest expense 108 87 35 552 1,213 Foreign currency loss 1,722 866 — — — Depreciation and amortization expense 32,785 19,624 9,750 7,220 5,572 Income tax benefit (4,867 ) (1,297 ) — — — Stock-based compensation expense 31,410 21,930 15,823 12,499 7,527 Total adjustments 55,985 40,839 25,225 20,104 14,220 Adjusted EBITDA (loss) $ 17,655 $ 11,416 $ 4,541 $ (6,629 ) $ (14,779 ) Item 7.Management'sManagement’s Discussion and Analysis of Financial Condition and Results of OperationsSee 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 50 hereof.Item 7A. Quantitative and Qualitative Disclosures About Market RiskMarket 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 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 low 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 RiskWe 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, 2016.Foreign Currency Exchange RiskAll of our current client contracts are denominated in U.S. dollars. Therefore, we have minimal, if any, foreign currency exchange risk with respect to our revenue.We have a branch office in Hong Kong for program marketing and student support and incur expenses related to its operations. The functional currency of this office is Hong Kong dollars, which exposes us to changes in foreign currency exchange rates. Hong Kong dollar currency rates have historically been tied to the U.S. dollar, however. In addition, because of the small size of our Hong Kong office and the relatively nominal amount of our expenses denominated in Hong Kong dollars, we do not expect any material effect on our financial position or results of operations from fluctuations in exchange rates. However, our exposure to foreign currency exchange risk may change over time as business practices evolve or we expand internationally, and if our exposure increases, adverse movement in foreign currency exchange rates could have a material adverse impact on our financial results.InflationWe do not believe that inflation has had a material effect on our business, financial condition or results of operations. Through our pricing model, we benefit from price increases implemented by our clients, and we continue to monitor inflation-driven cost increases in order to minimize their effects through productivity improvements and cost containment efforts. If our costs were to become subject to significant inflationary pressures, the price increases implemented by our clients and our own pricing strategies might not fully offset the higher costs. Our inability or failure to do so could harm our business, financial condition and results of operations.Item 8. Financial Statements and Supplementary DataSee the Company's consolidated financial statements at December 31, 2016, and for the periods then ended, together with the report of KPMG LLP thereon and the information contained in Note 14 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 50 hereof.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresAn evaluation was performed by our management, with the participation of our Chief Executive Officer (our Principal Executive Officer) and our Chief Financial Officer (our Principal Financial Officer), of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of December 31, 2016. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as designed and implemented, are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.Management's Report on Internal Control Over Financial ReportingManagement's report set forth on page 70 is incorporated herein by reference.Changes in Internal Control Over Financial ReportingThere have been no changes in our internal control over financial reporting that occurred during the period covered by this Annual Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Not applicable.We will file a definitive Proxy Statement for our 2017 Annual Meeting of Stockholders or our 2017 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 2017 Proxy Statement that specifically address the items set forth herein are incorporated by reference.Item 10. Directors, Executive Officers and Corporate GovernanceThe information required by Item 10 is hereby incorporated by reference to the sections of our 2017 Proxy Statement under the captions "Board of Directors and Committees," "Election of Directors," "Management" and "Section 16(a) Beneficial Ownership Reporting Compliance."Item 11. Executive CompensationThe information required by Item 11 is hereby incorporated by reference to the sections of our 2017 Proxy Statement under the captions "Executive Compensation" and "Director Compensation."Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by Item 12 is hereby incorporated by reference to the sections of our 2017 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 IndependenceThe information required by Item 13 is hereby incorporated by reference to the sections of our 2017 Proxy Statement under the captions "Transactions with Related Parties" and "Director Independence."Item 14. Principal Accounting Fees and ServicesThe information required by Item 14 is hereby incorporated by reference to the section of our 2017 Proxy Statement under the caption "Independent Registered Public Accounting Firm Fees."Item 15. Exhibits, Financial Statement Schedules(a) ExhibitsSee the Exhibit Index immediately following the Selected Financial Data of this Annual Report on Form 10-K.(b) Financial StatementsSee the Index to Consolidated Financial Information on page 50 hereof.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:2U, Inc.February 24, 2017By:/s/ CHRISTOPHER J. PAUCEKName:Christopher J. PaucekTitle:Chief Executive Officer and DirectorPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.SignatureTitleDate/s/ CHRISTOPHER J. PAUCEKChristopher J. PaucekChief Executive Officer and Director (Principal Executive Officer)February 24, 2017/s/ CATHERINE A. GRAHAMCatherine A. GrahamChief Financial Officer (Principal Financial Officer)February 24, 2017/s/ ANDREA PAPACONSTANTOPOULOSAndrea PapaconstantopoulosChief Accounting Officer (Principal Accounting Officer)February 24, 2017/s/ PAUL A. MAEDERPaul A. MaederDirector and Chairman of the BoardFebruary 24, 2017/s/ MARK J. CHERNISMark J. ChernisDirectorFebruary 24, 2017/s/ TIMOTHY M. HALEYTimothy M. HaleyDirectorFebruary 24, 2017/s/ JOHN M. LARSONJohn M. LarsonDirectorFebruary 24, 2017SignatureTitleDate/s/ CORETHA M. RUSHINGCoretha M. RushingDirectorFebruary 24, 2017/s/ ROBERT M. STAVISRobert M. StavisDirectorFebruary 24, 2017/s/ SALLIE L. KRAWCHECKSallie L. KrawcheckDirectorFebruary 24, 2017/s/ EARL LEWISEarl LewisDirectorFebruary 24, 2017/s/ EDWARD S. MACIASEdward S. MaciasDirectorFebruary 24, 20172U, Inc.INDEX TO CONSOLIDATED FINANCIAL INFORMATIONPAGEManagement's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited)51Management's Report on Internal Control Over Financial Reporting (Unaudited)70Consolidated Financial Statements:Reports of Independent Registered Public Accounting Firm71Consolidated Balance Sheets as of December 31, 2016 and 201573Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 201474Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 2016, 2015 and 201475Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 201476Notes to Consolidated Financial Statements77Selected Financial Data (Unaudited)102Management's Discussion and Analysis of Financial Condition and Results of OperationsYou 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"1A “Risk Factors” and"Special“Special Note Regarding Forward-LookingStatements"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.OverviewWe are a leadingprovider of cloud-based software-as-a-service, or SaaS,education technologyand technology-enabled servicescompany thatenable leadingwell-recognized nonprofit colleges and universities trust todeliver their degree programs at scale to students anywhere.bring them into the digital age. OurSaaS technology consistscomprehensive platform ofan innovative online learning environment, where our clients deliver their high-quality educational content to students in a live, intimate and engaging setting. We also provide a comprehensive suite oftightly integratedapplications, including a content management system and customer relationship management, that serve as the back-end infrastructure of the programs we enable. This technology is fused with technology-enabled services, including student acquisition services, content development services, student and faculty support, clinical placement services, and admissions applications advising services, each of which we optimize with data analysis and machine learning techniques. This suite oftechnology and servicesallows our clients' programs to expand and operate at scale, providingprovides thecomprehensivedigital infrastructurecolleges anduniversities 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; andgraduate theiruniversity clients can improve educational outcomes, skills attainment and career prospects for a greater number of students.We haveachieved significant growthtwo 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 ina relatively short period of time. Full course equivalent enrollments in our clients' programs grew from 41,034 duringthetwelve months ended December 31, 2014United States to77,344 duringenable thetwelve months ended December 31, 2016, representing a compound annual growth rate of 37%. From our inception through December 31, 2016, more than 24,000 unique individuals have enrolled as students in our clients' programs. For the years ended December 31, 2016, 2015 and 2014, our revenue was $205.9 million, $150.2 million and $110.2 million, respectively. However, because we must incur significant technology, content development, program marketing and sales expenses well in advance of generating revenue under a new client program, we have a history of losses despite our revenue growth. In order to become profitable, our revenue from existing client programs will need to increase at a rate faster than the expenses we will incur in connection with the launch of new client programs.We believe our business strategy will continue to offer significant opportunities for growth, but it also presents a number of risks and challenges. In particular, to remain competitive, we will need to continue to innovate in a rapidly changing landscape for the application of technology like ours to theonline delivery ofhigher education. As described above, we have added,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 around the world through relationships with leading universities in the United States, the United Kingdom andwe intendSouth Africa. We target working professionals seeking career advancement through skills attainment.Our core strategy is tocontinue to add,launch graduate programs and short courses with new and existing university clientsin a numberand to increase student enrollments across our portfolio ofnewofferings. We are also committed to continuously improving our platform to deliver high-quality university andexisting degree verticals each year.student experiences and outcomes at scale.Wealso have increasedare focused on rapidly growing our business andintendplan to continue toincreaseinvest for long-term growth, including investments in our marketing activities as we continue to scale current offerings while adding newstudent enrollments at existing client programs. To do so, we will needgraduate programs and short courses, investments in our technology platform and infrastructure toconvincedeliver newclients asfunctionality to meet thequality and valueneeds of oursolutions, cost-effectively identify qualified students for our clients' programs and help our clients retain those students once enrolled. We must also be able to successfully execute our business strategy while navigating constantly changing higher education laws and regulations applicable to ouruniversity clients and students, and investments insome casesdeveloping content toourselves, particularlymeet theincentive compensation rule that generally prohibits making incentive payments related to student acquisition. We seek to ensure that addressing all of these risks and challenges does not divert our management's attention from continuing to build on the strengths that we believe have driven the growthneeds of ourbusinessaccelerating program and offering launch schedules. 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). 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 thelast several years.expansion of our business.Non-cash stock-based compensation expense is a component of compensation cost. 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. Non-cash stock based compensation expense also includes charges associated with providing our 2017 Employee Stock Purchase Plan.Certain Trends and UncertaintiesThe following represents a summary of certain trends and uncertainties, which could have a significant impact on our financial condition and results of operations. This summary is not intended to be a complete list of potential trends and uncertainties and should be considered along with the factors identified in the section titled “Risk Factors” of this Annual Report on Form 10-K and elsewhere in this report.The risk of a data security breach or service disruption has increased as the frequency, intensity and sophistication of attempted attacks and intrusions from around the world have increased. While we make significant efforts to maintain the security and integrity of our services and computer systems, our cybersecurity measures and the cybersecurity measures taken by our third-party data center facilities may be unable to anticipate, detect or prevent all attempts to compromise our systems.Webelieveand ourfocusuniversity clients are subject to certain education regulations, such as the HEA, which are frequently revised, repealed or expanded. The re-authorization of the HEA is currently in process and the outcome could alter theregulatory landscape of the higher education industry, and thereby impact the manner in which we conduct business and serve ourbundle of technology and services, maintaining the integrity of our clients' educational brands and enabling strong student outcomes will contribute to the success ofuniversity clients.Our university clients have regular turnover in leadership positions. These changes can have a positive or negative impact on our business.However,If new leaders do not support online delivery of educational offerings, we may not besuccessfulable to add additional offerings with the university client or the university client may not renew their relationship with us. New leaders may also make changes inaddressinguniversity policies, which could result in changes to admissions standards or application of admissions standards andmanaging the many challenges and risks that we face.negatively impact student enrollment in a university client’s 2U-powered graduate programs.
Our Business Modeland Components of Operating Results
The key elements of our business model and components of our operating results are described below.RevenueDriversOur Graduate Program Segment derives revenue primarily from contractually specified percentages of the amounts our university clients receive from their students for tuition andPredictabilitySubstantially allfees, less credit card fees and other agreed-upon charges. Most of our contracts with university clients in this segment are long-term and typically have 10 to 15 year initial terms.Our Short Course Segment derives revenueis deriveddirectly fromrevenue-share arrangementscontracts with students for the tuition and fees paid to enroll in and progress through ourclients, under which we receiveshort courses. We pay a contractually specified percentage of theamountsgross proceeds received from studentspay themfor each course to the associated university client for providing short course content and certification, which is recognized on our consolidated statements of operations and comprehensive loss as curriculum and teaching costs. Our contracts with university clients intuitionthis segment are typically shorter andother fees. Accordingly, theless restrictive than our contracts with university clients in our Graduate Program Segment.The primary driver of our revenue growth across our segments is the increase in the number of studentcourseenrollments in ourclients' programs.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,by our clients,either by adding new university clients or byexpanding the number of client programs;•- adding graduate programs and short courses with current university clients;
our ability toidentify andacquire prospective students forour clients' programs;graduate programs and•- short courses; and
our abilityand that of our clients,to retain the students who enroll intheir programs.graduate programs and short courses.
In the near term, we expect theprimarysignificant drivers of our consolidated financial results to continue to be ourfirst twograduate programs with the University of Southern California,which areSimmons University, the University of North Carolina and Syracuse University, within ourlongest running programs, which we launchedGraduate Program Segment. The following table sets forth the percentages of our consolidated revenue earned from these university clients in2009 and 2010, andourprograms with Simmons College, which launched between 2013 and 2016.Graduate Program Segment for the periods presented:Year Ended
December 31,2018 2017 2016 University of Southern California 21 % 27 % 34 % Simmons University 13 % 17 % 18 % Syracuse University 10 % 11 % <10% University of North Carolina <10% 10 % 11 % For theyearsyear ended December 31,2016, 20152018, revenue associated with our three largest university clients in our Short Course Segment accounted for approximately 81% of the segment’s revenue, and2014, 34%, 43% and 55%, respectively,each were less than 10% of our consolidated revenuewas derived from the two University of Southern California programs.on a combined basis. For theyearsyear ended December 31,2016, 2015 and 2014, 18%, 16% and 8%, respectively,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 revenuewas derived from the Simmons College programs. We expect that the two programs with the University of Southern California and our programs with Simmons College will continue to account foron alarge portion of our revenue even though that portion should decline as other client programs become more mature and achieve higher enrollment levels.Programcombined basis.Marketing and SalesExpenseCosts
Our most significantexpensecost in each fiscal periodhas been program marketing and sales expense, whichrelates primarily to student acquisitionactivities.activities across both of our segments. This includes the cost of online advertising and demand generation, as well as cash and non-cash compensation and benefit costs (including stock-based compensation) for our graduate program and short course marketing, marketing analytics and admissions application counseling personnel.We have the primary responsibility for identifying qualified students for ourclients'graduate programs and short courses, generating potential student interestin the programsand driving applications to theprograms. While our clients make all admissions decisions, theeducational offerings. The number of students who enroll in ourclients'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.Accordingly, althoughGraduate Program SegmentWe 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 eight months. Based on the student 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 ourclients'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 significantprogrammarketing and sales expense for existing graduate programs going forward to generate a continuous pipeline of new enrollments. For new graduate programs, we begin incurringprogrammarketing and sales costs as early as nine months prior to thestart of a new client program.
classes beginning.We typically identify prospective students for our clients' programs between three months and two or more years before they ultimately enroll. For the students currently enrolled in our clients' programs and those who have graduated, the average time from our initial prospective student acquisition to initial enrollment was approximately seven months. For the students who have graduated from these programs, the average time from initial enrollment to graduation was 22 months. Based on the student retention rates and patterns we have observed in our clients' programs, we estimate that, for ourcurrent programs, the average time from a student's initial enrollment to graduation will be approximately two years.Accordingly, our
programmarketing 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. Becauseprogrammarketing 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 ourclients'graduate programs as a result of current periodprogrammarketing 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 periodprogrammarketing and sales expense as expressed in our financial statements. Further, we believe that ourprogrammarketing 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 ourprogrammarketing and sales expense to ensure that across our portfolio ofclient programs,offerings, our cost to acquire students for theseprogramsofferings 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 anyprogram. 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 program 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.offering. The LTR to TCA ratio may varyfrom program to programacross offerings depending on thedegree being offered,nature of the offering, where thatprogramoffering is in its lifecycle and whether we enable the same or similardegreesofferings at other universities.Short Course SegmentWe 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.Other Costs and ExpensesOur other costs and expenses consist of the following:Curriculum and teaching. Curriculum and teaching costs are associated with our Short Course Segment and primarily relate to amounts due to our university clients, which are based on contractually specified percentages of the gross proceeds associated with our short course offerings for providing content and certifying courses. This also includes costs to compensate short course facilitators.Servicing and support. Servicing and support costs consist primarily of cash and non-cash compensation and benefit costs (including stock-based compensation) related to the management and operations of our graduate programs and short courses, providing support for our SaaS technology, as well as supporting students enrolled in our offerings and faculty members. 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 tofacilitate 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 licensing and other costs associated with maintaining our platform in a cloud environment and support for our internal infrastructure.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, and other corporate costs such as insurance and travel that are not related to another function.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.Other Income (Expense), NetOther income (expense), net primarily consists of foreign currency gains and losses.Income Tax BenefitIncome tax benefit consists of U.S. federal, state and foreign income taxes. Our effective tax rate for the period is based on a mix of higher-taxed and lower-taxed jurisdictions. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses.Period-to-Period FluctuationsOur revenue, cash position, accounts receivable,anddeferred revenue, and sales and marketing expense can fluctuate significantly from quarter to quarter due to variations driven by the academic schedules of ourclients' programs. Thesegraduate 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.Class startsGraduate 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 ofclassescourses ourclientgraduate programs and short courses have in session, and therefore the number of students enrolled, will vary frommonth to month andquarter to quarter, leading to variability in our revenue.Ourclients'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
programmarketing and sales activity. We typically reduce our paid search and otherprogrammarketing and sales efforts during late November and December because these efforts are less productive during the holiday season. This generally results in lower totalprogrammarketing and sales expense during the fourth quarter. In addition, because we begin spending onprogrammarketing and sales, and, to a lesser extent, services and support as much as nine months prior to the start of classes for a newclientgraduate 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 newclientgraduate programs andanticipated program launch dates.Componentsshort courses launches.Results of OperationsFull-Year20162018 Highlights•
Revenue was$205.9$411.8 million, an increase of37.1%43.6% from$150.2$286.8 million for the year ended December 31,2015.•- 2017.
Net loss was$(20.7)$(38.3) million, or$(0.44)$(0.69) per share, compared to$(26.7)$(29.4) million, or$(0.63)$(0.60) per share for the year ended December 31,2015.•- 2017.
AdjustedEBITDAEBITDA* was$4.5$17.7 million, compared toan adjusted EBITDA loss of $(6.6)$11.4 million for the year ended December 31,2015.RevenueSubstantially all2017.We launched 14 new graduate programs and 17 new short courses.We completed a public offering ofour revenue consistscommon stock in May 2018 in which we sold 3,833,334 shares and received net proceeds ofa contractually specified percentage$330.9 million.* Adjusted EBITDA is a financial measure not in accordance with United States generally accepted accounting principles, or U.S. GAAP. For more information about adjusted EBITDA and a reconciliation of net loss, the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, to adjusted EBITDA, see the section below titled “Adjusted EBITDA.” Consolidated Operating ResultsComparison of Years Ended December 31, 2018 and 2017The following table sets forth selected consolidated statement of operations data for each of theamountsperiods indicated.Year Ended December 31, 2018 2017 Period-to-Period Change Amount Percentage of Revenue Amount Percentage of Revenue Amount Percentage (dollars in thousands) Revenue $ 411,769 100.0 % $ 286,752 100.0 % $ 125,017 43.6 % Costs and expenses Curriculum and teaching 23,290 5.7 6,609 2.3 16,681 252.4 Servicing and support 67,203 16.3 50,767 17.7 16,436 32.4 Technology and content development 63,812 15.5 45,926 16.0 17,886 38.9 Marketing and sales 221,015 53.7 150,923 52.6 70,092 46.4 General and administrative 82,989 20.2 62,665 21.9 20,324 32.4 Total costs and expenses 458,309 111.4 316,890 110.5 141,419 44.6 Loss from operations (46,540 ) (11.4 ) (30,138 ) (10.5 ) (16,402 ) 54.4 Interest income 5,173 1.3 371 0.1 4,802 * Interest expense (108 ) — (87 ) — (21 ) 24.6 Other expense, net (1,722 ) (0.4 ) (866 ) (0.3 ) (856 ) 98.7 Loss before income taxes (43,197 ) (10.5 ) (30,720 ) (10.7 ) (12,477 ) 40.6 Income tax benefit 4,867 1.2 1,297 0.4 3,570 * Net loss $ (38,330 ) (9.3 )% $ (29,423 ) (10.3 )% $ (8,907 ) 30.3 * Not meaningful for comparative purposes. Our results of operations for the year ended December 31, 2018 included a full year of operations related to ourclients bill to their students for tuition and fees, less credit card fees and other specified charges we have agreed to exclude in certainShort Course Segment, whereas the same period ofour client contracts, which we refer to as net program proceeds. Most2017 included only six months ofour contracts have 10 to 15 year initial terms. We recognize revenue ratably over the service period, which we definesuch operations as thefirst throughacquisition of GetSmarter occurred on July 1, 2017.The following table sets forth thelast day of classesrevenue by segment for eachacademic term in a client's program.We establish a refund allowance for our share of tuition and fees ultimately uncollected by our clients.We also offered rebates to a limited group of students who enrolled in a specific client program between 2009 and 2011, which we will be required to pay to such students if they complete their degrees and pre-specified, post-graduation work requirements within a defined period of time after graduation. For students in this group who are still enrolled in the program, we accrue the rebate liability as they continue through the program towards graduation. In addition, all students in this group are required to certify to us each September as to their continuing eligibility for these rebates. For those students who do not make such certification and are therefore no longer eligible for the rebate, because, for example, they have failed to meet their post-graduation work requirements, we reduce the allowance accordingly at that time. As of December 31, 2016 and 2015, 61 and 81 students, respectively, remained eligible to receive these rebates. These rebates and refunds offset the net program proceeds that we recognize as revenue.
periods indicated.In addition to providing access to our SaaS technology, we provide technology-enabled services that support the complete lifecycle of a higher education program, 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. 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 termof theservice period.Year Ended December 31, Period-to-Period Change 2018 2017 Amount Percentage (dollars in thousands) Revenue by segment* Graduate Program Segment $ 348,361 $ 270,432 $ 77,929 28.8 % Short Course Segment 63,408 16,320 47,088 288.5 Total revenue $ 411,769 $ 286,752 $ 125,017 43.6 * Approximately $44,000 of intersegment revenues have been excluded from the year ended December 31, 2018. RevenueWe generally receive payments from our clients early in each academic term, prior to completion of the service period. We record these advance payments as deferred revenue until the services are delivered or until our obligations are otherwise met, at which time we recognize the revenue. As of each balance sheet date, deferred revenue is a current liability and represents the excess amounts we have billed or received over the amounts we have recognized as revenue in the consolidated statements of operations as of that date.. Revenue for the year ended December 31,
20162018 was$205.9$411.8 million, an increase of$55.7$125.0 million, or37.1%43.6%, from$150.2$286.8 million for the same period of 2017. Graduate Program Segment revenue increased by $77.9 million, or 28.8%. This increase was primarily due to growth in full course equivalent enrollments of 28,774, or 29.1%. Short Course Segment revenue increased by $47.1 million, or 288.5%. This increase was driven by both a growth in full course equivalent enrollments of 21,372, or 197.3%, and an increase in the average revenue per full course equivalent enrollment, from $1,507 to $1,969. Fluctuations in foreign currency exchange rates from those prevailing in the same period of 2017 did not have a material impact on revenue.Curriculum and Teaching. Curriculum and teaching costs for the year ended December 31,2015. The increase was primarily attributable to a 35.6% increase in period-over-period full course equivalent enrollments in our client programs, from 57,019 for the year ended December 31, 2015 to 77,344 for the year ended December 31, 2016. Of the increase in full course equivalent enrollments, 476, or 2.3% of the total increase,2018 wereattributable to client programs launched during the 12 months ended December 31, 2016.Revenue for the year ended December 31, 2015 was $150.2$23.3 million, an increase of$40.0$16.7 million, or36.2%252.4%, from$110.2$6.6 million for theyear ended December 31, 2014. The increasesame period of 2017. This was primarilyattributabledue toa 39.0%an increase inperiod-over-period full course equivalent enrollmentsthe number of short courses taken in ourclient programs, from 41,034 for the year ended December 31, 2014 to 57,019 for the year ended December 31, 2015. Of the increase in full course equivalent enrollments, 3,354, or 21.0% of the total increase, were attributable to client programs launched during the 12 months ended December 31, 2015.Short Course Segment.
Costs and ExpensesCosts and expenses consist of servicing and support costs, technology and content development costs, program marketing and sales expenses and general and administrative expenses. To support our anticipated growth, we expect to continue to hire new employees (which will increase both our cash and non-cash stock-based compensation costs), increase our program promotion and student acquisition efforts, expand our technology infrastructure and increase our other program support capabilities. As a result, we expect our costs and expenses 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.Non-cash stock-based compensation expense is a component of compensation cost within each of the four cost and expense categories described above. In early 2014, the Compensation Committee of our Board of Directors approved a framework for granting equity awards under our 2014 Equity Incentive Plan. Under this framework, the majority of our equity awards are made on or around April 1 of each year and typically have four-year vesting periods. As such, non-cash stock-based compensation expense is expected to continue to increase year-over-year until four years after the initial early-2014 grants.Servicing and
support.Support.Servicing and support expense consists primarily of cash and non-cash stock-based compensation costs related to program management and operations, as well as costs for technical support for our SaaS technology and faculty and student support. It includes costs to facilitate in-program field placements, student immersions and other student enrichment experiences and costs to assist our clients with their state compliance requirements. It also includes software licensing, telecommunications and other costs to provide access to our SaaS technology for our clients and their students.Servicing and support costs for the year ended December 31,
20162018 were$41.0$67.2 million, an increase of$9.0$16.4 million, or27.9%32.4%, from$32.0$50.8 million for theyear ended December 31, 2015.same period of 2017. This increase was primarily dueprimarilyto a$5.4$12.3 million increase in cash and non-cash compensationcosts, a $1.0 million increase in non-cash stock-based compensation costsanda $0.5 million increase in travel and related expensesbenefit costs, as we increased our headcount inthis area by 26% to serve a growing number of students and faculty inexisting and new client programs and a $0.9 million increase in costs associated with student immersion courses and on-campus initiatives. Additionally, software licensing costs increased by $0.7 million, while otherservicing and supportcosts increased $0.5 million. As a percentage of revenue, servicing and support costs decreased from 21.4% for the year ended December 31, 2015 to 19.9% for the same period of 2016, as client programs continued to mature and greater operational efficiencies were achieved.Servicing and support costs for the year ended December 31, 2015 were $32.0 million, an increase of $5.2 million, or 19.3%, from $26.8 million for the year ended December 31, 2014. This increase was due primarily to a $3.9 million increase in compensation costs, and a $0.2 million increase in travel and related expenses as we increased our headcount in this areaby25%31% to serve a growing number of students and faculty in existing and newclient programs.graduate programs and short courses. Additionally, $1.9 million of the increase related to student immersion costs,for student support services increased by $0.6and $1.1 millionsoftware licensing costs increased by $0.3of the increase related to rent and other facilities costs. The remainder of the increase related to $1.1 million of higher travel andcosts for facilitating in-program field placements increased by $0.2 million. As a percentage of revenue,other servicing and supportcosts decreased from 24.4% for the year ended December 31, 2014 to 21.4% for the same period of 2015, as client programs continued to mature and greater operational efficiencies were achieved.costs.
Technology andcontent development.Content Development.Technology and content development expense consists primarily of cash and non-cash stock-based compensation and outsourced services costs related to the ongoing improvement and maintenance of our SaaS technology, and the developed content for our client programs. It also includes the costs to support our internal infrastructure, including our cloud-based server usage. Additionally, it includes the associated amortization expense related to capitalized technology and content development costs, as well as hosting and other costs associated with maintaining our SaaS technology in a cloud environment.Technology and content development costs for the year ended December 31,
20162018 were$33.3$63.8 million, an increase of$6.1$17.9 million, or22.3%38.9%, from$27.2$45.9 million for theyear ended December 31, 2015.same period of 2017. This increase was due,primarilyin part, to a$0.8$7.9 million increaseinrelated to higher amortization expense associated with capitalized technology and content development to support the scaling of existing and launching of new graduate programs and short courses. Additionally, $5.4 million of the increase related to cash and non-cash compensation and benefit costs (net of amounts capitalized for technology and content development),a $0.8 million increase in non-cash stock-based compensation costs, a $0.5 million increase in employee technological equipment expenditures and a $0.3 million increase in travel and related expenses,as we increased our headcount inthis areatechnology and content development by31%40% to support thelaunch of new client programs andscaling of existingprograms. Additionally,and launching of new graduate programs and short courses and $3.0 million of the increaseinrelated to higher hosting and licensing costs due to the larger number of courses that have been developedforand the continued maintenance and support of ourclient programs resultedplatform and internal infrastructure in$1.8a cloud environment. The remainder of the increase related to $1.6 million ofhigher amortization expense associated withother net costs to support and maintain ourcapitalized technologyinternal software applications.Marketing andcontent development costsSales. Marketing andhigher cloud-based hosting services of $0.7 million. Finally, technology consulting expense increased by $0.1 million, while other technology and content development expense increased by $1.1 million. As a percentage of revenue, technology and content development costs decreased from 18.1% for the year ended December 31, 2015 to 16.2% for the same period of 2016, as we have continued to achieve scale.Technology and content developmentsales costs for the year ended December 31,20152018 were$27.2$221.0 million, an increase of $70.1 million, or 46.4%, from $150.9 million for the same period of 2017. This increase was primarily due to higher direct internet marketing costs of $40.0 million, as we increased our student acquisition activities to drive enrollments in our new and existing graduate programs and short courses. Additionally, $21.7 million of the increase related to higher cash and non-cash compensation and benefit costs, as we increased our headcount in marketing and sales by 32% to drive enrollment and revenue growth in existing and new graduate programs and short courses. The remainder of the increase related to $4.6 million of higher amortization expense related to acquired websites, a $1.9 million increase related to higher rent expense, $1.0 million of higher travel and entertainment costs and $0.9 million related to higher other net cost increases to support our graduate program and short course marketing efforts.General and Administrative. General and administrative costs for the year ended December 31, 2018 were $83.0 million, an increase of $20.3 million, or20.3%32.4%, from$22.6$62.7 million for the same period of 2017. This was primarily due to a $17.8 million increase in cash and non-cash compensation and benefit costs, as we increased our headcount in general and administrative by 27% to support our growing business. Additionally, $2.5 million of the increase related to higher consulting and other professional services, travel costs, depreciation and amortization expense, rent and other facilities costs, partially offset by reductions in year-over-year costs after the integration of our enterprise resource planning system that was completed in the second quarter of 2017.Net Interest Income (Expense). For the year ended December 31, 2018, we earned net interest income of $5.1 million, compared to $284,000 for the same period of 2017, primarily due to a higher cash and cash equivalents balance resulting from our May 2018 public offering of common stock.Other Expense, Net. For the year ended December 31, 2018, we incurred other expense, net, of $1.7 million, compared to $866,000 in the same period of 2017, primarily due to foreign currency rate fluctuations associated with the operations of our Short Course Segment.Income Tax Benefit. For the year ended December 31, 2018, we recognized a tax benefit of $4.9 million. Our effective tax rate was approximately 11% for the year ended December 31, 2018. A one-time tax benefit of approximately $2.8 million related to an asset acquisition of certain third-party technologies is included in our income tax benefit for the year ended December 31, 2018. This benefit relates to the reversal of our tax valuation allowance that was no longer needed as a result of establishing a net deferred tax liability. Excluding the one-time tax benefit, our tax benefit of $2.1 million for the year ended December 31,2014. This was due primarily to a $2.8 million increase in compensation costs (net of capitalized amounts for software and content development) as we increased our headcount in this area by 23% to support additional client program launches and scaling of existing client programs. Further, an increase of $1.4 million resulted from higher depreciation expense associated with our capitalized internal use software and content development costs, primarily as a result of an increase in the number of courses that have been developed for our client programs. Additionally, costs2018, related toour cloud-based server usage increasedlosses generated by$0.4 million to support a greater number of our clients' programs. As a percentage of revenue, technologyoperations andcontent development costs decreased from 20.5% for the year ended December 31, 2014 to 18.1% for the same period of 2015, as we have continued to achieve scale.Program marketing and sales.Program marketing and sales expense consists primarily of costs related to student acquisition. This includes the cost of online advertising and prospective student generation, as well as cash and non-cash stock-based compensation costs for our program marketing, search engine optimization, marketing analytics and admissions application counseling personnel. We expense all costs related to program marketing and sales as they are incurred.Program marketing and sales expense for the year ended December 31, 2016 was $106.6 million, an increase of $23.7 million, or 28.6%, from $82.9 million for the year ended December 31, 2015. This increase was due primarily to a $11.6 million increase in direct internet marketing costs to acquire students for our clients' programs. Additionally, cash compensation costs increased by $8.0 million, non-cash stock-based compensation costs increased by $0.3 million, rent expense increased by $1.0 million and travel and related expenses increased by $0.6 million as we increased our headcount in this area by 21% to acquire students for, and drive revenue growth in, new client programs. Finally, advertising expenses increased by $0.7 million, depreciation and amortization of fixed assets increased by $0.4 million, and other program marketing and sales expenses increased by $1.1 million to support our program marketing efforts. As a percentage of revenue, program marketing and sales expense decreased from 55.2% for year ended December 31, 2015 to 51.8% for the same period of 2016, reflecting a higher year-over-year percentage increase in revenue than the increase in expense.Program marketing and sales expense for the year ended December 31, 2015 was $82.9 million, an increase of $17.7 million, or 27.1%, from $65.2 million for the year ended December 31, 2014. This increase was due primarily to an $8.4 million increase in direct internet marketing costs to acquire students for our clients' programs. Additionally, compensation costs increased by $8.0 million as we increased our headcount in this area by 29% to acquire students for, and drive revenue growth in, new client programs, while advertising expenses increased by $0.2 million and other program marketing and sales expenses increased by $1.1 million to support our program marketing efforts. As a percentage of revenue, program marketing and sales expense decreased from 59.2% for year ended December 31, 2014 to 55.2% for the same period of 2015, reflecting a higher year-over-year percentage increase in revenue than the increase in expense.General and administrative.General and administrative expense consists primarily of cash and non-cash stock-based compensation costs for employees in our executive, administrative, finance and accounting, legal, communications and human resources functions. Additional expenses include 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.General and administrative expense for the year ended December 31, 2016 was $46.0 million, an increase of $11.9 million, or 34.9%, from $34.1 million for the year ended December 31, 2015. This increase was due primarily to a $4.3 million increase in cash compensation costs and a $2.0 million increase in non-cash stock-based compensation costs as we increased in our headcount in this area by 35% to support our growing business. Further, software expenses primarily related to the implementation of our enterprise resource planning system integration increased by $2.5 million, employee education benefits increased by $2.5 million, accounting services and other professional fees increased by $1.1 million and other general and administrative costs increased by $0.5 million. These increases were partially offset by a $1.0 million signing bonus of a key executive in June 2015, which consisted of cash and a common stock award signing bonus. As a percentage of revenue, general and administrative expense decreased slightly from 22.7% for the year ended December 31, 2015 to 22.4% for the same period of 2016.General and administrative expense for the year ended December 31, 2015 was $34.1 million, an increase of $10.7 million, or 45.7%, from $23.4 million for the year ended December 31, 2014. This was due primarily to a $6.7 million increase in compensation costs and $1.0 million increase in travel and related expenses, as we increased our headcount in this area by 22% to support our growth.Additionally, we recorded a $0.8 million charge related to the execution of a new lease for our Maryland headquarters, costs for higher education benefits we provide to our employees increased by $0.5 million, while legal and other professional fees increased by $0.7 million. Further, insurance costs increased by $0.1 million and other general and administrative costs increased by $0.9 million. As a percentage of revenue, general and administrative expense increased from 21.2% for the year ended December 31, 2014 to 22.7% for the same period of 2015.Other Income (Expense)Other income (expense) consists of interest income, interest expense and other expenses. Interest income is derived from interest received on our cash and cash equivalents. Interest expense consists primarily ofthe amortization ofdeferred financing costs associated with our line of credit and convertible notes prior to their conversion and changesacquired intangibles in ourpreferred stock warrant liability asShort Course Segment that are expected to be realized through future reversing taxable temporary differences. We expect to continue to recognize aresult of changestax benefit in thefair value of such warrants (through April 2, 2014).The fair value offuture for ourpreferred stock warrant liability was reassessed at the end of each reporting period and any increase in fair value was recognized in other expense, while any decrease in fair value was recognized in other income. Upon completion of our initial public offering, or IPO, the preferred stock warrants automatically became warrants to purchase common stock. At that time, we reclassified the preferred stock warrant liability to additional paid-in capital and no further changes in fair value were recognized in other income or expense.For the year ended December 31, 2015, other expense consisted of a loss on an investment we made in an early stage entity to test international marketing channels.Total other income (expense) for the year ended December 31, 2016 was $0.3 million, an increase of $0.9 million, or 154.8%, from an other loss of $0.6 million for the same period of 2015. This increase was primarily driven by lower interest expense of $0.5 million and higher interest income of $0.2 million. Also contributingShort Course Segment to theyear-over-year increaseextent that this segment continues to generate pre-tax losses while carrying deferred tax liabilities that are inother income (expense) was a $0.3 million write-down on an investment which occured during 2015.Total other income (expense) for the year ended December 31, 2015 was a net expenseexcess of$0.6 million, a decrease of $0.5 million, or 43.3%, from $1.1 million for the same period of 2014. This decrease was primarily driven by lower interest expense of $0.7 million and higher interest income of $0.1 million. Also, during 2015 we invested in an early stage entity which is establishing an international marketing channel. Due to the risk of recoverability of this investment, we estimated the fair value of the investment to be zero, recorded a write-down on the investment to fair value and recognized a $0.3 million charge in other expense, which partially offset the decrease to other income (expense).Income Tax (Expense) BenefitIncomedeferred taxexpense consists of U.S. federal, state and foreign income taxes.assets. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses.We incurred immaterial state and foreignOn December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income taxliabilities foreffects of theyears endedTax Cuts and Jobs Act of 2017 (“Tax Act”). As of December 31,2016, 20152018, we finalized our assessment of the Tax Act, including our determination that no transitional tax is required.Comparison of Years Ended December 31, 2017 and2014.2016Consolidated Statements of Operations as a Percentage of RevenueThe following table sets forth selected consolidated
statementsstatement of operations dataas a percentage of revenuefor each of the periods indicated.Year Ended December 31, 2016 2015 2014 Revenue
100.0 % 100.0 % 100.0 % Costs and expenses:
Servicing and support
19.9 % 21.4 % 24.4 % Technology and content development
16.2 18.1 20.5 Program marketing and sales
51.8 55.2 59.2 General and administrative
22.4 22.7 21.2 Total costs and expenses
110.3 117.4 125.3 Loss from operations
(10.3 ) (17.4 ) (25.3 ) Other income (expense):
Interest expense
0.0 (0.4 ) (1.1 ) Interest income
0.2 0.1 0.1 Other
0.0 (0.1 ) 0.0 Total other income (expense)
0.2 (0.4 ) (1.0 ) Net loss
(10.1 )% (17.8 )% (26.3 )% Year Ended December 31, 2017 2016 Period-to-Period Change Amount Percentage of Revenue Amount Percentage of Revenue Amount Percentage (dollars in thousands) Revenue $ 286,752 100.0 % $ 205,864 100.0 % $ 80,888 39.3 % Costs and expenses Curriculum and teaching 6,609 2.3 — — 6,609 * Servicing and support 50,767 17.7 40,982 19.9 9,785 23.9 Technology and content development 45,926 16.0 33,283 16.2 12,643 38.0 Marketing and sales 150,923 52.6 106,610 51.8 44,313 41.6 General and administrative 62,665 21.9 46,021 22.4 16,644 36.2 Total costs and expenses 316,890 110.5 226,896 110.3 89,994 39.7 Loss from operations (30,138 ) (10.5 ) (21,032 ) (10.3 ) (9,106 ) 43.3 Interest income 371 0.1 383 0.2 (12 ) (3.0 ) Interest expense (87 ) 0.0 (35 ) 0.0 (52 ) 150.0 Other income (expense), net (866 ) (0.3 ) 0.0 0.0 (866 ) * Loss before income taxes (30,720 ) (10.7 ) (20,684 ) (10.1 ) (10,036 ) 48.5 Income tax benefit 1,297 0.4 — — 1,297 * Net loss $ (29,423 ) (10.3 )% $ (20,684 ) (10.1 )% $ (8,739 ) 42.3 * Not meaningful for comparative purposes. Our results of operations for the year ended December 31, 2017 includes six months of operations related to our Short Course Segment, whereas the same period of 2016 includes no amounts of such operations as the acquisition of GetSmarter occurred on July 1, 2017.The following table sets forth the revenue by segment for each of the periods indicated.Year Ended December 31, Period-to-Period Change 2017 2016 Amount Percentage (dollars in thousands) Revenue by segment* Graduate Program Segment 270,432 205,864 64,568 31.4 % Short Course Segment 16,320 — 16,320 * Total revenue $ 286,752 $ 205,864 $ 80,888 39.3 Revenue. Revenue for the year ended December 31, 2017 was $286.8 million, an increase of $80.9 million, or 39.3%, from $205.9 million for the same period of 2016. Graduate Program Segment revenue increased by $64.6 million, or 31.4%. This increase was primarily driven by growth in full course equivalent enrollments of 21,560, or 27.9% and, to a lesser extent, an increase in the average revenue per full course equivalent enrollment, from $2,662 to $2,734. 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. Fluctuations in foreign currency exchange rates from those prevailing in the same period of 2016 did not have a material impact on revenue.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 for the same period of 2016 as the acquisition of GetSmarter occurred on July 1, 2017.Servicing and Support. Servicing and support costs for the year ended December 31, 2017 were $50.8 million, an increase of $9.8 million, or 23.9%, from $41.0 million for the same period of 2016. This increase was primarily due to a $7.5 million 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, $1.4 million of the increase related to rent, other facilities costs and travel costs within our Graduate Program Segment and $0.8 million of the increase related to 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.Technology and Content Development. Technology and content development costs for the year ended December 31, 2017 were $45.9 million, an increase of $12.6 million, or 38.0%, from $33.3 million for the same period of 2016. This increase was due in part to a $4.1 million 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 programs and launch of new graduate programs. Additionally, $5.1 million 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 and $2.8 million of the increase related to 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.Marketing and Sales. Marketing and sales costs for the year ended December 31, 2017 were $150.9 million, an increase of $44.3 million, or 41.6%, from $106.6 million for the same period of 2016. This increase was primarily due to a $19.6 million increase in direct internet marketing costs to acquire students for our Graduate Program Segment. Additionally, $10.1 million of the increase related to cash and non-cash compensation and benefit costs, as we increased our headcount in marketing and sales by 26% within our Graduate Program Segment to acquire students for, and drive revenue growth in, existing and new graduate programs and $8.9 million of the increase related to 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.General and Administrative. General and administrative costs for the year ended December 31, 2017 were $62.7 million, an increase of $16.6 million, or 36.2%, from $46.0 million for the same period of 2016. This increase was due in part to a $7.5 million 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, $2.0 million of the 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. Further, $3.3 million of the increase related to additional general and administrative costs associated with our Short Course Segment and $1.2 million 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 support growth within our Graduate Program Segment.Net Interest Income (Expense). For the year ended December 31, 2017, we earned net interest income of $284,000, a decrease of 18.4%, from $348,000 for the same period of 2016.Other Income (Expense), Net. For the year ended December 31, 2017, we incurred other expense, net, of $0.9 million 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.Income Tax Benefit. 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. Our effective tax rate was approximately 4% for the year ended December 31, 2017.Business Segment Operating ResultsWe define segment profitability as net income or net loss, as applicable, before net interest income (expense), taxes, depreciation and amortization expense, 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 following table reconciles net loss to total segment profitability:Year Ended
December 31,2018 2017 2016 (in thousands) Net loss $ (38,330 ) $ (29,423 ) $ (20,684 ) Adjustments: Interest income (5,173 ) (371 ) (383 ) Interest expense 108 87 35 Foreign currency loss 1,722 866 — Depreciation and amortization expense 32,785 19,624 9,750 Income tax benefit (4,867 ) (1,297 ) — Stock-based compensation expense 31,410 21,930 15,823 Total adjustments 55,985 40,839 25,225 Total segment profitability $ 17,655 $ 11,416 $ 4,541 Years Ended December 31, 2018 and 2017Revenue by segment and segment profitability for the years ended December 31, 2018 and 2017 were as follows:Year Ended December 31, Period-to-Period Change 2018 2017 Amount Percentage (dollars in thousands) Revenue by segment* Graduate Program Segment $ 348,361 $ 270,432 $ 77,929 28.8 % Short Course Segment 63,408 16,320 47,088 288.5 Total revenue $ 411,769 $ 286,752 $ 125,017 43.6 Segment profitability Graduate Program Segment $ 16,839 $ 13,022 $ 3,817 29.3 Short Course Segment 816 (1,606 ) 2,422 (150.8 ) Total segment profitability $ 17,655 $ 11,416 $ 6,239 54.6 * Approximately $44,000 of intersegment revenues have been excluded from the year ended December 31, 2018. Segment profitability in our Graduate Program Segment for the year ended December 31, 2018 was $16.8 million, an increase of $3.8 million, or 29%, from $13.0 million for the same period of 2017. The primary factor favorably impacting segment profitability in this segment was the year-over-year growth in revenue. Additionally, we experienced a decrease in short-term annual incentive compensation costs and a decline in professional fees following the implementation of an enterprise resource planning system that was largely completed in 2017. We expect to increase investment in the development, marketing and support of newer and newly launching programs in this segment as we continue to scale our operations to prepare for future launches of an increasing number of programs in 2019 as compared to prior periods. Based on timing differences between the addition of costs related to the increased investment and the related recognition of revenue, we expect that there will be significant variability in segment profitability in this segment between periods.Segment profitability in our Short Course Segment for the year ended December 31, 2018 was $0.8 million, an increase of $2.4 million, or 151%, from $(1.6) million for the same period of 2017. Segment profitability for the year ended December 31, 2018 includes 12 months of operations related to our Short Course Segment, whereas the same period of 2017 includes only six months of such operations as the acquisition of GetSmarter occurred on July 1, 2017. The primary factor favorably impacting segment profitability in this segment was year-over-year growth in revenue. There were also changes in relative expense levels and expense timing in this period of rapid growth for the Short Course Segment, year-over-year. Therefore, changes in segment profitability do not necessarily represent a business trend. Changes in segment profitability are highly dependent upon the timing of new course launches and new course presentations. We expect to increase investment in the development, marketing and support of newer and newly launching courses in this segment. Based on timing differences between the addition of costs related to the increased investment and the related recognition of revenue, we expect that there will be significant variability in segment profitability in this segment between periods.Years Ended December 31, 2017 and 2016Revenue by segment and segment profitability for the years ended December 31, 2017 and 2016 were as follows:Year Ended December 31, Period-to-Period Change 2017 2016 Amount Percentage (dollars in thousands) Revenue by segment Graduate Program Segment 270,432 $ 205,864 $ 64,568 31.4 % Short Course Segment 16,320 — 16,320 * Total revenue $ 286,752 $ 205,864 $ 80,888 39.3 % Segment profitability Graduate Program Segment 13,022 $ 4,541 $ 8,481 186.8 % Short Course Segment (1,606 ) — (1,606 ) * Total segment profitability $ 11,416 $ 4,541 $ 6,875 151.4 % * Not meaningful for comparative purposes. Segment profitability in our Graduate Program Segment for the year ended December 31, 2017 was $13.0 million, an increase of $8.5 million, or 186.8%, from $4.5 million for the same period of 2016. The period-over-period increase in segment profitability in this segment was primarily due to cost growth outpacing revenue growth, particularly in marketing expenditures and marketing and program staffing, during 2017. We had been scaling operations to prepare for future launches of an increasing number of programs in 2017 and 2018 as compared to 2016.Segment profitability in our Short Course Segment for the year ended December 31, 2017 was $(1.6) million, compared to zero for the same period of 2016. Segment profitability for the year ended December 31, 2017 includes six months of operations related to our Short Course Segment, whereas the same period of 2016 includes no activity of such operations as the acquisition of GetSmarter occurred on July 1, 2017.Key Business and Financial Performance MetricsWe 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’ OfferingsWe 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 add the full course equivalent enrollments for each course within each segment to calculate the total full course equivalent enrollments per segment. This metric allows us to consistently view period over period changes in enrollments by accounting 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 in 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 our graduate programs and short courses, as applicable, and varying tuition levels, among other factors.The following table sets forth the full course equivalent enrollments and average revenue per full course equivalent enrollment in our Graduate Program Segment and Short Course Segment for the periods presented.Year Ended December 31, 2018 2017 2016 Graduate Program Segment Full course equivalent enrollments 127,678 98,904 77,344 Average revenue per full course equivalent enrollment $ 2,728 $ 2,734 $ 2,662 Short Course Segment Full course equivalent enrollments 32,202 10,830 * — Average revenue per full course equivalent enrollment $ 1,969 $ 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 in 2017 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. Of the increase in full course equivalent enrollments in our Graduate Program Segment for the years ended December 31, 2018 and 2017, 7,899 or 27.5% and 959 or 4.4%, respectively, were attributable to graduate programs launchedduring the preceding 12 months. Of the increase in full course equivalent enrollments in our Short Course Segment for the year ended December 31, 2018, 7,266 were attributable to short courses launched during the preceding 12 months.Adjusted EBITDAAdjusted EBITDA represents our earnings before net interest income (expense), taxes, depreciation and amortization expense, 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.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 expense 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 the impact of changes in foreign currency exchange rates;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; andother 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:Year Ended December 31, 2018 2017 2016 (in thousands) Net loss $ (38,330 ) $ (29,423 ) (20,684 ) Adjustments: Interest income (5,173 ) (371 ) (383 ) Interest expense 108 87 35 Foreign currency loss 1,722 866 — Depreciation and amortization expense 32,785 19,624 9,750 Income tax benefit (4,867 ) (1,297 ) — Stock-based compensation expense 31,410 21,930 15,823 Total adjustments 55,985 40,839 25,225 Adjusted EBITDA $ 17,655 $ 11,416 $ 4,541 Financial Condition: Capital Resources and LiquidityCapital ExpendituresDuring the year ended December 31, 2018, we had capital asset additions of $87.4 million, which were comprised of $67.2 million in capitalized technology and content development, $7.9 million of trade and domain names, $7.4 million of other property and equipment and $4.9 million of leasehold improvements. The $87.4 million increase consisted of $77.2 million in cash capital expenditures and $5.3 million of non-cash capital expenditures, primarily related to the acquisition of certain long-lived assets for which we have an accrued liability. Due to extended payment terms associated with the timing of cash capital expenditures made more than 90 days after the date of purchase, an additional $4.9 million was classified as cash flows from financing activities in the consolidated statement of cash flows for the year ended December 31, 2018. In 2019, we expect new capital asset additions of approximately $95 to $98 million, of which approximately $12 to $14 million will be funded by landlord leasehold improvement allowances.Sources of LiquidityPublic Offerings of Common StockOn May 22, 2018 we sold 3,833,334 shares of our common stock to the public, including 500,000 shares sold pursuant to the underwriters’ over-allotment option, and received net proceeds of $330.9 million. 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, and received net proceeds of $189.5 million. We intend to use the net proceeds from both of these public offerings of common stock for working capital and other 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 well as the strategic acquisitions of, or investments in, complementary products, technologies, solutions or businesses.Lines of CreditWe currently have a $25.0 million revolving line of credit with Comerica Bank (“Comerica”), which had no amounts outstanding as of December 31, 2018 and 2017. 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 effective as of December 31, 2018, to extend the maturity date of the credit agreement through March 31, 2019.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, 2018 and 2017, our adjusted quick ratios were 12.38 and 5.44, 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 opportunity to cure such non-compliance, or we otherwise experience an event of default under the line of credit, the lenders may require repayment in full of all principal and interest outstanding. 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, 2018, we have entered into standby letters of credit totaling $11.5 million, as security deposits for the applicable leased facilities and 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.Government GrantsIn June 2017, we entered into a total of two conditional loan agreements with Prince George’s County, Maryland and the State of Maryland 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. The loan with the State of Maryland has a maturity date of December 31, 2026, and the loan with Prince George’s County, Maryland has a maturity date of June 22, 2027. The interest expense related to these loans for the years ended December 31, 2018 and 2017 is immaterial.Working CapitalWe define working capital as current assets minus current liabilities. Our working capital as of December 31, 2018 and 2017 was $453.2 million and $190.1 million, respectively. Our cash and cash equivalents balance within working capital as of December 31, 2018 and 2017 was $449.8 million and $223.4 million, respectively. The increase in our working capital in 2018 as compared to 2017 primarily relates to higher cash balances held at year end related to our public offering of common stock in May 2018. 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 or certificates of deposits that are currently providing only a minimal return.Cash FlowsThe following table summarizes our cash flows for the periods presented:Year Ended December 31, 2018 2017 2016 (in thousands) Cash (used in) provided by: Operating activities $ (3,120 ) $ 8,106 $ 5,210 Investing activities (102,461 ) (149,374 ) (24,518 ) Financing activities 333,037 196,752 4,309 Effect of exchange rate changes on cash (1,054 ) (844 ) — Net increase (decrease) in cash and cash equivalents $ 226,402 $ 54,640 $ (14,999 ) Operating ActivitiesCash flows from operating activities have typically been generated from our net income (loss) and by changes in our operating assets and liabilities, particularly from accounts receivable, adjusted for non-cash expense items such as amortization and depreciation expense and stock-based compensation expense.Cash used in operating activities for the year ended December 31, 2018 was $3.1 million, while cash provided by operating activities for the same period of 2017 was $8.1 million, a change of $11.2 million, or 138.5%. This $11.2 million change in operating cash flows was primarily due to a $25.8 million change in working capital and a $8.9 million increase in net loss. These changes in operating cash flows were partially offset by a $13.2 million increase in depreciation and amortization expense, a $9.5 million increase in stock-based compensation expense and an increase in other net cash inflows of $0.8 million. Our cash flows from operating activities for the year ended December 31, 2018 included a full year of operations related to our Short Course Segment, whereas the same period of 2017 included only six months of such operations as the acquisition of GetSmarter occurred on July 1, 2017.Cash provided by operating activities for the year ended December 31, 2017 was $8.1 million, an increase of $2.9 million or 55.6% from net cash provided by operating activities of $5.2 million for the same period of 2016. This was primarily due to a $8.7 million increase in net loss and a $5.2 million change in working capital. These decreases in cash were partially offset by a $9.9 million increase in stock-based compensation expense and a $6.1 million increase in depreciation and amortization expense. Of the $8.1 million increase in cash provided by operating activities, $1.7 million is associated with the GetSmarter acquisition.Investing ActivitiesCash used in investing activities for the year ended December 31, 2018 was $102.5 million, a decrease of $46.9 million from $149.4 million for the same period of 2017. This decrease was primarily due to the July 1, 2017 acquisition of GetSmarter for $97.1 million and a $15.3 million decrease in purchases of property, plant and equipment as we moved into new facilities in the prior year. These decreases in outflows were partially offset by an increase of $41.4 million in amortizable intangible assets to support a greater number of launched graduate programs and short courses. The increase in amortizable intangible assets included an increase of $17.3 million in acquisitions of technology to be integrated into our platform,including $9.0 million related to the purchase of WeWork’s intangible assets. Additionally offsetting these items was a $25.0 million outflow related to a short-term investment in a certificate of deposit.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 increase was primarily due to $97.1 million in net cash paid to acquire GetSmarter, a $19.7 million increase in 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.Financing ActivitiesCash provided by financing activities for the year ended December 31, 2018 was $333.0 million, an increase of $136.3 million from $196.8 million for the same period of 2017. This increase was primarily due to an increase of $141.4 million in proceeds received from our public offering of common stock, partially offset by an outflow of $4.9 million related to payments on the acquisition of amortizable intangible assets.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 increase 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.Contractual Obligations and CommitmentsThe 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 as of December 31, 2018. Future events could cause actual payments to differ from these amounts.Payment due by period Contractual Obligations Less than1 year1 - 3 years 3 - 5 years More than5 yearsTotal (in thousands) Deferred government grant obligations $ — $ — $ — $ 3,500 $ 3,500 Operating lease obligations 12,941 27,920 27,592 68,347 136,800 Future minimum payments to university clients 10,125 1,250 1,250 3,775 16,400 Purchase obligations 7,234 6,550 — — 13,784 Total $ 30,300 $ 35,720 $ 28,842 $ 75,622 $ 170,484 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 on our consolidated balance sheets as accounts payable and accrued liabilities.We have entered into an agreement with one university client in our Graduate Program Segment under which we would be obligated to make future minimum program payments in the event that certain program metrics are not achieved. Due to the dependency of these calculations on future program performance, the timing and amounts of any associated contingent payments cannot be reasonably estimated at this time, and have therefore been excluded 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.OtherWe 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 EstimatesThismanagement'smanagement’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“Notes to Consolidated FinancialStatements"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 andDeferredAllowance for Doubtful AccountsOn January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606)and the related amendments using the modified retrospective transition method and concluded that doing so did not have a material impact on the amount and timing of either our revenue or costs. As part of our assessment, we completed reviews of our contracts and evaluated our costs, including costs of obtaining contracts with our university clients and costs associated with content development. Certain of these contract and content costs are capitalized under the new standard. The adoption of ASU 2014-09 did not have a material impact as of January 1, 2018, and no cumulative adjustment was recorded. Further, the amounts reported as of December 31, 2018 on our consolidated balance sheets and our results of operations for the year ended December 31, 2018 reported on our consolidated statements of operations and comprehensive loss would not have been materially different than under legacy U.S. GAAP (i.e., Topic 605).
Werecognize revenue whengenerate substantially all ofthe 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.We primarily deriveour revenue fromlong-term contracts that typically range from 10contractual arrangements, with either our university clients or students, to15 years in length. Under these contracts, we enable access to our cloud-basedprovide a comprehensive platform of tightly integrated technology andprovidetechnology-enabledmarketing, content developmentservices that support our graduate programs andsupporting servicesshort courses.Performance ObligationsA performance obligation is a promise in a contract toour clientstransfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation andtheir faculty and students. We are entitled to arecognized as revenue when, or as, the performance obligation is satisfied.Our Graduate Program Segment derives revenue primarily from contractually specifiedpercentagepercentages ofnet program proceedsthe amounts our university clients receive fromour clients. These net program proceeds represent gross proceeds billed by our clients totheir students in 2U-enabled graduate programs for tuition and fees, less credit card fees and other specified charges we have agreed to exclude in certain university contracts. Our contracts with university clients in this segment typically have 10 to 15 year initial terms and have a single performance obligation, as the promises to provide a platform ofour clienttightly integrated technology and services that university clients need to attract, enroll, educate and support students are not distinct within the context of the contracts.A refund allowanceThe single performance obligation isestablished for our share of tuitiondelivered as the university clients receive andfees ultimately uncollected byour clients. We also offered rebates to a group of students who enrolled in a specific client program between 2009 and 2011,consume benefits, whichwe will pay to the student if he or she completes the degree and certain post-graduation work requirements within a specified period of time. These rebates and refunds offset the net program proceeds recognized as revenue. Revenue is recognizedoccurs ratably overthe service period, which we define as the first through the last daya series ofclasses for eachacademicterm in a client's program. We invoice ourterms. The amounts received from university clientsbased on enrollment reports that are generated by our clients. In some instances, these enrollment reports are received prior to the conclusion of the drop/add period. In such cases, we establish a reserve against revenue, if necessary, based on our estimate of changes in enrollments expected prior to the end of the drop/add period.We generate substantially all of our revenue from multiple-deliverable contractual arrangements with our clients. Under each of these arrangements, we provide (i) cloud-based technology that serves as a learning platform for our client's faculty and students and which also enables a comprehensive range of other client functions, (ii) program marketing and application services for student acquisition, (iii) in conjunction with the client's faculty members, content development for courses and (iv) faculty and student support services, including technical field training and support, non-academic student advising and academic progress monitoring.In order to treat deliverables in a multiple-deliverable contractual arrangement as separate units of accounting, deliverables must have standalone value upon delivery. The services are provided primarily in support of courses offered through our through solutions and for students of the online courses delivered through our solutions. Accordingly, we haves determined that no individual deliverable has standalone value upon delivery and, therefore, deliverables within our multiple-deliverable arrangements do not qualify for treatment as separate units of accounting. Accordingly, we consider all deliverables to be a single unit of accounting and recognize revenue from the entire arrangementover the term of the arrangement are variable in nature in that they are dependent upon the number of students that are enrolled in the program within each academic term. These amounts are allocated to and are recognized ratably over the related academic term, defined as the period beginning on the first day of classes through the last. Revenue is recognized net of an allowance, which is established for our expected obligation to refund tuition and fees to university clients.Our Short Course Segment derives revenue directly from contracts with students for the tuition and fees paid to enroll in and progress through our short courses, which run between six and 16 weeks. Our contracts with students in this segment have multiple performance obligations as the delivery of the short course and student support services are each considered distinct performance obligations. These performance obligations are each satisfied ratably over the same short course presentation period, which is defined as the period beginning on the first day of the course through the last. We recognize the gross proceeds received from the students and shares contractually specified percentages with our university clients, for providing short course content and certification, which are recognized as curriculum and teaching costs on our consolidated statements of operations and comprehensive loss. Our contracts with university clients in this segment are typically shorter and less restrictive than our contracts with university clients in our Graduate Program Segment.We do not disclose the value of unsatisfied performance obligations for our Graduate Program Segment because the variable consideration is allocated entirely to a wholly unsatisfied promise to transfer a serviceperiod.Advancethat forms part of a single performance obligation. We do not disclose the value of unsatisfied performance obligations for our Short Course Segment because the performance obligation is part of a contract that has an original duration of less than one year.Contract Acquisition CostsWe pay commissions to certain of our employees to obtain contracts with university clients in our Graduate Program Segment. These costs are capitalized and recorded on a contract-by-contract basis and amortized using the straight-line method over the expected life, which is generally the length of the contract.With respect to contract acquisition costs in our Short Course Segment, we have elected to apply the practical expedient in ASC Topic 606 to expense these costs as incurred, as the terms of contracts with students in this segment are less than one year.Payments to University ClientsPursuant to certain of our contracts in the Graduate Program Segment, we have made, or are obligated to make, payments to university clients at either execution of a contract or at the extension of a contract in exchange for various marketing and other rights. Generally, these amounts arerecordedcapitalized and amortized as contra revenue over the life of the contract, commencing on the later of when payment is due or when contract revenue recognition begins.Accounts Receivable, Contract Assets and LiabilitiesBalance sheet items related to contracts consist of accounts receivable, net and deferred revenueuntilon our consolidated balance sheets. Included in accounts receivable, net are trade accounts receivable, which are comprised of billed and unbilled revenue. Accounts receivable, net is stated at net realizable value, and we utilize theservicesallowance method to provide for doubtful accounts based on management’s evaluation of the collectability of the amounts due. Our estimates aredelivered or obligations are met, at which timereviewed and revised periodically based on historical collection experience and a review of the current status of accounts receivable, net. Historically, actual write-offs for uncollectible accounts have not significantly differed from prior estimates. We recognize unbilled revenue when revenue recognition occurs in advance of billings. Unbilled revenue isrecognized.recognized in our Graduate Program Segment because billings to university clients do not occur until after the academic term has commenced and final enrollment information is available. Our unbilled revenue represents contract assets.Deferred revenueas of a particular balance sheet daterepresents the excess of amounts billed or received as compared to amounts recognized in revenuein theon our 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.Accounts ReceivableWe generally receive payments for our share of tuition andAllowancefees from graduate program university clients early in each academic term and from short course students, either in full upon registration forDoubtful Accountsthe course or in full before the end of the course based on a payment plan, prior to completion of the service period. These payments are recorded as deferred revenue until the services are delivered or until our obligations are otherwise met, at which time revenue is recognized.
GoodwillGoodwill is the excess of purchase price over the fair value of identified net assets of the business acquired. Ouraccounts receivable are statedgoodwill balance relates to the acquisition of GetSmarter in 2017. We review goodwill atnet realizableleast annually, as of October 1. 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. Weextendwill test our goodwill at the reporting unit level, which is an operating segment or one level below an operating segment. We initially 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 aminimal amount of uncollateralized credit to our clients. We utilize the allowance method to provide for doubtful accountsreporting unit is less than its carrying value based onmanagement's evaluationour qualitative assessment. Upon the completion of thecollectabilitytwo-step process, we may be required to recognize an impairment based on the difference between the carrying value and the fair value of theamounts due. Our estimate is based on historical collection experiencegoodwill recorded.Internally-Developed Intangible AssetsCapitalized TechnologyCapitalized technology includes certain purchased software anda reviewtechnology licenses, direct third-party costs, and internal payroll and payroll-related costs used in the creation ofthe current status of accounts receivable. Historically, actual write-offs for uncollectible accounts have not significantly differed fromourestimates. As of December 31, 2016 and 2015, we determined that no significant allowances for doubtful accounts were necessary.Internally-Developed Software CostsWe capitalize certain costs associated with internally-developed software, primarily consisting of direct labor associated with creating theinternal-use 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 our and theuniversity'suniversity’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 periodover which we expect to benefit from the use of that software. Once the software is placed in service, these costs are
depreciatedamortized onathe straight-line method over the estimated useful life of the software, which is generally three to five years.Capitalized Content DevelopmentCostsWework with each of our clients' faculty members todevelopand maintain educationalcontentthat is delivered to their students through our cloud-based technology. The online content developed jointly by us and our clients consists of subjects chosen and taught by client's faculty members and incorporates references and examples designed to remain relevant over extended periods of time. Online delivery of the content, combined with live, face-to-face instruction, provides us with rapid user feedback, which we use to make ongoing corrections, modifications and improvements to the course content. Our clients retain all intellectual property rights to the developed content, although we retain the rights to the content packaging and delivery mechanisms. Much of our new content development uses proven delivery platforms and is therefore primarily subject-specific in nature. As a result, a significant portion of content development costs qualify for capitalization due to the focus of our development efforts on the unique subject matter of the content. Similar to on-campus programs offered by our clients, the online degree programs that we enable offer numerous coursesfor eachdegree. We therefore capitalize our development costs on a course-by-course basis.We develop contentoffering on a course-by-course basis in conjunction with the faculty for eachclient program. Thegraduate program and short course. University clients and their faculty generally provide materials used for the courseoutlinesinthe form of the curriculum, required textbooks,an on-campus setting, including curricula, case studies and other reading materials,as well as presentations that are typically used in the on-campus setting.and presentations. We arethenresponsible forand incur all of the expenses related to,the conversion of the materialsprovided by each clientinto a format suitable for delivery through ourcloud-based technology.online learning platform, including all expenses associated with this effort. With regard to the Graduate Program Segment, the development of content is part of our single performance obligation and is considered a contract fulfillment cost.
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 theclients' programsuniversity clients’ offerings for deliverythroughvia oursolutions.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 for each offering are recorded on a course-by-course basis and included in capitalized content costs in amortizable intangible assets, net ontheour consolidated balance sheets. These costs are amortized using the straight-line method over the estimated useful life of the respectivecapitalized content program,course, which is generally four to 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 byprogramfaculty members for similar on-campusprograms. Itofferings.Evaluation of Long-Lived AssetsWe 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. In order to assess the recoverability of the capitalized technology and content development costs, the costs are grouped by the lowest level of independent cash flows (i.e., by degree program or short course, for content development costs). Recoverability of a long-lived asset isreasonably possiblemeasured 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 thatdeveloped content couldasset or asset group. If such assets are not recoverable, the impairment to berefreshed beforerecognized is measured by the amount by which the carrying value of an asset exceeds the estimateduseful lives are complete.Stock-Based CompensationWe 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 atfair valueat each grant date. We consider what we believe to be comparable publicly traded companies, discounted free(discounted cashflows, and an analysis of our enterprise value in estimating the fair value 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 periodflow) of theaward, adjusted for estimated forfeitures. Stock options subjectasset or asset group. Our impairment analysis is based upon cumulative results and forecasted performance.Recent Accounting PronouncementsRefer toservice-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, 2016, 2015 and 2014, we recorded stock-based compensation expense of $15.8 million, $12.5 million and $7.5 million, respectively. Information about the assumptions usedNote 2 in thecalculation of stock-based compensation expense is set forth in Note 9 in the "Notes“Notes to Consolidated FinancialStatements"Statements” included in Part II, Item 8 of this Annual Report on Form10-K.10-K for a discussion of FASB’s recent accounting pronouncements and their effect on us.
Item 7A. Quantitative and Qualitative Disclosures About Market RiskMarket 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 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 RiskWe 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. No amounts were outstanding as of December 31, 2018 and 2017, respectively.Foreign Currency Exchange RiskPrior 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 material 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, 2018 and 2017, our foreign currency translation adjustment was a loss of $13.8 million and a gain of $5.3 million, respectively. For the years ended December 31, 2018 and 2017, we recognized foreign currency exchange losses of $1.7 million and $0.9 million, respectively, included on our consolidated statements of operations and comprehensive loss.The foreign exchange rate volatility of the trailing 12 months ended December 31, 2018 was 13% and 6% for the South African rand and British pound, respectively. The foreign exchange rate volatility from the date of acquisition of GetSmarter to December 31, 2017 was 10% and 5% for the South African rand and British 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.InflationWe 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.Item 8. Financial Statements and Supplementary Data2U, Inc.INDEX TO CONSOLIDATED FINANCIAL STATEMENTSPAGE Consolidated Balance Sheets as of December 31, 2018 and 2017 Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2018, 2017 and 2016 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016 Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016 Report of Independent Registered Public Accounting FirmTo the Stockholders and Board of Directors2U, Inc.:Opinion on the Consolidated Financial StatementsWe have audited the accompanying consolidated balance sheets of 2U, Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017 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, 2018, and the related notes and financial statement Schedule II—Valuation and Qualifying Accounts (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, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, 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, 2018, 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 26, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.Change in Accounting PrincipleAs discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenues and related costs in 2018 due to the adoption, effective January 1, 2018, of ASU No. 2014-09, Revenue from Contracts with Customers.Basis for OpinionThese 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./s/ KPMG LLP We have served as the Company’s auditor since 2013.McLean, VirginiaFebruary 26, 2019Report of Independent Registered Public Accounting FirmTo the Stockholders and Board of Directors2U, Inc.:Opinion on Internal Control Over Financial ReportingWe have audited 2U, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2018, 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, 2018, 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, 2018 and 2017, 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, 2018, and the related notes and financial statement Schedule II—Valuation and Qualifying Accounts (collectively, the consolidated financial statements), and our report dated February 26, 2019 expressed an unqualified opinion on those consolidated financial statements.Basis for OpinionThe 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 ReportingA 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 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 26, 2019 2U, Inc.Consolidated Balance Sheets(in thousands, except share and per share amounts)December 31,
2018December 31,
2017Assets Current assets Cash and cash equivalents $ 449,772 $ 223,370 Investments 25,000 — Accounts receivable, net 32,636 14,174 Prepaid expenses and other assets 14,272 10,509 Total current assets 521,680 248,053 Property and equipment, net 52,299 49,055 Goodwill 61,852 71,988 Amortizable intangible assets, net 136,605 90,761 University payments and other assets, non-current 34,918 22,205 Total assets $ 807,354 $ 482,062 Liabilities and stockholders’ equity Current liabilities Accounts payable and accrued expenses $ 27,647 $ 22,629 Accrued compensation and related benefits 23,001 19,017 Deferred revenue 8,345 7,024 Other current liabilities 9,487 9,330 Total current liabilities 68,480 58,000 Deferred government grant obligations 3,500 3,500 Deferred tax liabilities, net 6,949 10,087 Lease-related and other liabilities, non-current 23,416 22,643 Total liabilities 102,345 94,230 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, 57,968,493 shares issued and outstanding as of December 31, 2018; 52,505,856 shares issued and outstanding as of December 31, 2017 58 53 Additional paid-in capital 957,631 588,289 Accumulated deficit (244,166 ) (205,836 ) Accumulated other comprehensive income (loss) (8,514 ) 5,326 Total stockholders’ equity 705,009 387,832 Total liabilities and stockholders’ equity $ 807,354 $ 482,062 See accompanying notes to consolidated financial statements.2U, Inc.Consolidated Statements of Operations and Comprehensive Loss(in thousands, except share and per share amounts)Year Ended December 31, 2018 2017 2016 Revenue $ 411,769 $ 286,752 $ 205,864 Costs and expenses Curriculum and teaching 23,290 6,609 — Servicing and support 67,203 50,767 40,982 Technology and content development 63,812 45,926 33,283 Marketing and sales 221,015 150,923 106,610 General and administrative 82,989 62,665 46,021 Total costs and expenses 458,309 316,890 226,896 Loss from operations (46,540 ) (30,138 ) (21,032 ) Interest income 5,173 371 383 Interest expense (108 ) (87 ) (35 ) Other expense, net (1,722 ) (866 ) — Loss before income taxes (43,197 ) (30,720 ) (20,684 ) Income tax benefit 4,867 1,297 — Net loss $ (38,330 ) $ (29,423 ) $ (20,684 ) Net loss per share, basic and diluted $ (0.69 ) $ (0.60 ) $ (0.44 ) Weighted-average shares of common stock outstanding, basic and diluted 55,833,492 49,062,611 46,609,751 Other comprehensive loss Foreign currency translation adjustments, net of tax of $0 for all periods presented (13,840 ) 5,326 — Comprehensive loss $ (52,170 ) $ (24,097 ) $ (20,684 ) See accompanying notes to consolidated financial statements.2U, Inc.Consolidated Statements of Changes in Stockholders’ Equity(in thousands, except share amounts)Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance, December 31, 2015 45,776,455 $ 46 $ 351,324 $ (155,581 ) $ — $ 195,789 Exercise of stock options 1,011,153 1 4,858 — — 4,859 Issuance of common stock in connection with settlement of restricted stock units, net of withholdings 351,319 — (382 ) — — (382 ) Issuance of common stock award 12,708 — (168 ) — — (168 ) Stock-based compensation expense — — 15,823 — — 15,823 Net loss — — — (20,684 ) — (20,684 ) Balance, December 31, 2016 47,151,635 47 371,455 (176,265 ) — 195,237 Cumulative-effect of accounting change (Note 2) — — 148 (148 ) — — Balance, December 31, 2016, adjusted 47,151,635 47 371,603 (176,413 ) — 195,237 Exercise of stock options 846,821 1 6,614 — — 6,615 Issuance of common stock in connection with settlement of restricted stock units, net of withholdings 459,900 1 (1,310 ) — — (1,309 ) Issuance of common stock in connection with a public offering of common stock, net of offering costs 4,047,500 4 189,452 — — 189,456 Stock-based compensation expense — — 21,930 — — 21,930 Net loss — — — (29,423 ) — (29,423 ) Foreign currency translation adjustment — — — — 5,326 5,326 Balance, December 31, 2017 52,505,856 53 588,289 (205,836 ) 5,326 387,832 Exercise of stock options 1,012,473 1 7,365 — — 7,366 Issuance of common stock in connection with settlement of restricted stock units, net of withholdings 553,159 — (3,451 ) — — (3,451 ) Issuance of common stock in connection with a public offering of common stock, net of offering costs 3,833,334 4 330,897 — — 330,901 Issuance of common stock in connection with employee stock purchase plan 63,671 — 3,121 — — 3,121 Stock-based compensation expense — — 31,410 — — 31,410 Net loss — — — (38,330 ) — (38,330 ) Foreign currency translation adjustment — — — — (13,840 ) (13,840 ) Balance, December 31, 2018 57,968,493 $ 58 $ 957,631 $ (244,166 ) $ (8,514 ) $ 705,009 See accompanying notes to consolidated financial statements.2U, Inc.Consolidated Statements of Cash Flows(in thousands)Year Ended December 31, 2018 2017 2016 Cash flows from operating activities Net loss $ (38,330 ) $ (29,423 ) $ (20,684 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization expense 32,785 19,624 9,750 Stock-based compensation expense 31,410 21,930 15,823 Changes in operating assets and liabilities: Accounts receivable, net (18,497 ) (5,634 ) (6,885 ) Prepaid expenses and other assets (4,932 ) 1,549 (1,090 ) Accounts payable and accrued expenses 4,724 3,504 (2,459 ) Accrued compensation and related benefits 4,046 2,504 3,086 Deferred revenue 1,527 1,661 528 Payments to university clients (11,322 ) (13,239 ) 2,234 Other liabilities, net (6,243 ) 4,763 4,907 Other 1,712 867 — Net cash (used in) provided by operating activities (3,120 ) 8,106 5,210 Cash flows from investing activities Purchase of a business, net of cash acquired — (97,102 ) — Purchases of property and equipment (11,996 ) (27,316 ) (7,648 ) Additions of amortizable intangible assets (65,190 ) (23,823 ) (16,728 ) Purchase of investments (25,000 ) — — Advances made to university clients (300 ) (1,950 ) — Advances repaid by university clients 25 817 — Other — — (142 ) Net cash used in investing activities (102,461 ) (149,374 ) (24,518 ) Cash flows from financing activities Proceeds from issuance of common stock, net of offering costs 330,901 189,463 — Proceeds from exercise of stock options 7,366 6,615 4,859 Proceeds from Employee Stock Purchase Plan share purchases 3,121 — — Proceeds from debt — 3,500 — Payments on debt — (1,517 ) — Tax withholding payments associated with settlement of restricted stock units (3,451 ) (1,309 ) (378 ) Payments for acquisition of amortizable intangible assets (4,900 ) — — Other — — (172 ) Net cash provided by financing activities 333,037 196,752 4,309 Effect of exchange rate changes on cash (1,054 ) (844 ) — Net increase (decrease) in cash and cash equivalents 226,402 54,640 (14,999 ) Cash and cash equivalents, beginning of period 223,370 168,730 183,729 Cash and cash equivalents, end of period $ 449,772 $ 223,370 $ 168,730 See accompanying notes to consolidated financial statements.2U, Inc.Notes to Consolidated Financial Statements1. Organization2U, Inc. (together with its subsidiaries, 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 of tightly integrated technology and services provides the digital infrastructure universities need to attract, enroll, educate and support students at scale. 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”). As a result of the acquisition of GetSmarter, the Company now manages its operations in two operating segments, which are also its 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 around the world through relationships with leading universities in the United States, the United Kingdom and South Africa. Refer to Note 13 for further information on the Company’s segments.2. Significant Accounting PoliciesBasis of Presentation and Principles of ConsolidationThe 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.Use of EstimatesThe 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.InvestmentsThe Company’s investments within current assets on the consolidated balance sheets relate to certificates of deposit with original maturities between three months and one year. As of December 31,2016, unrecognized compensation expense2018, the Company had a $25.0 million certificate of deposit included in investments that qualifies as a Level 1 fair value measurement asset and was stated at cost, which approximates fair value.Revenue Recognition, Accounts Receivable and Allowance for Doubtful AccountsOn January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) and the relatedto unvested options totaled $11.6 millionamendments using the modified retrospective transition method andwill be recognized overhas concluded that doing so did not have aweighted-average periodmaterial impact on the amount and timing ofapproximately 2.1 years.either its revenue or costs. As part of its assessment, the Company completed reviews of its contracts and evaluated its costs, including costs of obtaining contracts with its university clients and costs associated with content development. Certain of these contract and content costs are capitalized under the new standard. The adoption of ASU 2014-09 did not have a material impact as of January 1, 2018, and no cumulative adjustment was recorded. Further, the amounts reported as of December 31,
2016, unrecognized compensation2018 on the consolidated balance sheets and the results of operations for the year ended December 31, 2018 reported on the consolidated statements of operations and comprehensive loss would not have been materially different than under legacy U.S. GAAP (i.e., Topic 605).The Company generates substantially all of its revenue from contractual arrangements, with either its university clients or students, to provide a comprehensive platform of tightly integrated technology and technology-enabled services that support its graduate programs and short courses.2U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)Performance ObligationsA performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.The Graduate Program Segment derives revenue primarily from contractually specified percentages of the amounts the Company’s university clients receive from their students in 2U-enabled graduate programs for tuition and fees, less credit card fees and other specified charges the Company has agreed to exclude in certain university contracts. The Company’s contracts with university clients in this segment typically have 10 to 15 year initial terms and have a single performance obligation, as the promises to provide a platform of tightly integrated technology and services that university clients need to attract, enroll, educate and support students are not distinct within the context of the contracts. The single performance obligation is delivered as the university clients receive and consume benefits, which occurs ratably over a series of academic terms. The amounts received from university clients over the term of the arrangement are variable in nature in that they are dependent upon the number of students that are enrolled in the program within each academic term. These amounts are allocated to and are recognized ratably over the related academic term, defined as the period beginning on the first day of classes through the last. Revenue is recognized net of an allowance, which is established for the Company’s expected obligation to refund tuition and fees to university clients.The Short Course Segment derives revenue directly from contracts with students for the tuition and fees paid to enroll in and progress through the Company’s short courses, which run between six and 16 weeks. The Company’s contracts with students in this segment have multiple performance obligations as the delivery of the short course and student support services are each considered distinct performance obligations. These performance obligations are each satisfied ratably over the same short course presentation period, which is defined as the period beginning on the first day of the course through the last. The Company recognizes the gross proceeds received from the students and shares contractually specified percentages with its university clients, for providing short course content and certification, which are recognized as curriculum and teaching costs on the Company’s consolidated statements of operations and comprehensive loss. The Company’s contracts with university clients in this segment are typically shorter and less restrictive than the Company’s contracts with university clients in the Graduate Program Segment.The Company does not disclose the value of unsatisfied performance obligations for the Graduate Program Segment because the variable consideration is allocated entirely to a wholly unsatisfied promise to transfer a service that forms part of a single performance obligation. The Company does not disclose the value of unsatisfied performance obligations for the Short Course Segment because the performance obligation is part of a contract that has an original duration of less than one year.Contract Acquisition CostsThe Company pays commissions to certain of its employees to obtain contracts with university clients in the Graduate Program Segment. These costs are capitalized and recorded on a contract-by-contract basis and amortized using the straight-line method over the expected life, which is generally the length of the contract.With respect to contract acquisition costs in the Short Course Segment, the Company has elected to apply the practical expedient in ASC Topic 606 to expense these costs as incurred, as the terms of contracts with students in this segment are less than one year.Payments to University ClientsPursuant to certain of the Company’s contracts in the Graduate Program Segment, the Company has made, or is obligated to make, payments to university clients at either execution of a contract or at the extension of a contract in exchange for various marketing and other rights. Generally, these amounts are capitalized and amortized as contra revenue over the life of the contract, commencing on the later of when payment is due or when contract revenue recognition begins.Accounts Receivable, Contract Assets and LiabilitiesBalance sheet items related tounvested restricted stock units was $19.2 millioncontracts consist of accounts receivable, net andwilldeferred revenue on the Company’s consolidated balance sheets. Included in accounts receivable, net are trade accounts receivable, which are comprised of billed and unbilled revenue. Accounts receivable, net is stated at net realizable value, and the Company utilizes the allowance method to provide for doubtful accounts based on management’s evaluation of the collectability of the amounts due. The Company’s estimates are reviewed and revised periodically based on historical collection experience and a review of the current status of2U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)accounts receivable, net. Historically, actual write-offs for uncollectible accounts have not significantly differed from prior estimates. The Company recognizes unbilled revenue when revenue recognition occurs in advance of billings. Unbilled revenue is recognized in the Graduate Program Segment because billings to university clients do not occur until after the academic term has commenced and final enrollment information is available. The Company’s unbilled revenue represents contract assets.Deferred revenue represents the excess of amounts billed or received as compared to amounts recognized in revenue on 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 generally receives payments for its share of tuition and fees from graduate program university clients early in each academic term and from short course students, either in full upon registration for the course or in full before the end of the course based on a payment plan, prior to completion of the service period. These payments are recorded as deferred revenue until the services are delivered or until the Company’s obligations are otherwise met, at which time revenue is recognized.Business CombinationsThe 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, 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 on the Company’s consolidated financial statements from the acquisition date.Concentration of Credit RiskFinancial 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. The Company maintains an allowance for doubtful accounts, if needed, based on collection history.Cash and Cash EquivalentsCash and cash equivalents consist of bank checking accounts, money market accounts, investments in certificates of deposit that have an original maturity of three months or less and highly liquid marketable securities with maturities at the time of purchase of three months or less.Fair Value MeasurementsThe carrying amounts of certain assets and liabilities, including cash and cash equivalents, accounts receivable, advances to university clients, 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; andLevel 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.2U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)Advances to University ClientsThe 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 the related amount of imputed interest is deemed significant. For the years ended December 31, 2018, 2017 and 2016, the Company did not incur a material amount of imputed interest income.Long-Lived AssetsProperty and EquipmentProperty 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 AssetsAcquired 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. Capitalized technology includes certain purchased software and technology licenses, direct third-party costs, and internal payroll and payroll-related costs used in the creation of our internal-use 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 using the straight-line method over the estimated useful life of the software, which is generally three to five years.Capitalized Content Development. The Company develops content for each offering on a course-by-course basis in conjunction with the faculty for each graduate program and short course. University clients and their faculty generally provide materials used for the course in an on-campus setting, including curricula, case studies and other reading materials, and presentations. The Company is responsible for the conversion of the materials into a format suitable for delivery through its online learning platform, including all expenses associated with this effort. With regard to the Graduate Program Segment, the development of content is part of the Company’s single performance obligation and is considered a contract fulfillment cost.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’ offerings for delivery via the Company’s online learning platform. 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 begins. The capitalized costs for each offering are recorded on a course-by-course basis and included in capitalized content costs in amortizable intangible assets, net on the Company’s consolidated balance sheets. These costs are amortized using the straight-line method over the estimated useful life of the respective course, which is generally four to 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 faculty members for similar on-campus offerings.Evaluation of Long-Lived Assets2U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)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. In order to assess the recoverability of the capitalized technology and content development costs, the costs are grouped by the lowest level of independent cash flows (i.e., by degree program or short course, for content development costs). 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. The Company’s impairment analysis is based upon cumulative results and forecasted performance.Non-Cash Long-Lived Asset AdditionsDuring the year ended December 31, 2018, the Company had capital asset additions of $87.4 million in property and equipment and capitalized technology and content development, of which $5.3 million consisted of non-cash capital expenditures, primarily related to the acquisition of certain long-lived assets for which a liability was accrued. Due to extended payment terms associated with the timing of cash capital expenditures made more than 90 days after the date of purchase, an additional $4.9 million was classified as cash flows from financing activities in the consolidated statement of cash flows for the year ended December 31, 2018.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.GoodwillGoodwill is the excess of purchase price over the fair value of identified net assets of the business acquired. The Company’s goodwill balance relates to the acquisition of GetSmarter in 2017. The Company reviews goodwill at least annually, as of October 1. 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 tests goodwill at the reporting unit level, which is an operating segment or one level below an operating segment. The Company initially assesses 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 aweighted-average periodreporting unit is less than its carrying value based on a qualitative assessment. Upon the completion ofapproximately 2.4 years.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.
Employee BenefitsThe Company offers a variety of benefits to its employees (e.g., healthcare, gym memberships and tuition reimbursement). The Company accounts for costs related to providing employee benefits as incurred, unless there is a service requirement, in which case, such costs are recognized over the service commitment period.2U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)Government GrantsGovernment 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.IncomeTax (Expense) BenefitTaxes
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 considerThe Company considers all positive and negative evidence relating to the realization of the deferred tax assets in assessing the need for a valuation allowance.WeThe Company currentlymaintainmaintains a full valuation allowance againstourdeferred taxassets.We recordassets 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.We accountThe Company accounts for uncertainty in income taxes using a two-step approach for evaluating tax positions. Step one, recognition, occurs whenwe concludethe 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 ifwethe Company subsequentlydeterminedetermines that a tax position no longer meets the more likely than not threshold of being sustained.We recognizeThe Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expensein our consolidated statements of operations.Key Business and Financial Performance MetricsWe 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, we discuss revenue and the components of loss from operations in the section above entitled "—Components of Operating Results and Results of Operations." Additionally, we utilize other key metrics to evaluate the success of our growth strategy, including measures we refer to as platform revenue retention rate and full course equivalent enrollments in our clients' programs.Platform Revenue Retention RateWe measure our platform revenue retention rate for a particular period by first identifying the group of programs that our clients launched with our solutions before the beginning of the prior year comparative period. We then calculate our platform revenue retention rate by comparing the revenue we recognized for this group of programs in the reporting period to the revenue we recognized for thesame group of programs in the prior year comparative period, expressed as a percentage of the revenue we recognized for the group in the prior year comparative period.The following table sets forth our platform revenue retention rate for the periods presented, as well as the number of programs included in the platform revenue retention rate calculation. For all of these periods, our platform revenue retention rate was greater than 100% because we had no programs terminate and full course equivalent enrollments in the aggregate increased year-over-year. There is no direct correlation between the platform revenue retention rate and the number of programs included in the calculation of that rate. However, there may be a correlation between the platform revenue retention rate and the average maturity of the programs included in the calculation of that rate because newer programs tend to have higher percentage growth rates.Year Ended December 31, 2016 2015 2014 Platform revenue retention rate
123.0 % 120.2 % 112.4 % Number of programs included in comparison(1)
12 9 4 (1)Reflects the number of programs operating both in the reported period and in the prior year comparative period.
Full Course Equivalent Enrollments in Our Clients' ProgramsWe measure full course equivalent enrollments in our clients' programs by determining, for each of the courses offered during a particular period, the number of students enrolled in that course multiplied by the percentage of the course completed during that period. We use this metric to account for the fact that many courses offered by our clients 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 in our client programs during a period. This number is derived by dividing our total revenue for a period by the number of full course equivalent enrollments during that same period. This amount may vary from period to period dependingonthe academic calendars of our clients, the relative growth rates of programs with varying tuition levels, the launch of new programs with higher or lower than average net tuition costs and annual tuition increases instituted by our clients. As a part of our growth strategy, we are actively targeting new graduate-level clients in academic disciplines for which we have existing programs. Over time, this strategy is likely to reduce our average revenue per full course equivalent. However, we believe this approach will enable us to leverage our program marketing investments across multiple client programs within specific academic disciplines, significantly decreasing student acquisition costs within those disciplines and more than offsetting any decline in average revenue per full course equivalent enrollment.The following table sets forth the full course equivalent enrollments and average revenue per full course equivalent enrollment in our clients' programs for the periods presented.Year Ended December 31, 2016 2015 2014 Full course equivalent enrollments in our clients' programs
77,344 57,019 41,034 Average revenue per full course equivalent enrollment in our clients' programs
$ 2,662 $ 2,634 $ 2,687 Adjusted EBITDAAdjusted EBITDA represents our earnings before net interest (income) expense, income taxes, depreciation and amortization, adjusted to eliminate stock-based compensation expense, which is a non-cash item. 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.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 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:Year Ended December 31, 2016 2015 2014 (in thousands) Net loss
$ (20,684 ) $ (26,733 ) $ (28,999 ) Adjustments:
Interest expense
35 552 1,213 Interest income
(383 ) (167 ) (92 ) Depreciation and amortization expense
9,750 7,220 5,572 Stock-based compensation expense
15,823 12,499 7,527 Total adjustments
25,225 20,104 14,220 Adjusted EBITDA (loss)
$ 4,541 $ (6,629 ) $ (14,779 ) Liquidity and Capital ResourcesSources of LiquidityOn December 31, 2013, we entered into a credit agreement with Comerica Bank for a revolving line of credit with an aggregate commitment not to exceed $37.0 million. On January 21, 2014, we borrowed $5.0 million under this line of credit and repaid this borrowing in full on February 18, 2014.On December 31, 2015, we amended our credit agreement with Comerica Bank to reduce the aggregate amount we may borrow to $25.0 million and extend the maturity date through April 29, 2016, and on January 30, 2017, we amended our credit agreement to extend the maturity date through March 1, 2017. No amounts were outstanding under this credit agreement as of December 31, 2016. We intend to extend this agreement under comparable terms, prior to expiration.Certain of our operating lease agreements entered into prior to December 31, 2016 require security deposits in the form of cash or an unconditional, irrevocable letter of credit. As of December 31, 2016, we have entered into standby letters of credit totaling $7.1 million, as security deposits for the applicable leased facilities. These letters of credit reduced the aggregate amount we may borrow under our revolving line of credit to $17.9 million. In addition, on February 13, 2017, we entered into a standby letter of credit totaling $4.4 million, as a security deposit for our leased facility in Brooklyn, New York. This letter of credit reduced the aggregate amount we may borrow under its revolving line of credit to $13.5 million.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 Bank'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 client 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, 2016 and 2015, our adjusted quick ratios were 5.43 and 7.90, 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 opportunity to cure such non-compliance, or we otherwise experience an event of default under the line of credit, the lenders may require repayment in full of all principal and interest outstanding. If we fail to repay such amounts, the lenders could foreclose on the assets we have pledged as collateral under the line of credit. We are currently in compliance with all such covenants.Public Offering of Common StockOn April 2, 2014, we closed our IPO in which we issued and sold 8,626,377 shares of common stock resulting in net proceeds of $100.3 million. 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. Refer to Note 1 in the "Notes to Consolidated Financial Statements" included in Part II, Item 8 of this Annual Report on Form 10-K for additional details.Working CapitalThe following table summarizes our cash and cash equivalents, accounts receivable and working capital for the periods presented:As of December 31, 2016 2015 2014 (in thousands) Cash and cash equivalents
$ 168,730 $ 183,729 $ 86,929 Accounts receivable, net
7,860 975 350 Working capital
143,629 160,310 66,220 Our cash at December 31, 2016 was held for working capital purposes. 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 FlowsThe following table summarizes our cash flows for the periods presented:Year Ended December 31, 2016 2015 2014 (in thousands) Cash provided by (used in):
Operating activities
$ 5,210 $ (9,267 ) $ (11,685 ) Investing activities
(24,518 ) (15,945 ) (10,982 ) Financing activities
4,309 122,012 102,584 Operating ActivitiesFor the year ended December 31, 2016, net cash provided by operating activities was $5.2 million, consisting of $25.6 million in non-cash items and a $0.3 million net cash inflow from changes inworking capital, partially offset by a net loss of $20.7 million. Non-cash items consisted of non-cash stock compensation charges of $15.8 million and depreciation and amortization expense of $9.8 million. The increase in cash resulting from changes in working capital consisted of a $3.1 million increase in accrued compensation and related benefits, a $2.2 million increase in payments to certain of our university clients in exchange for contract extensions and various marketing and other rights and a $2.2 million change in other assets and other liabilities, partially offset by a $6.9 million increase in accounts receivable and other changes of $0.3 million.For the year ended December 31, 2015, net cash used in operating activities was $9.3 million, consisting of a net loss of $26.7 million and a $3.1 million net cash outflow from changes in working capital, partially offset by $20.5 million in non-cash items. Non-cash items consisted of non-cash stock compensation charges of $12.5 million, depreciation and amortization expense of $7.2 million and a $0.8 million charge related to the execution of a new lease agreement for our Maryland headquarters. The decrease in cash resulting from changes in working capital consisted of a $4.0 million increase in prepaid expenses and other current assets, a $3.7 million increase in payments to certain of our university clients in exchange for contract extensions and various marketing and other rights, partially offset by an increase in accrued compensation and related benefits of $4.3 million and other changes of $0.3 million.For the year ended December 31, 2014, net cash used in operating activities was $11.7 million, consisting of a net loss of $29.0 million, partially offset by $13.1 million in non-cash items and a $4.2 million net cash inflow from changes in working capital. Non-cash items consisted of non-cash stock compensation charges of $7.5 million and depreciation, amortization expense of $5.6 million. The increase in cash resulting from changes in working capital consisted of an increase in accrued compensation and related benefits of $3.1 million and a $3.0 million increase accrued expenses and other current liabilities primarily due to higher accrued program marketing costs and an increase of $0.7 million related to the change in the fair value of the Series D redeemable convertible preferred stock warrants prior to their conversion to additional paid-in capital upon the closing of the initial public offering, partially offset by decreases in accounts payable of $2.6 million.Investing ActivitiesFor the year ended December 31, 2016, net cash used in investing activities was $24.5 million, consisting primarily of $16.7 million in costs related to internal-use software and content developed to support a greater number of launched programs. Additionally, purchases of property and equipment were $7.7 million, primarily related to leasehold improvement expenditures related to our new office operating leases, and other investing activities of $0.1 million.For the year ended December 31, 2015, net cash used in investing activities was $15.9 million, consisting primarily of $12.4 million in costs related to internal-use software and content developed to support a greater number of launched programs. Additionally, $2.0 million was related to the purchase of amortizable intangible assets associated with our marketing domain names and $0.3 million related to an investment we made in an early stage entity to test international marketing channels, while other purchases of property and equipment were $1.2 million.For the year ended December 31, 2014, net cash used in investing activities was $11.0 million, consisting primarily of $9.5 million in costs related to internal-use software and content developed to support a greater number of launched programs, and $1.5 million related to purchases of property and equipment.Financing ActivitiesFor the year ended December 31, 2016, net cash provided by financing activities was $4.3 million, consisting primarily of $4.9 million in proceeds received from the exercise of stock options, partiallyoffset by $0.6 million of cash used for the payment of employee withholding taxes related to the release of restricted stock units.For the year ended December 31, 2015, net cash provided by financing activities was $122.0 million, consisting primarily of $117.1 million in net proceeds from our public offering of common stock and $5.3 million in proceeds received from the exercise of stock options, partially offset by $0.4 million of cash used for the payment of employee withholding taxes related to the release of restricted stock units.For the year ended December 31, 2014, net cash provided by financing activities was $102.6 million, consisting primarily of $100.3 million in net proceeds from our initial public offering. In addition, we received net cash of $2.3 million from the exercise of stock options.Operating and Capital Expenditure RequirementsIn 2016, we had new capital asset additions of $30.8 million, which was primarily comprised of $17.0 million in capitalized technology and content development costs and $11.7 million of leasehold improvements and other facilities-related capital costs. Of the $30.8 million increase, our cash capital expenditures were $24.4 million, with the difference consisting of landlord-funded leasehold improvement allowances and other accrued capital expenditures. In 2017, we expect new capital asset additions of approximately $64 to $69 million, of which approximately $11 to $13 million will be funded by landlord leasehold improvement allowances.Contractual Obligations and CommitmentsWe have non-cancelable operating leases for our office space, and we are also contractually obligated to make fixed payments to certain of our university clients in exchange for contract extensions and various marketing and other rights.We have a $25.0 million line of credit from Comerica Bank (with letters of credit reducing the aggregate amount we may borrow to $17.9 million) and no amounts were outstanding as of December 31, 2016. In addition, on February 13, 2017, we entered into a standby letter of credit totaling $4.4 million, as a security deposit for our leased facility in Brooklyn, New York. This letter of credit reduced the aggregate amount that we may borrow under our revolving line of credit to $13.5 million.The following table summarizes our obligations under non-cancelable operating leases and commitments to certain of our clients in exchange for contract extensions and various marketing and other rights at December 31, 2016. Future events could cause actual payments to differ from these amounts.Payment due by period Contractual ObligationsTotal Less than
1 year1 - 3 years 3 - 5 years More than
5 years(in thousands) Operating lease obligations
$ 96,191 $ 6,924 $ 16,145 $ 16,903 $ 56,219 Payments to clients
16,003 4,978 4,750 1,250 5,025 Total
$ 112,194 $ 11,902 $ 20,895 $ 18,153 $ 61,244 We have entered into a specific program agreement under which we would be obligated to make future minimum program payments to a 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 contingentpayments, and because we believe any contingent payments under this agreement would likely be immaterial, 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.Off-Balance Sheet ArrangementsWe 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.Recent Accounting PronouncementsRefer 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.Management's Report on Internal Control Over Financial ReportingManagement of 2U, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) 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 (iii) 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.The Company's management assessed the effectiveness of internal control over financial reporting as of December 31, 2016. In making this assessment, management used the criteria set forth inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. Management has concluded that, as of December 31, 2016, the Company's internal control over financial reporting was effective based on these criteria.The effectiveness of the Company's internal control over financial reporting as of December 31, 2016, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report included herein.Report of Independent Registered Public Accounting FirmThe Board of Directors and Stockholders2U, Inc.:We have audited the accompanying consolidated balance sheets of 2U, Inc. and subsidiaries (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of operations, changes in stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2016. 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 conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of 2U, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, 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), 2U, Inc.'s internal control over financial reporting as of December 31, 2016, based on criteria established inInternal Control—Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 24, 2017 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting./s/ KPMG LLPMcLean, VirginiaFebruary 24, 2017Report of Independent Registered Public Accounting FirmThe Board of Directors and Stockholders2U, Inc.:We have audited 2U, Inc.'s internal control over financial reporting as of December 31, 2016, based on criteria established inInternal Control—Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 2U, Inc.'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 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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 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.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 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.In our opinion, 2U, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established inInternal Control—Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of 2U, Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, changes in stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2016 and our report dated February 24, 2017 expressed an unqualified opinion on those consolidated financial statements./s/ KPMG LLPMcLean, VirginiaFebruary 24, 20172U, Inc.Consolidated Balance Sheets(in thousands, except share and per share amounts)December 31, 2016 2015 Assets
Current assets:
Cash and cash equivalents
$ 168,730 $ 183,729 Accounts receivable, net
7,860 975 Advances to clients
567 1,508 Prepaid expenses and other assets
7,541 6,695 Total current assets
184,698 192,907 Property and equipment, net
15,596 3,621 Capitalized technology and content development costs, net
31,867 22,628 Advances to clients, non-current
2,100 1,042 Prepaid expenses, non-current
7,052 7,099 Other non-current assets
3,007 3,744 Total assets
$ 244,320 $ 231,041 Liabilities and stockholders' equity
Current liabilities:
Accounts payable
$ 3,729 $ 4,544 Accrued compensation and related benefits
16,491 13,405 Accrued expenses and other liabilities
17,712 12,039 Deferred revenue
3,137 2,609 Total current liabilities
41,069 32,597 Non-current liabilities
8,014 2,655 Total liabilities
49,083 35,252 Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, 0 shares issued and outstanding as of December 31, 2016 and 2015
— — Common stock, $0.001 par value, 200,000,000 shares authorized, 47,151,635 shares issued and outstanding as of December 31, 2016; 45,776,455 shares issued and outstanding as of December 31, 2015
47 46 Additional paid-in capital
371,455 351,324 Accumulated deficit
(176,265 ) (155,581 ) Total stockholders' equity
195,237 195,789 Total liabilities and stockholders' equity
$ 244,320 $ 231,041 See accompanying notes to consolidated financial statements.2U, Inc.Consolidated Statements of Operations(in thousands, except share and per share amounts)Year Ended December 31, 2016 2015 2014 Revenue
$ 205,864 $ 150,194 $ 110,239 Costs and expenses:
Servicing and support
40,982 32,047 26,858 Technology and content development
33,283 27,211 22,621 Program marketing and sales
106,610 82,911 65,218 General and administrative
46,021 34,123 23,420 Total costs and expenses
226,896 176,292 138,117 Loss from operations
(21,032 ) (26,098 ) (27,878 ) Other income (expense):
Interest expense
(35 ) (552 ) (1,213 ) Interest income
383 167 92 Other
— (250 ) — Total other income (expense)
348 (635 ) (1,121 ) Loss before income taxes
(20,684 ) (26,733 ) (28,999 ) Income tax expense
— — — Net loss
(20,684 ) (26,733 ) (28,999 ) Preferred stock accretion
— — (89 ) Net loss attributable to holders of common stock
$ (20,684 ) $ (26,733 ) $ (29,088 ) Net loss per share attributable to holders of common stock, basic and diluted
$ (0.44 ) $ (0.63 ) $ (0.91 ) Weighted-average shares of common stock outstanding, basic and diluted
46,609,751 42,420,356 32,075,107 See accompanying notes to consolidated financial statements.2U, Inc.Consolidated Statements of Changes in Stockholders' Equity (Deficit)(in thousands, except share amounts)Common Stock Additional
Paid-In
CapitalAccumulated
DeficitTotal
Stockholders'
Equity (Deficit)Shares Amount Balance, December 31, 2013
7,629,133 8 7,817 (99,849 ) (92,024 ) Exercise of stock options
940,642 1 2,281 — 2,282 Grant of common stock
5,000 — 55 — 55 Accretion of issuance costs on redeemable convertible preferred stock
— — (89 ) — (89 ) Stock-based compensation expense
— — 7,527 — 7,527 Conversion of redeemable convertible preferred stock to common stock
23,501,208 23 98,113 — 98,136 Conversion of Series D warrants to common stock warrants
— — 821 — 821 Issuance of common stock from initial public offering, net of issuance costs
8,626,377 9 100,293 — 100,302 Exercise of warrants to purchase common stock
32,709 — — — — Net loss
— — — (28,999 ) (28,999 ) Balance, December 31, 2014
40,735,069 $ 41 $ 216,818 $ (128,848 ) $ 88,011 Exercise of stock options
1,141,731 1 5,335 — 5,336 Issuance of common stock in connection with settlement of restricted stock units, net of withholdings
248,088 — (436 ) — (436 ) Issuance of common stock, net of issuance costs
3,625,000 4 117,108 — 117,112 Issuance of common stock award
26,567 — 750 — 750 Stock-based compensation expense
— — 11,749 — 11,749 Net loss
— — — (26,733 ) (26,733 ) Balance, December 31, 2015
45,776,455 $ 46 $ 351,324 $ (155,581 ) $ 195,789 Exercise of stock options
1,011,153 1 4,858 — 4,859 Issuance of common stock in connection with settlement of restricted stock units, net of withholdings
351,319 — (382 ) — (382 ) Issuance of common stock award
12,708 — (168 ) — (168 ) Stock-based compensation expense
— — 15,823 — 15,823 Net loss
— — — (20,684 ) (20,684 ) Balance, December 31, 2016
47,151,635 $ 47 $ 371,455 $ (176,265 ) $ 195,237 See accompanying notes to consolidated financial statements.2U, Inc.Consolidated Statements of Cash Flows(in thousands)Year Ended December 31, 2016 2015 2014 Cash flows from operating activities
Net loss
$ (20,684 ) $ (26,733 ) $ (28,999 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization
9,750 7,220 5,572 Stock-based compensation expense
15,823 12,499 7,527 Charge related to execution of new lease agreement
— 884 — Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable, net
(6,885 ) (625 ) 1,485 Increase in advances to clients
(117 ) (875 ) (1,094 ) Increase in prepaid expenses and other current assets
(973 ) (4,001 ) (374 ) (Decrease) increase in accounts payable
(815 ) 2,251 (2,565 ) Increase in accrued compensation and related benefits
3,086 4,317 3,123 Increase in accrued expenses and other liabilities
1,052 1,216 2,978 Increase in deferred revenue
528 703 640 Decrease (increase) in payments to clients
2,234 (3,664 ) (826 ) Decrease (increase) in other assets and other liabilities, net
2,211 (2,709 ) 153 Other
— 250 695 Net cash provided by (used in) operating activities
5,210 (9,267 ) (11,685 ) Cash flows from investing activities
Capitalized technology and content development cost expenditures
(16,728 ) (12,358 ) (9,454 ) Purchases of property and equipment
(7,648 ) (1,256 ) (1,499 ) Other
(142 ) (2,331 ) (29 ) Net cash used in investing activities
(24,518 ) (15,945 ) (10,982 ) Cash flows from financing activities
Proceeds from exercise of stock options
4,859 5,336 2,282 Proceeds from issuance of common stock, net of offering costs
— 117,112 100,302 Proceeds from revolving line of credit
— — 5,000 Payment on revolving line of credit
— — (5,000 ) Other
(550 ) (436 ) — Net cash provided by financing activities
4,309 122,012 102,584 Net (decrease) increase in cash and cash equivalents
(14,999 ) 96,800 79,917 Cash and cash equivalents, beginning of period
183,729 86,929 7,012 Cash and cash equivalents, end of period
$ 168,730 $ 183,729 $ 86,929 Supplemental disclosure of non-cash investing and financing activities
Accrued capital expenditures
$ 6,729 $ 415 $ 557 Accretion of issuance costs on redeemable convertible preferred stock
— — 89 Common stock granted in exchange for consulting services received
— — 55 See accompanying notes to consolidated financial statements.2U, Inc.Notes to Consolidated Financial Statements1. Description of the Business2U, Inc. (the "Company") was incorporated as 2Tor Inc. in the State of Delaware in April 2008 and changed its name to 2U, Inc. on October 11, 2012. Under long-term agreements, the Company provides an integrated solution comprised of cloud-based software-as-a-service ("SaaS"), fused with technology-enabled services (together, the "Platform"), that allows leading colleges and universities to deliver high-quality online degree programs, extending the universities' reach and distinguishing their brands. The Company's SaaS technology consists of (i) a comprehensive learning environment ("Online Campus"), which acts as the hub for all student and faculty academic and social interaction, and (ii) a comprehensive suite of integrated applications, which the Company uses to launch, operate and support the Company's clients' programs. The Company also provides a suite of technology-enabled services optimized with data analysis and machine learning techniques that support the complete lifecycle of a higher education program, 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.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, at an issuance price of $34.00 per share. The Company received net proceeds of $117.1 million after deducting underwriting discounts and commissions of $5.5 million and other offering expenses of approximately $0.6 million.2. Significant Accounting PoliciesBasis 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.ReclassificationsCertain prior period amounts in the consolidated balance sheets, consolidated statements of cash flows and the notes thereto have been reclassified to conform to the current period's presentation. Specifically, capitalized technology costs have been reclassified out of property and equipment and have been combined with capitalized content development costs. These reclassifications had no impact on total assets or investing activities previously reported for any periods presented.Use of EstimatesThe preparation of financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. On an ongoing basis, the Company evaluates its estimates, including those related to the useful lives of long-lived assets, fair value measurements and income taxes, among others. 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.2U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)Cash and Cash EquivalentsCash 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.Concentration of Credit RiskFinancial 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.During the year ended December 31, 2016, three clients each accounted for 10% or more of the Company's revenue, as follows: $71.0 million, $36.7 million and $22.1 million, which equals 35%, 18% and 11% of total revenue, respectively.During the year ended December 31, 2015, three clients each accounted for 10% or more of the Company's revenue, as follows: $65.2 million, $23.8 million and $17.6 million, which equals 43%, 16% and 12% of total revenue, respectively.During the year ended December 31, 2014, three clients each accounted for 10% or more of the Company's revenue, as follows: $61.1 million, $15.9 million and $14.6 million, which equals 55%, 14% and 13% of total revenue, respectively.As of December 31, 2016, two clients each accounted for 10% or more of the Company's accounts receivable balance, as follows: $5.8 million and $1.4 million, which equals 74% and 17% of total accounts receivable, respectively. As of December 31, 2015, one client accounted for more than 10% of the Company's accounts receivable balance, as follows: $0.2 million, which equals 18% of total accounts receivable.Accounts Receivable and Allowance for Doubtful AccountsAccounts receivable are stated at net realizable value. The Company extends a minimal amount of uncollateralized credit to its clients. The Company utilizes the allowance method to provide for doubtful accounts based on management's evaluation of the collectability of the amounts due. The Company's 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 the Company's estimates. As of December 31, 2016 and 2015, the Company determined that no significant allowances for doubtful accounts were necessary.Fair Value MeasurementsThe 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.2U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)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.
Assets Measured at Fair Value on a Recurring BasisThe Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. This determination requires significant judgments to be made. The Company had Level 1 money market investments of $137.9 million and $155.6 million included in cash and cash equivalents as of December 31, 2016 and 2015, respectively.Advances to ClientsThe Company is contractually obligated to pay advances to certain of its clients in order to fund start-up expenses of the program on behalf of the client. Advances to 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 AssetsProperty and EquipmentProperty 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 periodically2U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)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.Capitalized Technology and Content Development CostsThe 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.The Company works with each client's faculty members to develop and maintain educational content that is delivered to their students through Online Campus. The online content developed jointly by the Company and its clients consists of subjects chosen and taught by clients' faculty members and incorporates references and examples designed to remain relevant over extended periods of time. Online delivery of the content, combined with live, face-to-face instruction, provides the Company with rapid user feedback that it uses to make ongoing corrections, modifications and improvements to the course content. The Company's clients retain all intellectual property rights to the developed content, although the Company retains the rights to the content packaging and delivery mechanisms. Much of the Company's new content development uses proven delivery platforms and is therefore primarily subject-specific in nature. As a result, a significant portion of content development costs qualify for capitalization due to the focus of the Company's development efforts on the unique subject matter of the content. Similar to on-campus programs offered by the Company's clients, the online degree programs enabled by the Company offer numerous courses for each degree. The Company therefore capitalizes its development costs on a course-by-course basis.The Company develops content on a course-by-course basis in conjunction with the faculty for each client program. The 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 client into a format suitable for delivery through Online Campus.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 clients' programs for delivery via Online Campus. Capitalization ends when content has been fully developed by both the Company and the client, at which time amortization of the capitalized content development costs begins. 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 life2U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)of the respective capitalized content program, which is generally five years. The estimated useful life corresponds with the Company's 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.Other Non-Current AssetsThe Company records amounts paid more than 12 months in advance of being incurred as prepaid expenses, non-current. In addition, the Company has certain other assets that are long-term in nature, which are classified as other non-current assets. These consist primarily of other amortizable intangible assets associated with the Company's marketing websites and related domain names and security deposits on leased office facilities.Evaluation of Long-Lived AssetsThe 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. For the years ended December 31, 2016 and 2015, no impairment of long-lived assets was deemed to have occurred.Revenue Recognition and Deferred RevenueThe 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.The Company primarily derives its revenue from long-term contracts that typically range from 10 to 15 years in length. Under these contracts, the Company enables access to its Platform to its clients and their faculty and students. The Company is entitled to a contractually specified percentage of net program proceeds from its clients. These net program proceeds represent gross proceeds billed by clients to students, less credit card fees and other specified charges the Company has agreed to exclude in certain of its client contracts.The Company generates substantially all of its revenue from multiple-deliverable contractual arrangements with its clients. Under each of these arrangements, the Company provides (i) access to Online Campus, which serves as a learning platform for its client's faculty and students and which also enables a comprehensive range of other client functions, (ii) access to operations applications which2U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)provide the content management, admissions application processing, customer relationship management, and other functionality necessary to effectively operate the Company's clients' programs and (iii) technology-enabled services that support the complete lifecycle of a higher education program, 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.In order to treat deliverables in a multiple-deliverable contractual arrangement as separate units of accounting, deliverables must have standalone value upon delivery. The technology-enabled services within the Platform are provided primarily in support of programs delivered through Online Campus, and for students of the programs delivered through Online Campus. Accordingly, the Company has determined that no individual deliverable has standalone value upon delivery and, therefore, deliverables within the Company's multiple-deliverable arrangements do not qualify for treatment as separate units of accounting. Therefore, 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.Advance payments are recorded as deferred revenue until services are delivered or obligations are met, at which time revenue is recognized. Deferred revenue as of a particular balance sheet date represents the excess of amounts received as compared to amounts recognized in revenue inthe consolidated statements of operationsas of the end of the reporting period,andsuch amounts are reflected as a current liability on the Company's consolidated balance sheets.Programcomprehensive loss.Marketing and SalesExpenseCosts
The majority of the marketing and sales costs incurred by the Company are directly related to acquiring students for itsclients'university clients’ graduate programs, with lesser amounts related tothe Company's ownacquiring students for its short course and marketing and advertisingefforts.efforts related to the Company’s own brand. For the years ended December 31, 2018, 2017 and 2016,2015 and 2014, expensescosts related to theCompany's ownCompany’s marketing and advertising efforts of its own brand were not material. All such costs are expensed as incurred and reported inprogrammarketing and sales expenseinon theCompany'sCompany’s consolidated statements ofoperations.operations and comprehensive loss.
As of December 31, 2018 and 2017, the Company had $10.3 million and $11.7 million, respectively, of accrued marketing costs included in accounts payable and accrued expenses on the Company’s consolidated balance sheets.LeasesThe 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 theCompany'sCompany’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 liabilityinon 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 assetsinon the consolidated financial statements for lease agreementsthethat require payments in advance or deposits held for security that are refundable, less any damages, at the end of the respective lease.2U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)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 a2U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)straight-line basis over theawards'awards’ requisite serviceperiod,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 estimatedforfeitures.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 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.Basic and Diluted Loss per Common ShareThe Company usesForeign Currency TranslationFor thetwo-class method to compute net loss per share of common stock because the Company has issued securities, other than common stock, that contractually entitle the holders to participate in dividends and earningsportion of theCompany. The two-class method requires earningsCompany’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,to be allocated between common stockandparticipating securities based upon their respective rights to receive distributedassets andundistributed earnings. Holdersliabilities are converted at the closing rates on the period end date. Gains and losses on translation ofeach series of the Company's redeemable convertible preferred stock (prior to their conversion to common stock) were entitled to participate in distributions, whenthese accounts are accumulated andif declared by the board of directors, that are made to holders of common stock, andreported as aresult are considered participating securities.Underseparate component of stockholder’s equity and comprehensive loss.For any transaction that is in a currency different from thetwo-class method, for periods with net income, basic net income per share of common stock is computed by dividing the net income attributable to holders of common stock by the weighted-average number of shares of common stock outstanding during the period. Net income attributable to holders of common stock is computed by subtracting from net income the portion of current year earnings that the participating securities would have been entitled to receive pursuant to their dividend rights had all of the year's earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the participating securities have no obligation to fund losses. Diluted net loss per share of common stock is computed under the two-class method by using the weighted-average number of shares of common stock outstanding, plus, for periods with net income attributable to holders of common stock, the potential dilutive effects of stock options and warrants. In addition,entity’s functional currency, the Companyanalyzesrecords a gain or loss based on thepotential dilutive effect ofdifference between theoutstanding participating securities under the "if-converted" method when calculating diluted earnings per share, in which it is assumed that the outstanding participating securities convert into common stockexchange rate at thebeginning oftransaction date and theperiod. The Company reportsexchange rate at themore dilutive oftransaction settlement date (or rate at period end, if unsettled) as other income (expense), net on theapproaches (two-class or "if-converted") as its diluted net income per share during the period. Due to net losses for the years ended December 31, 2016, 2015 and 2014, basic and diluted loss per share were the same, as the effect of potentially dilutive securities would have been anti-dilutive.Comprehensive LossThe Company's net loss equals comprehensive loss for all periods presented as the Company has no material components of other comprehensive income. Therefore, noconsolidated statements of operations and comprehensiveincome are included in the consolidated financial statements for any periods presented.loss.
Recent Accounting PronouncementsIn August2016,2018, the Financial Accounting Standards Board("FASB"(“FASB”) issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires customers in cloud computing arrangements that are service contracts to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company adopted this ASU as of July 1, 2018 under the prospective method. During the six months ended December 31, 2018 since the adoption of this ASU, the Company capitalized $0.4 million of implementation costs incurred in its cloud computing arrangements that are service contracts.In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements, which clarifies and corrects unintended applications of guidance, and makes improvements to several Accounting StandardsUpdate ("ASU")Codification topics. The applicable amendments in this ASU will be effective for the Company in annual periods beginning after December 15, 2018. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements and related disclosures.In June 2018, the FASB issued ASU No.2016-15,2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments to nonemployees. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements and related disclosures.In January 2017, the FASB issued 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 expects that the adoption of this standard will impact its consolidated financial statements and related disclosures only to the extent that a future goodwill impairment test results in the recognition of an impairment charge.In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash2U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)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
arewere effective forannual reporting periodsfiscal years beginning after December 15, 2017. The Companyis currently evaluating the effect thatadopted this ASU on January 1, 2018. Adoption of this standardwilldid not have a material impact onitsthe Company’s consolidated statements of cash flows and related disclosures.2U, Inc.Notes to Consolidated Financial Statements (Continued)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 theemployees'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 Companyis adoptingadopted this ASU on January 1,2017, and does not believe that2017. In connection with the adoption of this standard, the Company elected to no longer apply an estimated forfeiture rate and willhaveinstead account for forfeitures as they occur. Accordingly, the Company applied the modified retrospective adoption approach, which resulted in amaterial impact on its consolidated financial position or related disclosures.$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 15,2018.2018, and the Company will adopt this ASU in the first quarter of 2019. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. ASU No. 2018-10 clarifies ambiguous or potentially conflicting guidance in ASU No. 2016-02, but is not expected to have a material impact on the Company. ASU No. 2018-11 provides entities with an additional transition method to adopt Topic 842. Under the new transition method, an entity initially applies the new lease standard at the adoption date, rather than at the beginning of the earliest period presented, and recognizes a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has elected this transition method upon the adoption date of January 1, 2019. In December 2018, the FASB issued ASU No. 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, to add clarity to lessor accounting for sales taxes, certain lessor costs and certain requirements related to variable payments in contracts. ASU No. 2018-20 is not expected to have a material impact on the Company.A number of optional practical expedients may be applied in transition. The Company does not intend to recognize right-of-use assets or lease liabilities for leases with a term of 12 months or less, as permitted by the short-term lease practical expedient. In transition, the Company plans to apply the package of practical expedients that permit entities to not reassess (i) whether expired or existing contracts contain a lease under the new standard, (ii) the lease classification for expired or existing leases, or (iii) whether previously capitalized initial direct costs would qualify for capitalization under the new standard. The Company plans to apply the practical expedient that permits a lessee to account for lease and non-lease components in a contract as a single lease component. In addition, the Company does not intend to use hindsight during transition.The Company is currently evaluating the effect that this ASU will have on its consolidated financialpositionstatements and related disclosures andbelieves that this standard may materially increaseis in the process of considering changes to itsother non-currentsystems and processes. Upon adoption, the Company expects to record right-of-use assets of approximately $33 million, which have been adjusted for accrued rent, andnon-currentthe remaining balance of any lease incentives upon transition, and corresponding lease liabilities of approximately $58 million on the consolidated balance sheetsin order to record right-of-use assets and related liabilitiesfor itsexistingoperating leases.In November 2015, the FASB issued ASU No. 2015-17,Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The ASU eliminates the requirement to classify deferred tax assets and liabilities between current and noncurrent. The ASU requires classification of all deferred tax asset and liability balances as noncurrent. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, with early adoption permitted. Adoption of theThis ASU iseither retrospectivenot expected toeach prior period presented, or prospective. As of December 31, 2015, the Company early adopted the ASU prospectively. Adoption of this standard did nothave a material impact on theCompany'sconsolidatedfinancial positionstatements of operations and comprehensive loss orrelated disclosures.In April 2015,theFASB issued ASU No. 2015-05,Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid inconsolidated statements of cash flows.3. Business CombinationOn July 1, 2017, the Company, through aCloud Computing Arrangement. The ASU provides guidance to customers in a cloud computing arrangement to determine whether the arrangement includes a software license. When a cloud computing arrangement includes a software license, the customer is required to account for the license elementwholly owned subsidiary (“2U South Africa”), completed its acquisition of all of thearrangement consistent withoutstanding equity interests of Get Educated International Proprietary Limited (“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 theacquisitionachievement ofother software licenses.certain financial milestones in calendar years 2017 and 2018. As of December 31, 2018, the financial milestones were not met and no earn out payment was due. Theamendments in this ASU are effective for fiscal years beginning aftervaluation of the assets acquired and liabilities assumed (i.e., purchase price allocation) was completed as of December15, 2015.31, 2017.The Companyadopted this ASU on January 1, 2016. Adoptionhas completed its valuation ofthis standard did not have a material impact ontheCompany's consolidated financial position or related disclosures.In April 2015,assets acquired and liabilities assumed of GetSmarter. The following table summarizes theFASB issued ASU No. 2015-03,Interest—Imputationestimated fair values ofInterest (Subtopic 835-30): SimplifyingthePresentationassets acquired and liabilities assumed as ofDebt Issuance Costs. The ASU simplifiesthe
the acquisition:2U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)presentation of debt issuance costs by requiring that such costs be3. Business Combination (continued)Estimated Average
Useful Life (in years)Purchase Price
Allocation(in thousands) Cash and cash equivalents $ 1,584 Current assets 3,676 Property and equipment, net 479 Amortizable intangible assets: Capitalized technology 3 2,800 Capitalized content development 4 5,000 University client relationships 9 28,000 Trade names and domain names 10 8,900 Goodwill 68,172 Current liabilities (9,031 ) Non-current liabilities (10,894 ) $ 98,686 The unaudited pro forma combined financial information below is presentedin the consolidated balance sheets as a direct deduction from the carrying value of the associated debt instrument, consistent with debt discounts. Subsequent to the issuance of this ASU, the SEC staff announced that the presentation of debt issuance costs associated with line-of-credit arrangements may be presented as an asset. This announcement was codified by the FASB in ASU No. 2015-15. The amendments in these ASUs are effectiveforfiscal years beginning after December 15, 2015. The Company adopted this ASU on January 1, 2016. Adoption of this standard did not have a material impact on the Company's consolidated financial position or related disclosures.In January 2015, the FASB issued ASU No. 2015-01,Income Statement—Extraordinaryillustrative purposes andUnusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. The ASU simplifies income statement presentation by eliminating the concept of extraordinary items. The amendments in this ASU are effective for fiscal periods beginning after December 15, 2015. The Company adopted this ASU on January 1, 2016. Adoption of this standard did not have a material impact on the Company's consolidated financial position or related disclosures.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 Companydoes notexpectpurport to represent what thenew standard toresults of operations would actually havea significant impact on its reporting process.In May 2014,been if theFASB 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 standards"). The new revenue standards may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognizedbusiness combination occurred as of the date indicated or what the results would be for any future periods. The following table presents the Company’s unaudited pro forma combined revenue, pro forma combined net loss and pro forma combined net loss per share for the year ended December 31, 2017 as if the acquisition ofadoption. During 2016, the Company has made measurable progress towards completing the evaluation of the potential changes from adopting the new standard on our future financial reporting and disclosures. The Company has engaged an independent third-party expert to assist with the implementation of this standard, has completed the review of the Company's contracts portfolio and has made significant progress in the review of current accounting policies and practices to identify potential differences that could result from applying the requirements of the new standard to our revenue contracts. The Company will continue to evaluate the impact that the new revenue standards will have, if any, on the Company's consolidated financial statements and related disclosures and is still2U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)determining the method of adoption that will be elected. The Company will adopt this new standardGetSmarter had occurred on January 1,2018, and plans on giving additional updates on progress made towards adoption and further conclusions in its Form 10-Q's of 2017.3. Accounts Receivable and Allowance for Doubtful AccountsAccounts receivable, net consists of the following:2017:December 31, 2016 2015 (in thousands) Accounts receivable
$ 7,859 $ 360 Other receivables
1 615 Accounts receivable, net
$ 7,860 $ 975 The changes in allowance for doubtful accounts are as follows:Year Ended Year Ended
December 31, 2017(in thousands, except per share amounts) Pro forma revenue $ 294,446 Pro forma net loss (37,267 ) Pro forma net loss per share, basic and diluted $ (0.76 ) Balance at
Beginning of
PeriodAdditions Charged
to ExpenseDeductions Balance at End
of Period(in thousands) Allowance for doubtful accounts:
Year ended December 31, 2016
$ — $ — $ — $ — Year ended December 31, 2015
— — — — Year ended December 31, 2014
12 — (12 ) — 2U, Inc.Notes to Consolidated Financial Statements (Continued)4. Property and Equipment,
and Other Amortizable Intangible AssetsNet
Property and equipment, net consisted of the following as of:December 31, 2016 2015 December 31,
2018December 31,
2017(in thousands) (in thousands) Computer hardware
$ 3,935 $ 2,911 $ 5,114 $ 2,663 Furniture and office equipment
2,204 1,666 14,888 11,210 Leasehold improvements
6,689 1,837 45,158 42,086 Leasehold improvements in process
6,864 — 1,940 194 Total
19,692 6,414 67,100 56,153 Accumulated depreciation and amortization
(4,096 ) (2,793 ) (14,801 ) (7,098 ) Property and equipment, net
$ 15,596 $ 3,621 $ 52,299 $ 49,055 Other amortizable intangible assets, net
$ 2,263 $ 2,396 Depreciationand amortizationexpense of property and equipmentand other amortizable intangible assetswas$2.0$8.9 million,$1.2$5.5 million and$1.0$1.7 million for the years ended December 31, 2018, 2017 and 2016,2015 and 2014,respectively.As of December 31, 2016, the estimated future depreciation and amortization expense for property and equipment placed in service and other amortizable intangible assets is as follows (in thousands):2017
$ 2,279 2018
2,035 2019
1,723 2020
1,434 2021
1,187 Thereafter
2,337 Total
$ 10,995 2U, Inc.Notes to Consolidated Financial Statements (Continued)5.Capitalized TechnologyGoodwill andContent Development CostsCapitalized technologyAmortizable Intangible Assets (continued)5. Goodwill andcontent development costsAmortizable Intangible AssetsThe table below summarizes the changes in the carrying amount of goodwill by reportable segment:Graduate Program Segment Short Course Segment Total (in thousands) Balance as of December 31, 2016 $ — $ — $ — Acquisition of GetSmarter — 68,172 68,172 Foreign currency translation adjustments — 3,816 3,816 Balance as of December 31, 2017 — 71,988 71,988 Foreign currency translation adjustments — (10,136 ) (10,136 ) Balance as of December 31, 2018 $ — $ 61,852 $ 61,852 Amortizable intangible assets consisted of the following as of:December 31, 2016 December 31, 2015 Gross
Carrying
AmountAccumulated
AmortizationNet
Carrying
AmountGross
Carrying
AmountAccumulated
AmortizationNet
Carrying
Amount(in thousands) Capitalized technology costs
$ 12,988 $ (7,822 ) $ 5,166 $ 8,564 $ (5,697 ) $ 2,867 Capitalized technology costs in process
4,112 — 4,112 1,640 — 1,640 Total capitalized technology costs
17,100 (7,822 ) 9,278 10,204 (5,697 ) 4,507 Capitalized content development costs
33,353 (15,367 ) 17,986 24,796 (10,931 ) 13,865 Capitalized content development costs in process
4,603 — 4,603 4,256 — 4,256 Total capitalized content development costs
37,956 (15,367 ) 22,589 29,052 (10,931 ) 18,121 Capitalized technology and content development costs, net
$ 55,056 $ (23,189 ) $ 31,867 $ 39,256 $ (16,628 ) $ 22,628 December 31, 2018 December 31, 2017 EstimatedAverage UsefulLife (in years)GrossCarryingAmountAccumulatedAmortizationNetCarryingAmountGrossCarryingAmountAccumulatedAmortizationNetCarryingAmount(in thousands) Capitalized technology 3-5 $ 68,291 $ (16,945 ) $ 51,346 $ 27,108 $ (9,486 ) $ 17,622 Capitalized content development 4-5 79,725 (31,662 ) 48,063 55,872 (21,417 ) 34,455 University client relationships 9 25,616 (4,269 ) 21,347 29,443 (1,636 ) 27,807 Trade names and domain names 8-10 18,793 (2,944 ) 15,849 12,119 (1,242 ) 10,877 Total amortizable intangible assets, net $ 192,425 $ (55,820 ) $ 136,605 $ 124,542 $ (33,781 ) $ 90,761 AmortizationThe amounts presented above include $40.3 million and $15.6 million of in process capitalized technology and content development as of December 31, 2018 and December 31, 2017, respectively.During 2018, the Company acquired certain third-party technologies to enhance the Company’s platform, which is referred to as the 2U Operating System, or 2UOS, for aggregate consideration of $9.5 million. These amounts are classified as capitalized technology within amortizable intangible assets, net, on the Company’s consolidated balance sheets. Additionally, during the same period the Company purchased several active websites and additional domains for consideration of $7.6 million to support the marketing efforts of certain graduate programs. As of December 31, 2018, these acquired assets are classified in trade names and domain names within amortizable intangible assets, net, on the Company’s consolidated balance sheets.In the first quarter of 2018, the Company entered into an agreement with WeWork Companies, Inc. (“WeWork”) and Flatiron School, Inc., a wholly owned subsidiary of WeWork, to purchase a perpetual source code license for the Learn.co platform and certain integration software development services for $14.5 million. As of December 31, 2018, the Company has recorded capitalized technology of $13.2 million related to this agreement in amortizable intangible assets, net on the Company’s consolidated balance sheets. The remaining $1.3 million is payable under the agreement in connection with the performance of certain software development services. In addition, the Company entered into a multi-year agreement to purchase Global Access Memberships to WeWork spaces around the world that will be provided to students in 2U-powered online graduate programs as well as to faculty and lead convenors of its offerings, an agreement to offer $5 million in scholarships to certain WeWork community members and employees, and collaborate on additional mutually agreed upon projects.2U, Inc.Notes to Consolidated Financial Statements (Continued)The Company recorded amortization expense related tocapitalized technology was $2.1amortizable intangible assets of $23.9 million,$1.6$14.0 million and$1.4$8.0 million for the years ended December 31, 2018, 2017 and 2016,2015 and 2014,respectively.This expense is included in technology and content development costs in the accompanying consolidated statements of operations.The Company recorded amortization expense related to capitalized content development costs of $5.7 million, $4.5 million and $3.2 million for the years ended December 31, 2016, 2015 and 2014, respectively.As of December 31,
2016,2018, the estimated future amortization expense forthe capitalized technology and content development costsamortizable intangible assets placed in service is as follows (in thousands):2017
$ 8,082 2018
6,876 2019
4,844 2020
2,614 2021
736 Thereafter
— Total
$ 23,152 2019 $ 25,244 2020 21,814 2021 16,420 2022 12,405 2023 7,690 Thereafter 12,730 Total $ 96,303 6. Commitments and ContingenciesLegal ContingenciesFrom time to time, the Company may become involved in legal proceedings or be subject to claims (e.g., related to regulatory, employment or indirect tax matters) 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, 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 CommitmentsCertain of the agreements entered into between the Company and its university clients in the Graduate Program Segment 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 in the Graduate Program Segment 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 ClientsPursuant to certain of the Company’s contracts in the Graduate Program Segment, the Company has made, or is obligated to make, payments to university clients in exchange for contract extensions and various marketing and other rights. As of December 31, 2018, the future minimum payments due to university clients were as follows (in thousands):2019 $ 10,125 2020 625 2021 625 2022 625 2023 625 Thereafter 3,775 Total future minimum payments to university clients $ 16,400 Contingent PaymentsThe Company has entered into an agreement with one university client in the Graduate Program Segment under which the Company would be obligated to make future minimum payments in the event that certain program metrics are not achieved. Due to the dependency of these calculations on future program performance, the timing and amounts of any associated contingent payments cannot be reasonably estimated at this time, and have therefore been excluded from the table above.2U, Inc.Notes to Consolidated Financial Statements (Continued)6. Non-current LiabilitiesNon-current liabilities consisted7. LeasesThe 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, 2018, thefollowingfuture minimum lease payments were asof:follows (in thousands):December 31, 2016 2015 (in thousands) Lease-related liabilities
$ 7,620 $ 2,165 Other
394 490 Total non-current liabilities
$ 8,014 $ 2,655 2019 $ 12,941 2020 14,020 2021 13,900 2022 13,633 2023 13,959 Thereafter 68,347 Total future minimum lease payments $ 136,800 7. CommitmentsThe 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 on the accompanying consolidated balance sheets. The deferred rent liability related to these leases totaled $8.9 million andContingenciesLine$6.5 million as of December 31, 2018 and 2017, respectively. The Company does not have any subleases as of December 31, 2018.Total rent expense from non-cancelable operating lease agreements (net of sublease income of zero, zero and $0.3 million) was $9.3 million, $8.5 million and $5.8 million for the years ended December 31, 2018, 2017 and 2016, respectively.8. DebtLines of CreditOn December 31, 2013, the Company entered into a credit agreement with Comerica Bank (“Comerica”) for a revolving line of credit with an aggregate commitment not to exceed $37.0 million.On January 21, 2014, the Company borrowed $5.0 million under this line of credit and repaid this borrowing in full on February 18, 2014.On December 31, 2015, the Company amended this credit agreement to reduce the aggregate amount it may borrow to $25.0
million,million. In June 2017, the Company andon January 30, 2017,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 December 31, 2018, the Company amended this credit agreement to extend the maturity date through March1, 2017.31, 2019. No amounts were outstanding under this credit agreement as of December 31,2016.2018 or 2017. The Company intends to extend this agreement under comparable terms, prior to expiration.Certain of the Company's operating lease agreements entered into prior to December 31, 2016 require security deposits in the form of cash or an unconditional, irrevocable letter of credit. As of December 31, 2016, the Company has entered into standby letters of credit totaling $7.1 million, as security deposits for the applicable leased facilities. These letters of credit reduced the aggregate amount the Company may borrow under its revolving line of credit to $17.9 million. In addition, on February 13, 2017, the Company entered into a standby letter of credit totaling $4.4 million, as a security deposit for its leased facility in Brooklyn, New York. This letter of credit reduced the aggregate amount the Company may borrow under its revolving line of credit to $13.5 million.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 ofComerica Bank'sComerica’s prime rate, the federal funds rate plus 1% or the30 day30-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.Borrowings under the line of credit are collateralized by substantially all of theCompany'sCompany’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 least2U, Inc.Notes to Consolidated Financial Statements (Continued)7. Commitments and Contingencies (Continued)1.10 to 1.00. As of December 31,
20162018 and2015,2017, theCompany'sCompany’s adjusted quick ratio was5.4312.38 and7.90,5.44, respectively.��The covenants under the line of credit also place limitations on theCompany'sCompany’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 lenders may require repayment in full of all principal2U, Inc.Notes to Consolidated Financial Statements (Continued)8. Debt (Continued)and interest outstanding.If the Company fails to repay such amounts, the lenders could foreclose on the assets pledged as collateral under the line of credit.The Company is currently in compliance with all such covenants.Legal ContingenciesFrom 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, 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.Program Marketing and Sales CommitmentsCertain of theagreements entered into between the Company and its clients require the Company to commit to meet certain staffing and spending investment thresholds related to program marketing and sales activities. In addition, certain of theCompany’s operating lease agreements require security deposits in theCompany 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.Operating LeasesThe Company leases office facilities under non-cancelable operating leases in Maryland, New York, California, Colorado, North Carolina, Virginia and Hong Kong. The Company also leases office equipment under non-cancelable leases.form of cash or an unconditional, irrevocable letter of credit. As of December 31,2016,2018, thefuture minimum lease paymentsCompany 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 bearing interest at a rate of 10.25%, with an original maturity date of December 31, 2017. These facilities were extended with a borrowing base of $1.3 million and matured on March 31, 2018. As of December 31, 2018, there were no amounts outstanding under these facilities.Government GrantsOn 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 asfollows (in thousands):“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, 2018, the Company did not incur a material amount of interest expense on this forgivable loan.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, 2018, the Company did not incur a material amount of interest expense on this forgivable loan.9. Income TaxesThe following table presents the components of loss before income taxes:2017
$ 6,924 2018
7,829 2019
8,316 2020
8,083 2021
8,820 Thereafter
56,219 Total future minimum lease payments
$ 96,191 Year Ended December 31, 2018 2017 2016 (in thousands) Loss before income taxes: United States $ (33,339 ) $ (25,002 ) $ (20,684 ) Foreign (9,858 ) (5,718 ) — Total $ (43,197 ) $ (30,720 ) $ (20,684 ) TableFor the year ended December 31, 2018, the Company had a tax benefit ofContents
$4.9 million, which was solely related to a deferred tax benefit. For the year ended December 31, 2017, the Company had a tax benefit of $1.3 million, which was solely related to a deferred tax benefit. For the year ended December 31, 2016, the Company did not have a current or deferred tax provision or benefit.2U, Inc.Notes to Consolidated Financial Statements (Continued)7. Commitments and Contingencies9. Income Taxes (Continued)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 $2.5 million and $0.6 million as of December 31, 2016 and 2015, respectively. The Company does not have any subleases as of December 31, 2016.Total rent expense from non-cancelable operating lease agreements (net of sublease income of $0.3 million, $0.3 million and $0.3 million) was $5.8 million, $3.5 million and $2.6 million for the years ended December 31, 2016, 2015 and 2014, respectively.Fixed Payments to ClientsThe Company is contractually obligated to make fixed payments to certain of its clients in exchange for contract extensions and various marketing and other rights. Currently, the future minimum fixed payments to the Company's clients in exchange for contract extensions and various marketing and other rights were as follows (in thousands):2017
$ 4,978 2018
3,875 2019
875 2020
625 2021
625 Thereafter
5,025 Total future minimum program payments
$ 16,003 Contingent Payments to ClientsThe Company has entered into specific program agreements under which it would be obligated to make future minimum program payments to a 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, and because it believes any contingent payments under this agreement would likely be immaterial, the Company has excluded such payments from the table above.2U, Inc.Notes to Consolidated Financial Statements (Continued)8. Income TaxesThe Company had domestic losses before income taxes of $20.7 million, $26.7 million and $29.0 million for the years ended December 31, 2016, 2015 and 2014, respectively.A reconciliation between theCompany'sCompany’s statutory federal income tax rate and the effective tax ratefor the years ended December 31,isas follows:presented below:Year Ended December 31, 2016 2015 2014 2018 2017 2016 U.S. statutory federal income tax rate
35.0 % 35.0 % 35.0 % 21.0 % 35.0 % 35.0 % Increase (decrease) resulting from:
U.S. state income taxes, net of federal benefits
5.5 7.7 5.8 0.9 9.9 5.5 Foreign tax rate differential 1.1 (1.4 ) — Non-deductible expenses
(4.4 ) (2.0 ) (2.8 ) (2.6 ) (1.8 ) (1.5 ) Stock-based compensation 30.0 40.9 (2.9 ) Change in valuation allowance
(36.6 ) (39.1 ) (32.4 ) (39.3 ) 29.8 (36.6 ) Change in tax rate (0.1 ) (108.0 ) — Other
0.5 (1.6 ) (5.6 ) 0.3 (0.2 ) 0.5 Effective tax rate
0.0 % 0.0 % 0.0 % 11.3 % 4.2 % 0.0 % The significant components of theCompany's deferred tax assets and liabilities as of December 31 are as follows:2016 2015 (in thousands) Deferred tax assets:
Accrued expenses and other
$ 2,757 $ 1,899 Accrued compensation and related benefits
4,317 3,306 Rebate reserve
126 167 Deferred rent
1,028 282 Stock-based compensation
7,127 4,971 Net operating loss carryforwards
61,995 54,967 Valuation allowance
(62,297 ) (54,739 ) Total deferred tax assets
$ 15,053 $ 10,853 Deferred tax liabilities:
Prepaid expenses
$ (1,524 ) $ (875 ) Capitalized content development costs
(9,368 ) (7,583 ) Capitalized software development costs
(3,848 ) (1,886 ) Property and equipment
(313 ) (509 ) Total deferred tax liabilities
$ (15,053 ) $ (10,853 ) Net deferred tax assets/liabilities
$ — $ — 2U, Inc.Notes to Consolidated Financial Statements (Continued)8. Income Taxes (Continued)Deferred tax valuation allowances and changes in deferred tax valuation allowances are as follows:Balance at
Beginning of
PeriodAdditions
Charged to
ExpenseDeductions Balance at End
of Period(in thousands) Income tax valuation allowance:
Year ended December 31, 2016
$ 54,739 $ 7,558 $ — $ 62,297 Year ended December 31, 2015
44,309 10,430 — 54,739 Year ended December 31, 2014
34,921 9,388 — 44,309 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,Company’s deferred tax assets and liabilities aredetermined based on the differences between the financial statement and tax basesas follows:As of December 31, 2018 2017 (in thousands) Deferred tax assets: Accrued expenses and other $ 2,580 $ 2,395 Accrued compensation and related benefits 3,395 3,524 Rebate reserve 5 20 Deferred rent 6,388 6,924 Stock-based compensation 8,279 6,874 Deferred income 257 191 Foreign net operating loss carryforwards 1,543 1,704 U.S. net operating loss carryforwards 96,809 69,425 Valuation allowance (88,061 ) (71,101 ) Total deferred tax assets $ 31,195 $ 19,956 Deferred tax liabilities: Prepaid expenses and other $ (95 ) $ (355 ) Capitalized content development costs (11,866 ) (8,600 ) Capitalized software development costs (13,388 ) (4,356 ) Property and equipment (4,038 ) (4,720 ) Intangibles (8,757 ) (12,012 ) Total deferred tax liabilities $ (38,144 ) $ (30,043 ) Net deferred tax liabilities $ (6,949 ) $ (10,087 ) As ofthe assets and liabilities using enacted tax rates that are in effect for the year in which the differences are expected to reverse. Deferred tax assets are subject to periodic recoverability assessments. Recognition of deferred tax assets is appropriate only if the likelihood of realization of such assets is more likely than not to occur. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized.AtDecember 31,2016,2018, the Company had afederalU.S. net operating loss("NOL"(“NOL”) carryforward of approximately$198.2$373.5 million, of which $254.5 million expires between 2029 and2036.2037. The Company generated $119.0 million of U.S. NOLs for the year ended December 31, 2018. In accordance with the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), U.S. NOLs arising in a tax year ending after 2017 will not expire. 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 $5.8 million in its foreign jurisdictions, which does not expire. A full valuation allowance has been established to offsettheits 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 taxassets.assets in these jurisdictions. The total increase in the valuation allowance was$7.6$17.0 million for the year ended December 31,2016.2018. The utilization of the NOL carryforwards to reduce future income taxes will depend on theCompany'sCompany’s ability to generate sufficient taxable income prior to the expiration of the NOL carryforwards.In addition, a certain portionUnder the provisions ofthe above NOL carryforwards may be subject toInternal Revenue CodesectionSection 382,limitations, whichcertain substantial changes in the Company’s ownership maylimit theirresult in a limitation on the amount of U.S. net operating loss carryforwards that could be utilized annually to offset futureuse.taxable income and taxes payable. The Company
completed an analysisdoes not expect such limitation, if any, to impact the use ofits stock ownership changes through December 31, 2016 in accordance with Internal Revenue Code section 382 andtheTreasury Regulations promulgated thereunder, and determined that a greater than fifty percent ownership change of one or more of its 5-percent shareholders occurred. Absent a subsequent ownership change, all of the Company'snet operating lossessubject to the ownership change should be available. Therefore, despite the fact that an ownership change occurred, such change is not expected to limit the ability of the Company to utilize the carryforward net operating losses of approximately $198.2 millionprior to their expiration.The Company applies the provisions of ASC 740-10 to uncertain tax positions. ASC 740-10 clarifies accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. If the probability for sustaining a tax position is greater than fifty percent, then the tax position is warranted and recognition should be at the highest amount that would be expected to be realized upon settlement. The Company did not identify any tax positions that would be required for inclusion in the financial statements. As of December 31, 2016, the Company had not made any changes to its tax positions since December 31, 2015.
2U, Inc.Notes to Consolidated Financial Statements (Continued)8.9. Income Taxes (Continued)The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.As of December 31,20162018 and2015,2017, the Companyhad no accrued interest or penalties related tohas 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 to2012,2015, 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.9. Stockholders' EquityImmediately uponOn December 22, 2017, theclosingTax Act was enacted into law and contains certain key tax provisions that affect 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 theIPOCompany’s deferred assets and liabilities, (iii) changing the Company’s ability to utilize future net operating losses and (iv) requiring a one-time tax onApril 2, 2014,any of theCompany's certificateCompany’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 ofincorporationenactment, 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 were accounted for in 2017. The Company’s 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 the Company has available as of December 31, 2017 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 had negative cumulative foreign earnings and profits as of December 31, 2017, and therefore, did not incur any transition tax in 2017.The Company wasamendedrequired to recognize the effect of the tax law changes in the period of enactment, such as re-measuring its U.S. deferred tax assets andrestatedliabilities, 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 allowed entities toamongrecord provisional amounts during a measurement period not to extend beyond one year from the enactment date. The Company considered its E&P and otherthings, authorize 200,000,000 sharesitems to be provisional and has since completed its analysis within the measurement period in accordance with SAB 118. The Company recorded no adjustment to the income tax benefit (expense) on the Company’s consolidated statements ofcommon stockoperations during the re-measurement period and5,000,000 sharesfinalized its E&P position, which resulted in no transition tax due, as originally estimated.The Tax Act includes Global Intangible Low-Taxed Income (“GILTI”) provisions that require a company to include in its U.S. income tax return foreign subsidiary earnings in excess ofpreferred stock.an allowable return on the foreign subsidiary’s tangible assets. Due to foreign subsidiary losses, this provision does not apply to the Company in 2018. Another significant section of the Tax Act, the Base Erosion Anti-Abuse Tax (“BEAT”), will not apply to the Company’s 2018 tax year as the Company does not meet the minimum revenue requirements under the BEAT. As these taxes may become applicable in the future, the Company will continue to monitor the potential impact.
10. Stockholders’ EquityOnSeptember 30, 2015,May 22, 2018, the Company sold3,625,0003,833,334 shares of its common stock to the public, including525,000500,000 shares sold pursuant to theunderwriters'underwriters’ over-allotmentoption. The Companyoption, and received net proceeds of$117.1 million, which$330.9 million. 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, and received net proceeds of $189.5 million. The Company intends to use the net proceeds from both of these public offerings of common stock for working capital and other general corporatepurposes.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 well as strategic acquisitions of, or investments in, complementary products, technologies, solutions or businesses.
As of December 31,2016,2018, 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.AtAs of December 31,2016,2018, the Company had reserved a total of9,337,33412,352,406 of its authorized shares of common stock for future issuance as follows:2U, Inc.Notes to Consolidated Financial Statements (Continued)10. Stockholders' Equity (continued)Outstanding stock options
4,057,788 4,882,237PossibleOutstanding restricted stock units1,139,045 Available for future issuance under Amended and Restated 2014 Equity Incentive Plan 6,219,244 3,042,163
Available for future issuance under 2017 Employee Stock Purchase PlanOutstanding restricted stock units936,329 1,412,934Total shares of common stock reserved for future issuance
12,352,406 9,337,334The compensation committee of the Company's board of directors, acting under authority delegated from the board of directors, granted on January 1, 2017, option awards to employees to purchase an aggregate of 2,839 shares of common stock at an exercise price of $30.15 and restricted stock unit awards for an aggregate of 2,875 shares of common stock, in each case under the 2014 Equity Incentive Plan (as defined in Note 9 below).10.11. Stock-Based CompensationThe 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 Amended and Restated 2014 Equity Incentive Plan (the"2014 Plan"“2014 Plan”) and the 2008 Stock Incentive Plan (the"2008 Plan"“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.2U, Inc.Notes to Consolidated Financial Statements (Continued)10. Stock-Based Compensation (Continued)2014 Plan
In February 2014, theCompany'sCompany’s stockholders approved the 2014 Plan. The 2014 Plan provides for the grant of incentive stock options to theCompany'sCompany’s employees and its parent and subsidiarycorporations'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 theCompany'sCompany’s employees, consultants and directors. The 2014 Plan also provides for the grant of performance-based cash awards to theCompany'sCompany’s employees, consultants and directors.A total of 2,800,000 shares of theCompany'sCompany’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 theCompany'sCompany’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 theCompany'sCompany’s common stock outstanding on December 31st of the preceding calendar year, or a lesser number of shares as may be determined by theCompany'sCompany’s board of directors. The shares available for issuance increased by2,357,5792,896,365 and2,288,8202,625,292 on January 1,20172019 and2016,2018, 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 or 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 2014Plan'sPlan’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 31,2016,2018, the Company had3,042,1636,219,244 shares reserved for issuance under the 2014 Plan. Further, as of December 31,2016,2018, under the 2014 Plan, options to purchase2,165,9142,687,726 shares of theCompany'sCompany’s common stock were outstanding at a weighted-average exercise price of$19.21$38.58 per share and1,412,9341,139,045 restricted stock units were outstanding.2008 PlanIn October 2008, theCompany'sCompany’s stockholders approved theCompany'sCompany’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 theCompany'sCompany’s employees and the employees of theCompany'sCompany’s subsidiaries, and for the grant of nonstatutory stock options, restricted stock awards and deferred stock awards to theCompany'sCompany’s employees, directors and consultants.Upon the effective date of the 2014 Plan, theThe Company ceasedusinggranting equity awards under the 2008 Plan,to grant new equity awards,andbegan using the 2014 Plan for grants of new equity awards. Accordingly,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.2U, Inc.Notes to Consolidated Financial Statements (Continued)10. Stock-Based Compensation (Continued)As of December 31,
2016,2018, options to purchase2,716,3231,370,062 shares of theCompany'sCompany’s common stock were outstanding under the 2008 Plan at a weighted-average exercise price of$3.99$4.95 per share.Stock Options2U, Inc.Notes to Consolidated Financial Statements (Continued)11. Stock-Based CompensationExpenseStock-based compensation expense related to stock-based awards is included in the following line items in the accompanying consolidated statements of operations:(Continued)Year Ended December 31, 2016 2015 2014 (in thousands) Servicing and support
$ 3,245 $ 2,270 $ 1,468 Technology and content development
2,392 1,548 794 Program marketing and sales
1,317 1,057 676 General and administrative
8,869 7,624 4,589 Total stock-based compensation expense
$ 15,823 $ 12,499 $ 7,527 Stock OptionsThe terms of stock option grants, including the exercise price per share and vesting periods, are determined by theCompany'sCompany’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 theCompany'sCompany’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 option, expected stock price volatility and dividend yield.Additionally, the recognition of expense requires estimation of the number of options that will ultimately vest and those that will be forfeited. The Company estimates the expected forfeitures of share-based awards at the grant date and recognizes the compensation cost only for those awards expected to vest.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'sCompany’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“simplified method."” Under the"simplified“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 Companyuseduses the"simplified method"“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 historicalvolatilities for publicly tradedvolatility of the Company’s common stockof comparable companiesover the estimated expected life of the stock options. The Companyassumedassumes no dividend yield because dividends are not expected to be paid in the near future, which is consistent with theCompany'sCompany’s history of not declaring or payingdividends.2U, Inc.Notesdividends toConsolidated Financial Statements (Continued)10. Stock-Based Compensation (Continued)Prior to the IPO, the Company determined for financial reporting purposes the estimated per share fair value of its common stock at various grant dates using contemporaneous valuations performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants Practice Aid, "Valuation of Privately-Held Company Equity Securities Issued as Compensation," also known as the Practice Aid. In conducting the contemporaneous valuations, the Company used relevant information available and considered all objective and subjective factors that it believed to be relevant for each valuation conducted, including management's best estimate of the Company's business condition, prospects and operating performance at each valuationdate.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, Year Ended December 31, 2016 2015 2014 2018 2017 2016 Risk-free interest rate
1.1% - 1.9% 1.5% - 1.9% 1.7% - 2.1% 2.3% - 3.0% 2.0% - 2.1% 1.1% - 1.9% Expected term (years)
5.43 - 6.50 5.56 - 6.08 5.11 - 6.25 5.97 - 6.77 6.00 - 6.08 5.43 - 6.50 Expected volatility
50% 50% 50% - 55% 44% - 45% 46% - 49% 50% Dividend yield
0% 0% 0% 0% 0% 0% The following is a summary of the stock option activity for the year ended December 31,2016:2018:Number of
OptionsWeighted-Average
Exercise Price per
ShareWeighted-Average
Remaining
Contractual Term
(in years)Aggregate
Intrinsic
Value
(in thousands)Outstanding balance at December 31, 2015
5,298,510 $ 8.07 6.66 $ 105,595 Granted
758,547 23.57 9.00 Exercised
(1,011,153 ) 4.82 2.94 Forfeited
(154,493 ) 20.37 Expired
(9,174 ) 18.22 Outstanding balance at December 31, 2016
4,882,237 10.74 6.30 95,081 Exercisable at December 31, 2016
3,394,702 6.54 5.37 80,159 Vested and expected to vest at December 31, 2016
4,772,843 10.47 6.24 94,201 Number ofOptionsWeighted-AverageExercise Price perShareWeighted-AverageRemainingContractual Term(in years)AggregateIntrinsicValue(in thousands)Outstanding balance as of December 31, 2017 4,559,176 $ 15.10 5.89 225,283 Granted 668,390 84.06 8.76 Exercised (1,012,473 ) 7.27 2.34 Forfeited (157,305 ) 45.59 Expired — — Outstanding balance as of December 31, 2018 4,057,788 27.23 5.95 113,211 Exercisable as of December 31, 2018 2,910,317 14.07 4.91 104,444 The weighted-average grant date fair value of theCompany'sCompany’s stock options granted during the years ended December 31, 2018, 2017 and 20162015was $39.66, $19.65 and2014 was$11.41$12.54 and $5.71per share, respectively.The total unrecognized compensation cost related to the unvested options as of December 31,20162018 was$11.6$28.9 million and will be recognized over a weighted-average period of approximately2.12.9 years.The aggregate intrinsic value of the options exercised during the years ended December 31, 2018, 2017 and 20162015 and 2014was $54.0 million, $24.9 million$25.8and $24.9 million,and $16.2 million,respectively.2U, Inc.Notes to Consolidated Financial Statements (Continued)10. Stock-Based Compensation (Continued)Restricted Stock Units
Throughout20162018 and2015,2017, the Company granted restricted stock units under the 2014 Plan to theCompany'sCompany’s directors and certain of theCompany'sCompany’s employees. The terms of the restricted stock unit grants under the 2014 Plan, including the vesting periods, are determined by theCompany'sCompany’s board of directors or the compensation committee thereof. Restricted2U, Inc.Notes to Consolidated Financial Statements (Continued)11. Stock-Based Compensation (Continued)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 unitactivity:activity for the year ended December 31, 2018:Number of
Restricted Stock
UnitsWeighted-Average
Grant Date Fair
Value per ShareOutstanding balance at December 31, 2015
1,220,008 $ 17.97 Granted
701,668 23.30 Vested
(368,927 ) 17.04 Forfeited
(139,815 ) 20.60 Outstanding balance at December 31, 2016
1,412,934 20.60 Number ofRestricted StockUnitsWeighted-AverageGrant Date FairValue per ShareOutstanding balance as of December 31, 2017 1,413,423 $ 29.95 Granted 536,502 81.55 Vested (595,866 ) 25.79 Forfeited (215,014 ) 50.90 Outstanding balance as of December 31, 2018 1,139,045 52.47 The total compensation cost related to the nonvested restricted stock units not yet recognized as of December 31,20162018 was$19.2$43.8 million and will be recognized over a weighted-average period of approximately2.42.2 years.11.Employee Stock Purchase PlanThe Company’s 2017 Employee Stock Purchase Plan (the “ESPP”) provides (i) for two offering periods each year and (ii) that the purchase price for shares of the Company’s common stock purchased under the ESPP will be 90% of the lesser of the fair market value of the 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. 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. Participating eligible employees 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, with the aggregate purchase of each offering period limited to a maximum fair market value of $25,000 per employee per year. Participation in the ESPP began on January 1, 2018. 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.During the year ended December 31, 2018, an aggregate of 63,671 shares of 2U’s common stock were purchased in accordance with the ESPP. Net proceeds from the issuance of shares of 2U’s common stock under the ESPP for the year ended December 31, 2018 were $3.1 million. As of December 31, 2018, 936,329 shares remain available for purchase under the ESPP.Stock-Based Compensation ExpenseStock-based compensation expense related to stock-based awards, as well as the ESPP, is included in the following line items on the accompanying consolidated statements of operations and comprehensive loss:Year Ended December 31, 2018 2017 2016 (in thousands) Curriculum and teaching $ 14 $ 3 $ — Servicing and support 4,764 4,036 3,245 Technology and content development 4,094 3,306 2,392 Marketing and sales 2,743 1,742 1,317 General and administrative 19,795 12,843 8,869 Total stock-based compensation expense $ 31,410 $ 21,930 $ 15,823 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.12. Net Loss per Share2U, Inc.Notes to Consolidated Financial Statements (Continued)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 theCompany'sCompany’s net loss. The following 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 31,2016, 20152018, 2017 and2014:2016:Year Ended December 31, Year Ended December 31, 2016 2015 2014 2018 2017 2016 Stock options
4,882,237 5,298,510 5,850,211 4,057,788 4,559,176 4,882,237 Restricted stock units
1,412,934 1,220,008 992,665 1,139,045 1,413,423 1,412,934 2U, Inc.Notes to Consolidated Financial Statements (Continued)11. Net Loss per Share (Continued)Basic and diluted net loss per share
attributable to holders of common stockis calculated as follows:Year Ended December 31, 2016 2015 2014 Numerator (in thousands):
Net loss attributable to holders of common stock
$ (20,684 ) $ (26,733 ) $ (29,088 ) Denominator:
Weighted-average shares of common stock outstanding, basic and diluted
46,609,751 42,420,356 32,075,107 Net loss per share attributable to holders of common stock, basic and diluted
$ (0.44 ) $ (0.63 ) $ (0.91 ) Year Ended December 31, 2018 2017 2016 Numerator (in thousands): Net loss $ (38,330 ) $ (29,423 ) (20,684 ) Denominator: Weighted-average shares of common stock outstanding, basic and diluted 55,833,492 49,062,611 46,609,751 Net loss per share, basic and diluted $ (0.69 ) $ (0.60 ) $ (0.44 ) 12.13. Segment and Geographic InformationOperatingThe Company’s operations consist of two operating segments, which aredefined as components of an enterprise for which discrete financial information is available that is evaluated regularly byalso its two reportable segments: thechief operating decision maker ("CODM") for purposes of allocating resourcesGraduate Program Segment andevaluating financial performance.the Short Course Segment. TheCompany's CODM reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. As such, the Company's operations constitute a single operating segment and one reportable segment. The Company offers similarCompany’s Graduate Program Segment provides services tosubstantially all of its clients, which primarily representwell-recognized nonprofit colleges and universities,in the United States. Substantially all assets were held and all revenue was generatedprimarily 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 around the world through relationships with leading universities in the United States, the United Kingdom and South Africa.Graduate Program SegmentFor the year ended December 31, 2018, three university clients each accounted for 10% or more of the Company’s consolidated revenue, as follows: $86.9 million, $54.2 million and $42.7 million, which equaled 21%, 13% and 10% of the Company’s consolidated revenue, respectively. For the year ended December 31, 2017, four university clients 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 equaled 27%, 17%, 11% and 10% of the Company’s consolidated revenue, respectively.As of December 31, 2018, two university clients each accounted for 10% or more of the Company’s consolidated accounts receivable, net balance, as follows: $11.9 million and $11.8 million, which equaled 36% and 36% of the Company’s consolidated accounts receivable, net balance, respectively. As of December 31, 2017, two university clients each accounted for 10% or more of the Company’s consolidated accounts receivable, net balance, as follows: $9.4 million and $2.0 million, which equaled 67% and 14% of the Company’s consolidated accounts receivable, net balance, respectively.Short Course SegmentFor the year ended December 31, 2018 and 2017, there were no customers or individual university clients that had revenue associated with it that accounted for 10% or more of the Company’s consolidated revenue. In addition, as of December 31, 2018 and December 31, 2017, no customers had accounts receivable, net balances that accounted for 10% or more of the Company’s consolidated accounts receivable, net balance, as customers are individual students or third parties paying on their behalf, rather than university clients.For the year ended December 31, 2018, offerings associated with three university clients each accounted for 10% or more of the segment’s revenue, and when combined, accounted for approximately 81% of the segment’s revenue. For the year ended December 31, 2017, offerings associated with three university clients each accounted for 10% or more of the segment’s revenue, and when combined, accounted for approximately 82% of the segment’s revenue.2U, Inc.Notes to Consolidated Financial Statements (Continued)13. Segment and Geographic Information (Continued)Segment PerformanceThe following table summarizes financial information regarding each reportable segment’s results of operations for the periods presented:Year Ended December 31, 2018 2017 2016 (in thousands) Revenue by segment* Graduate Program Segment $ 348,361 $ 270,432 $ 205,864 Short Course Segment 63,408 16,320 — Total revenue $ 411,769 $ 286,752 $ 205,864 Segment profitability** Graduate Program Segment $ 16,839 $ 13,022 $ 4,541 Short Course Segment 816 (1,606 ) — Total segment profitability $ 17,655 $ 11,416 $ 4,541 Segment profitability margin*** Graduate Program Segment 4.8 % 4.8 % 2.2 % Short Course Segment 1.3 (9.8 ) — Total segment profitability margin 4.3 3.9 2.2 * The Company has excluded approximately $44,000 of intersegment revenues from the year ended December 31, 2018. ** The Company defines segment profitability as net income or net loss, as applicable, before net interest income (expense), taxes, depreciation and amortization expense, 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 the respective segment’s revenue. The following table reconciles net loss to total segment profitability:Year Ended December 31, 2018 2017 2016 (in thousands) Net loss $ (38,330 ) $ (29,423 ) $ (20,684 ) Adjustments: Interest income (5,173 ) (371 ) (383 ) Interest expense 108 87 35 Foreign currency loss 1,722 866 — Depreciation and amortization expense 32,785 19,624 9,750 Income tax benefit (4,867 ) (1,297 ) — Stock-based compensation expense 31,410 21,930 15,823 Total adjustments 55,985 40,839 25,225 Total segment profitability $ 17,655 $ 11,416 $ 4,541 2U, Inc.Notes to Consolidated Financial Statements (Continued)13. Segment and Geographic Information (Continued)The Company’s total assets by segment are as follows:December 31,
2018December 31,
2017(in thousands) Total assets Graduate Program Segment $ 702,827 $ 359,597 Short Course Segment 104,527 122,465 Total assets $ 807,354 $ 482,062 Trade Accounts Receivable and Contract LiabilitiesThe Company’s trade accounts receivable and contract liabilities in each segment are as follows:December 31,
2018December 31,
2017(in thousands) Trade accounts receivable Graduate Program Segment accounts receivable, net of allowance for doubtful accounts of $0 for all periods presented $ 31,110 $ 12,520 Graduate Program Segment unbilled revenue 265 666 Short Course Segment accounts receivable, net of allowance for doubtful accounts of $257 and $287 as of December 31, 2018 and 2017, respectively 982 988 Total trade accounts receivable $ 32,357 $ 14,174 Contract liabilities Graduate Program Segment deferred revenue $ 2,864 $ 2,523 Short Course Segment deferred revenue 5,481 4,501 Total contract liabilities $ 8,345 $ 7,024 For the Graduate Program Segment, revenue recognized duringall periods presented.13.the year ended December 31, 2018 that was included in the deferred revenue balance at the beginning of the year was $2.5 million. For the Short Course Segment, revenue recognized during the year ended December 31, 2018 that was included in the deferred revenue balance at the beginning of the year was $4.5 million.Contract Acquisition CostsThe Graduate Program Segment had $0.3 million of net capitalized contract acquisition costs as of December 31, 2018. For the year ended December 31, 2018, the Company capitalized $0.3 million and recorded an immaterial amount of amortization expense in the Graduate Program Segment.Geographical InformationThe Company’s non-U.S. revenue, which is based upon the currency of the country in which the university client primarily operates, was $33.9 million and $10.0 million for the years ended December 31, 2018 and 2017, respectively, and was sourced entirely from the Short Course Segment’s operations outside of the U.S. The Company’s long-lived tangible assets in non-U.S. countries as of December 31, 2018 and December 31, 2017 totaled approximately $1.2 million and $0.7 million, respectively.2U, Inc.Notes to Consolidated Financial Statements (Continued)14. Retirement PlanThe 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 eachemployee'semployee’s contribution up to 6% of theemployee'semployee’s salarydeferral.deferral each plan year. For the years ended December 31,2016, 20152018, 2017 and2014,2016, the Company made employer contributions of $2.1 million, $1.3 million and $1.1 million,$0.8 million and $0.6 million,respectively.14.15. Related Party TransactionsDuring theyearsyear ended December 31, 2016,2015 and 2014,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.ForThe Company had no transactions with this related party during the years ended December 31,2016, 20152018 and2014,2017, other than the repayment of a $0.1 million security deposit in connection with the expiration of the sublease in December 2016. For the year ended December 31, 2016, the Company recorded $0.3 million$0.3 million and $0.3 million, respectively,as rental income from this related entity.TheDuring the year ended December 31, 2016, the Company utilized the marketing and event planning services of a company that is partially owned by one of theCompany'sCompany’s former executives. The Company had no transactions with this related party during the years ended December 31, 2018 and 2017. The Company recorded $1.4million, $1.7 million and $1.6million for the expenses incurred related to the services provided by this related party for theyearsyear ended December 31,2016, 2015 and 2014, respectively.2016. Nomaterialamounts were due to the2U, Inc.Notes to Consolidated Financial Statements (Continued)14. Related Party Transactions (Continued)related party or recorded in accounts payable on the consolidated balance sheets as of December 31,
20162018 and2015.15.2017.16. Quarterly Financial Information (Unaudited)The following tables set forth certain unaudited quarterly financial data for20162018 and2015.2017. 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,
2016June 30,
2016September 30,
2016December 31,
2016(in thousands, except share and per share amounts) Revenue
$ 47,444 $ 49,110 $ 51,960 $ 57,350 Costs and expenses:
Servicing and support
9,512 10,260 10,351 10,859 Technology and content development
7,275 8,842 8,670 8,496 Program marketing and sales
23,656 27,483 28,165 27,306 General and administrative
10,447 10,944 11,569 13,061 Total costs and expenses
50,890 57,529 58,755 59,722 Loss from operations
(3,446 ) (8,419 ) (6,795 ) (2,372 ) Other income (expense):
Interest expense
(26 ) (9 ) — — Interest income
92 91 37 163 Other
— — — — Total other income (expense)
66 82 37 163 Net loss
$ (3,380 ) $ (8,337 ) $ (6,758 ) $ (2,209 ) Net loss per share:
Basic and diluted
$ (0.07 ) $ (0.18 ) $ (0.14 ) $ (0.05 ) Weighted-average shares used in computing net loss per share:
Basic and diluted
45,953,082 46,494,464 46,903,628 47,075,167 Three Months Ended March 31,
2018June 30,
2018September 30,
2018December 31,
2018(in thousands, except share and per share amounts) Revenue $ 92,288 $ 97,423 $ 106,963 $ 115,095 Costs and expenses Curriculum and teaching 4,307 6,007 6,351 6,625 Servicing and support 15,233 17,297 16,586 18,087 Technology and content development 13,840 15,235 16,361 18,376 Marketing and sales 53,058 58,376 60,548 49,033 General and administrative 21,869 22,480 18,974 19,666 Total costs and expenses 108,307 119,395 118,820 111,787 Income (loss) from operations (16,019 ) (21,972 ) (11,857 ) 3,308 Interest income 342 912 1,799 2,120 Interest expense (27 ) (27 ) (27 ) (27 ) Other expense, net (395 ) (825 ) (273 ) (229 ) Income (loss) before income taxes (16,099 ) (21,912 ) (10,358 ) 5,172 Income tax benefit (expense) 1,228 3,565 414 (340 ) Net income (loss) $ (14,871 ) $ (18,347 ) $ (9,944 ) $ 4,832 Net income (loss) per share, basic $ (0.28 ) $ (0.33 ) $ (0.17 ) $ 0.08 Net income (loss) per share, diluted $ (0.28 ) $ (0.33 ) $ (0.17 ) $ 0.08 Weighted-average shares used in computing net income (loss) per share, basic 52,687,299 54,981,192 57,663,361 57,924,666 Weighted-average shares used in computing net income (loss) per share, diluted 52,687,299 54,981,192 57,663,361 60,666,682
2U, Inc.Notes to Consolidated Financial Statements (Continued)15.16. Quarterly Financial Information (Unaudited)(Continued)(continued)
Three Months Ended March 31,
2015June 30,
2015September 30,
2015December 31,
2015(in thousands, except share and per share amounts) Revenue
$ 34,612 $ 35,238 $ 37,092 $ 43,252 Costs and expenses:
Servicing and support
7,550 7,903 7,845 8,749 Technology and content development
6,134 6,466 7,082 7,529 Program marketing and sales
19,587 21,526 21,567 20,231 General and administrative
6,711 8,871 8,477 10,064 Total costs and expenses
39,982 44,766 44,971 46,573 Loss from operations
(5,370 ) (9,528 ) (7,879 ) (3,321 ) Other income (expense):
Interest expense
(126 ) (126 ) (127 ) (173 ) Interest income
28 24 21 94 Other
— — (250 ) — Total other income (expense)
(98 ) (102 ) (356 ) (79 ) Net loss
$ (5,468 ) $ (9,630 ) $ (8,235 ) $ (3,400 ) Net loss per share:
Basic and diluted
$ (0.13 ) $ (0.23 ) $ (0.20 ) $ (0.07 ) Weighted-average shares used in computing net loss per share:
Basic and diluted
40,978,741 41,362,476 41,645,894 45,651,475 Three Months Ended March 31,
2017June 30,
2017September 30,
2017December 31,
2017(in thousands, except share and per share amounts) Revenue $ 64,829 $ 64,995 $ 70,250 $ 86,678 Costs and expenses Curriculum and teaching — — 1,792 4,817 Servicing and support 10,925 13,458 12,939 13,445 Technology and content development 9,205 11,140 12,735 12,846 Marketing and sales 34,670 37,242 41,311 37,700 General and administrative 13,664 13,930 17,227 17,844 Total costs and expenses 68,464 75,770 86,004 86,652 Income (loss) from operations (3,635 ) (10,775 ) (15,754 ) 26 Interest income 196 53 18 104 Interest expense — (1 ) (36 ) (50 ) Other income (expense), net — (1,031 ) 59 106 Income (loss) before income taxes (3,439 ) (11,754 ) (15,713 ) 186 Income tax benefit (expense) — — 974 323 Net income (loss) $ (3,439 ) $ (11,754 ) $ (14,739 ) $ 509 Net income (loss) per share, basic $ (0.07 ) $ (0.25 ) $ (0.30 ) $ 0.01 Net income (loss) per share, diluted $ (0.07 ) $ (0.25 ) $ (0.30 ) $ 0.01 Weighted-average shares used in computing 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 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresDisclosure Controls and ProceduresUnder the supervision and with the participation of our management, including our Chief Executive Officer and Chief FinancialDataThe following selected consolidatedOfficer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 Rules 13a-15 and 15d-15 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 ReportingManagement is responsible for establishing and maintaining adequate internal control over financialdatareporting for theyears ended December 31, 2016, 2015, 2014, 2013Company. With the participation of our Chief Executive Officer and2012, andChief Financial Officer, management conducted an evaluation of theselected consolidated balance sheet dataeffectiveness of our internal control over financial reporting as of December 31,2016, 2015, 2014, 2013 and 2012 are derived from our audited consolidated financial statements. Our historical results are not necessarily indicative2018 based on the Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of theresultsTreadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2018.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 ReportingWe made no changes in our internal control over financial reporting during the three months ended December 31, 2018 that have materially affected, or are reasonably likely tobe expectedmaterially affect, our internal control over financial reporting, other than changes in controls to integrate the business we acquired in thefuture. The selected consolidated financial data should be read together withGetSmarter acquisition.Item7 "Management's Discussion and Analysis9B. Other InformationNot applicable.PART IIIWe will file a definitive Proxy Statement for our 2019 Annual Meeting ofOperations" and in conjunctionStockholders or our 2019 Proxy Statement with theconsolidated financial statements, related notes,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 2019 Proxy Statement that specifically address the items set forth herein are incorporated by reference.Item 10. Directors, Executive Officers andother financialCorporate GovernanceThe informationincluded elsewhere inrequired by Item 10 is hereby incorporated by reference to the sections of our 2019 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 CompensationThe information required by Item 11 is hereby incorporated by reference to the sections of our 2019 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 MattersThe information required by Item 12 is hereby incorporated by reference to the sections of our 2019 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 IndependenceThe information required by Item 13 is hereby incorporated by reference to the sections of our 2019 Proxy Statement under the captions “Transactions with Related Parties” and “Director Independence.”Item 14. Principal Accounting Fees and ServicesThe information required by Item 14 is hereby incorporated by reference to the section of our 2019 Proxy Statement under the caption “Independent Registered Public Accounting Firm Fees.”PART IVItem 15. Exhibits, Financial Statement Schedules(a) ExhibitsSee the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.(b) Financial Statement SchedulesSchedule II—Valuation and Qualifying Accounts (in thousands)Year Ended December 31, 2016 2015 2014 2013 2012 (in thousands, except share and per share amounts) Consolidated Statement of Operations Data:
Revenue
$ 205,864 $ 150,194 $ 110,239 $ 83,127 $ 55,879 Costs and expenses:
Servicing and support
40,982 32,047 26,858 22,718 14,926 Technology and content development
33,283 27,211 22,621 19,472 8,299 Program marketing and sales
106,610 82,911 65,218 54,103 45,390 General and administrative
46,021 34,123 23,420 14,840 10,342 Total costs and expenses
226,896 176,292 138,117 111,133 78,957 Loss from operations
(21,032 ) (26,098 ) (27,878 ) (28,006 ) (23,078 ) Other income (expense):
Interest expense
(35 ) (552 ) (1,213 ) 27 (73 ) Interest income
383 167 92 26 38 Other
— (250 ) — — — Total other income (expense)
348 (635 ) (1,121 ) 53 (35 ) Loss before income taxes
(20,684 ) (26,733 ) (28,999 ) (27,953 ) (23,113 ) Income tax expense
— — — — — Net loss
(20,684 ) (26,733 ) (28,999 ) (27,953 ) (23,113 ) Preferred stock accretion
— — (89 ) (347 ) (339 ) Net loss attributable to common stockholders
$ (20,684 ) $ (26,733 ) $ (29,088 ) $ (28,300 ) $ (23,452 ) Net loss per share attributable to common stockholders, basic and diluted
$ (0.44 ) $ (0.63 ) $ (0.91 ) $ (3.81 ) $ (3.33 ) Weighted-average common shares outstanding used in computing net loss per share attributable to common stockholders, basic and diluted
46,609,751 42,420,356 32,075,107 7,432,055 7,037,090 Other Financial Data:
Adjusted EBITDA (loss)(1)
$ 4,541 $ (6,629 ) $ (14,779 ) $ (21,245 ) $ (18,814 ) (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 Adjusted
Balance at Beginning of Period Additions Charged to Expense/Against Revenue Deductions Balance at End of Period Allowance for doubtful accounts: Year ended December 31, 2018 $ 287 $ 571 $ (601 ) 257 Year ended December 31, 2017 — 287 — 287 Year ended December 31, 2016 — — — — Balance at Beginning of Period Additions Deductions Balance at End of Period Income tax valuation allowance: Year ended December 31, 2018 $ 71,101 $ 16,960 $ — 88,061 Year ended December 31, 2017 62,297 17,967 (9,163 ) 71,101 Year ended December 31, 2016 54,739 7,558 — 62,297 Item 16. Form 10-K SummaryNone.EBITDASIGNATURESPursuant tonet loss,themost directly comparable financial measure calculated and presented in accordance with GAAP, seerequirements of Section 13 or 15(d) of thesection below titled "Adjusted EBITDA."Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:As of December 31, 2016 2015 2014 2013 2012 (in thousands) Consolidated Balance Sheet Data:
Cash and cash equivalents
$ 168,730 $ 183,729 $ 86,929 $ 7,012 $ 25,190 Accounts receivable, net
7,860 975 350 1,835 248 Total assets
244,320 231,041 113,039 28,652 39,877 Total liabilities
49,083 35,252 25,028 22,629 13,467 Total redeemable convertible preferred stock
— — — 98,047 92,706 Additional paid-in capital
371,455 351,324 216,818 7,817 5,483 Total stockholders' equity
195,237 195,789 88,011 (92,024 ) (66,296 ) 2U, Inc.
February 26, 2019By: /s/ CHRISTOPHER J. PAUCEK Name: Christopher J. Paucek Title: Chief Executive Officer and Director POWER OF ATTORNEYAdjusted EBITDAKNOW ALL PERSONS BY THESE PRESENTSTo provide investors, 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 withadditional information regarding our financial results, we have provided withinthe 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-KAdjusted EBITDA, a non-GAAP financial measure. We have provided a reconciliation belowhas been signed by the following persons on behalf ofAdjusted EBITDA to net loss,themost directly comparable GAAP financial measure.We have included Adjusted EBITDA in this Annual Report on Form 10-K because it is a key measure used by our managementregistrant andboard 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 resultsin thesame manner as our managementcapacities andboard 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 results as reported under GAAP. Some of these limitations are:•although depreciation and amortization are non-cash charges,on theassets 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 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.
dates indicated.Because of these and other limitations, you should consider Adjusted EBITDA alongside other GAAP-based financial performance measures, including various cash flow metrics, net income (loss)Table of Contentsand our other GAAP results. The following table presents a reconciliation of Adjusted EBITDA to net loss for each of the periods indicated:Year Ended December 31, 2016 2015 2014 2013 2012 (in thousands) Net loss
$ (20,684 ) $ (26,733 ) $ (28,999 ) $ (27,953 ) $ (23,113 ) Adjustments:
Interest expense
35 552 1,213 (27 ) 73 Interest income
(383 ) (167 ) (92 ) (26 ) (38 ) Depreciation and amortization expense
9,750 7,220 5,572 4,335 2,869 Stock-based compensation expense
15,823 12,499 7,527 2,426 1,395 Total adjustments
25,225 20,104 14,220 6,708 4,299 Adjusted EBITDA (loss)
$ 4,541 $ (6,629 ) $ (14,779 ) $ (21,245 ) $ (18,814 ) Signature Title Date /s/ CHRISTOPHER J. PAUCEK Chief Executive Officer and Director (Principal Executive Officer) February 26, 2019 Christopher J. Paucek /s/ CATHERINE A. GRAHAM Chief Financial Officer (Principal Financial Officer) February 26, 2019 Catherine A. Graham /s/ JOHN B. ELLIS Chief Accounting Officer (Principal Accounting Officer) February 26, 2019 John B. Ellis /s/ PAUL A. MAEDER Director and Chairman of the Board February 26, 2019 Paul A. Maeder /s/ TIMOTHY M. HALEY Director February 26, 2019 Timothy M. Haley /s/ JOHN M. LARSON Director February 26, 2019 John M. Larson /s/ CORETHA M. RUSHING Director February 26, 2019 Coretha M. Rushing /s/ ROBERT M. STAVIS Director February 26, 2019 Robert M. Stavis /s/ SALLIE L. KRAWCHECK Director February 26, 2019 Sallie L. Krawcheck /s/ EARL LEWIS Director February 26, 2019 Earl Lewis /s/ EDWARD S. MACIAS Director February 26, 2019 Edward S. Macias /s/ VALERIE B. JARRETT Director February 26, 2019 Valerie B. Jarrett /s/ GREGORY PETERS Director February 26, 2019 Gregory Peters /s/ ALEXIS MAYBANK Director February 26, 2019 Alexis Maybank SPECIAL NOTE REGARDING EXHIBITSIn 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 statementsprovideprove 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 madeofor at any other time. Additional information about the Company may be found elsewhere in this Annual Report on Form 10-K and theCompany'sCompany’s other public filings, which are available without charge through theSEC'sSEC’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.Exhibit IndexExhibit Number Description Form File No. Exhibit Number Filing Date Filed Herewith 3.1
Amended and Restated Certificate of Incorporation of the Registrant. 8-K 001-36376 3.1 April 4, 2014 3.2
Amended and Restated Bylaws of the Registrant. 8-K 001-36376 3.2 April 4, 2014 4.1
Specimen stock certificate evidencing shares of Common Stock. S-1/A 333-194079 4.2 March 17, 2014 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. S-1 333-194079 10.1 February 21, 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, and Addenda dated as of April 12, 2010 and July 22, 2011. S-1 333-194079 10.2 February 21, 2014 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. S-1/A 333-194079 10.2.1 March 17, 2014 10.2.2
* Amendment to Master 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-K 001-36376 10.2.2 March 10, 2016 10.3
Amended and Restated Investor Rights Agreement, dated as of March 27, 2012, by and among the Registrant and certain of its stockholders. S-1 333-194079 10.6 February 21, 2014 10.4
† Fourth Amended and Restated 2008 Stock Incentive Plan, as amended to date. S-1 333-194079 10.7 February 21, 2014 10.5
† Form of Incentive Stock Option Agreement under 2008 Stock Incentive Plan. S-1 333-194079 10.8 February 21, 2014 10.6
† Form of Non-Qualified Stock Option Agreement under 2008 Stock Incentive Plan. S-1 333-194079 10.9 February 21, 2014 ExhibitNumberDescription Form File No. ExhibitNumberFiling Date Filed Herewith 10-Q 001-36376 2.1 May 4, 2017 8-K 001-36376 2.2 July 3, 2017 8-K 001-36376 3.1 April 4, 2014 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 S-1 333-194079 10.2 February 21, 2014 S-1/A 333-194079 10.2.1 March 17, 2014 10-K 001-36376 10.2.2 March 10, 2016 S-1 333-194079 10.6 February 21, 2014 S-1 333-194079 10.7 February 21, 2014 S-1 333-194079 10.8 February 21, 2014 S-1 333-194079 10.9 February 21, 2014 10-Q 001-36376 10.1 August 2, 2018 10-Q 001-36376 10.2 August 2, 2018 Exhibit Number Description Form File No. Exhibit Number Filing Date Filed Herewith 10.7
† 2014 Equity Incentive Plan. S-1 333-194079 10.11 February 21, 2014 10.8
† Form of Stock Option Agreement under 2014 Equity Incentive Plan. S-1 333-194079 10.12 February 21, 2014 10.9
† Form of Restricted Stock Unit Award Agreement under 2014 Equity Incentive Plan. S-1 333-194079 10.13 February 21, 2014 10.10
† Summary of Non-Employee Director Compensation Plan. 10-Q 001-36376 10.1 May 12, 2014 10.11
† Confidential Information, 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. S-1/A 333-194079 10.14 March 17, 2014 10.12
† Form of Indemnification Agreement with directors and executive officers. S-1 333-194079 10.15 February 21, 2014 10.13
† Confidential Information, Invention Assignment, Work for Hire, Noncompete and No Solicit/No Hire Agreement, dated as of February 28, 2009, by and between the Registrant and Robert L. Cohen. S-1/A 333-194079 10.16 March 17, 2014 10.14
* Amended and Restated 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. S-1 333-194079 10.4 February 21, 2014 10.15
Sublease, by and between the Registrant and Noodle Education, Inc., dated as of November 16, 2011. S-1 333-194079 10.17 February 21, 2014 10.16
Office Lease, by and between Lanham Office 2015 LLC and 2U Harkins Road LLC, dated as of December 23, 3015. X 10.17
Agreement of Lease, by and between 55 Prospet Owner LLC and 2U NYC, LLC, dated as of February 13, 2017. X 21.1
Subsidiaries of the Registrant. 23.1
Consent of KPMG LLP, independent registered public accounting firm. X ExhibitNumberDescription Form File No. ExhibitNumberFiling Date Filed Herewith 10-Q 001-36376 10.3 August 2, 2018 10-Q 001-36376 10.1 May 12, 2014 S-1/A 333-194079 10.14 March 17, 2014 S-1 333-194079 10.15 February 21, 2014 10-Q 001-36376 10.4 August 2, 2018 S-1 333-194079 10.4 February 21, 2014 10-K 001-36376 10.16 February 24, 2017 10-K 001-36376 10.17 February 24, 2017 10-K 001-36376 10.18 February 24, 2017 X X X X X X 101.INS XBRL Instance Document. X 101.SCH XBRL Taxonomy Extension Schema Document. X ExhibitNumberDescriptionFormFile No.Exhibit NumberFiling DateFiled Herewith31.1Certification 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.DescriptionForm File No. ExhibitNumberFiling Date Filed Herewith 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. X
101.DEF31.2Certification 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.XBRL Taxonomy Extension Definition Linkbase Document.X
101.LAB32.1Certification 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.XBRL Taxonomy Extension Label Linkbase Document.X 32.2Certification 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.X101.INSXBRL Instance Document.X101.SCHXBRL Taxonomy Extension Schema Document.X101.CALXBRL Taxonomy Extension Calculation Linkbase Document.X101.DEFXBRL Taxonomy Extension Definition Linkbase Document.X101.LABXBRL Taxonomy Extension Label Linkbase Document.X101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document. 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.
* 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. 97