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2U, Inc. FORM 10-K TABLE OF CONTENTS
2U, Inc. INDEX TO CONSOLIDATED FINANCIAL STATEMENTSINFORMATION

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File Number: 001-36376

2U, INC.
(Exact name of registrant as specified in its charter)

(301) 892-4350
Registrant's telephone number, including area code:

          Securities registered pursuant to Section 12 (b) of the Act:

None
Securities registered pursuant to Section 12 (g) of the Act:None

          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations 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 ý    No o

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. oý

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

          The aggregate market value of the 27,893,62042,046,218 shares held by non-affiliates as of June 30, 20152016 (computed based on the closing price on such date as reported on the NASDAQ Global Select Market) was $897,895,628.$1,236,579,271.

          As of March 3, 2016,February 17, 2017, there were 45,962,95447,229,877 shares of the registrant's common stock, par value $0.001 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

          Portions of the Company's definitive proxy statement, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, for its 20162017 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and which are subject to substantial risks and uncertainties. In some cases, you can identify forward-looking statements by the words "may," "might," "will," "could," "would," "should," "expect," "intend," "plan," "objective," "anticipate," "believe," "estimate," "predict," "project," "potential," "continue" and "ongoing," or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Annual Report on Form 10-K, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain. Forward-looking statements include statements about:

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trends in the higher education market and the market for online education, and expectations for growth in those markets;



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the acceptance, adoption and growth of online learning by colleges and universities, faculty, students, employers, accreditors and state and federal licensing bodies;



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the potential benefits of our cloud-based SaaS technology and technology-enabled services to clients and students;



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anticipated launch dates of new client programs;



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the predictability, visibility and recurring nature of our business model;



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our ability to acquire new clients and expand programs with existing clients, includingclients;



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our ability to execute our growth strategy in the international, undergraduate and doctoralnon-degree alternative markets;



•

our ability to continue to acquire prospective students for our clients' programs;



•

our ability to affect or increase student retention in our clients' programs;



•

our growth strategy;



•

the scalability of our cloud-based SaaS technology;



•

our expected expenses in future periods and their relationship to revenue;



•

potential changes in regulations applicable to us or our clients; and



•

the amount of time that we expect our cash balances and other available financial resources to be sufficient to fund our operations.

        You should refer to the risks described in Part I, Item 1A "Risk Factors" in this Annual Report on Form 10-K for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Annual Report on Form 10-K will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

        You should read this Annual Report on Form 10-K completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

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2U, Inc.
FORM 10-K

TABLE OF CONTENTS

Table of Contents

PART I

Item 1.    Business

Our Mission

        2U enablespartners with great colleges and universities to bring their degree programsbuild what we believe is the world's best online allowing themeducation. Our platform provides a comprehensive fusion of technology, services and data architecture to transform the way higher education is delivered. We believe that our Platform, a fusion of cloud-based software-as-a-service technology and technology-enabled services, allows our clients, historically campus-based universities of the highest quality and rigor, into digital versions of themselves. Why should a student need to reach students globally, enabling the educationpick up their life, quit their job and move to attend a graduate program at a great university? With 2U's solutions, they providedon't have to reach its highest potential so students can reach theirs.anymore.

Company Overview

        We are a leading provider of cloud-based software-as-a-service, or SaaS, technology fused withand technology-enabled services which we refer to as our Platform. Our Platform enablesthat enable leading nonprofit colleges and universities to deliver their high quality educationdegree programs at scale to qualified students anywhere. Our SaaS technology consists of an innovative online learning environment, whichwhere 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 refer to as Online Campus, and our operations applications.enable. This technology is fused with technology-enabled services, to complete our Platform. Our Platformincluding student acquisition services, content development services, student and faculty support, clinical placement services, and admissions applications advising services. This suite of technology tightly integrated with technology-enabled services, optimized with data analysis and machine learning techniques, provides a comprehensive set of capabilities that would otherwise require the purchase of multiple, disparate point solutions, and allows our clients' programs to expand and operate at scale, providing the comprehensive infrastructure colleges and universities need to attract, enroll, educate, support and graduate their students. By leveraging our Platform, we believe

        We provide the significant domain expertise and operating capacity our clients are ablerequire to expand their addressable markets while providing educational engagement, experiencesscale and outcomes to theiroperate successfully in the online students that match or exceed those of their on-campus offerings.

        Our clients useenvironment. Utilizing data analysis and machine learning techniques, the Online Campus portion of our Platform to offer high quality educational content, instructor-led classes averaging 12 students per session in a live, intimate and engaging setting, and a rich social networking experience, all accessible through proprietary web-based and mobile applications. Online Campus challenges every student to learn from the front row and every faculty member to engage students in new and innovative ways. Our clients use the operations applications within our Platform to expand, enable and support their online operations, and integrate those operations with their existing university systems. These applications provide the content management, admissions application processing, customer relationship management and other functionality necessary to effectively operate our clients' programs. Our Platform also provides clients with real-time data and deep analytical insight related to student performance and engagement, student and faculty satisfaction and enrollment. We believe that the SaaS technology within our Platform is flexible, easy to use, highly scalable and characterized by a high level of availability and security.

        The technology-enabled services we provide within our Platform are designed to improve enrollment and retention of our clients' students as well as to provide those students with a complete, high qualityhigh-quality educational experience. We have primary responsibility for identifying qualified students for our clients' programs, generating potential student interest in the programs and driving applications to the programs. We have developeddeploy sophisticated digital program marketing and student acquisition capabilities, and we work closely with our clients to help them create highly engaging multimedia instructional content for delivery through our innovative learning environment, Online Campus. We also provide otherthe services that support the complete lifecycle of a higher education program, including advising prospective students through the admissions application process, providing 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. We provide the significant domain expertise

        Through our experience launching and operating capacity our clients require to scale and operate successfully in the online environment.

        Our clients areprograms with leading nonprofit colleges and universities, 12 ofwe have developed a proprietary program-selection algorithm, which were ranked by U.S. Newsenables us to systematically identify degrees at colleges and World Report among the top 75 undergraduate institutions in its 2016 National University Rankings. Our clients primarily use our Platform to offer full graduate degree programs online. Through our uncompromising focus on quality and deep understanding of the higher education

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environment,universities that we believe we have becomethe highest probability of success—for us, our clients, and their students. The algorithm not only a valued provider of the technology servicesenables us to deploy capital with greater confidence, but it also provides our clients use to implementwith greater assurance of, and manage their critical online education operations, but also a trusted steward of their brands.visibility into, program success.

        We believe that by delivering high qualityhigh-quality degree programs online using our Platform,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 Platform,solutions, clients give their students, who receive the same

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degree 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.

        Full course equivalent enrollmentsOur 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 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 grew from 31,338 duringafter their first semester. In the twelve months ended December 31, 20132016, 62% of our revenue was related to 57,019 duringstudents who had enrolled and completed their first semester prior to the twelve monthsstart 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 representingand 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 compound annual growth ratenon-GAAP measure, was $4.5 million, a loss of 35%. We measure full course equivalent enrollments in our clients' programs by determining, for each$6.6 million and a loss of the courses offered during$14.8 million, respectively. For a particular period, the numberreconciliation of students enrolled in that course multiplied by the percentage of the course completed during that period. Any individual student may be enrolled in more than one course during a period.Adjusted EBITDA to net loss, see "Selected Financial Data—Adjusted EBITDA." From our inception through December 31, 2015,2016, more than 17,50024,000 unique individuals have enrolled as students in our clients' programs, and 84%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 $1.0$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 Platform.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. In addition, our proprietary program-selection algorithm enables us to deploy capital with greater confidence as we can systematically identify universities and programs that we believe have the highest probability of success with our Platform.

        Our client contracts generally have initial terms between 10 and 15 years in length, and, since our inception, all of the clients that have engaged us remain active. In addition, three of our clients who have launched programs and have students enrolled have elected to extend the initial terms of four program agreements with us in advance of those contracts renewing. With these extensions, the initial terms of those programs now extend to between 2027 and 2032.

        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, 2015, 58% 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, 2015, 2014 and 2013, our revenue was $150.2 million, $110.2 million and $83.1 million, respectively. For the years ended December 31, 2015, 2014 and 2013, our net losses were $26.7 million, $29.0 million and $28.0 million, respectively, and our Adjusted EBITDA loss, a non-GAAP measure,




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was $6.6 million, $14.8 million and $21.2 million, respectively. For a reconciliation of Adjusted EBITDA loss to net loss, see "Selected Financial Data—Adjusted EBITDA Loss."

        Adjusted EBITDA loss improvement over the periods presented is due partly to the maturing of programs within our entire program portfolio. Because we incur program marketing and sales expenses prior to generating the revenue related to those expenses, programs will typically show an adjusted EBITDA loss for several years prior to reaching adjusted EBITDA profitability. The following table presents a reconciliation, after allocation of all corporate costs, of full year 2015 net (loss) income margin to adjusted EBITDA (loss) income margin for our client programs, grouped by the length of time since program launch, as of December 31, 2015. For a list of programs and their respective launch dates, see "Business—Clients."

		Less than 2 Years			2 - 3 Years			Greater than 3 Years			Total
Net (loss) income			(184	)%		(12	)%		17	%		(18	)%
Interest expense(1)			0	%		0	%		0	%		0	%
Interest income(1)			0	%		0	%		0	%		0	%
Depreciation and amortization expense(1)			9	%		5	%		4	%		5	%
Stock-based compensation expense(1)			17	%		10	%		6	%		8	%
Adjusted EBITDA (loss) income			(158	)%		4	%		27	%		(4	)%

---

(1)

We consider interest expense, interest income, and the non-program specific portions of depreciation and amortization expense and stock-based compensation expense to be corporate expenses, and therefore we allocate those expenses to the above groupings based on our corporate allocation methodology.

Market Opportunity

        The global higher education industry is undergoing a significant transition. Due primarily to macroeconomic conditions, public higher education institutions in the United States and other countries in recent years have faced decreased governmental financial support and increased volatility in graduate enrollment rates. At the same time, we believe the long-term growth prospects of the global higher education industry are strong, as governments, corporations and individuals around the world are increasingly recognizing the importance of education in a knowledge-based economy.

        In addition, technology, and online learning in particular, is reshaping how institutions deliver and individuals access education. Rising rates of internet penetration, the rapid proliferation of mobile devices and the growth in cloud-based services are broadening the accessibility of educational content and services as well as the potential reach of educational institutions. As a result, colleges and universities are rethinking their operational and business models, determining how to incorporate technology-enabled offerings into their long-term growth strategies and seeking cost-effective ways to expand their academic reach.

Rising Global Demand for Postsecondary Education

        Higher education is a large and well-established market, both in the United States and worldwide. In the United States alone, total revenue for all degree-granting postsecondary institutions was over $555 billion for the 2012-2013 academic year, according to a May 2015 report by the U.S. National Center for Education Statistics. The decade between 2000 and 2010 saw a 37% increase in enrollment in postsecondary degree granting institutions in the United States, from 15.3 million to 21.0 million, according to the U.S. Department of Education, and that number is expected to rise to 24 million by 2022, a further increase of 14%.




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Rapid Growth in Online Education

        The market for online postsecondary education has grown more rapidly than the overall postsecondary market, driven by the increased acceptance of online programs among students, academic institutions and employers, and the greater flexibility and convenience of many online programs.

        We believe that in the past, many nonprofit institutions lacked confidence that online programs could offer sufficient quality to align with their brands, market reputations and academic standards. However, academic research, as well as our own experience, lead us to believe that academic outcomes in online environments are generally equivalent to or better than those in traditional face-to-face environments. We also believe nonprofit institutions have been hesitant to adopt new initiatives given that they lacked the capital, technological expertise and marketing capabilities necessary to build significant online operations. However, as technology has improved, online education has also improved and can now provide the quality educational experiences and student outcomes that leading nonprofit colleges and universities demand. In our clients' programs, for example, students experience high quality educational content (both synchronous and asynchronous), instructor-led classes averaging 12 students per session in a live, intimate and engaging setting, and a rich social networking experience. We believe this leads to an intimate and successful learning environment that rivals on campus program quality, and that nonprofit colleges and universities will increasingly consider online education as a means to cost-effectively extend their mission and reach.

Challenges Faced by Providers of Postsecondary Education

        During this period of transition, providers of higher education are facing several fundamental challenges. First, many institutions recognize that they do not possess the human or technological resources necessary to implement a successful online learning strategy. Scaling degree programs online requires robust technology platforms and support services, significant expertise in digital marketing and recruiting, and the ability to create highly engaging multimedia content. These are resources that colleges and universities have traditionally not possessed.

        Second, many institutions face increasing financial challenges that prevent them from investing more heavily in developing technology-based solutions. In the United States, funding and endowment returns have declined in recent years. At the end of fiscal year 2012, the market value of the endowment funds of colleges and universities in the United States was $425 billion, reflecting an increase of only 1% that year. In addition, in 2012, total state support for higher education declined by 7% to $81.1 billion, and increased only slightly to $81.6 billion in 2013, according to a 2013 annual report from the State Higher Education Executive Officers Association. Given this environment, institutions of higher education are actively looking for ways to increase revenue, such as by raising tuition or increasing enrollment.

        Third, the shift in education towards digital media is altering the competitive landscape but the impact on traditional higher education institutions is yet unclear. The internet is allowing new forms of instructional content and courses to proliferate, including, without limitation, a variety of non-degree programs providing certificates or other credentials in technology, management and other specific skills. If in the future these non-degree alternatives become widely accepted by students and employers as a substitute for full degrees, traditional higher education institutions that fail to adapt may cede market share to nontraditional competitors.

Our Opportunity

        We believe that an increasing number of institutions of higher education globally will implement online learning strategies to extend their reach and remain relevant to the needs of students. We believe we have a significant opportunity to help leading nonprofit colleges and universities implement




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and scale high quality online degree programs, while protecting and delivering on the promise of their brands thereby improving the reputation of online learning generally. We believe that the transition of the higher education market to cloud-based online delivery is just beginning, and that we are uniquely positioned to capture market share by delivering our compelling, value-producing Platform to these institutions. Our Platform provides nonprofit colleges and universities with the ability to capitalize on the disruptive forces of online education while extending the academic reach of their programs. By doing so, our clients are able not only to fulfill their missions but also to develop significant new sources of revenue through meaningful additional enrollments.

Our Approach

        Our Platform provides integrated cloud-based SaaS technology and technology-enabled services that enables leading nonprofit colleges and universities to deliver high quality online degree programs. The SaaS portion of our Platform is comprised of Online Campus and our operations applications. Online Campus supports a wide range of university functions, such as enabling high quality educational content, instructor-led classes averaging 12 students per session in a live, intimate and engaging setting, and a rich social networking experience, all accessible through proprietary web-based and mobile applications. It also serves as a hub for student and faculty interaction, and incorporates a live, or synchronous, learning experience, with pre-produced, or asynchronous, educational content and dynamic social networking.

        Our clients use the operations applications within our Platform to expand, enable and support their online operations, and we integrate these applications with the various student information and other operating systems they use to manage functions within their institutions. These applications provide the content management, admissions application processing, customer relationship management, and other functionality necessary to effectively operate our clients' programs. Our Platform also provides our clients with real-time data and deep analytical insight related to student performance and engagement, student and faculty satisfaction, and enrollment. We believe that the SaaS technology within our Platform is flexible, easy to use, highly scalable and characterized by a high level of availability and security.

        In conjunction with our cloud-based SaaS technology, we provide technology-enabled services that support the complete lifecycle of a higher education program. These include assisting our clients in developing engaging premium quality academic content that we host and deliver on our Online Campus, attracting students, advising prospective students through the admissions application process, providing technical, success coaching and other support, facilitating accessibility to individuals with disabilities, facilitating in-program field placements, and obtaining state regulatory approvals. Our clients retain control of, and responsibility for, accreditation, developing admissions criteria and making admissions decisions, financial aid, selecting and hiring faculty, reviewing and approving the curriculum, and the direct delivery of academic services such as teaching, grading and assessment.

        Using our Platform, our clients can:

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Extend Institutional Mission and Reach.  Our Platform enables clients to 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. Through our Platform, 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.



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Increase Revenue.  Our Platform enables clients to increase their overall enrollments significantly, thereby growing their tuition revenue. Students who enroll in our clients' programs through our Platform generally pay the same tuition as on-campus students.




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Increase Scalability.  Our Platform allows clients to 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 Platform also allows our clients to identify and employ highly qualified teaching faculty without geographic constraint.



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Deliver a Differentiated, Engaging Learning Environment.  The Online Campus portion of our Platform leverages advanced software technology to enable highly interactive learning experiences. 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.



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Utilize Ongoing Data and Analytical Insight.  Our Platform enables clients to 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.



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Increase Speed to Market.  Our Platform enables institutions to 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.

Our Strengths

        We believe the following to be our key strengths:

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Robust, Differentiated SoftwareBundled Technology and Services Platform.with a Focus on Quality.  We believe that our Platform, comprised of robust cloud-based SaaS technology fused with technology-enabled services, is highly differentiated in the marketplace. The cloud-based SaaS technology within our Platform offerssolutions offer extensive features, high configurability, an intuitive user interface and the ability to support synchronous and asynchronous learning at scale. Our technology-enabled services are tightly integrated with our SaaS technology and together they provide a broad set of capabilities that would otherwise require the purchase of multiple, disparate point solutions, and the employment of significant human resources and expertise.



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Proven Track Record Delivering Solutions for Leading Higher Education Institutions.Driving High Quality Student Outcomes.  We believe our track record of successfully implementing our Platform for leading nonprofit colleges and universities, together with the trust we have built with clients, create a significant competitive advantage. Additionally, we regularly conduct Net Promoter Score® surveys with the faculty and 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 from both groups demonstrate that we deliver our Platform in an effective and user-friendly manner.



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Proprietary, Data-Driven Approach to Growth.  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 sets including the operating history of our existing programs, and is based on key market variables, including the existing market size of a degree,




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potential student demographics and client characteristics. We believe our approach to identifying potential growth opportunities enables us to systematically identify degrees at colleges and universities 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.

•

Dedicated Focus on Quality.  We prioritize quality by employing a "white glove" service model.  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 graduation rates and otherthe following key measures of success. It



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Net Promoter Score.    We regularly conduct Net Promoter Score® surveys with the students in each of our client programs. Net Promoter Score is alsoa 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, 2015, 84%2016, 83% of students who have ever entered our clients' programs have either graduated or remain enrolled.



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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%.



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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.



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Data-Driven Approach to Marketing.  We believe that our shared marketing funnel of prospective students across our client programs in the same or similar degree verticals delivers marketing leverage that allows us to 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. In addition, we use data analytics and machine learning to ensure that our marketing efforts are focused on finding prospective students for the right programs at times when conversion is more likely.

Our Growth Strategy

        We intend to continue our industry leadership as a provider of cloud-based SaaS technology and technology-enabled services that enable leading 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:

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Grow Our Client Base.  We intend to expand beyond our existing client base through two focused approaches:



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Add Programs in New Academic Disciplines.Graduate Degree Verticals.  We believe there is a substantial opportunity for us to increase the size of our client base by adding graduateAdd graduate-level programs with new and current clients in new academic disciplinesdegree verticals within our core market of selective colleges and universities.






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Expand Within Existing Academic Disciplines.Add Programs in Current Graduate Degree Verticals.  We are also actively targetingAdd graduate-level programs with new graduate-leveland current clients in academic disciplines wheredegree 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 qualityhigh-quality educations and significantly decreasing student acquisition costs within those disciplines.



•
Increase Enrollment and Add Programs and Program Offerings withat Existing Clients.Clients' Programs.  We intend to continue to increaseIncrease student enrollments within the existing programs we enable for our clients. We will seek to accomplish this by acquiring an increasing number of students for our clients' existing degree programs and by adding additionaldiversifying and innovating our degree offerings within a program, as we have done for programs at clients including the University of Southern California, Georgetown University and Syracuse University. We have also been able to expand our relationships with clients by adding degree programs at the same university, as we have at the University of Southern California, the University of North Carolina at Chapel Hill, Syracuse University and The George Washington University, among others.program.

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.



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Dynamic Social Networking.  Online Campus provides an intuitive social interface that connects students to an extended network of faculty, other students, researchers and administrators who are a part of their university community. We provide users with fully customizable social profiles,




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multimedia postings and dynamic communication and notification tools designed to supplement the live classroom experience and promote meaningful relationships.

OperationsIntegrated Back-End Applications

        Our clients use the operationsintegrated back-end applications within our Platform to expand, enablelaunch, operate and support their online operations,our clients' programs, and integrate those operations withseamlessly communicate between their existing university systems. These applications provide the content management, admissions application processing, customer relationship management,information technology systems and other functionality necessary to effectively operate our clients' programs.information technology systems. In addition, these applications provide clients with real-time data and deep analytical insight related to student performance and engagement, student and faculty satisfaction, and enrollment.

        Our operationsback-end applications include the following:

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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.



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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.



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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 clientsour clients' faculty to seamlessly integrate thetheir work of faculty with that of our course production and content development staff.



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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.



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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.




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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:

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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,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.



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Student Acquisition.  Leveraging our customer relationship management deploymentsdata analytics and other technology within our Platform,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.




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•

Dedicated "White Glove" Service.  High quality student and faculty support is a central pillar of our bundled service offering. 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. Some of the key services we provide include:



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Admissions Application Advising:  Leveraging our customer relationship management deployments and other technology, within our Platform, 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.



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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 Online Campus and other components of our Platformsolutions to facilitate outstanding live instruction.



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Accessibility:  For students with disabilities, we are able to facilitate accessibility across our Platform. 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.



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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, within our Platform, we work closely with faculty to identify and approve sites that meet curriculum requirements. Through December 31, 2015,2016, our placement team has facilitated more than 24,000nearly 32,000 individual in-program field placements in approximately 20,00025,000 organizations around the world.



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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.



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State Authorization ServicesServices..  Each online program we enable for a client offers using our Platform 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.



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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.




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•

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:

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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.



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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.



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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.



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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.



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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.



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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

        TheOur cloud-based SaaS technology within our Platform 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 use




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open-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 theour SaaS technology within our Platform 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.




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        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 Marketing and SalesPipeline

        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. Our model is not dependent on launching a large number of new programs per year, either with new or existing clients. Accordingly,However, we do not maintain a small sales forceteam targeted at new client or program acquisition. Rather, ourOur new clients and programs are largely generated through a direct approach by our senior management to selected colleges and universities. Weuniversities and we use a proprietary program selection algorithm to develop our pipeline of target clients.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 marketdegree vertical size, selectivity, student demographics, competition and other factors to identify combinations of colleges and universities and programsopportunities we believe will have the best prospects of long-term success.

Clients

        The following table sets forthOur clients are leading nonprofit colleges and universities who primarily use our solution to offer full graduate degree programs online. We have grown our client and program base significantly since our inception from one client with one program in 2008 to 17 clients with 38 programs today. A full listing of all 38 announced programs can be found at investor.2u.com. Through our uncompromising focus on quality and deep understanding of the programshigher education environment, we currently enable forbelieve we have become not only a valued provider of the technology and services our clients use to implement and manage their respective programcritical online education operations, but also a trusted steward of their brands. We currently have announced long-term client contracts with 17 universities and colleges to operate a total




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of 38 programs. At the end of 2016, we had launched 24 programs in 17 different degree verticals. In 2017, we plan to launch dates:the following ten programs:

University/School		Program Name		Expected Program Launch Date
University of Southern California—Rossier School of Education		USC Rossier Online		April 2009
University of Southern California—School of Social Work		MSW@USC		October 2010
Georgetown University—School of Nursing and Health Studies		Nursing@Georgetown		March 2011
University of North Carolina at Chapel Hill—Kenan-Flagler Business School		MBA@UNC		July 2011
Washington University in St. Louis—School of Law		@WashULaw		January 2013
University of North Carolina at Chapel Hill—School of Government		MPA@UNC		January 2013
American University—School of International Service		International Relations Online		May 2013
The George Washington University—Milken Institute School of Public Health		MPH@GWHealthInformatics@GW		June 2013January 2017
Simmons College—Syracuse University—Maxwell School of NursingCitizenship and Health SciencesPublic Affairs		Nursing@Simmons(1)ExecutiveMPA@Syracuse		October 2013July 2017
University of California, Berkeley—SchoolSouthern California—Jimmy Iovine and Andre Young Academy for Arts, Technology and the Business of InformationInnovation		DataScience@BerkeleyDesign@USC		January 2014August 2017
The George WashingtonVanderbilt University—Milken Institute SchoolPeabody College of Public HealthEducation and Human Development		MHA@GWPeabody Online		April 2014September 2017
Simmons College—Pepperdine University—School of Social WorkLaw		SocialWork@SimmonsLaw@Pepperdine		July 2014
Syracuse University—Martin J. Whitman School of Management		MBA@Syracuse		January 2015
Southern Methodist University—Interdisciplinary curriculum		DataScience@SMU		January 2015
Northwestern University—The Family Institute		Counseling@Northwestern		March 2015
Syracuse University—S.I. Newhouse School of Public Communications		Communications@Syracuse		July 2015
American University—Kogod School of Business		MBA@American		October 2015

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(1)

Includes RN to BSN and RN to MSN, which launched in 2014.




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        In addition, the following table sets forth the programs we have announced and expect to launch in the future:

University/School		Program Name
Yale University—School of Medicine		Yale PA Online
Simmons College—Interdisciplinary curriculum		Simmons Enterprise ProgramSeptember 2017
New York University—Steinhardt School of Culture, Education, and Human Development		Speech Pathology Program
New York University—Steinhardt School of Culture, Education, and Human Development OT@NYU		School Counseling Program
New York University—Steinhardt School of Culture, Education, and Human Development		Occupational Therapy Program
University of Southern California—School of Social Work, Department of Nursing		Nursing@USCSeptember 2017
New York University—Steinhardt School of Culture, Education, and Human Development		Counseling for Mental Health
The George Washington University—Milken Institute School of Public Health and Wellness		HealthInformatics@GW
Syracuse University—School of Information Studies		iSchool@Syracuse
Syracuse University—College of Engineering and Computer Science		Engineering@SyracuseSeptember 2017
Syracuse University		DataScience@Syracuse		October 2017
University of Dayton—School of Business Administration		MBA@Dayton		October 2017
Pepperdine University—Graduate School of Education and Psychology		Psychology@Pepperdine		October 2017

        Our long-term client contracts do not include termination rights for convenience. Most contracts impose liquidated damages for a client's non-renewal, unless the 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.

        Our contracts also set forth the parties' respective rights to offer competitive programs. For example, some contracts permit us to offer competitive programs with other schools whose potential students are not academically qualified or otherwise interested in the program we offer with our client. Other contracts prohibit us from offering competitive programs with a specific list of schools, whether a certain number as listed on U.S. News & World Report's "best" schools list or a specifically enumerated list of schools negotiated with our client. In addition, any limitation on our ability to offer competitive programs becomes inapplicable if a 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 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.

        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 2014, 43% and 55%, respectively, of our revenue was derived from these two programs. We expect USCthat these programs will continue to account for a large portion of our revenue until our other client programs become more mature and achieve significantly higher enrollment levels.

        We have contractsa 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 of




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Education 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. UnderWe amended our contractscontract with each of 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. With Rossier, we are eligible for an increased percentage of net program proceeds, if the net program proceeds exceed a specified level. Under our amended contract with the School of Social Work, the initial term expires on June 30, 2030. As part of this amendment,which is reduced over time, and we agreed to provide fixed and contingent cash payments over time and a reduction in our revenue share percentage to be phased in over time. In exchange of the foregoing, the school agreed to significantly reduce the exclusivity obligations contained in the original contract.




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        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.

        Our programs with Simmons College accounted for 18% and 16% of our revenue for the yearyears ended December 31, 2016 and 2015, and for less than 10% of our revenue for the year ended December 31, 2014.respectively. Our programs with the University of North Carolina accounted for 12%11% and 13%12% of our revenue for the years ended December 31, 2016 and 2015, and 2014, respectively. Our program with the Georgetown University School of Nursing and Health Studies accounted for less than 10% of our revenue for the year ended December 31, 2015, and for 14% of our revenue for the year ended December 31, 2014.

Competition

        The overall market for technology solutions that enable higher education providers to deliver education online is highly fragmented, rapidly evolving and subject to changing technology, shifting needs of students and educators and frequent introductions of new methods of delivering education online. Several competitors provide solutions that compete with some of the capabilities of our Platform.solutions. Two such competitors, EmbanetCompass and Deltak, 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 Partners, providing some or all of the services we provide, and these companies may choose to pursue some of the institutions we target. In addition, nonprofit colleges and universities may elect to continue using or develop their own online learning solutions in-house.

        We expect that the competitive landscape will expand as the market for online programs at nonprofit institutions matures. We believe the principal competitive factors in our market include the following:

•

brand awareness and reputation;



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ability of online programs to deliver desired student outcomes;



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robustness and evolution of technology offering;



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breadth and depth of service offering;



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ability to invest in program start-up costs;launching and operating programs;



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expertise in program marketing, student acquisition and student retention;



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quality of user experience;



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ease of deployment and use of solutions;



•

level of customization, configurability, integration, security, scalability and reliability of solutions; and



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quality of client base and track record of performance.

        We believe we compete favorably on the basis of these factors. Our ability to remain competitive will depend, to a great extent, upon our ability to consistently deliver high qualityhigh-quality technology solutions,




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meet client needs for content development, and acquire, support and retain students who achieve high qualityhigh-quality outcomes.

Intellectual Property

        We protect our intellectual property by relying on a combination of copyrights, trademarks, trade secrets, 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, and other distinctive logos associated with our brand. We also have two patent




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applications pending in the United States, which are directed to computer-implemented processes that facilitate asynchronous student responses to teacher questions.

        We ensure that we own intellectual property created for us by signing agreements with employees, independent contractors, consultants, companies, and any other third party that creates intellectual property for us that assign any intellectual property rights to us.

        Portions of our Platformsolutions rely upon third-party licensed intellectual property.

        We have also established business procedures designed to maintain the confidentiality of our proprietary information, including the use of confidentiality agreements with employees, independent contractors, consultants and companies with which we conduct business.

        We continue to evaluate developing and expanding our intellectual property rights in patents, trademarks and copyrights, as available through registration in the United States and internationally.

        For important additional information related to our intellectual property position, please review the information set forth in "Risk Factors—Risks Related to Intellectual Property."

Education Laws and Regulations

        The higher education industry is heavily regulated. Institutions of higher education that award degrees and certificates to signify the successful completion of an academic program are subject to regulation from three primary entities: the U.S. Department of Education, or DOE, accrediting agencies and state licensing authorities. Each of these entities promulgates and enforces its own laws, regulations and standards, which we refer to collectively as education laws.

        We contract with postsecondary institutions that are subject to education laws. In addition, we ourselves are required to comply with certain education laws as a result of our role as a service provider to institutions of higher education, either directly or indirectly through our contractual arrangements with clients. Our failure, or that of our clients, to comply with education laws could adversely impact our operations. As a result, we work closely with our clients to maintain compliance with education laws.

Federal Laws and Regulations

        Under the Higher Education Act of 1965, as amended, or the HEA, institutions offering postsecondary education must comply with certain laws and related regulations promulgated by the DOE in order to participate in the Title IV federal student financial assistance programs. All of our clients participate in the Title IV programs.

        The HEA and the regulations promulgated thereunder are frequently revised, repealed or expanded. Congress historically has reauthorized and amended the HEA in regular intervals, approximately every five to seven years. The re-authorization process is currently under way.

        The re-authorization of the HEA could alter the regulatory landscape of the higher education industry, and thereby impact the manner in which we conduct business and serve our clients. In




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addition, the DOE is independently conducting an ongoing series of rulemakings intended to assure the integrity of the Title IV programs. The DOE also frequently issues formal and informal guidance 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.




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        Although we are not considered an institution of higher education and we do not directly participate in Title IV programs, we are required to comply with certain regulations promulgated by the DOE as a result of our role as a service provider to institutions that do participate in Title IV programs. These include, for example, regulations governing student privacy under Family Educational Rights and Privacy Act, or FERPA. The most material obligations stem from new rules and revisions to existing regulations promulgated by the DOE in 2010 as part of the so-called "program integrity" rules.

        While the program integrity rules were targeted at for-profit institutions of higher education, most apply equally to traditional colleges and universities such as our clients, and they apply in particular to institutions contracting with outside vendors to provide services, particularly in connection with distance education. These rules include principally the incentive compensation rule, the misrepresentation rule, the written arrangements rules and state authorization requirements. The more significant program integrity rules applicable to us or our clients are discussed in further detail below.

Incentive Compensation Rule

        The HEA provides that any institution that participates in the Title IV federal student financial assistance programs must agree with the DOE that the institution will not provide any commission, bonus or other incentive payment to any person or entity engaged in any student recruiting or admission activities.

        As part of the program integrity rules, the DOE issued revised regulations regarding incentive compensation effective July 1, 2011. Under the revised regulations, each higher education institution agrees that it will not "provide any commission, bonus, or other incentive payment based in any part, directly or indirectly, upon success in securing enrollments or the award of financial aid, to any person or entity who is engaged in any student recruitment or admission activity, or in making decisions regarding the award of title IV, HEA program funds." Pursuant to this rule, we are prohibited from offering our covered employees, which are those involved with or responsible for recruiting or admissions activities, any bonus or incentive-based compensation based on the successful recruitment, admission or enrollment of students into a postsecondary institution.

        In addition, the revised rule initially raised a question as to whether our company itself, as an entity, is prohibited from entering into tuition revenue-sharing arrangements with clients. On March 17, 2011, the DOE issued official agency guidance, known as a "Dear Colleague Letter," or the DCL, providing guidance on this point. The DCL states that "[t]he Department generally views payment based on the amount of tuition generated as an indirect payment of incentive compensation based on success in recruitment and therefore a prohibited basis upon which to measure the value of the services provided" and that "[t]his is true regardless of the manner in which the entity compensates its employees." But the DCL also provides an important exception to the ban on tuition revenue-sharing arrangements between institutions and third parties. According to the DCL, the DOE does not consider payment based on the amount of tuition generated by an institution to violate the incentive compensation ban if the payment compensates an "unaffiliated third party" that provides a set of "bundled services" that includes recruitment services, such as those we provide. Example 2-B in the DCL is described as a "possible business model" developed "with the statutory mandate in mind." Example 2-B describes the following as a possible business model:

        "A"A third party that is not affiliated with the institution it serves and is not affiliated with any other institution that provides educational services, provides bundled services to the institution including




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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 entity's activities for all the bundled services that are offered and provided collectively, as long as the entity does not make prohibited compensation payments to its employees, and the institution does not pay the entity separately for student recruitment services provided by the entity."




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        The DCL guidance indicates that that an arrangement that complies with Example 2-B will be deemed to be in compliance with the incentive compensation provisions of the HEA and the DOE's regulations. Our business model and contractual arrangements with client institutions closely follow Example 2-B in the DCL. In addition, we assure that none of our "covered employees" is paid any bonus or other incentive compensation in violation of the rule.

        Because the bundled services rule was promulgated in the form of agency guidance issued by the DOE in the form of a DCL and is not codified by statute or regulation, the rule could be altered or removed without prior notice, public comment period or other administrative procedural requirements that accompany formal agency rulemaking. Similarly, a court could invalidate the rule in an action involving our company or our clients, or in action that does not involve us at all. The revision, removal or invalidation of the bundled services rule by Congress, the DOE or a court could require us to change our business model.

Misrepresentation Rule

        The HEA prohibits an institution that participates in the Title IV programs from engaging in any "substantial misrepresentation" regarding three broad subject areas: (1) the nature of the school's education programs, (2) the school's financial charges and (3) the employability of the school's graduates. In 2010, as part of the program integrity rules, the DOE revised its regulations in order to significantly expand the scope of the misrepresentation rule. Although some of the DOE's most expansive amendments to the misrepresentation rule were overturned by the courts in 2012, most of the 2010 amendments survived and remain in effect.

        Under the new rule, "misrepresentation" is defined as any false, erroneous or misleading statement, written, visual or oral. This includes even statements that "have the likelihood or tendency to deceive." Therefore, a statement need not be intentionally deceitful to qualify as a misrepresentation. "Substantial misrepresentation" is defined loosely as a misrepresentation on which the person to whom it was made could reasonably be expected to rely, or has reasonably relied, to that person's detriment.

        The new regulation also expands the scope of the rule to cover statements made by any representative of an institution, including agents, employees and subcontractors, and statements made directly or indirectly to any third party, including state agencies, government officials or the public, and not just to students or prospective students.

        Violations of the misrepresentation rule are subject to various sanctions by the DOE and violations may be used as a basis for legal action by third parties. Similar rules apply under state laws or are incorporated in institutional accreditation standards.standards and the Federal Trade Commission (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 clients, must use a high degree of care to comply with the misrepresentation rulesuch rules and are prohibited by contract from making any false, erroneous or misleading statements about our clients. To avoid an issue under the misrepresentation rule and similar rules, we assure that all marketing materials are approved in advance by our clients before they are used by our employees and we carefully monitor our subcontractors.




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Accreditation Rules and Standards

        Accrediting agencies primarily examine the academic quality of the instructional programs of an educational institution, and a grant of accreditation is typically viewed as confirmation that an institution or an institution's programs meet generally accepted academic standards. Accrediting agencies also review the administrative and financial operations of the institutions they accredit to ensure that each institution has the resources to perform its educational mission. The DOE also relies on accrediting agencies to determine whether institutions' educational programs qualify the institutions to participate in Title IV programs.




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        In addition to institutional accreditation, colleges and universities may require specialized programmatic accreditation for particular educational programs. Many states and professional associations require professional programs to be accredited, and require individuals to have graduated from accredited programs in order to sit for professional license exams. Programmatic accreditation, while not a sufficient basis for institutional Title IV Program certification by the DOE, assists graduates to practice or otherwise secure appropriate employment in their chosen field. Common fields of study subject to programmatic accreditation include teaching and nursing.

        Although we are not an accredited institution and are not required to maintain accreditation, accrediting agencies are responsible for reviewing an accredited institution's third-party contracts with service providers like us and may require an institution to obtain approval from or to notify the accreditor in connection with such arrangements. One purpose of the notification and approval requirements is to verify that the accredited institution remains responsible for providing academic instruction leading to a credential and provides oversight of other activities undertaken by third parties like us that are within the scope of its accreditation. We work closely with our clients to assure that the standards of their respective accreditors are met and are not adversely impacted by us.

        Accrediting agencies are also responsible for assuring that any "written arrangements" to outsource academic instruction meet accrediting standards and related regulations of the DOE. Our operations are generally not subject to such "written arrangements" rules because academic instruction is provided by our client institutions and not by us.

State Laws and Regulations

        Each state has at least one licensing agency responsible for the oversight of educational institutions operating within its jurisdiction. Continued approval by such agencies is necessary for an institution to operate and grant degrees, diplomas or certificates in those states. Moreover, under the HEA, approval by such agencies is necessary to maintain eligibility to participate in Title IV programs. TheState attorneys general are also active in enforcing education laws, and the level of regulatory oversight varies substantially from state to state.

        We and our clients may be subject to regulation in each state in which we or they own facilities, provide distance education or recruit students. State laws establish standards for, among other things, student instruction, qualifications of faculty, location and nature of facilities, recruiting practices and financial policies. The need to comply with applicable state laws and regulations may limit or delay our ability to market programs or offer new degree programs of our clients.

        State regulatory requirements for online education are inconsistent between states, change frequently and, in some instances, are outmoded. 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.

        As part of the program integrity rules, the DOE required, among other things, that an institution offering distance learning or online programs secure the approval of those states which require such




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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;2012 on procedural grounds; however, the DOE is considering issuing newpromulgated similar replacement regulations regarding state authorization. The DOE rulemaking to consider these and other issues is currently inactive, butin December 2016, with an effective date of July 1, 2018. However, it is the policy of DOE to require proof of all necessary state approvals when an institution seeks to renew its authorization to participate in the Title IV programs.




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        We monitor state law developments closely and work closely with our clients to assist them with obtaining any required approvals.

Other Laws

        Our activities on behalf of institutions are also subject to other federal and state laws. These regulations include, but are not limited to, consumer marketing and unfair trade practices laws and regulations, including those promulgated and enforced by the Federal Trade Commission,FTC, as well as federal and state data protection and privacy requirements.

Employees

        As of December 31, 2015,2016, we had 9051,119 full-time employees and 9990 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.

Facilities

        We currently leaseOur headquarters are located in Lanham, Maryland where we occupy approximately 87,000153,000 square feet of space for our corporate headquarters in Landover, Maryland pursuant tounder a lease that expires in 2028. We also currently lease approximately 94,000 square feet in Landover, Maryland, in connection with our former corporate headquarters, which expires in July, 2018. On December 23, 2015,

        In February 2017, we entered intosigned a new lease for new office space in Brooklyn, New York, which we expect to occupy in 2018 after we vacate our Maryland headquarters.current offices in New York City. The 11 year, nine month office building lease is forcovers three floors totaling approximately 250,000 rentable80,000 square feet by the end ofand will expire approximately eleven years and nine months after the lease termcommencement date. We expect that the new space will allow us to accommodate our growth in Lanham, Maryland, and the initial term is expected to commence on December 1, 2016.local area.

        We also currently lease an aggregate of approximately 89,000114,000 square feet of space in New York, California, Colorado, North Carolina, Virginia and Hong Kong. We believe that our current facilities are currently evaluating options forsuitable and adequate to meet our ongoing needs and that, if we require additional space, in New York and Colorado as needed to accommodate our growth, and we believe that we will be able to obtain such spaceadditional facilities on acceptable, 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.




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Available Information

        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 SEC, and all amendments to these filings, free of charge from our website at investor.2u.com as soon as reasonably practicable following our filing of any of these reports with the SEC. You can also obtain copies free of charge by contacting our Investor Relations department at our office address listed above. The public may read and copy any materials filed by 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's references to the URLs for these websites are intended to be inactive textual references only.

Item 1A.    Risk Factors


        In addition to the other information set forth in this Annual Report on Form 10-K, you should carefully consider the factors discussed in the "Special Note Regarding Forward-Looking Statements" in this Annual Report on Form 10-K.

Risks Related to Our Business Model, Our Operations and Our Growth Strategy

We have a limited operating history, which makes it difficult to predict our future financial and operating results, and we may not achieve our expected financial and operating results in the future.

        We were incorporated in 2008 and launched our first client program in 2009. 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.




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We have incurred significant net losses since inception, and we expect our operating expenses to increase significantly in the foreseeable future, which may make it more difficult for us to achieve and maintain profitability.

        We incurred net losses of $20.7 million, $26.7 million $29.0 million and $28.0$29.0 million during the years ended December 31, 2016, 2015 2014 and 2013,2014, 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 programs and increase our program marketing and sales efforts to drive the acquisition of potential students in these programs. 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 able to achieve and maintain profitability, the value of our company and our common stock could decline significantly.




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Our business depends heavily on the adoption by colleges and universities of online delivery of their programs. If we fail to attract new colleges and universities as clients, our revenue growth and profitability may suffer.

        The success of our business depends in large part on our ability to enter into agreements with additional nonprofit colleges and universities for their offering of degree programs online. In particular, to engage new clients, we need to convince nonprofit colleges and universities, many of which have been educating students in generally the same types of on-campus programs for hundreds of years, to invest significant time and resources to adjust the manner in which they teach students for an online degree program. The delivery of degree-granting programs online at leading nonprofit colleges and universities is nascent, and many administrators and faculty members have expressed concern regarding the perceived loss of control over the education process that might result from offering content online, as well as skepticism regarding the ability of colleges and universities to provide high qualityhigh-quality education online that maintains the standards they set for their on-campus programs. It may be difficult to overcome this resistance, and there can be no assurance that online programs of the kind we develop with our clients will ever achieve significant market acceptance.

Our financial performance depends heavily on our ability to acquire qualified potential students for our clients' programs, and our ability to do so may be affected by circumstances beyond our control.

        Building awareness of our clients' programs is critical to our ability to acquire prospective students for our clients' programs and generate revenue. A substantial portion of our expenses is attributable to program marketing and sales efforts dedicated to attracting potential students to our clients' programs. Because we generate revenue based on a portion of the tuition and fees that our clients bill to the students enrolled in their programs, it is critical to our success that we identify prospective students who meet our clients' admissions criteria in a cost-effective manner, and that enrolled students remain active in our clients' programs.




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        The following factors, many of which are largely outside of our control, may prevent us from successfully driving and maintaining student enrollment in our clients' programs in a cost-effective manner or at all:

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Negative perceptions about online learning programs.  As a non-traditional form of education delivery, prospective students will subject our clients' online degree programs to increased scrutiny. Online learning programs that we or our competitors offer may not be successful or operate efficiently, and new entrants to the field of online learning also may not perform well. Such underperformance could create the perception that online programs in general are not an effective way to educate students, whether or not our clients' programs achieve satisfactory performance, which could make it difficult for us to successfully attract prospective students for our clients' programs. Students may be reluctant to enroll in online programs for fear that the learning experience may be substandard, that employers may be averse to hiring students who received their education online, or that organizations granting professional licenses or certifications may be reluctant to grant them based on degrees earned through online education.



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Ineffective program marketing efforts.  We invest substantial resources in developing and implementing data-driven program marketing strategies that focus on identifying the right potential student at the right time. Our program marketing efforts make substantial use of search engine optimization, paid search and custom website development and deployment.deployment and we rely on a small number of internet search engines and marketing partners. If our execution of this strategy proves to be inefficient or unsuccessful in generating a sufficient quantity of high qualityhigh-quality prospective students, or if the costs associated with the execution of this strategy increase, our revenue could be adversely affected.



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Damage to client reputation.  Because we market a specific client degree program to potential students, the reputations of our clients are critical to our ability to enroll students. Many factors affecting our clients' reputations are beyond our control and can change over time, including




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their academic performance and ranking among nonprofit educational institutions offering a particular degree program.



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Lack of interest in the degree offered by the program.  We may encounter difficulties attracting qualified students for degree programs that are not highly desired or that are relatively new within their fields. Macroeconomic conditions beyond our control may diminish interest in employment in a field, and that could contribute to lack of interest in degrees in the disciplines offered by our clients.



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Our lack of control over our clients' admissions decisions.  Even if we are able to identity prospective students for a program, there is no guarantee that students will be admitted to that program. Our clients retain complete discretion in their admissions decisions, and any changes to admissions standards, or inconsistent application of admissions standards, could affect student enrollment and our ability to generate revenue.



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Inability of students to secure funding.  Like traditional college and university students, many of the students in our clients' programs rely heavily on the availability of third-party financing to pay for the costs of their educations, including tuition. This tuition assistance may include federal or private student loans, scholarships and grants, or benefits or reimbursement provided by the students' employers. Any developments that reduce the availability of financial aid for higher education generally, or for our clients' programs in particular, could impair students' abilities to meet their financial obligations, which in turn could result in reduced enrollment and harm our ability to generate revenue.



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General economic conditions.  Student enrollment in our clients' programs may be affected by changes in the U.S. economy and, to a lesser extent, by global economic conditions. An improvement in economic conditions in the United States and, in particular, an improvement in




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the U.S. unemployment rate, may reduce demand among potential students for higher educational services, as they may find adequate employment without additional education. Conversely, a worsening of economic and employment conditions may reduce the willingness of employers to sponsor higher educational opportunities for their employees or discourage existing or potential students from pursuing higher education due to a perception that there are insufficient job opportunities, increased economic uncertainty or other factors, any of which could adversely impact our ability to attract qualified students to our clients' programs. If one or more of these factors reduces student demand for our clients' programs, enrollment could be negatively affected, our costs associated with student acquisition and retention could increase, or both, any of which could materially compromise our ability to grow our revenue or achieve profitability. These developments could also harm our reputation and make it more difficult for us to engage additional clients for new programs, which would negatively impact our ability to expand our business.

Disruption to or failures of theour SaaS technology within our Platform could reduce client and student satisfaction with our clients' programs and could harm our reputation.

        The performance and reliability of theour SaaS technology within our Platform is critical to our operations, reputation and ability to attract new clients, as well as our student acquisition and retention efforts. Our clients rely on this technology to offer their programs online, and students access this technology on a frequent basis as an important part of their educational experience. Accordingly, any errors, defects, disruptions or other performance problems with theour SaaS technology within our Platform could damage our or our clients' reputations, decrease student satisfaction and retention and impact our ability to attract new students and clients. If any of these problems occur, our clients may, following notice and our failure to cure, terminate their agreements with us, or make indemnification or other claims against us. In addition, sustained or recurring disruptions in theour SaaS technology within our Platform could adversely affect our and our clients' compliance with applicable regulations and accrediting body standards.




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Our market may be limited based on the types of nonprofit colleges and universities we target for online degree programs.

        We primarily market our Platformintegrated solution to selective nonprofit colleges and universities, a market that is necessarily limited. Some of the contracts we enter into with our clients contain limitations on our ability to contract with other institutions to offer the same degree program, and maintaining good relations with our clients may mean that we may be less likely to approach certain institutions that they regard as their direct competitors to offer similar programs, 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.

We have agreed to incur, and we may incur in the future, costs to terminate some or all of the exclusivity obligations in somecertain of our client contracts.

        SomeCertain of our client contracts limit our ability to enable competitive programs with other schools. We have determined that enabling some of these contractually prohibited competitive programs is




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desirable within our business strategy. To eliminate some or all of the exclusivity obligations in certain clients' contracts with us, we have agreed with certain clients to do some or all of the following: make fixed and contingent cash payments over time, reduce our revenue share over time, and/or make minimum investments in marketing under certain conditions.

        We may determine in the future that enabling additional contractually prohibited competitive programs is desirable, and we may therefore agree with additional clients to incur costs similar to those above to reduce or eliminate the exclusivity obligations contained in their contracts with us.

        If the competitive programs we ultimately enable fail to reach scale or cannot be scaled at a reasonable cost, or if we need to incur contingent costs in connection with our offering of competitive programs, our ability to grow our business and achieve profitability would be impaired.

Our clients may disagree with our decision to offer competitive programs pursuant tounder 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.




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Attracting new clients for the launch of new programs is complex and time-consuming. If we pursue unsuccessful client opportunities, we may forego more profitable opportunities and our operating results and growth would be harmed.

        The process of identifying specific degree programs at the selective nonprofit colleges and universities, that we believe will be a good fit for our Platform, and then negotiating contracts with potential clients, is complex and time-consuming. Because of the initial reluctance on the part of some nonprofit colleges and universities to embrace a new method of delivering their education services and the complicated approval process within universities, our sales process to attract and engage a new client can be lengthy. Depending on the particular college or university, we may face resistance from university administrators or faculty members during the process.

        The sales cycle for a new degree program often spans one year or longer. In addition, our sales cycle can vary substantially from program to program because of a number of factors, including the client's approval processes or disagreements over the terms of our offerings. We spend substantial effort and management resources on our new program sales efforts without any assurance that our efforts will result in the launch of a new program. If we invest substantial resources pursuing unsuccessful program opportunities, we may forego other more profitable client relationships, which would harm our operating results and growth.




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To launch a new program, we must incur significant expense in technology and content development, as well as program marketing and sales, to identify and attract prospective students, and it may be several years, if ever, before we generate revenue from a new program sufficient to recover our costs.

        To launch a new program, we must integrate components of our Platformsolutions with the various student information and other operating systems our clients use to manage functions within their institutions. In addition, our content development staff must work closely with that client's faculty members to produce engaging online coursework and content, and we must commence student acquisition activities. This process of launching a new program is time-consuming and costly and, under our agreements with our clients, we are primarily responsible for the significant costs of this effort, even before we generate any revenue. Additionally, during the life of our client agreements, we are responsible for the costs associated with continued program marketing, maintaining theour SaaS technology within our Platform and providing non-academic and other support for students enrolled in the program. We invest significant resources in these new programs from the beginning of our relationship with a client, and there is no guarantee that we will ever recoup these costs.

        Because our client agreements provide that we receive a fixed percentage of the tuition that the clients receive from the students enrolled in their programs, we only begin to recover these costs once students are enrolled and our clients begin billing students for tuition and fees. The time that it takes for us to recover our investment in a new program depends on a variety of factors, primarily the level of our student acquisition costs and the rate of growth in student enrollment in the program. We estimate that, on average, it takes approximately four to five years after engagement with a client to fully recover our investment in that client's new program. Because of the lengthy period required to recoup our investment in a program, unexpected developments beyond our control could occur that result in the client ceasing or significantly curtailing a program before we are able to fully recoup our investment. As a result, we may ultimately be unable to recover the full investment that we make in a new program or achieve our expected level of profitability for the program.

If new programs do not scale efficiently and in the time frames we expect, our reputation and our revenue will suffer.

        Our continued growth and profitability depends on our and our clients' ability to successfully scale newly launched programs. As we continue aggressively growing our business, we plan to continue to hire new employees at a rapid pace, particularly in our program marketing and sales team and our




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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, which would adversely impact our ability to generate revenue, and our clients and the students in their programs 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, our clients' and their students' experiences with our Platform may suffer, which could damage our reputation among colleges and universities and their faculty and students.

        In addition, if our clients cannot quickly develop the infrastructure and hire sufficient faculty and administrators to handle growing student enrollments, our clients' and their students' experiences with our Platformsolutions may suffer, which could damage our reputation among colleges and universities and their faculty and students.

        Our ability to effectively manage any significant growth of new programs and increasing student enrollment will depend on a number of factors, including our ability to:

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satisfy existing students in, and attract and enroll new students for, our clients' programs;



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assist our clients in recruiting qualified faculty to support their expanding enrollments;



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assist our clients in developing and producing an increased volume of course content;



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successfully introduce new features and enhancements and maintain a high level of functionality in theour SaaS technology within our Platform;technology; and



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deliver high qualityhigh-quality support to our clients and their faculty and students.




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        Establishing new client programs or expanding existing programs will require us to make investments in management and key staff, increase capital expenditures, incur additional marketing expenses and reallocate other resources. If student enrollment in our clients' programs does not increase, if we are unable to launch new programs in a cost-effective manner or if we are otherwise unable to manage new client programs effectively, our ability to grow our business and achieve profitability would be impaired, and the quality of our solutions and the satisfaction of our clients and their students could suffer.

Our financial performance depends heavily on student retention within our clients' programs, and factors influencing student retention may be out of our control.

        Once a student is enrolled in a program, we and our client must retain the student over the life of the degree program to generate ongoing revenue. Our strategy involves offering high qualityhigh-quality support to students enrolled in our clients' programs to support their retention. If we do not help students quickly resolve any educational, technological or logistical issues they encounter, otherwise provide effective ongoing support to students or deliver the type of high quality,high-quality, engaging educational content that students expect, students may withdraw from the program, which would negatively impact our revenue.

        In addition, student retention could be compromised by the following factors, many of which are largely outside of our control:

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Reduced support from our clients.  Because revenue from a particular program is directly attributable to the level of student enrollment in the program, our ability to grow our revenue from a client relationship depends on the client continuing to offer its online program to students, as well as the growth of enrollment in that program. Although our contracts with clients generally require that the client expand enrollment in their programs to include all qualified applicants, our only recourse if they choose not to do so is termination of the exclusivity limitations on developing programs with other colleges or universities that are included in our agreements with our clients. Despite the agreements we have in place with our clients, our clients could limit enrollment in their programs, cease providing the programs




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altogether or significantly curtail or inhibit our ability to promote their programs, any of which would negatively impact our revenue.



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Lack of support from client faculty members.  It takes a significant time commitment and dedication from our clients' faculty members to work with us to develop course content designed for an online learning environment. Our clients' faculty may be unfamiliar with the development and production process, may not understand the time commitment involved to develop the course content, or may otherwise be resistant to changing the ways in which they present the same content in an on-campus class. Our ability to maintain high student retention will depend in part on our ability to convince our clients' faculty of the value in the time and effort they will spend developing the course program. Lack of support from faculty could cause the quality of our clients' programs to decline, which could contribute to decreased student satisfaction and retention.



•

Student dissatisfaction.  Enrolled students may drop out of our clients' programs based on their individual perceptions of the value they are getting from the program. For example, we may face retention challenges as a result of students' dissatisfaction with the quality of course content and presentation, dissatisfaction with our clients' faculty, changing views of the value of our clients' programs and degrees offered and perceptions of employment prospects following completion of the program. Factors outside our control related to student satisfaction with, and overall perception of, a program may contribute to decreased student retention rates for that program.






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Personal factors.  Factors impacting a student's willingness and ability to stay enrolled in a program include personal factors, such as ability to continue to pay tuition, ability to meet the rigorous demands of the program, and lack of time to continue classes, all of which are generally beyond our control.

        Any of these factors could significantly reduce the revenue that we generate from a program, which would negatively impact our return on investment for the particular program, and could compromise our ability to grow our business and achieve profitability.

We currently have, and for the foreseeable future expect to continue to have, a small number of programs that contribute a meaningful portion of our revenue and thereforegenerate positive earnings and cash flow. Therefore we expect that the loss, or material underperformance, of any one programof these programs could hurt our future financial performance.

        We currentlyOf the programs we operate, 18 programs that have launchedonly a small number contribute a significant portion of our revenue and have contracts to launch an additional 11 programs in the future.generate positive earnings and cash flow. As a result, of this small number of programs, the material underperformance of any one program, including the failure to increase student enrollment in a program, or any decline in the ranking of one of our clients'these programs or other impairment of their reputation, could have a disproportionate effect on our business. Additionally, because we rely on our own reputation for delivering high quality online programs and recommendations from existing clients to attract potential new clients, the loss of any single client program, or the failure of any client to renew its agreement with us upon expiration, could impair our ability to pursue our growth strategy and ultimately to become profitable.

A significant portion of our revenue is currently attributable to programs with the University of Southern California. The loss of, or a decline in enrollment in, either of these programs could significantly reduce our revenue.

        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 2014, 43% and 55%, respectively, of our revenue was derived from these two programs. We expect that USCthese programs will continue to account for a large portion of our revenue until our other client programs become more mature and achieve significantly higher enrollment levels. Any decline in USC's reputation, any increase in USC's tuition, or any changes in USC's policies could adversely affect the number of students that enroll in these two programs. Further, the faculty or administrators of these two schools could become resistant to offering their online programs through our Platform,solutions, making it more difficult for us to attract and retain students. These graduate schools are not required to expand student enrollment in their online programs and, upon the expiration of their contracts, they are not required to continue using us as the




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provider of their online programs. If either of these programs were to materially underperform for any reason or to terminate or not renew their relationships with us, it would significantly reduce our revenue.

The loss, or material underperformance, of any one of our programs could harm our reputation, which could in turn affect our profitability.

        We rely on our reputation for delivering high-quality online programs and recommendations from existing clients to attract potential new clients. Therefore, the loss of any single client program, or the failure of any client to renew its agreement with us upon expiration, could harm our reputation and impair our ability to pursue our growth strategy and ultimately to become profitable.

If our security measures are breached or fail and result in unauthorized disclosure of data, we could lose clients, fail to attract new clients and be exposed to protracted and costly litigation.

        Maintaining security of theour SaaS technology within our Platform is of critical importance for our clients because it stores and transmits proprietary and confidential university and student information, which may include sensitive personally identifiable information that is subject to stringent legal and regulatory obligations. As a technology company, we face an increasing number of threats to theour SaaS technology, within our Platform, including unauthorized activity and access, system viruses, worms, malicious code and organized cyberattacks, any of which could breach our security and disrupt our solutions and our clients' programs. If our security measures are breached or fail as a result of third-party action, employee error, malfeasance or otherwise, we could be subject to liability or our business could be interrupted, potentially over an extended period of time. Any or all of these issues could harm




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our reputation, adversely affect our ability to attract new clients and students, cause existing clients to scale back their programs or elect not to renew their agreements, cause prospective students not to enroll or students to stay enrolled in our clients' programs, or subject us to third-party lawsuits, regulatory fines or other action or liability. Further, any reputational damage resulting from breach of our security measures could create distrust of our company by prospective clients or students. In addition, our insurance coverage may not be adequate to cover losses associated with such events, and in any case, such insurance may not cover all of the types of costs, expenses and losses we could incur to respond to and remediate a security breach. As a result, we may be required to expend significant additional resources to protect against the threat of these disruptions and security breaches or to alleviate problems caused by such disruptions or breaches.

We have grown rapidly and expect to continue to invest in our growth for the foreseeable future. If we fail to manage this growth effectively, the success of our business model will be compromised.

        We have experienced rapid growth in a relatively short period of time, which has placed, and will continue to place, a significant strain on our administrative and operational infrastructure, facilities and other resources. Our ability to manage our operations and growth will require us to continue to expand our program marketing and sales personnel, technology team, finance and administration teams, as well as our facilities and infrastructure. We will also be required to refine our operational, financial and management controls and reporting systems and procedures. If we fail to manage this expansion of our business efficiently, our costs and expenses may increase more than we plan and we may not successfully expand our client base, enhance our Platform,solutions, develop new programs with new and existing clients, attract a sufficient number of qualified students in a cost-effective manner, satisfy the requirements of our existing clients, respond to competitive challenges or otherwise execute our business plan. Although our business has experienced significant growth in the past, we cannot provide any assurance that our revenue will continue to grow at the same rate in the future.




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        Our ability to manage any significant growth of our business effectively will depend on a number of factors, including our ability to:

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effectively recruit, integrate, train and motivate a large number of new employees, including our program marketing and technology teams, while retaining existing employees;



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maintain the beneficial aspects of our corporate culture and effectively execute our business plan;



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continue to improve our operational, financial and management controls;



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protect and further develop our strategic assets, including our intellectual property rights; and



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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 will be able to effectively manage any future growth in an efficient, cost-effective or timely manner, or at all. In particular, any failure to implement systems enhancements and improvements successfully will likely negatively impact our ability to manage our expected growth, ensure uninterrupted operation of key business systems and comply with the rules and regulations that are applicable to public reporting companies. Moreover, if we do not manage the growth of our business and operations effectively, the quality of our solutions could suffer, which could negatively affect our reputation, results of operations and overall business.

We may expand by acquiring or investing in other companies, which may divert our management's attention, result in dilution to our shareholders and consume resources that are necessary to sustain our business.

        We 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. 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 assimilating or integrating the businesses, technologies, products, personnel, or operations of acquired companies, particularly if the key personnel of the acquired company choose not to work for us, the acquired company's technology is not compatible with ours, or we have difficulty retaining the customers of any acquired business due to changes in management or otherwise. Additionally, we may encounter difficulties integrating 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 associated with the integration or the failure to complete 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. Moreover, the anticipated benefits of any acquisition, investment, or business relationship may not be realized or we may be exposed to unknown liabilities, including litigation against the companies we may acquire. For one or more of those transactions, we may:

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issue additional equity securities that would dilute our shareholders;




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use cash that we may need in the future to operate our business;



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incur debt on terms unfavorable to us or that we are unable to repay or that may place burdensome restrictions on our operations;



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incur large charges or substantial liabilities; or



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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 clients 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, Partners, 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 to receive from a client. The competitive landscape may also result in longer and more complex sales cycles with a prospective client or a decrease in our market share among selective nonprofit colleges and universities seeking to offer online degree programs, any of which could negatively affect our revenue and future operating results and our ability to grow our business.

        A number of competitive factors could cause us to lose potential client opportunities or force us to offer our solutions on less favorable economic terms, including

•

competitors may develop service offerings that our potential clients find to be more compelling than ours;



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competitors may adopt more aggressive pricing policies and offer more attractive sales terms, adapt more quickly to new technologies and changes in client and student requirements, and devote greater resources to the acquisition of qualified students than we can; and



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current and potential competitors may establish cooperative relationships among themselves or with third parties to enhance their products and expand their markets, and our industry is likely to see an increasing number of new entrants and increased consolidation. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share.

        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.




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If for-profit postsecondary institutions, which offer online education alternatives different from ours, perform poorly, it could tarnish the reputation of online education as a whole, which could impair our ability to grow our business.

        For-profit postsecondary institutions, many of which provide course offerings predominantly online, are under intense regulatory and other scrutiny, which has led to media attention that has sometimes portrayed that sector in an unflattering light. Some for-profit online school operators have been subject to governmental investigations alleging the misuse of public funds, financial irregularities, and failure to achieve positive outcomes for students, including the inability to obtain employment in their fields.




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These allegations have attracted significant adverse media coverage and have prompted legislative hearings and regulatory responses. These investigations have focused on specific companies and individuals, and even entire industries in the case of recruiting practices by for-profit higher education companies. Even though we do not market our solutions to these institutions, this negative media attention may nevertheless add to skepticism about online higher education generally, including our solutions.

        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, 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 client base and grow our clients' programs, which would make it difficult to continue to grow our business.

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 clients and the significant nature of each new client relationship, our senior management team is heavily involved in the client identification and sales process, and their expertise is critical in navigating the complex approval processes of large nonprofit colleges and universities. We do not maintain key-person insurance on any of our employees, including our senior management team. The loss of the services of any individual on our senior management team, or failure to find a suitable successor, could make it more difficult to successfully operate our business and achieve our business goals.

        Our future success also depends heavily on the retention of our program marketing and sales, technology and content development and support teams to continue to attract and retain qualified students in our clients' programs, thereby generating revenue for us. In particular, our highly-skilled technology and content development employees provide the technical expertise underlying our bundled technology-enabled services that support our clients' programs and the students enrolled in these programs. 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 clients, loss of expertise or know-how and unanticipated recruitment and training costs.

If certain awards under our stock plans are deemed to have not expired in accordance with their terms, we could be liable to certain award holders for substantial amounts.

        Each of our 2008 Stock Incentive Plan and 2014 Equity Incentive Plan provide that vested stock option awards issued under those plans expire upon the occurrence of certain events. For example, each plan provides, among other things, that stock options expire and are no longer exercisable upon




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the earlier to occur of 90 days after a separation of service, or, depending on the specific circumstances of the grantee, 5 or 10 years after the grant date. Award recipients under these plans have failed and may fail in the future to exercise their stock options within the prescribed time frame or may otherwise fail to comply with terms and conditions of the plans or the corresponding award agreements resulting in the expiration of those option awards. Award recipients with expired option awards have disagreed and may disagree in the future with our or our 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




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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.

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 may, however, need to raise additional funds to respond to business challenges or opportunities, accelerate our growth, develop new programs or enhance our Platform.solutions. 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 located outside of the United States and the international residents applying to and enrolling in our clients' programs expose us to international risks.

        Operating in international markets requires significant resources and management attention and subjects us to regulatory, economic and political risks that are different from those in the United States. We have a branch office in Hong Kong for program marketing and student support. Because we have employees in Hong Kong, we are subject to Hong Kong's compensation and benefits regulations, which differ from compensation and benefits regulations in the United States. Further, acquiring international applicants and enrollments for our clients 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.

        One element of our growth strategy is to expand our international operations and establish a worldwide client base. We cannot assure you that our expansion efforts into international markets will be 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 face risks in doing business internationally that could constrain our operations and compromise our growth prospects, including:

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the need to localize and adapt online degree programs or other offerings for specific countries, including translation into foreign languages and ensuring that these programs enable our clients to comply with local education laws and regulations;




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data privacy laws that may require data to be handled in a specific manner;



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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;



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new and different sources of competition, and practices which may favor local competitors;






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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;



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compliance challenges related to the complexity of multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy and data protection, and anti-bribery laws and regulations such as the U.S. Foreign Corrupt Practices Act;



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increased financial accounting and reporting burdens and complexities;



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restrictions on the transfer of funds;



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adverse tax consequences, including the potential for required withholding taxes for our overseas employees;



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unstable regional and economic political conditions; and



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unstable regional and economic political conditions.

        Future agreements with international clients may provide for payments to us to be denominated in local currencies. In such case, fluctuations in the value of the U.S. dollar andcurrency exchange rates or restrictions on foreign currencies could impact our operating results when translated into U.S. dollars, and we may not be able to engage in currency hedging activities to effectively limit the risk of exchange rate fluctuations.

currency.

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, 2015,2016, we had federal net operating loss carryforwards due to prior period losses, which, if not utilized, will begin to expire in 2029. Our gross state net operating loss carryforwards are equal to or less than the federal net operating loss carryforwards and expire over various periods based on individual state tax laws. These net operating loss carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could adversely affect our profitability. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an "ownership change," which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation's ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. Similar rules may apply under state tax laws. We have completed an analysis of the stock ownership changes through September 30, 2015,December 31, 2016, and determined that there has not beena greater than 50% ownership change of one or more of its 5-percent shareholders occurred. Absent a subsequent ownership change, all of our net operating losses subject to the ownership change should be available. Therefore, despite the fact that an ownership change prioroccurred, such change is not expected to that date. However, we have not completed an analysis to determine what, if any, impact any ownership change after September 30, 2015, has had onlimit our ability to utilize ourcarryforward net operating loss carryforwards.losses before expiration. In addition, we may experience ownership changes in the future as a result of subsequent shifts in our stock ownership. If we determine that ana future ownership change has occurredoccurs and limits our ability to use our historical net operating loss carryforwards, is materially limited, it would harm our future operatingfinancial statement results by increasing our future tax obligations.

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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' compensation, unemployment benefits, labor, employment and tort laws, including for prior periods, as well as potential liability for

        We use a number of key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. In addition to adjusted EBITDA loss, which we discuss below, we discuss revenue and the components of operating loss in the section below entitled "—Components of Operating Results." Additionally, we utilize other key metrics to evaluate the successResults and Results of our growth strategy, including measures we refer to as Platform revenue retention rate and full course equivalent enrollments in our clients' programs.Operations

Platform Revenue Retention RateFull-Year 2016 Highlights

        We measure our Platform revenue retention rate for a particular period by first identifying the group of programs that our clients launched 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 the same 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.

Full Course Equivalent Enrollments in Our Clients' Programs

        We 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 depending on the

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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 programs in academic disciplines for which we have existing programs. Over time, this strategy may reduce our average revenue per full course equivalent if these new programs in existing academic disciplines have lower program tuitions than that of the first program. However, we believe this approach will enable us to leverage our program marketing investments across these multiple program 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.

Adjusted EBITDA Loss

        Adjusted EBITDA loss 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 loss 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 loss can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that adjusted EBITDA loss 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 loss 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 loss may not be comparable to similarly titled measures of other companies because other companies may not calculate adjusted EBITDA loss in the same manner as we do. We prepare adjusted EBITDA loss 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 loss has limitation 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,Revenue was $205.9 million, an increase of 37.1% from $150.2 million for the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA loss does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;year ended December 31, 2015.



•

adjusted EBITDANet loss does not reflect changes in,was $(20.7) million, or cash requirements$(0.44) per share, compared to $(26.7) million, or $(0.63) per share for our working capital needs;the year ended December 31, 2015.



•

Adjusted EBITDA was $4.5 million, compared to an adjusted EBITDA loss does not reflectof $(6.6) million for the potentially dilutive impact of equity-based compensation;



•

adjusted EBITDA loss 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 loss differently, which reduces its usefulness as a comparative measure.year ended December 31, 2015.

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        Because of these and other limitations, you should consider adjusted EBITDA loss 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 adjusted EBITDA loss to net loss for each of the periods indicated:

Components of Operating Results

Revenue

        Substantially all of our revenue consists of a contractually specified percentage of the amounts our clients bill to their students for tuition and fees, less credit card fees and other specified charges we have agreed to exclude in certain of our client contracts, which we refer to as net program proceeds. Most of our contracts have 10 to 15 year initial terms. We recognize revenue ratably over the service period, which we define as the first through the last day of classes for each academic 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 2014, 81 and 130 students, respectively, remained eligible to receive these rebates. These rebates and refunds offset the net program proceeds that we recognize as revenue.

        The following table sets forth the components of our revenue for the periods indicated.

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In addition to providing access to theour SaaS technology, within our Platform, 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 term of the service period.

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        We 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, 2016 was $205.9 million, an increase of $55.7 million, or 37.1%, from $150.2 million 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, were attributable to client programs launched during the 12 months ended December 31, 2016.

        Revenue for the year ended December 31, 2015 was $150.2 million, an increase of $40.0 million, or 36.2%, from $110.2 million for the year ended December 31, 2014. The increase was primarily attributable to a 39.0% increase in period-over-period full course equivalent enrollments in our client 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.

Costs and Expenses

        Costs 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.    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 theour SaaS technology within our Platform for our clients and their students.

        Technology        Servicing and content development.    Technology and content development expense consistssupport costs for the year ended December 31, 2016 were $41.0 million, an increase of $9.0 million, or 27.9%, from $32.0 million for the year ended December 31, 2015. This increase was due primarily of compensation and outsourced services costs related to the ongoing improvement and maintenance of the SaaS technology within our Platform, 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 depreciation and amortization expense related to internally developed software and content, as well as hosting and other costs associated with maintaining the SaaS technology within our Platforma $5.4 million increase in a cloud environment.

        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 ascash 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.

        General and administrative.    General and administrative expense consists primarily ofa $1.0 million increase in non-cash stock-based compensation costs for employeesand a $0.5 million increase in travel and related expenses as we increased our executive, administrative, financeheadcount in this area by 26% to serve a growing number of students 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.faculty in

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Other Income (Expense)

        Other income (expense) consists of interest income, interest expenseexisting and other expenses. Interest income is derived from interest received on our cashnew client programs and cash equivalents. Interest expense consists primarily of the amortization of deferred financinga $0.9 million increase in costs associated with our linestudent immersion courses and on-campus initiatives. Additionally, software licensing costs increased by $0.7 million, while other servicing and support costs increased $0.5 million. As a percentage of creditrevenue, servicing and convertible notes prior to their conversion and changes in our preferred stock warrant liability as a result of changes in the fair value of such warrants (through April 2, 2014).

        The fair value of our preferred 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 will be 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.

Income Tax (Expense) Benefit

        Income tax expense consists of U.S. federal, state and foreign income taxes. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses. We incurred immaterial state and foreign income tax liabilities for the years ended December 31, 2015, 2014 and 2013.

Results of Operations

Comparison of Years Ended December 31, 2015 and 2014

        The following table sets forth selected consolidated statement of operations data for each of the periods indicated.

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        Revenue.    Revenuesupport costs decreased from 21.4% for the year ended December 31, 2015 was $150.2 million, an increase of $40.0 million, or 36.2%, from $110.2 millionto 19.9% for the year ended December 31, 2014. Of the increase, the foursame period of 2016, as client programs that launched priorcontinued to January 1, 2013 resulted in higher period-over-period revenues of $5.1 million, while $16.9 million was primarily attributable to increases in period-over-period full course equivalent enrollments in the client programs that launched in 2013. Increases in full course equivalent enrollments in the programs that launched in 2014 contributed $10.6 million in additional revenues, while the client programs that launched in 2015 generated $8.1 million on a year-to-date basis. In addition, our rebate liability decreased less in 2015 than it had in the prior year, which resulted in a corresponding decrease in our year-over-year revenue of $0.7 million. The decrease in the rebate liability was the result of certain students not certifying their continuing eligibility for the rebate program.mature and greater operational efficiencies were achieved.

        Servicing and support.        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 area by 25% to serve a growing number of students and faculty in existing and new client programs. Additionally, costs for student support services increased by $0.6 million, software licensing costs increased by $0.3 million and costs for facilitating in-program field placements increased by $0.2 million. As a percentage of revenue, servicing and support costs 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.

        Technology and 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, 2016 were $33.3 million, an increase of $6.1 million, or 22.3%, from $27.2 million for the year ended December 31, 2015. This increase was due primarily to a $0.8 million increase in cash compensation 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 in this area by 31% to support the launch of new client programs and scaling of existing programs. Additionally, the increase in the number of courses that have been developed for our client programs resulted in $1.8 million of higher amortization expense associated with our capitalized technology and content development costs and higher 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 development costs for the year ended December 31, 2015 were $27.2 million, an increase of $4.6 million, or 20.3%, from $22.6 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, costs related to our cloud-based server usage increased by $0.4 million to support a greater number of our clients' programs. As a percentage of revenue, technology and content 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.

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        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.

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Additionally, we recorded a $0.8 million charge related to the execution of a

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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 of the amortization of deferred financing costs associated with our line of credit and convertible notes prior to their conversion and changes in our preferred stock warrant liability as a result of changes in the fair value of such warrants (through April 2, 2014).    Other

        The fair value of our preferred 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 contributing to the year-over-year increase in other 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 expense 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).

ComparisonIncome Tax (Expense) Benefit

        Income tax expense consists of Years EndedU.S. federal, state and foreign income taxes. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses. We incurred immaterial state and foreign income tax liabilities for the years ended December 31, 20142016, 2015 and 20132014.




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Consolidated Statements of Operations as a Percentage of Revenue

        The following table sets forth selected consolidated statementstatements of operations data as a percentage of revenue for each of the periods indicated.

        Revenue.    Revenue for the year ended December 31, 2014 was $110.2 million, an increase of $27.1 million, or 32.6%, from $83.1 million for the year ended December 31, 2013. Of the increase, $14.3 million was primarily attributable to increases period-over-period full course equivalent enrollments in the client programs that launched in 2013. Increases in full course equivalent enrollments in the four client programs launched prior to January 1, 2013 resulted in higher period-over-period revenues of $9.4 million, while programs that launched in 2014 contributed $2.8 million. In addition, our rebate liability decreased, which resulted in a corresponding increase in our revenue by $0.6 million. The decrease in the rebate liability was the result of some students not certifying their continuing eligibility for the rebate program and fewer of the original cohort of students still being enrolled in the applicable client program and, therefore, a reduction in the rate of rebate liability accrual during the period.

Critical Accounting Policies and Significant Judgments and Estimates

        This management's discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP.

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The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reported period. In accordance with U.S. GAAP, we base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Actual results may differ from these estimates if conditions differ from our assumptions.

        While our significant accounting policies are more fully described in Note 2 in the "Notes to Consolidated Financial Statements" included in Part II, Item 8 of this Annual Report on Form 10-K, we believe the following accounting policies are critical to the process of making significant judgments and estimates in preparation of our consolidated financial statements.

Revenue Recognition and Deferred Revenue

        We recognize revenue when all of the following conditions are met: (i) persuasive evidence of an arrangement exists, (ii) rendering of services is complete, (iii) fees are fixed or determinable and (iv) collection of fees is reasonably assured.

        We primarily derive our revenue from long-term contracts that typically range from 10 to 15 years in length. Under these contracts, we enable access to our cloud-based technology Platform and provide technology-enabled marketing, content development and supporting services to our clients and their faculty and students. We are entitled to a contractually specified percentage of net program proceeds from our clients. These net program proceeds represent gross proceeds billed by our clients to students, less credit card fees and other specified charges we have agreed to exclude in certain of our client contracts. A refund allowance is established for our share of tuition and fees ultimately uncollected by

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our clients. We also offered rebates to a group of students who enrolled in a specific client program between 2009 and 2011, which we 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 recognized ratably over the service period, which we define as the first through the last day of classes for each academic term in a client's program. We invoice our clients based 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) a cloud-based technology Platform 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 overthrough our Platformthrough solutions and for students of the online courses delivered over its Platform.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 arrangement over the term of the service period.

        Advance payments are recorded as deferred revenue until the services are delivered or obligations are met, at which time revenue is recognized. Deferred revenue as of a particular balance sheet date

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represents the excess of amounts received as compared to amounts recognized in revenue in the consolidated statements of operations as of the end of the reporting period, and such amounts are reflected as a current liability on our consolidated balance sheets.

Accounts Receivable and Allowance for Doubtful Accounts

        Our accounts receivable are stated at net realizable value. We extend a minimal amount of uncollateralized credit to our clients. We utilize the allowance method to provide for doubtful accounts based on management's evaluation of the collectability of the amounts due. Our 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 our estimates. As of December 31, 20152016 and 2014,2015, we determined that no significant allowances for doubtful accounts were necessary.

Internally DevelopedInternally-Developed Software Costs

        We capitalize certain costs associated with internally-developed 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 our and the university's networks and systems, and the testing of the software. Capitalization of costs requires judgment in determining when a project has reached the application development stage and the period

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over which we expect to benefit from the use of that software. Once the software is placed in service, these costs are depreciated on a straight-line method over the estimated useful life of the software, which is generally three years.

Capitalized Content Development Costs

        We work with each of our clients' faculty members to develop and maintain educational content that is delivered to their students through our cloud-based technology Platform.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 courses for each degree. We therefore capitalize our development costs on a course-by-course basis. As students must matriculate into a client program in order to take a course, revenues and identifiable cash flows are also measured at the client program level.

        We develop 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. We are then responsible for, and incur all of the expenses related to, the conversion of the materials provided by each client into a format suitable for delivery through our cloud-based technology Platform.

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        The content development costs that qualify for capitalization are third-party direct costs, such as videography, editing and other services associated with creating digital content. Additionally, we capitalize internal payroll and payroll-related costs incurred to create and produce videos and other digital content utilized in the clients' programs for delivery viathrough our Platform.solutions. Capitalization ends when content has been fully developed by both us and the client, at which time amortization of the capitalized content development costs begin. The capitalized costs are recorded on a course-by-course basis and included in capitalized content costs on the consolidated balance sheets. These costs are amortized using the straight-line method over the estimated useful life of the respective capitalized content program, which is generally five years. The estimated useful life corresponds with the planned curriculum refresh rate. This refresh rate is consistent with expected curriculum refresh rates as cited by program faculty members for similar on-campus programs. It is reasonably possible that developed content could be refreshed before the estimated useful lives are complete.

Stock-Based Compensation

        We have issued three types of stock-based awards under our stock plans: stock options, restricted stock units and stock awards. Stock option awards granted to employees, directors and independent contractors are measured at fair value at each grant date. We consider what we believe to be comparable publicly traded companies, discounted free cash flows, 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 period of the award, adjusted for estimated forfeitures. Stock options subject to service-based vesting generally vest at various times from the date of the grant, with most stock options vesting in tranches, generally over a period of four years. Restricted stock units subject to service-based vesting generally vest 25% on each anniversary of the grant date over four years.

        SomeTable of the stock options granted during the year ended December 31, 2012 were subject to both performance and service-based vesting conditions. We recognize compensation expense using an accelerated recognition method for awards subject to performance-based vesting conditions when it is probable that the performance condition will be achieved.Contents

        For the years ended December 31, 2016, 2015 2014 and 2013,2014, we recorded stock-based compensation expense of $15.8 million, $12.5 million $7.5 million and $2.4$7.5 million, respectively. Information about the assumptions used in the calculation of stock-based compensation expense is set forth in Note 9 in the "Notes to Consolidated Financial Statements" included in Part II, Item 8 of this Annual Report on Form 10-K.

        As of December 31, 2015,2016, unrecognized compensation expense related to unvested options totaled $11.6 million and will be recognized over a weighted-average period of approximately 2.1 years.

        As of December 31, 2015,2016, unrecognized compensation expense related to unvested restricted stock units was $14.8$19.2 million and will be recognized over a weighted-average period of approximately 2.62.4 years.

Income TaxesTax (Expense) Benefit

        Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that are included in the financial statements. Under this method, the deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of the assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on the deferred tax assets and liabilities is recognized in earnings in the period when the new rate is enacted. Deferred tax assets are subject to periodic recoverability assessments. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. We consider all positive and negative evidence

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relating to the realization of the deferred tax assets in assessing the need for a valuation allowance. We currently maintain a full valuation allowance against our deferred tax assets.

        We record a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We account for uncertainty in income taxes using a two-step approach for evaluating tax positions. Step one, recognition, occurs when we conclude that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination. Step two, measurement, determines the amount of benefit that is more likely than not to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. De-recognition of a tax position that was previously recognized would occur if we subsequently determine that a tax position no longer meets the more likely than not threshold of being sustained. We recognize interest and penalties, if any, related to unrecognized tax benefits as income tax expense in our consolidated statements of operations.

Key Business and Financial Performance Metrics

        We use a number of key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. In addition to adjusted EBITDA, which we discuss below, 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 Rate

        We 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 the

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same 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.