2U, Inc.
2U, Inc. (Form: 10-Q, Received: 05/04/2017 16:19:05)

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2017

 

or

 

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

 

For the transition period from                      to

 

Commission File Number: 001-36376

 

2U, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

26-2335939

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

7900 Harkins Road,
Lanham, MD

 

20706

(Address of principal executive offices)

 

(Zip Code)

 

(301) 892-4350

(Registrant’s telephone number, including area code)

 

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.  x  Yes  o  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x  Yes  o  No

 

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

 

Large accelerated filer   x

 

Accelerated filer   o

 

 

 

Non-accelerated filer   o

 

Smaller reporting company   o

 

 

 

 

 

Emerging growth company  o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

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

 

As of April 28, 2017, there were 47,542,527 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements

3

 

 

 

Condensed Consolidated Balance Sheets (unaudited) as of March 31, 2017 and December 31, 2016

3

 

 

Condensed Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2017 and 2016

4

 

 

Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited) for the three months ended March 31, 2017

5

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2017 and 2016

6

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

 

 

 

Item 4.

Controls and Procedures

23

 

 

 

PART II. OTHER INFORMATION

23

 

 

 

Item 1.

Legal Proceedings

23

 

 

 

Item 1A.

Risk Factors

23

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23

 

 

 

Item 3.

Defaults Upon Senior Securities

23

 

 

 

Item 4.

Mine Safety Disclosures

23

 

 

 

Item 5.

Other Information

24

 

 

 

Item 6.

Exhibits

24

 

 

 

Signatures

 

25

 

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Table of Contents

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, 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:

 

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

 

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

 

·                   the potential benefits of our cloud-based software-as-a-service (“SaaS”) technology and technology-enabled services to clients and students;

 

·                   anticipated launch dates of new client programs;

 

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

 

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

 

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

 

·                   our ability to continue to acquire prospective students for our 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 our Annual Report on Form 10-K for the year ended December 31, 2016 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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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Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.        Financial Statements

 

2U, Inc.

Condensed Consolidated Balance Sheets

(unaudited, in thousands, except share and per share amounts)

 

 

 

March 31,
2017

 

December 31,
2016

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

142,889

 

$

168,730

 

Accounts receivable, net

 

28,672

 

7,860

 

Advances to clients

 

296

 

567

 

Prepaid expenses and other assets

 

8,855

 

7,541

 

Total current assets

 

180,712

 

184,698

 

Property and equipment, net

 

29,659

 

15,596

 

Capitalized technology and content development costs, net

 

34,263

 

31,867

 

Advances to clients, non-current

 

2,100

 

2,100

 

Prepaid expenses, non-current

 

10,843

 

7,052

 

Other non-current assets

 

3,103

 

3,007

 

Total assets

 

$

260,680

 

$

244,320

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

10,829

 

$

3,729

 

Accrued compensation and related benefits

 

8,823

 

16,491

 

Accrued expenses and other liabilities

 

19,468

 

17,712

 

Deferred revenue

 

11,719

 

3,137

 

Total current liabilities

 

50,839

 

41,069

 

Non-current lease-related liabilities

 

13,792

 

7,620

 

Other non-current liabilities

 

305

 

394

 

Total liabilities

 

64,936

 

49,083

 

Commitments and contingencies (Note 4)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000,000 shares authorized, 0 shares issued and outstanding as of March 31, 2017 and December 31, 2016

 

 

 

Common stock, $0.001 par value, 200,000,000 shares authorized, 47,346,546 shares issued and outstanding as of March 31, 2017; 47,151,635 shares issued and outstanding as of December 31, 2016

 

47

 

47

 

Additional paid-in capital

 

375,549

 

371,455

 

Accumulated deficit

 

(179,852

)

(176,265

)

Total stockholders’ equity

 

195,744

 

195,237

 

Total liabilities and stockholders’ equity

 

$

260,680

 

$

244,320

 

 

See accompanying notes to condensed consolidated financial statements.

 

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2U, Inc.

Condensed Consolidated Statements of Operations

(unaudited, in thousands, except share and per share amounts)

 

 

 

Three Months Ended
March 31,

 

 

 

2017

 

2016

 

Revenue

 

$

64,829

 

$

47,444

 

Costs and expenses:

 

 

 

 

 

Servicing and support

 

10,925

 

9,512

 

Technology and content development

 

9,205

 

7,275

 

Program marketing and sales

 

34,670

 

23,656

 

General and administrative

 

13,664

 

10,447

 

Total costs and expenses

 

68,464

 

50,890

 

Loss from operations

 

(3,635

)

(3,446

)

Other income (expense):

 

 

 

 

 

Interest expense

 

 

(26

)

Interest income

 

196

 

92

 

Total other income (expense)

 

196

 

66

 

Loss before income taxes

 

(3,439

)

(3,380

)

Income tax expense

 

 

 

Net loss

 

$

(3,439

)

$

(3,380

)

Net loss per share, basic and diluted

 

$

(0.07

)

$

(0.07

)

Weighted-average shares of common stock outstanding, basic and diluted

 

47,237,341

 

45,953,082

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

 

2U, Inc.

Condensed Consolidated Statement of Changes in Stockholders’ Equity

(unaudited, in thousands, except share amounts)

 

 

 

 

 

Additional

 

 

 

Total

 

 

 

Common Stock

 

Paid-In

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Equity

 

Balance, December 31, 2016

 

47,151,635

 

$

47

 

$

371,455

 

$

(176,265

)

$

195,237

 

Cumulative-effect of accounting change (Note 2)

 

 

 

148

 

(148

)

 

Balance, December 31, 2016, adjusted

 

47,151,635

 

47

 

371,603

 

(176,413

)

195,237

 

Exercise of stock options

 

55,337

 

 

518

 

 

518

 

Issuance of common stock in connection with settlement of restricted stock units, net of withholdings

 

139,574

 

 

(467

)

 

(467

)

Stock-based compensation expense

 

 

 

3,895

 

 

3,895

 

Net loss

 

 

 

 

(3,439

)

(3,439

)

Balance, March 31, 2017

 

47,346,546

 

$

47

 

$

375,549

 

$

(179,852

)

$

195,744

 

 

See accompanying notes to condensed consolidated financial statements.

 

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2U, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited, in thousands)

 

 

 

Three Months Ended
March 31,

 

 

 

2017

 

2016

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(3,439

)

$

(3,380

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

3,648

 

2,149

 

Stock-based compensation expense

 

3,895

 

3,544

 

Changes in operating assets and liabilities:

 

 

 

 

 

Increase in accounts receivable, net

 

(20,812

)

(287

)

Decrease in advances to clients

 

271

 

575

 

Increase in prepaid expenses and other current assets

 

(816

)

(1,397

)

Increase in accounts payable

 

7,100

 

1,806

 

Decrease in accrued compensation and related benefits

 

(7,668

)

(6,459

)

Increase in accrued expenses and other liabilities

 

918

 

2,299

 

Increase in deferred revenue

 

8,582

 

7,373

 

Increase in payments to clients

 

(4,514

)

(309

)

Decrease in other assets and other liabilities, net

 

1,236

 

364

 

Net cash (used in) provided by operating activities

 

(11,599

)

6,278

 

Cash flows from investing activities

 

 

 

 

 

Purchases of property and equipment

 

(9,384

)

(345

)

Capitalized technology and content development cost expenditures

 

(4,909

)

(3,554

)

Other

 

 

(68

)

Net cash used in investing activities

 

(14,293

)

(3,967

)

Cash flows from financing activities

 

 

 

 

 

Proceeds from exercise of stock options

 

518

 

1,021

 

Tax withholding payments associated with settlement of restricted stock units

 

(467

)

(182

)

Other

 

 

(169

)

Net cash provided by financing activities

 

51

 

670

 

Net (decrease) increase in cash and cash equivalents

 

(25,841

)

2,981

 

Cash and cash equivalents, beginning of period

 

168,730

 

183,729

 

Cash and cash equivalents, end of period

 

$

142,889

 

$

186,710

 

 

See accompanying notes to condensed consolidated financial statements.

 

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2U, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1.              Description of the Business

 

2U, Inc. (the “Company”) was incorporated as 2Tor Inc. in the State of Delaware in April 2008 and changed its name to 2U, Inc. on October 11, 2012. Under long-term agreements, the Company provides an integrated solution comprised of cloud-based software-as-a-service (“SaaS”), fused with technology-enabled services (together, the “Platform”), that allows leading colleges and universities to deliver high-quality digital degree programs, extending the universities’ reach and distinguishing their brands. The Company’s SaaS technology consists of (i) a comprehensive learning environment (“Online Campus”), which acts as the hub for all student and faculty academic and social interaction, and (ii) a comprehensive suite of integrated applications, which the Company uses to launch, operate and support the Company’s clients’ programs. The Company also provides a suite of technology-enabled services optimized with data analysis and machine learning techniques that support the complete lifecycle of a higher education program, including attracting students, advising prospective students through the admissions application process, providing technical, success coaching and other support, facilitating accessibility to individuals with disabilities, and facilitating in-program field placements.

 

2.              Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and include the assets, liabilities, results of operations and cash flows of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Reclassifications

 

Certain prior period amounts in the condensed consolidated balance sheets and condensed consolidated statements of cash flows have been reclassified to conform to the current period’s presentation.

 

Unaudited Condensed Consolidated Financial Information

 

The accompanying unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The Company has condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP in the accompanying unaudited condensed consolidated financial statements. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of financial position, the results of operations, changes in stockholders’ equity and cash flows, and the disclosures made herein are adequate to prevent the information presented from being misleading. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results for the full year ending December 31, 2017 or the results for any future periods. These unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2016, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 24, 2017.

 

Use of Estimates

 

The preparation of financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. On an ongoing basis, the Company evaluates its estimates, including those related to the useful lives of long-lived assets, fair value measurements and income taxes, among others. The Company bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates. The Company evaluates its estimates and assumptions on an ongoing basis.

 

Concentration of Credit Risk

 

Financial instruments that subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. All of the Company’s cash is held at financial institutions that management believes to be of high credit quality. The Company’s bank accounts exceed federally insured limits at times. The Company has not experienced any losses on cash to date. To manage accounts receivable risk, the Company maintains an allowance for doubtful accounts, if needed.

 

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During the three months ended March 31, 2017, four clients each accounted for 10% or more of the Company’s revenue, as follows: $19.7 million, $11.7 million, $6.8 million and $6.5 million, which equals 30%, 18%, 11% and 10% of total revenue, respectively.

 

During the three months ended March 31, 2016, three clients each accounted for 10% or more of the Company’s revenue, as follows: $17.9 million, $7.8 million and $5.1 million, which equals 38%, 16% and 11% of total revenue, respectively.

 

As of March 31, 2017, two clients each accounted for 10% or more of the Company’s accounts receivable balance, as follows: $19.4 million and $5.8 million, which equals 68% and 20% of total accounts receivable, respectively. As of December 31, 2016, two clients each accounted for 10% or more of the Company’s accounts receivable balance, as follows: $5.8 million and $1.4 million, which equals 74% and 17% of total accounts receivable, respectively.

 

Long-Lived Assets

 

Property and Equipment

 

Property and equipment is stated at cost less accumulated depreciation and amortization. Expenditures for major additions, construction and improvements are capitalized. Depreciation and amortization is expensed using the straight-line method over the estimated useful lives of the related assets, which range from three to five years for computer hardware and five to seven years for furniture and office equipment. Leasehold improvements are depreciated on a straight-line basis over the lesser of the remaining term of the leased facility or the estimated useful life of the improvement, which generally ranges from four to 11 years. Useful lives of significant assets are periodically reviewed and adjusted prospectively to reflect the Company’s current estimates of the respective assets’ expected utility. Repair and maintenance costs are expensed as incurred.

 

Capitalized Technology and Content Development Costs

 

The Company capitalizes certain costs related to internal-use software, primarily consisting of direct labor associated with creating the software. Software development projects generally include three stages: the preliminary project stage (all costs are expensed as incurred), the application development stage (certain costs are capitalized and certain costs are expensed as incurred) and the post-implementation/operation stage (all costs are expensed as incurred). Costs capitalized in the application development stage include costs of designing the application, coding, integrating the Company’s and the university’s networks and systems, and the testing of the software. Capitalization of costs requires judgment in determining when a project has reached the application development stage and the period over which the Company expects to benefit from the use of that software. Once the software is placed in service, these costs are amortized on the straight-line method over the estimated useful life of the software, which is generally three years.

 

The Company works with each client’s faculty members to develop and maintain educational content that is delivered to their students through Online Campus. The online content developed jointly by the Company and its clients consists of subjects chosen and taught by clients’ faculty members and incorporates references and examples designed to remain relevant over extended periods of time. Online delivery of the content, combined with live, face-to-face instruction, provides the Company with rapid user feedback that it uses to make ongoing corrections, modifications and improvements to the course content. The Company’s clients retain all intellectual property rights to the developed content, although the Company retains the rights to the content packaging and delivery mechanisms.

 

Much of the Company’s new content development uses proven delivery platforms and is therefore primarily subject-specific in nature. As a result, a significant portion of content development costs qualify for capitalization due to the focus of the Company’s development efforts on the unique subject matter of the content. Similar to on-campus programs offered by the Company’s clients, the digital degree programs enabled by the Company offer numerous courses for each degree. The Company therefore capitalizes its development costs on a course-by-course basis.

 

The Company develops content on a course-by-course basis in conjunction with the faculty for each client program. The clients and their faculty generally provide course outlines in the form of the curriculum, required textbooks, case studies and other reading materials, as well as presentations that are typically used in the on-campus setting. The Company is then responsible for, and incurs all of the expenses related to, the conversion of the materials provided by each client into a format suitable for delivery through Online Campus.

 

The content development costs that qualify for capitalization are third-party direct costs, such as videography, editing and other services associated with creating digital content. Additionally, the Company capitalizes internal payroll and payroll-related costs incurred to create and produce videos and other digital content utilized in the clients’ programs for delivery via Online Campus. Capitalization ends when content has been fully developed by both the Company and the client, at which time amortization of the capitalized content development costs begins. The capitalized costs are recorded on a course-by-course basis and included in capitalized content costs on the condensed 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 Company’s planned curriculum refresh rate.

 

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Table of Contents

 

Evaluation of Long-Lived Assets

 

The Company reviews long-lived assets, which consist of property and equipment, capitalized technology costs, capitalized content development costs and acquired finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Recoverability of a long-lived asset is measured by a comparison of the carrying value of an asset or asset group to the future undiscounted net cash flows expected to be generated by that asset or asset group. If such assets are not recoverable, the impairment to be recognized is measured by the amount by which the carrying value of an asset exceeds the estimated fair value (discounted cash flow) of the asset or asset group. In order to assess the recoverability of the capitalized technology and content development costs, the costs are grouped by degree vertical, which is the lowest level of independent cash flows. The Company’s impairment analysis is based upon cumulative results and forecasted performance. The actual results could vary from the Company’s forecasts, especially in relation to recently launched programs. For the three months ended March 31, 2017 and 2016, no impairment of long-lived assets was deemed to have occurred.

 

Non-cash investing and financing activities

 

During the three months ended March 31, 2017, the Company had new capital asset additions of $20.0 million, which was comprised of $11.1 million of leasehold improvements, $4.8 million in capitalized technology and content development costs and $4.1 million of other property and equipment. The $20.0 million increase primarily consisted of $14.3 million in cash capital expenditures and $5.4 million in landlord funded leasehold improvements.

 

During the three months ended March 31, 2016, the Company had new capital asset additions of $4.4 million, which was primarily comprised of capitalized technology and content development costs. The increase consisted almost entirely of cash capital expenditures.

 

Revenue Recognition and Deferred Revenue

 

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

 

The Company primarily derives its revenue from long-term contracts that typically range from 10 to 15 years in length. Under these contracts, the Company enables access to its Platform to its clients and their faculty and students. The Company is entitled to a contractually specified percentage of net program proceeds from its clients. These net program proceeds represent gross proceeds billed by clients to students, less credit card fees and other specified charges the Company has agreed to exclude in certain of its client contracts.

 

The Company generates substantially all of its revenue from multiple-deliverable contractual arrangements with its clients. Under each of these arrangements, the Company provides (i) access to Online Campus, which serves as a learning platform for its client’s faculty and students and which also enables a comprehensive range of other client functions, (ii) access to operations applications which provide the content management, admissions application processing, customer relationship management, and other functionality necessary to effectively operate the Company’s clients’ programs and (iii) technology-enabled services that support the complete lifecycle of a higher education program, including attracting students, advising prospective students through the admissions application process, providing technical, success coaching and other support, facilitating accessibility to individuals with disabilities, and facilitating in-program field placements.

 

In order to treat deliverables in a multiple-deliverable contractual arrangement as separate units of accounting, deliverables must have standalone value upon delivery. The technology-enabled services within the Platform are provided primarily in support of programs delivered through Online Campus, and for students of the programs delivered through Online Campus. Accordingly, the Company has determined that no individual deliverable has standalone value upon delivery and, therefore, deliverables within the Company’s multiple-deliverable arrangements do not qualify for treatment as separate units of accounting. Therefore, the Company considers all deliverables to be a single unit of accounting and recognizes revenue from the entire arrangement over the term of the service period.

 

Advance payments are recorded as deferred revenue until services are delivered or obligations are met, at which time revenue is recognized. Deferred revenue as of a particular balance sheet date represents the excess of amounts received as compared to amounts recognized in revenue in the condensed consolidated statements of operations as of the end of the reporting period, and such amounts are reflected as a current liability on the Company’s condensed consolidated balance sheets.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation awards based on the fair value of the award as of the grant date. For awards subject to service-based vesting conditions, the Company recognizes stock-based compensation expense on a straight-line basis over the awards’ requisite service period. For awards subject to both performance and service-based vesting conditions, the Company recognizes stock-based compensation expense using an accelerated recognition method when it is probable that the performance condition will be achieved.

 

See Note 6 for a summary of assumptions used in calculating the fair value of stock options.

 

Comprehensive Loss

 

The Company’s net loss equals comprehensive loss for all periods presented as the Company has no material components of other comprehensive income.

 

Recent Accounting Pronouncements

 

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments . The ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice surrounding how certain transactions are classified in the statement of cash flows. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the effect that this standard will have on its consolidated statements of cash flows and related disclosures.

 

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In March 2016, the FASB issued ASU No. 2016-09, Compensation —Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting . The ASU simplifies various aspects related to the accounting and presentation of share-based payments. The guidance also allows employers to withhold shares to satisfy minimum statutory withholding requirements up to the employees’ maximum individual tax rate without causing the award to be classified as a liability. Additionally, the guidance stipulates that cash paid by an employer to a taxing authority when directly withholding shares for tax withholding purposes should be classified as a financing activity on the statement of cash flows, and allows companies to elect an accounting policy to either estimate the share-based award forfeitures (and expense) or account for forfeitures (and expense) as they occur. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016. The Company adopted this ASU on January 1, 2017. In connection with the adoption of this standard, the Company elected to no longer apply an estimated forfeiture rate and will instead account for forfeitures as they occur. Accordingly, the Company applied the modified retrospective adoption approach, which resulted in a $0.1 million cumulative-effect reduction to retained earnings with an offset to additional paid-in-capital.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) . The ASU introduces a model for lessees requiring most leases to be reported on the balance sheet. Lessor accounting remains substantially similar to current U.S. GAAP. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018. The Company is currently evaluating the effect that this ASU will have on its consolidated financial position and related disclosures, and believes that this standard may materially increase its other non-current assets and non-current liabilities on the consolidated balance sheets in order to record right-of-use assets and related liabilities for its existing operating leases.

 

In August 2014, the FASB issued ASU No. 2014-15,  Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern . The ASU requires that an entity’s management evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The amendments in this ASU are effective for annual reporting periods ending after December 15, 2016. The Company adopted this ASU on January 1, 2017. Adoption of this standard did not have a significant impact on the Company’s financial reporting process.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) , which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the FASB deferred the mandatory effective date of this ASU by one year from January 1, 2017 to January 1, 2018. Early application is permitted, but not prior to the original effective date of January 1, 2017. Subsequently, the FASB has issued the following standards related to ASU No. 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations ; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing ; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients ; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers . The Company must adopt ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20 with ASU No. 2014-09 (collectively, the “new revenue standard”). The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company has engaged an independent third-party to assist with the implementation of the new revenue standard, has completed the review of the Company’s contracts portfolio and has continued to make progress with its implementation and assessment of the new revenue standard during the first quarter of 2017. While the Company cannot currently estimate the impact of adopting the new revenue standard, the Company is in the process of reviewing the current accounting policies and practices to identify potential differences that could result from applying the requirements of the new revenue standard to its revenue contracts and expects to complete the assessment effort by the end of the second quarter of 2017. Over the second half of 2017, the Company will complete the quantification of any identified impacts, the evaluation and implementation of any necessary changes to its business processes and controls in order to support revenue recognition and disclosure under the new revenue standard, and the determination of which transition approach will be applied. As part of this effort, the Company will continue to monitor and assess the impact of any changes to the new revenue standard and its interpretations as they become available. The Company will provide additional updates on progress made and further conclusions in its remaining Quarterly Reports on Form 10-Q to be filed in 2017, and adopt the new revenue standard on January 1, 2018.

 

3.              Capitalized Technology and Content Development Costs

 

Capitalized technology and content development costs consisted of the following as of:

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

 

 

(in thousands)

 

Capitalized technology costs

 

$

13,617

 

$

(8,520

)

$

5,097

 

$

12,988

 

$

(7,822

)

$

5,166

 

Capitalized technology costs in process

 

5,382

 

 

5,382

 

4,112

 

 

4,112

 

Total capitalized technology costs

 

18,999

 

(8,520

)

10,479

 

17,100

 

(7,822

)

9,278

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capitalized content development costs

 

36,265

 

(16,778

)

19,487

 

33,353

 

(15,367

)

17,986

 

Capitalized content development costs in process

 

4,297

 

 

4,297

 

4,603

 

 

4,603

 

Total capitalized content development costs

 

40,562

 

(16,778

)

23,784

 

37,956

 

(15,367

)

22,589

 

Capitalized technology and content development costs

 

$

59,561

 

$

(25,298

)

$

34,263

 

$

55,056

 

$

(23,189

)

$

31,867

 

 

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Amortization expense related to capitalized technology was $0.7 million and $0.5 million for the three months ended March 31, 2017 and 2016, respectively. This expense is included in technology and content development costs in the accompanying condensed consolidated statements of operations.

 

The Company re corded amortization expense related to capitalized content development costs of $1.7 million and $1.2 million for the three months ended March 31, 2017 and 2016, respectively.

 

As of March 31, 2017, the estimated future amortization expense for the capitalized technology and content development costs placed in service is as follows (in thousands):

 

2017

 

$

6,626

 

2018

 

7,686

 

2019

 

5,650

 

2020

 

3,246

 

2021

 

1,370

 

Thereafter

 

6

 

Total

 

$

24,584

 

 

4.              Commitments and Contingencies

 

Line of Credit

 

In March 2017, the Company amended its credit agreement for a revolving line of credit to extend the maturity date through July 31, 2017. No amounts were outstanding under this credit agreement as of March 31, 2017 or December 31, 2016. The Company intends to extend this agreement under comparable terms, prior to expiration.

 

Certain of the Company’s operating lease agreements entered into prior to March 31, 2017 require security deposits in the form of cash or an unconditional, irrevocable letter of credit. As of March 31, 2017, the Company has entered into standby letters of credit totaling $11.5 million, as security deposits for the applicable leased facilities. These letters of credit reduced the aggregate amount the Company may borrow under its revolving line of credit to $13.5 million.

 

Under this revolving line of credit, the Company has the option of borrowing funds subject to (i) a base rate, which is equal to 1.5% plus the greater of Comerica Bank’s prime rate, the federal funds rate plus 1% or the 30 day LIBOR plus 1%, or (ii) LIBOR plus 2.5%. For amounts borrowed under the base rate, the Company may make interest-only payments quarterly, and may prepay such amounts with no penalty. For amounts borrowed under LIBOR, the Company may make interest-only payments in periods of one, two and three months and will be subject to a prepayment penalty if such borrowed amounts are repaid before the end of the interest period.

 

Borrowings under the line of credit are collateralized by substantially all of the Company’s assets. The availability of borrowings under this credit line is subject to compliance with reporting and financial covenants, including, among other things, that the Company achieves specified minimum three-month trailing revenue levels during the term of the agreement and specified minimum six-month trailing profitability levels for some client programs, measured quarterly. In addition, the Company is required to maintain a minimum adjusted quick ratio, which measures short-term liquidity, of at least 1.10 to 1.00. As of March 31, 2017 and December 31, 2016, the Company’s adjusted quick ratio was 5.40 and 5.43, respectively.

 

The covenants under the line of credit also place limitations on the Company’s ability to incur additional indebtedness or to prepay permitted indebtedness, grant liens on or security interests in its assets, carry out mergers and acquisitions, dispose of assets, declare, make or pay dividends, make capital expenditures in excess of specified amounts, make investments, loans or advances, enter into transactions with affiliates, amend or modify the terms of material contracts, or change its fiscal year. If the Company is not in compliance with the covenants under the line of credit, after any opportunity to cure such non-compliance, or it otherwise experiences an event of default under the line of credit, the lenders may require repayment in full of all principal and interest outstanding. If the

 

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Company fails to repay such amounts, the lenders could foreclose on the assets pledged as collateral under the line of credit. The Company is currently in compliance with all such covenants.

 

Legal Contingencies

 

From time to time, the Company may become involved in legal proceedings or other contingencies in the ordinary course of its business. The Company is not presently involved in any legal proceeding or other contingency that, if determined adversely to it, would individually or in the aggregate have a material adverse effect on its business, operating results, financial condition or cash flows. Accordingly, the Company does not believe that there is a reasonable possibility that a material loss exceeding amounts already recognized may have been incurred as of the date of the balance sheets presented herein.

 

Program Marketing and Sales Commitments

 

Certain of the agreements entered into between the Company and its clients require the Company to commit to meet certain staffing and spending investment thresholds related to program marketing and sales activities. In addition, certain of the agreements require the Company to invest up to agreed-upon levels in marketing the programs to achieve specified program performance. The Company believes it is currently in compliance with all such commitments.

 

Operating Leases

 

The Company leases office facilities under non-cancelable operating leases in Maryland, New York, California, Colorado, North Carolina, Virginia and Hong Kong. In February 2017, the Company signed a lease for new office space in Brooklyn, New York, which is expected to be occupied beginning in 2018 after vacating the current offices in New York City. The lease covers three floors totaling approximately 80,000 square feet and will expire approximately eleven years and nine months after the lease commencement date, which will be no later than July 1, 2017. The Company also leases office equipment under non-cancelable leases.

 

As of March 31, 2017, the future minimum lease payments were as follows (in thousands):

 

2017

 

$

5,677

 

2018

 

8,948

 

2019

 

11,656

 

2020

 

11,561

 

2021

 

13,828

 

Thereafter

 

97,003

 

Total future minimum lease payments

 

$

148,673

 

 

The future minimum lease payments due under non-cancelable operating lease arrangements contain fixed rent increases over the term of the lease. Rent expense on these operating leases is recognized over the term of the lease on a straight-line basis. The excess of rent expense over actual lease payments is reported in non-current liabilities in the accompanying condensed consolidated balance sheets. The deferred rent liability related to these leases totaled $3.6 million and $2.5 million as of March 31, 2017 and December 31, 2016, respectively. The Company does not have any subleases as of March 31, 2017.

 

Total rent expense from non-cancelable operating lease agreements was $1.9 million for the three months ended March 31, 2017, and $1.0 million (net of sublease income of $0.1 million) for the three months ended March 31, 2016.

 

Fixed Payments to Clients

 

The Company is contractually obligated to make fixed payments to certain of its clients in exchange for contract extensions and various marketing and other rights. Currently, the future minimum fixed payments to the Company’s clients in exchange for contract extensions and various marketing and other rights were as follows (in thousands):

 

2017

 

$

1,728

 

2018

 

3,875

 

2019

 

875

 

2020

 

625

 

2021

 

625

 

Thereafter

 

5,025

 

Total future fixed payments to clients

 

$

12,753

 

 

Contingent Payments to Clients

 

The Company has entered into specific program agreements under which it would be obligated to make future minimum program payments to a client in the event that certain program metrics, partially associated with programs not yet launched, are not achieved. Due to the dependency of these calculations on future program launches, the amounts of any associated contingent payments cannot be reasonably estimated at this time. As the Company cannot reasonably estimate the amounts of the contingent payments, and because it believes any contingent payments under this agreement would likely be immaterial, the Company has excluded such payments from the table above.

 

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5.                                       Stockholders’ Equity

 

As of March 31, 2017, the Company was authorized to issue 205,000,000 total shares of capital stock, consisting of 200,000,000 shares of common stock and 5,000,000 shares of preferred stock. At March 31, 2017, the Company had reserved a total of 11,500,002 of its authorized shares of common stock for future issuance as follows:

 

Outstanding stock options

 

4,803,073

 

Possible future issuance under 2014 Equity Incentive Plan

 

5,452,700

 

Outstanding restricted stock units

 

1,244,229

 

Total shares of common stock reserved for future issuance

 

11,500,002

 

 

The compensation committee of the Company’s board of directors, acting under authority delegated from the board of directors, granted in April 2017 option awards to employees to purchase an aggregate of 510,335 shares of common stock at an exercise price of $39.66 and restricted stock unit awards for an aggregate of 447,493 shares of common stock, in each case under the 2014 Equity Incentive Plan (as defined in Note 6 below).

 

6.                                       Stock-Based Compensation

 

The Company provides equity-based compensation awards to employees, independent contractors and directors as an effective means for attracting, retaining and motivating such individuals. The Company maintains two share-based compensation plans: the 2014 Equity Incentive Plan (the “2014 Plan”) and the 2008 Stock Incentive Plan (the “2008 Plan”). Upon the effective date of the 2014 Plan in January 2014, the Company ceased using the 2008 Plan to grant new equity awards and began using the 2014 Plan for grants of new equity awards.

 

The number of shares of the Company’s common stock that may be issued under the 2014 Plan will automatically increase on January 1st of each year, for a period of ten years, from January 1, 2015 continuing through January 1, 2024, by 5% of the total number of shares of the Company’s common stock outstanding on December 31st of the preceding calendar year, or a lesser number of shares as may be determined by the Company’s board of directors. The shares available for issuance increased by 2,357,579 and 2,288,820 on January 1, 2017 and 2016, respectively, pursuant to the automatic share reserve increase provision under the 2014 Plan.

 

Stock-Based Compensation Expense

 

Stock-based compensation expense related to stock-based awards is included in the following line items in the accompanying condensed consolidated statements of operations:

 

 

 

Three Months Ended
March 31,

 

 

 

2017

 

2016

 

 

 

(in thousands)

 

Servicing and support

 

$

695

 

$

651

 

Technology and content development

 

646

 

452

 

Program marketing and sales

 

342

 

258

 

General and administrative

 

2,212

 

2,183

 

Total stock-based compensation expense

 

$

3,895

 

$

3,544

 

 

Stock Options

 

The following table summarizes the assumptions used for estimating the fair value of the stock options granted for the periods presented.

 

 

 

Three Months Ended
March 31,

 

 

 

2017

 

2016

 

Risk-free interest rate

 

2.1

%

1.9

%

Expected term (years)

 

6.08

 

6.08

 

Expected volatility

 

49

%

50

%

Dividend yield

 

0

%

0

%

 

The following is a summary of the stock option activity for the three months ended March 31, 2017:

 

 

 

Number of
Options

 

Weighted-Average
Exercise Price per
Share

 

Weighted-Average
Remaining
Contractual Term
(in years)

 

Aggregate
Intrinsic
Value
(in thousands)

 

Outstanding balance at December 31, 2016

 

4,882,237

 

$

10.74

 

6.30

 

$

95,081

 

Granted

 

2,839

 

30.15

 

9.76

 

 

 

Exercised

 

(55,337

)

9.37

 

5.83

 

 

 

Forfeited

 

(26,666

)

19.92

 

 

 

 

 

Expired

 

 

 

 

 

 

 

Outstanding balance at March 31, 2017

 

4,803,073

 

10.72

 

5.93

 

139,015

 

Exercisable at March 31, 2017

 

3,504,296

 

6.83

 

5.11

 

115,061

 

Vested and expected to vest at March 31, 2017

 

4,803,073

 

10.72

 

5.93

 

139,015

 

 

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The total compensation cost related to the nonvested options not yet recognized as of March 31, 2017 was $11.0 million and will be recognized over a weighted-average period of approximately 2.1 years.

 

The aggregate intrinsic value of the options exercised during the three months ended March 31, 2017 and 2016 was $1.5 million and $5.3 million, respectively.

 

Restricted Stock Units

 

The following is a summary of restricted stock unit activity for the three months ended March 31, 2017:

 

 

 

Number of
Restricted
Stock Units

 

Weighted-
Average Grant
Date Fair Value

 

Outstanding balance at December 31, 2016

 

1,412,934

 

$

20.60

 

Granted

 

2,875

 

30.15

 

Vested

 

(153,301

)

11.50

 

Forfeited

 

(18,279

)

22.75

 

Outstanding balance at March 31, 2017

 

1,244,229

 

21.71

 

 

The total compensation cost related to the nonvested restricted stock units not yet recognized as of March 31, 2017 was $19.2 million and will be recognized over a weighted-average period of approximately 2.3 years.

 

7.                                       Net Loss per Share

 

Diluted net loss per share is the same as basic net loss per share for all periods presented because the effects of potentially dilutive items were anti-dilutive, given the Company’s net loss. The following securities have been excluded from the calculation of weighted-average shares of common stock outstanding because the effect is anti-dilutive for the three months ended March 31, 2017 and 2016:

 

 

 

Three  Months Ended
March 31,

 

 

 

2017

 

2016

 

Stock options

 

4,803,073

 

5,019,640

 

Restricted stock units

 

1,244,229

 

1,011,375

 

 

Basic and diluted net loss per share is calculated as follows:

 

 

 

Three Months Ended
March 31,

 

 

 

2017

 

2016

 

Numerator (in thousands):

 

 

 

 

 

Net loss

 

$

(3,439

)

$

(3,380

)

Denominator:

 

 

 

 

 

Weighted-average shares of common stock outstanding, basic and diluted

 

47,237,341

 

45,953,082

 

Net loss per share, basic and diluted

 

$

(0.07

)

$

(0.07

)

 

8.                                       Segment and Geographic Information

 

Operating segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) for purposes of allocating resources and evaluating financial performance. The Company’s CODM reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. As such, the Company’s operations constitute a single operating segment and one reportable segment. The Company offers similar services to substantially all of its clients, which primarily represent well-recognized nonprofit colleges and universities in the United States. Substantially all assets were held and all revenue was generated in the United States during all periods presented.

 

9.             Subsequent Events

 

As disclosed in the Company’s Current Report on Form 8-K filed on May 2, 2017, the Company’s wholly subsidiary K2017143886 South Africa Proprietary Limited (“2U South Africa”), a company duly incorporated and registered in accordance with the laws of South Africa, entered into a share sale agreement (the “Share Sale Agreement”), dated as of May 1, 2017, by and among 2U South Africa, Get Educated International Proprietary Limited, a private company duly incorporated in South Africa (“GetSmarter”), the shareholders of GetSmarter (the “Sellers”) and Samuel Edward Paddock, as the sellers’ representative.

 

Under the terms of the Share Sale Agreement, 2U South Africa will acquire all of the outstanding equity interests of GetSmarter (the “Acquisition”) for approximately $103 million in cash (the “Purchase Price”), plus a potential earn out payment of up to $20 million, subject to the achievement of certain financial milestones in calendar years 2017 and 2018. Following the completion of the Acquisition, GetSmarter will be a wholly owned subsidiary of 2U South Africa. The Purchase Price is subject to certain purchase price adjustments for cash, indebtedness, transaction expenses and other matters. The Acquisition is expected to close during the third quarter of 2017.

 

Each of GetSmarter and the Sellers have made customary representations and warranties and covenants in the Share Sale Agreement and certain of the Sellers have agreed to indemnify 2U South Africa and the Company with respect to breaches of representations and warranties of GetSmarter and the Sellers, pre-closing taxes and certain other matters, in each case, subject to limitations. Certain of the Sellers have agreed to customary non-competition and non-solicitation obligations following closing of the Acquisition.

 

The Acquisition is subject to customary closing conditions, including certain regulatory approvals and third party consents, absence of any order or laws prohibiting completion of the Acquisition, the absence of a material adverse effect on GetSmarter and the accuracy of each party’s representations and warranties (subject to certain qualifications), and each party’s material compliance with their respective covenants and agreements contained in the Share Sale Agreement.

 

Under the terms of the Share Sale Agreement, the Company has agreed to issue restricted stock unit awards over the shares of common stock, par value $0.001 per share, of the Company to certain employees and officers of GetSmarter. The awards will be subject to the 2014 2U, Inc. Equity Incentive Plan and will vest over either a two or four year period following closing of the Acquisition.

 

The foregoing summary of the Share Sale Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Share Sale Agreement, which is attached hereto as Exhibit 2.1 and incorporated by reference herein.

 

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Item 2.          Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2016. Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended. The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions, or the negative of such words or phrases, are intended to identify “forward-looking statements.” We have based these forward-looking statements on our current expectations and projections about future events. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Many factors could cause or contribute to these differences, including those discussed in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2016, and our other filings with the Securities and Exchange Commission, or “SEC.” Statements made herein are as of the date of the filing of this Form 10-Q with the SEC and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim, any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes for the year ended December 31, 2016, which are included in our Annual Report on Form 10-K filed with the SEC on February 24, 2017.

 

Overview

 

We are a leading provider of cloud-based software-as-a-service, or SaaS, technology and technology-enabled services that enable leading nonprofit colleges and universities to deliver their degree programs at scale to students anywhere. Our SaaS technology consists of an innovative online learning environment, where our clients deliver their high-quality educational content to students in a live, intimate and engaging setting. We also provide a comprehensive suite of integrated applications, including a content management system and a customer relationship management system, that serve as the back-end infrastructure of the programs we enable. This technology is fused with technology-enabled services, including student acquisition services, content development services, student and faculty support, clinical placement services, and admissions applications advising services . This suite of 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.

 

Our Business Model

 

The key elements of our business model are described below.

 

Revenue Drivers and Predictability

 

Substantially all of our revenue is derived from revenue-share arrangements with our clients, under which we receive a contractually specified percentage of the amounts students pay them in tuition and other fees. Accordingly, the primary driver of our revenue growth is the increase in the number of student course enrollments in our clients’ programs. This in turn is influenced primarily by three factors:

 

·                                           our ability to increase the number of programs offered by our clients, either by adding new clients or by expanding the number of client programs;

 

·                                           our ability to identify and acquire prospective students for our clients’ programs; and

 

·                                           our ability, and that of our clients, to retain the students who enroll in their programs.

 

In the near term, we expect the primary drivers of our financial results to continue to be our first two programs with the University of Southern California, which are our longest running programs, which we launched in 2009 and 2010, and our programs with Simmons College, which launched between 2013 and 2016. For the three months ended March 31, 2017 and 2016, 30% and 38%, respectively, of our revenue was derived from the first two University of Southern California programs. For the three months ended March 31, 2017 and 2016, 18% and 16%, respectively, of our revenue was derived from the Simmons College programs. We expect that the first two DGPs with the University of Southern California and our programs with Simmons College will continue to account for a large portion of our revenue even though that portion should decline as other client programs become more mature and achieve higher enrollment levels.

 

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Program Marketing and Sales Expense

 

Our most significant expense in each fiscal period has been program marketing and sales expense, which relates primarily to student acquisition activities. 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. While our clients make all admissions decisions, the number of students who enroll in our clients’ programs in any given period is significantly dependent on the amount we have spent on these student acquisition activities in prior periods. Accordingly, although most of our clients’ programs span multiple academic terms and, therefore, generate continued revenue beyond the term in which initial enrollments occur, we expect that we will need to continue to incur significant program marketing and sales expense for existing programs going forward to generate a continuous pipeline of new enrollments. For new programs, we begin incurring program marketing and sales costs as early as nine months prior to the start of a new client program.

 

We typically identify prospective students for our clients’ programs between three months and two or more years before they ultimately enroll. For the students currently enrolled in our clients’ programs and those who have graduated, the average time from our initial prospective student acquisition to initial enrollment was approximately seven months. For the students who have graduated from these programs, the average time from initial enrollment to graduation was 22 months. Based on the student retention rates and patterns we have observed in our clients’ programs, we estimate that, for our current programs, the average time from a student’s initial enrollment to graduation will be approximately two years.

 

Accordingly, our program marketing and sales expense in any period is an investment we make to generate revenue in future periods. Likewise, revenue generated in any period is largely attributable to the investment made in student acquisition activities in earlier periods. Because program marketing and sales expense in any period is almost entirely unrelated to revenue generated in that period, we do not believe it is meaningful to directly compare the two. We believe that the total revenue we will receive over time related to students who enroll in our clients’ programs as a result of current period program marketing and sales expense, will be significantly greater as a multiple of that current period expense than is implied by the multiple of current period revenue to current period program marketing and sales expense as expressed in our financial statements. Further, we believe that our program marketing and sales expense in future periods will generally decline as a percentage of the revenue reported in those same periods as our revenue base from returning students in existing programs increases.

 

We continually manage our program marketing and sales expense to ensure that across our portfolio of client programs, our cost to acquire students for these programs is appropriate for our business model. We use a ratio of attrition adjusted lifetime revenue of a student, or LTR, to the total cost to acquire that student, or TCA, as the measure of our marketing efficiency and to determine how much we are willing to spend to acquire an additional student for any program. The calculations included in this ratio include certain assumptions. For any period, we know what we spent on program sales and marketing and therefore, can accurately calculate the ratio’s denominator. However, given the time lag between when we incur our program marketing and sales expense and when we receive revenue related to students enrolled based on that expense, we have to incorporate forecasts of student enrollments and retention into our calculation of the ratio’s numerator, which is our estimate of future revenue related to that period’s expense. We use the significant amount of data we have on the effectiveness of various marketing channels, student attrition and other factors to inform our forecasts and are continually testing the assumptions underlying these forecasts against actual results to give us confidence that our forecasts are reasonable. The LTR to TCA ratio may vary from program to program depending on the degree being offered, where that program is in its lifecycle and whether we enable the same or similar degrees at other universities.

 

Period-to-Period Fluctuations

 

Our revenue, cash position, accounts receivable and deferred revenue can fluctuate significantly from quarter to quarter due to variations driven by the academic schedules of our clients’ programs. These programs generally start classes for new and returning students an average of four times per year. Class starts are not necessarily evenly spaced throughout the year, do not necessarily correspond to the traditional academic calendar and may vary from year to year. As a result, the number of classes our client programs have in session, and therefore the number of students enrolled, will vary from month to month and quarter to quarter, leading to variability in our revenue.

 

Our clients’ programs often have academic terms that straddle two fiscal quarters. Our clients generally pay us when they have billed tuition and specified fees to their students, which is typically early in the academic term, and once the drop/add period has passed. We recognize the related revenue ratably over the course of the academic term, beginning on the first day of classes through the last. Because we generally receive payments from our clients prior to our ability to recognize the majority of those amounts as revenue, we record deferred revenue at each balance sheet date equal to the excess of the amounts we have billed or received from our clients over the amounts we have recognized as revenue as of that date. For these reasons, our cash flows typically vary considerably from quarter to quarter and our cash position, accounts receivable and deferred revenue typically fluctuate between quarterly balance sheet dates.

 

Our expense levels also fluctuate from quarter to quarter, driven primarily by our program marketing and sales activity. We typically reduce our paid search and other program marketing and sales efforts during late November and December because these efforts are less productive during the holiday season. This generally results in lower total program marketing and sales expense during the fourth quarter. In addition, because we begin spending on program marketing and sales, and, to a lesser extent, services and support as much

 

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as nine months prior to the start of classes for a new client program, these costs as a percentage of revenue fluctuate, sometimes significantly, depending on the timing of new client programs and anticipated program launch dates.

 

Components of Operating Results and Results of Operations

 

First Quarter 2017 Highlights

 

·                   Revenue was $64.8 million, an increase of 36.6% from $47.4 million in the first quarter of 2016.

 

·                   Net loss was $(3.4) million, or $(0.07) per share, compared to $(3.4) million or $(0.07) per share, in the first quarter of 2016.

 

·                   Adjusted EBITDA was $3.9 million, compared to $2.2 million in the first quarter of 2016.

 

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.

 

In addition to providing access to our SaaS technology, we provide technology-enabled services that support the complete lifecycle of a higher education program, including attracting students, advising prospective students through the admissions application process, providing technical, success coaching and other support, facilitating accessibility to individuals with disabilities and facilitating in-program field placements. We have determined that no individual deliverable has standalone value upon delivery and, therefore, the multiple deliverables within our arrangements do not qualify for treatment as separate units of accounting. Accordingly, we consider all deliverables to be a single unit of accounting and we recognize revenue from the entire arrangement over the term of the service period.

 

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 three months ended March 31, 2017 was $64.8 million, an increase of $17.4 million, or 36.6%, from $47.4 million for the same period of 2016. The increase was primarily attributable to a 34.7% increase in period-over-period full course equivalent enrollments in our client programs, from 17,709 for the three months ended March 31, 2016 to 23,857 for the three months ended March 31, 2017. Of the increase in full course equivalent enrollments, 808, or 13.1%, were attributable to client DGPs launched during the 12 months ended March 31, 2017. Also contributing to the increase, adjustments to student refund allowances resulted in higher period-over-period revenues of $0.5 million.

 

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 our SaaS technology for our clients and their students.

 

Servicing and support.   Servicing and support costs for the three months ended March 31, 2017 were $10.9 million, an increase of $1.4 million, or 14.9%, from $9.5 million for the same period of 2016. This increase was due primarily to a $1.3 million increase in cash compensation costs as we increased our headcount in this area by 17% to serve a growing number of students and faculty in existing and new client programs. As a percentage of revenue,

 

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servicing and support costs decreased from 20.0% for the three months ended March 31, 2016 to 16.8% for the same period of 2017, as revenue grew at a higher rate than the increase in expense.

 

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.   Technology and content development costs for the three months ended March 31, 2017 were $9.2 million, an increase of $1.9 million, or 26.5%, from $7.3 million for the same period of 2016. This increase was due primarily to the increased number of courses that have been developed for our client programs, which resulted in higher amortization expense associated with our capitalized technology and content development costs of $0.8 million. Additionally, cash compensation costs (net of amounts capitalized for technology and content development) increased by $0.5 million, as we increased our headcount in this area by 27% to support the launch of new client programs and the scaling of existing programs. The remainder of the increase in technology and content development costs related to cloud-based hosting services, non-cash compensation and travel and related expenses. As a percentage of revenue, technology and content development costs decreased from 15.3% for the three months ended March 31, 2016 to 14.2% for the same period of 2017, as revenue grew at a higher rate than the increase in expense.

 

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.   Program marketing and sales expense for the three months ended March 31, 2017 was $34.7 million, an increase of $11.0 million, or 46.6%, from $23.7 million for the same period of 2016. This increase was due primarily to a $7.7 million increase in direct internet marketing costs to acquire students for our clients’ programs. Additionally, cash compensation costs increased by $2.2 million as we increased our headcount in this area by 20% to acquire students for, and drive revenue growth in, new client programs. The remainder of the increase in program marketing and sales expense primarily related to rent expense in connection with our new Maryland headquarters lease, travel and related expenses, non-cash stock-based compensation and other costs to support our programs marketing efforts. As a percentage of revenue, program marketing and sales expense increased from 49.9% for the three months ended March 31, 2016 to 53.5% for the same period of 2017, 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. General and administrative expense for the three months ended March 31, 2017 was $13.7 million, an increase of $3.3 million, or 30.8%, from $10.4 million for the same period of 2016. This was due primarily to an increase in employee education benefits of $0.9 million and higher cash compensation costs of $0.9 million as we increased our headcount in this area by 25% to support our growing business. Additionally, consulting costs increased by $0.6 million primarily driven by the integration of our enterprise resource planning system, and our depreciation and amortization expense increased by $0.5 million primarily due to placing more fixed assets into service in connection with the commencement of our new Maryland headquarters lease, as well as accelerated depreciation of certain facility-related assets in connection with our headquarters relocation. The remainder of the increase in general and administrative expense primarily related to higher legal, accounting and other professional fees. As a percentage of revenue, general and administrative expense decreased from 22.0% for the three months ended March 31, 2016 to 21.1% for the same period of 2017, reflecting a higher year-over-year percentage increase in revenue than the increase in expense.

 

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.

 

Total other income (expense) for the three months ended March 31, 2017 was $0.2 million, an increase of $0.1 million, or 199.1%, from $0.1 million for the same period of 2016. This increase was driven by higher interest income associated with our cash balances.

 

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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 three months ended March 31, 2017 and 2016.

 

Consolidated Statements of Operations as a Percentage of Revenue

 

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

 

 

 

Three Months Ended
March 31,

 

 

 

2017

 

2016

 

Revenue

 

100.0

%

100.0

%

Costs and expenses:

 

 

 

 

 

Servicing and support

 

16.8

 

20.0

 

Technology and content development

 

14.2

 

15.3

 

Program marketing and sales

 

53.5

 

49.9

 

General and administrative

 

21.1

 

22.0

 

Total costs and expenses

 

105.6

 

107.2

 

Loss from operations

 

(5.6

)

(7.2

)

Other income (expense):

 

 

 

 

 

Interest expense

 

 

(0.1

)

Interest income

 

0.3

 

0.2

 

Other

 

 

 

Total other income (expense)

 

0.3

 

0.1

 

Net loss

 

(5.3

)%

(7.1

)%

 

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 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.

 

 

 

Three Months Ended
March 31,

 

 

 

2017

 

2016

 

Platform revenue retention rate

 

131.3

%

123.3

%

Number of programs included in comparison (1)

 

17

 

12

 

 


(1)                                  Reflects the number of programs operating both in the reported period and in the prior year comparative period.

 

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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 academic calendars of our clients, the relative growth rates of programs with varying tuition levels, the launch of new programs with higher or lower than average net tuition costs and annual tuition increases instituted by our clients. As a part of our growth strategy, we are actively targeting new graduate-level clients in academic disciplines for which we have existing programs. Over time, this strategy is likely to reduce our average revenue per full course equivalent. However, we believe this approach will enable us to leverage our program marketing investments across multiple client programs within specific academic disciplines, significantly decreasing student acquisition costs within those disciplines and more than offsetting any decline in average revenue per full course equivalent enrollment.

 

The following table sets forth the full course equivalent enrollments and average revenue per full course equivalent enrollment in our clients’ DGPs for the periods presented.

 

 

 

Three Months Ended
March 31,

 

 

 

2017

 

2016

 

Full course equivalent enrollments in our clients’ programs

 

23,857

 

17,709

 

Average revenue per full course equivalent enrollment in our clients’ programs

 

$

2,717

 

$

2,679

 

 

Adjusted EBITDA

 

Adjusted EBITDA represents our earnings before net interest (income) expense, income taxes, depreciation and amortization, adjusted to eliminate stock-based compensation expense, which is a non-cash item. Adjusted EBITDA is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, the exclusion of certain expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

 

Adjusted EBITDA is not a measure calculated in accordance with U.S. GAAP, and should not be considered as an alternative to any measure of financial performance calculated and presented in accordance with U.S. GAAP. In addition, adjusted EBITDA may not be comparable to similarly titled measures of other companies because other companies may not calculate adjusted EBITDA in the same manner as we do. We prepare adjusted EBITDA to eliminate the impact of stock-based compensation expense, which we do not consider indicative of our core operating performance.

 

Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are:

 

·                   although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

·                   adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

·                   adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation;

 

·                   adjusted EBITDA does not reflect interest or tax payments that may represent a reduction in cash available to us; and

 

·                   other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

 

Because of these and other limitations, you should consider adjusted EBITDA alongside other U.S. GAAP-based financial performance measures, including various cash flow metrics, net income (loss) and our other U.S. GAAP results. The following table presents a reconciliation of net loss to adjusted EBITDA for each of the periods indicated:

 

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Three Months Ended
March 31,

 

 

 

2017

 

2016

 

 

 

(in thousands)

 

Net loss

 

$

(3,439

)

$

(3,380

)

Adjustments:

 

 

 

 

 

Interest expense

 

 

26

 

Interest income

 

(196

)

(92

)

Depreciation and amortization expense

 

3,648

 

2,149

 

Stock-based compensation expense

 

3,895

 

3,544

 

Total adjustments

 

7,347

 

5,627

 

Adjusted EBITDA

 

$

3,908

 

$

2,247

 

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

In March 2017, we amended our credit agreement for a revolving line of credit to extend the maturity date through July 31, 2017. No amounts were outstanding under this credit agreement as of March 31, 2017 or December 31, 2016.

 

Certain of our operating lease agreements entered into prior to March 31, 2017 require security deposits in the form of cash or an unconditional, irrevocable letter of credit. As of March 31, 2017, we have entered into standby letters of credit totaling $11.5 million, as security deposits for the applicable leased facilities. These letters of credit reduced the aggregate amount we may borrow under our revolving line of credit to $13.5 million.

 

Under this revolving line of credit, we have the option of borrowing funds subject to (i) a base rate, which is equal to 1.5% plus the greater of Comerica Bank’s prime rate, the federal funds rate plus 1% or the 30 day LIBOR plus 1%, or (ii) LIBOR plus 2.5%. For amounts borrowed under the base rate, we may make interest-only payments quarterly, and may prepay such amounts with no penalty. For amounts borrowed under LIBOR, we may make interest-only payments in periods of one, two and three months and will be subject to a prepayment penalty if we repay such borrowed amounts before the end of the interest period.

 

Borrowings under the line of credit are collateralized by substantially all of our assets. The availability of borrowings under this credit line is subject to our compliance with reporting and financial covenants, including, among other things, that we achieve specified minimum three-month trailing revenue levels during the term of the agreement and specified minimum six-month trailing profitability levels for some of our client programs, measured quarterly. In addition, we are required to maintain a minimum adjusted quick ratio, which measures our short-term liquidity, of at least 1.10 to 1.00. As of March 31, 2017 and December 31, 2016, our adjusted quick ratios were 5.40 and 5.43, respectively.

 

The covenants under the line of credit also place limitations on our ability to incur additional indebtedness or to prepay permitted indebtedness, grant liens on or security interests in our assets, carry out mergers and acquisitions, dispose of assets, declare, make or pay dividends, make capital expenditures in excess of specified amounts, make investments, loans or advances, enter into transactions with our affiliates, amend or modify the terms of our material contracts, or change our fiscal year. If we are not in compliance with the covenants under the line of credit, after any opportunity to cure such non-compliance, or we otherwise experience an event of default under the line of credit, the lenders may require repayment in full of all principal and interest outstanding. If we fail to repay such amounts, the lenders could foreclose on the assets we have pledged as collateral under the line of credit. We are currently in compliance with all such covenants.

 

Cash Flows

 

The following table summarizes our cash flows for the periods presented:

 

 

 

Three Months Ended
March 31,

 

 

 

2017

 

2016

 

 

 

(in thousands)

 

Cash (used in) provided by:

 

 

 

 

 

Operating activities

 

$

(11,599

)

$

6,278

 

Investing activities

 

(14,293

)

(3,967

)

Financing activities

 

51

 

670

 

 

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Operating Activities

 

For the three months ended March 31, 2017, net cash used in operating activities of $11.6 million consisted of a net loss of $3.4 million and a $15.7 million net cash outflow from changes in working capital, partially offset by $7.5 million in non-cash items. The decrease in cash resulting from changes in working capital consisted of a $20.8 million increase in accounts receivable, a $7.7 million decrease in accrued compensation and related benefits and other changes in working capital of $2.9 million, partially offset by an $8.6 million increase in deferred revenue and a $7.1 million increase in accounts payable. Non-cash items consisted of non-cash stock-based compensation charges of $3.9 million and depreciation and amortization expense of $3.6 million.

 

For the three months ended March 31, 2016, net cash provided by operating activities of $6.3 million consisted of $5.7 million in noncash items and a $4.0 million net cash inflow from changes in working capital, partially offset by a net loss of $3.4 million. Non-cash items consisted of non-cash stock-based compensation charges of $3.5 million and depreciation and amortization expense of $2.1 million. The increase in cash resulting from changes in working capital consisted of a $7.4 million increase in deferred revenue, a $2.3 million increase in accrued expenses and other liabilities, a $1.8 million increase in accounts payable and a $0.4 million change in other assets and other liabilities. These increases were partially offset by a $6.5 million decrease in accrued compensation and related benefits and a $1.4 million increase in prepaid expenses and other current assets.

 

Investing Activities

 

For the three months ended March 31, 2017, net cash used in investing activities of $14.3 million consisted of $9.4 million of purchases of property and equipment, primarily related to leasehold improvement expenditures related to our new office operating leases. Additionally, costs related to internal-use software and content developed to support a greater number of launched programs were $4.9 million.

 

For the three months ended March 31, 2016, net cash used in investing activities of $4.0 million consisted primarily of costs related to internal-use software and content developed to support a greater number of launched programs.

 

Financing Activities

 

For the three months ended March 31, 2017, net cash provided by financing activities was $0.1 million, consisting of $0.5 million of proceeds received from the exercise of stock options, partially offset by $0.4 million of cash used for the payment of employee withholding taxes related to net settlement releases of restricted stock units.

 

For the three months ended March 31, 2016, net cash provided by financing activities was $0.7 million, consisting of $1.0 million of proceeds received from the exercise of stock options, partially offset by $0.3 million of cash used for the payment of employee withholding taxes related to the release of restricted stock units.

 

Operating and Capital Expenditure Requirements

 

During the three months ended March 31, 2017, we had new capital asset additions of $20.0 million, which was comprised of $11.1 million of leasehold improvements, $4.8 million in capitalized technology and content development costs and $4.1 million of other property and equipment. The $20.0 million increase primarily consisted of $14.3 million in cash capital expenditures and $5.4 million in landlord funded leasehold improvements. For the full year of 2017, we expect new capital asset additions of approximately $44 to $49 million, of which approximately $6 to $8 million will be funded by landlord leasehold improvement allowances.

 

Contractual Obligations and Commitments

 

We have non-cancelable operating leases for our office space, and we are also contractually obligated to make fixed payments to certain of our university clients in exchange for contract extensions and various marketing and other rights.

 

We have a $25.0 million line of credit from Comerica Bank (with letters of credit reducing the aggregate amount we may borrow to $13.5 million) and no amounts were outstanding as of March 31, 2017.

 

See Note 4 in the “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 and “Legal Proceedings” contained in Part II, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding contingencies.

 

Recent Accounting Pronouncements

 

Refer to Note 2 in the “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of FASB’s recent accounting pronouncements and their effect on us.

 

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Item 3.          Quantitative and Qualitative Disclosures About Market Risk

 

There have been no material changes to market risk from the information provided in Part II, Item 7A of our Annual Report on Form 10-K, filed with the SEC on February 24, 2017.

 

Item 4.                      Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” as promulgated under the Exchange Act and the rules and regulations thereunder. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of March 31, 2017.

 

Changes in Internal Control Over Financial Reporting

 

During the first quarter of 2017, we finished the migration our Human Capital Management and payroll systems to a single enterprise resource planning (“ERP”) system called Workday. This completed the first of a two-phase ERP system implementation project. The second phase of this implementation project covers the migration of our accounting and financial reporting systems to Workday, which is targeted to occur in the second quarter of 2017. This two-phase ERP system implementation impacts various internal processes and controls for business activities within human resources, payroll and accounting, as well as financial reporting. While the Company believes that this new system and the related changes to internal controls will ultimately strengthen its internal controls over financial reporting, there are inherent risks in implementing any ERP system, and the Company will continue to evaluate and test control changes in order to provide certification on the effectiveness, in all material respects, of its internal controls over financial reporting for the year ending December 31, 2017.

 

Except for our implementation of Workday as described above, there were no changes in our internal control over financial reporting that occurred during the first quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The Company has modified and will continue to modify its internal controls relating to its business and financial processes throughout the entire ERP system implementation.

 

PART II. OTHER INFORMATION

 

Item 1.                      Legal Proceedings

 

The information required by this Item is incorporated herein by reference to Note 4 in “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

Item 1A.             Risk Factors

 

The risks described in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the SEC on February 24, 2017, remain current in all material respects. Those risk factors do not identify all risks that we face . Our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations.

 

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

 

None.

 

Item 3.                      Defaults Upon Senior Securities

 

None.

 

Item 4.                      Mine Safety Disclosures

 

None.

 

23



Table of Contents

 

Item 5.        Other Information

 

None.

 

Item 6.        Exhibits

 

Exhibit
Number

 

Description of the Document

2.1

 

Share Sale Agreement, by and among a wholly owned subsidiary of the Registrant, K2017143886 South Africa Proprietary Limited, Get Educated International Proprietary Limited (“Get Educated”), the shareholders of Get Educated, and Samuel Edward Paddock, as the Seller’s Representative.

3.1 (1)

 

Amended and Restated Certificate of Incorporation of the Registrant.

3.2 (2)

 

Amended and Restated Bylaws of the Registrant.

31.1

 

Certification of Chief Executive Officer of 2U, Inc. pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certification of Chief Financial Officer of 2U, Inc. pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

 

Certification of Chief Executive Officer of 2U, Inc. in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

 

Certification of Chief Financial Officer of 2U, Inc. in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

 

XBRL Instance

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 


(1)            Previously filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-36376), filed with the Commission on April 4, 2014, and incorporated by reference herein.

 

(2)            Previously filed as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No. 001-36376), filed with the Commission on April 4, 2014, and incorporated by reference herein.

 

24



Table of Contents

 

SIGNATURES

 

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

 

 

2U, Inc.

 

 

May 4, 2017

By:

/s/ Christopher J. Paucek

 

 

Christopher J. Paucek

 

 

Chief Executive Officer

 

 

 

May 4, 2017

By:

/s/ Catherine A. Graham

 

 

Catherine A. Graham

 

 

Chief Financial Officer

 

25


Exhibit 2.1

 

150 west street

sandown sandton johannesburg 2196

p o box 783347 sandton south africa 2146

docex 152 randburg

tel +2711 269 7600 fax +2711 269 7899

info@ensafrica.com ensafrica.com

 

SHARE SALE AGREEMENT

 

entered into between

 

GET EDUCATED INTERNATIONAL PROPRIETARY LIMITED

 

(Registration No. 2016/324480/07)

 

and

 

K2017143886 SOUTH AFRICA PROPRIETARY LIMITED

 

(Registration No. 2017/143886/07)

 

and

 

THOSE PERSONS NAMED IN ANNEXURE G

 

and

 

SAMUEL EDWARD PADDOCK

 

(Identity No. 8110095231089)

 

and

 



 

ROBERT JAMES PADDOCK

 

(Identity No. 8307235194082)

 

and

 

ANTHONY EDWARD GRAHAM SAUNDERS

 

(Identity No. 7905075139082)

 

and

 

CHRISTOPHER MURRAY VELLA

 

(Identity No. 8110265072081)

 

and

 

RYAN MICHAEL O’MAHONEY

 

(Identity No. 7909285085085)

 

and

 

DALE WILLIAMS

 

(Identity number. 6703275134081)

 

2



 

TABLE OF CONTENTS

 

 

Clause number and description

 

Page

 

 

 

 

1.

INTERPRETATION

 

5

 

 

 

 

2.

CONDITIONS PRECEDENT

 

21

 

 

 

 

3.

TERMINATION OF THE SHAREHOLDERS’ AGREEMENT, SALE AND SUBSCRIPTION AGREEMENT AND CALL OPTIONS

 

25

 

 

 

 

4.

MERGER NOTIFICATION

 

25

 

 

 

 

5.

SALE OF THE SOLD SHARES

 

25

 

 

 

 

6.

PURCHASE PRICE

 

26

 

 

 

 

7.

CLOSING

 

27

 

 

 

 

8.

SHAREHOLDER LOANS

 

32

 

 

 

 

9.

PURCHASE PRICE ADJUSTMENTS

 

33

 

 

 

 

10.

LATE PAYMENT AND INTEREST

 

34

 

 

 

 

11.

EQUITY AWARDS AND RETENTION BONUS POOL FOR CERTAIN EMPLOYEES

 

35

 

 

 

 

12.

INTERIM PERIOD UNDERTAKINGS

 

36

 

 

 

 

13.

ANTI-CORRUPTION

 

43

 

 

 

 

14.

WARRANTIES

 

46

 

 

 

 

15.

INDEMNIFICATION

 

50

 

 

 

 

16.

INTENTIONALLY OMITTED

 

56

 

 

 

 

18.

RESTRAINTS

 

56

 

 

 

 

19.

INDEPENDENT ACCOUNTANT

 

61

 

 

 

 

20.

SELLERS’ REPRESENTATIVE

 

62

 

 

 

 

21.

BREACH

 

63

 

 

 

 

22.

NO LIABILITY TO PERFORM WHILST SELLER/S OR PURCHASER IN BREACH

 

64

 

 

 

 

23.

ARBITRATION

 

64

 

 

 

 

24.

CONFIDENTIALITY

 

65

 

 

 

 

25.

PUBLICITY

 

66

 

 

 

 

26.

DOMICILIA CITANDI ET EXECUTANDI

 

67

 

 

 

 

27.

GOVERNING LAW

 

69

 

3



 

28.

SUBMISSION TO JURISDICTION

 

69

 

 

 

 

29.

COSTS

 

69

 

 

 

 

30.

WHOLE AGREEMENT, NO AMENDMENT

 

69

 

 

 

 

31.

NO CESSION OR ASSIGNMENT

 

70

 

 

 

 

32.

STIPULATIO ALTERI

 

70

 

 

 

 

33.

COUNTERPARTS

 

70

 

 

 

 

Annexure A

2017 Preliminary Budget

79

 

 

 

Annexure B

Warranties

80

 

 

 

Annexure C

Preliminary Unaudited Accounts

81

 

 

 

Annexure D

Data Room Index

82

 

 

 

Annexure E

Earn Out Amount —Calculation and Determination, Earn Out Protections

83

 

 

 

Annexure F

Material Contracts

86

 

 

 

Annexure G

Sellers and Sellers’ Interests

87

 

 

 

Annexure H

Escrow Agreement

88

 

 

 

Annexure I

Sellers’ Escrow Proportion

89

 

 

 

Annexure J

RSU Award / Equity Award Table

90

 

 

 

Annexure K

Working Capital Calculation

91

 

 

 

Annexure L

Form of Estimated Closing Statement

92

 

 

 

Annexure M

Executive Employment Agreement Template

93

 

 

 

Annexure N

Parent Guarantee from 2U

94

 

 

 

Annexure O

Interim Period Facility

95

 

 

 

Annexure P

Indemnifying Sellers’ Proportions

96

 

4



 

1.                                       INTERPRETATION

 

In this Agreement, clause headings are for convenience and shall not be used in its interpretation and, unless the context clearly indicates a contrary intention -

 

1.1.                             an expression which denotes -

 

1.1.1.                                             any gender includes the other genders;

 

1.1.2.                                             a natural person includes an artificial or juristic person (corporate or unincorporated and including the state) and vice versa; and

 

1.1.3.                                             the singular includes the plural and vice versa;

 

1.2.                             the following expressions shall bear the meanings assigned to them below and cognate expressions bear corresponding meanings -

 

1.2.1.                                             Audited Accounts ” means the signed and audited consolidated balance sheets of the Group as of December 31, 2016 and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for the twelve month period ended December 31, 2016, as well as the footnotes to such financial statements as of and for the same period (“ 2016 Audited Accounts ”) as well as the signed and audited consolidated balance sheets of the Group as of December 31, 2015 and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for the twelve month periods ended December 31, 2015, as well as the footnotes to such financial statements, together with the unconsolidated statements above of each of the members of the Group as of and for the same period (“ 2015 Audited Accounts ” and together with the 2016 Audited Accounts, the “ Audited Accounts ”) such that all of the preceding are presented in USD, in conformity with accounting principles generally accepted in the U.S. (U.S. GAAP), and audited in accordance with generally accepted auditing standards in the U.S. (as defined by the AICPA);

 

1.2.2.                                             Preliminary Unaudited Accounts ” means (A) (i) the consolidated balance sheets of the Group as of December 31, 2016 and (ii) the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for the twelve month period ended December 31, 2016, as well as the footnotes to such financial statements, together with the unconsolidated statements above of each of the members of the Group as of and for the same periods, a copy of which is attached hereto as Annexure C.1

 

5



 

(“ 2016 Preliminary Unaudited Accounts ”), (B) (i) the consolidated balance sheets of the Group as of December 31, 2015 and (ii) the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for the twelve month period ended December 31, 2015, as well as the footnotes to such financial statements, together with the unconsolidated statements above of each of the members of the Group as of and for the same periods, a copy of which is attached hereto as Annexure C.2 (“ 2015 Preliminary Unaudited Accounts ”) and (C) (i) the consolidated balance sheets of the Group as of March 31, 2017 and (ii) the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for the three month period ended March 31, 2017, as well as the footnotes to such financial statements, together with the unconsolidated statements above of each of the members of the Group as of and for the same periods, a copy of which is attached hereto as Annexure C.3 (“ 2017 Preliminary Unaudited Accounts ” and together with the 2016 Unaudited Accounts and the 2015 Unaudited Accounts, the “ Preliminary Unaudited Accounts ”), all of which have been prepared in accordance with IFRS in USD, with any exceptions to IFRS identified and quantified, unless otherwise mutually agreed between the Purchaser and the Sellers’ Representative in writing;

 

1.2.3.                                             Final Unaudited Accounts ” means (A) (i) the consolidated balance sheets of the Group as of December 31, 2016 and (ii) the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for the twelve month period ended December 31, 2016, as well as the footnotes to such financial statements, together with the unconsolidated statements above of each of the members of the Group as of and for the same periods (“ 2016 Final Unaudited Accounts ”), (B) (i) the consolidated balance sheets of the Group as of December 31, 2015 and (ii) the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for the twelve month period ended December 31, 2015, as well as the footnotes to such financial statements, together with the unconsolidated statements above of each of the members of the Group as of and for the same periods (“ 2015 Final Unaudited Accounts ”) and (C) (i) the consolidated balance sheets of the Group as of March 31, 2017 and (ii) the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for the three month period ended March 31, 2017, as well as the footnotes to such financial statements, together with the unconsolidated statements above of each of the members of the Group as of and for the same periods (“ 2017 Final Unaudited Accounts ” and together

 

6



 

with the 2016 Unaudited Accounts and the 2015 Unaudited Accounts, the “ Final Unaudited Accounts ”), all of which shall be prepared in accordance with IFRS in USD or U.S. GAAP, as mutually agreed between the Purchaser and the Sellers’ Representative in writing, and all of which shall be reviewed by the Auditors and shall be confirmed by the Auditors in writing as having been reviewed by them;

 

1.2.4.                                             2017 Preliminary Budget ” means the budget for the Company and the Group for the financial year ending December 31, 2017, a copy of which is attached hereto as Annexure A, which has been prepared in accordance with IFRS in USD, with all exceptions to IFRS identified and quantified;

 

1.2.5.                                             2017 Final Budget ” means the budget for the Company and the Group for the financial year ending December 31, 2017, which shall be prepared in accordance with IFRS in USD or U.S. GAAP, as mutually agreed between the Purchaser and the Sellers’ Representative in writing;

 

1.2.6.                                             2018 Budget ” means the budget for the Company and the Group for the financial year ending December 31, 2018, which shall be prepared in accordance with IFRS in USD or U.S. GAAP, as mutually agreed between the Purchaser and the Sellers’ Representative in writing;

 

1.2.7.                                             2U ” means 2U, Inc., a company incorporated in the State of Delaware in the U.S., the common shares of which are listed on the NASDAQ;

 

1.2.8.                                             Agreement ” means this agreement and its annexures, as amended from time to time;

 

1.2.9.                                             “Anti-corruption Laws ” means laws, regulations or orders relating to anti-bribery or anti-corruption (governmental or commercial), including but not limited to the FCPA and the U.K. Bribery Act 2010, having the force of law, to the extent such laws, regulations or orders apply to the business and dealings of the Company and/or any Group Company;

 

1.2.10.                                      Auditors ” means Grant Thornton Cape Inc. Chartered Accountants (S.A.), the auditors of the Company, or any other independent public registered accounting firm, reasonably acceptable to Purchaser, appointed by the Company after 1 January 2017 to audit the Company’s financial statements;

 

1.2.11.                                      Business ” means the business conducted by the Company and the business conducted by each other member of the Group;

 

7



 

1.2.12.                                      Business Day ” means any day other than a Saturday, Sunday or official public holiday in South Africa, the United States or the United Kingdom;

 

1.2.13.                                      Cash on Hand ” means all cash and cash equivalents of the Group.  “Cash on Hand” shall, for the avoidance of doubt, exclude (i) any deduction, withholding or additional cost (including Tax) payable or incurred on any cash or cash equivalents that at the relevant date (or within thirty-three (33) days thereof) is not capable of being spent, distributed, loaned or released by a Group Company from the jurisdiction in which it is situated on that date, (ii) any cash or cash equivalents received by the Company with respect to repayment of loans among any Group Company and any employee, director, officer or shareholder of any Group Company or from borrowings under the Interim Period Facility, if applicable; (iii) any cash or cash equivalents that are not otherwise readily accessible on that date by the Group (including any cash and cash equivalents designated as restricted cash on the consolidated balance sheet contained in the 2016 Preliminary Unaudited Accounts and/or the Preliminary Management Accounts, any cash securing rent deposits or any other cash held as collateral in respect of obligations to any other party); and (iv) all Tax (A) the liability for which has been incurred prior to the Closing Date or is attributable to such pre-Closing period and/or (B) the liability for which is not reflected in the 2016 Final Unaudited Accounts and/or (C) any Tax payable by any member of the Group arising from or out of the implementation of the Transaction and any steps taken to place any Seller in a position to sell its Sold Shares in terms of this Agreement, and which Tax contemplated in (A), (B) and/or (C) of this definition has not been paid as at the Closing Date (including, to avoid doubt, employee PAYE tax and VAT due for payment within 30 days after the Closing Date);

 

1.2.14.                                      Closing ” means the closing of the Transaction on the Closing Date, as provided for in clauses 7.3 and 7.5;

 

1.2.15.                                      Closing Date ” means the CP Fulfilment Date or such other date as Purchaser and the Sellers’ Representative may mutually agree in writing; provided, however, that in no event shall the Closing occur within the last forty-five (45) days of any fiscal quarter of 2U (in which case, the Closing Date shall be deferred to the first Business Day of the next fiscal quarter of 2U), without the prior written consent of 2U;

 

1.2.16.                                      Companies Act ” means the Companies Act, No. 71 of 2008, as amended, and any regulations or rules promulgated thereunder;

 

1.2.17.                                      Company ” means Get Educated International Proprietary Limited (Registration No. 2016/324480/07), a private company duly incorporated in South Africa;

 

8



 

1.2.18.                                      Company Representative ” means the Company, any Group Company, or any director, prescribed officer, agent or employee of the Company or any Group Company (in their capacity as such) (individually and collectively);

 

1.2.19.                                      Company Transaction Costs ” means all third party fees, expenses or other costs incurred or contracted for by or on behalf of the Group and/or the Sellers on or before the Closing Date, which are unpaid as of the Closing Date or are payable on or after the Closing Date (excluding fees paid to Grant Thornton LLP after April 1, 2017 and any STT payable with respect to the Transaction), in connection with the Transaction (inclusive of VAT), including, without limitation:

 

1.2.19.1.                        the fees of Webber Wentzel from 1 December 2016 in connection with the Transaction;

 

1.2.19.2.                        the fees of any broker, financial advisor, legal counsel, or other advisor in respect of the Transaction including, without limitation, with respect to advice received on the structuring of the Transaction); and

 

1.2.19.3.                        any compensation payable by any Group Company to any director, officer, employee, agent, consultant or advisor as a result of the transactions contemplated by this Agreement, including any change in control payments, transaction-related bonuses, retention or “stay” bonuses (excluding those contemplated by clause 11.2.2), special or closing bonuses or similar payments;

 

1.2.20.                                      Conditions Precedent ” means the suspensive conditions set out in clause 2.1;

 

1.2.21.                                      Costa ” means Robyn Costa, identity number 8207080106084;

 

1.2.22.                                      Covenantors ” means Samuel Edward Paddock, Robert James Paddock, Anthony Edward Graham Saunders, Ryan Michael O’Mahoney, Dale Williams and Christopher Murray Vella and a reference to “Covenantors” includes a reference to each individually;

 

1.2.23.                                      CP Fulfilment Date ” means the date on which the last of the Conditions Precedent is fulfilled, or waived, as the case may be;

 

1.2.24.                                      Credit Agreement ” means that certain Amended and Restated Revolving Credit Agreement, dated as of December 31, 2013 (as amended, amended and restated, supplemented or otherwise modified from time to time), among 2U and

 

9



 

Comerica Bank, as administrative agent, a lender, issuing lender, and swing line lender, and the other lenders from time to time party thereto;

 

1.2.25.                                      Data Room ” means the electronic data room hosted by Merrill Corporation via their website address http://global.merrillcorp.com/dashboard/home, on an exchange named Project Penguin;

 

1.2.26.                                      Data Room Index ” means the index of the documents listed in the Data Room, a copy of which is attached as Annexure D;

 

1.2.27.                                      DiGame ” means DiGame Africa, company number 137512 C1/GBL and licence number C116015654, a company incorporated in accordance with the laws of the Republic of Mauritius;

 

1.2.28.                                      Earn Out Amount ” means an amount calculated in accordance with Annexure E;

 

1.2.29.                                      ENS Africa ” means Edward Nathan Sonnenbergs Inc, attorneys of ENS House, 1 North Wharf Square, Lower Loop Street, Cape Town;

 

1.2.30.                                      Escrow Agent ” bears the meaning set out in clause 7.4.1;

 

1.2.31.                                      Escrow Agreement ” means the Escrow Agreement in the form attached as Annexure H to be entered into between the Purchaser, the Company, 2U, the Escrow Agent and the Sellers’ Representative (on behalf of all the Sellers, save for DiGame, which shall not be bound thereby) and in terms of which the Sellers’ Escrow Proportions shall be as set out therein and in terms of which the Escrow Amount shall be payable to the Party/ies to whom it becomes payable, in whole or in part (and which shall contain a provision that the Escrow Agreement shall remain in effect and the Purchaser shall deliver to the Escrow Agent thereunder any portion of the Earn Out Amount which is subject to a dispute in accordance with clause 6.4 and/or concerning a Set Off Amount (as described in Annexure E) until such time as  the dispute concerning such Earn Out Amount or any Set Off Amount thereto has been finally determined or settled in accordance with this Agreement);

 

1.2.32.                                      Escrow Amount ” means USD 7,440,000;

 

1.2.33.                                      Fairly Disclosed ” means disclosed in such manner and in such detail as would enable the Purchaser, acting reasonably and in good faith, to identify and to be sufficiently aware of the matter so as fairly to be on notice in respect thereof and thus able to make further inquiries, examinations or assessments as are reasonably necessary to understand the nature and extent of the matter

 

10



 

and its potential impact on the relevant company or relevant asset or liability to which the disclosure relates and to make an informed assessment of the matter concerned and to establish with a reasonable degree of certainty what the consequences thereof would be;

 

1.2.34.                                      FCPA ” means the U.S Foreign Corrupt Practices Act of 1977, as amended;

 

1.2.35.                                      FT ” means the trustees for the time being of The Firebird Trust, Master’s reference number IT1883/2012;

 

1.2.36.                                      General Indemnity ” shall bear the meaning ascribed thereto below clause 15.1.9;

 

1.2.37.                                      General Tax Indemnity ” shall bear the meaning ascribed thereto in clause 15.1.10;

 

1.2.38.                                      GetSmarter ” means Get Educated Proprietary Limited, registration number 2013/058758/07, a South African private company incorporated and tax resident in South Africa, trading as “GetSmarter”;

 

1.2.39.                                      Governmental Entity ” means (i) any supra-national, national, state, municipal or local government (including any subdivision, court, administrative agency or commission or other authority thereof), (ii) any quasi-governmental, private body or any other entity exercising any regulatory, executive, legislative, judicial, taxing, or administrative functions of or pertaining to government, (iii) any public international organisation, (iv) any agency, division, bureau, department, or other political subdivision of any government, entity or organisation described in the foregoing clauses (i) or (ii) of this definition, (v) any company, business, enterprise, or other entity owned, in whole or in part, or controlled by any government, entity, organisation, or other person described in the foregoing clauses (i), (ii), (iii) or (iv) of this definition, or (v) any political party;

 

1.2.40.                                      Government Official ” means (i) any official, officer, employee, or representative of, or any person acting in an official capacity for or on behalf of, any Governmental Entity, (ii) any political party or party official or candidate for political office, (iii) a Politically Exposed Person (PEP) as defined by applicable law, rule or regulation; (iv) any member of a royal or ruling family; or (v) any company, business, enterprise or other entity owned, in whole or in part, or controlled by any person described in the foregoing clauses (i), (ii), (iii), or (iv) of this definition;

 

1.2.41.                                      Group ” means the Company and the Subsidiaries;

 

11



 

1.2.42.                                      Group Company ” means a company in the Group;

 

1.2.43.                                      GS Online ” means Get Smarter Online Limited, company number 09755054, a private company incorporated and tax resident in England;

 

1.2.44.                                      Hill ” means John Hill, identity number 8806125021081;

 

1.2.45.                                      IAT ” means the trustees for the time being of The Infinite Affluence Trust, Master’s reference number IT2996/98;

 

1.2.46.                                      IFRS ” means International Financial Reporting Standards;

 

1.2.47.                                      Income Tax Act ” means the Income Tax Act, 58 of 1962, as amended, and any regulations or rules promulgated thereunder;

 

1.2.48.                                      Indemnifying Sellers ” means each of the Sellers with the exception of DiGame;

 

1.2.49.                                      Indemnifying Sellers’ Proportions ” means, with respect to any Indemnifying Seller, a fraction, the numerator of which is (x) the number of Sold Shares held by such Indemnifying Seller and the denominator of which is (y)  the aggregate number of issued Shares of the Company minus those Sold Shares sold by DiGame, in each case, on the Closing Date, immediately before the Closing, as set out in the second column of Annexure P;

 

1.2.50.                                      Independent Accountant ” means a suitably qualified independent accountant or accounting firm to be agreed upon by the Sellers’ Representative and the Purchaser or, failing agreement within 5 (five) Business Days from the date of a request by either of them for such agreement, as appointed by the president for the time being of the South African Institute of Chartered Accountants;

 

1.2.51.                                      Interim Period ” means the period from the Signature Date up to (and including) the earlier of the Closing Date or the date of termination or rescission of this Agreement in accordance with its terms;

 

1.2.52.                                      Johnson ” means Amy Johnson, identity number 8704230079088;

 

1.2.53.                                        Key Employees ” means the following key employees of the Company and the Group:

 

1.2.53.1.                        Samuel Edward Paddock,

 

1.2.53.2.                        Robert James Paddock,

 

1.2.53.3.                        Anthony Edward Graham Saunders,

 

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1.2.53.4.                        Amy Johnson,

 

1.2.53.5.                        Ryan Michael O’Mahoney,

 

1.2.53.6.                        Christopher Murray Vella,

 

1.2.53.7.                        John Hill, and

 

1.2.53.8.                        Thelma Janse Van Rensburg;

 

1.2.54.                                      Preliminary Management Accounts ” means the unaudited internally prepared monthly consolidated management accounts of the Company and its Subsidiaries, for each complete calendar month between 1 January 2016 and the last day of the calendar month preceding the Signature Date (reflecting the current month in question and, separately and cumulatively, for the financial year which commenced 1 January 2016), all of which shall be prepared in accordance with IFRS in USD, with any exceptions to IFRS identified and quantified;

 

1.2.55.                                      Final Management Accounts ” means the unaudited internally prepared monthly consolidated management accounts of the Company and its Subsidiaries, for each complete calendar month between 1 January 2016 and the last day of the full calendar month thirty (30) days prior to the Closing Date (reflecting the current month in question and, separately and cumulatively, for the financial year which commenced 1 January 2016), all of which shall be prepared in accordance with IFRS in USD or U.S. GAAP, as mutually agreed between the Purchaser and the Sellers’ Representative in writing;

 

1.2.56.                                      Material Adverse Effect ” means any event, circumstance, change, occurrence or effect (collectively, “ Events ”) that, individually or in the aggregate with all other Events, (A) are materially adverse to the business, assets, liabilities, prospects, financial condition or results of operations of the Group, taken as a whole, or (B) materially impair or delay the ability of the Company to consummate the transactions contemplated by this Agreement; provided that none of the following shall be deemed to constitute, and none of the following shall be taken into account in determining whether there has been, a Material Adverse Effect: any adverse Event arising from or relating to (i) general business, political or economic conditions, including such conditions related to the business of the Group, (ii) financial, banking or securities markets, including any disruption thereof, any decline in the price of any security or any market index, changes in interest or exchange rates or the availability of credit financing, (iii) changes in applicable law or IFRS or the interpretation thereof, or

 

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(iv) the announcement of the transactions contemplated by this Agreement; provided that with respect to a matter described in any of the foregoing clauses (i) - (iii), such matter shall only be excluded so long as such matter does not have a disproportionate effect on the Group, taken as a whole, relative to other comparable entities operating in the industry in which the Group operates;

 

1.2.57.                                      Material Contract ” means each contract set out in Annexure F;

 

1.2.58.                                      Parties ” means the Company, the Purchaser, the Sellers and the Sellers’ Representative, and “ Party ” shall mean any of them as the context may require;

 

1.2.59.                                      PFT ” means the trustees for the time being of The Paddock Family Trust, Master’s reference number IT2581/98;

 

1.2.60.                                      Prime Rate ” means in relation to any period, the percentage prime rate of interest ruling from time to time, expressed as a rate per annum, at which the Company’s commercial bankers from time to time lends to its customers from time to time during that period, as published by such bankers;

 

1.2.61.                                      PT ” means the trustees for the time being of The Princess Trust, Master’s reference number IT1524/2011;

 

1.2.62.                                      Purchase Price ” means the Rand Equivalent of the aggregate amount payable by the Purchaser in respect of the Sold Shares, as determined in accordance with this Agreement;

 

1.2.63.                                      Purchaser ” means K2017143886 South Africa Proprietary Limited (Registration No. 2017/143886/07), a company duly incorporated and registered in accordance with the laws of South Africa;

 

1.2.64.                                      Rand ” means Rand, the official currency of South Africa;

 

1.2.65.                                      Rand Equivalent ” means:

 

1.2.65.1.                        in respect of each amount payable by the Purchaser in respect of the Purchase Price (including the Escrow Amount and the Earn Out Amount), an amount quoted in Rand, being the equivalent of the relevant amount of USD converted into Rand by the Purchaser’s South African bankers and in the amount so paid by the Purchaser’s South African bankers to the Purchaser;

 

1.2.65.2.                        in respect of amounts contemplated in this Agreement which are referred to in USD and require conversion into Rand (such as, by way of example only, the amount of Cash on Hand and the amount

 

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of Working Capital), other than those in clause 1.2.65.1, an amount quoted in Rand, being the equivalent of the relevant amount of USD as if it had been converted into Rand by the Purchaser’s South African bankers for the date in question at 17h00 on that date using the average of the bid and offer prices then prevailing at such bankers and vice versa for amounts in Rand which require conversion into USD;

 

1.2.65.3.                        if applicable, in respect of amounts in UK Pounds Sterling (“ GBP ”) as applicable to GS Online, which require conversion into Rand (such as, by way of example only, the amount of Cash on Hand and the amount of Working Capital), an amount quoted in Rand, being the equivalent of the relevant amount of GBP as if it had been converted into Rand by the Purchaser’s South African bankers for the date in question at 17h00 on that date using the average of the bid and offer prices then prevailing at such bankers;

 

1.2.66.                                      Related Person ” shall mean an “associate” as defined in the Listings Requirements published by the JSE Limited as at the Signature Date.  For the avoidance of doubt and without limitation:

 

1.2.66.1.                        Samuel Edward Paddock and his Related Persons are Related Persons in respect of SEPFT;

 

1.2.66.2.                        Robert James Paddock and his Related Persons are Related Persons in respect of RJPFT;

 

1.2.66.3.                        Amanda Claire Paddock and Graham John Paddock and their Related Persons are Related Persons in respect of PFT;

 

1.2.66.4.                        Christopher Murray Vella and his Related Persons are Related Persons in respect of VT;

 

1.2.66.5.                        Anthony Edward Graham Saunders and his Related Persons are Related Persons in respect of FT;

 

1.2.66.6.                        Ryan Michael O’Mahoney and his Related Persons are Related Persons in respect of PT; and

 

1.2.66.7.                        Dale Williams and his Related Persons are Related Persons in respect of IAT;

 

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1.2.67.                                      Relevant Parties ” means, for purposes of clause 19 and clause 23, the Purchaser and the Sellers’ Representative, each being a “ Relevant Party ”;

 

1.2.68.                                      Required Company Information ” means all customary financial and other pertinent information regarding the Company and the Subsidiaries as Purchaser shall reasonably request during the Interim Period, including (i) information necessary for 2U to prepare a pro forma consolidated balance sheet (statement of financial position) and pro forma consolidated statements of income of 2U and the Company on a combined basis, (ii) any audit reports, and other financial information and financial data, pro forma financial statements and other data and information regarding the Company and the Subsidiaries for the financial periods and of the type and form required by Regulation S-X and Regulation S-K under the Securities Act for registered offerings of securities on Form S-3 (or any successor forms thereto) under the Securities Act, and of the type and form, and for the periods, in each case, as reasonably requested by Purchaser, (iii) the Final Unaudited Accounts, (iv) the Final Management Accounts; (v) the 2017 Final Budget; (vi) the2016 student enrollment data and associated revenue by course by month for each Group Company; (vii), 2017 and 2018 projected student enrollment data and associated revenue by course by month for each Group Company; and (viii) all other data of the Company and the Subsidiaries that would be necessary for independent accountants to provide customary “comfort” (including customary negative assurances) or necessary for 2U to make applicable filings under Regulation S-X and Regulation S-K under the Securities Act;

 

1.2.69.                                      RJPFT ” means the trustees for the time being of The Robert James Paddock Family Trust, master’s reference number IT2913/2012;

 

1.2.70.                                      Sale and Subscription Agreement ” means the Sale and Subscription Agreement entered into in writing between SEPFT, RJPFT, PFT, DiGame Africa, GetSmarter and the Company, dated August 5, 2016;

 

1.2.71.                                      Sanctions Laws and Regulations ” means (i) any of the Trading With the Enemy Act, the International Emergency Economic Powers Act, the United Nations Participation Act, or the Syria Accountability and Lebanese Sovereignty Act, all as amended, or regulations of the US Treasury Department Office of Foreign Assets Controls (“ OFAC ”), or any export control law or regulation applicable to US-origin goods, or any enabling legislation or executive order relating to any of the above, as collectively interpreted and applied by the US Government at the prevailing point in time (ii) any U.S. sanctions related to or administered by the US Department of State and (iii) any sanctions measures or

 

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embargos imposed by the United Nations Security Council, Her Majesty’s Treasury (UK), the European Union or other relevant sanctions authority;

 

1.2.72.                                      Sanctions Target ” means (i) any country or territory that is the subject of country-wide or territory-wide Sanctions, including, but not limited to, as at the Signature Date, Iran, Cuba, Syria, Sudan and North Korea; (ii) a person or entity that is on the list of Specially Designated Nationals and Blocked Persons published by OFAC or any equivalent list of sanctioned persons issued by the U.S. Department of State; or (iii) a person or entity that is located in or organised under the laws of a country or territory that is identified as the subject of country-wide or territory-wide Sanctions Law and Regulations;

 

1.2.73.                                      Sanctioned Person ” means any person or organisation (i) located within, or doing business or operating from, a country or other territory subject to a general embargo administered by OFAC, (ii) designated on the OFAC list of Specially Designated Nationals or (iii) otherwise targeted under any Sanctions Laws or Regulations, or a person owned or controlled by, or acting as an agent for, any such person or organisation described in sub-clauses (i), (ii) or (iii) above;

 

1.2.74.                                      Sanctioned Territory ” means any country or other territory subject to a general export, import, financial or investment embargo under Sanctions Laws or Regulations;

 

1.2.75.                                      Securities Act ” means the U.S. Securities Act, 1933;

 

1.2.76.                                      Sellers ” means those persons named in the first column of Annexure G;

 

1.2.77.                                      Sellers’ Escrow Proportions ” means, with respect to any Seller, a fraction, the numerator of which is (x) the number of Sold Shares held by such Seller and the denominator of which is (y) the aggregate number of issued Shares of the Company, minus those Sold Shares sold by DiGame, in each case, on the Closing Date, immediately before the Closing, as set out in the second column of Annexure I;

 

1.2.78.                                      Sellers’ Proportions ” means, with respect to any Seller, a fraction, the numerator of which is the number of Sold Shares held by such Seller and the denominator of which is the aggregate number of issued Shares of the Company, in each case, on the Closing Date, immediately before the Closing, as set out in the second column of Annexure G;

 

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1.2.79.                                      Sellers’ Representative ” means the duly authorised representative of the Sellers for the purposes set out in this Agreement as set out in clause 20, being Samuel Edward Paddock;

 

1.2.80.                                      SEPFT ” means the trustees for the time being of The Samuel Edward Paddock Family Trust, Master’s reference number IT2914/2012;

 

1.2.81.                                      Shareholders’ Agreement ” means the agreement entered into in writing between the Company, the Sellers and certain individuals in respect of the Company, dated August 5, 2016;

 

1.2.82.                                      Shares ” means ordinary shares having no par value in the authorised share capital of the Company;

 

1.2.83.                                      Signature Date ” means the date of signature of this Agreement by the last of all of the Parties to do so;

 

1.2.84.                                      Sold Shares ” means the 714,000 ordinary shares of no par value in issue by the Company on the Closing Date, being 100% (one hundred per cent) of the issued shares of the Company;

 

1.2.85.                                      South Africa ” means the Republic of South Africa;

 

1.2.86.                                      STT ” means securities transfer tax;

 

1.2.87.                                      STT Act ” means The Securities Transfer Act, No. 25 of 2007, as amended;

 

1.2.88.                                      Subsidiaries ” means GetSmarter and GS Online;

 

1.2.89.                                      TAA ” means the Tax Administration Act No. 28 of 2011;

 

1.2.90.                                      Target Cash on Hand ” means Cash on Hand in an aggregate amount equal to R20 million;

 

1.2.91.                                      Tax ” means all statutory taxes, including all income tax, capital gains tax, secondary tax on companies (or any similar tax replacing or substituting it), dividend tax, dividend withholding tax, value-added tax, donations tax, Regional Service Council levies, skills development levies, stamp duties, securities transfer tax, transfer duties, mineral royalty, PAYE, unemployment insurance fund contributions, levies, assessments, imposts, deductions, charges and withholdings whatsoever in terms of any tax legislation, and includes all additional tax, penalties and interest payable as a consequence of any failure or delay in paying any taxes, and “ Taxes ” shall have a corresponding meaning;

 

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1.2.92.                                      Tax Warranty ” means each of the warranties regarding Tax contained in paragraph 12 of Annexure B and the General Tax Indemnity;

 

1.2.93.                                      Title Warranty ” means each of the specific warranties contained in clause 14.3 and in paragraph 2 of Annexure B, and “Title Warranties” shall mean all of them as the context may require;

 

1.2.94.                                      Transaction ” means the sale of the Sold Shares in terms of this Agreement;

 

1.2.95.                                      Transaction Agreements ” means this Agreement, the 2U Parent Guarantee (attached as Annexure N) and the Escrow Agreement;

 

1.2.96.                                      UK ” means the United Kingdom of Great Britain;

 

1.2.97.                                      US ” means the United States of America;

 

1.2.98.                                      USD ” means United States Dollars, the official currency of the US;

 

1.2.99.                                      Van Rensburg ” means Thelma Janse Van Rensburg, identity number 8701280213088;

 

1.2.100.                               VAT ” means value added tax in terms of the VAT Act;

 

1.2.101.                               VAT Act ” means the Value Added Tax Act, 1991;

 

1.2.102.                               VT ” means the trustees for the time being of The Velflex Trust, Master’s reference number IT1323/2015;

 

1.2.103.                               Warranty Claim ” means any claim or claims by the Purchaser against the Sellers or any of them for or in respect of breach of the warranties in terms of this Agreement, including under the General Indemnity or the General Tax Indemnity;

 

1.2.104.                               Webber Wentzel ” means Webber Wentzel Attorneys of 15 th  Floor, Convention Tower, Heerengracht, Foreshore, Cape Town; and

 

1.2.105.                               Working Capital ” means the result of the current assets of the Group (aggregated as if they were one legal entity) minus the current liabilities of the Group (aggregated as if they were one legal entity) as at the commencement of business on the Closing Date, comprising each of the line items and taking into account the principles and adjustments set out in Annexure K and no others; and for the avoidance of doubt excluding dividend withholding tax or any other Tax, stamp duty, levy or impost payable upon or as a result of the

 

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implementation of the Transaction Agreements and excluding also Company Transaction Costs;

 

1.3.                             if any provision in a definition is a substantive provision conferring a right or imposing an obligation on any Party then, notwithstanding that it is only in a definition, effect shall be given to that provision as if it were a substantive provision in the body of this Agreement;

 

1.4.                             any reference to an enactment is to that enactment as at the Signature Date and as amended or re-enacted from time to time and includes any subordinate legislation made from time to time under such enactment.  Any reference to a particular section in an enactment is to that section as at the Signature Date, and as amended or re-enacted from time to time and/or an equivalent measure in an enactment, provided that if as a result of such amendment or re-enactment, the specific requirements of a section referred to in this Agreement are changed, the relevant provision of this agreement shall be read also as if it had been amended as necessary, without the necessity for an actual amendment;

 

1.5.                             if any term is defined within the context of any particular clause in this Agreement, the term so defined, unless it is clear from the clause in question that the term so defined has limited application to the relevant clause, shall bear the meaning ascribed to it for all purposes in terms of this Agreement, notwithstanding that that term has not been defined in this interpretation clause;

 

1.6.                             where any number of days is to be calculated from a particular day, such number shall be calculated as excluding such particular day and commencing on the next day, and including the last day.  If the last day of such number so calculated falls on a day which is not a Business Day, the last day shall be deemed to be the next succeeding day which is a Business Day;

 

1.7.                             references to time are to time in South Africa;

 

1.8.                             if figures are referred to in numerals and in words and if there is any conflict between the two, the words shall prevail;

 

1.9.                             any reference to days (other than a reference to Business Days), months or years shall be a reference to calendar days, months or years, as the case may be;

 

1.10.                      expressions defined in this Agreement shall bear the same meanings in schedules or annexures to this Agreement which do not themselves contain their own conflicting definitions;

 

1.11.                      the use of any expression in this Agreement covering a process available under South African law such as winding up (without limitation eiusdem generis ) shall, if any of the

 

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Parties is subject to the law of any other jurisdiction, be construed as including any equivalent or analogous proceedings under the law of such defined jurisdiction;

 

1.12.                      the expiration or termination of this Agreement shall not affect such of the provisions of this Agreement as expressly provide that they will operate after any such expiration or termination or which of necessity must continue to have effect after such expiration or termination, notwithstanding that the clauses themselves do not expressly provide for this;

 

1.13.                      any reference in this Agreement to a Party shall include a reference to that Party’s assigns expressly permitted under this Agreement and, if such Party is liquidated or sequestrated or placed under Business Rescue in terms of Chapter 6 of the Companies Act, be applicable also to and binding upon that Party’s liquidator, trustee or Business Rescue practitioner, as the case may be;

 

1.14.                      any reference in this Agreement to any other agreement or document shall be construed as a reference to such other agreement or document as same may have been, or may from time to time be, amended, varied, novated or supplemented;

 

1.15.                      the words “other” and “otherwise” shall not be construed eiusdem generis with any preceding words if a wider construction is possible;

 

1.16.                      the words “include”, “including” and “in particular” shall be construed as being by way of example or emphasis only and shall not be construed, nor shall they take effect, as limiting the generality of any preceding word/s; and

 

1.17.                      the terms of this Agreement having been negotiated, the contra proferentem rule (the rule of construction that a contract shall be interpreted against the party responsible for the drafting or preparation of the contract) shall not be applied in the interpretation of this Agreement.

 

2.                                       CONDITIONS PRECEDENT

 

2.1.                             The whole of this Agreement, save for the provisions of this clause 2, clauses 1, 7.1, 7.2, 8.1,11.2.1, 12, 13, 19 and clauses 20 to 33 (both inclusive) which shall be of immediate force and effect on the Signature Date, is subject to the fulfilment (or, where appropriate, waiver) of the following Conditions Precedent by no later than 17h00 on 3 July 2017 or such other date as may be specified in relation to any particular Condition Precedent:

 

2.1.1.                                             the Sellers’ Representative has delivered to the Purchaser a final tax study of the Group prepared by Aronson LLC (which study is currently in process);

 

2.1.2.                                             since the Signature Date, there shall not have occurred a Material Adverse Effect;

 

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2.1.3.                                             by no later than 17h00 on the fifth (5 th ) Business Day following the Signature Date, each of the Key Employees enters into a new Executive Employment Agreement substantially in the form attached as Annexure M;

 

2.1.4.                                             by no later than 17h00 on the thirtieth (30 th ) Business Day following the Signature Date, each of the consents set forth in Annexure F shall have been obtained from the relevant counterparty and each such consent shall be in full force and effect through the Closing Date;

 

2.1.5.                                             by no later than 17h00 on the fifteenth (15 th ) Business Day following the Signature Date, the Escrow Agreement has been entered into in writing by each of the parties thereto;

 

2.1.6.                                             by no later than 17h00 on June 30, 2017, the Purchaser has received from the Company the Required Company Information;

 

2.1.7.                                             the Takeover Regulation Panel granting its approval or an unconditional written exemption in terms of section 119(6) of the Companies Act in relation to the sale of the Sold Shares as contemplated in this Agreement;

 

2.1.8.                                             by no later than 17h00 on June 30, 2017, 2U shall have entered into an effective waiver, consent, amendment, or other modification of or to the provisions of the Credit Agreement to permit (i) the Transaction and (ii) any other transactions contemplated by this Agreement;

 

2.1.9.                                             by no later than 17h00 on the fifteenth (15th) Business Day after the Signature Date, 2U providing an irrevocable guarantee to and in favour of the Sellers, in the form attached hereto as Annexure N, to the Sellers’ Representative and an authorised dealer and/or authorised bank (as authorised by the Foreign Surveillance Department of the South African Reserve Bank) appointed by the Purchaser for purposes of obtaining the approval referred to in clause 2.1.10.2;

 

2.1.10.                                      the authorised dealer and/or authorised bank (as authorised by the Foreign Surveillance Department of the South African Reserve Bank) appointed by the Purchaser for this purpose confirms in writing to the Purchaser:

 

2.1.10.1.                        in respect of the share certificate in the name of DiGame, reflecting DiGame as the owner of 142 800 Sold Shares, such authorised bank shall cancel the “non-resident” endorsement thereon on the Closing Date as a result of the Transaction; and

 

2.1.10.2.                        either that the furnishing by 2U of the guarantee referred to in clause 2.1.9 does not require approval under South African

 

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exchange control laws, regulations, policies or practice or that, if it does require such approval, such approval is granted.

 

2.2.                             Forthwith after the Signature Date, the Parties shall use their respective reasonable commercial endeavours and co-operate in good faith to procure, to the extent that it is within their power to do so, the fulfilment of all of the Conditions Precedent, as expeditiously as reasonably possible with a view to achieving the fulfilment of all of the Conditions Precedent as soon as reasonably possible, irrespective of the date specified for their fulfilment.

 

2.3.                             The Conditions Precedent set out in clauses 2.1.1, 2.1.2, 2.1.3, 2.1.4, 2.1.6, 2.1.8 and 2.1.10 have been inserted for the benefit of the Purchaser which will be entitled at its sole discretion to waive any one or more or all of such Conditions Precedent (in whole or in part, as elected by the Purchaser) prior to the expiry of the relevant time period set out in clause 2.1 (or such extended time period as may be agreed in writing between the Sellers’ Representative and the Purchaser in accordance with clause 2.7).

 

2.4.                             The Condition Precedent set out in clause  2.1.9 has been inserted for the benefit of the Sellers which will be entitled to waive such Condition Precedent prior to the expiry of the relevant time period set out in clause 2.1 (or such extended time period as may be agreed in writing between the Sellers’ Representative and the Purchaser in accordance with clause 2.7).

 

2.5.                             The Condition Precedent set out in clause 2.1.5 has been inserted for the benefit of the Sellers and the Purchaser, who will be entitled by agreement between the Sellers’ Representative and the Purchaser in writing to waive such Condition Precedent prior to the expiry of the relevant time period set out in clause 2.1 (or such extended time period as may be agreed in writing between the Sellers’ Representative and the Purchaser in accordance with clause 2.7).

 

2.6.                             The Condition Precedent in clause 2.1.7 may not be waived.

 

2.7.                             Unless the Conditions Precedent have been fulfilled or waived by not later than the relevant dates for fulfilment thereof (or such later date or dates as may be agreed in writing between the Sellers’ Representative and the Purchaser on or before the aforesaid date or dates), the provisions of this Agreement save for this clause 2, clauses 1, 7.1, 7.2, 8.1,11.2.1, 12, 13, 19 and clauses 20 to 33 (both inclusive) which will remain of full force and effect, will never become of any force or effect and the status quo ante will be restored as near as may be possible and none of the Parties will have any claim against any other in terms hereof or arising from the failure of the Conditions Precedent, save for any claims arising from a breach of clause 2.2 and/or any prior breach of any of the provisions of this Agreement which became effective on the Signature Date.

 

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2.8.                             The Mutual Non-Disclosure Agreement entered into between 2U and the Company on or about 2 September 2016 shall continue to apply according to its terms and is in no way affected by this Agreement.  In addition, the Purchaser shall have the same obligations in terms thereof as those of 2U and the Sellers shall have the same obligations in terms thereof as those of the Company.

 

2.9.                             Each of the Sellers jointly in the Sellers’ Proportions (and not jointly and severally) give the Purchaser, in addition to the warranties set out in clauses 14.1, 14.2 and 14.3 and the warranties set out in Annexure B, the following warranties, namely that on the Signature Date:

 

2.9.1.                                             the Sellers (in their capacities as shareholders of the Company) and the board of directors of the Company have each passed resolutions electing (in the case of the Sellers) the following persons as directors of the Company and accepting their appointment (in the case of the board of directors of the Company), with effect from the date and time upon which this Agreement, having become unconditional, is implemented and the Purchaser is entered into the securities register of the Company as the holder of the Sold Shares at the Closing, namely Susan Cates and Matthew Norden, true copies of which have been furnished to the Purchaser;

 

2.9.2.                                             each of the Sellers and the boards of directors of each of the Group Companies have passed all such resolutions and obtained all such consents as may be necessary or required for purposes of the provisions of clauses 3.1, 3.2, 3.3 and 3.4 being of full force and effect from the Closing Date;

 

2.9.3.                                             the shareholders and the boards of directors of the Company and each member of the Group have each passed all such resolutions and obtained all necessary consents as may be necessary or required in terms of the memorandum of incorporation (or equivalent constitutional document) of each member of the Group and the Shareholders’ Agreement in order to make this Agreement binding on the Sellers in all respects according to its terms;

 

2.9.4.                                             the shareholders of the Company have passed special resolutions in terms of sections 44 and 45 of the Companies Act, approving any financial assistance by the Company in terms of this Agreement and as contemplated by those sections for purposes of the Transaction (including to enable the Company to fund GetSmarter for purposes of clauses 11.2 and 11.3 and for the payment of Company Transaction Costs payable by the Company);

 

2.9.5.                                             with effect from the Closing Date, all delegations of authority by the boards of directors of each member of the Group have been fully revoked; and

 

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2.9.6.                                             the trustees of each Seller which is a trust have approved the terms of this Agreement and the Escrow Agreement and confirmed the authority of the person who signs this Agreement and the Escrow Agreement for such Seller.

 

3.                                       TERMINATION OF THE SHAREHOLDERS’ AGREEMENT, SALE AND SUBSCRIPTION AGREEMENT AND CALL OPTIONS

 

3.1.                             The Sellers, GetSmarter and the Company (as well as the other signatories thereto) hereby terminate the Shareholders’ Agreement, and the parties to the Sale and Subscription Agreement (the Company agreeing for itself and for and on behalf of GetSmarter) hereby terminate the Sale and Subscription Agreement (solely with respect to the warranties, representations and undertakings that survived the date of the Closing Meeting, as defined in the Sale and Subscription Agreement), in each case, effective as of the Closing Date, and the Sellers waive all and any claims against the Company which any one or more or all of them may have, with effect from the Closing Date.

 

3.2.                             Each of the Sellers waives all and any pre-emptive and similar rights which it may have to purchase any of the Sold Shares, whether in terms of the Shareholders’ Agreement or the Company’s memorandum of incorporation or otherwise.

 

3.3.                             The Company waives all and any pre-emptive and similar rights which it may have to acquire any of the Sold Shares, whether in terms of the Shareholders’ Agreement or the Company’s memorandum of incorporation or otherwise.

 

3.4.                             Each Seller which holds a call option over any Sold Shares held by any other Seller/s agrees that in the Interim Period it shall not be entitled to exercise such call option and that each such call option lapses in its entirety on the Closing Date.

 

4.                                       MERGER NOTIFICATION

 

It is recorded that the Transaction will not result in an acquisition of control as contemplated by Chapter 3 of the Competition Act, 1998 which will require the approval of the Competition Commission or the Competition Tribunal prior to the Transaction being implemented.

 

5.                                       SALE OF THE SOLD SHARES

 

5.1.                             The Purchaser agrees to purchase (and take cession of all rights in and to) the Sold Shares at the Purchase Price and the Sellers agree to sell and cede all rights in and to the Sold Shares to the Purchaser on the Closing Date against payment of the portion of the Purchase Price due and payable on the Closing Date in accordance with clauses 6 and 7. The Purchaser purchases the Sold Shares as one indivisible transaction and shall not be required to complete the purchase unless 100% (one hundred per cent) of the issued shares in the Company are sold, ceded and transferred to it on the Closing Date at the Closing.

 

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5.2.                             Notwithstanding the Signature Date, the Sold Shares are sold with effect from the Closing Date against payment of the Purchase Price due and payable on the Closing Date in accordance with clauses 6 and 7, from which date all risk in and benefits attaching to them shall be deemed to have passed to the Purchaser.

 

6.                                       PURCHASE PRICE

 

6.1.                             The aggregate amount payable by the Purchaser in respect of the Sold Shares (“ Purchase Price ”) shall be the sum of the amounts determined in terms of clause 6.2 (as may be adjusted in accordance with clause 9) and clause 6.4.

 

6.2.                             The portion of the Purchase Price determined on the Closing Date shall be an amount calculated as follows:

 

6.2.1.                                             the Rand Equivalent of USD 103,000,000 (one hundred three million USD); less

 

6.2.2.                                             any Company Transaction Costs (inclusive of VAT) incurred on or before Closing which are payable on or after the Closing Date; less

 

6.2.3.                                             the amount by which Cash on Hand as of the close of business on the Business Day immediately prior to the Closing is less than the Target Cash on Hand; less

 

6.2.4.                                             if applicable, an amount equal to the amount due in terms of clause 12.11.1; less

 

6.2.5.                                             the amount, in aggregate, paid by the Purchaser to the Company on the Closing Date in terms of clause 8; less

 

6.2.6.                                             the amount, in aggregate, paid by the Purchaser to the Company on the Closing Date in terms of clauses 11.2.2 and 11.3.

 

6.3.                             The Purchase Price shall be paid in accordance with clause 7.

 

6.4.                             In addition to the Purchase Price determined in accordance with clause 6.2, in respect of each of the years ended on each of December 31, 2017 and December 31, 2018, an amount equal to the Rand Equivalent of the applicable Earn Out Amount, if any, shall become payable by the Purchaser to the Sellers, as determined in terms of Annexure E, in respect of the Sold Shares, which amount shall be quantified with reference to the audited financial statements of the Group and shall be payable not later than 30 (thirty) days after the audit of the Group for the year in question has been completed and the audited financial statements signed by the auditors. Any Earn Out Amount paid by the Purchaser to the Sellers shall constitute an increase in the Purchase Price paid by the Purchaser for the Sold Shares as of the Closing Date.  In accordance with clause 9.3 and Annexure E, the Earn Out Amount or any part thereof may be set off by Purchaser against any amount which any

 

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Seller/s may owe to the Purchaser as a result of any claim by the Purchaser in terms of this Agreement which has not been settled in full from the Escrow Amount or by the Sellers directly in cash.  If any dispute arises between the Sellers’ Representative and the Purchaser concerning the Purchaser’s set off of any Earn Out Amount (or portion thereof) against any amount the Purchaser alleges is owed to it by the Sellers, notwithstanding anything to the contrary herein, the Purchaser shall deliver eighty percent (80%) of such portion of any Earn Out Amount in dispute to the Escrow Agent to be held in accordance with the Escrow Agreement, pending a written agreement of the Parties resolving such dispute or a final determination of such dispute in accordance with this Agreement.  Any payment which may become due to the Sellers from such amounts held pursuant to the terms of the Escrow Agreement shall be payable only to the Sellers excluding DiGame (which shall not be entitled to payment of any amount from the Escrow Agreement in any circumstance) in accordance with each of the Sellers’ respective Sellers’ Escrow Proportion.  The remaining balance of such portion of any Earn Out Amount in dispute shall be retained by the Purchaser and shall be payable to DiGame only to the extent all or any portion of such amount is finally determined to be payable to DiGame in accordance with a written agreement of the Parties resolving such dispute or a final determination of such dispute in accordance with this Agreement.

 

6.5.                             The Purchaser and the Company shall, until 31 December 2018 (“ Earn Out Protection Period ”), ensure that the business of the Company is conducted in accordance with the final paragraph of Annexure E.

 

7.                                       CLOSING

 

7.1.                             The Sellers’ Representative shall, not later than five (5) Business Days prior to the Closing Date, provide to the Purchaser a written statement prepared (in good faith with reasonably supporting documentation) (in accordance with the form attached as Annexure L) (the “ Estimated Closing Statement ”) setting out:

 

7.1.1.                                             the calculation of the Purchase Price in accordance with clause 6.2;

 

7.1.2.                                             a true and complete schedule of the Company Transaction Costs, with a detailed breakdown and itemisation of their composition and amounts and the persons to which such amounts are due;

 

7.1.3.                                             the Cash on Hand as of the close of business on the Business Day prior to the Closing Date;

 

7.1.4.                                             the Working Capital as of the close of business on the Business Day prior to the Closing Date; and

 

7.1.5.                                             the amounts to be paid to the Company in accordance with clause 8;

 

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7.1.6.                                             the amount of unpaid Tax (other than STT) payable by any member of the Group after the Closing Date, the liability for which arose or accrued on or prior to the Closing Date, separately itemising each category of tax in a different line item (by way of example only and without limitation, one line item for PAYE for employees, one line item for VAT, one line item for skills development levies, etc).

 

The Estimated Closing Statement shall be based upon the Final 2016 Unaudited Accounts and Final Management Accounts for the Interim Period and the books and records of the Group during the Interim Period.  The content of the Estimated Closing Statement and the components thereof shall be reasonably acceptable to Purchaser.  The Company shall provide reasonable access to the appropriate personnel and financial books and records of the Group and its representatives, as well as any additional relevant information and work papers as the Purchaser may reasonably request, to enable the Purchaser to properly evaluate the Estimated Closing Statement.

 

7.2.                             If the Purchaser disputes the portion of the Purchase Price referred to in clause 6.2 as reflected in the Estimated Closing Statement and/or the basis of calculation of any one or more components thereof in writing by notice to the Sellers’ Representative, the dispute shall be resolved or determined in accordance with clauses 9 and 19 after the Closing Date, unless the amount in dispute exceeds R5,000,000 (five million rand) and concerns a matter referred to in clause 7.1.3 or clause 7.1.4, in which case the Closing Date shall be deferred to the first Business Day following resolution and/or determination of such dispute; provided that the Closing shall not occur within the last forty-five (45) days of any fiscal quarter of 2U (in which case, the Closing Date shall be deferred to the first Business Day of the next fiscal quarter of 2U). If the Purchaser does not dispute same before the Closing, such failure to raise a dispute shall in no way affect the Purchaser’s right to raise a dispute after the Closing and/or to claim any amount from the Sellers in terms of this Agreement.

 

7.3.                             At 09h00 on the Closing Date, the Purchaser shall, subject to clause 7.6, pay to ENS Africa the portion of the Purchase Price referred to in clause 6.2, less the Escrow Amount which shall be paid to the Escrow Agent in accordance with clause 7.4, in such a manner that the payment shall immediately reflect in ENS Africa’s designated bank account on the Closing Day, for distribution by ENS Africa of the amount received by ENS Africa to Webber Wentzel, with Webber Wentzel to distribute same to the Sellers. Webber Wentzel shall on the Closing Date distribute the Purchase Price referred to in clause 6.2, as received by Webber Wentzel from ENS Africa  as follows:

 

7.3.1.                                             an amount equal to twenty percent (20%) of the portion of the Purchase Price determined on the Closing Date in accordance with clause 6.2 shall be paid to DiGame; and

 

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7.3.2.                                             the remaining portion of the amount received by Webber Wentzel from ENS Africa on the Closing Date in accordance with clause 7.3, shall be delivered to the Sellers (other than DiGame), in accordance with their respective Sellers’ Escrow Proportions.

 

For all purposes of this Agreement, payment of any amount by the Purchaser to ENS Africa and by ENS Africa to Webber Wentzel in terms of this Agreement shall fully and finally discharge the obligation of the Purchaser to make payment of such amount to the Sellers for all purposes of this Agreement. Neither the Purchaser nor ENS Africa shall be responsible for the payment by Webber Wentzel of any amount received by Webber Wentzel from ENS Africa to any Seller, nor shall it be liable for any non-payment or late payment by Webber Wentzel.  The Sellers and Webber Wentzel are responsible for ensuring that all amounts paid by the Purchaser to ENS Africa and by ENS Africa to Webber Wentzel in terms of this Agreement are allocated between the Sellers, and neither the Purchaser nor ENS Africa shall have any liability in this regard.

 

7.4.                             Escrow Amount

 

7.4.1.                                             On the Closing Date (the “ Escrow Payment Date ”), the Purchaser shall cause to be delivered to a separate account with Delaware Trust Company (the “ Escrow Agent ” and such account, the “ Escrow Account ”) the Escrow Amount in accordance with the terms of the Escrow Agreement. Such amount shall be held pursuant to the terms of the Escrow Agreement and shall be available to satisfy any obligations of the Sellers (other than DiGame) in respect of (i) any adjustments to the Purchase Price hereunder, and (ii) any indemnification obligations and any claims for breach of any warranty of the Sellers (other than DiGame) under this Agreement. 2U shall pay all fees and expenses of the Escrow Agent.

 

7.4.2.                                             Notwithstanding anything to the contrary contained in this Agreement, if the Purchaser intends to set-off or deduct amounts due and payable to the Purchaser, in terms of this Agreement, from any portion of (i) the Escrow Amount and/or (ii) the Earn Out Amount, and the Sellers’ Representative disputes such set-off or deduction, then such disputed amount shall be placed with the Escrow Agent in accordance with clause 6.4..

 

7.4.3.                                             Subject to the terms and conditions of this Agreement and the Escrow Agreement, (i) fifty percent (50%) of any amounts remaining in the Escrow Account on the twelve (12) month anniversary of the Closing Date and (ii) any amounts remaining in the Escrow Account on the eighteen (18) month anniversary of the Closing Date (each such date, an “ Escrow Release Date ”), which are not reserved for the payment of, or otherwise subject to, any claim for

 

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adjustment to the Purchase Price, indemnification, claim for breach of warranty hereunder or disputed right to set off hereunder (the “ Escrow Release Amount ”), shall be released for benefit of the Sellers (other than DiGame) no later than the fifteenth (15th) Business Day following such Escrow Release Date (each, an “ Escrow Payment Date ”).  On each Escrow Payment Date, the Escrow Agent shall deliver the applicable Escrow Release Amount on behalf of the Purchaser to ENS Africa, for payment by ENS Africa to Webber Wentzel and for distribution by Webber Wentzel to the Sellers (other than DiGame) pro rata in accordance with their respective Sellers’ Escrow Proportions.

 

7.4.4.                                             For all purposes of this Agreement, DiGame shall not be a party to the Escrow Agreement and shall not be entitled to receive any portion of the Escrow Amount or any other amounts payable to Sellers in terms of the Escrow Agreement.

 

7.4.5.                                             If any amount becomes payable to the Purchaser from the Escrow Amount or any other amount held in terms of the Escrow Agreement in terms of this Agreement, such amount shall have been released on behalf of the Sellers, excluding DiGame, in the Sellers’ respective Sellers’ Escrow Proportions.

 

7.5.                             At 09h00 on the Closing Date, the Purchaser (or its representatives) and the Sellers’ Representative shall meet at the head offices of the Company or such other venue as the Company, the Sellers’ Representative and the Purchaser shall agree in writing, at which meeting, against receipt of payment of the Purchase Price in accordance with clause 7.3:

 

7.5.1.                                             the Sellers’ Representative (for and on behalf of all the Sellers) and the representatives of the Purchaser shall confirm in writing that all of the Conditions Precedent have been fulfilled or waived, as the case may be, and that the Agreement has become unconditional;

 

7.5.2.                                             the Sellers’ Representative shall deliver to the Purchaser the confirmation by each Seller, in writing, that the representations and warranties contained in this Agreement (subject to clause 14.6) were true and correct on and as of the Signature Date and are true and correct on and as of the Closing Date, dated on and as of the Closing Date (disregarding any “Material Adverse Effect” or similar materiality qualification therein), except that representations and warranties that are made as of a specific date are true and correct only as of such date;

 

7.5.3.                                             the Sellers’ Representative shall (and the Sellers shall procure that the Sellers’ Representative shall) against payment of that portion of the Purchase Price due

 

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and payable on the Closing Date in accordance with clauses 6 and 7 by the Purchaser in terms of clause 7.3, immediately deliver to the Purchaser:

 

7.5.3.1.                               the share certificates in respect of all of the Sold Shares (including that of DiGame, with its non-resident endorsement cancelled), together with declarations for the transfer thereof in blank as to transferee, duly signed by the respective Sellers of such Sold Shares as of the Closing Date and otherwise complying with the provisions of the Company’s memorandum of incorporation and the STT Act, each of the Sellers and the Company acknowledging and agreeing that this Agreement constitutes a proper instrument of transfer for purposes of the requirements of the Company’s memorandum of incorporation;

 

7.5.3.2.                               a certified copy of a resolution passed:

 

7.5.3.2.1.                                               by the directors of the Company approving of the transfer of the Sold Shares to the Purchaser;

 

7.5.3.2.2.                                               by the Sellers (in their capacities as shareholders of the Company) and the directors of the Company and of the Subsidiaries electing (in the case of the Sellers) the Purchaser’s nominee/s named in clause 2.9.1 as directors of the Company and accepting their appointment (in the case of the board of directors of the Company and the Subsidiaries), with effect from Closing;

 

7.5.3.3.                               such other documents as are necessary in order to enable the Purchaser to procure the registration of the Sold Shares into its name;

 

7.5.3.4.                               an updated securities register of the Company to reflect the transfer of the Sold Shares and that the Purchaser is the holder of 100% (one hundred per cent) of the issued shares of the Company; and

 

7.5.3.5.                               deliver a new share certificate to the Purchaser reflecting the Purchaser as the holder of the Sold Shares; and

 

7.5.4.                                             the Sellers shall deliver to the Purchaser the resignation letters of each of the directors of the Company and the Subsidiaries in office as of the Closing Date, namely Samuel Edward Paddock, Robert James Paddock and Samer Salty, in which they acknowledge and agree they have no claims against the relevant

 

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Group Company as a result of such resignation and which resignations shall become effective immediately upon the date and time upon which the persons named in clause 2.9.1 have had their appointment as directors confirmed by the then existing board of directors.

 

7.6.                             Notwithstanding clause 7.5 and notwithstanding anything to the contrary contained anywhere else in this Agreement, if at the meeting referred to in clause 7.5 the Purchaser does not receive from the Sellers’ Representative the written confirmation referred to in clause 7.5.2, signed by each Seller individually, the Purchaser shall be entitled to cancel this Agreement with immediate effect and without the requirement to give notice, in which case the Purchaser shall —

 

7.6.1.                                             have no obligation, on the Closing Date or at any time thereafter, to make payment of any amount whatsoever to the Sellers, ENS Africa, Webber Wentzel, the Company or any other person, as contemplated in clause 7.3 or in any other provision of this Agreement, or for any other cause or reason whatsoever and shall not be, or be deemed to be, in breach of this Agreement if it fails to make any such payment;

 

7.6.2.                                             have no liability or obligation of any nature to any of the Sellers for any reason whatsoever, whether arising in terms of or out of this Agreement or otherwise.

 

7.7.                             The Parties shall perform all such other reasonable acts as may be necessary or required to facilitate the implementation of the Transaction on the Closing Date.

 

7.8.                             All payments by the Purchaser to ENS Africa shall be made into the South African bank account nominated in writing by ENS Africa for this purpose not less than 10 (ten) Business Days before the Closing.

 

7.9.                             The Parties agree that the sale of the Sold Shares is one indivisible sale.  If the sale of the Sold Shares is not implemented in full on the Closing Date, the Purchaser shall have the right, on written notice to the Sellers’ Representative, to cancel this Agreement forthwith, without prejudice to its right to claim damages. Similarly, all payments by ENS Africa to Webber Wentzel shall be made into the South African bank account nominated in writing by Webber Wentzel for this purpose not less than 10 (ten) Business Days before the Closing.

 

8.                                       SHAREHOLDER LOANS

 

8.1.                             Not less than five (5) Business Days prior to the Closing Date, the Company shall notify the Purchaser in writing of the amount of the outstanding loans among any Group Company and any Seller (“ Indebted Seller ”) and the amount owed by each Indebted Seller individually to each Group Company, specifying which Group Company.  The aggregate amount owed by

 

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the Indebted Sellers for purposes hereof shall not exceed R10,500,000 (ten million five hundred thousand Rand).

 

8.2.                             On or prior to the Closing Date, each Indebted Seller, individually, shall make payment of the amount owed by it to the Company.  The Purchaser shall be entitled, in its sole discretion, to make payment of such amounts directly to the Company on behalf of each Indebted Seller if they do not do so themselves on or prior to the Closing Date.  If the Purchaser does so, the amounts so paid by the Purchaser in terms hereof shall constitute payment by the Purchaser to the Company, on behalf of each Indebted Seller, of the amount owed by each Indebted Seller to the Company as notified to the Purchaser in terms of clause 8.1 and shall simultaneously constitute —

 

8.2.1.                                             partial payment by the Purchaser to the Indebted Seller concerned of a portion of the Purchase Price due to such Indebted Seller on the Closing Date; and

 

8.2.2.                                             payment by the Indebted Seller concerned of the amount owed by it to the Company (or other Group Company) in discharge of that debt in that amount.

 

9.                                       PURCHASE PRICE ADJUSTMENTS

 

9.1.                             Within thirty (30) days following the Closing Date, Purchaser shall prepare, or cause to be prepared, and deliver to the Sellers’ Representative a written statement (the “ Closing Statement ”) setting out:

 

9.1.1.                                             the calculation of the Purchase Price in accordance with clause 6.2 based on the Closing Statement;

 

9.1.2.                                             a true and complete schedule of the Company Transaction Costs, with a detailed breakdown and itemisation of their composition and the persons to which such amounts are due;

 

9.1.3.                                             the Cash on Hand as of the close of business on the Business Day prior to the Closing Date;

 

9.1.4.                                             the Working Capital as of the close of business on the Business Day prior to the Closing Date; and

 

9.1.5.                                             the amount of unpaid Tax (other than STT) payable by any member of the Group after the Closing Date, the liability for which arose or accrued on or prior to the Closing Date, separately itemising each category of tax in a different line item (by way of example only and without limitation, one line item for PAYE for employees, one line item for VAT, one line item for skills development levies, etc).

 

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9.2.                             Subject to clause 9.5, if the portion of the Purchase Price payable on the Closing Date as calculated pursuant to the Closing Statement is greater than the Purchase Price as calculated pursuant to the Estimated Closing Statement by reason of —

 

9.2.1.                                             Cash on Hand being more at Closing than as set out in the Estimated Closing Statement; and/or

 

9.2.2.                                             Company Transaction Costs being less than as set out in the Estimated Closing Statement,

 

then Purchaser shall promptly pay the amount of such difference to ENS Africa, for payment by ENS Africa to Webber Wentzel, for distribution by Webber Wentzel to the Sellers in accordance with their respective Sellers’ Proportions, provided that for purposes of clause 9.2.1, the maximum amount payable in terms hereof in respect of Cash on Hand shall be an amount equal to the difference between the Cash on Hand as set out in the Estimated Closing Statement and the amount of Target Cash on Hand.

 

9.3.                             Subject to clause 9.5, if the portion of the Purchase Price payable on the Closing Date as calculated pursuant to the Estimated Closing Statement is greater than the Purchase Price payable on that date as calculated pursuant to the Closing Statement, then the Sellers shall promptly pay the amount of such difference to the Purchaser.  The Purchaser shall be entitled to set off such amount against any portion of the Purchase Price, Escrow Amount or other amount payable to the Sellers in terms of this Agreement.

 

9.4.                             Any amounts paid by the Purchaser to the Sellers in accordance with clause 9.2 shall constitute an increase in the Purchase Price paid by the Purchaser for the Sold Shares as of the Closing Date.

 

9.5.                             If the Sellers’ Representative disputes the portion of the Purchase Price referred to in clause 6.2 as reflected in the Closing Statement and/or the basis of calculation of any one or more components thereof in writing by notice to the Purchaser, the dispute shall be resolved or determined in accordance with clause 19 and payment in terms of clause 9.2 or clause 9.3, as the case may be, shall be deferred until the third Business Day after the determination of such dispute.

 

10.                                LATE PAYMENT AND INTEREST

 

Should a Party fail to make payment of any amount owing by it under this Agreement, then, without prejudice to such other rights as may accrue to any other Party as a consequence of such failure, such Party shall be liable for interest on the unpaid portion of such payment at the Prime Rate plus 2% (two percent) per annum (capitalised monthly in arrears on the balance due), from the date on which such payment was due to the date of actual payment, both dates inclusive.

 

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11.                                EQUITY AWARDS AND RETENTION BONUS POOL FOR CERTAIN EMPLOYEES

 

11.1.                      Equity Awards

 

11.1.1.                                      By no later than thirty (30) days after the Closing Date, the Purchaser shall procure that restricted stock unit awards (“ RSU Awards ”) over 2U shares shall be granted to those persons named in Annexure J and those persons referred to in clause 11.1.5, subject to this clause 11.

 

11.1.2.                                      The terms of the RSU Awards shall be subject to the 2014 2U, Inc. Equity Incentive Plan, any applicable successor equity incentive plan, or amendments to any such plan to comply with applicable law (the “ Plan ”) and the applicable award agreements (the “ Award Agreements ”).  The value of the RSU Awards shall be as set forth in Annexure J and shall vest over a two year period after the grant date. The exact number of RSU Awards granted to each individual listed in Annexure J shall be calculated by dividing the applicable dollar value as set forth in Annexure J by the fair market value of a share of 2U, Inc.’s common stock on the close of trading (Eastern Time) on the Closing Date for the Year 1 Awards (as defined in Annexure J) and on the first anniversary of the Closing Date (or, if such day is not a Business Day, the first Business Day thereafter) for the  Year 2 Awards (as defined in Annexure J).

 

11.1.3.                                      The RSU Awards shall be made pursuant to the Plan, the applicable Award Agreements, and in compliance with South African laws (including exchange control). In addition, if required to comply with applicable law, the Purchaser, in its sole discretion, may elect to issue any other award whose value is determined with reference to 2U’s common stock in lieu of RSU Awards.  All such equity awards will be subject to other terms and conditions (including, without limitation, vesting conditions to be contained in the incentive plan document and applicable award agreements).

 

11.1.4.                                      Upon finalisation of such equity incentive plan by no later than (30) thirty days after the Closing Date, the Purchaser shall procure that those persons named in Annexure J shall be granted equity awards according to and subject to the terms of such equity incentive plan and applicable Award Agreements, on the basis set out in this clause 11 and in Annexure J (subject to such changes and modifications as may be required to comply with applicable law, including without limitation, South African exchange control laws, regulations and practise).

 

11.1.5.                                      In addition to those persons named in Annexure J, the Purchaser shall procure that an additional 35 employees of the Group (such list of employees to be

 

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provided in writing by the Sellers’ Representative to the Purchaser) are awarded RSUs and/or Stock Options and/or restricted stock, phantom stock or any other award whose value is determined with reference to 2U’s common stock, as determined in the sole discretion of the Purchaser, to a value, per person, of USD25,000 (the “ Additional Equity Awards ”). The Additional Equity Awards shall vest over a four year period after the grant date and shall otherwise be granted in accordance with the applicable provisions of clauses 11.1.1 to 11.1.4.  On 1 April of each year, from 2018, such persons (if there is no change in their employment status) shall be eligible to receive annual awards under the Plan, subject to the prior written approval of the Compensation Committee of the Board of Directors of 2U in each instance.

 

11.2.                      Bonus Awards

 

11.2.1.                                      Following the Signature Date and at least five days prior to the Closing Date, the Company shall identify employees of GetSmarter to whom GetSmarter wishes to grant bonus awards and the respective amounts thereof, which amounts shall not exceed Twenty Million Rand (R20,000,000) in the aggregate.  The Company will reasonably consult with the Purchaser in determining the recipients and respective amounts of such bonus awards.  Such bonus awards shall be made pursuant to an award agreement in form and substance reasonably acceptable to the Purchaser.

 

11.2.2.                                      An amount equal to such bonus awards, which amounts shall not exceed Twenty Million Rand (R20,000,000) in the aggregate, shall be paid by the Purchaser to the Company on the Closing Date so as to fund GetSmarter’s ability to make such bonus awards and payments.  The bonus awards shall be paid by the Company to GetSmarter and by GetSmarter to the respective recipients thereof in accordance with their terms promptly after receipt thereof by the Company.

 

11.3.                      Donation.  An amount equal to Ten Million Rand (R10,000,000) shall be paid by the Purchaser to the Company on the Closing Date so as to fund a donation from GetSmarter to the University of Cape Town (the “ Donation ”). The Donation shall be paid by the Company to GetSmarter and by GetSmarter to the University of Cape Town in the calendar quarter in which the Closing occurs and in accordance with all applicable law.

 

12.                                INTERIM PERIOD UNDERTAKINGS

 

12.1.                      The Sellers undertake that, during the Interim Period, save with the prior written consent of the Purchaser:

 

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12.1.1.                                      the Company has continued and will continue to operate in the ordinary, normal and regular course of business (including, without limitation, with respect to the management of its Working Capital) and the Company has not taken and will not take steps to apply for its winding-up;

 

12.1.2.                                      the Company has not and will not enter into any agreement or transaction other than in the ordinary, normal and regular course of its business;

 

12.1.3.                                      the Company has not changed and will not change its normal manner, method or trading style of carrying on business;

 

12.1.4.                                      no assets have been or will be acquired or sold by the Company other than in the ordinary, normal and regular course of business;

 

12.1.5.                                      the Company has not and will not incur any liabilities other than in the ordinary, normal and regular course of business or in accordance with the 2017 Preliminary Budget and will not authorise or incur, any capital expenditure except in the ordinary, normal and regular course of business or in accordance with the 2017 Preliminary Budget;

 

12.1.6.                                      the Company has not issued nor will it issue or agree to issue any shares (including bonus and capitalisation shares) and the Sellers have not passed nor agreed to pass, and will not pass nor agree to pass, any resolution for the increase or reduction of the Company’s capital, or for the creation of any securities;

 

12.1.7.                                      other than in the ordinary course of business, the Company has not acquired or entered into any agreement to acquire, and will not acquire or enter into any agreement to acquire (whether by one transaction or a series of transactions) the whole or a substantial or material part of the business, undertaking or assets of any other person/s;

 

12.1.8.                                      other than in the ordinary course of business with respect to programs offered with the Company’s university clients, the Company has not entered nor will it enter into or agree to enter into, any joint venture, partnership agreement or other venture for the sharing of profits or assets;

 

12.1.9.                                      the Company has paid and will pay all amounts of any nature whatsoever that become due and payable by the Company in the ordinary course and in accordance with past practice;

 

12.1.10.                               no actual or contingent liabilities have been or will be paid, agreed, undertaken, indemnified or guaranteed by any Group Company for the benefit of any Seller

 

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or any Related Person to that Seller (including with respect to any share capital or other securities of any Group Company), and any existing indemnities or guarantees for the benefit of any Seller or any Related Person to that Seller will be released prior to the Closing Date without any costs to the Group;

 

12.1.11.                               existing insurance cover for the Company has been and shall in all material respects be maintained at all times on the basis disclosed to the Purchaser as being in force on the Signature Date;

 

12.1.12.                               the Company has kept and will keep proper accounting records and in them make complete entries of any dealings and transactions in relation to the Company.

 

12.2.                      Without prejudice to the provisions of clause 12.1, in the Interim Period, the Sellers and the Company shall each procure, so far as it is lawfully able, that (except as set out in clause 12.5) none of the following matters will be undertaken by the Company without the prior written consent of the Purchaser:

 

12.2.1.                                      the modification of any of the rights attached to any shares of the Company or the creation or issue of any shares or the grant or agreement to grant any option over any shares of the Company;

 

12.2.2.                                      the declaration, payment or other making by the Company of any dividend or other distribution or return of capital to its shareholder/s or the repayment by the Company of any loan accounts;

 

12.2.3.                                      any alteration to the articles of association or any other constitutional document of the Company;

 

12.2.4.                                      the granting by the Company of any guarantee, suretyship, indemnity or any other security in respect of the liabilities of any third person;

 

12.2.5.                                      the making of any individual capital expenditure or commitment to the extent such individual capital expenditure or commitment is not expressly contained in the 2017 Preliminary Budget;

 

12.2.6.                                      the borrowing of any money or acceptance of any financial facility by the Company or the making or granting of any loan or any financial facility other than the facility set forth in Annexure O (the “ Interim Period Facility ”),  provided always that the Interim Period Facility may only be used and extended in accordance with its terms, in the ordinary course of business and in accordance with the terms set forth in  Annexure O;

 

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12.2.7.                                      other than liens arising by operation of law or in the ordinary course of business, the creation or issue or allowing to come into being of any encumbrance upon or over any part of the material property or material assets of the Company or the creation or issue of debentures;

 

12.2.8.                                      the payment of any amount by or on behalf of the Company to or for the benefit of the Sellers or their Related Persons, save for Company Transaction Costs or remuneration, reimbursement of business expenses and other employment related payments, in each case in the ordinary course of business, consistent with past practice in respect of exiting employment arrangements;

 

12.2.9.                                      the waiver or forgiveness of any material amount owed to the Company by a member of the Group and vice versa ;

 

12.2.10.                               entering into or agreeing to enter into any new death, retirement, profit-sharing, bonus, share option, share incentive or other employee incentive scheme for the benefit of any of the employees of the Group or make any variation (including, but without limitation, any increase in the rates of contribution) to any such existing scheme;

 

12.2.11.                               save as required by law or contained in the 2017 Preliminary Budget, making any change to the terms of employment of any or all of the employees of the Group which could increase the total staff costs;

 

12.2.12.                               commencing, compromising or discontinuing any legal, administrative, regulatory or arbitration proceedings;

 

12.2.13.                               save in respect of the repaying or prepaying of any debt required in terms of this Agreement, repaying or prepaying any loans of whatever nature and amount, any borrowings or any other financial facility or assistance (excluding accounts payable arising in the ordinary course of business and/or any amounts payable to the Subsidiaries of the Company) made available to it;

 

12.2.14.                               save as required by law or by changes to IFRS or other applicable accounting standards, making any changes to the accounting policies and procedures of the Company and its Subsidiaries;

 

12.2.15.                               selling, purchasing or disposing of any interest in any share or loan capital or other security;

 

12.2.16.                               giving consent to, amending or withdrawing any claim, election, surrender, disclaimer, consent or similar item relating to Tax that is outside the ordinary course of business and may adversely affect its Tax position;

 

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12.2.17.                               entering into or materially modifying any agreement with any trade union or other body representing its employees;

 

12.2.18.                               varying, surrendering or otherwise terminating any lease agreements by which any member of the Group is bound other than for material breach by the landlord or serve any notices upon the landlords under them;

 

12.2.19.                               intentionally and knowingly entering into an agreement, transaction or dealing (i) with, for the benefit of, or involving any property of, any Sanctioned Person, (ii) involving a Sanctioned Territory or (iii) that would violate or constitute sanctionable conduct under any Sanctions Laws or Regulations.

 

12.3.                      During the Interim Period, the Sellers shall procure that none of the following matters will be undertaken by the Company:-

 

12.3.1.                                      the sale or disposal of any material part of the undertaking or assets of the Company; and

 

12.3.2.                                      giving notice of termination of employment to, or dismissing, any Key Employee, other than for reason of material breach of employment contract or poor performance, without Purchaser’s prior written approval.

 

12.4.                      Required Company Information:

 

12.4.1.                                      During the Interim Period, the Sellers shall, and shall cause the Company to provide to Purchaser, and shall cause each of its Subsidiaries to provide, and shall use its commercially reasonable best efforts to cause its Representatives, including legal and accounting, to provide to Purchaser as promptly as practicable (i) all Required Company Information and (ii) all cooperation requested by Purchaser in connection with preparing pro forma financial statements that would be prescribed by Rule 11-02 of Regulation S-X under the Securities Act including, for the avoidance of doubt, the pro forma consolidated balance sheet and pro forma consolidated statements of income of 2U (collectively, “ Pro Forma Financial Statements ”). In this regard the Sellers shall designate members of senior management, with appropriate seniority and expertise, of the Company to participate in a reasonable number of meetings in connection with preparing the Pro Forma Financial Statements. The Final Unaudited Accounts, the Final Management Accounts, the 2017 Final Budget and the 2018 Budget (collectively, the “ Final Unaudited Financial Statements ”) required to be delivered as part of Required Company Information shall be prepared in accordance with IFRS in USD or U.S. GAAP, as mutually agreed between the Purchaser and the Sellers’ Representative in

 

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writing; provided, however, that the Final Unaudited Financial Statements shall each be prepared in accordance with the same standard.

 

12.4.2.                                      During the Interim Period, the Sellers shall, and shall cause the Company to use its commercially reasonable best efforts to provide to Purchaser, and shall cause each of its Subsidiaries to use its commercially reasonable best efforts to provide, and shall use its commercially reasonable best efforts to cause its Representatives, including legal and accounting, to provide, the Audited Accounts; provided, however, that failure to provide the Audited Accounts shall not constitute a breach of this Agreement so long as all Required Company Information has been provided to the Purchaser in accordance with this Agreement.

 

12.5.                      Nothing in this clause 12 shall compel or be construed as compelling the Sellers or the Company to do anything or refrain from doing anything which the Sellers may be advised by external counsel constitutes any act or omission in contravention of any competition or anti-trust legislation (including the Competition Act) in any relevant jurisdiction and to the extent that same may be so construed as being in contravention of such legislation and/or any judicial decision thereon, such provision in this clause 12 shall to that extent be deemed to be pro non scripto .

 

12.6.                      The liability of the Sellers for any breach of the undertakings in this clause 12 shall be joint in the Sellers Proportions (and not joint and several).

 

12.7.                      During the Interim Period, the Sellers shall procure that the Company shall:

 

12.7.1.                                      deliver to the Purchaser copies of the Final Management Accounts within 10 (ten) Business Days of each month end;

 

12.7.2.                                      notify the Purchaser of any breach or reasonably suspected breach of any of the Interim Period undertakings given in terms of this clause 12 as soon as reasonably possible but in any event within 2 Business Days of becoming aware of such breach or suspected breach; and

 

12.7.3.                                      use its reasonable endeavours to procure the written consent of all relevant counterparties of the Company to the change of control over the Company that will result from the implementation of this Agreement.

 

12.8.                      During the Interim Period, the Sellers shall procure that Samuel Edward Paddock and Robert James Paddock meet with nominated senior representatives of the Purchaser at the Company’s premises in Cape Town or via teleconference at regular intervals (and, unless otherwise agreed, no more than once per week) so as to —

 

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12.8.1.                                      keep the Purchaser informed of all material matters relating to the business of the Company (other than sensitive information in breach of competition laws) and the Group and the assets and affairs of the Company and the Group insofar as such matters, assets and affairs impact upon the terms of this Agreement;

 

12.8.2.                                      respond to questions and reasonable requests for information from the Company made by the Purchaser, or procure reasonable access by the Purchaser to information and/or employees of the Group, provided that the Purchaser does not unreasonably disrupt the operations of the Company and its Subsidiaries; and

 

12.8.3.                                      discuss the progress and any issues relating to the fulfilment of the Conditions Precedent and any other matters that it may be appropriate to discuss in preparation for the Closing Date.

 

12.9.                      The Purchaser shall make its nominated senior representatives (and, at its discretion, its professional advisors) available for any meeting contemplated in clause 12.8.  The Company shall be entitled to have its own nominated senior representatives and professional advisors present at such meetings.

 

12.10.               Notwithstanding anything in this clause 12 above, any act or omission or conduct by the Sellers or any Group Company during the Interim Period:

 

12.10.1.                               as may be required to give effect to any provision of this Agreement or any other Transaction Agreement or otherwise provided or contemplated in this Agreement or any other Transaction Agreement;

 

12.10.2.                               in accordance with the 2017 Preliminary Budget;

 

12.10.3.                               taken or not taken to comply with any order or obligation of any Governmental Entity; and

 

12.10.4.                               in respect of which the Purchaser has given its prior written consent,

 

shall not be a breach of this clause 12.

 

12.11.               Notwithstanding the undertakings given by the Sellers in this clause 12:

 

12.11.1.                               without limitation to any other remedies available to Purchaser, if the aggregate likely damages that would be suffered by the Group or the Purchaser resulting from a breach of this clause 12 exceeds an aggregate amount of R10,000,000 and the Sellers and/or the Company have not remedied the aforementioned breach prior to the Closing Date, then the Purchaser will be entitled to cancel this Agreement on written notice to the Sellers’ Representative prior to the

 

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Closing Date.  If the aggregate likely damages that would be suffered by the Group or the Purchaser resulting from a breach of this clause 12 is less than R10,000,000, the Purchase Price shall be reduced by such amount, or if the Purchaser only becomes aware of such breach after the Closing Date, the Purchaser’s remedy for such breach shall, however, be limited to a claim for specific performance and/or damages, provided that any such claim for damages may only be instituted after the Closing Date and any Indemnified Claims and/or proven damages shall be first settled out of the Escrow Amount in terms of the Escrow Agreement or set off against any amount payable to the Sellers after the Closing Date in terms of this Agreement;

 

12.11.2.                               no liability under this clause 12 shall attach to the Sellers in relation to claims, damages, costs, expenses, losses or liabilities:

 

12.11.2.1.                 for any indirect, special or consequential loss, except to the extent of any such losses payable to a third party; and

 

12.11.2.2.                 in excess of an amount equal to the total Purchase Price on the basis that the aggregate amount recoverable from the Sellers, inclusive of interest and costs, from a breach under this clause 12, shall be limited to an amount equal to the total Purchase Price; and

 

12.11.3.                               if any potential claim arises by reason of liability under this clause 12 which is contingent only, then the Sellers shall not be under any obligation to make any payment pursuant to such claim until such time as the contingent liability ceases to be contingent and becomes actual.

 

12.12.               In this clause 12, references to the Company shall in each case include references to each member of the Group.

 

13.                                ANTI-CORRUPTION

 

If, at any time between