Acquistion of New York Code and Design Academy

6 Months Ended

Jun. 30, 2016

Acquisition of New York Code and Design Academy [Abstract]

Acquisition of New York Code and Design Academy

3.  Acquisition of New York Code and Design Academy

On January 13, 2016, the Company acquired all of the outstanding stock of New York Code and Design Academy, Inc. (“NYCDA”), a provider of non-degree information technology curriculum primarily based in the New York City area (the “Acquisition”). The Acquisition supports the Company’s strategy to complement its traditional degree offerings with a broader platform of educational services. The Company incurred transaction costs of approximately $0.2 million, and these costs are included in general and administrative costs in the unaudited consolidated statements of income. The acquisition is accounted for as a business combination.

The purchase price includes $2.4 million paid up front in cash, plus contingent cash payments of (a) up to $12.5 million payable based on NYCDA’s results of operations over a five-year period (the “Earnout”), (b) $5.0 million payable based on NYCDA’s receipt of a state regulatory permit, and (c) $0.5 million payable based on NYCDA’s receipt of another state regulatory permit. Pursuant to the Acquisition, $1.0 million of the Earnout may be accelerated upon receipt of one of the state regulatory permits. In April 2016, NYCDA received one of the state regulatory permits and the Company paid $6.0 million of contingent consideration to the sellers.

In addition, the Company paid a total of $4.6 million to two of NYCDA’s founders who are required to remain employed for at least three years from the acquisition date. If either of them terminates employment voluntarily, or is terminated for cause (as defined), he is required to reimburse the Company his respective portion of the retention amount. This amount is classified as prepaid compensation and is amortized to compensation expense over three years.

Total potential cash payments for the acquisition and the Earnout could aggregate to $25.0 million.

The Company determined the preliminary fair values of the assets acquired and liabilities assumed at the date of the Acquisition. The allocation of the purchase price is based on preliminary estimates and assumptions, and is subject to revision based on final analyses that support the underlying estimates, which will be completed within the measurement period of up to 12 months from the date of the Acquisition. Accordingly, the allocation is subject to change and the impact of such changes could be material. During the second quarter of 2016, there was a measurement period adjustment to goodwill and deferred tax liabilities of $0.2 million.

The allocation of the purchase price, including the measurement period adjustment record in the second quarter of 2016, is as follows:

		Purchase
		Price
		Allocation	Useful Life
Cash	$	790
Other assets		1,265
Intangibles:
Trade name		5,660	Indefinite
Goodwill		13,993
Liabilities assumed		(4,783)
Total assets acquired and liabilities assumed, net		16,925
Less: contingent consideration		(14,500)
Less: cash acquired		(790)
Cash paid for acquisition, net of cash acquired	$	1,635

The fair value of the contingent consideration was measured by applying a probability weighted discounted cash flow model based on significant inputs not observable in the market (Level 3 inputs). Key assumptions include a discount rate of 4.5% and expected future value of payments of $12.5 million, based on management’s assessment that NYCDA will achieve its performance targets after the five-year measurement period. The fair value of assets acquired and liabilities assumed was determined based on assumptions that reasonable market participants would use while employing the concept of highest and best use of the respective items. The following assumptions were used, the majority of which include significant unobservable inputs (Level 3), and valuation methodologies to determine fair value:

· Intangibles – Income approaches were used to value the substantial majority of the acquired intangibles. The trade name was valued using the relief from-royalty method, which represents the benefit of owning these intangible assets rather than paying royalties for their use.

· Other assets and liabilities – The carrying value of all other assets and liabilities approximated fair value at the time of acquisition.