Acquisition of New York Code and Design Academy

9 Months Ended

Sep. 30, 2017

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 web and application software development courses 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, which were included in general and administrative costs in the unaudited consolidated statements of income in the period those costs were incurred. The Acquisition was accounted for as a business combination.

The purchase price included $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”), and (b) $5.5 million payable based on NYCDA’s receipt of state regulatory permits. Pursuant to the Acquisition, $1.0 million of the Earnout may be accelerated upon receipt of one of the state regulatory permits. The Company recorded total contingent consideration of $14.5 million at the time of acquisition. In April 2016 and August 2016, NYCDA received the state regulatory permits and the Company paid $6.0 and $0.5 million of contingent consideration to the sellers, respectively.

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 was classified as prepaid compensation and is amortized to compensation expense over three years.

Total potential cash payments for the Acquisition, including the contingent cash payments and prepaid compensation, could total $25.0 million.

The allocation of the purchase price was as follows (in thousands):

		Purchase
		Price
		Allocation	Useful Life
Cash	$	790
Other assets		1,265
Intangibles:
Trade name		5,660	Indefinite
Goodwill		13,944
Liabilities assumed		(4,734)
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 Earnout was originally measured by applying a probability 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, at the time, of $12.5 million. Following its initial recognition, the Company assesses the carrying value of the Earnout to the fair value of the remaining payments. Fair value is then adjusted as necessary to reflect revisions to the business plan, expectations relative to achieving the performance targets over the earnout period, and the impact of the discount rate. No adjustment to the Earnout was recorded in the three and nine months ended September 30, 2016. During the three months ended June 30, 2017, the Company updated its near-term revenue projections for NYCDA and reduced the balance of the contingent consideration by $2.3 million. During the three months ended September 30, 2017, following delays in implementing its marketing strategy to enroll new students, the Company further updated its revenue projections during the Earnout measurement period resulting in a reduction in the contingent consideration balance by an additional $5.5 million. The fair value of the Earnout at September 30, 2017 is zero, and the maximum possible amount that could be paid is $11.5 million.

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.